By this time, it would be hard to find a node in the blogosphere that is not in triumph over the recent drubbing publishers took before the Supreme Court. The case, Kirtsaeng v. John Wiley & Sons, was a technical one, but it touched on the all-important issue of first-sale rights, and for that reason it sparked visions of the ultimate goal of total destruction of the publishing industry. The Kirtsaeng whipping comes on the heels of the rout handed to publishers in the Georgia State case, which essentially ruled that creative works are protected by copyright except when fair use can be invoked, which is always and everywhere. The Georgia State case is now winding its way through the appeals process, but the publisher plaintiffs seem to me to resemble Rocky Balboa, fighting to the end but determined not to be knocked to the mat. Lie down, Rocky, it’s over.
The Kirtsaeng case, for those who are cheering but don’t know why, concerned a young gentlemen (Kirtsaeng) who made the not extraordinary discovery that college textbooks sell for a lower price in Asia than in the US. He arranged to purchase books in Asia and then resold them in the United States. The plaintiffs argued that although those books were printed legally in Asia, there were territorial restrictions that prohibited their import into other markets. Kirtsaeng’s argument — that once you bought something you could do whatever you want with it (the principle of first sale) — was supported by SCOTUS. For the publishers, this means that the historical practice of pricing books to their markets (more expensive in the US, cheaper in Asia and Africa) will come to an end. This will not lower prices in the US, but it will increase prices elsewhere.
It’s not really the copyright issues that interest me; it’s the business practice of market segmentation that copyright makes possible. But before getting into that, let’s note in passing that Kirtsaeng created no value in his operations. He created no new content, produced and manufactured nothing, created no new markets. He was an arbitrageur — that is, someone who spots inefficiencies in the marketplace and exploits them. We mostly think of arbitrageurs on Wall Street, where they see that copper is trading for $0.03 higher in London than in Hong Kong and promptly buy in one market and sell in the other. This is the kind of activity that deservedly has come under attack in the past few years (“We are the 99%!”), but when the same action takes place around books, the arbitrageur is hailed as a hero and liberator of the people. It is one of the more noisome aspects of capitalism that sometimes financial rewards are bestowed on people who create nothing.
But, Rocky, lie down, I say, lie down! The issue is not copyright but what you were trying to gain from copyright. With textbooks the calculus is simple. Textbooks are terribly expensive to create, averaging around $750,000 for development costs, thus placing them beyond the reach of any but the privileged students of the First World. Publishers therefore price books in developing markets purely on a marginal basis, meaning that the development cost is borne by American consumers alone and that students in weaker economies only have to pay a mark-up over the variable costs of printing and binding. This is how a Pearson chemistry textbook finds its way to Namibia and a McGraw-Hill text on physiology to India. Publishers segment markets to make their wares more widely available and to maximize their revenue.
Although the Georgia State case appeared to be about copyright, the business issue underlying it is market segmentation. For a publisher, a library is one market segment, classroom adoptions another. But put an electronic text into the library reserve room and allow any number of students to get access to it, and you have allowed one segment to subsume another. There is real money at stake here. An academic book publisher might derive, say, 25% of total revenue from library sales, a similar amount from course adoptions, and perhaps an equal amount or more from the individuals (faculty and staff) affiliated with the university. But that reserve room copy, if it has no restrictions on its use, can supplant both classroom sales and sales to faculty. Thus the segmented market has become whole again, and one copy now serves a university community where formerly several were required.
Publishers have traditionally used copyright to enforce market segmentation (among other things). The segments can be drawn pretty much along any lines, provided that the license is carefully worded. Most common is geographical segmentation, precisely what was at issue in the Kirtsaeng case. In the library market, the aim was to separate library, classroom, and individual use. Trade publishing markets historically were segmented by time and format — the hardcover ships initially, the paperback follows a year later. Book club rights sliced the market another way, and serial rights (the reprinting of sections in a magazine) reached yet another segment. In the world of digital texts, many of these segments disappear and no favorable court ruling is likely to restore the old demarcations. If publishers want to continue to segment markets, they will have to find new ways of doing it, and they most likely will have to do it without the support of copyright.
The new market segmentation is likely to take place on the level of the individual. Consider that seat you just bought on United Airlines. You sit six across, knees pressed to your forehead, and for this privilege you paid $500. But the person on the left, who is equally uncomfortable, paid $700, and the person on your right paid only $300. Airlines have learned to segment markets in a number of ways, the most important being when you purchase a ticket.
Or think about college tuition. I know firsthand of a student whose parents paid $50,000 to send her to a private university for one year. She had two roommates — one paid $7,000, one paid nothing. Universities, in other words, use means-testing to set prices. Of course, if you are the parent who paid full retail, you won’t like this. How far will means-testing go? Will you pay $3 for a beer, I pay $5, and my wealthy cousin pays $7? It may occur to someone to ask: What’s the point of being rich?
By collecting information on users, all businesses, publishers among them, will begin to introduce new forms of price discrimination, another form of market segmentation. What is lost in copyright protection will be offset — perhaps more than offset — in data analysis. You may someday discover that as a reader of this blog, the special promotion to subscribe to The New York Times costs less than for the readers of O’Reilly’s Radar blog, and the books you purchase on Amazon may cost you one thing, your impecunious friend something else, and less.
As the courts continue to pick the locks of copyright, publishers will at first respond with rage (down, Rocky, down!), then resentment, but then finally with innovation. It is most probable to me that publishers will sign up for membership in the surveillance society, using information technology to develop new profit-making mechanisms for market segmentation. It seems unlikely that the college students who “won” with the Kirtsaeng ruling will like the new paradigm any more than the old one of high-priced textbooks.
Careful readers of this post will see the business opportunities emerging here. Price discrimination through database analysis is a path out of the copyright morass. This new strategy will require new tools and platforms, and my friends in the consulting world will spend many hours at high fees explaining how all this works and how to capitalize on it. There’s nothing so enriching as the loss of a copyright lawsuit.