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Economics of internet - Song Digital Reader/eBooks

Part A: The following table shows book sales in the U.S. during 2004. With what you know about the impact of the Internet, what are some of the key differences you would expect to see if you had the equivalent table in the year 1994? If possible, support your answer with relevant readings.

Sales Range Titles Units
1,000,000 10 17,396,510
500K to 1,000,000 22 13,798,299
250K to 500K 64 22,252,491
100K to 250K 324 46,932,031
50K to 100K 767 51,858,835
5K to 50K 23,047 280,000,591
1,000 to 4,999 67,008 149,093,614
100 to 999 202,938 69,548,499
Sold 99 or less 948,005 14,346,417
Total 1.2 million 665 Million +
Source: Book Industry Study Group

Part B: In the Fall of 2006, Sony introduced a digital reader, capable of synchronizing with your computer like an iPod, downloading books, and serving as a portable electronic book and other media player (shown to the right). It supports a Sony specific format for digital rights management (BBeB Book), as well as third party and open standard media formats such as unprotected Adobe PDF, Microsoft Word, MP3 (for music), and JPEG, GIF, PNG, and BMP (for images). What are economic reasons that Sony might have for only offering its own proprietary standard for books covered by rights management while simultaneously offering the other standards for unprotected media? Do you agree with their approach?

Part C: What rows in the Table above would you expect to change the most if the Sony Reader becomes very popular? Justify your answer.

Part D: How might the pricing policies for Sony eBooks (not the Reader) change if the Sony Reader had thumbprint recognition versus a Reader without such user authentication?

See attached file for full problem description.


Solution Preview

Part A.
In 1994 the Internet wasn't a big part of people's lives, so the effects of the internet are those that would appear in the 2004 chart by comparison. One of the main effects of the Internet has been the explosive sales of used books.

"The rapid growth of the general trade used book market is a direct result of the Internet eliminating much of the friction in the buying and selling process," says Jeff Hayes, Group Director for InfoTrends and principal analyst for the study. "Used books are now a factor in the business equation for publishers and booksellers."

Used books sales will skew the numbers on the bottom of the chart. In other words, they appears a large number of titles, each of which generates only a small amount of income. Therefore in 1994, we would expect to see more of the income at the top of the chart.

Part B.
Books covered by copyright can be problematic for e-publishers. Google was recently sued by ...