How Digital Entertainment Monopolies Have Trapped You

The business model of many modern technology companies is to lure people into digital monopolies (or what are sometimes called "ecosystems") from whence ridiculous profits can be gouged. You see, the internet and computing hardware, software and networking have become so fault-tolerant and scalable that it enables tremendous numbers of transactions per second to be completed without the need for expensive employees. This can generate profit at hitherto unprecedented rates for what is little more than "file-sharing".

Computer picture from Shutterstock

The Apple TV

At home we have an "Apple TV". It's an amazingly clever device, only costs about A$100 (+GST) and plugs into your TV set to allow you to watch movies and TV shows from the iTunes store in glorious HD via a wireless internet connection.

The beauty of the Apple TV is that it is very cheap and very tiny. Apple doesn't need to make any money from initially selling me the device, because most of the things I use it for make Apple more money.

Every time I rent a video or TV show Apple cashes in, and it's all done by computer, with little or no employees involved.

On Saturday I had the pleasure of watching The Dark Knight Rises on my Apple TV with my sons. Currently in Australia the movie costs $24.99 but in the US only $US14.99. Now, you might wonder why copying a bunch of bits in a file to the Apple TV costs $10 more from Australia than the US, even though our dollar is worth more?

The answer is simple:

By purchasing an Apple TV I have trapped myself into a digital monopoly and they can get away with it.

I can't watch online movies legally in any other way without investing in someone else's device first. The barrier to switching movie providers is too high, so I stick with Apple.

I'm in their "ecosystem" and this is exactly where they want me.

This is really very different from how I used to watch movies, because anyone could sell me a video or DVD, which introduced competition – and the manufacturer was completely out of the picture after the initial purchase.

So what's the impact of this on the local economy?

Whither The Video Store?

Once upon a time I used to go to the video shop and rent videos.

After an (often painful) family decision I would hand over my $7 for a latest release, and sometimes more in late fees.

The owner of the video store paid some kid to man the store, paid rent to the shop's owner, and paid money to the Australian distributor. He or she then kept the profit after an initial outlay for the video/DVD.

My money was used for all sorts of purposes that helped stimulate the local economy and generate taxation.

Now I rent online and most of my money goes offshore and contributes to our foreign debt.

But this practice isn't limited to videos.

Every Tom, Dick and Harry is trying to trap us into digital monopolies or "ecosystems" that often suck money out of the country for little more that the transfer of information. As more of our disposable income goes towards the digital world, the more exposed we as a nation become.

Let's look at the iPhone/iPad or Android phones/tablets.

Once the initial hardware purchase has been made, every time we buy an "app" from the App Store or Google Play, 30 per cent of the purchase price goes to Apple or Google respectively for doing little more than file-sharing after their initial investment in the hardware development.

Curiously, although Apple has made a bundle from this, it's true that software on the App Store is much cheaper than an equivalent game on a typical console.

That's because anyone can develop apps for the App Store but consoles generally restrict the number of people who can develop games to the select few willing to enter a relationship with the console creator.

Independent third parties are not allowed to write and distribute their own games for most consoles so that the consumer is forced to pay inflated prices for the software.

e-books are another example of growing digital ecosystems.

The wonderful Kindle tries very hard to get you to purchase from Amazon.

The cost of e-book distribution is almost nothing, and yet my only friend who writes bestsellers tells me that she only gets 25 per cent of each e-book sale, with the "file sharer" getting the rest!

Is this fair?

Billion Dollar Profits

Apple, being a public company, is forced to declare its profits, and has some amazing stats. In its latest proud declaration of record profits, Apple explains that the company posted record quarterly revenue of $US54.5 billion and a record quarterly net profit of $US13.1 billion.

This means on average almost 25 per cent of each purchase is profit.

In fact Apple has made so much money that it has about $US140 billion cash in the bank.

The Free Market, Regulations Or People To The Rescue?

Historically, when pricing becomes outrageous, other vendors enter "the space" and offer cheaper alternatives and competition drives down pricing (and profits).

But if anyone wants to take on Apple, they better be prepared to take on a company with more than $US100 billion to spend defending its profits.

Increasingly consumers are being sucked into purchasing devices that mandate the continued purchase from a monopoly or else the (expensive) device is useless.

With the coming of "the Cloud", where your content is stored elsewhere, if you ever abandon one vendor you might just torch your entire collection, making this problem even worse.

This is where governments should come in to protect consumers.

How many parents have been horrified at the cost of console games once the initial console purchase has been made?

Companies selling devices that lock you into buying software or content from a single vendor should be subject to different tax structures than open-source devices.

Alternatively the gouged users should rise up and found their own companies that develop open-source hardware and platforms that anyone can provide content for, defeating the monopolies that increasingly abound in the digital world.

Matthew Bailes is Pro-Vice Chancellor (Research) at Swinburne University of Technology. He receives funding from the Australian Research Council for research into Astronomy and associated supercomputing technologies. His research is also supported by supercomputer vendors via cash, travel grants and discounts on hardware. The ConversationThis article was originally published at The Conversation. Read the original article.


Comments

    Passing legislation to tax digital monopolies will just hurt the consumer as the cost is passed on to customers.

    Gauged users are only in it for themselves, and an alternative needs to provide a better value proposition than the incumbent. Your own antidote suggested you’d fork over $7.00 and sometimes a late fee, after a heated family debate on which video to rent. These hassles are minimised in digital distribution.

    While it’s a shame these ecosystems are offshore, isn’t that an advantage of a global economy. We can’t be best of breed locally in every industry. Consumer markets are driven by population and Australia just doesn’t have the head count for organisations to invest in such services. We should be thankful that overseas organisations are happy to invest in our market, providing consumers with a digital distribution option, which has established benefits against the bricks and mortar model.

    Every change in process has Pro's and Con's. You can't just point your finger at the offshore profits and disregard the benefits that digital entertainment monopolies provide.

    "On Saturday I had the pleasure of watching The Dark Knight Rises on my Apple TV with my sons. Currently in Australia the movie costs $24.99 but in the US only $US14.99"

    I still find the online movie options too expensive in this country. When I can buy the Dark Knight Rises Double Play from JB Hi Fi for $20, I don't see the point in downloading it for $25. As for renting, I'm lucky enough to live just down the road from a video rental store with extremely cheap rentals (e.g. $6 for 5 weeklies).

    I know you pay for convenience with the streaming, but for me it is just not worth the extra money.

    Well, it's apparent that Matthew Bailes has no idea how pricing works in the iTunes store. Base prices are set by the country's rights holders. If a movie is more expensive here than in the US, then this is because the Australian rights holder has set the price that way, not Apple.

    In turn, these prices are set to ensure that people are not driven away from purchasing the DVD/BluRay disc.

    While Apple used to have ultimate say for music track pricing (it doesn't now) it has never had that control for movies or TV shows.

    Might as well retitle the article "Why People Pirate"

    It's clear that nothing is going to change. What Apple etc don't realize is that they can't have it both ways. They cannot realistically expect Australia and other governments worldwide to protect their interests by cracking down on piracy, whilst at the same time preventing people from downloading their complete collection and transferring it to different devices they own.

    The way I see it, they have already built piracy into their business model by making it a "closed" device. A certain number of consumers will pay to get their entire collections again from Apple or Google or even Microsoft when switching device ecosystems. That's where the current hundreds of millions in profits come from.

    If they made it device agnostic though, where people just buy the content they want in the format they want once, it decreases profits significantly - however it's only then that Apple and others can expect governments to crack down file sharers.

    They've made their choice already.

    Much of this problem can be avoided by making smart choices when it comes to your hardware and digital media. I don't have an Apple TV, I have an old laptop running XBMC hooked up to my TV, which does everything the Apple TV can do (including AirPlay support) and more besides. And it cost me precisely nothing (it was given to me by a friend who no longer needed it).
    At some point in the future I may make a very extravagant purchase and upgrade to a Raspberry Pi, costing perhaps all of $50 (once a case and USB power supply are added in).

    Similarly, when it comes to digital media; I have an eReader, but I only buy ebooks that are either DRM free, or where I know I can remove the DRM myself. Same goes for music, movies, &c. The result? All my digital media can be enjoyed on any platform, any way I want.

    Additionally, you can take advantage of services like Spotify or Rdio, which are essentially platform Agnostic - Spotify, certainly, runs on iOS, Android, Windows Phone and even Blackberry(!) and also on OS X, Windows and even Linux. Netflix will no doubt reach our shores eventually as well. And if you ever choose to leave their ecosystems, you're not "torch[ing] your entire collection", because you never bought a collection - you just rented access to a service.

    Yes, it takes a little effort; you have to go to the trouble of informing yourself, and (potentially) learning how to do things like remove DRM. But really, is it not the case with most things in life that if you don't do a little research beforehand, you're likely to get screwed? Relying on governments to regulate this stuff is a bad idea, as it would stifle innovation. For instance, you could have the government ban DRM, which sounds pretty great to me, except then services like Spotify and Netflix wouldn't be able to operate. We should certainly push for DRM free services where it's not necessary - pressure on the music industry, for instance, finally resulted in DRM-free music being sold in most music stores, including iTunes and on Amazon. I'd love to see the same kind of pressure on eBook retailers. But the answer here is better education and consumer pressure, not legislation.

    Last edited 01/03/13 1:47 am

    It does appear that all businesses want to develop into monopolies, or at least oligopolies, to ensure the greatest level of profit. By reducing competition they restrict the consumers options.
    Apple, kindle and others create these 'ecosystems" to capture consumers who wish only to consumer product. This business model is the same in many businesses, take the drug trade; a seller will offer a cheaper good drug to a first timer (Same as a cheap console) then once hooked the user returns to the dealer for his/her fix, they pay more and become dependent on their drug of choice. The user knows where to get their fix and is easy to get. The funniest example I found was Kindle offering wifi - are we so lazy that we can't go to our PC and connect a cable to download data?
    I agree with others on this forum that suggest that education is the way out. The community is the strongest competitor to any monopoly. Building systems that allow any product to be played/viewed takes back the power from those companies that believe it is their right to gouge we the consumer.
    I am new to this community but I am very pleased to know that there are people out there creating change and more importantly advising others how.
    I am reminded of a conversation many years ago about PC v Apple; one comment that really struck home was " Imagine if we drove on roads that were rated ford only or GM only, or what if every time they fixed the road you had to buy an upgrade" I can only say there would be anarchy.

    To all those that spend time finding hacks and fixes to improve our life and reduce the power of companies to suck us dry I say - Power on!!!

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