Rent-seeking in the 21st century: where eBay, free software, Foxconn and the MPAA come from

Over on O'Reilly Radar, Jim Stogdill has a fabulous piece on the economic theory of rents as they apply to technology businesses, open source, cloud computing, spectrum auctions, and other chewy, boingy subjects. This is exactly the kind of economist talk I love: the stuff that makes you slap your forehead and say of course, that's how it works:
Obviously digital distribution has also damaged the traditional channel model of the music, film, and photography markets. The impact of this is that the tail-end of the curve can probably shift business models and still make the same money (by touring, selling FLAC files, whatever). But the head -- where the record companies are -- will struggle to extract rents like they used to. As they realize this, they do what rent holders who are losing always do: dispense patronage from their existing franchise and try to influence the law to make their rents more permanent.

Apple has historically lived on rents derived from superior design, which is a very hard thing to do consistently. So they've earned their rents so far. Recently, they've gotten even smarter. The App Store is an MBA's dream because it combines network effects with classic distribution channel control and slotting fees. It also has strong barriers to exit. Interestingly, Foxconn (and its employees) mostly continue to work at opportunity cost levels of renumeration. Rents stay with the leverage and are not evenly distributed through the supply chain.

Apple also finds itself in the odd position of Karmic enforcer. The software developers that once helped destroy content owners' iron-clad grip on distribution now find themselves selling their creations for 30 percent of $.99. Karma is a bitch.

Google extracts amazing rents through a combination of innovation and network effects, although they have really struggled to duplicate their core search / AdSense monopoly. Innovation is keeping Google ahead of Schumpeter for now, but hasn't yet created a second vortex of network effect monopoly. So Bing is an important threat if its share continues to grow. Emerging and effective competition in the area where you are extracting rents will have a non-linear impact on your bottom line. If all goes well (in a Schumpeterian sense), both Bing and Google's search franchises will be rent free in an economic sense. Good for people buying ads, bad for people that hope Google will keep taking the cash thrown off to innovate in other areas (like creating an Office rent-neutralizing alternative in the cloud). It's like watching a pair of Ultra Kaiju trying to choke each other out over Tokyo.

Points of control = Rents


    1. Really? Here the author says “rent” is “the amount you pay people in excess of what you really have to to get them to do something.” So anybody who loves their job is a rent seeker. In fact, anybody who tolerates their job more than just barely is a rent seeker to a small degree. If you do anything for money, and you wouldn’t quit immediately if you were paid a dollar less a week, then you’re getting at least a dollar a week in economic rent.

      1. As usual, economists have their own definition on a common word (tho to be honest, they are not alone. Scientists have their own definition of theory for instance). This makes reading various economic texts a bit like walking in a verbal minefield. When you think you got the right understanding, boom goes a redefined word.

  1. That’s odd. I get 70% of $0.99 from Apple for my 3d asteroids/space combat game. Did other people not negotiate as well?

    1. I think his comment is that while Apple have been able to shore up a control point (rent gate?), they have only managed to do so at the border of pointlessness (30% rent on .99).

      1. I’m pretty sure that is not what he is saying. Who are “the software developers” in this sentence? Not Apple.

  2. May I be the first to say that, indeed, The Rent is Too Damn High!

    (also Ultra Kaiju are cool. . .)

  3. Jim doesn’t understand the iTunes App Store economics, but most non-developers don’t anyway.

    The App Store is not the ‘Karmic enforcer’ for software developers – quite the opposite – they created a brand-new, multi-billion-dollar software market that didn’t exist before – that’s why there are so many of us developing software for it.

    Its not like writing $.99 Objective-C apps is ‘just that much fun’ that 59k developers jumped on in 2 years.

    30% is Apple’s take, not the developer – the developer gets the other 70%, which is standard for software distribution.

    The $.99 is not a problem, as there is no commitment or overhead in App Store participation. Like any platform, you need to choose your products carefully (language-independant casual game like, oh, I dunno, Angry Birds?) in order to target the entire iOS market worldwide and make a bundle.

    1. Oh, they create a market alright. But just like the record companies being the gatekeepers of the recorded music market, apple is the gatekeeper of the mac/ios software market.

  4. Apple’s market is nothing like the record companies’ market. Apple doesn’t pay advances and require you to recoup their promotional expenses against your royalties, they just charge you 30% of your retail cost.

    Let’s compare apples to apples, as it were. If you are an independent musician, you need only register with iTunes as a record label, and Apple just takes 30% of the track cost. You need to have a business bank account to collect the money, but Apple doesn’t really do any gatekeeping, other than to flag explicit content. Artists like Pomplamoose are using this model and doing much better than they would under a record company. A record label will concentrate its resources on a few tentpole releases and pretty much let the new artists fend for themselves, charging them money they haven’t yet made to promote them. Apple also takes no rights to your likeness, bandname, recordings, etc. The deal is not exclusive, you can put your music on other stores at the same time, tour, do whatever you want, and you can end it whenever you want, as opposed to the 7 year contracts in the music industry.

    The software market for iTunes is different in that you can even release free content at no cost to yourself. If you do charge money, Apple takes 30%, but they also provide a selling infrastructure you could not easily duplicate on your own, with worldwide currency conversion, etc.

    1. Its still early days. Lets see how apple behaves once they have been running their app store as long as the record companies have been in the business.

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