'Efficient' monopolies

["Jose G. Perez" <jgperez@xxxxxxxxxxx>]

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Eli,

        Monopolies are economically inefficient under capitalism. So
*much* so that in one of those "stop me before I kill again" moments,
the U.S. ruling class had their government outlaw them, and that is
pretty much a rule throughout the capitalist world, monopolies are
either straight-up illegal or face countless restrictions so as to make
them impractical and dangerous for most lines of business. 

        Of course, the laws of the economic system are more powerful
than those put together in some parliament, and the drive towards
monopolization in all sectors in extremely powerful and not to be
deterred by some piece of paper, especially when judges and politicians
can be had so cheap (the effect of competition in the political market,
although the Republicans are trying to fix that). And the forms that
monopolization and cartelization take have also evolved to get around
the laws, among other things.

        As to why monopolies are inefficient under capitalism, it's the
lack of any real competition. By the way, I use the word "monopoly" to
include all sorts of variants of the same phenomenon, duopolies
(intel-amd on the X86 microprocessor architecture), cartels (Hollywood,
the Music Mafia and RIAA, Detroit) and so on. 

        The recording industry is a good case in point. CD's are 1970's
digital tech, from the very earliest days of this kind of technology.
Since the late 1980's at least, and probably earlier, there's been much
better ways of encoding audio digitally. Since the early 90's they've
been talking about a new generation of digital audio discs (5.1 channels
and at least 90-some khz sampling, as opposed to the CD "red book"
standard. 

        That current standard is, if I remember right, 44khz sampling,
i.e., barely double the top edge of the audible range, clearly
insufficient and the real reason audiophiles can tell the difference
between vinyl and CD's. Double-blind tests have shown that people can
tell the difference between CD's and vinyl, but can't tell the
difference once you use higher sampling rates. Some highly controlled
testing has been done  by academia, and supposedly a lot privately by
SONY, Phillips and others, to the point even of making sure of encoding
into test CD's vinyl "hiss" so people can't tell the difference that
way. That's how they developed --or at least so the story goes, I've
never seen it in print-- the standards for DVD's.

        The audio program on a well-mastered DVD is superior in quality
to CD's. And there are already two strictly audio disc standards out
there, with products on the market, for a  next-generation digital audio
disk.

        The industry nevertheless remains tied to the sinking ship of
the CD Digital Audio standard, just as they remained married to the
cassette standard for a convenience format to the point there even
within the last year or so I've still seen bins in some record stores
with tapes in them that they can't move because cassettes are like, so
1970s.

        That's because the real costs of production and distribution of
a ready-to-put-on-the-shelf CD, or viewed another way, the amount of
socially necessary labor time they embody, is less than $3. And actually
a FINISHED product (with inserts, case, shrink wrap and price sticker)
you pick up from a plant costs less than a dollar in any reasonable
quantity. The monopoly pricing power of the RIAA cartel has allowed them
to maintain a price of somewhere around $15, at least double the actual
*value*  of a CD. 

        If you do a little thought experiment you can see this I think.
Imagine copyright law was reworked this way: anyone who wanted to could
make CD's of any content, provided they paid a standard, average royalty
corresponding to the current royalty rates. And suppose the cost of
production of a CD is $1.00, royalties $2. Costs of producing the master
come out of artists' royalties, as is the case today. Distribution and
warehousing and so on are $1. Total cost is $4. Retail price is going to
be $7, wholesale price $4.20.

        Of course the cost of a real ready-to-sell CD is already lower,
and distribution costs in this scenario would probably be driven lower.
You'd get almost completely automated pressing and CD packaging plants
close to major consumer markets. The $2 royalty in my scenario
represents "monopoly pricing" corresponding to the monopoly copyright
gives "content creators".  And as you see, the way the publishers, the
industry has shaped copyright law, it has served to propel an ADDITIONAL
$8 or so in the wholesale price (I think it is just under $12 total)
which represents almost completely the industry monopoly (cartel) "tax"
extracted from consumers.

        This is economically inefficient by capitalist definitions and
any others I can think of. A $7 price point would make CD's an impulse
buy, pushing sales much higher in volume terms and quite possibly in
dollar terms. 

        Even the Hollywood studios, which are first cousins or half
brothers of the music mafia, actually is trying to get to that sort of
level on movies, especially because of the "vision" of the guy
considered the father of the DVD, a Warner Bros guy whose name I forget
(Warner Bros, in its infinite corporate wisdom once it had become part
of the mega conglomerate AOL Time Warner, fired him a year ago).

        These things cost next to nothing to make (a miniscule amount of
plastic, there is more in just about any child's toy) and a tiny bit of
metal foil stamped with the program content. Hollywood has been driven
much closer to just selling these things at value, i.e., accepting a
much smaller monopoly superprofit, because they didn't have the
prescience to get from Congress an exception to the general first sale
doctrine of copyright law saying you couldn't rent out their product
once you bought them, whereas the recording industry and software houses
did buy themselves that exemption from traditional copyright law.

        That's because Hollywood was so backward they had no idea they
could actually sell MILLIONS of copies of a movie. They were
overwhelming focused on stamping out consumer "piracy" two decades ago
when this all came up. "Piracy" being, of course, the VCR, they wanted
them declared illegal. And their model was selling rental places $2 to
produce VHS tapes for up to $200. Then for some Easter season someone
had the bright idea of selling E.T., I think it was, for $25 (mid-80's
dollars!) and it was such a smashing success that then they began moving
to actually selling tapes to consumers. At first the model was a
"window" of high-priced VHS for selling into the rental stores, then a
year or more later, a low-priced home edition would come out of the most
popular tittles only, of course. 

        I could trace you the whole evolution to today's movie displays
in supermarkets, which was the last thing the guy from Warners Bros. got
off the ground before they fired him (if you look at the displays you'll
see in most places it is still only Warner products).  But the point is,
they could have been doing this 20 years ago, and in fact would have had
no choice but to do so if the industry could somehow have been magically
re-engineered to create effective competition and prevent a "publisher"
cartel with truly monstrous monopoly pricing power. And the difference
between the few tens of thousands of VHS copies of a big movie they
distributed in the 1980's and the millions on home copies (both VHS and
DVD formats) distributed now reflects the economic inefficiency inherent
in monopolization.

José



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