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”.
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 (see below).
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 A$24.99 but in the US only US$14.99. 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 A$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% 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% 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 US$54.5 billion and a record quarterly net profit of US$13.1 billion.
This means on average almost 25% of each purchase is profit.
In fact Apple has made so much money that it has about US$140 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 US$100 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.