Economic Thoughts on the Google Book Settlement

[Ahmed Hindawi <ahmed.hindawi@hindawi.com>]

Something that is clear to me is that Google must be planning to 
use the current Book archive it has in order to tap into the book 
sales market in general (meaning that it will be selling the 
newly published books as well). They are coming from a different 
angle than Amazon.com, but they will most certainly have their 
eye on a market that is currently worth tens of billions of 
dollars. Especially that it is not clear that online advertising 
money will continue to increase and even if it does, the horizon 
of this market might be in sight. Google can double its current 
revenue if it became the world "Book Distributor" to individuals 
and organizations.

First, I have two questions that I hope someone can answer them 
for me (or tell me that there is no such answer at the moment). 
Then, I would like to share some thoughts about the economic 
problems and consequences of a particular scenario that might 
actually take place. First the two questions:

(1) Will Google have the right to creating sub-collections and 
licensing them to different organizations (households?, 
individuals?)? Does the settlement give this right of slicing the 
collection it sub-collections? Can Google create the "Google 
Mathematics Book Collection" or the "Google Social Science 
Collection" or the "Google Science Fiction Collection" and 
license them to libraries, or is Google bound by selling only 
licenses to its whole collection.

(2) Who will determine how the revenue of licenses will be 
divided between the rights holders (after Google takes its cut 
according to the settlement)? This question is always faced by 
aggregators selling cross-publisher content to libraries (e.g., 
ALPSP Learned Journal Collection or the O'Reilly's Safari book 
collection). Most of time, the solution relies on using the 
"current" market price of the items within the collection 
(subscription rates for journals or cover price of books) and/or 
usage levels by the subscribing library. Google will have hard 
time doing either of these, as I will explain below.

The first problem with using the "current" market price is that 
with many books being out of print and for quite some time, there 
is no "current" market price.

However, even if Google can figure something out to use some sort 
of cover price of books to distribute the money between rights 
holders, this cover price can only be used as long as publishers 
will not "adjust" them (for newly published books) to give 
themselves an unfair portion of the revenue. If I price my 
journal at $100,000 in a cross-publisher journal collection to 
get a larger share, I will penalize my direct subscription 
revenue which usually is the major revenue stream. However, in a 
world where I am only relying on the collection revenue stream, I 
will inflate my prices as much as I can, to get the maximum 
possible revenue share from the collection. Clearly this can be a 
problem if the Google revenue generated from site licenses become 
big enough (say $20b) for publishers to "concentrate on it" and 
forget the rest of the market.

So, may be Google (or the Publishers Association or the Authors 
Guild) should forget about the cover price and split the money 
based on usage without taking the cover price into account. But 
this can be problematic. A publisher of a Mathematics book with 
potential audience of 500 people will not be happy to share the 
revenue with a trade book publisher based on usage only. This is 
the reason why Mathematics books are more expensive in the market 
in first place. The cost of producing them, divided by the number 
of "page views" they generate is much higher than regular trade 
book.

Aggregate collections (of any materials) can work with their 
revenue divided between their content producers (publishers or 
rights holders) based on usage only if the usage is correlated 
with the cost of producing them. As an example, consider netflix: 
movie studios are happy letting them stream movies to their 
subscribers and they get a fee per view because although there is 
a movie that costed $300m to produce and another the costed $30m 
to produce and a third that costed $3m to produce, the usage of 
the three movies (the number of people interested in seeing the 
movie at the same price) tend to be 100:10:1 or close to that 
ratio. This is why most movie DVDs are comparable in prices 
regardless of the huge difference between the movie production 
budgets. If you produce a $300m movie, you get your money back 
largely because many people will want to watch it and not because 
you charge $200 for its DVD.

My point is, if you aggregate these types of contents together in 
a single product and license it, content producers (assuming that 
they are happy with the total revenue generated by the collection 
to start with) will be willing to agree on a flat per usage 
formula. For other types of content, the whole system breaks 
down. Trying to create a book collection with scholarly books 
that are generally expensive to produce and fiction books that 
are generally inexpensive to produce while having a negative 
correlation between the potential usage of the two groups will 
most certainly be objectionable to the scholarly book publishers.

If Google can actually create sub-collections or similar 
material, it may be able to tackle this problem to some degree at 
least, hence my first question.

One interesting thing to notice here is that if we convert to 
large collection licenses like these (in which case the cover 
price cannot be used as a bases to distribute the revenue between 
publishers), and if we rely on usage to distribute the revenue, 
we will be in a total "page view economy." Just like the current 
media companies which are relying on advertising which is base on 
the number of page views they can generate for their content. The 
only difference (and it is a very important difference) is that 
instead of the publisher getting $1 for every 1000 page views, 
they will get, say, $12 for every 1000 page views (this would be 
like reading 4 books of 250 page each for $3 each book). This 
would be a world where publishers are competing to produce 
materials that attract readership, because they know that the 
more people read their book (which is free at the point of 
consumption), the larger percentage they will get from that 
license fee at the end of the year. Is this a bad thing, not 
necessary. It can actually be a very good thing.

The fundamental problem is, you need to slice the collection 
enough to make everyone happy (even within Mathematics, a 
publisher of a K* Algebra for graduate students will not want to 
compete based on page views with an a Junior level Numerical 
Analysis book publisher). When items are sold separately, market 
prices solve this problem: you can price your K* Algebra at a 
higher price and the few people who want to read it, will be 
willing to pay this higher price for it. Prices really play a 
very important role in the economy and when/if we create a new 
world based on large cross-publisher collection licenses, we need 
to find a way of recreating the market mechanisms within the 
aggregation in order to reward publishers who produce materials 
that are expensive to produce and at the same time have limited 
potential use. Otherwise, the system will force these publishers 
out of the market and there will be no venues for such content to 
be produce and consumed.

In a hypothetical world where all of publishers revenue are 
coming from these large collections, publishers will care about 
the quality (both the editorial quality and the production 
quality) because they want to maximize the usage of their 
published materials. They will not have sales forces (another 
saving in addition to the print, binding, shipping, etc.), but 
will probably have larger marketing departments. They will want 
to want everyone to know about their books and to encourage 
everyone to read it (hey, it is free at the point of use, so they 
cannot lower their price to entice potential readers, they can 
only try to increase the quality of their published materials).

Any thoughts?

Ahmed Hindawi