General Inequality

On last week’s episode of the Accidental Tech Podcast, John Siracusa spent a great deal of time explaining his disappointment in Apple for sticking to its long-held policy whereby it takes a 30% cut of all digital transactions, regardless of volume. He theorized that Apple’s strict adherence to this rule had led Amazon to remove comiXology’s ability to sell comics within the app, thus leading to a detrimental user experience for this segment of Apple users who now had to use a clunky web-based workaround. Then, in this week’s follow-up segment, John revisited this subject in response to a number of listener comments questioning how his suggester solution — a discounted cut for high-volume retailers driving huge traffic through Apple’s platform, such as Amazon would with in-app purchases of comics and books, for example — did not clash with his stated support of net neutrality. Rather than weigh in with my feedback in an email though, I would rather it appear in a public forum if for no other reason than so that, if I am completely off-base, someone can tell me so; because as I listened to John justify his position in response to his listeners’ opinions, I couldn’t help but feel he completely missed the point.

The entire argument in favor of net neutrality is predicated on the belief that at some point in the future, an entrant will emerge with a better business model, a superior product, or revolutionary and disruptive approach to an entrenched player’s space — or some combination of all three — but will nevertheless fail because while the incumbent can afford to shell out vast sums of money to ensure speedy delivery of high-quality content to its users, this upstart cannot. For example, in such a world where net neutrality does not exist, a company could come out with a service superior to that of Netflix’s in every way — cheaper monthly fees, a larger catalog, and higher-quality media — but because Netflix can afford to have its videos delivered at twice the speed our hypothetical upstart can, Netflix will inevitably win out. Unfortunately, although the necessity of net neutrality in this hypothetical future scenario is clear, it remains just that: both a hypothetical and a future scenario, meanwhile the promise of faster Netflix viewing is both a very real and immediately-realized offering. Needless to say, this can make explaining the value of this concept extremely difficult.

I did not choose net neutrality for the main topic today, though, but rather John’s suggestion that Apple could — and should — either lower or remove its imposed 30% cut on all digital transactions in order to make its digital retail business more attractive to resellers and, thus, provide a better experience to its users. I don’t mean to single out John, for others have made similar suggestions as of late, especially with WWDC fast approaching and thus the potential for huge changes such as this as well, but his response to this valid question came off as a dismissal more than a considered reply made in recognition of the validity of the other side’s opinion. And after that, what choice did I have but to put my own thoughts on this matter to words? Let me answer that for you — none.

Imagine a scenario in which two companies, Company A and Company B, sell the same goods. Company B, however, has operated for a number of years already and amassed a great deal of money and power in its chosen space, whereas Company A is naught but an upstart. Both looking to expand their presence in an emerging market, each approach the same retailer who informs them that they will both have to turn over 50% of the selling price in order to stock their widgets on it shelves. Company A takes the retailer off to the side and explains that it learned from Company B’s early mistakes and built a better product, so although it will only move a small number of units at first, it will undoubtedly become a huge business in the future. Until then, though, it really, really needs to not lose 50% of its widgets’ value just to bring them to market. The retailer, however, sticks to its guns: no volume, no discount. Company B, however, has no problem decreasing its margins by 50% in exchange for reaching this new market, and so it strikes a deal with the retailer; Company A, reluctantly, does as well, counting on its superior product to differentiate itself from the lower-quality version its competitor sells.

Company A’s detractors spoke very critically of this move, questioning why it did not just go with another venue — this retailer was, after all, but a small player in the grand scheme of things, with only a small percentage of the market under its control. However, even the loudest of voices failed to realize that within this target market segment of high-value consumers, this retailer is the only game in town; it would not be wholly inappropriate to say it had a monopoly on this user base, because it did. To liken it to a real-world example, as clichéd and worthy of mockery as this phrase has become, Apple does indeed have a monopoly on iOS users.

At this point, our hypothetical yet all too likely scenario can go one of four ways — think of this as one of those “choose your own ending” stories: in the first scenario, unable to subsist on such meager revenue, Company A eventually folds, leaving the monolithic Company B the only game in town. Alternately, no one looks closely enough or cares enough to distinguish between the two companies’ widgets, and ultimately chooses Company B’s because they recognize the brand; Company A, once again, fails. In the third scenario, some non-insignificant portion of the market realizes the value of Company A’s product over that of Company B’s, but the latter undercuts the former into nonexistence, using its vast resources and sway to back up this unsustainable strategy. Finally, in our fourth and final scenario, everyone loves Company A’s product more — they realize its superiority to that of Company B’s, and they begin buying it only to have Company B offer the retailer an extra 20% cut, because they can afford it, to make its inferior product appear more often and in a more complimentary light than everyone else’s. As for the end result, I’m sure you can guess.

In the end, then, no matter what happens, Company A — the proverbial “little guy" — loses even though it has the better widget and beats Company B in every aspect save price. Most importantly though, the consumer loses as well. The companies involved, retailer making all the rules, widget in question, price, profit margin, percent cut, and the size of the target market matter not, for the end result remains the same across the board whenever a prohibitively difficult to obtain advantage is made available to one player involved, but remains out of reach of the others: the entrant, unable to ante up with the appropriate buy in, inevitably fails, leaving Company B, Netflix, or whichever imposing corporation applies to the story at hand, the unchallenged winner. I fail to see how this is any different than net neutrality, I fail to see how either is better than the other, and I fail to see how both are not equally terrible. But please — enlighten me: the way things are going now, I would love to have someone prove me wrong.