A Stitch in Haste

Some busybodies in the U.K. need a refresher course in basic economics:

Apple Computer's three-month-old European iTunes service came under attack Wednesday from Britain's Consumers' Association, which asked the Office of Fair Trading, a business watchdog, to investigate why the service's prices are higher than those in the United States.

British iTunes customers pay 79 pence ($1.40, or 120 eurocents) per song, while French and German residents pay 67.7 pence ($1.20, or 99 eurocents), a difference of 17.5 percent. Americans pay even less: just 99 cents per song.
...
For the Consumers' Association, the important point is that the United Kingdom, France and Germany are all part of what is supposed to be a single market. "This is precisely the sort of market where the internet should be delivering benefits to the consumer as well as industry," said Graham Vidler, head of policy for the Consumers' Association. "This is partly about the difference between a physical product and a digital market, but the key is that it's a single-market issue. We know that iTunes is even cheaper in the U.S. than in France and Germany, but neither the OFT (Office of Fair Trading) nor the EC (European Commission) has any power to do anything about that. But they do have power as the guardians of the single market to see fair play."

The busybodies are of course confusing two entirely different economic concepts.

The first concept is "purchasing power parity" or the "law of one price" -- essentially the fiction that prices and exchange rates should be such that, say, a cheeseburger should cost exactly the same regardless of where it's sold and in what currency.

Again, that's a complete fiction in the real world, where different manufacturing, transportation and storage costs will invariably result in different prices (this is true even without exchange rates...think "prices may vary in Alaska and Hawaii"). Factor in different interest rates, not to mention different levels of regulation and hidden taxes, and there is no basic reason to expect, or demand, that currency-adjusted prices for anything should be comparable in different markets.

Ah, but wait, say the busybodies -- there are no "different markets," just one Europe. Moreover, they argue, since iTunes is a digital medium, there are no "different manufacturing, transportation and storage costs" and therefore no justification for charging different prices.

Phooey.

The busybodies have it exactly backwards. The very fact that Apple can charge different prices proves that there are different markets. That's the very definition of a "market."

Of course, the real complaint of the busybodies is that Apple ought not to be allowed to charge different prices even though they can. To which the only proper answer is "why not?"

There is nothing intrinsically immoral about price discrimination (i.e., charging different buyers different prices for the same good). In fact, there can be powerful social-utilitarian arguments in favor of allowing it, if you're into that sort of thing (I'm certainly not). In any case, if Apple can extract different prices in different countries, then they have every right to do so, as long as they do not engage in any anti-competitive practices (and exactly what should constitute "anti-competitive" is a whole different violent rant thoughtful post).

Excellent primer on price discrimination here.

Meanwhile, more iPod/iTunes posts here and here. See also my post on gouging, another form of perfectly reasonable price discrimination.

You may know that the Eurocrats, who like to smack down U.S. companies because they're...well, U.S. companies...has been molesting Microsoft recently over silly antitrust allegations.

But here's a particularly perverse part of the E.U.'s war against good, cheap stuff:

"Microsoft is forced to create an adaptation of Windows that it would never consider creating otherwise and it must label it with its valuable Windows trademark," Microsoft lawyer Jean-Francois Bellis told the court. "It strikes at the very heart of Microsoft's business model and design of Windows." Linda Averett of Microsoft said that many Web sites and software products will not work without Windows Media Player. Consumers who buy computers with Windows "are very likely to feel deceived when they find that Web sites don't work." She said that consumers will be uncertain how Windows might change in the future. "What other piece is going to be gone? The graphics file?" she said. "This is a serious problem."

Imagine regulators ordering Coca-Cola to offer flat soda right next to carbonated soda so consumers "would have a choice." What if nobody wants that choice? The action by the E.U. is especially absurd given that Windows Media Player, RealPlayer, QuickTime, iTunes and who knows how many other media players are all available for free anyway.

Where exactly is the logic of forcing Microsoft to remove a vital but non-revenue component of its operating system? Of course, there isn't any logic -- except that a U.S. company is hassled and harassed by regulatory bureaucrats who probably couldn't change their screensaver settings.

Pathetic.

Related Posts:
Microsoft and Mozilla: An Update (Microsoft's So-Called "Monopoly")
Many Happy Returns (Microsoft Dividend Announcement)
What Channel Country? What Station Price? (U.K. versus iTunes)
Franken-Wine's Monster (Europe's War on GM Food)

A blogger is always supposed to substantiate his claims of prescience with links. In this case I cannot comply, because it happened before I started blogging.

But my friends will remember my loud and repeated predictions back in April, when Netflix raised its prices, that "THIS WILL NOT STAND! The market will not tolerate this!"

Ahem:

The future suddenly looks shaky for online DVD rental pioneer Netflix Inc.
...
Netflix is betting an upcoming 18 percent reduction in its monthly service fee will lure millions of new subscribers, extending its reign as king of online DVD rentals even though its profits are expected to disintegrate amid the stiffer competition.

Investors aren't nearly as confident. Netflix's stock has plunged 75 percent during the last nine months, reflecting fears that the 5-year-old company is destined to become another dot-com pipe dream.

Many industry analysts now view Netflix - with 2.2 million subscribers - as a prime takeover target, with Amazon and Yahoo Inc. shaping up as the most logical suitors.
...
The Amazon threat, though, prompted Netflix to backpedal and lower the monthly fee to $17.95 effective Nov. 1. The company also scrapped its plans to expand into the United Kingdom.
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Dallas-based Blockbuster already is undercutting Netflix by lowering the monthly subscription fee for its online rental service from $19.99 to $17.49, effective Monday (Oct. 25). The recent repricing leaves discount king Wal-Mart in the unusual position of having the niche industry's highest subscription fee at $18.76 per month to check out up to three titles.

Netflix is a great service. I've been a member and a fan for over two years (and, in the spirit of full disclosure, I made a sh*tload of money trading its stock -- I own none currently). But they got just plain cocky in raising their rates, and they got punished.

As I succinctly blogged previously: "I love competition."

Related Posts:
What Channel? What Station?
What Channel Country? What Station Price?
Will MP3's Be the Next Airline Industry?
Capitalists 'R' Us

Just as I was getting all my budgetary ducks in a row to take the plunge and buy a 42" plasma TV, Dell decides to get into the business and undercut Gateway (whence I was planning to buy), charging $1,000 less.

Cheaper TV. Cheaper DVD rentals.

I love competition. I mean, I really love it!

UPDATE: Did I say $1,000 less? Make that $1,500 less!

Related Posts:
"Men's Socks are Amazing..."
What Channel? What Station?
Getting Carded
Follow the Bouncing Check

Microsoft is ready to begin selling the product it had no desire to make but was forced to by the European Union:

The world's largest software maker was forced to change its Windows OS as part of the European Union's landmark antitrust ruling.
...
Microsoft will make Windows XP Home Edition N and Windows XP Professional N — the "N" stands for "not with Media Player" — available to manufacturers on June 15 in English, French, German, Italian and Spanish. Versions in other languages ... will be available July 15.

Of course, Microsoft committed only two crimes: (1) making a very good product at a very good price, and (2) not being European.

I predict that sales of this new forced-labor OS will be somewhere between "zero" and "only what the E.U. bureaucracy itself buys."

One thing's for sure: Microsoft won't need any of these to ship this unnatural mutant software.

Is it any surprise that, in the wake of Europe's obnoxious antitrust shakedown of Microsoft, Intel would be next?

AMD [formerly "Advanced Micro Devices"] announced today that it filed an antitrust complaint against Intel Corporation ("Intel") yesterday in U.S. federal district court for the district of Delaware under Section 2 of the Sherman Antitrust Act, Sections 4 and 16 of the Clayton Act, and the California Business and Professions Code. The 48-page complaint explains in detail how Intel has unlawfully maintained its monopoly in the x86 microprocessor market by engaging in worldwide coercion of customers from dealing with AMD. It identifies 38 companies that have been victims of coercion by Intel — including large scale computer-makers, small system-builders, wholesale distributors, and retailers, through seven types of illegality across three continents.

Those poor "victims of coercion" include such "helpless" entities as Dell, Sony and Hewlett-Packard.

And of course, AMD is not playing Robin Hood to return any money to these "victim" mega-corporations. What is AMD suing for?

"[R]elief as may be necessary or appropriate to restore and maintain competitive conditions in the x86 Microprocessor Market."

In other words, force Intel to let AMD win, which it couldn't do on its own.

I am not a particular expert on Intel or AMD (I'm also not an expert in antitrust law, although, like any good econo-lawyer, I know the basics).

On the other hand, as someone who has worked in equity research for many years, I do know the general gist of the ongoing "Intel v. AMD" contest. It goes something like this:

--Intel makes a CPU.
--AMD tries to copy it and undercut Intel on price.
--Intel makes a better CPU.
--AMD tries to copy it and undercut Intel on price.
--Intel makes a better CPU.
--AMD tries to copy it and undercut Intel on price.

And so on, for the last ten years or so. It is only recently that AMD seems to have gotten the upper hand on Intel with its new 64-bit chip. (Keep in mind also that both companies make many other chips besides microprocessors, and that there are many other semiconductor companies through the world.)

Whatever arrangements Intel may have had with its customers (which, recall, are not you and me, but the hardly powerless computer manufacturers), they do not circumvent the fact that, generally speaking, Intel always had the better chip. Paying more for something better is not evidence of "monopoly power," but rather of "mousetrap power" (as in "build a better mousetrap...").

Just because one competitor beats another does not mean that there was an antitrust violation or even an antitrust concern. AMD's complaint (PDF - 48 pages) compares Intel's conduct to a "cocaine dealer" that beat computer maker Gateway into "guacamole." That's not a reasoned grievance — that's sour grapes.

Stated differently, compare these two quotes:

"For most competitive situations, this is just business. But from a monopolist, this is illegal."
--Hector Ruiz, AMD Chairman, President and Chief Executive Officer

"[N]o U.S. antitrust regulators or courts have declared Intel a monopoly. AMD must thus prove the monopolist allegation even though AMD's very existence could be wielded as a counterargument."
--AP report on the lawsuit.

This is not antitrust — this is bratty whining. And it will likely achieve nothing, since the government has shown no interest in Intel throughout the entire PC revolution.

As one Wall Street analyst put it (I'm paraphrasing): "The only impact on these two companies will be to increase their legal expenses."

Time to give "loser pays" another look.

UPDATE: Intel has filed its answer to AMD's complaint and basically calls "Shenanigans!" on the lawsuit. One interesting factoid: AMD apparently runs its manufacturing facilities at full capacity. How can AMD claim to be losing business to Intel's "anticompetitive business practices" if AMD is selling all the chips it can make?

Sony, which was Apple before Apple was Apple, is admitting defeat and radically downsizing its operations:

Electronics giant Sony has announced plans to cut 10,000 jobs worldwide as part of a restructuring programme. ... The company will also close or sell 11 of its 65 manufacturing plants.
...
The company that invented the Walkman has been humbled in the portable music market by Apple's iPod, while it has also been caught out by the shift from traditional cathode-ray tube televisions to flat screens.

Critics of capitalism often focus on company size, arguing something like, "For capitalism to work, it requires competition, and mega-corporations like Microsoft, Wal-Mart and, um, Sony don't really compete, because they're practically monopolies."

Nonsense. Indeed the exact opposite proves to be true almost without exception: it takes remarkably few competitors to bring about competition. Sony has only a handful of competitors to the Walkman and old-fashioned television businesses. And those handful of competitors cleaned Sony's clock-radio.

Sony gave us great Walkmans and Discmans. But it didn't give us great iPods. And all its size and market power couldn't help it compete with a better product — a better product that only capitalism and the profit motive could give us.

In a centrally-planned economy, however, where economics and politics are intertwined, there would have been no incentive to invent, or perfect, the MP3 player. And even if it had been invented, the political power (not the economic power) of an entrenched producer like Sony would have been able to keep it off the market. Or perhaps the mere subjective whim of some bureaucrat would have been enough: "We have a perfectly good Walkman factory — why displace all those workers just to go from a dozen songs to 10,000?"

All variations of central planning presume static markets: that nothing ever changes and that entrepreneurship and risk taking are merely "exploitation."

And the format of that old song is incompatible with your iPod.

Here's the latest chapter in the ongoing harassment of Microsoft by the European Union:

The European Union on Thursday threatened to fine Microsoft Corp. up to 2 million euros ($2.37 million) a day for failing to obey its 2004 antitrust ruling, accusing the company of intransigence in sharing information with competitors.
...
The threat of new sanctions against Microsoft aims to force it to provide more detailed information so competitors' products can be made more compatible with Microsoft's Windows server operating system.
...
Brad Smith, Microsoft's top lawyer, accused the EU Commission of threatening the fine before it had even reviewed highly technical documentation he said Microsoft sent to European officials on Wednesday.
...
"Every time we do absolutely everything we've been asked to do, we're told that there's something else we need to do," Smith said in an interview with The Associated Press.

When a government orders a company, upon pain of multi-million dollar fines, to allow its competitors to become "more compatible" with that company's products, then they cease to be "competitors" and become moochers.

The last time the E.U. bullied Microsoft around, the result was a product that no one bought. How does this "improve the competitive landscape"? How are European consumers (not businesses, but consumers) made better off by forcing Microsoft to flush CD-ROMs, man-hours and money down the w.c.?

But of course antitrust harassment of successful companies is never about consumers, regardless of any grandstanding to the contrary by politicians or bureaucrats. Antitrust protects not competition but competitors. And the only way to protect competitors is at the expense of consumers.

After a century of failed experiments in antitrust central planning, the United States has for the most part wizened up; antitrust review by agencies such as the Federal Trade Commission is minimal these days, and the most obnoxious manifestations of antitrust command-and-control — the Interstate Commerce Commission and the Civil Aeronautics Board — have been relegated to the Delete Key of History.

Hopefully Europe won't stay too unenlightened for too long. Too much is at stake for too many European consumers.

More thoughts at The Phalanx.

...so says one of the most anti-law entities ever concocted: the European Commission --

Microsoft has been fined 280.5m euros ($357m; £194m) by the European Commission for failing to comply with an anti-competition ruling.
...
The move follows a landmark EU ruling in 2004, which ordered Microsoft to provide rivals with information about its Windows operating system.
...
The daily fines will come into force from 31 July if Microsoft fails to supply "complete and accurate" technical information to rival developers, the EU said.

Microsoft has insisted it is meeting the Commission's demands, and says it expects to deliver the final bundle of information for use by rival software firms by 18 July.
...
EU Competition Commissioner Neelie Kroes said she had "no alternative but to levy penalty payments" against Microsoft, adding that "no company is above the law".

And precisely what law would that be? The law of property, whence most other laws derive? The one that says that the fruits of one's private entrepreneurship and risk-taking should accrue to him unfettered by the petty jealousies of others? The one that says that private people should be able to buy and sell among themselves with no random or capricious interference from hack bureaucrats who produce nothing but economic friction? The one that says that lower prices are better than higher prices, that more efficiency is better than less efficiency, and that more comprehensive solutions are better than less comprehensive solutions?

Whatever law Microsoft broke, let's hope it and other businesses find ever more ways to potentially break it.

After years of baselessly harassing Microsoft for selling a product that people want to buy (solution: force them to sell a product people don't want to buy -- to make them better off), Eurocrats are now setting their sights on Apple:

The Dutch consumer protection agency became the latest in Europe on Thursday to pressure Apple Inc. into changing restrictions that tie songs bought on iTunes to its market-leading iPod players.

Consumentenbond spokesman Ewald van Kouwen said his group had filed a formal complaint with the Dutch antitrust watchdog NMa asking for an investigation into what he called "illegal practices" by Apple's iTunes online store.

"What we want from Apple is that they remove the limitations that prevent you from playing a song you download from iTunes on any player other than an iPod," van Kouwen said. "When you buy a music CD it doesn't play only on players made by Panasonic. People who download a song from iTunes shouldn't be bound to an iPod for the rest of their lives."

The Dutch complaints follow similar ones from consumer-rights groups in Germany, France and the Nordic countries.

This is, of course, utter nonsense.

First of all, digital music is not a natural resource. A file format is not centuries-old technology that anyone and everyone can share and that Apple is now somehow "stealing" or "hoarding." They invented their particular format, and people are free to embrace it or shun it as they see fit. And if many, most or nearly all Europeans are indeed embracing it, then wouldn't that suggest that the best course of action is no action at all? Why should offering people what they want be considered either an offense or offensive?

Apple has competition, both within the narrow market of digital music and in the broader market of "music" generally. If iTunes continues to thrive, it will only be because it continues to indenture itself to its customers. This, to a European, is somehow a sin.

The "Panasonic - CD" analogy is particularly retarded (not least because the compact disc was invented by Philips and Sony, not Panasonic). The correct analogy would be a law requiring all CD players to also play cassettes, or to include a radio, or to have both European and American plugs. Requiring a company to sell a product that customers don't want simply does not make those customers better off, especially if (when) the company, facing higher costs, raise prices or exits the market altogether.

Let's hope the Eurocrats don't force Apple to "Think Different" about doing business there.

---

Did I mention Microsoft?

A coalition of rivals charged on Friday that Microsoft's new Vista operating system will perpetuate practices found illegal in the European Union nearly three years ago.

The European Commission found in 2004 that Microsoft used its dominance to muscle out RealNetworks and other makers of audio and video streaming software and that it made its desktop Windows deliberately incompatible with rival's server software.

Those "practices found illegal" were, again, selling a product people wanted to buy. Go figure.

Antitrust laws do not protect competition, they protect competitors -- who, recall, are not "consumers." How sad that Microsoft's "rivals" are seeking unearned enrichment via the coercive power of corrupt governments.

This story will no doubt incense the malcontents who are still fuming over Apple's sloppy, but in no way immoral, timing of a significant price cut for the iPhone:

After taking apart the nano, iSuppli estimates that all the parts inside cost Apple $58.85 for the $149 model with 4 gigabytes of storage capacity, and $82.85 for the 8GB version priced at $199. For the lower-priced model, that would represent a drop of more than $13 per unit in costs compared with the 4GB nano that Apple introduced a year ago. That's also more than $31 cheaper per unit than the parts in the original 2GB nano introduced in September, 2005.

Charging $150 for $60 worth of stuff? What could possibly by more oppressive? Surely there's an antitrust violation in there somewhere. Just ask Microsoft.

Of course, the devil-slayer is in the details:

iSuppli's estimates don't account for nonhardware costs, including software development, intellectual property, packaging, final assembly, and distribution.

Stated differently, iSupply's statistics are totally worthless (except to a handful of trade specialists, engineers and investment analysts).

Still, the Big Lie of Marxist-Leninism and its offspring (modern socialism, the New Deal, antitrust law, Michael Moore, etc.) is precisely this notion that a manufactured good is nothing more than the sum of its components — the little pieces and the little people who put them together (after being shown how). The omissions — especially "development" but also marketing, financing, etc. — all the intangibles to which one cannot point as one can point to a button or battery, are somehow not "real components" and are therefore not "real costs."

From there, it is a short step to concluding that what's left over, even after subtracting intangible costs (i.e., "profit"), is even less "legitimate" a component of a good's price than the intangible costs of R&D or marketing. Profits cease to be a return to a factor of production, on an equal footing with wages, rent and interest, but instead are a "residual." Profits, in this model, are not ascribable to a "component" of the good being sold, and are therefore not "earned" in the way that the seller of a component or worker on the assembly line "earns" their share of the price of the final good.

Wholly preposterous. And yet that is precisely what almost every single introductory economics student in every capitalist economy is taught.

Entrepreneurship — innovation and risk-taking — is a factor of production no different in principle, or in ethical underpinning, from labor, capital or land. And the return to entrepreneurship — profit — is no different in principle, or in ethical underpinning, from wages, interest or rent. iPods do not grow on trees, and those who brought them into being are exploiting no one by selling them — at any price to any willing buyer. By definition, not a single supplier, employee or customer of Apple, or of any other entrepreneurial venture, has ever been "exploited" (outside of collusive rent-seeking conspiracies with government — which of course is not "capitalism" but rather the most insolent form of anti-capitalism). "Exploitative capitalism" is simply an oxymoron.

Add that to your intellectual playlist.

(Via Slashdot.)