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Marginal Cost Pricing: iPad Edition

By Matthew Yglesias  

"Marginal Cost Pricing: iPad Edition"

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If you liked marginal cost pricing for mass transit, then as Tim Lee observes you’re going to hate Apple’s new iPad which represents the furthest elaboration of Apple’s turn to a business model where they’re not only trying to sell you a device (iPod, iPhone, etc.), they’re trying to become a monopoly retailer of digital content:

This is of a piece with the rest of Apple’s media strategy. Apple seems determined to replicate the 20th century business model of paying for copies of content in an age where those copies have a marginal cost of zero. Analysts often point to the strategy as a success, but I think this is a misreading of the last decade. The parts of the iTunes store that have had the most success—music and apps—are tied to devices that are strong products in their own right. Recall that the iPod was introduced 18 months before the iTunes Store, and that the iPhone had no app store for its first year. In contrast, the Apple TV, which is basically limited to only playing content purchased from the iTunes Store, has been a conspicuous failure. People don’t buy iPods and iPhones in order to use the iTunes store. They buy from the iTunes store because it’s an easy way to get stuff onto their iPods and iPhones.

Apple is fighting against powerful and fundamental economic forces. In the short term, Apple’s technological and industrial design prowess can help to prop up dying business models. But before too long, the force of economic gravity will push the price of content down to its marginal cost of zero. And when it does, the walls of Apple’s garden will feel a lot more confining. If “tablets” are the future, which is far from clear, I’d rather wait for a device that gives me full freedom to run the applications and display the content of my choice.

Right. I find the whole thing a little bit weird. I love Apple’s design sensibility and have spent a ton of money on Apple products over the years. But when I looked into what the Apple TV actually does, I wanted nothing to do with it. There are lots of different kinds of digital video content. A device that stored all kinds of digital video content and displayed it on my television, that had aesthetically pleasing industrial design and an aesthetically pleasing interface is something I’d be tempted to buy.

Obviously over the years I have, in fact, used the iTunes store to buy music and put it on an iPod or an iPhone. But I’ve also loaded audio from plenty of other sources—BitTorrent, Emusic, CD rips, Yale Open Courses, etc.—onto them. That’s the genius of it. The rise of a world in which the marginal cost of distributing content is zero, and therefore content becomes extremely cheap, is very bad for incumbent producers/distributors of content. But it’s a windfall for the people who make the devices that store/play/use the content. To me it looks like Apple has rode that wave by being good at building devices. The whole “store” kick just seems like a misunderstanding of what’s appealing about these products. The iPad is cool-looking and seems to have a considerable amount of computing power—why not just let people come up with whatever they want to put on it?

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