Privacy.  PRIVACY.  The RIGHT to PRIVACY.  Do you believe we should have a right to privacy?  Should we expect that our government will allow us to live our lives without surveillance, free from the need to check, to constantly look over our shoulders to see who from the government is watching?

As always the world is full of events occupying our time and driving the news.  And, as is usually the case, each story is presented in isolation.  Rarely does anyone discuss the connectedness of the stories or their implications.  Often, that means little, but occasionally the disconnectedness points to the dissonance in government when agencies pursue their agendas.  Once in a while the opportunity arises from this to view the conflict in “generalizable principles” that drive our government’s behavior.

Yesterday President Obama made a rare selection for the Supreme Court choosing someone who has not sat on the bench. ¹  In the past few decades concomitant with the selection of a nominee we have heard the hue and cry from both sides of the abortion debate.  So far there has been little discussion on this issue. ²   The Washington Post today suggests today that part of the silence is due to the economic issues of the past few years, but hints that the lack of a record on the part of Elena Kagan will cause many to dig back through what record there is.  This in itself could be cause for silence.

As the Post points out the issue of concern to many is her views on the “right to privacy.”  Interestingly, this is the “right” that has been cited as the underpinnings of a woman’s right to choose.  Also, interestingly, opponents point out the glaring absence of the “right” to privacy in the constitution. ³

The Washington Post may be correct–this may well be the sleeper issue of the summer. ⁴

So the right to privacy has been a major underpinning of the “pro-choice” movement.  And so far the government has held that there is a “right to privacy.” The question now is–is that a special right, or a general right?  That is, does this “right to privacy exist only for the arguments surrounding and defending abortion, or is it a fundamental right that is applied to everyone in every walk of life, every day?

Think long and hard about this.  What is the heart of the debate concerning immigration in Arizona?  Is it really racism? Or is it about the right to live a private life, without the intrusion of the government into your private life without cause?  After removing the words “Racism” and “racist” from the discussion, the most vocal arguments so far against the new immigration law in Arizona have centered around the stopping of individuals that law enforcement might believe are here illegally based solely on “their perceived ethnic origin.” So the question really is one of privacy.

Now let’s take that next step–the government actually implying that they are using the tools of high-tech espionage to track down citizens–not for terrorism, or murder, or violent crimes, but for failing to pay $4000 in taxes. ⁵  (See the video below)

Of course, we all know that the state of Pennsylvania doesn’t actually use satellite surveillance and listening devices, and gps tracking to monitor their citizens.⁶  It’s just a commercial. It’s not meant to REALLY intimidate anyone.  It’s just meant to be cute.

Right?  RIGHT?

So now we face  the BIG PROBLEM.

By shifting to a policy where everyone is now to be insured, we open the floodgates of demand (okay, a bit much. But we certainly will allow millions more in.) Demand for services will increase. So it would make sense that prices would increase to balance out the demand (remember Econ 101, all else equal, in the near term an increase in demand will result in an increase in price. In the long term it should result in an increase in supply, as the market responds to the increased demand for the product).

Will we see prices increase? Not for the consumer–they are capped at the Co-pay. And now we are seeing pressures to not raise prices from the supply side (and the insurance companies will be SHOT if they raise rates significantly).

So what happens now? If prices cannot go up, then demand will remain (unrealisticly) high. Unrealistic in that demand is acting free of the market place.

With demand high, and the inability to increase prices we will see no real “benefit” to more providers entering the marketplace.

More to the point, even if we could see more providers enter the market there are significant barriers to entry. Consider the medical field:

1. Doctors must go through extensive training, and then licensing (not to mention the fact that they never really get it right–so must keep “practicing”)

2. medicines must be approved after rigorous testing, and their labs must be approved, and so forth.

3. Various other licensing and authorizing are in place for therapists, assistants, nurses, and the like.

Supply cannot respond quickly, and with a rising demand and supply unable to keep up, and with no pricing mechanism to regulate the demand we will face:

Shortages of service resulting in long waiting lines/delays.

And how do you deal with shortages? Since the market forces are not allowed to work, we are left with the government stepping in, once again, to fix the mess of it’s own making. They will have to “ration” care.

Sorry–it’s a fact. In every nation that has shifted to “socialized” they have faced shortages, lines and rationing.

It’s not something we can “do better.”

It’s economics.

The whole initiative is predicated on a few arguments:

1. Costs (prices) are too high.
2. Insurance companies are “making too much money”
3. Millions of people don’t have access to care
4. The Health Care people are receiving is poor (oh, wait, it’s not about the actual care…)

So let’s tackle this. The basic problem now comes down to a discussion of supply and demand/economics.

As the system currently works we have two sets of perverse incentives fighting against the consumer (and one of these incentives takes place with the willing, yet unknowing, assistance of the patient)

First, the perverse incentives of the patient:

Currently, the “cost of entry” into the health care system is high (monthly “Insurance” rates) but thanks to low, or no, co-pays, the marginal costs of most health care transactions are quite low.

Given the low costs incurred per visit, and the high “sunk” costs incurred to enter the system, the insureds (patients) who HAVE insurance are incented to go to the doctors more frequently, and to go ahead and get the prescriptions (Hey, it’s only $3 copay at Wal*Mart!)

Of course, this is a mirage. The actual costs of each visit and each prescription are borne by the insurance companies, which then have to recover their costs through increased premiums, which of course has everyone screaming that the insurance companies are “gouging” the customers.

On the other hand, we have a set of pricing incentives that also conspire against the consumer. The ‘care providers” are aware that the patient/customer doesn’t see the actual costs–they only pay the co-pay. So given this we have a series of perversions that are at play:

1. Doctors are more able to prescribe tests/medicines, and the like, since they will receive little if any push-back from the patients because of costs. More services with a low marginal cost to the consumer/patient, but a higher total cost, paid by the insurance companies.
2. Insurance companies work to lower their costs by negotiating to pay health care providers a fraction (some value less than 1) of the billable rate. Thus the providers are incented to increase their prices the maintain their revenue stream. This increases the costs once again.

So these two twists to the problem work once again to force the insurance companies to have to raise the rates (really on everyone) to cover the payments they are having to make.

Now–as consumers, we see that we are paying a high “sunk cost” as a monthly fee and, rather than view this as traditional insurance (where I am betting against myself) the consumer wants to try to get at least that benefit back out of the “system” (and is encouraged to do so, by “low co-pays”)

Sadly, the whole mess was brought on by our desire to protect everyone and provide some level planning to health care. The “free market” actually would provide better incentives here, placing limits/governors not only on how much people are willing to spend on services, but the prices that people would have to pay. If service providers want to stay in business then they would be forced to price competitively based on the market, and the market would be making the decisions based on the consumers. As it stands now, with the “same co-pay regardless” the consumer has no indication of value, and the market cannot respond. Viagra is as valued as Interferon and as Motrin.

What to do when everything costs the same?

I am not alone in my expectation that the Health Care (insurance) reform will not improve Health Care (it won’t make bad doctors good ones, for instance) and it won’t improve access since lower prices have that pesky effect of increasing demand–in a field where the barriers to entry for suppliers are significant.

I will say this:  Welcome to the new “Grand Experiment.”  If it succeeds, then by all means celebrate (but could we get a good solid definition of success on which we can all agree?)  But (and this is significant) if it fails, how many will have died as part of the experiment, and will we ever be able to recover?

One final note:  As researchers we have to seek, and get, informed consent from human subjects before we can experiment on them.  Did you get the forms?

I am not writing this as a “hater” or critic of the iPad.  I just would love to see if the demand spiked on the first day and dropped precipitously, or whether the demand over the 21 days prior to shipping stayed relatively constant, or even ramped up as we approached the 3rd of April.

Here’s what I wonder:  people who are early adopters, and the first to get in line and wait for days for a new product, are by all anecdotal evidence I have heard the ones who pre-order, and pre-ordered on the first day they could.  And in the case of my brother, ordered it as soon as the Apple Store made it available.

If my supposition is true, then the demand for pre-ordered items would have been heavily front-loaded.  Conversely,  I would find it quite interesting if demand for the iPad through pre-ordering had any sort of ramping to the demand pattern.  If the demand was increasing, then the big question of the day would be:  Why?

The next question is are the people who would normally stand in line to get the next “really cool product” the same who would want to pre-order right away (and thus reduce or eliminate lines at the stores) or is the psychology of waiting in line for a “cool new product” palpably different from the psychology of “getting” it?

Anyone have any thoughts or insights into this?

What sort of incentives could they be talking about? And why choose that word?

Well, the last point is obvious.  The definition of incentive (by most dictionaries) is to encourage or motivate to action.  These are all “positive” words.  Things that make us shake our head in the affirmative. “Ahhh… incentives. Nice.”

We usually see these as pay bonuses, time off, gifts.  Additional “things” that would encourage us to do a bit more.

Of course, that isn’t what AT&T is thinking.  In this case AT&T is going to try to come up with some way to get people (their customers) to stop using a service they provide–most likely the service offering that led them to AT&T and the iPhone in the first place! AT&T is looking to “consider new pricing models to curb users’ data usage as it tries to keep up with growing demand.”

What pricing model would “encourage” you to use less of something you currently consume and enjoy?  I think this is obvious–AT&T is going to charge you more.  So the incentive here is a negative one.  ¹

What is perhaps even more interesting is this (and I will leave you with this thought):  AT&T isn’t saying “We realize you like using our product and our product is in high demand and thus we will increase the price and generate greater profits for our shareholders.”  They are saying “We realize you like using our product, but we don’t want you to, so we are going to raise the price so that you stop using it.”

Tell ya what AT&T, when my contract runs out, how about I reduce my data consumption to zero.  The Droid sure is looking better every day!

So for those that have been listening to our podcast Real Tech for Real People, we have talked quite a bit about the numbers of people that don’t have high speed (broadband) internet access.  We have been reporting the numbers we had previously read that had anywhere from 40-45% of the population does not have access.

Okay, I am confused. FCC says 96% of households have, or have access to, broadband.

“No less than 96 percent of households either subscribe to or have access to broadband service, according to an F.C.C. task force, which presented a status report to the commission last month.” (see commission report here)

The article reports that the task force goes on to report that:

• median speed is 3 megabit/second ¹
• 1/3 of households “choose” to not subscribe

The seem to be dumbfounded that so many households would choose to not get high-speed internet.

“The most interesting question here is the one that the F.C.C. can’t answer: Why have 33 percent of American households that have access to broadband elected not to subscribe? The reasons “are not well understood,” the report says. A survey focusing on the nonadopters is under way.” (see Pew survey for breakdown of demographics)

The astute reader will note a few things here:

• 33% of “households” does not equal %33 of population.
• “have access to” is not clearly defined.  Does this mean “can drive to Panera?” Or are sitting under a satellite?
• The assumption that these households “elect” ( or choose) to not subscribe is a poor assumption
• There exists a Pew survey (see link above) that actually gives strong hints as to why they don’t have it–so why aren’t they “well understood”?

I have sat through many presentations where the demographics have been dissected ad nauseum, along with conclusions!  Usually it revolves around the high cost of delivery of low quality service to rural areas, $50-$80/month for .5, to 1.5 megbit/second.  Think about that.  If you pay $50 for FIOS for 15 mb/sec service, you are paying the same price for 30 TIMES more speed/capability than the same price for satellite internet, without the latency (lag) issues associated with satellite.  And the satellite internet puts a 17 GB download/month cap on your use! Oh, and with FIOS you can also get TV service, and phone service.

Of course, there are other issues as well, including the fact that some segments of the population prefer to live their “first life” rather than a “Second Life” interacting in a real rather than a virtual world.

But I cannot get past the simple, obvious fact that “access” that is over-priced and under-capable is not really access at all, but political double-speak.

Do you know people without a “broadband subscription” (let’s say, for this discussion, broadband at home)?  Why do you think they have “elected” not to subscribe? Or if they have told you–please share!

Tell me–what do YOU think?  I would like to share your thoughts in our next Podcast that we record Tuesday night, 20 October 2009.

Part of my argument hinged on the elimination of the resale market in large part due to the robust DRM (copy protection) afforded by the digital books.  Unfortunately, when I presented this argument a few weeks ago, someone pointed me to a site that shared the (convoluted) steps necessary to break the DRM on the Kindle.  So much for secure. ¹

This forced me to think a bit further.

In this post, I hope to make a case for reasonably priced digital textbooks in an era of “cracked DRM” that can still result in a win-win.

If students can copy textbooks and share them, will they?  Perhaps I have a more optimistic view of the world, but I think that, when given a choice to do the right thing, students will.  That is, if they think they are being treated as adults, and not being unjustly charged.  Let me explain.

I believe that students will buy the textbooks rather than steal them, if the books are affordable.  and by affordable I mean, as one student put it when asked on Twitter “@ steep discount.”  Probably $30 for a textbook that in print sells for $150.  Remember from my previous post that publishers aren’t selling to every student as it is.  Capturing a significantly larger piece of the market, semester over semester, will result in significant revenue increases–without any additional overhead or variable costs.

I also believe that students will buy a reasonably priced textbook if, along with the book, they receive other types of “digital” support.  That support will be available, but may require them to have a “licensed” copy of the book.  Simple enough.  Your digital reader has a serial number/PID, so the licensed copy can access additional licensed material.   The additional materials could include podcasts, video lectures, or video/audio tutorials on working through homework problems.

I also believe students will pay for books, because the system supports the buying of books.  Loans cover tuition and expenses, to include books. Parents buy books.  My students have reminded me that there is a significant amount of “outside” money that comes their way for book purchases.  But that alone won’t be enough to get them to buy the books. What will?

How about providing a way for students to continue to “resell” their books?  Another common criticism from students is that they get pennies on the dollar when they go back to resell the book.  They are more incensed when they see the mark-up the bookstore then places on the book they sold back!² Students currently fight back by selling (and buying) their used books on sites such as half.com, a used book online marketplace.

I think that a technological solution to book resales, that allows the students to transfer digital ownership to another student, will result in more students buying legitimate copies.  Why? In the paragraph above I mention that students get “outside” money for book purchases.  More than a few students pointed out to me that, at the end of the semester, they sell those book back and that money then becomes “theirs.”  A few call it “Beer money” but I am sure there are other uses as well.  Given that this is digital, this doesn’t have to be seen as a competitor to the publisher, but rather as another opportunity for the publisher to “add value.”

Imagine this:  the publisher, who controls the DRM accounts, sets up a clearing house where the student who purchased the book can make the book (and the license to read/use that book) available for resale, setting the sale price themselves.  At the end of the sale, the seller essentially will turn over the digital rights to the book to the new purchaser.  This is half.com made simpler.  There are no shipping costs.  The transfer can be automatic and nearly instantaneous.  And if the publisher manages the site, the publisher can charge a “reasonable” handling fee, just like half.com.  And we know students are willing to pay it–because they already do!

So, in summary, the hacking of the DRM doesn’t have to spell the doom of affordable digital textbooks.  Despite what RIAA and the MPAA may say, we aren’t all criminals.  When provided with affordable content, and a reasonable way to re-sell the content when the semester is over, students will continue to buy books from the publishers, and the publishers can continue to make revenue–even in the resale market!

Win! Win! Win!

¹ For the record, I tried it, and it works.  I broke the protection of a book I bought, and read it in another device that I own. After that, I deleted them.

² (For example, a $180 book was “bought back” at $15. Resold at $80. Yes, that is an extreme example, but it is a true one!)

• Text books have a limited audience, resulting in smaller volumes of sales and prin runs (10′s not 100s, of thousands).  Limited runs mean that the overhead and setup costs of printing a run are spread across a fewer number of books. Historically to make a book cheaper they either had to reduce the quality of the materials, automate the process, or produce larger production runs hoping to sell more of the books.
• The costs associated with distributing books are high (packaging, warehousing, and shipping to name a few key ones)
• The inability to accurately forecast demand for “new” editions at locations, because of the…
• Strong used  book market that publishers compete against

My support for digital textbooks has emphasized that digital textbooks drive out  out the costs associated with physical books, and thus allow for both a reduction in price, and an increased margin for the publisher.  This can be seen because:

1.  Publishers no longer need the overhead necessary to design the packaging (including the covers), presses to print the books, warehouses to store the books, or distribution systems to ship the books.   Oh, and they don’t need the management to manage all of that.  This drives costs out of the process. (hint–what could this do for prices?)

2.  Because the books are delivered, directly to the student through digital means, there is no need to keep safety stocks of book inventories to cover the sales of the books.  No physical inventory drives costs out because it means there is:

• No capital outlay for bookstores to buy a “forecasted” amount of books
• No shelves required for the books
• No possibility of stockouts (I had a class where there were only enough books for 10% of my students well into the second week of class!)
• No need to ship back the unsold books, because the forecast was “wrong” (due to used book sales, borrowed books, or just students “dropping” the class.)

3.  The digital rights management (DRM, or “copy protection”) of digital books appears to be rock solid, so students are not likely to “give” copies to their friends.  Publishers would be guaranteed sales², allowing them to lower prices. This would mean that:

• Publishers don’t compete with a ‘re-sale’ market. Think about this.  Part of the reason the costs are so high for the textbooks is that the publishers know that they will only “fully” sell out in the first semester the book is available.  Every semester after that they are competing with a (rather robust) resale market.
• Publishers won’t have to release new editions every two years “simply” to refresh the sales.  With strong DRM publishers can expect to make sales to nearly every student, every semester.
• New editions will be developed for the right reasons–new, improved content and new knowledge.

Given the above, my argument really focused on the need for publishers to pass on the savings to the consumer (the student) making textbook pricing reasonable again.   The major criticism of students (the high prices of textbooks) could all but disappear.

Affordable textbooks for students, and increased (and guaranteed) revenue for publishers!

One of the key points in my argument had been (yes, had) that the DRM on the Kindle and Sony readers was secure, and thus students wouldn’t hack the books and “share” (illegally give copies) to other students.  That is essential to keeping the revenue model moving forward for publishers and is why the RIAA and MPAA are working so hard to protect their intellectual property.  But alas, sometimes things change, and we know that if anyone can hack a DRM it will most likely be motivated college students.

Thus, I have been spending time thinking about how we can still achieve a win-win, even if students “crack” the DRM market.

Stay tuned! More on this to come!

¹ Unfortunately, there will be near term losers, including the people working at the printing presses, the local bookstores, and the supply chain partners that normally deliver, store, and reship textbooks. More on these folks later.

² Think about it. In a class of 30 students, in the first semester a new book is offered, all the students will buy the book. Let’s say the book costs $100. That is $3000 in sales for the publisher. (Not profit. Remember the high costs of physical books.) Now let’s assume that half of the students with new books decide to resell their books each semester. If in the next semester half of the next class purchases “used: books that reduces the revenue for the publisher to just $1500. If we follow this through, then the 3rd semester, 3/4^ths of the books in the class are used books cutting revenue to $750. by the end of the second academic year the publishers revenue is cut to about $400. In two years, with 120 students going through the class, the publisher would make $5650. If there was no used book market, the publisher could make the same revenue selling the books at $47/book. And that is assuming there was no savings in costs by shipping digitally!