Read the followung case scenario and answer the following questions:
Question 1: Explain the economic concepts found in the reading assignment.
Question 2: Discuss how the course readings relate to the context of the scenario. Be sure to include citations and references where appropriate.
Case Scenario:
Will Bury, enterprising inventor, is convinced that soon everyone will be reading or listening to everything digitally, including all the great books that, up to now, have been mostly available in hardcopy. He knows, of course, that there are books on CD, but these are relatively expensive and have been recorded using human readers. He also knows that there is technology that will transform the printed word into audio, but until now the sound is somewhat inhuman. Will plans on speeding up the transformation with a proprietary technology he has developed and patented that takes the printed word for text materials and creates a file with the option of reading it digitally or listening to it with a very realistic synthetic voice. Will knows that he has free access to books no longer under copyright protection, and he figures he can pay a $5 per title royalty fee for copyrighted books to greatly expand his catalog. So far, he has limited himself to English language books but is working on a language translation option as well.
To date, Will’s technical skills outpace his business acumen. He is struggling with some basic decisions. He’s been doing this as a garage operation for the last few years and has missed a lot of his daughter’s soccer games while he held down his job at High Tech Digital Industries to keep his family comfortable on his $200,000 annual salary and benefits package. But eventually, he may have to decide whether to devote most of his time to his invention. Moreover, he is not sure how to determine all the applications for his technology, who would want it, how it would be delivered to customers, how many books would be bought at what price, etc. Even after he has secured the rights to copyrighted material, he needs some help getting his hands on the books he wants digitally transformed and scanning them into his digitizer. It’s not difficult to train others to do this, but it takes about an hour per 500 pages to complete the transformation into the digital files that enable them to be read or listened to. To make sure the process works well, Will has been doing this himself, but he realizes this is not a good use of his time nor will it get many books digitized. Fortunately, the digitizer Will uses is inexpensive to reproduce for others to use, and Will is certain that the security he has encoded into it will prevent others from unauthorized replication of the device. But where are these people whom he can hire to do the work and how much should he pay them? If it is easy to train workers in the US to do this, could Will pay $10 an hour for someone with the skills of a high school graduate? If this is the skill level, could he pay a worker overseas $2 an hour for the same service?
To address some of these issues, Will has been doing some research. First, he checked online to discover that a roughly 500-page book on CD costs about $20. This is a pretty good substitute for his audio files of a book, and further research suggests that he could apply his digitizing process to more recent copyright-protected books for about a $5 royalty fee per book. Of course, he’d still incur the labor charge of scanning the book. Will continues to wonder whether people want to read digitally or listen to the books they enjoy for pleasure or whether they still prefer a physical book to read. Will found an article from a reputable source that suggests customers of digital and audio books are relatively affluent, their household incomes grow above average, and acceptance of digital reading for pleasure is lagging behind acceptance of digital reading for business, but that digital listening to books is attracting the same audience who download music to digital devices.
Further research has suggested that price is an important feature driving the appeal of digital book files. Will is trying to apply some earlier experiences in movie distribution to his digital book project. When movies were first released to general consumer distribution as videotapes, they were expensive, often about $80 per title. When the price was lowered closer to $20 per title, the evidence suggests that volume sales typically went up 600 percent. Of course, not everything stayed the same; in recent years movie titles have been released more quickly following their showing in theaters, there have been more extra features on the DVDs due to greater storage capacity, and the format changed to disk from videotape. Some have hinted that, while there are fewer blockbuster hits now, there are more titles appealing to a broader set of tastes. Will is trying to find more evidence of the effect of price on volume demand, but this is all he has discovered so far.
Nevertheless, Will needs to determine a launch price when he first introduces his digital titles to the market. He set up a Web site offering his small catalog of books and set the price at $10 for a title on which copyright has lapsed and $15 a title when he has to pay a royalty. He is a little disappointed in his sales in the first six months of operation, selling only 1000 of the older books (lapsed copyright) and 2000 of the newer books. Moreover, he is confused as to why he sold twice as many of the more expensive books. He wonders whether he should lower or raise prices to increase his revenues. What can he expect to happen to his volume sales if he does change price? If he decides to change price, up or down, is it better to make a small change and observe the effects on quantity or will customers more likely react to a change in price of at least $1 per title? If he does change his price, will this have any effect on the prices charged by big-volume sellers for conventional hardcopy books?
While Will is pondering his pricing strategy, he visits a friend, Elsa Budley, who has had more experience selling online. Elsa started an online business selling her artwork. While her initial sales were a bit disappointing, she offered some shocking advice. She discovered that she actually sold more artwork when she raised her price at the same time that she expanded her online advertising budget. Elsa thinks Will’s key to success is to raise price and sell more books!
Will Bury senses he is on the brink of great success and fortune with a proprietary technology that transforms how we access books and other materials currently offered only in print. But he is also on the verge of making some very fundamental business mistakes that could rob him of his well-deserved success. He can be more successful if he observes some basic concepts included in the early part of this course.