Stephen King spooks publishing's middlemen

New digital technology is changing the balance of power in publishing markets

Like many economists, crime fiction is my genre of choice, not horror. The 100 per cent logical detective of fiction is, after all, the only obvious example in the real world of the rational agents who people economic models. But Stephen King, the well-known author of spooky novels, has forced the pace on a fascinating change in the economics of publishing with his decision to post his new work chapter by chapter on the internet as long as enough readers send him $1 per download.

Like many economists, crime fiction is my genre of choice, not horror. The 100 per cent logical detective of fiction is, after all, the only obvious example in the real world of the rational agents who people economic models. But Stephen King, the well-known author of spooky novels, has forced the pace on a fascinating change in the economics of publishing with his decision to post his new work chapter by chapter on the internet as long as enough readers send him $1 per download.

Bypassing publishers is in fashion. News of the direct online publishing venture by Mr King was followed by the announcement that Alan McGee's Poptones is to float on the Alternative Investment Market. Poptones intends to bypass the major record companies by financing new artists, without signing them up to long-term contracts. Although not quite as direct as posting your own music directly on the internet, this is definitely a step away from conventional intermediation by the big music companies. And the music business is, of course, in panic at the prospect of Napster, which allows free exchange of MP3 files, undermining its sales.

New digital technology, especially the Net, is obviously changing the balance of power in publishing markets such as these, but it is not apparent yet who the winners and losers are going to be. The reason the technology has such a big impact is that it is turning them more than ever into "winner-takes-all" markets.

The economics of superstars dates back to an article about the movies by Sherwin Rosen published in the American Economic Review in 1985, but applies in many similar industries. It suggests that the top film stars earn phenomenally more than actors, who are objectively just as good, because of special demand and supply conditions.

On the supply side, the marginal cost of increased output is essentially zero. It doesn't cost the actor any more effort if one more person goes to see the film; he only makes the movie once. On the demand side, audiences do not know how good an actor is until they have seen him. They have to have bought and consumed the product to know its quality. So faced with a known star and an unknown when it comes to the choice of Saturday evening's entertainment, most will opt for the former.

These supply conditions now apply in a huge number of markets. Music and publishing are obvious examples. The cost of copying a song or book is pretty much zero thanks to digital technology. Software is another easy example. In many of the professions, too, the potential for zero-cost replication is huge. Education, medicine and law, for instance, could develop into markets where existing "stars" develop a much broader reach at no extra cost using the internet as a distribution channel. It is even true in economics where top professors - and Paul Krugman, now at Princeton University, is the topmost example - have used their websites to become, if not quite household names, then certainly vastly better known than most of their peers.

However, the uncertainty about who will capture the superstar gains arises on the demand side. With Poptones, Mr McGee is trying to jumpstart unknown musicians past the initial hurdle of anonymity into stardom. In economic terms he is less like a publisher, more like an agent, and one lending his own established reputation to his discoveries.

Stephen King can bypass publishers because he is already a huge star. The profit or economic rent that formerly went to a publishing house can be shared between the author and his readers, a dollar a chapter probably working out at rather less than the price of a new hardback. Mr King is publishing the equivalent of "shareware" for the written word, with the difference that unlike many programmers he is so well known he will continue to make millions of dollars. Harry Potter author J.K.Rowling could do the same if she chose, but it is unlikely to be as lucrative an option for my first crime novel, when I get round to writing it.

Publishers probably therefore still have an essential role as incubators of future stars. And, of course, many of us like the physical presence of beautifully produced books rather than scrappy printouts or even portable electronic books. There is no immediate prospect of coffee table books or glossy recipe books being published over the Net. Publishing is certainly not a dying industry. But it does seem clear that there will be a transfer of economic rents from publishers to artists and consumers. A significant group of stars will be able to cut out the middlemen.

However, the reduction in duplication costs thanks to digital technology will also help boost the profitability of the intermediaries and increase the size of their market. Publishing has been surprisingly slow to globalise but there is now a clear trend towards simultaneous publication by a single publisher in a large number of countries, in place of the slow sale of rights to different publishers in each country.

And publishers themselves will of course be able to release books online at much lower costs than is involved in printing, distribution and warehousing. With the potential for a dramatic reduction in production costs and increased demand, perhaps every party can be a winner, even in a winner-takes-all economy. After all, it is precisely the prospect of gains all round that makes the New Economy so exciting.

d.coyle@independent.co.uk