Ebook Readers and China’s Infant Industry Argument

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You ever hear anyone use the term “textbook example”? It means that something follows othodoxy so closely that it could be taken from the pages of a textbook.

I have one for your consideration: China’s ebook reader market.

First the latest market development, then the economic theory. Here’s what happened at an industry meeting today:

China will regulate the booming e-book reader market by setting up entry thresholds and industry standards to prevent overheated investment and protect authors’ copyright, regulators said during a forum today.

“It’s (e-book) no doubt a booming industry but it still faces problems,” said Zhang Yijun, a senior official at the General Administration of Press and Publication. “The regulation will help the industry grow in a healthy way.”

Problems include overheated investment, lack of industry standards, the copyright issue and lack of content regulation on cyber bookstores, industry officials said.

In China, more than 40 firms are working on business on e-books, which accounts for half of global figures now, Zhang said.

The administration will investigate the industry and set up the entry threshold. The administration, the copyright society and leading firms like Hanvon, will set up the industry standard, from content, format, encryption, copyright to certification sectors.

This really is classic stuff. The principle here is called the infant industry argument, often attributed to Alexander Hamilton and Friedrich List over two hundred years ago, and it’s one of the main justifications for State protectionism.

Here’s how it works. Say that there are a lot of fairly new companies that produce widgets in a country – let’s call it Shanzhaistan. As good as these widgets are, the companies in Shanzhaistan simply cannot compete against the mammoth American widget manufacturers that have been in the business for 75 years and have a large and well developed market.

Why can’t the Shanzhaistan companies compete against their American counterparts? One reason, say proponents of the infant industry argument, is that the American firms enjoy economies of scale, while all the small Shanzhaistan enterprises are fighting for a piece of a much smaller market.

So the Shanzhaistan government has an idea. To protect its widget market from the scourge of American competition, it places prohibitive tariffs on imported widgets at such rates that the domestic widgets are the only reasonable choice for most consumers.

Safe behind the tariff wall, Shanzhaistan’s widget market grows, industry consolidation proceeds apace, and the products improve. Years down the road, Shanzhaistan’s widgets are now competitive with American widgets, the tariffs come down, and everyone competes on a level playing field.

Well, this story is slightly outdated. Because of the GATT and WTO, tariffs are no longer the protectionists favored weapon. If possible, anti-dumping is the way to go. But for electronic goods like ebook readers, that’s not really going to fly.

For an emerging IT device, another option is standardization. This can be a nifty protectionist trick. You get the major manufacturers in your country together, agree on a standard they can meet that is incompatible with current tech standards in other countries, and you pass a law mandating it. This doesn’t always work of course; China tried it with Wi-Fi a few years ago and were smacked down by the multinationals and their governments.

So what’s the deal with ebook readers? Too many manufacturers, too much investment, and a market that is still too small to support all this activity. China likes to pick winners and losers in some industries (this is industrial policy), so it may jump in and help coordinate industry consolidation.

Additionally, there are a lot of foreign competitors, including the new iPad, a crapload of smart phones, etc. So in addition to consolidation, some standardization might be helpful for the home team. What that means is hard to say – file and memory formats can’t really be screwed around with at this point. For ebook readers, you better allow for TXT, HTML, PDF, and EPUB at least, if not DOC, LIT, MOBI and a few others.

It will be interesting to see how this shakes out, and whether this infant industry is actually protected without sparking off WTO-ish trade fights. I doubt it will come to that for a variety of reasons, the big one being that ebook readers, as special-purpose devices, are already dinosaurs. Any company that banks on the narrow ebook market niche is in for a rude wake-up call very soon.

One last note on copyrights and content. You’ll notice in that above quote that “content” is something that is identified as being in need of standardization. Obviously the existing print industries are tightly controlled, and the government is taking great pains to rein in questionable Net content. Ebooks are a potential leakage point, so some of this entails nailing down ebook distribution points. Good luck with that.

Lots of homage paid to copyright and encryption. A hearty good luck as well on that front. Once a work is rendered digitally, it gets into the public domain in a freely-distributable format very quickly. Whatever is done within the ebook industry won’t matter all that much. The only way to fight against copyright infringement is to shut down major online distribution channels and hope that more users don’t get savvy to the delights of lesser-known sources like the Undernet.

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