I want to thank Robin for posting concerning the effort required to compile
and maintain something as huge as the Grove dictionary.  I do have a couple
of observations though.  I promise this will be my last economics lecture,
at least for today.  :-)

Robin Newton wrote:

>I completely agree with you that prices for electronic versions of Grove
>and other dictionaries often seem prohibitively expensive.  But, I think
>the one important aspect to remember is that production costs form a tiny
>part of the whole financial equation.

Indeed.  The creation of New Grove II has been an extremely expensive
undertaking, and if you consider that it's really a project that's been
in the works since 1873 (interestingly, Sir George Grove was an engineer
by training - my hero), the effort expands to thousands more contributors,
and perhaps millions of hours of additional effort.

In my R&D career I've been involved in many development projects, most
of them not intended to create commodity products, and none intended for
consumers.  I've also had the opportunity in marketing and development
roles to make the transition from a speciality to a commodity product by
employing a combination of cost reduction (making it cheaper to product
each unit) and seeking broader markets.  I think a number of parallels
can be drawn between my experiences and the choices Macmillan publishers
now face with the New Grove II.

Extremely expensive product development efforts are not particular
uncommon.  For instance, it's quite possible that the car you drive costs
billions of dollars to bring to the market.  But, did the first hundred
people who showed up in the showroom have to pay $250 million each for
their cars? No, the car company knows that it's going after a market of a
certain size, and prices the units accordingly.  Macmillan is in a similar
situation, except for one important detail.

Spend much time around manufacturing, marketing, and sales and you quickly
learn that if a product was astronomically expensive to develop, but costs
nearly nothing to produce in quantity, then all of your efforts need to
be directed towards broadening the market for your product.  Volume is
everything.  Not only do you recoup your development costs faster and more
reliably with a larger market, but once you have recouped costs, you can
really rake in the bucks even if you reduce price even further (per unit
profitability goes way up).

Macmillan and the folks involved with the Newest Grove face a completely
different situation from that they faced in 1980 when the last edition
was released.  In 1980 I'm sure they saw their market as primarily
institutions, music schools, and libraries.  A limited market, to be sure
(and they were probably right for the most part).  Also consider the fact
that their only rational option was to produce a high-quality hardbound
version, specifically to met the requirements of this core market.  The
cost of printing, binding, and shipping those 20-volume sets was probably
rather significant.  So not only did they have a large development costs
(usually referred to as a non-recurring cost) but they also had relatively
high unit production costs (called recurring costs).  The large size of the
set also further limited their market:  how many people do you know who
blithely purchase 20-volume sets of anything even if price is not a primary
concern?

Things have changed a little bit though, and I believe Macmillan has an
opportunity to make far more money with the latest edition than they ever
have in the past.  First, there has to be some recognition that there is
a market out there beyond the institutions, music schools, and libraries.
There are a lot of educator, artists, and enthusiasts who would have an
interest in a such a dictionary, if the price was not unreasonable.

The key is to balance recurring and non-recurring costs with price and
volume.

>The whole dictionary is over 27,000 pages long in 29 volumes.

What if - and I'm just throwing numbers around here - Macmillan offered
the traditional hardbound library version at, say, $4000 (they have several
pricing plans for the printed version, depending on who you are and how you
pay, but this is basically it).  That satisfies the traditional market
without sacrificing revenue per unit (though I have to wonder how many
small libraries that currently have a good copy of the New Grove will be
willing to fork over four grand for a newer version - I suspect there's
going to be some significant resistance in this market).  Now let's say
they offer a licensed network version on CD-ROM for libraries and such and
priced it at about half the print version cost.  This is essentially a new
market.  Though it may deplete sales of the hardbound version slightly,
most libraries will still want the bound version, so net revenues from
these customer may actually increase (how many small libraries, not able
to spend $4000 on a bound version will be willing to augment their old
bound New Grove with a newer electronic version?).

Now let's say they offer a CD-ROM version with an individual licence
at $100-200 a copy.  I think this would immediately open up the market
for individual purchasers.  How many of the 1000 people on this list, for
example, would want a electronically searchable copy of the New Grove II
at $175? Remember that these new customers came at essentially no cost.
Their CD-ROM version cost Macmillan a few dollars to produce.  The profit
margin is excellent.  The beauty of a licensing scheme such as this is that
you can then charge a fee for yearly updates, say $250 for institutions
and $50 for individuals.  The Grove editors have to produce updates anyway
to maintain the credibility of the project, so there's relatively little
additional development costs for these CD-ROM updates.  (As an aside, my
1995 paperback edition of the New Grove shows copyright updates for every
year between 1908 and 1995, except 1982 and 1983.) What I've described here
is essentially a new, and (comparatively speaking) large, market that has
barely been tapped with previous editions.

Then there's the online version.  There are some opportunities here too.
Let's say they charge a subscription rate (currently priced at a ridiculous
$650 per year for an single user) based on what you've bought in the past.
If a user wants online only access (nearly free for the publisher, BTW - no
recurring costs), then charge $20 a month.  If the user has already bought
the CD-ROM version, charge $5 a month for online access.  These and other
subscription options are the much coveted revenue "streams" that have made
so many millionaires on the net.  I'd hate to see them lose an opportunity
here.

All of this pricing and market analysis is off-the-cuff - I don't have
any hard market data, and perhaps Macmillan has already calculated price
sensitivities in their various market segments and have based their current
pricing decisions on this analysis.  But looking at their web pages, I
don't see much innovative marketing going on, and that's a shame because
one of the other important aspects contributing to the success of
high-development-cost/low-production-cost products is getting to the
markets quickly.  That development was expensive, and every day you delay
getting to the market pushes profitability further into the future.  Plus
you have the benefit of buzz and involvement by your customers - free
marketing and advertising if you will.  Right now most of us are saying,
"that's nice, but I'm going away now to wait five, ten, or fifteen years
for the discounted paperback or online versions".

I should also note that much of this discussion applies directly to the
classical CD market.  Labels have a high development cost (paying the
orchestra, singers, engineers, graphic artists and editors, venue, etc.),
but very low production costs.  Volume should be everything, but instead
they assume they have a very limited market and set price to make it so.

>If I remember correctly, the last edition of Grove took something like 5
>years to break even, let alone make a profit.

Put me in charge.  I'll have it profitable within two.  :-)

>I wish it were cheaper to buy - I certainly can't afford to buy it in any
>form - but I think you can see why its as much as it is!

When the very people who work on it can't afford it, to me that's a big red
flag.  Grove workers of the world, unite!  :-)

Dave
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