Amazon blinks, whines, says it will have to "capitulate" to Macmillan

Engadget has reported that Amazon released a statement today saying that it would have to "capitulate" to Macmillan's terms for pricing eBooks, and admitted that it removed Macmillan's print books from its website to punish the publisher. The funniest line in Amazon's statement is this one: "...we will have to capitulate and accept Macmillan's terms because Macmillian has a monopoly over their own titles...". That's like saying that Ford has a monopoly over its cars, or Kraft has a monopoly in Velveeta.

On the other hand, Amazon has a monopoly over the Kindle format. It won't license the format or its DRM system to any other manufacturer or software vendor. Unlike EPUB, PDF and other formats, the Kindle format is proprietary. Also, Amazon believes that it and it alone has the right to determine what the "reasonable" price for eBooks should be. Unilaterally removing all the titles, both print and electronic, from one of the top publishers to punish it for trying to have some control over the price of its eBooks sounds like the actions of a monopolist. Is the pot calling the kettle black, or is what we're hearing the sound of a glass house shattering?

Who sets the price?

The Amazon/Macmillan dustup brings to mind an important question: Should retailers have sole control over the prices of the products that they sell, or should manufacturers be able to determine prices (or at least price ranges)? Decades ago, many states in the U.S. passed Fair Trade laws that gave manufacturers control over the prices that retailers could sell their products for. (This shouldn't be confused with the Fair Trade movement that seeks to encourage producers in third-world countries to farm and manufacture sustainably.) These laws allowed manufacturers and their distributors to refuse to sell to retailers who would discount the prices of their products.

The Fair Trade rules were fair for manufacturers, less fair for retailers, and not fair at all for consumers, so they were eventually repealed or struck down. However, manufacturers still have the right to set Minimum Advertised Prices (MAP) for their products. Retailers can sell the products at any price they want, but they can't advertise the prices if they're lower than the MAPs set by the manufacturers. That's why you sometimes see "Prices too low to advertise", or on a website, you have to put a product into your shopping cart to see its price. MAP policies are very common with consumer electronics, cameras, watches and other high-ticket items.

In the Amazon/Macmillan situation, Amazon almost certainly has a clause in its contract with Macmillan that allows it to sell books for any price it chooses. Thus, Amazon would be immune from any MAPs set by Macmillan. However, there may be nothing in the contract dictating how long Macmillan has to deliver eBook versions of its print titles to Amazon; if so, Macmillan would be within its rights to delay availability of its eBooks to Amazon in order to encourage sales of full-price print copies. It's an interesting spin on the old Fair Trade argument: "We're not saying that we won't sell you eBooks, we just won't sell them to you until the print versions have been out for 30 or 60 days." It's similar to the release window strategy used by movie studios for decades. The legal problem could come if Macmillan discriminated against members of the same class of retailers.

Let's say that Apple sells an eBook title for $14.95, while Amazon sells it for $9.99.  Apple gets the eBook file and puts it on sale the same day as the print version, but Amazon doesn't get it until 60 days later. Unless there's some legitimate technical reason why Macmillan can't deliver the eBook file to Amazon at the same time as to Apple, its behavior could be seen as discriminatory. (Please remember that I'm not a lawyer, and your results may vary.) Macmillan would be required to provide the files to both Amazon and Apple at the same time, so as not to give Apple an unfair advantage.

Macmillan might still have an "out", again taken from the business practices of the movie industry. Most of us have been to neighborhood "second-run" movie theaters that get movies weeks after they're first released. These theaters sell tickets for a few dollars each, rather than the $10 and up that movie tickets commonly go for. The films that the second-run theaters are showing are exactly the same as the ones that were in the first-run theaters (well, not exactly the same--the prints are usually pretty beaten up), but the movie distributors can discriminate on the basis of price. It's not a fair analogy, because the publishers might actually get paid more by Amazon than Apple, while the film studios almost always end up making less from the second-run theaters than they did from the first-run ones. However, it demonstrates that Macmillan might have some "wiggle room" as to when it releases eBooks to different retailers.

In any event, the battle is now on, and it's likely to end up in the courts.

Amazon and Publishers: Playing "Chicken" Over eBook Prices?

According to The New York Times and other sources, Amazon has stopped selling all of Macmillan's books and eBooks, including imprints such as Farrar, Straus & Giroux, St. Martins Press and Henry Holt. The problem, which has not been officially confirmed by either Macmillan or Amazon, is that Macmillan wants Amazon to raise the eBook price of its bestsellers from $9.99 to $14.99. My wild speculation is that Macmillan threatened to delay or stop sending eBook files to Amazon altogether, and that Amazon retaliated by pulling all of Macmillan's titles, both print and electronic, out of its store.

This is a very dangerous game of "chicken" for both companies, and it may establish who has the real pricing power in the book distribution channel, publishers or resellers. For Macmillan and the other major trade publishers, Amazon is one of their biggest resellers in the U.S. Losing Amazon's revenue would be a huge blow. On the other hand, customers expect to be able to buy books from every publisher when they go to a bookstore. Losing the Macmillan catalog means that Amazon will be less attractive to customers.

Amazon's Jeff Bezos said this week that for every 10 copies of a print title with an eBook version available, six copies of eBooks are sold. Simple arithmetic shows that only 37.5% of the unit sales for those titles comes from eBooks. Given Amazon's pricing structure, it needs the sales of those print copies to help subsidize its eBook pricing model.

Both Macmillan and Amazon have valid arguments: For Macmillan, lowering the price of its bestsellers to $9.99 cheapens the value of those titles and builds customer expectations not to pay more than that, even for the print versions of titles. Given its deal with Apple, it appears to accept that eBooks should cost less than their print equivalents, but not so much less than they completely devalue its print versions.

I don't know what's in Amazon's distribution agreements with publishers, but I suspect that it says that Amazon has the right to sell titles for whatever it wants, independent of what it pays the publishers. What's not clear is whether the publishers are obligated to supply Amazon with copies of all their titles in eBook format, or whether they have to supply the eBooks at the same time as they supply print versions. It's very common for eBooks not to be available "day and date" with the street date of print titles, and few people have had a serious problem with that.

If one or more of the other major publishing houses join Macmillan's position, Amazon will have some very difficult choices to make: Pull all of their titles out of its store, agree to the publishers' demands, or negotiate a middle ground that works for both it and the publishers. There are also antitrust considerations, on both sides of the fence: Publishers could be seen as colluding or fixing prices, and Amazon could be charged with using monopoly power in both the print and eBook distribution businesses to force book publishers to agree to its eBook pricing model.

My opinion is that Amazon's decision to pull all of Macmillan's titles off its shelves may, in the short term, force Macmillan to capitulate, but it will strengthen the resolve of the trade publishing industry to wrest control over eBook pricing from Amazon. My suspicion is that Amazon has thrown the first brick in this war, but it may find that it's the one living in the glass house.

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• Amazon and Macmillan go to war: readers and writers are the civilian casualties (boingboing.net)

A how-to startup guide in two parts

I came across a couple of blog entries by Matt Mireles, founder of SpeakerText, who's managed to cram a tremendous amount of great advice for startups into two brief blog posts here and here. Enjoy!

It's Book Publishing Businesses, not Business

This morning, NPR did a news story about Apple's new iPad. I was half-awake when I heard the story, so I went to the NPR site to get the transcription. Near the top of the story, the reporter, Lynn Neary, said "At the iPad's unveiling Wednesday, Steve Jobs announced that five publishers — Simon & Schuster, Hachette Book Group, HarperCollins Publishers, Penguin, and Macmillan — had signed on to provide books to Apple's venture, with more to come." No problem there, but near the end of the story, she said the following: "Random House, the only major publisher that did not make a deal with Apple, issued a statement saying it is continuing conversations with the company about how they might best work together."

Put those two sentences together, and she's saying that the six publishers mentioned are the only "major" publishers. To be sure, they're the biggest trade publishers in the U.S. and European markets; they print the most popular fiction, biography, self-help and similar consumer-oriented titles. However, there are many other "major" publishers. The definition of a "major" publisher is determined largely by market segment. In technical and computer books, Pearson, Wiley and O'Reilly are among the dominant publishers. In textbooks, Cengage, Pearson, Houghton Mifflin Harcourt, McGraw-Hill and Wiley are powerhouses. In children's books, Scholastic and Houghton Mifflin Harcourt are among the biggest players, along with several of the big trade publishers. Heck, Pearson actually owns Penguin.

My point is that there is no single book publishing business and no single group of "major" publishers. Apple reproduced the strategy with eBooks that it followed when it launched iTunes, signing up the top five recording companies: Warner, Universal, EMI, Sony and BMG (Sony has since acquired BMG). Once it secured rights to the market leaders' catalogs, it went after smaller recording companies. It did the same thing with the iBookstore, going after the trade (consumer) publishing leaders first. But unlike the music business, where a handful of companies dominate every major category, each book category has its own group of dominant publishers. Getting the five publishers that Apple signed up gets them all but nothing in many of the major categories. They have a lot of negotiations ahead of them to get a range of eBooks comparable to what they already have in music.

The iPad: And They're Off!

Unless you were living in a fallout shelter, you know that Apple announced its tablet computer, the iPad, today. I won't rehash the features and specifications; there are plenty of places to find them. Editors and analysts are leaning a bit toward being underwhelmed by the product. Personally, I think that it's a little more expensive than it should be, although it's certainly less expensive than the "under $1,000" figure guessed by an analyst last Fall and echoed around the Internet. I also wonder why it doesn't support multitasking when the Apple-designed processor clearly seems to have the horsepower to support it. The absence of a built-in USB connector or slot for memory expansion with an SD card is also disconcerting.

Even with these flaws, the iPad is a very intriguing product. It's also very clearly a Version 1.0 product in the same way that the original iPhone was a 1.0 product. Apple got a lot right in the original iPhone, but they also missed the mark in a number of important areas, the biggest being no 3G. Apple fixed virtually all the problems over time, and I'm sure that they'll do the same with the iPad.

The best description that I've heard for the iPad is that it's the next generation of the iPod touch--a media consumption device, not a phone. I'm sure that Apple will sell lots of copies of iPad-compatible iWork applications, but the iPad is designed for content (and application) delivery, not content creation. I'll be very interested to see what application developers do with the iPad. We're likely to see a lot of blown-up iPhone apps early on, but the second generation of apps, those designed for the iPad from the start, are likely to be much more interesting.

Apple's eBook-related announcements were underwhelming, at least to me. They only have five (albeit big) publishers on board so far, Amazon will maintain price leadership, and their decision to use EPUB as their standard format negates a lot of the advantages of having a color screen capable of rendering complex images. There were no announcements of partnerships with textbook vendors, a hotly-rumored subject prior to the launch event.

On the other hand, Apple's announcement of a deal with AT&T to provide unlimited 3G digital service for $29.95/month with no contract required was stunning. Other mobile operators are going to be pressed to match or beat AT&T for competitive devices. Add VoIP to these devices and you'll have unlimited voice and data for $30/month or less.

In short, Apple got a lot of things right, but it also has some things to fix. I'm looking forward to what the iPad ecosystem will be two years down the road, and what the iPad and Apple's other announcements will do to spur even more innovation and competition.

The integration is the product

I've avoided speculating on the rumored Apple tablet--Apple will announce whatever it announces on Wednesday, everyone will know the truth, and the world will go on. However, both Apple and Amazon are pursuing a powerful strategy that makes the hardware device just one part of a much more comprehensive product.

In today's world, it's not all that difficult to build a personal media player or an eBook reader;  just go to CES or follow Engadget or Gizmodo, and you'll see more of both kinds of devices than you thought possible. What Apple did that was so powerful is that it linked a successful online media store with its best-of-breed personal media player, the iPod. Prior to Apple, you purchased an MP3 player from one company, it came with music management software (usually from another company), and you were on your own to purchase (or steal) music from wherever you could get it. Apple was the first to offer a completely integrated product: Player, music management software and music store, all of which were best-of-breed. Their strengths leveraged each other. When Apple introduced Windows support, the flood gates opened and Apple quickly dominated the player, music (now media) management and media retailing businesses.

Amazon is pursuing the same model with its Kindle, but it approached the eBook business from the retail side rather than software or consumer electronics. As of today, the Kindle 2 is the best-of-breed eBook reader, and Amazon is far and away the #1 seller of eBooks. Last week's announcement by Amazon of its 70% royalty plan for self-publishing authors is likely to reinforce that lead. The company's CreateSpace service helps authors edit and design eBooks (for a price), and then sell the resulting eBooks on Amazon. Everything integrated together is much more powerful than any individual component.

That brings me to my point: The integration IS the product. In the media business, you have to bring everything together: Content creation, distribution, management and devices. You also have to do all of them well; Sony has media players, a store, content creation and content management software. It even owns a record label and film studio, yet it's a faint shadow of Apple. The same goes for eBooks, where Sony builds readers, writes content management software and has its own store, yet it's a poor second-place player to Amazon.

If I had to pick one business to be in, I'd pick the content distribution business. The distributors will be the "arms dealers" for the myriad of media player manufacturers chasing Apple and eBook reader manufacturers chasing Amazon. If you can't come to market with an integrated offering, you're at best going to be a niche player. Consumers have voted overwhelmingly for integrated solutions with their dollars. That's why I wouldn't at all be surprised to see Apple follow the same model with whatever it announces this week, combining the iTunes Store and iPhone App Store to support a new range of content. Apple has taught the world that the integration is the product.

What could comScore learn from Domino's Pizza?

Last week, The Wall Street Journal's AllThingsD ran an article about comScore, the Internet website traffic measuring service. Yesterday, Jason Calacanis chimed in with his own heated remarks about comScore and one of its investors, and today, Michael Arrington and TechCrunch got sucked into the debate. I've linked to the articles on all three sites, so I won't rehash their arguments. However, let me summarize what I understand as the facts, and then make a few suggestions.

For more than ten years, comScore has used a diary approach for measuring website traffic, the same basic approach used for decades by Nielsen and Arbitron to report broadcast ratings. comScore's users manually reported the sites that they visited, and then their reports were aggregated and extrapolated to come up with gross visit counts. The problem was that almost since comScore's inception, many website operators claimed that their own reports showed much higher traffic than comScore, but comScore defended its methodology and claimed that it was accurate.

Radio and television broadcasters and their advertisers knew for decades that the diary method was inaccurate. People forgot to report programs that they watched or listened to. African-American and Hispanic households were underrepresented in diary samples, as were low-income households in general. Everyone knew that the methodology had serious problems. With the implementation of people meters that automatically track television viewership, the industry saw just how inaccurate the old diary-based system was.

The comScore diary system had similar deficiencies to the broadcast systems, but the company adamantly denied any flaws. Then, a few years ago, Google and Quantcast, among others, introduced "beacon" technologies that would report every time a webpage was viewed, bringing people meter-like technology to the Internet. These systems provided results that were generally much closer to the publishers' own logs than comScore.

Last week, comScore announced its own beacon-based system and stated that it will be significantly more accurate than its diaries. However, for a website operator to get comScore beacons, it either has to pay $10,000 per year to subscribe to comScore's report service or pay a one-time $5,000 fee for the company to "audit" the placement of the website's beacons to insure that one and only one beacon is on every page. If the website operator doesn't want to pay, comScore will continue to use its diary method, which it admits is inaccurate, to measure that site's traffic. It was this "pay for accurate numbers" approach that AllThingsD reported and that made Calacanis go ballistic.

comScore has the right to charge whatever it wants for its service, although $5,000 to "audit" beacon placement seems like a lot of money, given that it's likely to be a largely automated service. What I have problems with is comScore continuing to offer the diary service at all, and that's where my gratuitous Domino's Pizza reference comes in.

Recently, Domino's began running television ads taken from focus groups, where participants said things like "the crust is rubbery" and "the box tastes better than the pizza." Domino's ads say that it has taken the criticisms to heart and has changed its pizzas so they taste better. Domino's no longer sells its old, crappy pizzas, only the new ones. comScore, however, continues to offer the old, crappy diary measurements, right alongside the new, superior, beacon-based ones. If the old methodology doesn'r work very well, STOP USING IT!

If I was an advertiser, I'd now take comScore's diary ratings with a grain of salt. Mixing the two methodologies would actually make it more likely that I'd look at a competitive rating system, not less. I'm sure that comScore is afraid that dropping the diaries before it has a critical mass of beacon-equipped sites will make its overall service much less valuable, but there's an alternative approach it could have taken that would allow them to phase out diaries quickly and still generate revenue:

1. Make the beacons available to website operators free, just like Quantcast and Google do.
2. Provide the auditing service for the first year at a much lower price, and make it an annually renewable service.
3. Clearly distinguish in ratings reports which sites are audited and which are not. This will alert advertisers to sites that may be "gaming the system" by placing multiple beacons on a single page.

It's in comScore's best interest to get rid of the diaries and go to the audited system it's pursuing. It should do everything it can to make the transition as quickly as possible, even if it means leaving some money on the table in the short term.

Nexus One: First round, not the ballgame

After all the speculation and hype surrounding the launch of Google's first smartphone, the Nexus One, has come the reality: According to Flurry, which measures usage of smartphone applications, only about 20,000 Nexus Ones were sold in the first week. In my opinion, this is because customers have to purchase the phone directly from Google, even if they buy the subsidized T-Mobile version; it's not available in stores. Google's "the buck stops somewhere else" customer support plan is drawing criticism: For hardware problems, customers have to contact HTC, for software problems, Google, and for network problems, T-Mobile. Mobile subscribers are used to getting all their support from the carrier, and they expect Google to fill that role, but they're coming away frustrated and disappointed.

One one level, it appears that Google didn't think out the launch of the Nexus One very well. However, I believe that Google wants to become a mobile carrier, not just a supplier of software, services and advertising. The question is: What kind of a carrier does Google want to be?

They're probably not going to want to buy an existing carrier; that would be too expensive and carry too much baggage. Nor would they want to become a MVNO (mobile virtual network operator); at least in the U.S., no one has been successful reselling one of the major wireless carrier's services. Their best choice, and I think the one they're pursuing, is a combination of broadcast television bandwidth and the "white space" between television channels.

The FCC, which earlier was saying that it was likely to force broadcasters to give up bandwidth for broadband services, has now backed down and asked for voluntary participation. If broadcasters can see a financial upside to ceding bandwidth, they're much less likely to continue to fight proposals to use the white space between channels as well, for which they would have gotten nothing. By assembling bandwidth from existing television stations while using white space for other markets, Google and other companies could build broadband data services to rival the major mobile operators.

Google wouldn't even have to build out the network itself; it could invest in a company that plans to do it and reserve a portion of that company's bandwidth for itself. Once the network goes live, Google could sell its own wireless data service, probably at a fraction of the price of the major carriers, and offer voice as a VoIP service (which makes sense, given Google's acquisition of Gizmo5, a VoIP provider, last year.) Merging Google Voice and Gizmo5 would enable Google to offer a robust voice service without the massive infrastructure of the big mobile operators.

Once Google gets all of this in place, its own phones will work primarily on its network. It might offer dual-network versions that work on GSM or CDMA networks in the areas where Google doesn't have its own service, just as Sprint sells adapters and routers that connect to Clearwire's WiMax network where it's available and Sprint's own 3G network where it isn't.

The best way to look at the Nexus One is as the first step in a much longer-term strategy, and its customer service problems as "teething pains" on the way to becoming a mobile carrier.

Rewards lead to results

Have you ever wondered why so many companies are so focused on this month's or quarter's sales, while others have better long-term performance and are successful year after year? Why do some companies put so much effort into writing long-term plans that no one reads? The answer is employees do what they're rewarded for and avoid things that will lead to punishment. It sounds Pavlovian, but it explains a lot of behavior that otherwise doesn't make a lot of sense.

Salespeople are usually rewarded based on meeting quarterly and annual quotas. If they miss their quotas, their income will be lower than expected, they won't earn bonuses and they might get fired. Therefore, missing their quotas is to be avoided. On the other hand, they don't want to exceed their quotas by too much, because if they do, their quotas will be increased in the next period and they might have trouble achieving them. Also, if they know that they're going to exceed their quotas and they can have their customers defer purchases to the next quarter, it'll make next quarter's numbers much easier to make. So, even though they might be able to sell more in the current quarter, they don't.

Executives in public companies know that their stock value is based largely on sales, earnings  and profitability growth. It's easier and faster to increase profits by cutting costs than by increasing sales; that's why companies freeze hiring, delay capital expenses and lay off workers at the first sign of a sales downturn. These actions protect earnings and help to maintain stock prices, which means that the executives can preserve their bonuses. Obviously, many cost cuts are necessary and appropriate, but companies often overdo it, making themselves uncompetitive and crippling their ability to respond when the economy recovers. Short-term pain avoidance almost always trumps long-term thinking.

Rewards don't necessarily have to be economic; they can be emotional as well. Many studies show that giving people personal recognition for doing a good job can be even more effective in eliciting a desired behavior than bonuses, especially if the positive recognition is given often and sincerely.

Companies often reward employees for doing the wrong things. For example, some companies reward employees for writing long, detailed plans that are then put on a bookshelf and ignored. The details of the financial forecasts, the number of pages and the length of the accompanying executive presentations are the measurements for whether the plan is good or not, rather than the fact that events may make the plan irrelevant in a few months. Employees get the message that quantity is more highly valued than quality, and that the plan is more important than actual performance.

In short, people do what they're rewarded for. If you're not getting the results you want, first figure out what behavior you're rewarding.

3-D Cinema witout digital?

As I've written before, 3-D has come to be seen as the savior of the theatrical motion picture business, and potentially, the consumer electronics business as well. When you go into a movie theater to watch a 3-D movie, it's being projected by a digital projector. Digital projectors have a lot of advantages in picture quality (especially maintaining picture quality over time vs. a deteriorating film print), but they're very expensive (up to $150,000 for the highest resolution and most powerful projectors.) Meanwhile, there are tens of thousands of perfectly usable 35mm film projectors out there that are useless for 3-D. According to EE Times, Oculus3D is trying to rescue those analog projectors from premature retirement.

The Oculus3D system was co-developed by Lenny Lipton, the former Chief Technical Officer of RealD, the leader in theater 3-D projection systems. The Oculus3D system requires special processing of the final digital intermediates prior to creating the master negative for striking positive motion picture prints. Once that's done, the film is processed and handled identically to any other 35mm print.

Movies made with Oculus3D are printed with the left-eye view rotated 90 degrees in the left side of the 35mm frame and the right-eye view rotated 270 degrees in the right side of the frame. The Oculus3D system rotates the two images to zero degrees, polarizes and overlaps them so that they can be viewed properly with 3-D glasses. The Oculus3D projector lens will cost around $25,000. Inexpensive passive 3-D lenses are used with the system, and obviously, motion picture exhibitors can charge the same premium for tickets with the Oculus3D system that they charge today for 3-D from digital projectors. However, the equipment cost can be paid back five times faster with Oculus3D.

If Oculus3D performs competitively to digital projection systems, not only could 3-D be viable in far more theaters, but new life could be breathed into the film manufacturing and processing industries.

The 70% Solution

Yesterday, Amazon announced a new program offering publishers and self-publishing authors a 70% royalty on eBook sales as long as they agree to a number of rules, including:

• Pricing their eBooks between $2.99 and $9.99
• Setting the prices of their eBooks at least 20% below the price of their lowest-priced print versions of the same titles
• Giving Amazon "most favored nation" pricing status (the price that the author or publisher sells the titles for at Amazon has to be the same or lower than the price offered through any other reseller)
• Allowing Amazon to offer features such as text-to-speech on their eBooks

Apple is rumored to be offering publishers a 70% cut of revenues on eBook sales for its rumored tablet, and is said to be allowing publishers to set their own prices, so all that Amazon is really doing is matching Apple's terms. However, Amazon's moves are likely to spark a more seismic move in the publishing industry than simply paying more money to a few publishers. It may help spur a mass move to self-publishing, especially for authors who today typically sell 10,000 or fewer copies of their books.

Seventeen years ago, my first book (an introduction to Windows NT) was published by Sams, an imprint now owned by Pearson. The book sold a bit more than 10,000 copies, the minimum sales target for most computer book publishers back then. I earned out my advance ($8,000, as I recall), and made a few thousand more. However, given the amount of time I spent researching, writing and promoting the book, I could have worked at Burger King and made the same amount of money.

Also, I was responsible for promoting the book myself. When people say that one of the big reasons for publishing a book through a major publisher is their ability to promote books, don't believe them. Unless you're one of the publisher's top authors, you'll get little or no promotional support. I had to pay to fly myself around the country to promote the book, and a friend in Public Relations scored interviews for me with PBS' "Nightly Business Report" and other outlets.

So what does all this have to do with Amazon's announcement? I ran the numbers, and the economics are strongly in favor of an author self-publishing eBooks with Amazon or a similar service rather than going with a big publishing house. Here's an analysis that I did, comparing my book, originally priced at $19.95 and selling 10,000 copies in print, against the same title priced at $9.95 and selling 5,000 copies as an eBook:

	Print	eBook
List Price	$19.95	$9.95
Distributor Discount	50%	N/A
Royalty Base	$9.98	$9.95
Author Royalty	12%	70%
Royalty Revenues Per Copy	$1.20	$6.97
Unit Sales	10,000	5,000
Royalty Revenues ($)	$11,970	$34,825
Less: Editorial & Design Costs	$0.00	($5,000.00)
Net Author Revenues	$11,970	$29,825
Advantage ($)		$17,855
Advantage (%)		249%

Companies such as Lulu, iUniverse and Amazon's own CreateSpace offer editorial and design services for self-publishers. $5,000 is at the high side of what those companies charge for a complete editorial and design package. Even with the author paying for the editorial and design work that the publisher would ordinarily do, they'd still end up making 2.5 times as much money on an eBook priced half as much and selling half as many copies as the print version. That's amazingly compelling.

Amazon will try to steer as many of those self-publishing authors as it can to CreateSpace, where Amazon gets a cut of the editorial and graphics services as well. It means that the 30% that Amazon gets is just the start...and the fees paid to CreateSpace are paid upfront by the author, no matter how many copies the author sells. In essence, the authors are paying Amazon an advance for its services, and they're hoping to earn back the advance and make more through sales of the eBooks. It's a plan that could make your chin drop.

It's far too early to give the game to Amazon, but in many ways, they're moving beyond Apple in their integration of production services, distribution and delivery devices.

Startups: Quick and Dirty or Built to Last?

Several years ago, I rented a small house on the San Francisco Bay peninsula. The landlord was a very nice person, but she didn't want to spend a penny more than she had to for anything. In the mid-90's, she built a large house and installed the cheapest double-pane windows she could find. Typically, good windows that are properly installed last at least 25 years, but most of the internal vapor seals on the windows that she installed had broken in less than 10 years. The result was moisture and fogging between the panes that was impossible to remove. She was thinking about selling the house and knew that she could never get a good price with those windows, so she had to replace all of them.

There are times when you should spend money now in order to avoid having to spend more money later; the windows in that house are a good example. By installing good-quality windows when the house was built, the landlord could have avoided the hassle and expense of replacing them a few years later. However, there are also times when it's appropriate to spend the least amount possible building a "disposable" solution.

Software and Internet services startups have to make this same choice all the time: Spend a lot of money up front to get high-quality code that can be used for a long time, or go the cheap and dirty route and get something out that works but will have to be replaced quickly?  The answer depends on what stage your startup is in. If you're just getting started and you're still trying to determine if the opportunity you've targeted is real and your technical solution will work, cheap and dirty is best. You're almost certainly going to throw out your code once, if not multiple times, before you're got the right product/market fit. Once you've got your product/market fit right, you can begin replacing "temporary" code with higher-quality, more maintainable code (I hesitate to say "permanent". because no code should be permanent.)

There are always situations where getting it right the first time is essential, especially in applications used for mission-critical or life-and-death situations. However, for most early-stage startups, cheap and dirty is the way to go, at least at the beginning.

Profiles in Cowardice

It looks as though the negotiations between NBC and Conan O'Brien will be completed as early as tomorrow, and I couldn't be happier. With the disaster in Haiti, this entire situation doesn't even deserve ranking as a sideshow. However, a couple of things have happened that tick me off and point to the high level of cowardice within NBC's current management. First, Dick Ebersol, the president of NBC Sports, criticized O'Brien and David Letterman for their jokes about Jay Leno, saying that it was "chicken-hearted and gutless to blame a guy you couldn’t beat in the ratings." He went on to say that "what this is really all about is an astounding failure by Conan." Later, he claimed that if O'Brien had only taken his (Ebersol's) advice to water down his comedy to fit the 11:35 p.m. audience, everything would have been fine.

Let's take those arguments, in reverse order. O'Brien DID make his comedy blander and less pointed in order to avoid offending the "Tonight Show" audience. I don't think they ran the Masturbating Bear once during the last seven months, for example. I'd argue that it was removing exactly that edge that made The Tonight Show less entertaining and less interesting. In the last week, O'Brien has taken the gloves off, and his ratings have soared.

Second, the "failure" at 11:35 was hardly Conan's fault alone. NBC knew that putting Jay Leno on at 10 p.m. was going to draw away some of the older audience, and that they might not stay up later to watch O'Brien. If I recall the statistics, the average shortfall in ratings that NBC affiliates suffered by putting Leno on at 10 was 17%. That meant that a 17% lower audience was carrying over into the 11:35 time period for NBC. Of course O'Brien's ratings were lower, because he wasn't fighting on a level playing field. He had to start with the damage caused by The Jay Leno Show.

Before I skip to the first charge by Ebersol, let me bring you another quote, this time from an article last Friday in the New York Times, including a quote from Jeff Zucker, chairman of NBC Universal:

"Mr. Zucker said that it was during a phone call in the first week of January from Jeff Gaspin, NBC Universal’s head of entertainment, that he learned that the network’s affiliates were threatening to pre-empt the Leno show. 'It was becoming tough to deal with,” Mr. Zucker said. “The pressure from the affiliate body was strong.'

Mr. Gaspin’s idea was to move Mr. O’Brien’s show to 12:05 a.m., and give Mr. Leno a half-hour show at 11:35 p.m. 'That’s what he wanted to do, and I said, O.K., give it a shot,' Mr. Zucker said. The shot exploded in their faces."

Ahh, so it's Jeff Gaspin's fault, is it? If all that Zucker was doing was assenting to a plan proposed by his subordinate, why did Zucker go ballistic and threaten to not only pay O'Brien nothing but to keep him off the air for 3 1/2 years? He seems awfully invested in someone else's idea. It sounds more like Zucker is trying to make Gaspin the fall guy. Zucker was the one who came up with the plan to give The Tonight Show to O'Brien in the first place and to give Leno a show at 10 p.m. after Leno wouldn't agree to a show at 8 p.m. If he didn't originate the harebrained scheme of musical chairs starting with moving Leno back to 11:35, he most certainly approved it.

Which brings me to the "chicken-hearted and gutless" remark by Ebersol. Who's more chicken-hearted and gutless in this situation: O'Brien, standing up for himself, or Zucker, hiding behind Gaspin? For that matter, when Ebersol's Winter Olympics coverage loses $100 to $200 million for NBC, which he's said that it's going to do, I wonder who he'll blame or whether Zucker will stand up for him.

Entrepreneurship is a life choice, not a job choice

I was looking at the websites supporting the various entrepreneurial programs at my alma mater, Northwestern's Kellogg School of Management. There seemed to be a lot of activity until the current recession began, but since then, things have slacked off dramatically--not surprising considering the economy.

However, entrepreneurial programs at the graduate level have always had something of a checkered history. Most MBA students gravitate to the careers that pay the most. For years, that was consulting and then investment banking. In the mid- and late-90's, entrepreneurship programs took off and became the most popular programs at some schools. I suspect that the majority of those students didn't pursue entrepreneurship because they had a burning desire to found and run their own companies; rather, they saw an opportunity for quick wealth if they could take their companies public or flip them to an acquirer. When the dot-com economy collapsed, interest in entrepreneurship programs dwindled, and investment banking once again took over. (Today, I have no idea what MBA students are gravitating to.)

I believe that entrepreneurship is a life choice, not a job choice. You're either driven to create and build companies or you're not. You can teach the nuts and bolts of creating and building businesses, but not the mindset. In fact, the skills needed to be a successful entrepreneur are rarely taught in MBA programs. Graduate business programs are designed to create specialists--a student will be exposed to all the important disciplines, but they're expected to specialize in one or, as I was able to do, at most two. You graduate as a finance or marketing specialist, but to be a successful entrepreneur, you have to be a generalist. You must be functionally competent in a lot of areas, including product development, sales, marketing, finance, accounting, hiring, legal issues and a lot more.

I would gently suggest to anyone looking at entrepreneurship as a "get rich quick" opportunity that you're out of your mind. I was raised in an entrepreneurial family--my parents owned a retail store, and my father often said that he was in business for himself because he was unable to work for anyone else. It was a very difficult life for them, although they made sure that my sister and I had everything we needed. For 30 years, they were always one bad Christmas season away from disaster. They survived because they were driven to survive.

For you to really be successful, you have to be driven to build a business on your own, not on someone else's payroll. No graduate program can put that drive into your blood. It's either there or it's not.

Conan O'Brien Rejects NBC--Leno Will Get Back "The Tonight Show"

It looks like NBC is going to do what I suggested in an earlier post, but not because they want to do it. Yesterday, Conan O'Brien basically told NBC to "take a hike" with its plan to move Jay Leno back to 11:35 p.m. for 30 minutes, followed by The Tonight Show at 12:05 a.m. In a heartfelt but very carefully crafted public statement, O'Brien said that by moving The Tonight Show to 12:05 a.m. from a time period where it's been for almost 60 years, it will effectively no longer be The Tonight Show, and he won't be a party to that.

According to NBC, its contract with O'Brien doesn't specify at what time The Tonight Show has to run, so the network is completely within its contractual rights to move the show without having to pay O'Brien his kill fee. However, O'Brien is making the argument (and his lawyers would make the argument if it ever got to court) that having The Tonight Show on after the local news is a multigenerational institution with U.S. television viewers, and that by moving "The Tonight Show" to 12:05 a.m. and putting another entertainment program in front of it, O'Brien's show will be "The Tonight Show" in name only.

The trade press says that all that remains is for NBC to negotiate a cash settlement with O'Brien and an agreement on how long he'll have to stay off the air before he can work for a competitor. It's fairly clear that barring some other major event, O'Brien's last show as the host of The Tonight Show will be February 11th, the same night that "The Jay Leno Show" goes off the air. Leno will take over again as the host of The Tonight Show after the end of the Winter Olympics.

I have to admit that I wasn't a fan of O'Brien's Tonight Show, but I was even less of a fan of Jay Leno, who seems to believe that you can never dumb your talk show down enough for the audience. I'm not happy about the outcome, but NBC (and its acquirer, Comcast) has to be even less happy. No one in negotiations with NBC in the future is going to trust that the network will think through or stand by its decisions.

Buzzwords Without the Benefits

The eBook software company that I work for was just merged into a larger software division of the same company. This larger company uses Extreme Programming (XP) primarily as an excuse to put developers into pens. While other companies using XP put two developers into each cubicle or office, at this division, developers sit side-by-side at long tables with no privacy. The developers could just as easily be machine tools.

If the company was really getting benefits from the approach, I'd say that the human cost might be worth it, but they only manage to get one release out a year. Neither time-to-market nor responsiveness benefits from their approach. Developers are moved from project to project in order to meet staffing demands, so it's difficult or impossible for them to build and maintain domain expertise. There seems to be plenty of demand for customer support, so their approach isn't resulting in easier-to-use or higher-quality products.

I'd argue that the only reason that this company has been successful is that it's selling into a very conservative market that changes and adopts new technology very slowly. If they were competing in a more dynamic market, they'd have their heads handed to them.

It's easy to convince yourselves that you're experts in a given field if you're in a market cul-de-sac or technological backwater. An easy way to fall into this trap is to benchmark your operations against your direct competitors--that's what the U.S. automakers did, by comparing themselves against their next-door domestic competitors instead of the best companies around the world. The smart thing to do is to benchmark yourself against other similar, but not necessarily competing, businesses. Identify what they do right and what your direct competitors could learn to use against you.

3-D: Industry Savior or "Flavor of the Month"?

At the Consumer Electronics Show (CES) this week in Las Vegas, 3-D is everywhere. Sony, Panasonic and others showed LCD and plasma displays and Blu-Ray players that will support 3-D. Panasonic even showed a non-working prototype of a $20,000 camcorder capable of shooting 3-D content. ESPN and a consortium of Discovery, Sony and IMAX both announced plans for 3-D cable channels. The problem, however, isn't the technology (although the issue of 3-D formats needs to be resolved) but rather, how the technology is used.

If 3-D isn't shot very carefully, it usually becomes a brain-liquefying (and headache-inducing) experience. Both the right tools and the right technique are essential. If you think that it's tough for filmmakers to produce watchable 2-D movies and television shows, wait until they try to work in 3-D.

There's a very good chance that 3-D has become the consumer electronics industry's latest "flavor of the month". Blu-Ray was intended to save the industry, compensating for lost revenues from the decline in DVD player prices and encouraging consumers to pay more for Blu-Ray discs. That hasn't happened so far, thanks in large part to the recession, nor is it likely to happen in the future. However, 3-D could be the savior of Blu-Ray. It could even get people to replace earlier-generation HDTV displays with new models capable of the high refresh rates and resolution needed for 3-D. Or at least, that's what the industry hopes.

I can't help but think that 3-D is going to have the same impact as Blu-Ray has had or even less. Consumers are flocking to $1 a night Redbox DVD rentals, or they're turning to digital downloads and streaming video. 3-D technology is still about five years from being practical in everyday production, and if the industry tries to push out products too quickly, the most likely things that it's likely to stimulate sales of are headache remedies.

Leno Moving Back to 11:30 for 30 Minutes?

The New York Times is reporting that NBC is planning to move Jay Leno back to 11:35 p.m. to do a 30-minute show, followed by Conan O'Brien at 12:05 a.m. for an hour, and then Jimmy Fallon at 1:05 a.m. No word on what show gets named what, but I'm betting that O'Brien keeps "The Tonight Show" name and Leno's show remains "The Jay Leno Show". Besides being an act of desperation, NBC's moves smack of more half-steps: They can't remove Conan O'Brien from the Tonight Show without paying him a huge kill fee ($50 million, as I recall), but what can Jay Leno do in 30 minutes? A monologue, perhaps a sketch or comedy bit, but no interviews. O'Brien would start at 12:05 a.m., and Jimmy Fallon would be in Carson Daly's nosebleed territory.

NBC's hope is that moving Leno back to 11:35 p.m. will let them win the first half-hour of late night again against Letterman and Nightline, and give O'Brien a better lead-in, with the goal of keeping viewers from tuning to Letterman for the second half of his show, or to ABC's Jimmy Kimmel. But given NBC's track record, the chances are more likely that Nightline and Letterman will stay on top, the Tonight Show will be even more crippled than it is now, and Late Night will be killed in the ratings.

Why can't NBC simply bite the bullet and put Jay Leno back as the host of the Tonight Show? Pay O'Brien his kill fee and offer him Late Night again, move whatever Jimmy Fallon does to 1:35 a.m., and get rid of Carson Daly. Rather than really fix the problem, NBC's management looks like it's going to make another "bold move" that's really a half-step intended to save money.

Video Business Magazine closes

Today, Reed Business Information announced that it had shut down Video Business Magazine, effective immediately. Both the print magazine and the website were shut down. They were apparently victims of the recession, the decline in DVD sales, and the long-term closure of thousands of independent video rental stores, all of which resulted in lower advertising revenues.

Given that Video Business was one of two remaining magazines focusing on the home video industry in the U.S., the outlook for independent coverage of the industry isn't good. Also, speculation is high that Variety, Reed's flagship entertainment publication and newspaper, is either already on the block or soon will be for sale.

Google's Nexus One: Darwin at Work?

Google formally announced its Nexus One smartphone yesterday, and the trade press, many of whom had weeks to play with the phone prior to the announcement, was free to tell what it thought of the new phone. The verdict seems to be that it's the best Android phone to date, and a worthy competitor to Apple's 3GS. Now, we're going to see if Darwin was right.

Apple's iPhone is an excellent example of a closed ecosystem--everything is controlled by Apple, especially the pace of change. In the Android ecosystem, Google has limited control, in that it controls the pace of new Android operating system releases, but since Android is open source and anyone can build compatible devices, we're seeing a rate of change faster than anything in the Apple ecosystem. The Motorola Droid, which was the best Android smartphone, was supplanted by the Nexus One in just a few months. Motorola already has the next generation of the Droid design in testing, and other players, such as Samsung and Sony Ericsson, are hard at work on their own products.

The only real advantage that Apple has left is its lead in applications, which is still substantial. My suspicion is that Apple is going to try to change the topic of conversation later this month to its new tablet computer, which will likely use the iPhone's operating system. If that happens, Android will once again be playing catch-up. Nevertheless, the iPhone/Android battle is an excellent laboratory for testing evolutionary theory: Is a controlled or an open ecosystem better at producing valuable innovation? Apple's closed ecosystem has led the pack so far, but it's Android's turn to demonstrate the value of openness.

3D Comes to Cable

There were two announcements of new 3D cable networks at CES today. ESPN announced plans for a new 3D network, as did a joint venture among Discovery Communications, Sony and IMAX. ESPN's channel will launch this June and broadcast a minimum of 85 3D sporting events in its first year, the first one being a World Cup soccer match between South Africa and Mexico. The 24-hour Discovery/Sony/IMAX channel will launch next year and will feature programming from a variety of Discovery's channels.

It's far too early to tell whether these channels will turn out to be short-lived gimmicks or pioneers of a new generation of broadcasting. However, it's likely that other networks will follow suit, launching their own 3D services and putting additional demands for channels onto already crowded cable, satellite and IPTV systems. In turn, this will spur cable operators in particular to move even faster to Switched Digital Video and IP Video architectures.

As a practical matter, if you're in the market for a new HDTV display, you should probably go for one with at least a 120Hz refresh rate. There are no guarantees that it will work with 3D content, of course, unless the manufacturer says that it does.

Droid Doesn't?

I just noticed a Verizon commercial where they're giving away a HTC Droid Eris if you purchase a Motorola Droid. These kinds of deals usually don't happen unless sales slow down, which makes me wonder if Droid sales have already peaked. Verizon may also be running the promotion as a preemptive strike against the Google Nexus One, which is scheduled to be formally announced this coming Tuesday. Engadget's early review claims that the Nexus One is faster and better-designed than the Motorola Droid and slightly thinner than the iPhone 3GS.

Handset manufacturers competing in the Android space aren't going to be able to keep a "best-of-breed" position for very long. Motorola leapfrogged HTC, and now HTC looks like it's going to leapfrog Motorola. Samsung and Sony Ericsson are also in the market. It's going to be very tough to compete unless you've got the ability to crank out improved models quickly.

The Entrepreneurial Challenge

2010 has just begun, and depending on who you talk to, we're either still in the Great Recession, or it recently ended. Either way, there are millions of people in the U.S. and around the world who will remain unemployed or underemployed even after the economy recovers. As a society, we have both a moral and economic imperative to help these people get back on their feet. As a country, the U.S. can't survive with a hollowed-out manufacturing base, and having Wal-Mart or McDonald's as employers of last resort helps no one.

I believe that the end of the Great Recession presents a tremendous opportunity for individuals who want to start their own businesses. For many people, entrepreneurship will represent their best, or even their only, means of getting back on their feet financially. The challenge for those of us who have spent most of their careers in Silicon Valley and other entrepreneurial centers is to bring that startup culture to people who need it.

We've got the tools to spread ideas quickly and inexpensively; we need to use them to encourage new businesses, no matter where they're located. We also need to adapt our philosophy and techniques to the needs of entrepreneurs outside the major technology and business centers. It's far more likely that these new entrepreneurs will start a restaurant than a software company, and very few of them are ever going to have a business that's likely to go public. We need to help them build sustainable, profitable businesses that will allow them to make a good living and support themselves and their families.

Who's helped by "a la carte" pricing?

The Fox/Time Warner debacle (which was settled last night) has reopened discussion of a la carte pricing for cable. A la carte means that cable operators would be obligated to allow subscribers to choose and pay for only the channels that they watch. Never watch ESPN? You wouldn't have it in your channel list, and you wouldn't pay for it.

Consumers love the concept of a la carte, because it promises to dramatically lower cable costs. Most people have 20 or fewer channels that they watch regularly, and that's all that they'd have to pay for. However, a la carte is Kryptonite to both the cable operators and networks. The cable operators would have to price their services much closer to their actual costs, which would mean significantly lower revenues. They would no longer be able to offset the costs of cable networks that they have to pay for with cable networks that pay the operators for carriage. (For example, cable operators pay Fox to carry the Fox News Channel, but Fox pays the cable operators to carry the Fox Business Channel.)

Under a la carte, the cable networks could no longer get revenue from every cable subscriber, no matter whether or not they ever watch their channel. Disney's ESPN is legendary for refusing to allow its primary network to be moved to a sports tier; Disney insists on getting paid for every subscriber that a cable system has. If subscribers could pick and choose, Disney would only get revenue from those subscribers who actually want to watch ESPN enough to pay for it. ESPN's viewership numbers, and its advertising revenue, would likely drop significantly.

ESPN and Fox News are very popular, so they'd probably survive in an a la carte environment. The survival of marginal cable networks would be much more problematic. Most cable networks claim all of the subscribers to their cable systems as potential viewers, and set advertising rates (at least in part) based on those numbers. Marginal networks would see their potential viewer numbers drop dramatically under a la carte, and their revenues from cable operators would drop as well.

A few years ago, I interviewed a European IPTV operator that launched its service with a la carte pricing. The service was very popular, but it consistently missed its programming revenue goals, so it quietly replaced a la carte with the tiered pricing model used by US cable operators. The European operator found that it lost few subscribers and significantly increased revenues. (The operator's market was so competitive that even with tiers, its service was only 1/3rd the price of comparable cable or IPTV service in the US.)

A la carte pricing would be the fairest approach for consumers, and it would introduce true supply-and-demand pricing to the cable business, but it would probably also result in the failure of many existing cable channels. The forces favoring a la carte simply don't have the political or financial clout to make it happen in the U.S. at this time.