Amazon & Apple: Is their proxy war getting hotter?

Earlier today, according to Reuters, Walmart notified its store managers that the company would no longer carry Amazon's Kindle eReaders and tablets once its existing inventory and committed purchases run out. Walmart confirmed its decision with Reuters, but didn't specify the reason(s). In May, Target announced that it would no longer carry Kindles, and like Walmart, it never made an official public statement about the reason. However, CNN noted that Target had just been authorized by Apple to begin selling iPads, and that it planned to add Apple "mini-stores" within 25 of its locations.

There are two reasons being cited by observers as to why Walmart might have decided to drop Kindles:

1. Amazon may not have offered Walmart a sufficient discount, or
2. Walmart may see Amazon as an increasingly large competitor for general merchandise sales, and doesn't want to support a competitor any longer.

Both of these reasons make sense, and either one of them may be true, but let's sideline that discussion for a bit.

At Publishers Lunch Deluxe, Michael Cader reported on Apple's efforts to get evidence from Amazon for its defense in the government's eBook price-fixing case. According to Cader, Apple has been trying to compel the Justice Department to turn over the transcripts of interviews with 14 Amazon managers and executives. Those interviews weren't taken under oath. The Justice Department argued that the interviews are protected work product, and aren't subject to release. However, Justice has given Apple the names of everyone at Amazon who was interviewed, and said that Apple could take depositions directly from those people. In addition, the Justice Department has released all of its email communications with Amazon and all of the documents and data it received from Amazon during its investigation.

Apparently, Apple took up the Justice Department on its idea, and filed subpoenas to force the 14 Amazon employees to give depositions. Then, last Friday, September 14th, Amazon filed a motion in Seattle Federal court to quash the subpoenas, on the grounds that Amazon isn't a party to the litigation. This week, Apple filed a motion with Judge Denise Cote, who's in charge of all of the U.S. cases related to eBook price-fixing, to move Amazon's motion from Seattle to her court. Judge Cote is now considering Apple's motion.

I don't know that much about the law regarding who can and can't be compelled to provide depositions and discovery documents. What I do know is that if Apple does eventually get the right to enforce its subpoenas, Amazon is going to want to put strict limits in place to prevent any confidential information that's not directly related to the price-fixing case from being revealed to Apple.

That brings me back to the title of this post, and to my first point. Clearly, Apple and Amazon are competing in more areas, and in the U.S., Amazon is currently the only serious competitor to Apple in tablets, based on sales. Apple is widely rumored to be planning to announce a smaller iPad next month. Target dropped Amazon shortly after signing a deal to carry Apple's iPads, and now, a month before the smaller iPad's expected release, Walmart has also dropped Amazon's Kindles. Does that mean that Apple might have made Walmart's getting the small iPad conditional on dropping Amazon? It's certainly possible, but rather than getting into legally murky waters, Apple could have required Walmart to give its products a certain amount and type of display space--a very common condition in retail distribution deals. Walmart would have to get that space from somewhere, and "independently decided" (wink, wink, nudge, nudge) to take it from Amazon. Another perfectly legal option would be if Apple offered Walmart co-op funds if it did certain things (for example, PC manufacturers get reimbursed for part of their advertising costs by Intel if they include that four-note musical theme at the end of their commercials.) These payments amount to a discount--and if Target is already getting them, Walmart would be at a competitive disadvantage if it didn't get them as well.

All of this adds up to "shadows on the wall" suggesting a proxy war between Apple and Amazon:

• Amazon is using the Justice Department as a proxy against Apple to get agency terms and Most Favored Nation clauses terminated, and
• Apple is using Target and Walmart as proxies to hinder Amazon's ability to sell Kindles in stores.

If this "proxy war" model is correct, I'd expect Best Buy to be the next retailer to drop Kindles. Apple has dedicated sales space in most Best Buy stores, and a lot of leverage over the retailer. In addition, Amazon is a strong competitor to Best Buy, so there's plenty of reasons for Best Buy to stop selling Kindles.

You may say that this is all paranoia, and you may be right, but I've spent enough time in high tech to know that everything that's happened so far is right out of the Silicon Valley playbook. 

eReaders are great for casual readers, not so great for highlighting and notes

The Atlantic has an essay about the state of eReaders written by Alan Jacobs, an English professor at Wheaton College. Here's a summary:

• Both eReaders and tablets are making it easier to read at night, with front lights (eReaders) and dimmable backlights (tablets). 
• E Ink displays on eReaders are still far superior to LCD displays on tablets when it comes to glare. 
• The contrast of eReader displays has improved considerably. 
• eReaders have limited typeface options and do a poor job of handling kerning and spacing. (A large part of the problem is EPUB, which emphasizes dynamic page flow to the detriment of just about everything else.) 
• Highlighting and annotation, which are very important for literature studies, are all but impossible with eReaders. The trend to replace dedicated keyboards with on-screen keyboards has made annotation even more difficult. On the other hand, tablets handle highlighting and annotation much better, although they still have some quirks. For example, it's impossible to extend a highlight across a page break on the iPad (although it can easily be done on Nook and Kindle eReaders.) 

The bottom line is that eReaders and tablets are generally improving for general reading, but for engaged reading, there's been little improvement, and in some ways eReaders' capabilities are moving backwards.

Amazon puts limits on 3G web browsing

The Digital Reader reports that Amazon has imposed a 50MB/month limit on web browsing over 3G on older Kindle eReaders. (The current Kindle Touch doesn't allow web browsing over 3G at all.) There's no limit on bandwidth use over Wi-Fi. Once the 50MB limit is reached, the 3G connection only works for visiting Amazon.com, the Kindle Store and Wikipedia.

Reviews of six eTextbook platforms

On The Textbook Guru blog, Jeff Cohen has reviewed six eTextbook platforms: Chegg, CourseSmart, iBooks, Inkling, Kindle and Kno. Cohen doesn't pick a "winner," but he does a good job of reviewing the pros and cons of each platform as they relate to eTextbooks. Here's a brief summary:

• Chegg: Based on HTML5, has a built-in "Ask a Question" feature for getting more information from experts, and its purchase and usage models are based on how students actually use textbooks. It's biggest downside is that it's online only and requires an Internet connection at all times. 
• CourseSmart: It allows both online and offline access to eTextbooks. Individual pages, along with highlights and notes, can be shared with classmates and instructors. Up to ten pages from any title can be printed. However, CourseSmart only rents eTextbooks, and they're disabled at the end of the rental period. It only has one level of zoom and no multimedia features.
• iBooks: It brings Apple's ease-of-use and user interface design to eBooks. eTextbooks can include 3D models, embedded video and interactive quizzes. There are also virtual study cards that contain chapter-specific glossary terms. iBooks eTextbooks work both online and offline. The biggest downside is the still-limited number of eTextbooks available for the platform. 
• Inkling: Works on the iPad and in some HTML5-compatible browsers. Allows students to purchase eTextbooks by the chapter or by the entire book. Supports online and offline reading. Video, audio, interactive and 3D content can be incorporated into the eTextbooks. Notes can be shared with other students. The biggest drawback is a strict returns policy. 
• Kindle: Has the most flexible rental and returns policy--eTextbooks can be rented for 30 days and extended as needed, or returned within the first seven days for a full refund. The "X-Ray" feature gives the definitions of important words, phrases and names, and visual diagrams of where they're used in the text. The biggest drawback is that most eTextbooks don't use Kindle Format 8, so they're black & white only, with no 3D, animations or video, and very limited audio support. 
• Kno: Supports iPads and HTML5 browsers, but not all titles work in both eReaders.  eTextbooks can be returned within 15 days, so long as the user hasn't gone past the first 20% of the book. Notes, bookmarks and annotations can't be transferred between platforms--for example, notes made in the HTML5 version can't be accessed when the eTextbook is opened in the iPad eReader. Cohen found that Kno's beta "Quiz Me" feature, which turns sections of the eTextbook into fill-in-the-blanks quizzes, didn't work properly. Some images were left out due to copyright restrictions. 

Summary of Association of American University Presses' Spring 2012 eBook Survey

In preparation for the Association of American University Presses' annual convention in Chicago, the group has released its "Digital Book Publishing in the AAUP Community" survey for Spring 2012. Here's a summary of selected findings:

• The most popular digital publishing strategies being pursued by university presses are short-run digital printing/print-on-demand programs for backlist titles, and individual sales of eBooks, both of which are being used by 93% of the presses. By comparison, mobile eBooks or book-based apps are being used by only 34% of the presses. 
• Amazon's Kindle and ebrary tied as the most popular platform, vendor or aggregator that university presses use to provide digital content, with 81% using them. Google's eBookstore, NetLibrary and Barnes & Noble's Nook follow with 74%, 71% and 68% respectively. 
• In FY2011, the majority of university presses got 3% or less of their revenue from eBook sales or licenses. However, in FY2012, most presses expect to get between 1% and 10% of their revenue from eBooks.
• PDF is the most popular format offered by the university presses (used by 94% of the presses), followed by EPUB, with 87%. Amazon's Kindle formats (MOBI, PRC and AZW) are used by 49% of the presses. Adobe Digital Editions is used by 29% of the presses, and no other format is used by more than 18% of the presses. 
• 99% of the university presses participate in Google Books for Publishers; 88% use Amazon's Search Inside the Book, and 43% use Barnes & Noble's See Inside. 
• Social media, such as Facebook, Twitter, Goodreads and Shelfari, are by far the most popular digital marketing services used by university presses; 91% use them. Choice Reviews Online is in second place with 25%, followed by Scribd with 24%. However, according to the report, pirated content often shows up on Scribd, making the service problematic for many presses. 
• Less than 50% of presses offer any free content from their websites; the most popular form is PDF excerpts, offered by 44% of presses. 
• 54% of university presses use a single ISBN for all digital formats, 41% assign a separate number for each publisher format, and 5% assign a separate number for each vendor format. 

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eBook Wars: Browser Wars All Over Again

At the IDPF Digital Book 2012 Conference earlier this week, Michael Tamblyn, who's Kobo's Executive Vice-President for Content, Sales and Merchandising, gave a status report on his company's market success and progress in implementing an EPUB 3-compliant eReader. Mr. Tamblyn said that because there are "a half-dozen ways to do anything in EPUB 3," it's essential that his developers test Kobo's EPUB 3 prototype using live samples, but his company is having difficulty getting enough document samples for testing. He also said that some publishers are waiting to actually get commercial EPUB 3 readers in-house, so that they can develop their documents to use the features actually implemented by eReader developers.

The next day, I spoke to a manager from a document conversion and app development company on the BEA show floor. He said that his company recommends to publishers that they use EPUB 3  as the basis for creating eBooks. I asked, "But what about Amazon? They don't use EPUB 3." The representative said that Kindle Format 8 is "very close" to EPUB 3, and that Amazon might adopt EPUB 3 in the future. In any event, he said, it's fairly easy for his firm to convert EPUB 3 to KF8.

The era of "Browser Wars"

I came back from New York with a bad case of déjà vu. Anyone who was involved with the Internet from 1995 on remembers "Browser Wars," the battle between Netscape and Microsoft to dominate the web browser market. The engineering team that developed Mosaic, the first graphical web browser, at the University of Illinois, moved to Silicon Valley and wrote a new browser, code-named Mozilla, that became the Netscape browser. Netscape quickly became the most popular Internet software ever released to that date. Then, Microsoft licensed the original Mosaic code from the University of Illinois and released its own browser, called Internet Explorer.

Early on, Netscape introduced new tags and functionality to its browser at a fast clip. Some of these tags, such as frames, gave web designers more options for creating web page layouts, but the tags were implemented without being adopted by the World Wide Web Consortium (W3C,) the international standards-setting body for the Web. Microsoft adopted some of Netscape's tags and added many of its own. However, even when it adopted a Netscape tag, it would often adopt a different set of attributes (the settings that tell the tag what to do.) There were also variations in how browsers rendered tags: The exact same web page, using the same HTML tags and attributes, in two browsers that supported all the tags and attributes used in the page, could look different in the two browsers. For example, in one browser, the page might be displayed with a background color that bled all the way to the edges of the window, while in another browser, the same page might be displayed with a white border around the edges.

It wasn't only HTML that got "innovated" to pieces. The same scripting language got two different names--JavaScript at Netscape (where Brendan Eich invented it), and JScript at Microsoft. As with HTML, the two companies' implementations were different in subtle (and sometimes not so subtle) ways. This was the era of "Looks best in (Browser X)" and "We prefer (Browser X)". In some cases, web pages wouldn't even open in some browsers, and the user would be told to use or install a different browser.

Browser developers encouraged these differences in order to lock customers in, but they were a nightmare for website designers, who had to design different versions of their sites for different browsers, and even for different versions of the same browsers. Pressure from designers and software developers on browser vendors and standards organizations reduced, but to this day still hasn't completely eliminated, the requirement to do things in different ways for different browsers. The W3C took charge of defining new versions of HTML and pushed vendors to stop implementing their own new tags until they'd been reviewed and accepted by the W3C. The W3C also adopted Cascading Style Sheets (CSS,) which over the years have made it easier to tightly define the layout of web pages that work across browsers. Ecma International (formerly the European  Computer Manufacturers Association) took over standardization of JavaScript, and changed the name of the standardized version to ECMAScript.

However, even with all these standardization efforts, supported in some cases by companies whose annual revenues exceed those of the entire book publishing industry, there are still incompatibilities among browsers, and even among versions of the same browsers. For example, Mozilla has JavaScript in its Firefox browser, and Microsoft still has JScript in its Internet Explorer. Both are compatible with ECMAScript at a basic level, but both have additional features that are incompatible with each other.

From Browser Wars to eReader Wars

eBook designers have a variety of formats that they have to work with: Amazon's .AZW (based on the Mobipocket format acquired by Amazon) and Kindle Format 8 (based on HTML5 and CSS with extensions), EPUB 2.X, Apple's iBooks (EPUB 2 .X with Apple's extensions), Kobo Color Content (EPUB 2.X  with Kobo's extensions,) Nook Digital Replica Plus (EPUB 2.X with Barnes & Noble's extensions,) EPUB 3 (HTML5 and CSS3 with the IDPF's extensions) and PDF.

To eBook designers, the word "extensions" is a synonym for "incompatibilities." Two different eReaders may perform the same functions, but if the tags or attributes that tell the eReaders what to do are even slightly different, eBook designers will have to either design around the differences or not use the functions.

Can we draw lessons for the eBook industry from the Browser Wars years? I think that we can:

1. Incompatibilities among eReaders from different vendors, and even among different generations of eReaders from the same vendor, are inevitable and won't go away.
2. Amazon will adopt EPUB 3 48 hours after Apple provides full support of Flash in iOS. In other words, it'll never happen. Amazon's eBook formats are strategic technologies for the company, and it won't allow any competitor or group of competitors to dictate how a strategic technology must work.
3. Despite the best of intentions, browsers' implementations of HTML5, CSS3 and JavaScript are still incomplete, although they're much less incompatible than they once were.
4. EPUB 3 is based on HTML5 and CSS3, and most eReader developers will either base their software and devices on an existing web browser to avoid "reinventing the wheel," or will use the customer's existing web browser and then support the EPUB 3 extensions with JavaScript. Either case makes EPUB 3 subject to lesson 3 above.
5. In order to minimize time and cost, eBook designers and developers will inevitably gravitate to a "lowest common denominator" approach, where they'll either only use features supported compatibly by the largest number of eReaders, or will design eBooks so that features that aren't supported by a particular eReader are either simulated or ignored without crashing.

Is there a market for "enhanced" eBooks?

Shortly before Christmas, The Huntington Post published an interview with David Prichard, the President and CEO of Ingram's Content Group. Ingram is the largest book distributor in the U.S. and operates Lightning Source, which is one of the largest publishing-on-demand services companies, and a major vendor to self-publishers. In the interview, Prichard talked about the future of publishing, and one of the things he talked about were "enhanced" eBooks:

"Enhanced e-books are only in their infancy, allowing authors to add alternative endings or interviews. Down the road, who knows what's possible? Maybe we will have biometric devices that can sense your pulse and body temperature and change the plot based on your feelings -- and you think Stephen King is scary now." 

"...for example, a biography can to come to life in many ways. Jacqueline Kennedy: Historic Conversations on Life with John F. Kennedy has all of the interview audios, videos, photographs, text, and transcripts available. Even classics -- Penguin has updated Pride & Prejudice with clips from the movie and even instructions on dancing. For the 75th anniversary of The Hobbit, HarperCollins released an e-version with exclusives including J.R.R Tolkien's book illustrations and recently discovered Tolkien recordings. Publishers are still learning what added value readers will or won't pay for. I expect we'll continue to see lots of experimentation in this arena." 

Seth Godin, well-known author and marketer, responded on paidContent.org to Prichard's remarks:

"It (the interview) is filled with breathtaking visions of the future, and they are economically ridiculous. The Long Tail creates acres of choice, so much as to make the number of options almost countless. But at the same time, it embraces (in every format) much lower production values. For what Michael Jackson and Sony (NYSE: SNE) paid to produce the Thriller album, today’s artists can make and market more than 5,000 songs. You just can’t justify spending millions of dollars to produce a record in the long tail world." 

"The same thing that happened to music is going to be true of books. The typical e-book costs about $10 in out of pocket expenses to write (more if you count coffee and not just pencils). But if we add in $50,000 for app coding, $10,000 for a director and another $500,000 for the sort of bespoke work that was featured in Al Gore’s recent “book”, you can see the problem. The publisher will never have a chance to make this money back." 

"Sure, there will be experiments at the cutting edge, but no, they’re not going to pay off regularly enough for it to become an industry. The quality is going to remain in the writing and in the bravery of ideas, not in teams of people making expensive digital books."

Others have picked up on the discussion; for example, the Teleread blog summarized Godin's post, and as of now, every comment on the Teleread post opposes Godin's position. I agree with what Godin wrote, with some reservations. First, let's leave the "long tail" arguments aside--the long tail theory has largely been debunked. The long tail only makes money for distributors, who can aggregate small numbers of sales from a large number of publishers/writers/producers. However, the market is being flooded by titles from self-publishers, and it's harder than ever for consumers to separate the wheat from the chaff. Price is no longer an indicator of quality. The most likely outcome is that there will be a small number of titles that do well (as usual), and an ever-larger collection of titles that barely, if ever, earn back their investment in time and money.

Many of the Teleread commenters objected to Godin's statement that it costs "$10 in out of pocket expenses to write" an eBook. He doesn't include editorial, design and eBook conversion services, which can cost hundreds to thousands of dollars if an author farms them out, but that's not what the commenters objected to. Their concern was that Godin made no accounting for the value of the time that authors spend writing. I understand their arguments, but I'm not sure that they're realistic, especially in today's climate. In the 1990s, I wrote two computer books, one for Prentice Hall and the second for Ventana. The first one earned back its advance and sold around 12,000 copies domestically, as well as local-language reprints in a variety of markets. The second one was never released in the U.S., but was released by Ventana's partner in Japan as a local-language title. It didn't earn back its advance. Considering the time I spent writing the two books and the amount I earned, I would have made about the same amount on an hourly basis if I'd worked at Burger King. That's why I stopped writing books.

Your market value is what your customers or clients will pay for your time. In the case of a self-publisher, it's the income that you get from your title divided by the number of hours you spent working on it. If that number doesn't satisfy your financial requirements, you have to increase the number of copies you sell, change your pricing, or do something else that pays more money.

Now, to Godin's central point: Most publishers and self-publishers are very unlikely to recoup the additional cost for adding rich media and interactivity to their eBooks. His cost estimates may be off, but his logic is correct. The fact is that most "enhanced" eBooks to date have sold poorly. If you're creating a native app for iOS or Android and you have to hire developers to do it, that costs money. Even if you're sticking with, say, Apple's EPUB extensions for rich media, Barnes & Noble's extensions for Nook Kids, Kindle Format 8 (when it becomes available to all publishers) or, in the not-too-distant future, EPUB3, there's a cost in time and money for adding interactivity and rich media. For now, at least, you're unlikely to earn back that cost. Thus, the most reasonable approach is to create conventional eBooks.

At some point, enhanced eBooks will "crack the code" and become widely popular, and the additional front-end expense to produce them will be justified. Today, however, that's not the case.

Amazon and Apple's dramatically different strategies

Today's announcement of three new black & white Kindle models, plus the Kindle Fire tablet, have shaken up both Amazon's competitors and a number of industry observers. The Kindle 4 models (the Touch, Touch 3G and just plain Kindle) each set new low price points for eReaders with their functionality. The Kindle, at $79, will be a stocking-stuffer for the coming Holiday season. The Kindle Touch Wi-Fi, at $99, provides comparable functionality to Barnes & Noble's Nook for $40 less, and the Kindle Touch 3G adds always-on wireless connectivity. for $149. (All these prices are for Kindles with Special Offers, or in other words, advertising. Add $30 to the Kindle and $40 to the Kindle Touch models if you don't want ads.)

The Kindle Fire tablet, at $199, is cheaper than any brand name Android tablet except Lenovo's forthcoming A1, which comes with front and back cameras and GPS, all of which Amazon leaves off. However, Amazon has built its own user interface on top of Android that's designed to make the Kindle Fire much easier to use than Google's standard Android. Amazon has also built its own browser, called Silk, that uses Amazon's cloud services to pre-render web content for better performance.

Everything about the Kindle Fire demonstrates how radically Amazon's and Apple's strategies differ. Apple uses software to sell hardware; the iTunes Store and App Store are there to increase demand for Apple's hardware. Apple makes money from software and content, but it's a drop in the bucket compared to its hardware revenues. Amazon, on the other hand, uses hardware in order to sell its goods and services. It's likely that the new Kindles, including the Kindle Fire, are all being sold at close to break-even or possibly even at a small loss, in order to generate more sales of other goods and services. Amazon sees the Kindle Fire as potentially being as stimulative for music, movie and television show sales, as well as Amazon Prime subscriptions, as the black & white Kindles have been for eBook sales.

There's not a lot of daylight between Amazon and Apple for competitors to exploit. Amazon is setting price expectations at the low end and is trying to dominate the content market; Apple dominates the developer community, and the iPad will continue to have a much bigger selection of apps than any of its competitors. Can competitors sell more expensive tablets than Amazon with a mediocre selection of content, or less expensive tablets than Apple with a mediocre selection of apps? I doubt it.

This would have been a great opportunity for a radically different tablet, like Microsoft's Courier, that could compete in a completely different market segment, but Microsoft killed the Courier, and there's nothing on the horizon from first-tier competitors that can forge its own path. In hindsight, HP was probably right to kill the TouchPad, and I wouldn't be at all surprised to see other companies rethink their entire approach to the tablet market. Cloning Apple or Amazon won't work; competitors need radically different products.

Amazon's Kindle and the numbers game

Amazon has never revealed actual Kindle or eBook sales numbers, either in dollars or units. They've always stated the numbers in terms of a percentage of something else for which there are no actual numbers: Sales compared to a previous quarter or year, sales compared to hardcover books, etc.

There's a movement to try to pressure Amazon to release the actual numbers. However, there's no legal obligation on the company's part to release them, and Jeff Bezos has said that he won't do so for competitive reasons. When I was an industry analyst, I tried to get companies such as Motorola and Cisco to release installed base and/or shipment numbers for products sold into the IPTV (Intermet Protocol Television) market, and they always refused, even though they were clients of the company I was working for.

Companies have a right to withhold their sales figures for competitive reasons, but I've found that the real reason usually is that they'd be embarrassed if the numbers were released. For example, I was unable to get Microsoft to release sales numbers for its Mediaroom IPTV platform, on the basis that they didn't have permission from their customers. Apparently, not a single customer anywhere in the world was willing to release its numbers. Then, miraculously, shortly before I left, Microsoft began releasing detailed numbers. Why? Did all their customers suddenly mutually agree to start talking? In my opinion, the real reason was that Microsoft was afraid that investors would learn that they were spending an enormous amount of money on a business that was getting very little traction. Once their installed base reached a respectable level, they were happy to talk numbers.

I'm not going to state that the reason that Amazon refuses to release actual Kindle numbers is that they're disappointing when looked at objectively, since I have no evidence one way or another. However, companies with hot-selling products usually are glad to crow about their numbers. I leave the conclusion to you.