Does a Microsoft purchase of Nook Media make sense, and to whom?

Earlier this week, TechCrunch reported that it received private documents describing a $1 billion offer made by Microsoft to acquire Barnes & Noble's digital businesses from its Nook Media business unit, in which Microsoft invested $300 million last year. Nook Media also includes Barnes & Noble's college bookstore unit, which Microsoft doesn't want and would most likely be reintegrated with B&N's retail business.

Here's what Microsoft would be acquiring:

• Barnes & Noble's eBook business, including its publisher contracts, self-publishing business, eCommerce websites, online order fulfillment infrastructure and customer lists.
• The Nook hardware line (both eReaders and tablets,) and Barnes & Noble's hardware design operation in Silicon Valley.
• B&N's other digital product lines (apps, magazines, newspapers, audiobooks and video.)

The deal, if it goes through, would make Microsoft the second largest reseller of eBooks in the U.S., ahead of everyone other than Amazon. It would save Microsoft the time needed to build its own relationships with publishers and eBook distribution infrastructure. However, the other things it would buy might not be all that valuable:

• Barnes & Noble's tablet business, which was once a viable competitor for Apple and Amazon, has been declining since last year's Holiday sales season. B&N has been running a series of promotions to try to sell off its inventory of Nook HD and HD+ tablets.
• The document received by TechCrunch states that Barnes & Noble intends to shut down its tablet business by the end of its 2014 fiscal year. That's a huge "red flag" to B&N's Silicon Valley-based hardware and software engineers, who'll have no trouble finding jobs with other companies. By the time a Microsoft acquisition closes, most of Barnes & Noble's top engineers are likely to be gone.
• The existing Nook tablet line is of no interest to Microsoft, and in fact will represent a customer support liability.
• Microsoft already has its own app stores for Windows 8 and Windows Phone 8. It has no interest in maintaining the Nook's Android-based app store.
• Microsoft already sells videos and music through its Xbox Marketplace; it doesn't need Barnes & Noble's content.

That's what Microsoft gets for its one billion dollars, but what does the deal mean for Barnes & Noble? A billion dollars could fund a more serious reorganization of Barnes & Noble's retail business. The company is planning to reduce its store count largely by allowing leases for less-profitable locations to expire. Microsoft's money could enable Barnes & Noble's management to buy out leases and reduce its total number of stores much more quickly. It could also be used to redesign the stores in order to make them more profitable--but there's no evidence to date that Barnes & Noble knows how to turn its stores around.

Selling its eBook business to Microsoft also leaves Barnes & Noble with a big problem. eBooks represent as much as 30% of the sales of the Big 6 publishers; for some genres, such as romance, eBooks comprise 50% of sales. B&N's eBook sales are profitable and growing. So, Barnes & Noble needs to continue to offer eBooks to its customers. It could do so by referring its customers to Microsoft's eBookstore and getting a commission. However, Barnes & Noble would no longer be able to use its eBook sales to negotiate steeper discounts from publishers, since Microsoft would actually be the reseller for those publishers.

So, is Barnes & Noble's eBook business really worth a billion dollars (71% of the company's market capitalization as of this writing) to Microsoft? Is that billion dollars worth it to B&N if it means getting out of the only segment of the book business that's continuing to grow in both revenue dollars and units? In the long run, will selling its eBook business save Barnes & Noble's retail bookstores, or will it only buy the company a little more time?

 

Wishful thinking: "Silicon Valley Will Write The Next Big Check For Original Video Content"

At TechCrunch's Disrupt Conference today, Dana Brunetti, Kevin Spacey's partner in Trigger Street, a motion picture and television production company, said that "...Silicon Valley will likely become a major funding source for original content soon. For a company like Google, after all, offering a few million dollars to produce the next episode of a show like Mad Men and to put it on YouTube is pocket change." Perhaps, but that in no way means that it would be money well spent.

For decades, Hollywood producers and movie studios have solicited investment from people outside the entertainment business. The "term of art" for this kind of investment is "stupid money." Producers and studios go from country to country, convincing government leaders that tax breaks and credits for investment in films would results in thousands of jobs, not to mention great publicity for their countries. That's why you see credits for production funds you've never heard of and production sites far from Los Angeles in the end titles of movies. Germany, South Korea, Canada and the U.K. are just some of the countries that have been tapped for production money and tax credits over the last two decades. Almost every U.S. state has offered some form of movie production tax credits or incentives at one time or another. These programs dry up as lawmakers learn that the jobs created and revenues generated don't compensate for lost tax revenues. Producers look for more stupid money elsewhere, and the cycle repeats.

Individuals who invest in movies very rarely get a positive return on their investments. Entertainment industry accounting makes integral calculus look like simple arithmetic. Once money becomes available, a seemingly limitless number of hands reach out for it. Last week, for example, director Christopher Nolan had to file suit against his current and former talent agencies so that a court could decide which ones he must pay commissions to, as well as how much and on what projects. No one in their right mind would build a movie or television production system, or rules for employment, as they work today.

The approach that YouTube has taken with its channels makes sense. YouTube originally funded each of 100 channels with up to $1 million (some channels were rumored to have received as much as $2 million.) That's enough to "move the needle," but not enough for anyone to get rich on. The funding was an advance on advertising revenues, not an unrestricted grant. As YouTube gets actual performance numbers on each channel, it's offering additional advances to some, cutting others off and identifying new candidates for funding.

I have very real doubts about Netflix's original content strategy, which has funded House of Cards, a television series produced for Netflix by Trigger Street. The network television production model calls for hundreds of scripts, which are culled down into dozens of pilots, which are further cut to become the new shows for the next television season. Even at the most successful network, the success rate is pretty low. Netflix is cutting out most of the process and is going directly to production on the basis of scripts and the people involved. Choosing on the basis of name talent is far from a sure bet--for example, look at HBO's Luck, which had Dustin Hoffman in the lead and the directing/writing team of Michael Mann and David Milch. It was a disaster, and not just because three horses died during production.

If you want to invest in a movie so that you can rub shoulders with stars or see your name in the credits, and you have some "mad money" lying around that you can afford to lose, then by all means enjoy yourself. On the other hand, if you're investing in content in order to generate revenue, you've got to be a lot more systematic and much more hard-nosed.

Clueless publisher to release book based on "Text from Dog" Tumblr posts

Publishers are desperate to find the next "pre-sold" property...and here it is: The Bookseller reports that British publisher Headline has paid an undisclosed amount to animator Joe Butcher for a compilation of his Tumblr posts called "Text from Dog." The characters in the Tumblr, October Jones and his dog Cooper, have more than 100,000 Tumblr fans and 40,000 Twitter followers. Hence, a pre-sold audience. Here's a quote from Headline deputy publishing director Sarah Emsley (and I'm not making this up):

"October and Cooper have been brightening up our days for months and we could not be more thrilled to be working (with) them. Buy your copy this autumn to see if it will be BATDOG or CATCAT who reigns supreme this Christmas."

John Biggs at TechCrunch read the Bookseller story, and demolished it. Here's a quote:

So look, here’s what’s up: you guys are killing yourselves. Like this. You’re paying what? Probably six figures for a book based on Text From Dog, an arguably funny Tumblr that, in book form, will sell a maximum of 5,000 copies and then disappear from the cultural Zeitgeist. I mean you wouldn’t pay some no-talent asshole to pretend to write a work of fiction and then capitalize on her name to sell some garbage, would you? Oh wait, you would. But still. Why? Why are you doing this? Stop.

And another one:

I can see the wheels turning. “This is funny! It’s on the web! We can monetize it! People love dogs! People are stupid! This could make our quarter!” Stop.

You’re about to be flattened. Book piracy is about to smash your top shelf revenue while books like Text From Dog are going to kill any respect we once had for the big six. You guys clearly have no idea what you’re doing and you’re depending on your recent Yale-grad philosophy major Assistant Editor to bring you some hot, hot web trendz to capitalize on. Real fiction and non-fiction? Blah, that’s for old people and nerds. What the kids want to do these days is go into a book store and buy a book based on a Tumblr blog. Because kids are stupid. Also vampires. And sex.

Kobo’s Vox eReader Gets Full Access To Google Play

TechCrunch reports that Kobo's Vox eReader has gotten full access to Google Play, which makes all 500,000 Android Marketplace apps available to the Vox. Google had previously only given access to its Marketplace to one Android 2.X tablet, the original Samsung Galaxy Tab. It appears (although the article doesn't say) that Kobo has received Android certification for the Vox from Google. Google may have loosened its requirements for Kobo in response to the success of the Kindle Fire, which has helped to create a viable competitive Android app marketplace, and Barnes & Noble's deal with Microsoft, which will almost certainly lead to a Windows RT-based Nook tablet.

There are more important things than getting press

Yesterday, TechCrunch reported that ProFounder, a fundraising platform for startups, has shut down. According to the company's founders, securities regulations prohibited them from offering all the services that they wanted to, and led in large part to the company's failure. However, I don't want to dwell on the reasons for the company's failure, and instead examine the importance of one particular factor: Getting press.

If you look at the ProFounder home page (or the former home page, if it's no longer there), you'll see this near the bottom:




ProFounder, like many startups, worked hard to get press coverage; they believed that the press gave them credibility with customers and investors, and to an extent, that was true. However, startups often go to ridiculous lengths to get press coverage...even when their website is nothing more than a placeholder.

Press coverage can motivate people to visit your website...once. If you're not ready for the traffic or you can't do anything productive with it, getting press coverage is not only a waste of your time, it's actually counterproductive. Consider some of the mistakes commonly made by startups: Using your home page primarily to collect email addresses usually results in a low-quality mailing list. Collecting email addresses but not doing anything with them for months results in frustrated visitors. if your website is poorly designed, most visitors won't take the time to figure it out--they'll simply leave. If it's hard to sign up for your service, or either the sign up process or your service itself doesn't work, they'll leave. Even worse, once they leave they probably won't come back.

Press coverage that comes as a result of running a successful business is far more valuable than coverage pursued in the hopes that it will make your business successful. And, you have much more leverage over how your story is reported when the press is pursuing you, rather than the reverse. In the earliest stages of your business, social media is far more effective than press coverage for reaching potential customers.

Speculation: The game any number can play

Late last week, TechCrunch's MG Siegler reported that he had not only gotten his eyes on a prototype of a new Amazon tablet, but his hands as well. He reported many details about the hardware and software, the price, when it will be announced, and even what kinds of promotions Amazon plans for it. Siegler's story triggered a flood of speculative articles, all primarily based on his description. For example:

• From Forbes:  Amazon Can Become Tablet King With E-Commerce Underwriting
• From The Wall Street Journal: Amazon.com Says It Is Testing Website Redesign (Changes, Which Will Roll Out Gradually, Were Made With Tablet Computers In Mind)
• From Wireless World: Amazon's $249 tablet could shake up pay TV business

I take Siegler at his word that he saw and used a prototype of an Amazon tablet, and that he spoke with a source with inside information about Amazon's plans. However, we have no independent verification that the tablet he used is representative of the final product, or that the pricing, availability and promotional details that he got are correct and won't change by the time the product finally ships. Nor do we have any independent verification of what he wrote about a second tablet, or about Amazon's plans for other black & white Kindles.

It's easy (and fun for the whole family) to base articles on a single, unconfirmed story, but they take as fact what is only rumor and hearsay. The problem with piling speculation on top of hearsay is obvious: If the hearsay is incorrect, the speculation based on it is even more incorrect, and the whole pile tumbles down like a badly-constucted Jenga tower.

We know what TechCrunch published. Let's get some independent confirmation of the facts before we start drawing conclusions or determining what the impact will be on the industry. If Siegler is correct, we don't have long to wait before we get confirmation from Amazon itself. There's plenty of time to determine the implications of Amazon's actions once we know the "true facts".

Google and the limits of tweaking

Late last year, several observers wrote about what they believe is deterioration in the quality of Google's search results:

• Jeff Atwood of Stack Overflow wrote that sites that have simply copied Stack Overflow's articles and surrounded them with advertisements are showing up higher in Google's search results than the original Stack Overflow content. According to Google's own rules, that's not supposed to happen.
• Vivek Wadhwa wrote in TechCrunch: "Google has become a jungle: a tropical paradise for spammers and marketers. Almost every search takes you to websites that want you to click on links that make them money, or to sponsored sites that make Google money. There’s no way to do a meaningful chronological search."
• The "wheels fell off" of Google Search for Paul Kedrosky when he tried to decide which new dishwaher to buy. Thanks to keyword-driven content generated by content mills such as Demand Media and the Yahoo Contributor Network (formerly Associated Content), "Pages and pages of Google results...are just, for practical purposes, advertisements in the loose guise of articles, original or re-purposed. It hearkens back to the dark days of 1999, before Google arrived, when search had become largely useless, with results completely overwhelmed by spam and info-clutter."

Content providers have been trying to "game" Google's results ever since Google became a serious search engine player, but Google has always been able to adapt its algorithms to keep the best results coming up at the top. Now, however, it looks like the gamers are winning, and that's opening the door for other search engines.

This may not be a perfect, or even a relevant, analogy, but it may help explain what Google is facing. 25 years ago, Kurzweil was the only company that could read and convert virtually any typeface to ASCII (OCR, or optical character recognition). They did it by having the machine operator scan in examples of the material to be converted, and then individually identify each character ("this is an "L"...this is an "I"...this is a lower-case "i") until the reader could understand the test set. Then, the operator could scan in the complete set of documents, and the Kurzweil device would read and convert them. However, there were always characters that it still couldn't read, and the operator would have to stop and correct the mistakes. These corrections would further train the system.

The Kurzweil system could only recognize a limited number of typefaces at a time, because it would get confused. Over time, more training and corrections actually led to lower accuracy, as the system could no longer distinguish between similar characters such as "e", "o" and "q", "E" and "F", "D" and "O", or "I", "i", "L", "l" and "1". Early systems relied on character shapes alone and didn't use dictionaries or context checks. As a result, at some point the operator had to discard the training set and train the device all over again.

True algorithmic recognition systems from Palantir/Calera eventually solved the problem and were able to read the vast majority of typefaces without any training. Eventually, through acquisitions and mergers, the technologies of Kurzweil and Palantir/Calera fell under one roof at ScanSoft, and are currently sold as OmniPage 17 by Nuance.

My point is that the training technology of Kurzweil eventually reached its limit. Even after adding the best fixes the company could think of, its technology was eventually supplanted by algorithimically-based shape recognition, augmented with dictionaries and context analysis. Google could now face the same challenge. Having tweaked and augmented its search algorithms for years, it may no longer be able to keep up with attempts to game its system. In order to truly fix the problem, Google may have to either switch to a fundamentally different search and filtering technology, or bolt on a radically different approach, such as social searching.

As the Kurzweil case suggests, technologies have limits, and once those limits are reached, it may take radical, not just incremental, changes to the technologies in order to either get further improvements or to avoid going backward.

AngelGate: Send in the clowns

If you haven't been following the increasingly comical affair being called AngelGate, I'll run it down for you. First, a few definitions:

• A venture capitalist (VC) is an individual or firm who invests in start-ups and small private companies with the hope of selling their stock for a large profit, either on the public market or to a larger company that acquires a company that they've invested in.
• Angel investors are individual venture capitalists who invest their own money in start-ups, usually very early in the companies' lives (typically seed or first rounds).
• Superangels are individuals or small groups of investors that invest in a larger number of start-ups than an individual angel would normally invest in, but still focus on very early rounds.
• Conventional Venture Capital firms invest in a lot of different companies at many stages of development. They have a lot more money to invest than the angels or superangels, and usually invest in later rounds.

Last Tuesday, Mike Arrington, the publisher of TechCrunch, learned about a secret meeting of superangels being held at a restaurant in San Francisco called Bin 38. He was told that he wouldn't be welcome at the meeting if he attended, but he went anyway, and in a private meeting room, he found "ten or so" of the largest superangel investors in Silicon Valley. They basically went into a silent stupor when they realized that he was in the room, and he left shortly afterward. Later, "sources", which Arrington says were three people who attended the meeting, told him that the following subjects were discussed (I'm going to quote directly from the TechCrunch article:):

• Complaints about Y Combinator’s growing power, and how to counteract competitiveness in Y Combinator deals
• Complaints about rising deal valuations and they can act as a group to reduce those valuations
• How the group can act together to keep traditional venture capitalists out of deals entirely
• How the group can act together to keep out new angel investors invading the market and driving up valuations.
• More mundane things, like agreeing as a group not to accept convertible notes in deals (an entrepreneur-friendly type of deal).
• One source has also said that there is a wiki of some sort that the group has that explicitly talks about how the group should act as one to keep deal valuations down.

Venture capitalists, whether large firms, angels or superangels, are competitors. They do work together at times on deals, but generally, they compete with each other to make investments. There are U.S. Federal laws that deal with collusion between competitors to fix prices, terms and conditions, and to keep out or limit the activities of other competitors, and they have nothing to do with monopolies or market share. The very act of competitors conspiring secretly as Arrington says they did could be interpreted as illegal.

The best thing for the participants to do would have been to say nothing and refuse to comment if asked by the press, but that's not what happened. The day after the TechCrunch article was posted, Dave McClure, a superangel, claimed that Arringon's charges were a "bullshit superangel consipracy theory", admitted that he attended the meeting, gave his take on what was discussed, and then finished his screed with this line (and this is a direct quote: "(sic)i'm here to Disrupt, motherfucker. (sic)so go right ahead & Hate On Me."

Yesterday, Ron Conway, founder of the Silicon Valley Angels and one of the earliest angel investors, wrote a long email to attendees of the Bin 38 meeting to say that:

• He didn't attend either meeting (apparently there were two meetings), although one of his partners did
• He didn't agree with the agenda or process of the meetings
• He'd really appreciate it if the other superangels not talk to him again
• His only interest is the entrepreneurs that he funds
• And by the way, Dave McClure, don't write or say anything about this email

One of the most endearing things about Dave McClure is that he's incapable of keeping his mouth shut, so almost immediately after Conway sent his email, McClure demonstrated his mastery of Twitter by sending the entire world a message that he had intended to send only to another attendee of the dinners. In it, he confirmed that there were two meetings, said that he and other attendees were being "thrown under the bus" by Conway, and confirmed the identity of another person, David Lee, Conway's partner, who attended both meetings. McClure deleted the errant tweet, but not before it had been copied and widely distributed, including to TechCrunch.

TechCrunch ran McClure's tweet, and then they received a copy of Conway's email and ran that. McClure is continuing to respond to other postings around the web that agree with his point of view, when the best thing he could do right now is visit a foreign country with no Internet connectivity.

Whose story of what happened at the meetings is right, Arrington's or McClure's? Arrington didn't name any of his sources and didn't go into any specifics about what action(s) the group agreed to undertake (if in fact it agreed to do anything.) For his part, McClure didn't mention the fact that there were two meetings, not just one, in his response to Arrington's story, which certainly detracts from the authenticity of his account. Also, his tweet in response to Conway's email didn't say that Conway's or Arrington's charges were wrong, only that he (McClure) and other attendees were being thrown under a bus by Conway.

What conclusions can we draw from this mess (so far)? In the song "If I Was a Rich Man" from "Fiddler on the Roof", Tevye sings:

The most important men in town would come to fawn on me!
They would ask me to advise them,
Like a Solomon the Wise.
"If you please, Reb Tevye..."
"Pardon me, Reb Tevye..."
Posing problems that would cross a rabbi's eyes!

And it won't make one bit of difference if I answer right or wrong.
When you're rich, they think you really know!

Now we know: Being rich doesn't make you smart or give you common sense.

Here's your new Android/Chrome OS user interface

Earlier today, TechCrunch broke and confirmed the story that BumpTop has been acquired by Google; the terms of the acquisition haven't been announced. BumpTop (not to be confused with the Bump application for the iPhone) is a 3D user interface for tablets and touchscreen PCs that works on Windows and Mac OS X. The company has announced that it will discontinue its existing software and will provide no further updates for those products.

The following video provides a good demonstration of BumpTop's capabilities:



There have been a lot of questions about how Google would adapt Android for tablet applications, or develop a separate user interface for Chrome OS. BumpTop would provide an excellent tablet user interface for either operating system, and would give Google a running start in its battle with Apple.

Burn the boats, and don't use the iPad as a life raft

An interview that Marc Andreessen gave to Erick Schonfeld of TechCrunch on Friday is causing much discomfort in the "old media" ranks. In essence, Marc said that the only way for newspapers and magazines to save their businesses is to fully commit to digital media, instead of taking halfway measures designed to protect their print businesses. It's the cannibalization argument--it's much better to cannibalize yourself than to allow competitors to do it for you.

Those thoughts were interpreted by some to mean that he was suggesting that publishers should get out of the print business, but what I believe he meant is that they should be prepared to give up their print businesses, once it becomes clear that those businesses are no longer sustainable. However, what Marc said about the iPad is even more interesting. Rather than paraphrase, I'll quote the article precisely (with my apologies to Mr. Schonfeld and TechCrunch for the length of the quote):

"With all the recent excitement in media quarters recently over Apple’s upcoming iPad and other tablet computers, and their potential to create a market for paid digital versions and subscriptions of newspapers and magazines, I wondered if Andreessen still felt the same way. Does he think the iPad will change anything?"

"Andreessen asked me if TechCrunch is working on an iPad app or planning on putting up a paywall. I gave him a blank stare. He laughed and noted that none of the newer Web publications (he’s an investor in the Business Insider) are either. 'All the new companies are not spending a nanosecond on the iPad or thinking of ways to charge for content. The older companies, that is all they are thinking about.'"

"But people pay for apps. Wouldn’t he pay for a beautiful touchscreen version of a magazine? Maybe, if it were something genuinely new that blew him away. It would have to be more than an article with video and graphics though. (I agree, otherwise it’s no better than a CD-ROM)."

"Oh, and he points out, that the iPad will have a 'fantastic browser.' No matter how many iPads the Apple sells, the Web will always be the bigger market. “There are 2 billion people on the Web,” he says.' The iPad will be a huge success if it sells 5 million units.'"

Last week, Penguin showed a number of iPad applications based on its books; only one of them looked like a conventional eBook. However, all but one of them could easily be written in Flash and run in any modern browser, and the one that required use of the compass and accelerometer could probably be customized to use those features without having to be a completely native app. The problem, of course, is that Flash doesn't run on the iPad and won't run in the future, not for any serious technical reason, but because Steve Jobs hates Flash.

Writing applications for the web allows them to be used just about anywhere, on any device; writing them for the iPhone/iPod touch/iPad means that they can only be used on those devices, in the Apple environment. Time will tell if Marc's prediction about iPad sales will pan out, but why would a publisher lock itself into a single platform from a company that has a history of dictating terms to its content partners?

If you talk to executives from the record companies, they would probably say that they turned Apple into an 800 pound gorilla in the media business by ceding pricing control. The book publishers have apparently just done the same thing, in part to attack Amazon's pricing model, but at the price of giving Apple pricing control at slightly higher levels.

My opinion is that the iPad is going to be successful, more for its applications and user interface than simply for media consumption. Nevertheless, Marc's comments are on target. Publishers should build their digital businesses sustainably rather than defensively, and they shouldn't depend on the iPad to save them.

Apple to the FCC: "You see? You see? Your stupid minds! Stupid! Stupid!"

Well, okay, that's actually a line from "Plan 9 from Outer Space", but someone at Apple was thinking along those lines when they responded to the FCC's questions last Friday concerning Google Voice. (You can find Apple's entire response here.) After indulging in seven paragraphs of marketingspeak, Apple claims that it hasn't actually rejected Google Voice, which TechCrunch's Michael Arrington disputes; his sources inside Google assert that Apple did, in fact, reject the application. (We don't yet know Google's side of the story, because it redacted the section of its response to the FCC dealing with its discussions with Apple.) However, Apple states its case for why it would likely reject the application, a case that doesn't stand up to even the most cursory examination.

Apple claims that the Google Voice application replaces the functionality of Apple's carefully-crafted Visual Voicemail and text messaging features. In fact, it does no such thing. Google Voice sets up an additional phone number for the user. If the user chooses to give out their Google Voice number, and if they've configured Google Voice to forward calls to their iPhone, then and only then does Google Voice replace the iPhone's voicemail functionality for calls placed to their Google Voice number. If someone sends a SMS to the user's Google Voice number, the user would access the message through the iPhone Google Voice application instead of the iPhone's own SMS feature. But, if someone calls the user's iPhone directly, then the iPhone's voicemail system is used, and if they send a SMS directly to the iPhone, the iPhone's own capabilities are used. Google Voice doesn't usurp any functionality of the iPhone--it adds additional capabilities.

Apple also charges that the Google Voice application copies the user's entire contacts list to Google's own servers, which Michael Arrington again claims is untrue. Even if the charge is true, Apple itself enables the user's contact list to be copied to Google's servers via iTunes. Why is it okay when Apple does it but not when Google does the same thing?

Apple seemed to believe that the FCC wouldn't or couldn't figure out how Google Voice actually works. Making the assumption that you can baffle the U.S. Government with B.S. is dangerous. It reminds me of Jim Allchin's infamous testimony during Microsoft's antitrust trial, when he presented a bogus video purporting to demonstrate that Internet Explorer couldn't be removed from Windows without causing the operating system to slow down or malfunction. The Government shot holes in the video and Microsoft was forced to withdraw it. Microsoft subsequently admitted that it also falsified a second video that purported to show how easy it was to install Netscape Navigator on Windows.

Microsoft did a lot to destroy its own credibility in the course of its antitrust trials, and even though it managed to avoid serious damage through a "sweetheart" settlement with the Bush Administration, the company is still paying the price.

The FCC has a great deal of power over AT&T, but if Apple independently made the decision to ban Google Voice, as both it and AT&T claim, there's very little that the FCC can do. Apple's market share in mobile phone and smartphones is too small to claim that the company is a monopolist, so there's also very little that the U.S. Department of Justice can do. (DOJ could charge Apple with perjury in its response to the FCC; good luck trying to get that to stick.) The Federal Trade Commission might be able to take action, but I'm not sure what its grounds would be. So, Apple is probably not at risk for prosecution, but its reputation is every bit as much at risk as Microsoft's.

Apple's public behavior concerning the App Store has already changed substantially since the FCC issued its inquiry letter: Phil Schiller, Apple's Senior VP of Marketing, has personally written a developer and a blogger to explain the App Store approval process and state that improvements are underway. The response to the FCC made public a number of key details about the approval process, such as the average number of weekly filings and the number of reviewers. A formal appeal process for rejected applications also seems to be in the works.

With all that, however, Apple needs to approve Google Voice as an application, to try to put the immediate crisis behind it. In the long run, it should allow iPhone users to install applications from any developer, whether or not they've been approved by Apple, as Google's Android operating system does. Not only would this lessen government scrutiny, it would eliminate a huge reason for jailbreaking the iPhone.