Courier: Microsoft's most interesting product that doesn't exist?

Engadget got its hands on more pictures and videos of Microsoft's Courier yesterday. If you haven't been following it, Courier is a dual-screen tablet concept--a combination journal, browser, document creation tool and eBook reader--developed by a design studio owned by Microsoft. There have been no pictures or first-hand accounts of actual working hardware and software. All the public has seen to date are visualizations, renderings and animations.

What's interesting is that there are so many visualizations, renderings and animations. Normally, you see something like Courier in a conference keynote speech, the equivalent of a concept car that's exhibited at a few auto shows and then retired. What's curious about Courier is that it keeps popping up, each time with a few more details, a few more tweaks.

So what is Microsoft trying to do? Low-cost concept testing, trying to see if there's a market for the device before it commits to production? Does it want to shift the thinking about how eBook readers and similar devices should work, so that other companies will build devices that the Courier environment will run on? Or, is it readying the market for a product launch later this year or next?

From what I've seen of the Courier concepts, it truly looks like something different than the iPad and other tablet devices. Courier is much more like a "smart notebook" (a digital equivalent of a paper notebook) than a tablet or netbook. It has both a touch and pen interface, and is strongly dependent on the pen for writing and data input. In that sense, it's more like the Apple Newton than conventional tablets or eBook readers, although one hopes that its handwriting recognition is a lot better than the Newton's was.

Courier seems to have a more targeted focus than the iPad--it's a "magic diary" with virtually infinite capacity and connectivity that you can take anywhere. For that reason, it's unlikely to become the application development magnet that the iPhone is and the iPad will become. On the other hand, Courier may not need all that much in third-party software if everything that Microsoft is showing in its previews comes to fruition.

So, the question is whether we'll ever see Courier as a real, functioning product. I think that Microsoft would have a serious chance of establishing a new product category if it releases Courier and it does everything that the animations and visualizations say that it will be able to do. Until then, it remains vapor, but interesting vapor nonetheless.

Flash: It ain't dead yet

Tonight, TiVo announced its new Series 4 DVRs, called Premiere and Premiere XL, which will ship next month. Engadget covered the announcement in New York, so I'll skip the product details. However, one of the most intriguing aspects of the announcement is that the Premiere's user interface is built on Flash, and its performance looked quite smooth. While Apple and Adobe are throwing spitballs at each other over Flash on the iPad, TiVo has just moved Flash front-and-center into the living room. It remains to be seen whether the Premiere will halt TiVo's slide in the DVR business, but at least it indicates that the company isn't giving up on the hardware business.

The Content Paradox

The "old media" Goliaths like News Corporation, Viacom, CBS, Disney, NBC Universal and Time Warner are often said to be doomed to extinction by the Internet, yet it's content produced and owned by those same companies that's the most popular on the Internet. Those of us in the U.S. may complain about Hulu's limited selection of and time limits on access to content, yet Hulu is envied by content consumers around the world. YouTube would never have gotten to where it is today without all the "old media" content that was (and still is) uploaded for free consumption. If YouTube had depended totally on user-generated content, it never would have reached critical mass.

We may not like the restrictions and limitations that the old media companies put on usage of their content, but they own it, and they have the right (subject to "first sale" rules and other restrictions in the U.S.) to control how it's sold and distributed.

No Internet "new media" companies have content that's in the same popularity class as the old media companies. Producer/Distributors such as Revision3 and TWiT have built very solid businesses. TWiT, Leo Laporte's company, is attracting bigger audiences than TechTV ever did, and judging from Laporte's own comments, it's making a nice profit. However, the audience for all of TWiT's programming is tiny compared to any of the old media sites. Thus the paradox: The Internet relies on old media to drive traffic to new media sites, but the vast majority of original new media properties can't find big enough audiences to sustain themselves financially.

The Internet has lowered the barriers to entry for content producers and distributors down to almost nothing, but making the content available and getting people to read or watch it are two very different things. Building a big enough audience that your content or site becomes attractive to advertisers is much more difficult, and getting people to pay to access the content is even yet more difficult. The old media companies have at least solved the problem of getting people to watch or read their content, but the new media companies all have to start from scratch to build an audience.

Old media isn't having that much easier a time of it on the Internet--just today, for example, Hulu announced that Viacom's Comedy Central is withdrawing its programming at midnight on March 10th, thus removing some of the most topical and popular content from the site. Hulu is widely believed to be unprofitable, and rumors have been flying for months that its parent companies (News Corporation, NBC Universal, Disney and Providence Equity Partners) have been pushing it to adopt a pay model in addition to its existing advertising-supported model. So, simply bringing old media content to the Internet isn't a formula for financial success.

This argument is going to continue until someone releases a breakout hit on the Internet, figures out how to make money with it and builds a profitable, growing media business. Until that happens, the Internet will remain primarily a distribution channel for old media, rather than a viable channel for launching new media.

Hanging my shingle out (again)

Those (few) of you who regularly read this blog know that I've run my own businesses and consulted for high-tech firms for years. (I've also worked for some of the largest high-tech companies in the world, including HP and Toshiba.) In late 2008, I moved from Silicon Valley to be the product manager for eBook software for a large, privately-held Chicago-based company. The project that I've been working on is wrapping up, so I'm planning to return to the world of start-ups and services.

While I wrap up things in my current position, I'm available for consulting projects. I can't take on assignments directly related to eBooks, but I've got tons of experience with new media, Internet software and services, Internet video, cable and television broadcasting. You can check out my LinkedIn profile for more information about my skills and experience.

If I can help you, email me at lfeldman257 (at) gmail.com with your contact information.

Oh, and the name of my new consulting practice? It's Klemfarb. More soon...

Don't telegraph your moves

There once was a company named "Play" that developed what was, for the time, a revolutionary video processing system called Trinity. It could capture and switch video like professional video switchers that cost ten times as much. For three years, Play took Trinity to the NAB Show, each time promising to ship it before the end of that year, but never managing to do so. So, year after year, Play went to NAB, always showing a few more bells and whistles, but not a shipping product. By the time Play finally completed development and shipped Trinity, most people in the television industry has stopped paying attention. Play eventually went out of business, although some of its concepts live on in products from Newtek and Adobe.

Back in 1995-96, Netscape told the world that it would make Microsoft Windows obsolete by moving applications from the operating system to the browser, which would make the applications operating system-neutral. This was tantamount to waving a red flag in front of a bull; in this case, the bull was Microsoft. We all remember what Microsoft did in response--everything possible, both legal and illegal, to crush Netscape. For all its publicity and hype, Netscape wasn't big enough to withstand Microsoft's onslaught. The company was sold to AOL at a good price considering the situation, but it's fairly clear that Netscape would have eventually failed had AOL not acquired it.

RED, the digital cinema camera company, has fallen into the same trap as Play with its Scarlet camera. In 2007, RED started talking about Scarlet, a camcorder that would provide true HD output at a cost around $3,000, which at the time was where prosumer SD camcorders were priced. Then, in early 2008, Jim Jannard, RED's founder, announced that Scarlet was going to become a video-capable DSLR. In November 2008, RED showed off non-working prototypes of Scarlet and its big brother, Epic, but they didn't ship anything.

As soon as RED started talking about making Scarlet a DSLR, companies that already made DSLRs like Canon and Nikon, as well as companies that were planning to get into the DSLR business like Panasonic, started to pay very close attention. In November 2009, RED made the rounds again, this time with yet another non-working prototype of the Scarlet, but Canon, Nikon and Panasonic all had DSLRs in the market that could do HD video, all for less than the (now increased) price of the Scarlet. This March, you'll be able to buy a Canon Rebel T2i with excellent video capabilities for $799 without lens. Sony, which had been holding back, now plans to release two DSLRs with AVCHD video by the end of the year.

By making premature announcements, RED educated its competitors. RED may have assumed that its competitors were too incompetent or too hidebound to respond, but they were wrong. At best, the Scarlet is going to end up as a niche product rather than the revolutionary change in camera design that Jim Jannard envisioned.

Now, Microsoft itself may be falling into the same trap with Windows Phone 7 Series. At the Mobile World Congress a couple of weeks ago, Microsoft previewed its new operating system for smartphones, a radical departure from previous Microsoft offerings. The problem is that smartphones that run Microsoft's new operating system won't ship until the end of 2010, thus giving Apple, Google, RIM and other competitors nine months to respond. Microsoft used to be able to get away with it--their preannouncements would cause FUD (fear, uncertainty and doubt) in the minds of potential buyers of other products. However, that was when software development took years; now it takes months. By the end of the year, it's likely that the advancements that Microsoft demonstrated will be integrated into its competitors' platforms, and any real competitive advantage that it might have had will be lost.

The lesson? Don't telegraph your moves. Announcing products and strategies too early will only educate your competitors and frustrate customers, not create FUD.

Why "Pay-to-Pitch" makes no sense for anyone

Over the last few months, a firestorm has erupted over angel venture funding groups and "deal-finders" that charge startups to pitch to their investors. The battle has been led by Jason Calacanis, who's declared war on pay-to-pitch. The most recent pay-to-pitch scheme to come under the spotlight is from New York Angels, led by David Rose (not the one with the orchestra.) New York Angels charges $150 as an application fee for a chance to pitch to whichever members of his group decide to show up that night. That's a lot less than some other groups and finders who charge thousands of dollars, but it's still pay-to-pitch.

In defense of why his group charges an application fee, Rose said the following: "The reason we charge a fee is because we're between a rock and a hard place. The unfortunate but accurate fact is that 90% of all companies requesting funding are simply not fundable, by anyone, anywhere...no matter how earnest the entrepreneur might be. The larger VC funds get upwards of 10,000 plans each year, but that's ok for them because they either completely ignore over-the-transom submissions, or have them read by a paid associate." (Click here for a link to his complete response.)

The problem with this logic is that $150 isn't going to spell the difference between a fundable startup and one that's not, and New York Angels is taking money from all of them. Assuming that Rose and his team only actually present the plans that they think are fundable to investors, they're effectively collecting $1,500 for every startup that gets to pitch. On the other hand, if they're letting startups pitch that they know aren't fundable, they're misleading the startups and wasting their investors' time.

If I were an angel, I'd want to screen my own deals, rather than let someone else tell me what's good and what's not. I wouldn't put any more trust in Mr. Rose than into a stockbroker or investment banker who's trying to get me to make an investment.

I don't begrudge Mr. Rose or his logic; I just think that it's wrong. Pay-to-pitch doesn't open up any real funding opportunities for startups. Investors involved in pay-to-pitch schemes either a) could do better by screening their own deals, or b) are motivated by the money they make from pitching fees, which means that they're not serious investors.

Canon's new Rebel T2i "...Delivers a very similar picture to the 7D in every video mode"

One of the first in-field video shoots with the new Canon Rebel T2i is on the interwebs. According to Nino Leither, the Vienna-based cinematographer who shot the footage, the video from the T2i is virtually indistinguishable from that of the Canon EOS 7D, which costs twice as much. For professional videographers and cinematographers, the 7D is hardly expensive, but the Rebel T2i will cost $899 with a kit lens and is priced to be a "step-up" DSLR for consumers who want more than a point-and-shoot. The fact that you can shoot HD video with cinema-level depth-of-field control and interchangeable lenses using a DSLR that costs less than a high-quality consumer camcorder, at a data rate that no consumer camcorder can touch, is amazing.

One thing that's gone largely unnoticed is that Canon's DSLRs, along with models from most other manufacturers, come with software that allows the cameras to be configured and controlled over USB. You can configure white balance, gamma, exposure modes and much more from your PC. In Canon's case, you can even monitor the Live View display and shoot video or stills remotely. Professional video cameras use devices called CCUs (Camera Control Units) that do the same thing, but they cost thousands of dollars. (There are some camcorders that allow settings to be stored on a memory card and then swapped between devices, but they obviously don't allow live control.) The ability to bring multiple cameras to the same settings, and even operate them remotely, with a piece of free software is amazing.

Just as Canon's 5D and 7D set new standards for HD price/performance, the T2i will push that bar even further.

Update, 26 February 2010: Gizmodo has gotten its hands on two more videos shot with preproduction T2is. One video was shot in Beijing's Zhongguancun shopping district, which is apparently China's answer to Akihabara in Tokyo. The other one was shot in New York City. Again, the videographers said that, subjectively at least, the video shot by the T2i is very close or equal to that from the 7D.

Books: The container is not the information

Update, March 4, 2010: Penguin Group is well on its way to implementing the future of eBooks that I described in this post. John Makinson, Chairman and CEO of Pearson's Penguin Group spoke at the Financial Times' Digital Media & Broadcasting Conference in London on March 2nd. He showed some concepts for how Penguin plans to transform books into interactive applications for Apple's iPad.

Not a lot has changed in the structure of printed books since the time of Gutenberg. A typical book has a title page, a table of contents, a forward and/or introduction, a set of chapters, and sometimes, an index. Books were organized the way they were because it made it relatively easy for readers to navigate through the content. Today, most eBooks follow the same design and organization as print books, many even going so far as to precisely duplicate the layout of the original print book. However, an eBook is not a print book, and there's absolutely no reason why it needs to be interacted with in the same way as a print book.

In the simplest possible terms, a book is a container for information. The conventions that have developed over the centuries for organizing that information were appropriate for a print medium, but once a book is digitized, the ability to access and utilize the information contained in the book increases exponentially. For example, why bother with an index when a search engine will let you find anything in the book faster and more easily? If you can search for topics and relationships, why do you need a table of contents? Why bother to organize the book into pages when there's no standard page size for eBook readers and text will reflow according to the display or window size being used?

Is there a reason for a book designer to sweat over the details of specific typefaces and sizes when the user can change them with a push of a button or a mouse click? Instead of the page references used by writers and teachers to direct readers to a particular place in a book, why not use named anchors and hyperlinks to identify and navigate to important "landing zones"?

Once a print book is digitized, it can be incorporated into databases and searched along with other documents and information sources. Why limit the reader to just the information contained in the eBook in question? If the reader enters a query and the search engine finds better (or more recent, or more detailed) information from a source other than the eBook itself, shouldn't it point the reader to that information?

If an eBook can be read on a computer that supports audio and video playback and interactive content, why should the eBook itself be limited to text and static images? Replace the static illustration of a physics experiment with a dynamic animation that readers can interact with. Instead of a color image of an elephant, show a video of elephants in the wild. Instead of simply including Walt Whitman's poem "America", link to an audio recording from 1890 of Whitman himself reading the first four lines of the poem.

In short, a book is a container, not the information itself. eBooks limit their potential if they're nothing more than an electronic facsimile of the original print book. The contents of a print book should be the starting point for an eBook, not the end point.

Free exhibit pass to NAB 2010, April 10th-15th in Las Vegas

Most of my readers are probably familiar with the National Association of Broadcasters' annual convention in Las Vegas, to be held this year from April 10th through 15th. It's the premier broadcasting technology conference in North America, and along with IBC, held every September in Amsterdam, one of the world's two top broadcasting conferences. This year, they'll have exhibit space dedicated to over-the-top video and IPTV on broadband networks, along with the show's usual focus on audio and video production and post-production hardware, software and services.

I've both spoken at and attended NAB over the years, and if you have anything to do with audio or video production, post-production or distribution, it's well worth attending. They're giving away free exhibit-only passes; to register, visit http://ow.ly/13TL9 or the main NAB Show website at http://nabshow.com/register with the code A913. (If you decide to go, I'd suggest that you register for a hotel room early; even with the poor economy, hotels tend to fill up quickly.)

Is Microsoft back in the smartphone game?

Microsoft announced and demonstrated Windows Phone 7 Series today at the Mobile World Congress in Barcelona. It's a radical departure from earlier Windows Mobile operating system designs. They essentially abandoned the previous Windows metaphors in favor of Zune HD on steroids. The user interface is uncluttered, even Spartan, but very elegant and designed for excellent performance with today's smartphone CPUs and GPUs. It includes all the functionality of the Zune HD, and will be a gaming platform that's compatible with Xbox Live. (The Xbox Live-related features will be detailed at Microsoft's forthcoming MIX Conference.)

Smartphones with Windows Phone 7 won't start shipping until the end of the year. It's too early to say what impact the new operating system will have on the iPhone, Android, BlackBerry and other platforms, and given that Apple, Google and RIM now have nine months to respond before Microsoft gets to market, they could step up their games if they need to. However, it's a great sign that Microsoft has finally decided to drop the Windows Mobile baggage and build an operating system designed around how people really use smartphones today. Before this announcement, I was ready to write off Microsoft in the mobile phone market, but it now looks like they're going to remain a serious contender. This makes HTC, which stuck with the Windows Mobile platform despite Microsoft's problems, look even better.

Pivots: Getting it right the first time

Veoh's bankruptcy and liquidation announcement last week was no surprise for people who had followed the company for years. Veoh raised $70 million dollars in venture funding from mid-2005 to its demise. Its bankruptcy was triggered when the company could neither raise more money nor find an acquirer.

Veoh was somewhat unusual in the online video space, in that it followed the same basic business plan from launch to death (although, as Dan Rayburn pointed out, the elements of that business plan changed like the wind)--an advertising-supported business that aggregated content for consumers. A far more common path for online video startups is to begin as an advertising-supported content aggregator (either user-generated or professionally-produced content), and when that doesn't work, change direction (pivot) and take some portion of their technology--content management, encoding, video players or advertising delivery--and market it to businesses on a "white label" basis. When that plan fails (as it usually does), the company is either sold to an acquirer or shuts down.

An excellent example is Joost, which launched in late 2007 with a blizzard of hype as an advertising-supported content aggregator. It dropped its consumer-oriented services and shifted to offering white-label video distribution services to business in the summer of 2009. After burning through $45 million in outside investment and untold millions more from its founders, it was sold for a few million dollars to November 2009.

One lesson from all this is that pivoting will not necessarily save your business. The Lean Startup and Customer Development movements emphasize agility and quick changes to your business plan over taking the time at the outset to insure that you're targeting a real market opportunity and not a mirage. This works very well early on. However, once you staff up and raise a significant amount of outside investment, it's easy to find yourself trying to make a broken business model work for far too long. By the time you pivot, it's too late. Your investment, technology and user base become an "anchor" that defines the businesses that you can pivot into. In the case of online video, you end up pivoting from quicksand into a desert.

It's essential to take the time upfront to get your product/market fit right, and to insure that you're pursuing a real market and not a mirage. You may have to change direction a lot in the first few months of operation, as you learn more. It's much better to recognize early that you're going in the wrong direction and make changes, than to try to make mid-course corrections to a speeding locomotive. Once you've raised funds, staffed up and built your infrastructure, inertia and ego kick in, and fundamental changes to your direction will become almost impossible.

Thus this warning: Pivot early and often (if you have to), because you probably won't be able to successfully pivot later on.

Speed, not scale

Since the dawn of the Industrial Revolution, businesses have done everything they can to get big. Bigger companies can produce more at lower costs, allowing them to either lower prices and increase demand, or maintain prices and increase profits. More revenues and more profits enable you to get even bigger. To oversee a growing organization, you need more and more layers of management. You also have to do extensive planning and forecasting in order to anticipate the future. And to keep the wheels from flying off, you need detailed policies and procedures to cover just about every possible situation.

This model works fine in large, relatively stable markets, but as soon as the rate of change increases (due to technological or customer demand changes, competitive pressure, the availability of desirable substitutes, or any of a number of other causes), large organizations are unable to respond rapidly. As Nassim Nicholas Taleb demonstrated in his book "The Black Swan", there's no business or economy that's immune to rapid, and sometimes catastrophic, changes. What that means is that the bigger an organization gets, the less able it becomes to withstand sustained change.

Scale certainly still matters in some industries, especially those that require enormous capital investments. However, the value of being small, nimble and able to rapidly adapt to change outweighs the value of size and scale. Thanks largely to the Internet, small players are no longer at a significant cost disadvantage vs. big competitors, and geographic location is no longer essential for success. Speed, not scale, will win the race.

Quick notes: New Canon video DSLR, iPad application thoughts

Two quick notes: First, Canon just announced the EOS Rebel T2i, a DSLR with true 1080P video capture capabilities, all the same frame rates as the much-lauded EOS 7D, and an $899 list price including kit lens. In essence, it's a 7D for the first-time DSLR buyer. The T2i continues the trend of incorporating professional video capabilities into DSLRs. We'll know whether this is the real thing or too good to be true when sites like dpreview and CamcorderInfo get their hands on it, probably late this month or early next month.

The next step in the development of video DSLRs is to change their ergonomics so that they're comfortable to use for long periods of time. DSLRs, like all still cameras, are designed to be brought to the eye to frame and focus a shot or sequence of shots, and then to be put down, while video cameras are designed to be held steady at the eye for several minutes at a time. A number of companies have come up with shoulder stocks and other mounts to compensate for the poor ergonomics of DSLRs when used for video. The next step is for the DSLR vendors themselves, such as Canon and Nikon, to jump in with DSLRs that not only have video capture features but also have the right video ergonomics.

The second note is a thought about iPad applications for media production and post-production. Over the last few days, I've read articles in Mix Magazine and the Hollywood Hand Held blog about iPod applications for audio and video production. The iPad would make an almost perfect control surface for audio workstations, video editing systems and color correctors (the one missing element would be tactile feedback.) What's even nicer about the iPad is that its functions and layout could change at the push of a button. Euphonix, for example, has separate Artist Series hardware control surfaces for audio mixing, video editing and color grading; put them together and you're looking at a couple thousand dollars worth of hardware and a lot of desk space. An iPad could perform all the same functions at a fraction of the cost and would require a fraction of the desk space, plus it's portable.

As time goes on, I'm sure that we'll think up more and more applications for the iPad that take advantage of its display, touchscreen and intelligence.

Success leads to arrogance, which leads to failure

I've been following the recent Toyota saga with a good deal of amazement mixed with curiosity: How bad is this thing going to get? For three decades, Toyota was the world standard for quality. Their manufacturing, planning and training processes were all designed to eliminate the sources of defects and thus build inherently high-quality vehicles. Very few people purchased Toyotas because of how they looked or how exciting they were; most Toyotas are about as exciting as macaroni and cheese. They purchased them because they knew that they were reliable and dependable.

The wheels started falling off for Toyota (no pun intended) a few years ago, when the company's J.D. Power quality scores and Consumer Reports reviews started to decline. According to Business Week, several years ago, Toyota began pressuring parts suppliers to lower the cost of their parts. One unnamed vendor said that his company had been told to decrease the cost of its parts by 10% for each generation of designs. Perhaps Toyota thought that its manufacturing systems would identify and compensate for defects caused by less expensive parts; if so, it was clearly wrong.

What makes this even more embarrassing for Toyota is that the company looks like it's denying responsibility, assigning blame to its vendors and refusing to issue recalls until it's under intense Government pressure. Its head of quality in Japan said that the company had been pressured into issuing the recalls, but its U.S. division said that the recalls had been voluntary. The president of Toyota, Akio Toyoda, had nothing to say publicly about the crisis for weeks until he was cornered at the Economic Forum in Davos, Switzerland by a reporter. Yesterday, he finally made a public apology, but it was carefully worded not to say that Toyota caused the problems and accepts responsibility for them. It was, instead, a statement that the company would improve its processes and focus more on customers.

Just as the stuck accelerator problem seemed to be coming under control, word came out from both the U.S. and Japan that most of Toyota's Prius models may have braking problems that have resulted in accidents. The Japanese Government is calling for a recall in that country, but Toyota has so far refused to comply. Steve Wozniak, Apple's co-founder and the owner of several Priuses, reported that his 2010 Prius has a problem with uncontrollable acceleration when driven with cruise control. Wozniak believed that it was caused by a software bug, but Toyota's response was that there's no problem with the car's software. Then, they reversed course and said that yes, the Prius has software problems, but in the braking system, not the accelerator.

What caused the well-oiled Toyota machine to break down in so many ways will be the subject of case studies and books for years. I think that arrogance played a big part--the cocksure belief that Toyota's processes and systems were so good that they couldn't possibly be the problem. If there was a "problem", it was with customers who drove too fast, or who were incompetent, or who thought that they might score a financial windfall from the company. Toyota had managed to pass General Motors to become the world's largest car company...surely they knew what they were doing.

For many companies, their time of greatest success is also the time when failure becomes most likely. People make two critical errors when they experience success:

1. They convince themselves that they're solely responsible for their success, and that other factors, such as economic conditions, the failures of competitors or sheer luck, were immaterial.
2. They believe that their success validates their judgment, and that going forward, they'll have the same success.

Success is always due to a variety of factors, some internal and under our control, and some external and partially or completely out of our control.  A successful strategy under one set of conditions can fail miserably under a different set of conditions. Just ask GM: The company was making record profits from its trucks and SUVs when gasoline was under $2.00 a gallon, but at $4.00 a gallon, demand dried up and all the problems that had accumulated from decades of mismanagement became obvious. It was like a lake drying up to reveal the dead cattle that had wandered in and drowned over the decades. They were there all the time, they just weren't visible.

Success also makes us believe that we're infallible. We look at the great decisions we've made, admire the wonderful policies and procedures that we've put in place, and assume that as long as we keep doing the same things, we'll continue to be successful. However, go back to my previous point. Success is due to both internal and external factors, and we usually have little control over the external ones.

Consider Yahoo. They were by far the most popular site on the Internet. They had expanded from a search engine to a destination covering hundreds of topics with services for consumers and small businesses. Then, in 1998, out came this little two-man operation from graduate students at Stanford who thought that they had a better search engine. Yahoo first ignored, then disparaged this funny little company called Google. Ten years later, Google was the number one site on the Internet, while Yahoo, which had spread its focus so thinly over so many different businesses and market niches that one of its executives referred to it as the "peanut butter" problem, was looking to Microsoft for financial salvation.

When success spawns arrogance, complacency inevitably follows, and the result will be failure. No matter how successful you or your organization are, you don't have all the answers. You don't have control over all the variables that will determine your future success. Even Superman has to contend with Kryptonite.

Is the $9.99 eBook dead? Not at all

Earlier today, Gizmodo pronounced the $9.99 eBook dead, as a result of an announcement by Hachette that it is joining Macmillan (and probably HarperCollins) in instituting an agency pricing model where resellers such as Amazon and Apple will get a 30% commission on sales of eBooks at prices set by the publishers themselves. (I've learned from a source that Penguin is working on its own agency plan to be announced in a few months.) Of the Big 6 trade publishers, only Random House and Simon & Schuster would be without an agency model for sales of eBooks.

In response, Amazon has a number of tactics that it can execute. First, it can limit distribution of print titles from publishers who impose agency deals. The "nuclear option" that Amazon exercised against Macmillan backfired because the company "capitulated" almost immediately. However, a longer-term strategy of purchasing fewer print copies of Macmillan's titles, letting them go out of stock more often and taking longer to refill inventories would serve the same purpose. If the eBooks are available day-and-date with print versions and in unlimited quantities, while the print versions are often out of stock, it would provide more incentive for readers to move to eBooks.

Amazon could also play one publisher against the other, offering more promotional support and even co-op funds to help pay for newspaper, magazine and television advertising, in return for more pricing flexibility. Those publishers who cooperate would increase their revenues and/or decrease their costs, and would put pressure on other publishers to fall in line.

Finally, I expect Amazon to get even more aggressive in pursuing electronic rights from established authors. Many established authors or their estates have contracts with publishers that predate the eBook era, so they retain their eBook rights. There is a strong body of legal precedents and settlements that favor the authors and estates in cases where their print publishers claimed eBook rights that they had not specifically been granted. Amazon can price these titles at $9.99 or less and still offer extremely attractive financial deals to authors.

In short, the $9.99 eBook is far from dead, and Amazon still has many ways to prevail in the long term. 

NBC Universal: We make it up as we go along

In Congressional hearings today, NBC Universal and Comcast answered questions about how their merger would affect the supply of programming to competitive outlets, among other topics. During questions, NBC Universal Chairman Jeff Zucker was asked about Hulu's decision to block the ability of Boxee to display its programs. It's important to remember that at the time of the dustup between the two companies, Hulu was owned by NBC Universal, News Corporation and Providence Equity Partners (Disney subsequently invested in Hulu.) Therefore, any decisions that were made weren't Zucker's alone. However, responding to direct questioning, he said that the decision to block Boxee was made by Hulu's management because Boxee was "... illegally taking the content that was on Hulu without any business deal."

The problem with this statement is that it's wrong on both counts. First, Hulu's management has admitted that it was pressured by its joint venture owners, including NBC Universal, to block Boxee. Second, at the time that Boxee was displaying Hulu's content, it was using the same facilities that Hulu made freely available to anyone. Boxee wasn't stripping out any advertising in Hulu's streams or interfering with the streams in any way. Hulu specifically targeted Boxee in denying it service. Then, when Boxee attempted an end-around by using Hulu's freely-available RSS feeds, Hulu blocked them as well.

I wrote earlier about Zucker's cowardice in how he blamed Jeff Gaspin for the disastrous late night "musical chairs" plan at NBC. Now, Zucker is hiding behind Hulu's management (that acted at Zucker's direction) and is accusing Boxee of illegal behavior that never occurred. Boxee has responded to Zucker's charges and has linked to a video of the Congressional Q & A. I've given up on trying to comprehend how this man has managed to keep his job. All I can say is that Jack Welch is spinning in his grave, and he isn't even dead yet.

Motivation vs. fixation

Steve Tobak of BNET wrote yesterday about Steve Jobs's remarks about Google last week at Apple's post-iPad "town hall", and used them as an example of the value of having an enemy in order to motivate the troops. As someone working at Netscape when Microsoft declared us Enemy #1, I saw just how motivating having an enemy can be. At the same time, it's extremely important to differentiate between motivation and fixation. Microsoft focused so hard on killing Netscape that it repeatedly crossed the line from honest competition into using its monopoly position illegally. That decision brought both the U.S. Justice Department and European Union down on the company. The result is that Microsoft finds its hands tied whenever it tries to exercise its power.

It's also important not to fixate on a single competitor and ignore other risks. While Microsoft was pounding Netscape into the ground, Google was just getting started. Microsoft ignored Google, but Google's plan from the beginning was to eventually take on Microsoft, which it's successfully doing. Now, Google is too big for Microsoft to kill, and Microsoft's playbook, which was written in the Netscape days, is out of date and ineffective.

My last point is that it's better to fixate on customers than competitors. If you consistently satisfy customer needs, anticipate their future needs and are responsive when they have problems, you're going to be successful. I think that's the real secret of Apple's success with the iPod and iPhone. While competitors were focusing on adding more codecs to their MP3 players, Apple was focused on the user experience. Instead of trying to improve on the BlackBerry model as other smartphone companies were doing, Apple again focused on the user experience.

In short, it's important to understand your competitors but not fixate on them. Fixating on customers will almost always result in a better outcome.

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.