As a Colonel, John Boyd developed a framework to help train combat fighter pilots that became known as the OODA Loop (for observe, orient, decide, and act). He argued that the key to tactical success in combat is to obscure your intentions from your opponent while you simultaneously clarify and anticipate his intentions. By operating at a faster tempo in rapidly changing conditions, you both inhibit your opponent from adapting or reacting to changes and suppress his awareness of your actions. You cause an opponent to over- or under-react to uncertainty, ambiguity, or confusion. In military parlance, adopted by many technology strategists, you get inside their OODA Loop.

As an example, Barack Obama has been well inside Mitt Romney’s OODA Loop for the past month on issues of gender equality. His statements have frequently caused Romney to react in ways that Obama has clearly anticipated and exploited. But that’s another post. Today’s question is, has Amazon penetrated Apple’s OODA Loop with respect to eBooks? It sure looks like it.

The story begins in 2001, when Amazon observes Apple’s iTunes business model. Amazon CEO Jeff Bezos must have been awed watching Steve Jobs turn digital music, which was free and widely pirated, into a money machine. Jobs integrated a device (iPods), a store (iTunes), and a wholesale deal with music labels for content under which they agreed to let him set the retail price of tracks (it would be $.99). Within a few years, Apple was the world’s largest music retailer and record stores were a distant memory (although a very fond one). Steve Jobs had figured out how to compete with free — the first but not last technology leader to perform this trick.

Amazon copied Apple in building its book market. It built a device (Kindles), tied to its store and it bargained with book publishers for a wholesale deal for content. Like Jobs, Bezos insisted that publishers let him set the retail price, which he targeted at $9.99 per book. It is likely that publishers in some cases set wholesale prices higher than that and Bezos lost money on early book sales, but as the market grew, his pricing power grew with it and the full cost of each eBook declined as well. Bezos knew that when Apple entered the book market late, they would be forced to either a) stick to their traditional wholesale model, where he had a significant first mover advantage, knew more about online retailing, and held a brand advantage (do you really think “book” when you think iTunes?) or b) try to compete by attracting publishers and letting them control the product price. Bezos knew he would win either way.

Bezos also knew that “talent copies, genius steals” did not apply to Steve Jobs, who never copied anybody. He had a pretty good idea that Apple would try to convince publishers to adopt “agency pricing“, which, in contrast to wholesale pricing, gives the publisher the right to set the retail price and pays the retailer a commission. Jobs knew that agency pricing would attract publishers who resented price pressure from Amazon and that publishers backed by Apple would force Amazon to raise ebook prices. But only the largest publishers were strong enough to threaten to withdraw content from Amazon — most stuck with their wholesale pricing deals. Bezos raised prices reluctantly and selectively to keep large publishers from defecting. That’s why some ebooks now cost $14.99 on Amazon, while most cost $9.99.

Better yet, Bezos also knew that the manner of Apple’s entry into the book market looked a lot like price-fixing. Price fixing rarely gets you into trouble when, as in Apple’s music or Amazon’s book terms, you force retail prices lower, but collaborative arrangements that lead to higher prices to consumers frequently incur the wrath of the Department of Justice Antitrust Division. Bezos also understood that Apple could fall afoul of laws against price-fixing, even though Amazon, not Apple, has an effective eBook monopoly. A monopoly is generally not illegal unless you use it to jack up prices.

So what does Amazon do the day the Department of Justice discloses its investigation into Apple’s alleged price fixing? It lowers eBook prices. Apple has an estimated 15% share of the eBook market (courtesy, one suspects, of simple iPad users who don’t know any better). That share is heading nowhere but down under the agency model, which is why Apple should give it up as part of a quick settlement with the DOJ. I would not want to be eBook strategist Eddy Cue at Apple this week.

But Apple’s is not the only OODA loop in Bezos’ crosshairs. He is also deeply inside the heads of publishers, whose cockpits are blaring with enemy radar lock-in sirens — the last sound many fighter pilots ever hear. As he often does, Clay Shirky said it best:

Publishing is not evolving. Publishing is going away. Because the word “publishing” means a cadre of professionals who are taking on the incredible difficulty and complexity and expense of making something public. That’s not a job anymore. That’s a button. There’s a button that says “publish,” and when you press it, it’s done.

Amazon has demonstrated a much greater ability than Apple to observe, orient, decide, and act to dominate the eBook market. This is the second sign of peak Apple in as many weeks and another indication that Jeff Bezos has taken over from Steve Jobs as the reigning strategist of the technology world. That said, eBooks is not the most important market where these two companies will go head to head. That would be payments, because nobody else has 100 million credit cards on file. Bezos should think very hard about this one. Apple owns a big piece of mobile and can be on his tail payments in about 40 seconds.

Share/Bookmark

But amidst the carnage, a funny thing happened: the music industry grew larger even though it had fewer labels and far fewer retailers. Revenue from CDs was replaced by revenue from live concerts, ring tones, downloaded singles, merchandise, and sponsorships. The new industry has its challenges (many of them traceable to lousy music), but it has hardly collapsed.

This transformation presages the coming destruction of traditional book publishing and retailing, even as their overall publishing industry grows. Here are the seven reasons that bookstores and traditional book publishers are doomed.

7. Americans have stopped reading books. This is a non-trivial problem (after all, we did not stop listening to music). But the landmark National Endowment for the Arts study “Reading at Risk” confirms what we intuitively know: Americans read less than we used to. 43% of Americans read no books outside of work or school — a number meaningfully lower than Canada or most European countries.

Those who do read books, don’t read many of them. About 24 percent of Americans read eight or more books in 2002, a lower percentage of “strong readers” than two thirds of European countries surveyed. Only 16% of the US population reads a book or more each month. According to Morgan Stanley, 20% of all book buyers purchase a majority of all books. Men read much less than women. NPR reports that among active readers, women typically read nine books in a year, compared with only five for men. Women read more than men in all categories except for history and biography.

When most of us read, we prefer magazines and online articles that are shorter and less demanding than books. Kind of like you are doing right now.

6. Many of the books we read are crap. The largest single book category is still romance novels — a fact so embarrassing to the New York Times and other tastemakers that they exclude the category entirely from best seller lists. These bodice-rippers, together with religion, self-help, fantasy, and thrillers, account for a majority of books sold in the US (Gothic romance, which did not exist before 1972, by itself accounts for a majority of all paperback sales). Nearly all of these sales are to women, but women buy and read a lot more books than men even if you adjust out the Harlequins.

Part of this is, no doubt, that brains exposed to constant media are not well wired for long form reading. We prefer writing that is built around tidy lists…oops. Nice essay to this effect by Alan Jacobs (hey, if you have read this far, you can manage it).

5. We can easily get books for free. Just Google “Torrent” and “Books” along with anything else and you will be directed to many sites that enable you to download books as pdf files easily readable on a tablet or an eReader. The site I checked helps you steal any of several dozen books on religion, most of which presumably counsel the reader against theft.

It is always hard to estimate the economic impact of illicit downloading. I wonder if the net effect isn’t positive, even if authors howl. WordPerfect marketer Pete Peterson had a sensible point when he said that “if someone is going to steal software, I hope they steal ours”. Every illegal download is not a lost sale — but every time a reader finishes a book and raves about it, the marketing leads to new sales. Realizing this, most publishers will let you read the first chapter for free anyway. If we see publishers offering books for free but with advertising, we will know that the torrent sites have struck a nerve.

My current bet is that it won’t happen for the same reason that iTunes curbed illegal music downloading. Customers like the ancillary content and the reliable file quality enough that if the experience is frictionless and the price sensible, we will pay.

4. “Books” are mutating.  Like music and movies, books are becoming a service, not a product. Today Amazon launched its Kindle Lending Library, which turns books into a service like Spotify for music or Netflix for movies. The number of publishers who have embraced this idea? Zero. These guys would rather face the Torrent sites than let Amazon loan their books. But publishers need to monetize their back list. Over time, they will do a deal with Amazon, even if they require Amazon to purchase a new copy after a finite number of rentals. Many publishers require libraries to do that now — and would doubtless oppose libraries as socialist if Ben Franklin hadn’t established libraries before they got organized.

Books have become protean. Sites like Byliner and the Atavist are publishing long form essays by well known authors. This writing is longer than most essays but shorter than a book. Sometimes the pieces are free, sometimes paid, and sometimes, as in the case of a recent piece by author John Krakauer, free for the first 50,000 downloads, then paid. Inkling, a San Francisco startup, takes textbooks and transforms them into socially enabled multimedia iPad apps that end up not looking much like textbooks at all. They have just released The Professional Chef, the bible textbook produced by the Culinary Institute of America. You can buy the book or you can just buy a chapter. It features photos, note sharing between cooks, demonstration videos, etc. Their south of market neighbor,  Blurb, does the opposite: it converts your online blog into a nicely bound book you can give to mom. O’Reilly makes many of its books available by the chapter and lets you join a club to get lifetime book updates and access to community events. EBrary lets academic subscribers read huge online libraries and charges by the page for printing or copying.

3. Robo-books.  I shared a taxi yesterday with a guy who bragged that his wife “cranks out eBooks”. She writes 2-3 books each week the same way some kids write college papers: by stealing content and re-writing enough of it to not get caught. Of course, free market capitalism being the spectacular engine of innovation that it is, some late night huckster even sells Autopilot Kindle Cash that helps “your ten year old kid publish 10 to 20 new Kindle books a day.”

The impact of the resulting spam “books” has been extraordinary. In 2002, about 250,000 books were published in the US; about 15% of these books were self published. By 2010, the number of books had increase thirty times. 3.1 million books were published in the US — about 8,500 “books” per day and 90% of these books were self-published.  In response, Amazon has been forced to “curate” the user experience, meaning that they must try to filter the output of products like Amazon Kindle Cash. If they are wise, they will start charging “authors” $20 to publish their “books”, and deploy the same software that faculty use to detect even clever plagiarists.

Amazon's best selling Single

2. Economics. Amazon has put the publishing industry on notice by hiring respected industry veteran Larry Kirschbaum. In a sly reference to the music industry, Kirshbaum launched Amazon Singles. A single is what it sounds like — a chapter, not a book. It can be an article or an essay, like this terrific one by Hitchens on Bin Laden. In books as with music, you often want just the single, not the entire album.

By promoting authors whose books sell, Amazon has also created self-published millionaires. John Locke and Amanda Hocking are the superheroes of self-publishing. By making millions, they have helped transform self publishing from an industry backwater inhabited by the untouchables to a place where writers no longer share sales with publishers. Importantly, writers price their books and they have become smart about demand elasticity. Locke discovered that his CIA  novels increased twenty fold when he dropped the price from $1.99 to $.99.

“It wasn’t so long ago that an aspiring author would … don a pair of knee pads and assume a supplicating posture in order to beg agents to beg publishers to read their work. And from way on high, the publishers would bestow favor upon this one or that, and those who failed to get the nod were out of the game. No more.”

This trend will affect all publishers. Famous authors will wonder why they share revenue  with publishers. New authors (like Amanda Hocking) will demand enormous advances once they establish a reputation as a successful self-published writer. Because the profitability of the publishing industry turns on the ability of a few popular authors to subsidize the great majority of unprofitable ones, the defection of popular authors is especially threatening.

Publishers and retailers are being badly disintermediated not only because they add too little value, but because they add unnecessary costs. Traditional book retailing is insanely wasteful: at any given time about a quarter of the books are moving backwards in the supply chain because retailers can return product, usually without penalty, to distributors or publishers. I am not aware of any other industry that permits this. These and other costs make printed books more and more more expensive. Price increases, not unit sales, account for nearly all of the “growth” in the sales of traditional books. Trade book prices have risen twice as fast as inflation for more than a decade. Libraries now pay more than $80 per book, in part because library books require specialized processing.

1. Amazon. The number one reason that bookstores will close and publishers will die in large numbers is that Amazon is continuing to take a page from the Apple playbook and create a user experience that is integrated from content development to ecommerce and the device. They are not identical models: we will not see Amazon stores any time soon, nor Apple publishing, but clearly Amazon has learned a lot from Apple.

Indeed one could argue that they learned too well. Walter Isaacson’s asserts in his recent biography of Steve Jobs that Apple won the battle over agency pricing (they let the publisher set the price and took a cut, whereas Amazon set the price as the retailer and paid publishers a commission). In truth, Amazon won and Isaacson got the story wrong. Customers care enormously about price and convenience, as a quick glance at iBooks reveals: it is a wasteland. By combining a preeminent retail experience, offering books as physical, print on demand, or eBooks, featuring buy-back programs and used books, offering Singles, Publishing, and now Libraries, Amazon controls the reading waterfront. They are quickly taking the oxygen out of traditional book retailing and publishing.

When the dust settles, we will see the same thing we saw in music. Spending on what we read will go up with economic growth or a bit faster. But it will go to very different players for very different products than in the past.

Fine. 

Share/Bookmark

I have always loved printed books. I like discovering them and reading them. I like how they look, feel, and smell. I like rooms filled with books like the reading room of the British Museum or the New York Public Library or the rare book room at Shakespeare’s. I like the cluttered shelves of professor’s offices and books that become like old friends.  (Lawyers offices I like less. Identical leather bound volumes suggest a rigid mind. Doesn’t do it for me). 

If I visit your house, I will head for your public bookshelves. Scanning what you display and claim to read tells me about you. If you visit my house, you will find loaded bookshelves in the bathrooms, the bedrooms, and the basement. To say nothing of the offices.  

I love bookstores. I like discovering books but I also like seeing and smelling that many books. For many years when our kids were little, my wife and I had a babysitter show up every other Saturday night, just so we would get some time together. We were often too tired to plan real dates, so as I backed the car out of the driveway, I’d say “where to?”. We quite often ended up at a bookstore — our idea of a hot Saturday night. 

I started an online book company to support small bookstores and frequently preached the endurance of printed books. “Books have been around for five centuries. We believe in the form factor. If you don’t, you should not invest in this business”. I often joked that only eBook company CEOs actually read eBooks. Until recently, I not only bought more printed books than electronic ones, I also bought more books in stores than online. 

For me, it’s hard to imagine a life without printed books. But each year starting now, paper books will get scarcer, brick and mortar bookstores will become tougher to sustain, and the odds that I learn what you are reading from your shelves diminishes. For my grandkids, printed books will be like old maps: wonderous objects worthy of reverence — but nothing you’d actually use. 

In reporting earnings today, Amazon CEO Jeff Bezos noted that his company had achieved two milestones. Amazon enjoyed its first ten billion dollar quarter (when I entered the online book business in 1997, Amazon sales were about ten million dollars a month — 3 thousand times smaller than today).

More significantly however, was the reason for this growth.

“Kindle (electronic) books have now overtaken paperback books as the most popular format on Amazon.com. Last July we announced that Kindle books had passed hardcovers and predicted that Kindle would surpass paperbacks in the second quarter of this year, so this milestone has come even sooner than we expected.”

Amazon is not the entire economy, of course. Most books are still printed — but the shift to electronic books is accelerating, thanks to exploding sales of readers — especially iPads and Kindles.

As soon as 2013 and certainly by 2015, consumers will buy more electronic books than printed books. Outside of college towns and large cities, music stores disappeared five years ago — even though MP3 players integrated with online stores are only a decade old (the first iPod did not come out until two weeks after 9/11. Full iTunes integration and the acquisition of a lot of music took a bit longer).

As Mary Meeker’s chart from the recent Web 2.0 conference illustrates, iPad, iPod, and iPhone (all workable readers) adoption has been much faster than any technology in history. Faster than browsers and faster than DVDs. And her data exclude Kindles and Nooks.

Unlike music, supply is not a constraint on the growth of this market. Amazon has been patiently building its eBook inventory for years, long before sales could possibly justify it (I seriously doubt that Amazon has yet to see a dollar of profit on eBooks if you measure all eBook costs to date vs all eBook revenues). Whereas music was content constrained for years, books have arguably been device constrained until recently.

No longer: today, Amazon announced that 

“The U.S. Kindle Store now has more than 810,000 books including New Releases and 107 of 112 New York Times Bestsellers. Over 670,000 of these books are $9.99 or less, including 74 New York Times Bestsellers. Millions of free, out-of-copyright, pre-1923 books are also available to read on Kindle.

800,000 books is not every book, by a long shot. But it is almost every popular book and when you add Google books and the Open Content Alliance, the total number of scanned titles surely approaches ten million. Not all of these are available commercially, yet — but most will be within a few years. (Few people read more than a 2-3 thousand books in a lifetime anyway. The average is surely no more than a hundred).

The availability of very high quality reading software built for a variety of platforms is also not a constraint.

“Amazon added to its growing list of “Buy Once, Read Everywhere” Kindle apps, launching a Kindle app for Windows Phone 7. In addition, the Kindle for Android app was updated to enable users to buy, read and sync over 100 Kindle newspapers and magazines. All Kindle apps let customers “Buy Once, Read Everywhere”–on Kindle, Kindle 3G, Kindle DX, iPad, iPod touch, iPhone, Mac, PC, BlackBerry and Android-based devices. All Kindle apps are free and incorporate Amazon’s Whispersync technology, which allows readers to seamlessly switch between devices.

Finally, storage is not a contraint. 

“With Kindle Worry-Free Archive, books purchased from the Kindle Store are automatically backed up online in the Kindle library on Amazon where they can be re-downloaded wirelessly for free, anytime.

Digital reading is becoming so normal that it will soon be hard to find people who do not read digitally. Already, some magazines are not available in print. There will be the usual death throes: publishers will fight retailers over the cost of book returns (a big but not avoidable cost of brick and mortar retailing). These wars will brief and destructive to both sides.

Borders will close its doors this year. Barnes and Noble may remain open only because they will move out of book sales. They seem likely to take up clothing or electronics or gift cards or coffee. Or furniture or typewriters. Or something.

There are winners, of course. Device makers win (Amazon, Apple). Electronic retailers win (Amazon, Apple). Publishers who get out in front win (Smart: Wall St. Journal, Economist. Dumb: New Yorker, New York Times. Hopeless: magazines and book publishers who refuse to release electronic copies).

Books have had a good run. I am going to miss them.

Share/Bookmark

During the last four months, Amazon has finished its run as a device maker, consolidated its position as an e-bookseller, and quietly condemned most brick and mortar bookstores to extinction. Amazon will win the ebook wars running away.

Consider:

• Amazon has succeeded in making its Kindle ebook software truly cross platform. It now runs not only on the Kindle, but on Android and iPad, iPhone and Blackberry, Windows and Mac desktops. It remembers your place even when you change devices and the reading experience on the iPad is outstanding.. 
• Apple’s iBook is stuck in neutral. The iBook store still has very few titles, which often cost more than on Amazon, and although these titles are encoded in ePub, they can be downloaded only onto iOS platforms (iPhones, iPod Touches, and iPads). Apple will never allow you to read your iBook on an Android device, so every time you buy an iBook, you lock your library more tightly to Apple. Even Apple gave up that trick when it abandoned DRM in music.
• Now that the show is ending, the jesters have arrived. Borders, Barnes and Noble, and Sony have entered the market — none with a plan or a prayer of success. It is hard to imagine worse contestants: Borders is bleeding out the last of its cash while Barnes and Noble is desperate to sell greeting cards, coffee, and above all, itself. (BN is clearing out its dead music sections to help it sell more eBooks — which will quickly do to the rest of the store what the iPod did to the music department.) Sony hopes to sell its device through electronics channels — like Amazon. All three players have gained an initial media splash, then promptly cut prices.  

Although Google may alter the landscape signficantly when it launches its bookstore later this month, Amazon’s near term priorities should be clear:

• Push the title count ever higher – especially in textbooks. Get electronic versions of the backlist from every publisher in the world, then work the front list. This is not easy, but Amazon can do it and few other companies can. Those of us schooled by Amazon as competitors know that huge selection presents a formidable competitive barrier.  
• Grow publishing. Amazon already acts as a publisher and many writers earn more money publishing electronically on Amazon than they do with big six publishing deals. This will only continue as paper-oriented publishers erode trust with their writers by insisting on prices out of touch with the marginal cost of electronic publishing. Amazon gets this, and their recent decision to sign Andrew Wylie, the industry’s most famous agent, to an exclusive publishing deal is evidence that they will seize this opportunity.
• Avoid agency deals. Publishers, led by the estimable John Sargent at McMillan, have insisted on the right to increase the retail price of ebooks, even when it is not in their own long term economic interest to do so. Amazon is right to keep ebooks priced at $9.99 in order to rapidly convert the market. As it does so, publishers will be able to maintain author royalties and their own profitability, so long as they undertake the necessary transition at full speed. As the second major mover in this market, Apple accommodated publishers in order to get initial traction, but publishers will soon realize that an agency deal with Amazon will not translate into sales if  iPad users choose the cross platform Kindle software to iBooks. 
• Milk the device. Amazon was smart to launch a device before Apple did (imagine what the music industry would look like if Amazon had been first to market with a solid MP3 player). But as a device, Kindle is dead and making stuff is not what Amazon is great at anyway. Amazon should continue to lower the price and sell as many Kindles as people want — but admit that the device is now irrelevant to their eBook strategy.
• Make Kindle software simple and ever more compelling. As good as Kindle software is, it has some amazing deficiencies. To start with, you cannot buy a book. Amazon should integrate the store into the reader ferpete’ssake and go ahead and copy the iBook UI if need be (Apple copied it from Delicious Library for a reason — the bookshelf that rotates into a bookstore like something out of Sherlock Holmes is pretty cool). Short of that, Amazon could at least let you buy a digital book from their dedicated iPhone or iPad apps. These holes are very worth filling. 

If Amazon enables sharing (and arguably even if it doesn’t), eBooks are approaching a tipping point because sales of books in the US are heavily concentrated among avid readers who are shifting decisively away from print. This will kill traditional bookstores as quickly as the iPod killed music stores.

Americans buy about $25 billion of books each year. The census counted $16.6 billion in 2009, but they include greeting cards and other non-book items sold by book retailers and they exclude online sellers like Amazon. So retail store sales of books are probably $15 billion and falling. The rest is sales from mass merchandisers like Walmart and Costco, textbooks, specialty religious books, and professional books sold through nontraditional channels. $25 billion revenues has not grown since 2003 and unit sales have been flat for a lot longer than that. In short, selling printed books from stores is a business that has been fixin’ to die, even though printed books themselves will be around for many, many years.

In 2009, eBooks were about two percent of the total book market — less than $300 million in sales. But sales of readers in the form of tablets, high quality smart phones, and dedicated eBook devices is growing at a rate unprecedented in human history — faster than the growth of PCs, the web, or games if you believe Morgan Stanley’s chart. These devices are driving demand for ebooks. Apple sells 250,000 iPads each week, or a device every 2.5 seconds. This number will grow as they roll out international sales, new models, and lower prices. Apple claims that the iPad grabbed 22% of the eBook market in only two months, which would represent a month with $5 million of eBook sales. Since this would only require that every other iPad buyer download a single $10 book, I believe the claim. 

Nobody would be surprised to see eBooks accounting for a billion dollars, or 5% of trade and textbook sales by the end of 2011. JP Morgan sees eBooks quickly capturing 25% of retail book sales (they do not expect eBooks to actually grow the book market — although with considerably lower average selling prices, consumers would obviously need to buy more units for industry sales to remain constant).

Ebook sales are concentrated among active readers — the roughly 60 million book buyers, who buy ten or more books a year. This group, about a quarter of the adult population, is two-thirds female. But, you say, if 60 million people buy ten books a year at, say $25 per book, that is more than half the industry! 

Quite so. This is why active readers are the entire market focus of the publishing industry. But the American Bookseller Association’s own research shows that this group is moving rapidly to eBooks and that between a quarter and a half of avid readers are downloading pirated books from the many sites that now make this possible. Not surprisingly, this group accounts disproportionately for the skyrocketing sales of eBook readers, smart phones, and tablets. 

Given the margin structure of brick and mortar book retailing, if half of the avid reader market shifts to electronic books, one third of bookstore sales will evaporate and most bookstores outside of college towns and walkable cities will fail. It took less than five years from the introduction of the iPod in 2001 for music stores to vanish from the landscape. Most bookstores have less time left than that. One sign of doom: many of us now check the merchandise in the store before buying it cheaper online. The industry terms this “leakage” and it is was the first sign that local camera, electronic, and music retailers would soon die. Personally, I am a part of the problem — and I am sorry to see my retailers close. Then I get over it.

Can brick and mortar stores do anything to survive? No — eBooks are a fundamentally better product at a lower price. Ebooks not only cost less, weigh less, and are searchable, but increasingly they link readers who share interests and contain useful multimedia. They do not carry the cost of printing, shelf space, or returns to publishers — a serious problem for printed books.

It is probably piling on to point out that most book retailers indulge the avid readers who walk their door and made no effort at all to add new readers to the market. Growing avid readers is not especially hard, for retailers who focus on kids — especially at risk kids. A recent study showed that giving kids a dozen books to read over the summer had the same impact as summer school. Helping kids develop lifelong reading habits — and helping parents keep serious books at home — appears to makes a huge difference. Although the findings reek of endogeniety, a study of kids in 25 countries found that kids who grow up around books stay in school longer and earn more. (David Brooks has a nice reflection on this in the NYT.) 

All of this is, from Amazon’s perspective, truly ironic. In fifteen years, they have taken perhaps a 10% share of all US retail book sales at positive, if not wildly attractive, operating margins. They have of course earned the enduring enmity of independent book retailers. eBooks are another story altogether. By focusing on the Kindle as cross platform software, integrating its store with its reader, and enabling book sharing, Amazon can potentially own 75-85% of an exploding market at outstanding operating margins. Because eBooks take advantage of Amazon’s technology, not its operations, the operating leverage is enormous. And its competitive advantage is truly gruesome. If Amazon focuses and executes (and they always do), they will wreak more havoc on American booksellers in the next three years than in the past ten. 

Share/Bookmark

Amazon CEO Jeff Bezos has a tough habit to break. It started when he built the Kindle and he deliberately copied Apple's approach to the iPod.

• He integrated the Kindle tightly with his website. Just as iPods can only play music bought on iTunes and music bought on iTunes would only play on an iPod, Kindles only handle books bought on Amazon (Bezos did not try for a double lock: you can read Amazon eBooks on iPhones, Macs, and PCs).

• He subsidized the hardware and the content to build momentum, knowing that with volume, costs would drop and competitive barriers would grow. Steve Jobs had done the same with music. 

• He set the selling price. Jobs was hated by the music labels for insisting on $.99/track pricing and Bezos is equally despised by publishers for selling nearly all eBooks at $9.99 or less. Both men had the same agenda: to accelerate the adoption of digital media. 

Publishers howled. But Bezos stuck to his guns and refused to compromise, just as Jobs had done. Bezos even made the same arguments to publishers that Jobs did to labels:  "you will make more money this way because we will sell more units". 

So when Steve Jobs decided to sell eBooks, he tossed his old play book. Instead, he offered publishers something that they had long been unable to bargain from Amazon: agency model pricing. 

This is worth understanding. The key question for publishers is who sets the retail price of the product. Traditionally a publisher suggests a list price but the actual retail price is set by the retailer. A retailer is free to mark products down according to their strategy and in the book market, large discounters like Walmart and Costco as well as virtually all websites sell books at a discount to the list price suggested by publishers. Amazon has always treated best-selling print books as loss leaders and today sells virtually all e-Books below cost.

But in an agency model, Amazon and Apple are not retailers – they are agents of the publisher, who dictates the retail price and pays them an "agency fee" (a commission). Amazon has successfully resisted pressure to allow agency model pricing for the past two years. 

A table clarifies just how odd this is. This table illustrates (imperfectly because some costs are essentially fixed) the variable economics of a newly published mid list hardback trade book.  The economics of best-sellers, backlisted books, paperbacks, and textbooks are materially different but the conclusions are not. 

Share/Bookmark

Apple stoked rumors of a dreamy tablet for either two years old or thirteen, depending on how you count. For six months, the leading tech blogs have been quivering with speculation about the “Jesus tablet”. One blog, Gizmodo, offered $100,000 cash for an hour with an Apple tablet and lesser amounts for photos. Apple sent the lawyers after them and the cone of silence over Cupertino remained intact.

As the Wall Street Journal memorably noted, the last time there was this much excitement about a
tablet, it had commandments written on it.

Yesterday’s unveiling was attended by a few hundred journalists, selected by Apple for their demonstrated susceptibility to Jobsian hypnosis. They had all taken a bite of the forbidden fruit and dutifully played their assigned roles. Six months ago, they circulated Apple’s deliberate leaks about a $999 price point. Today, they drooled over the iPad, marveled at the $499 starting price, or sniffed at its inadequacies. For Apple, it’s all good — there is truly no such thing as bad PR.

Has Apple once again defined a new category of computing? Probably. Tablet computers are going to be an important way for many of us to consume media and the iPad looks to be the first important tablet.

But as he did with personal computers and music, Steve Jobs has tried not only to create a market, but to control every aspect of it as well. Last time the spoiler was Microsoft, which left Apple a tiny sliver of the market. This time, expect Google to offer consumers the choices that Apple would deny us. In Silly Con Valley, the fun never stops.

The New Taxonomy

Jobs opened with the right question: is there room for a device that sits between the PC and the smart phone?  The answer seems to go something like this: create content with a computer, communicate mobile content with a smart phone, and consume content with a tablet.

• Create on a computer. If you are working intensively with photos, video, words, numbers, or charts you are going to do it on a computer and eventually on a cloud-connected-computer like Google envisions with its Chrome OS.

• Communicate on a smart phone. If you are talking, Tweeting, messaging, using GPS navigation, listening to music, conducting routine transactions, consuming location-based services, viewing simple content (brief messages, short videos, a few pictures) a smart phone is ideal.

• Consume on a tablet. But if you are consuming media in a serious way: extensive multimedia browsing, gaming, reading lengthy content, watching a movie or a show that is more than a clip, or as will become increasingly common, a combination of these things, a high performance tablet is much better than a phone or a laptop. 

Of course you can do almost anything on any connected device. You can write a novel on your iPhone, you can play games on a laptop, and you can Tweet from a tablet. You can email or browse from any device. I have now read four complete books on my iPhone — not optimal, but it doesn’t suck. I have read zero books on a PC and
perhaps 20 books using e-ink style readers. But the framework is useful because as hardware becomes free and both software and files move online, we are spending more time in front of a screen than ever before. Being in front of the right screen matters.

A tablet is ideal for professionals who work on their feet. I cannot see the world’s 9 million physicians making rounds with an iPhone or while holding a notebook. But medical information systems that sync with smart tablets are a huge market (whether Apple can get out of it’s own way and serve this market is another question). Transportation and freight, process-intensive industries like chemicals, steel, or paper, outside sales and any professionals and anyone else who is on their feet all day already consume tablets running specialized, dedicated applications. A general device that can also run specialized applications makes a ton of sense.

More fundamentally, the iTab is built upon the UI of the future: human touch. 10,000 sensors that respond to your fingers, a variety of virtual keypads and keyboards, and finger motions that are likely to be completely unhinged within a few revisions. Remember, a lot of people did not want an iPhone until they held one in their hand. Good reason to think that the iPad will be even more seductive — especially since the processor is apparently unworldly fast.

Gaming, Browsing, and Reading are a tablet’s killer apps. Watching movies may emerge as a fourth, but movies are high bandwidth. work fine on laptops and, unless you are on an airplane, more fun to watch on a huge screen with other people around.

What Apple Learned from the iPhone

Three things surprised Apple about the iPhone. To start with, the App store results blew them away. Nobody expected 3 billion downloads.

Second, gaming. The popularity of iPhone games stunned Apple. Portable, connected games are fun and powerful — but nobody realized how games would dominate Apps. How important is gaming? Two thirds of all online video gamers become addicted for life: 217 million people worldwide and growing. Sales of video games will soon pass sales of books. The iPad will accelerate this because and it has a hand held screen that is eight times bigger and basically disappears. You will not see the device — just the game. With the release of the SDK yesterday, every serious game for the iPhone is being expanded and enlarged for the tablet. The applications are quite likely to be amazing.

Third, the iPod Touch. Who would pay $400 for an iPhone without a phone? A lot of people. The iPod touch is on fire — Apple is selling them in record numbers. They are basically pocket sized iPads. 

Browsing on the iPad will be astonishing because it is fast and tactile — again, the device will disappear. The great illusionist was not simply working his magic yesterday when he claimed that “seeing it is nothing like touching it”. My bet is that surfing on an iPad will be very compelling and will make mouse surfing seem pedestrian. We will see, but all the talk about “magic” yesterday suggests that Apple is keeping with its tradition of selling a very cool experience, not just a cool product. Will the tens of millions of older people who are computerphobic be tempted to use iPads? Yes.

Which leaves reading. The iPad will make an excellent reader for newspapers and magazines. It will not save traditional ink-based print media businesses because there is still no business model that completely replaces their rapidly vanishing advertising revenues. Like the iPod, the iPad will unbundle content (“I can get you the daily lead story from the Wall St. Journal, all of the New Yorker cartoons, and anything written in the NY Times by David Brooks, Tom Friedman, or John Markoff for $.29/day, delivered to you by 6am rain or shine”). Publishers will hate seeing their newspapers and magazines unbundled just like labels hated seeing their albums unbundled, but it seems certain to happen.

Textbooks: The Tablet’s First Killer App

In a look at textbooks markets here, I argued that the Kindle will disrupt textbook markets. The iPad is even more likely to do the job. Not by accident do four of the five publishers who yesterday announced that they would produce content for the iPad have very large textbook divisions. Textbooks are a great market for tablets for several reasons. First, America’s 16 million college students are early technology adopters. Second, they can be forced to adopt technology by faculty and college fiat. 23 years ago, I was one of the first students ever required by a college to buy a laptop. Mandating a $500 tablet will not be a hard decision for many colleges, especially if big textbook publishers subsidize tablets in exchange for colleges adopting their course bundles.

Third, textbook publishers are ready. They have already invested a lot in electronic textbooks and multimedia course content. McGraw-Hill has more than a thousand electronic textbooks. Thomson Learning’s unit Cengage Brain sells e-textbook and chapters. Freeload Press, launched in 2004, offers ad-supported e-textbooks. Fourth, textbook publishers prefer electronic editions because they destroy the secondary market.
You cannot resell your electronic textbook (not yet anyway).  

But traditional publishers will not be the sole beneficiaries because tablets will revolutionize the delivery of open source content. Open source publishers have an enormous amount of high quality material ready for tablets. OpenCourseWare was started by MIT to make course materials available online for free and is growing rapidly. They have hundreds of content partners that have assembled material for nearly 2,000 courses. Their website gets more than 3 million monthly visitors. Connexions has 15,000 modules that enable faculty to develop instructional materials online or recombine with existing materials. Everything is open-licensed and available for use worldwide.
The Hewlett Foundation-backed the Open Education Resource, a clearinghouse that develops and promotes open content. The Multimedia Educational Resource for Learning and Online Teaching (MERLOT) is a Cal State digital library of 20,000 online course materials used by
67,000 faculty to develop teaching materials.

The digital textbook market has not taken off in part because students are not keen to read books on laptops or netbooks. But Apple has deep distribution relationships in the educational market. Within a year, expect lower cost iPads to be flooding colleges. In short, e-textbooks represent a smoldering market in need of a tablet to set it ablaze. Several startups, including one announced today called Inkling, are poised to help small publishers and authors move educational content to the iPad.

If students buy $2-3 billion of printed college textbooks today, how much will they spend on printed books vs open source digital media in five years? In ten? When this market changes, it may change quickly because a quarter of all college students are replaced each year, so it has a constant supply of customers with unformed habits. It is also a classic “broken” market because, as with prescription drugs, the people who make the buying decision (professors) are not the people spending the money (students).

These markets are easily politicized because customers feel victimized.
It is easy to imagine students, enamored with their cool iPads, demanding that faculty move to open source courseware and faculty, wanting to be technically hip and economically accommodating, rushing to embrace the cause.

Will the Market Disappear?

How fast will the textbook market change?

In 1991, encyclopedias were a $1.2 billion market dominated by Britannica, which had a 50% share. Britannica’s secret weapon was its 2,000 strong sales force that sold the $1,200 product door-to-door as a key to social mobility (“madam, no family in this neighborhood would deny their child the advantages of a complete set”). With an advisory board consisting of more than 80 Nobel Laureates, Britannica kept World Book, owned by an obscure investor named Warren Buffett, stuck in the #2 position.

Two years later, Bill Gates became convinced that CD-ROMs were the next must-have item on personal computers. To promote demand, he decided to put an encyclopedia on a CD. When Britannica and World Book wouldn’t talk to him, he licensed the content of a third-rate encyclopedia sold in grocery stores — Funk and Wagnalls. He crammed it onto a CD, tossed in a few minutes of video clips, priced it at $395, and charged into the marketplace.

Nothing happened. Encarta was a joke.

So Gates dropped the price to $99 and in 1996 saw Encarta sales reach $100 million. Encarta vaporized Britannica. The high fixed cost company imploded and was liquidated for less than its book value. With a $99 product, Gates cut the total demand for encyclopedias in half from $1.2 billion to $600 million. By 2001 he cut the total market in half again. With $200m in sales, Encarta had destroyed 75% of the encyclopedia market and owned two thirds of what remained.

That same year a kid named Jimmy Wales assembled an open source online wiki and opened Wikipedia to community contributions. Today, there is no market for encyclopedias outside of a small online subscription business. Digital technology and open source content combined to destroy a $1.2 billion market in less than a decade. Textbook publishers who are salivating at the arrival of the iPad should think very carefully about what the same combination will do to their businesses.

Share/Bookmark

His friendship with Buffett notwithstanding, Bill Gates destroyed the market for encyclopedias in 1993 when Microsoft launched Encarta, the world's first digital encyclopedia. Encarta had been a challenge to build: Britannica and World Book had both turned down Microsoft, which was forced to turn for content to Funk and Wagnalls — an encyclopedia sold in grocery stores. But the quality of the Encarta content didn't matter, since its quantity was limited to five CDs. Encarta was sold on CDs in part to promote the use of CDs in computers. The disks contained perhaps 20 video clips — you could watch them all in well under an hour. Not only did computer retailers have no idea how to market a box of CDs, but Microsoft priced Encarta $395 when they launched it. At first, the product went nowhere.

Three years later, a lot had changed. Every new computer had CD drives, Microsoft had dropped the price of Encarta to $99, and Britannica was bleeding so much cash that its owners sold it for less than its book value. Encarta had grown to $100 million in sales even though total spending on encyclopedias was $600 million — half of what it had been three years earlier. Microsoft was deliberately shrinking the industry, not growing it.

 By 2001, Encarta had once again doubled in size again and again chopped the market in half. That year, an entrepreneur nobody had ever heard of destroyed the encyclopedia business for good. Jimmy Wales started an open source wiki with no revenue model and no competitive barrier beyond the passion of the devotees of the site he dubbed Wikipedia.

Britannica long ago became an unimportant niche product. Two months ago, Microsoft surrendered and killed Encarta. In 17 years, they had used digital media to transform a $1.2 billion print business only to see the market demolished altogether by open source content.

Keep encyclopedias in mind when you consider the future of textbooks. Like encyclopedias, textbooks will be quickly weakened by digital media and then destroyed altogether by open source content. College textbooks as we now know them will cease to exist (K-12 textbooks will take a lot longer, since their purchase is usually mandated by state school boards. These were surely the folks that Mark Twain had in mind when he noted that "First, God created idiots. That was for practice. Then He created school boards").

The seven large textbook publishers, campus bookstores, textbook rental sites (especially the one that has been comically overcapitalized by a venture fund that should know better) are all heading for waters that will not only be rough — they will be pirate-infested.

Pirates? Yes. Amazon's announcement of the Kindle DX this week, along with similar announcements likely to follow from Netbook makers and from Apple, will enable large scale textbook piracy. Amazon knows it and TechCrunch figured out pretty quickly as well.

The reason is simple economics: textbooks cost students an average of $900 per year — a large fraction of a college student's discretionary budget. Except that textbooks are not discretionary. Just as drug companies exhibit little pricing discipline when the purchase of their products is dictated by physicians, textbook companies freely gouge students who have no alternatives. Publishers raise textbook prices much faster than inflation, release editions with new pagination but few meaningful revisions just to frustrate the sale of used copies of their books, and maintain overseas prices that are much lower. Students can see these "grey market" prices and rightly resent them, much as seniors chafe at the much cheaper Canadian prices for vital drugs.

Free textbooks translates into a lot of beer money — even after you buy a Kindle. The Kindle DX reads pdf files, so enterprising students will scan all major textbooks and post them on Limewire, Kazaa and other file sharing sites. These sites are ready-made for textbook file sharing but without a convenient way to read and annotate a scanned book, there has been little reason to bother. The Kindle DX changes that. Now you can read the books and see illustrations quite well. (You can even annotate with the Kindle — sort of. This is an area where functionality is likely to improve.)

Textbook companies and trade publishers will crack down on piracy of course. Which will annoy faculty who assign the books, since many faculty resent the price of textbooks. If record labels got so little sympathy by suing students that they were forced to abandon the tactic, it is safe to assume that textbook publishers will fare a lot worse. (Whether all books will be pirated is an interesting question. I have some sympathy for Richard Sarnoff's statement to the New York Times that iTunes shows that if priced correctly, customers will pay for digital content. At $5 per trade book, he is probably right. As the price points move higher, my bet moves to the rum-soaked guys with parrots on their shoulders). At present however, college textbooks are made for pirates.

So are college campuses. Not only have American universities never been hotbeds of respect for private property, but analog copyright piracy is rife on most campuses. That's why how there are always plenty of photocopy shops next to college campuses. Professors assign "readers" consisting of collections of xeroxed articles or book chapters. Students shift their spending on course materials from the campus bookstore to the local copy shop. In a some cases, the copy shops collect and pay royalties on this material but often they do not. Moving faculty-sanctioned piracy from analog to digital is not a change in mindset, just in efficiency. Instead of sending a pirated master copy to Kinkos for reproduction, faculty will post their pirated readers behind a login that they share with students. Easier for professors, students, and trees.  That it inconveniences publishers and the local copy shop will trouble nobody.

One reason that faculty could care less about piracy is that they rarely earn significant royalties from publishing their research. I married into this business, so I understand that professors earn a lot when they publish. Their earnings come in the form of paid trips to conferences, speaking or consulting fees, the acclaim of their peers, promotions, and tenure. But faculty typically do not earn significant royalties from their published research. (The exception is if they write a widely assigned textbook, in which case they can make a fortune). Faculty have no incentive to protect the economic rents being extracted by textbook publishers.

Indeed faculty frequently give away course materials that they have written. Sometimes they post these materials on the web and urge students to download it. More often, they simply share material with each other. This instinct combined with open source licensing and the web has given birth to the explosion of open source educational content. The availability of high quality digital readers and of highly portable netbooks make open source content even more compelling.

There are several major open source initiatives — all spreading outward from major US technology regions. Four of the largest are:

• OpenCourseWare: This is an MIT-initiated program that is growing very rapidly. It was started by MIT faculty who wanted to make course materials available online for free.
  It now hosts materials for about 2,000 courses. The site receives over two million visitors each month and they have built more than one hundred content partners — primarily specialized departments of groups of faculty.

• Connexions: boasts 600,000 users per month from 200 countries (OK, we don't have 200 countries. Maybe they need to work on their geography offering). Enables faculty to develop instructional materials online or make use of existing materials. Everything is open-licensed.
  Users can read or print material online, or order a traditional book to be printed on demand.

• OER Commons: (Open Educational Resource Commons) This is a Hewlett Foundation-backed clearinghouse for open source content that began at Foothill College, a community college in the heart of Silicon Valley. OER develops open content and trains faculty to use OER tools and materials.

• MERLOT (Multimedia Educational Resource for Learning and Online Teaching)
  A no-cost digital library of 20,000 online course materials started by California State University.
  67,000 faculty use and develop material and they have built editorial boards in 21 disciplines to peer review the content.

These sources are destined to grow because both faculty and students benefit more from sharing course material than they do from assigning or buying textbooks. Open source content also reflects what Google's Melissa Meyer termed in her Congressional testimony this week "changes in the atomic unit of consumption".

The atomic unit of consumption of educational material is unlikely to remain a standardized expensive textbook — especially since the best teachers want a variety of teaching material. If they pay at all, students want to pay only for what they use. Digital media makes this possible and readers like the Kindle DX make it practical.

Some publishers will adapt to this change. Some will copy O'Reilly Media, which has done a brilliant job of enabling faculty to assemble modules of content from multiple sources and managing the associated micropayments. Others will enable students to select or customize material based on their strengths and interests. Some may employ multimedia and social media in creative and useful ways. Five sophomores at different colleges who realize that they are all researching the transformation of George Washington from a conventional to a guerrilla general might find useful ways to share insights and sources. Companies who are smart about building educational content and tools will find new ways to monetize this capability.

The best of this content will be sufficiently robust and self-directed to replace the worst of our current teachers. Some material will enhance classroom interactions,
others will target people who want to learn outside the classroom — a vastly larger market. New businesses are likely to preserve what is valuable about textbooks: material clearly organized so that students can master it efficiently. Accommodating a variety of backgrounds, knowledge, and learning styles is not likely to happen with a "one size fits all" book  — and we will all be better off for that. These businesses will all discard the cost of corrupt pricing, university cronyism (schools earn lucrative kickbacks from textbook sales at campus bookstores), mindless homogenization and hopeless efforts at ideological conformity or neutrality that characterize textbooks today. 

Most textbook publishers will, of course, go the way of Encyclopedia Britannica. The sooner the better. We are unlikely to look back on them fondly.

Share/Bookmark

I competed with this guy for a decade and frequently thought he was nuts. I questioned almost everything about Amazon, from their
international expansion, acquisitions, Kindle, customer obsessiveness, 12 million square feet
of DCs, debt load, savage discounting, corporate paranoia, the UI, really high capex, the acronyms programs like AWS, S3, FBA, EC2, and even Prime when it first
launched.

And occasionally Bezos blew it (auctions, A9, Living.com/kozmo.com/Pets.com and a lot more, early tab proliferation, the crazy Walmart executives, the gold treasure box that a brilliant but mad professor talked him in to, Segway, digital music, and many other experiments that turned out to be amusing belly flops). But in many of those years, the market paid him to try stuff — it would be a much bigger criticism to say he had not tested more ideas (see Whitman, Meg).

More often than not, Bezos had ideas that turned out to be game-changing smart. He created a highly experimental culture that learned quickly from its mistakes. Amazon invented associate programs and AB testing, which he used to create the e-commerce operating system. He bet on Prime, the free-shipping program that launched almost three years ago to raspberries from financial analysts. Prime costs Amazon a fortune, but subscribers end up buying more because they do ALL of their online shopping at Amazon. Over time, it has made a huge difference even though, as Bezos warned at the time, "the one thing you do know when you hold an all-you-can-eat buffet, the heavy eaters show up first."

He built one of the world's strongest brands by setting an very high hiring bar and being obsessed about low prices, large selection, and fast delivery. (His saying that "Your brand is what people say about you when you are not in the room" is  classic).

Not only that, but Amazon's commitment to cloud computing, which started out as paid storage (S3) and pay as you go computing (EC2), now includes a database (SimpleDB), a content
delivery network (CloudFront), computer-to-computer messaging (SQS), to say nothing of warehouse and fulfillment services (FBA). Amazon is no longer just an e-commerce company — by thinking well outside the box, Bezos had made it into a highly credible infrastructure company as well. When Amazon launched Prime and cloud computing, it still played kid brother to internet icons Yahoo! and eBay. Today it is worth as much as these two tired franchises combined.

Behind that goofy laugh is not only one very smart CEO, but a rare guy who walks the talk. Bezos is spending this week working in the Lexington, Kentucky fulfillment center to understand his company
from the bottom up.

A cynic might say it's because Amazon today announced it was closing
small fulfillment centers in Nevada, Indiana, and Pennsylvania — but I think not. These are normal capacity adjustments and the affected people will be offered transfers. Indeed, Bezos imposes some unusual requirements on his people

• every
  new Amazon employee has to spend time in Amazon's fulfilment-centers with their
  first year. Every two years, everyone does two days of customer
  service, and everyone has to be able to work in a call-centre. In the early years, the whole senior management team spent the holiday crush pulling long shifts in the fulfillment centers. This was mainly to help, but also to educate.

• Likewise, all desks at Amazon to this day are hardware store doors bolted to 4*4 legs – a reminder of the company's start up days (I've been in Amazon offices in Germany and Beijing and seen some very fancy doors used as desks — but they are door-desks just the same). 

• Bezos prefers “two-pizza teams”: if a group can't be fed with just two pizzas, the group is too big. I've seen a few three and four person teams at Amazon — but not nearly as many as most companies their size. 

• Bezos thinks that talent and fact-based analysis matters more than heirarchy, communication, and advertising. Amazon spends almost nothing on advertising, Bezos once declared communication not just unimportant but "terrible", and he is happy to see a fact-based analysis by junior people overturn decisions by senior ones.

• He often thinks in terms of efforts that pay off over 5-7 years — much longer term than most public company CEOs.

I learned a lot watching this guy — but probably not enough. We all think that CEOs should spend a week as an hourly employee looking at their company from the bottom. But I have to ask in ten years as the founding CEO of Alibris, how many weeks did I spend packing books in our warehouse or staffing a customer service desk?

None. I always had more important priorities.

Share/Bookmark

iTune customers have downloaded more than 6 billion tracks which is both extraordinary and odd. After all, most tracks are available for free online and free is a tough price point to compete against. Nonetheless, iTunes last year appears to have sold more tracks than users on file sharing sites downloaded for free.

How can Apple charge for something that is easily obtained for free? Some say they do it by adding enough convenience and value in the form of seamless device-website integration, reliable virus-free tracks, cover art, indexing, search, and recommendations to lock in their customers with love and loyalty.

Others say that’s fine, but Apple also cheats. They argue that Apple uses its iPods, iPhones, iTunes store, and “FairPlay” DRM standard to enforce a vertical monopoly by forcing iPod owners to use its store and forcing iTunes users to buy iPods.

Every consumer learns that Apple does this. Other online music stores cannot sell music files encoded with Apple’s FairPlay, and competing devices from companies such as Creative Labs and iriver cannot play FairPlay files. Consumers who want to listen to songs downloaded from iTunes must either have an iPod or convert the files to an open format, which is a real schmertz as those of us who have done it know. iPod owners who want to play music from other stores must also likewise circumvent the files’ DRM. Is this legal? iPod customers and the French government are both suing Apple to test these arrangements in court.

A bigger question is: does it matter? Earlier this month, Apple announced that Universal Music Group, Sony BMG, Warner Music Group and EMI would all offer their music without DRM. Eight million songs are available in Apple’s DRM-free format, with the remaining ten million tracks expected to be DRM-free by the end of March.

In other words, Apple has figured out that a one-way lock in is sufficient (iPods work only with iTunes). They do not need to enforce two way lock-in (I believe that DRM-free iTunes tracks will play on other devices). In any case, Apple encodes your email address in the XML metadata on each track you download with or without DRM, so if your files end up on Limewire, it is not hard to find the source.

Every business seeks to build and defend advantages — that’s what it means to have a business model. In this respect, Apple is doing what it has always done — integrating hardware and software to lock in users. It is hardly foolproof — note that their share of the desktop computers may be growing but it is still in single digits.

But the Apple model increasingly depends less on technology lock-in and more on assisting music discovery. Music discovery is subtle — but if there is going to be growth in the new music industry, discovery will drive it. Discovery takes many forms.

• Deliberate discovery. My favorite music discovery engine is Owl Media because I got to know the founders and the people who built their technology. Owl searches the digital fingerprint of a song you like to discover similar songs. The main problem is that nobody wants to search — listeners clearly prefer to be surprised by music they like.

• Discovery also occurs at online music stations. LastFM pioneered this category and is still the most social of the music radio sites. You can learn about new songs from those who like the same music you do, interact with people who share your tastes, and find out who is listening to the track you like right now. If you use music to make friends, it’s a great site.

• As I type, I am listening to Pandora on my desktop. I set the site to the “Keith Jarrett channel” to get piano jazz I like. Now and then I hear a track I like and with one click I add it to my iPhone. It’s a great service from an Oakland-based company. I’d like the business a lot more if their “music genome” were not hand-coded by hundreds of music freaks (picture Google trying to hand classify every web page) and their revenue was less dependent on iTune affiliate fees, but that’s business nitpicking. As a consumer, I like it plenty. Plus their free iPhone app rocks (and is reportedly the most popular iPhone app of all).

• iTunes itself is promoting discovery with Genius — it’s fine recommendation engine. It badly needs a new name, since Apple uses Genius to describe the geek squad toiling in the rear of every store. The problem with recommendation engines is that they only work while you are shopping.

The power of music discovery became clear to me last night. While working on a laptop at Starbucks, I listened to the stream of music that they play into all of their stores. Most stores also have a flat screen to display the name of the musician they are currently playing. One song caught my attention because it had the sort of complex, poetic lyrics favored by the songwriters who have long rocked my world: Bob Dylan, Bruce Springsteen, and Tom Waits.

I looked up at the screen and saw the name Josh Ritter. An instant later I had him on the laptop, watching him do last week’s Letterman show on YouTube. Within five minutes I had reviewed his bio (early thirties; son of two neuroscientists from Idaho), caught the editorial by the Amazon writer who was as blown away as I was (“…the best album of 2007, hands down, by the most under-accorded American musical genius…today’s Bruce Springsteen, today’s Bob Dylan….), perused his lyrics (phenomenal), and looked up his concert schedule (Feb 26 at the Great American Music Hall). I had work to finish, but later that night I checked out more tracks (see this or this).

I have yet to spend a nickel on the guy. But thanks to the emerging technology of music discovery, I found an amazing musician on a tiny label when I wasn’t even looking.

Discovery turns out to be a cousin of search. Search is how you find information, media, people, or experiences that you know you want. Discovery is when you find these things without knowing in advance that you want them. At best (as happened to me), the web helps you discover things even when you are not on a website.

The technology of discovery starts with your demographics and makes statistical inferences about what people like you typically like, it starts with your known shopping habits and uses that to help you discover stuff, or it starts with your keywords as a representation of your desires and intentions and goes from there. (Does Google save every search term you have ever used? Yep — along with your email and documents if you let them).

Getting discovery right is not simple — but the rewards to companies like Apple, Amazon, and Google (and potentially Starbucks) are huge.

As for Josh Ritter — check him out on Letterman.

Share/Bookmark

My iPhone has been taking over my brain — or at least the digital part of it. When I first got the device, I’d guess that 10% of my online time was on the iPhone and 90% on a computer. Now it is more like 40-60 with parity in sight. On short trips, I rarely pack a notebook — the iPhone is more useful and more reliable. Clearly the iPhone is achieving its goal of becoming computing platform comparable to the PC itself.

Why is this happening and what does it mean?

It’s easy to discount the tiresome visionaries who claim that cell phones will supplant desktops. After all, who wants to work on a tiny screen? But cellular computing gained credibility a decade ago when Blackberry introduced a PDA with robust desktop synchronization. Suddenly mobile apps were not simply small versions of the real thing — they were better for being mobile.

The iPhone was a quantum leap because it does so many things well. No other device to date combines a phone, PDA functions, internet browsing, gaming, media, and location specific tasks. Google’s Android and Blackberry itself, are now trying to catch up — and they surely will.

If all cell phones acquire this capability, it will be revolutionary. After all,  humans buy more than a billion cell phones each year, compared with fewer than 300 million computers. If cell phones really can do work previously done on desktop or portable computers (and a lot that was never done on PCs), it has big implications. The iPhone is the first device to make this a realistic possibility.

The iPhone is now arguably better than a Blackberry at the core tasks of syncing email, tasks, contacts, and calendars with the desktop because unlike Blackberries, iPhones are not completely dependent on Microsoft Exchange. Exchange is an expensive and cumbersome technology used by large enterprises with dedicated support staff. Many small and medium sized businesses would love to be rid of Exchange (and two CEOs in the last month have told me that they are getting rid of Exchange and ending support for Blackberries).

The iPhone works great with Exchange, but also with Apple’s MobileMe (still a work in progress),
and with Google applications, which are both free and first rate. Companies now save thousands of dollars and avoid managing an Exchange server
by using Google apps with Nuevasync  (a free service that technically runs on Exchange, but that’s a
technicality the user never sees) or tools like Spanning Sync. Mac users can sync Google apps with code provided by Google. So the iPhone is more flexible at core Blackberry functions and at least as strong. On everything else, there is literally no contest.

The list of "everything else" grows bigger every day. These ten thousand independent, downloadable applications make the
iPhone sing. By creating a platform, development and test tools, and
a distribution system, Apple has enabled fantastically rich
applications, much as Microsoft did with the PC three
decades ago. Applications are either free or cheap (almost all under $5). Installation takes 30 seconds.

(Which raises the obvious question: why has Apple resisted
doing this with the Mac? The closed nature of the Mac has always seemed like it reflected Steve Jobs’ worst blind spot — his demand for software control. If Macs had been as open to third party
developers as iPhones (or even as open as the Apple II was), Apple
would not be sitting on 3-4% market share. (HP, to put this in
perspective, sells six computers for each one that Apple sells). Some Jobs fans argue that Apples would not have been Apples in this case. True of course — but would Apple have been a stronger company? The answer is clearly yes — and I expect Apple to make the Mac development environment stronger as a result of their experience with the iPhone).

The iPhone applications (or iPhone optimized websites, which can look
just like applications and launch from the same kind of "desktop" icon) range
from inane to breathtaking. Here are the ones I like the most (to find
them, just search their names in the iPhone app store):

NATIVE APPS that are not PDA applications

• Maps are tied to Google Maps
  and now include real time traffic data, local bus and transit
  connections, and satellite photos. Still waiting for street view photos
  and voice directions, but if I were Garvin or another GPS company, I’d
  be very worried.

• You Tube works brilliantly when you have a
  3G or WiFi connection. Want to
  show the relatives a home movie? Show a quick demo over lunch? Preview a movie? You got it
  – free.

• iTunes lets you
  can buy music wirelessly and now features Genius — a recommendation engine. There are better music recommendation
  technologies out there, but it doesn’t matter: recommendations are like
  hand grenades. Close is close enough. 

• Clocks – OK, it’s a clock.
  How hard is that? But you don’t ever need to reset it when you travel,
  it handles alarms, global time zones, stopwatch, and a countdown timer all in a single app with a consistent interface. Lovely.

• Notes — it’s a notepad.
  I did not use mine
  for months, but once I started, it find that it fills all kinds of small needs.

NEW CORE APPS  these are as indispensable to me as Calendar, eMail, the phone, and the browser.

• Google now comes with voice search that takes your breath away. Say "recipe for butternut squash soup", "weather in Ontario, Canada", or "biography of Francis Perkins" and there it is. Fast, accurate, and easy to use. A complete stunner.

• 
  Remember the Milk is for my
  money the final word in task lists. Built by two Ozzies with a sense of
  humour, the application is very smart and the award-winning iPhone implementation is fantastic. You can share or tag tasks, add notes, and
  easily modify the system to fit Franklin, Getting Things Done, or other
  personal productivity fetishes. These are highly personal applications,
  but most people who try RTM never go back.

NEWS you can read newspapers or news services easily from iPhones. Best news apps are:

• Sites optimized for the iPhone including the Washington Post, Slate, the Los Angeles Times, CNN, MSNBC, Salon, and the Wall St. Journal (which has so far neglected to create a home page logo. What’s with that, guys?). These sites are fast, well laid out, and stable. Save them to your screen and you can create a highly useful page of news links.

• Bloomberg is the best news app for my money. Fast, fair, and financial. Reuters has a news app called Mobile News that ties for #2 with
  The New York Times news app. The NYT app is generally good, but prone to crashes. A lot like the Times itself.

• KPCC if you occasionally
  need live NPR radio (as I did if I was doing things during the
  presidential debates, for example), this streamed feed from Pasadena
  City College does the job. You have to put up with occasional
  reports of Los Angeles traffic accidents, but mostly it is NPR.

• Stitcher if you missed your Car Talk, Ira Glass, or Terry Gross, here is your fix. Stitcher
  lets you stream the podcast of popular radio shows the day after they air.

INFO SEARCH a lot of this is handled by the Google app referenced above, but if your needs are more specialized, check out

• Wikipanion gives you a iPhone
  optimized feed of Wikipedia. Great for settling those dinner table
  disputes about whether periodic table inventor Dmitri Mendeleev was ugly (yes) or a
  bigamist (also yes). Less helpful in determining whether his table is an invention or a discovery (debate among yourselves).

• White Pages is great for finding nearby stores, old girlfriends, or long lost cousins. (OK,
  you don’t use it a lot, but when you need it’s great). If you just want
  commercial listings, there are fine Yellow Pages apps as well.

• BART is for Bay Area
  residents, but they have these for a lot of cities. Find out the
  transit schedule, real time. Like a pocket on a shirt — so handy you
  forget it’s there.

RESERVATIONS seriously useful tools

• Open Table you want Italian for 4 at 7:30 in Portland? Open Table tells you who can guarantee you a seat and with a click, you have a reservation. A fine implementation of their normal site, which is great. I like the company, too.

• Flixster find out what is
  playing at your local theatre, read the reviews, watch the trailer, and
  reserve your tickets. Slick as a whistle, my dad woulda said.

UTILITIES small tools that make things work

• Air Sharing. Carry files with you without using a thumb drive and sync over the air. Works fine.

• Stanza is an e-book reader and a fine one. Reading on a iPhone is NOT difficult — set the type up the way you like it, make the font as big as you like, load the book or magazine, and go. Landscape or profile.

I would strongly urge Apple to invest in this by adding books and magazines to iTunes. Amazon’s Kindle is a great idea — but it is not a great device. With the iPhone’s huge installed base, publishers would run to list with Apple and Jobs could price books at $7.99 without hurting either publishers or authors.

SHOPPING technically, you can use an iPhone to shop on any website. But some sites make it very easy.

• Amazon has long had an optimized web site. Now they have an application, which works great.

• eBay works fine, although eBay itself is dragging a bit these days.

• CraigsMobile is a decent Craigslist tool, even if Craigslist itself is hit or miss.

GAMES depending on how you are wired, some of these will suck an hour out of your brain late at night. Personal favorites:

• Black and white. It’s Othello or Reversi ("minute to learn, lifetime to master"). The medium setting plays harder than the hard setting. The real game is to infer the rules it is using.

• Hearts great, since it gives you morons to play against so you usually win.

• Freecell long regarded as a thinking-person’s solitaire, this is a good example of a game that psychologists say scratches our itch for order.

• Chess not so great, since it kicks my butt unless I beg it not to. Caissa (pictured below) is very strong, but there are others.

• Wurdle. A strange and occasionally irritating word game. My wife is a Wurdle junkie, so we compete.
  At the moment her best of 3,000 points in two minutes beats my 2880.

WEIRD FUN this is a category that
the iPhone owns. Often takes advantage of the accelerometer, graphics,
and location tools in unusual ways.

• 
  Koi pond is zen hypnosis. Feed your fish, enjoy the sounds, recite your mantras…

• Ocarina is zen music. Turns
  your phone into an eery musical instrument. And lets you listen to someone up late in New Zealand or Tel Aviv playing his or her Ocarina live. May be
  the single most creative iPhone app.

• Coin flip lets you toss a
  coin. Pick the state quarter of your choosing. And decide exactly how
  fair the toss should be. You have to admire applications like this or
  Fake Phone call that build in the cheating right in. 

• Flashlight. I’m in a dark taxi and I hear my pen drop. Fire up the flashlight and find the pen. Can your phone do that?

• Face melter you mess with me, I melt your face. Or a photo of it anyway. Kids love this. Actually, I love it too.

• Facebook is a solution in
  search of a problem — and the solution has come to the iPhone. My wife
  asks "who is that extremely attractive French woman asking to be your friend?" Wish I knew…

• Pandora is an Oakland-based company that classifies music and so can play you more of
  what you like. Great product but not a great business. Cool if you want the Bob Dylan or Mark Knopfler
  channel, for example.

There great stuff coming, including an app that lets you photograph a bar code with the
iPhone’s modest camera — it then finds the lowest prices for that product in your area. There are thousands of specialized apps and games that I haven’t tried. And I
am sure that you have apps on your iPhone that I would like a lot.

The
point is that the iPhone has become an amazingly useful device. Once you
have one, you find yourself using it more and more (this might be a
good time to thank Dennis, the Jet Blue pilot who retrieved my iPhone
from TSA last week).

iPhone apps have created a new economic model for developers and
consumers. Most apps are either free or cost less than $5. There are
developers supporting themselves on these apps and at least one venture
fund (by the folks at Kleiner Perkins) set up to fund apps. Not sure
about the fund, but as a consumer, I could not be happier.(OK, cut and paste, a more stable browser, and a pop out keyboard would make me even happier). 

Android will keep Apple honest and give developers another platform to
build for. Perhaps Apple will own the premium "prosumer" market and Google the
lower end — hard to say. So long as Eric Schmidt is on the Apple
Board and Google keeps favoring Macs with their tools (note the sync discussion above), they are not competing head to head.

The iPhone, along with killer hardware and good interoperability with
PCs, is pulling consumers into Macs. Apple is the fastest growing
domestic vendor of computers, averaging 50% growth in an industry
growing at less than 15% by units. Only Taiwan’s Acer is growing
faster, and that is because PCs are increasingly a commodity. One evening on a
shopping street in Los Angeles this week, the fashion clothing stores,
the kitchen stores, and the bookstores were empty. The Apple store
was packed shoulder to shoulder, with lines behind every computer and every
cashier. At 6-8 times cash flow, Apple stock looks really cheap
right now.

But markets aside, this thing is infecting my brain. Has it got yours?

Share/Bookmark