On September 7, Amazon relented and made a deal to pay sales taxes on shipments to California (no doubt the trenchant analysis that follows persuaded them to do the right thing). For details of the deal see http://goo.gl/kNwjQ.

Now every other state in America needs to make a deal with Amazon — even if they have fewer than California’s 10% of the population. This reinforces the need for Congress to enact a cross-border VAT and to rebate 100% of the funds to the state to which the product ships.

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Amazon’s refusal to collect sales taxes is bad for the company’s reputation, bad for honest retailers, and bad for state governments. Six states have taken modest steps to level the tax playing field, causing Amazon to respond with a business, political, and legal offensive to protect its tax-avoidance strategy. The first battleground will be California, where Amazon and national retailers will fight a very expensive ballot initiative. Longer term however, Congress should close the unintended sales tax loophole created by Article I of the US Constitution.

One-click Tax Evasion?

Unlike almost every modern country, the US has never had a national sales tax. Most states tax sales within their state but are rightly prevented by the Constitution from taxing out of state transactions. Amazon has turned this important limit on state tax authority into a major piece of its business model. Unfortunately, a smart tactic is becoming a stupid strategy. Congress needs to level its head — and then level the playing field.

From its first day of business, Amazon.com has taken extraordinary measures to avoid collecting sales taxes. It locates distribution centers in low population states to minimize the number of customers for whom it must collect sales taxes. It builds complex software to ensure that every possible product ships across state lines so that customers have no tax obligation. It puts engineers and logisticians to work in shell corporations even if they work on Amazon’s retail website just to avoid creating “taxable nexus” — which obligate Amazon to collect sales taxes. It hires legions of attorneys to minimize and manage the inevitable tax claims. When states like Texas attempt to collect taxes, Amazon retaliates by closing facilities and filing f-you lawsuits. When states declare that Amazon’s hundreds of thousands of third party sellers and affiliates amount to a physical presence in the state, Amazon simply closes the programs — as it did last week in California. Today Amazon went even further: they filed a state ballot initiative in California that will let Californians vote on whether or not to pay sales taxes on third party purchases. National retailers are gearing up for a mammoth fight.

California Turns Green

Amazon is now America’s Number One Tax Evader. The company says that if you buy Hot Freddy’s Thai Salsa from a Los Angeles seller on Amazon, the sales taxes on the transaction are for you and Fred and the state to sort out. Unlike the corner grocery store, they won’t collect these taxes. Nobody disputes that Fred owes taxes on his sales to Californians, but Amazon says that collecting them is Fred’s job, not theirs. Since, as a practical matter, it costs California more to chase Fred than it is worth, Amazon’s policy needlessly costs California tax revenues and denies Californians badly needed public services.

So California sensibly joined five other states that require Amazon to collect sales taxes on the intrastate sales of third party sellers. The law goes further, and declares that third party sellers or affiliates (sites that earn commissions on traffic they send Amazon) constitute taxable nexus — as do subsidiaries. Jerry Brown signed the measure into law on June 30, whereupon Amazon immediately notified all California third party sellers and affiliates that they were discontinuing their program.

Amazon has built its business model around a court decision. In 1992, the Supreme Court ruled  in Quill Corporation v. North Dakota that a state can compel a company to collect taxes only if they have a physical presence, or a nexus, in the state. Absent nexus, the court held that online retailers and mail-order companies can sell products across state lines without collecting the tax. This decision reflects the current law and our national architecture as a republic formed in an era when very few goods were traded across state lines. It also reflects an odd twist in the way the US collects sales taxes: by taxing transactions based on where the seller does business not based on where the buyer lives, we effectively tax selling, not buying. In old fashioned Main Street America it doesn’t matter: every sale is local. But the rise of mail order and online retail meant that our peculiar approach created a giant loophole. I am aware of no other country that makes this mistake.

Your sales taxes have arrived...

The cost of this loophole is huge. According to the New York Times, “The state Board of Equalization, California’s tax collector, estimates the unpaid taxes at $1.15 billion in the last fiscal year, and estimates it will grow to almost $1.2 billion this year and $1.27 billion in 2012.”. For California, this is roughly the size of the state’s cuts to higher education. Not all of these taxes would have been collected by Amazon, but as the largest retail site in the world and the most aggressive defender of the interstate shipping loophole, they symbolize the problem.

Six states, including California, Texas, and Illinois, have now demanded that Amazon collect taxes based on the existence of third party sellers in their state. In each case, Amazon has killed third party and affiliate sales rather than comply. More states are likely to follow. Jeff Bezos has become an outspoken opponent of any move by states to cooperate on taxing cross-border sales and opposes any effort by Congress to resolve the issue. Amazon collects sales tax in only five states — Kansas, Kentucky, New York, North Dakota and Washington — where it has offices or another physical presence (and it suing New York). To avoid collecting taxes in several other states, it simply operates warehouses as subsidiaries which do not sell anything and are not subject to sales taxes. In California, Amazon hires engineers under the name of A9, its search subsidiary, and Lab 129, which digitizes books for the Kindle. In fact, these engineers all contribute directly to Amazon.com retail sales. Amazon does not even operate a search business in California or anywhere else and 100% of Kindle sales take place on Amazon — but Amazon is fighting for its right to use state resources without helping pay for them. A9 hires Silicon Valley engineers but argues that it creates no taxable nexus because it is a separate company and not itself a retailer. The new law makes this impossible. Amazon, of course, is suing.

Once upon a time, policymakers justified online sales tax exemptions on the grounds that e-commerce was an “infant industry” entitled to a break. The infant is now grown: online sales are now almost $200 billion. Soon, a majority of all media (books, movies, music, games) will be purchased online and the online share of many other retail categories will exceed 20%.

Amazon’s policy is narrow and short-sighted. Instead of building a finely tuned sales tax evasion machine, they should help shape a level playing field. Instead of crippling the tax base of states, they should lobby Congress for a national tax on interstate sales. This tax would only apply to goods shipped across state lines — something the commerce clause clearly lets Congress legislate. The taxes would be collected federally but rebated to states according to the ship to address. This would be the first step in rationalizing consumption taxes to actually tax buyers instead of sellers. Amazon could ask for two tax exemptions: for downloaded digital media because it is essentially a service — you cannot resell digital goods as property. Second hand items would be exempt, as they are in many states already, on the grounds that they were taxed once already.

Amazon is not going to do this, so citizens should. We could design the interstate tax as an education tax to build political support. Of course, any such measure would require Congressional tax leadership, a complete oxymoron at the moment. Amazon has effectively made a large business bet that Congress will be unwilling to enact a national consumption tax. But if national retailers and states combine to lobby Congress for a national sales tax on goods shipped across state lines, they have a powerful argument leveling the playing field and closing the loopholes that Amazon has invested far too much IQ figuring out how to exploit.

Besides, Amazon does not need a tax advantage in order to succeed. The company has a built a powerful brand by offering customers a great selection, a fine shopping experience, convenience, and low prices. The low prices are not simply the result of not charging taxes — they are the result of a much more efficient delivery system. Amazon has overhead that is radically lower than retailers like Home Depot, Barnes & Noble, or Sears. Amazon customers are not going to stop shopping online because they have to pay the same sales tax they would pay at the local store. With public pressure for Congressional leadership, Amazon will quickly figure out that the cost of collecting sales taxes is trivial relative to the cost of being branded the nation’s number one tax evader. If ever there were a time for retailers to organize a campaign to boycott Amazon, it is now. Independent booksellers should be especially easy to mobilize, since most are terminally ill and have nothing to lose.

Amazon is is rightly admired by consumers, investors, and business partners. It is suicidal for them to risk this reputation by becoming a poster child for tax evasion. With states struggling to finance basic health and education services and tens of billions of revenue dollars now at stake, Amazon should send a message that it is a public-spirited brand.  It owes us, and itself, a much higher standard of corporate citizenship.

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During the past two months, I have helped three technology startups raise early stage growth capital and casually advised several others. Each business is in a completely different market: mobile, pharma, cloud computing, crowdsourcing, global communications, etc. Each has unique strengths and weaknesses. The entrepreneurs have wildly different backgrounds and personal qualities.

Not all have completed their funding, but in the process each team has learned similar lessons in how best to approach outside investors (investments from friends, family, and fools doesn’t count. They apply different criteria.) Although I managed to raise tens of millions of dollars for early stage businesses, mainly Alibris, I have personally made most of the mistakes listed here and I have made some of them more than once. Nor is this list particularly unique: investors and experienced entrepreneurs write about them all the time.

So here is my list of the top ten mistakes that entrepreneurs make when they try to raise money from outside investors:

1. No story.  Entrepreneurs try to convince investors that they have a winning business – but investors have no idea which businesses will really work. It’s just too complicated. So investors do what human brains are wired to do when confronted with bewildering complexity: they listen for a coherent story. They listen for a particular kind of story that nearly always has three parts: a strong team that achieves impressive traction solving a big problem. These may be called Team has Traction on Trouble or Management has Momentum in a big Market, but to sell your company, you need to tell your version of this story.

2. No pain. Gill Cogan is a savvy financier, a friend, and a former investor of mine. I once pitched a business to him and after ten minutes, he smiled and said, “that’s what we call a vitamin business.” He explained that people often skip their vitamins – but they never skip their painkillers. Investors prefer a painkiller business. Or as another VC put it “what I really like is a tourniquet business”. A solution to a problem that is acutely felt can grow rapidly. A solution to a minor problem may not be a market at all, even if the problem is widespread. VCs do not fund vitamin businesses.

The flip side of no pain is, of course, no gain. More than anything else, investors want to back companies in huge or potentially huge markets. This leads to herd investing: everyone piles into mobile, cloud computing, or gaming. This is why venture investing has always been a fashion business. This looks irrational, but it makes perfect sense even if it kills the Phoenix. To start with, the cost and risk of investing in any startup is high and approximately constant, so why not focus on companies with huge upside? Moreover, fast growing markets put a lot of wind at a startup’s back, which makes errors much less costly. Investors understand what Google’s Eric Schmidt means when he says “rising revenues solves all problems” — so they back companies where explosive revenue growth is most likely. These are markets that solve big problems or capture huge opportunities.

3. No hub. You live in the wrong place. Capital is highly mobile, but capitalists and startup infrastructure are not. They live in Silicon Valley, Boston, and New York and more importantly, so do the entrepreneurs, technologists, researchers, startup attorneys, talented marketing types, engineers, specialized commercial banks, vendors, mentors, and much else. You can raise venture money in Austin, Charlotte, Seattle, LA, Portland, Chicago and a few other places – although investor quality drops precipitously outside of the major hubs. (If you care why and how this occurs and where is it all going, Google AnnaLee Saxenian – a leading scholar on this topic and a fantastic wife to boot). You may be able to raise money if you are not in a place with active venture or angel investors (several companies have, of course) but it’s tougher. If you live outside a funding hub and are serious about building a technology company, it often helps to relocate.

4. No traction. Your company has an idea but no product or service. Or it has a product but no customers. As Babak Nivi and Naval Ravikant, two well known investors behind the indispensable site VentureHacks, like to say, “traction speaks louder than words”.

You believe that you have invented a revolutionary new dog food that will quickly disrupt the market. Investors cannot possibly figure out if it is really better, so they look for a metric that is rising rapidly up and to the right – often by 20%/month. Any metric that shows rapidly growing engagement will do. Profit is ideal (if profits are growing fast, you can always raise money — although you may not need to). Revenue growth is next best, even if it is from a tiny base. Next best after that is growth in accounts, beta customers, users, or page views. Worst case, show videos of dogs wagging their tails and survey data from dog owners excited about your products. If you don’t have any signs of traction, you don’t have something that people appear to want. You don’t yet have a business.

As important as traction, is an understanding of why you achieved it and why it will continue. Are users engaging other users? What are your viral metrics? Are large companies buying? Why are they trusting a startup? Are customers buying? What are you offering that others cannot and how do you know? Real data about traffic, conversion, average transaction size, repeat rates, defections, costs, margins, etc. begin to paint a clear picture to investors. Ideas about what you hope will happen are simply no substitute.

5. No team. You love your team, but it may not be financable. Most investors back teams with a combination of proven business and technical experience. Why? A VC who was ex Air Force used to say, “backing entrepreneurs is like picking a pilot for an F-15. I favor the guy who has already crashed one, because he or she really doesn’t want to see that happen again”.  Or more commonly: “we know that good judgment comes from experience – and that experience comes from bad judgment”.

This may seem like a Catch-22, but it is rational. Recent research concluded that a venture-capital-backed entrepreneur who succeeds in a venture has a 30% chance of succeeding in his next venture. By contrast, first-time entrepreneurs have only an 18% chance of succeeding and entrepreneurs who previously failed have a 20% chance of succeeding.” The solution? Recruit a co-founder with the skills your team lacks. It does not substitute for product/market traction – but many investors will recognize that your ability to attract talented people is a form of traction.

By the way, there is one glaring sign of a weak team and I see it a lot: relatives in the company, especially on the founding team. Husbands and wives, fathers and sons, brothers and sisters, and couples of all sorts. It is rare that the weaker of these individuals would have been hired in a dispassionate search. Having your relatives in the company, especially a spouse, is a great way to signal investors that you are not determined to hire the very best.

6. Lousy communications. A lot has been written about this. Usually what gets called a communication problem is really a business problem. Bad communication is frequently a sign of bad thinking. But there is one communication problem that is chronic to entrepreneurs: over-communicating. You know too much about your business and in early stage conversations, your knowledge is a liability.

The solution is to prepare three sharply focused business summaries: a 15 word “big idea”, a 15 second elevator pitch, and a 15 slide funding pitch. The big idea is the subject line of the email that your trusted intermediary sends the VC. If they were helping you pitch YouTube in 2005, it might have said “Flickr for videos”. If you were pitching Alibris in 1997, it might have said “find millions of out of print books in one online store”. It is not a consumer-facing tag line, it is the cocktail party handle that people will use to describe your business.

The elevator pitch is the most important and most overlooked. Intermediaries who introduce you to investors will use this in the body of their email. You will use it to describe in a few sentences what problem you solve and what traction you are achieving. Bonus points if you can also fluff the team. Marc Andreesen, were he someone who needed money, might have pitched Ning in 2007 by asserting, “Social networks are an amazing, powerful medium. Ning lets any group build it’s own private social network. We recruited a first rate team, we are hosting more than 100,000 user-created networks, and we are growing at 10% per week.” Boom. Hold the elevator – I want to hear more.

Attached to the introductory email is either the 15 page pitch or a one page summary. Either can work. Do not prepare the pitch from scratch — follow a proven recipe like the excellent ones outlined here, here, here, or here. 15 pages, 15 minutes, 30-point type. It  is hard to over communicate in 30-point type.

There are three things that you should not communicate to an investor. Do not show them secrets. Investors share ideas — that’s often how good ideas germinate. They will share yours. Don’t show them an NDA — they won’t sign it. And don’t show them a business plan. You may want a business plan to force yourself to think through your operations and to have something to use to build a founding team, to brief a board member, or to attract talented leaders. But a business plan will not help you raise money because investors won’t read it and they shouldn’t.

7.  High burn. You have ten employees working for cash, nice offices, no product, and no customers. There are PR and law firms on retainer. You are burning faster than you are learning. Remember this: investors are not looking for companies that need money. They look for companies that will succeed whether the investor commits or not. Raising equity is like borrowing: quite often, the more desperately you need money, the less likely you are to get it. If this is you, take heart: you are unlikely, no matter how hard you try, to violate this rule more than I have.

To state the obvious: any business without revenue has to run very lean, even if they start with a million dollars of 3F seed money. You are still trying to fit your product to the market. You are testing, tweaking, selling, and learning. For most web-based businesses, you don’t need titles; you need one or two people who can sell and small team that can build. Pay is low – everyone works long hours for a bunch of stock. As one investor memorably put it, “an early stage business runs like a one story whorehouse: no fucking overhead”.

8.  No cred. Experienced investors listen for a team that shares the details about what it has built. They listen for specific milestones that reflect customer needs met. Weak teams spend more time talking about future plans – their unproven ideas about where to go next. Talk about traction, engagement, measurable progress both in your current business and in past ones. If you worked at a brand name company or went to a brand name school, mention it – but focus on what members of your team have built. You are trying to build a business, so your record of what you have built gives your team credibility.

9.  No insight into sales or distribution. Early stage companies often don’t know what they don’t know about sales or distribution. This is understandable because early stage companies are obsessed with building a product or a service to fit a market. Achieving product/market fit, or traction, or engagement is hard, critically important work. When it finally happens, it is like a deep sea fish striking your baited line – customers start pulling the product from your hands. You know it instantly (recall the crazy moment in the Social Network where Facebook suddenly goes viral at Harvard).  Getting to this point is the obsession of every startup team. As a result, most are not yet obsessing about sales and distribution.

But they will. Sales and distribution challenges vary all over the map, but most in most companies there are large learning curves and scale effects. Your customer acquisition costs drop as you get bigger and smarter. But in the beginning, you don’t really know how much it costs to acquire customers. The number is likely to be much bigger than you imagined. Which means you can burn through a lot more cash in year one than you expected to.

Put another way, traction can be a trap because it leads entrepreneurs to try to get as much capital as possible out of their growth. This is completely backwards. The point of starting a company is to get as much growth as possible out of your capital.

10. No lawyers. Entrepreneurs, with rare exception, did not go to law school or if they did, they did not pass the bar and become lawyers. New entrepreneurs often dislike lawyers – but they quickly learn that good lawyers matter. A lot.

Once investors are shareholders, their interests are substantially aligned with yours. Until they are shareholders however, the economic interest of an entrepreneur and an investor are opposed. Investors want to buy low; entrepreneurs want to sell high. And the terms, which can be bewildering to a new entrepreneur, matter a lot (as many a VC has said, “you can set the price, if I can set the terms”. They mean it.) In this situation, an entrepreneur needs legal counsel at least as competent as that enjoyed by investors. Day to day, a low cost lawyer is fine. For a major financing however, get a good lawyer who does startup financings for a living.

That’s my list of ten common errors. It is not comprehensive: you could no doubt put together a list of ten others. Nor is it universally right: every generalization has exceptions, including this one. And avoiding these mistakes is no guarantee that you will attract an investor. In raising money, most entrepreneurs kiss a lot of frogs before they find a prince. Then again, so do investors.

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I embed Jobs’ fascinating talk above. As usual, it is a tour de force. Jobs proves himself constitutionally incapable of touting a company line. When Apple is messing up, he says so. When he disagrees with management, he says so. When he is being outvoted on something, he complains. He has just been invited back in to Apple and is a consultant — but he respectfully and happily disses executives, managers, and product developers. He announces that some of them have done nothing in years. Several times he lays out an alternative path before noting wistfully that “it’s not my decision”.

Second, he describes his vision of the future. At about 14 minutes, he discloses that whether he is at Pixar, at home, or at work, he never loses a file, has the wrong version, or even has to back them up because Apple has a large server that replicates his content immediately, so he always has the current file.

When asked about Newton, the underwhelming Apple PDA, he comments on the impossibility of supporting three operating systems, noting that two (back then Rhapsody and AppleTalk) was an enormous job. Then he acknowledges that the device isn’t helpful because it has no keyboard and is not connected. “Who wants to use a little scribbly stylus? I don’t. ” If it were connected and had a keyboard, I’d use it in a heartbeat and I would not care what operating system it used.”

This week, Jobs gave the 2011 World Wide Developer Conference keynote and he finally brought this vision to market. Processors are now fast enough, storage now cheap enough, mobile bandwidth now high enough, and the Apple mobile ecosystem now developed enough that he could launch iCloud. It is the foundation of a unique and consistent vision of cloud computing that is quite different from Amazon or Google’s.

It is also the last major piece of the Apple puzzle. The company will continue to innovate and is likely to become very large — but the boundaries of the business are now clearly set. For years we have seen Apple expand its boundaries: an MP3 player, a phone, a tablet. Restructure every media business: music, movies, books, periodicals, and games. Cloud integration is the last piece of this vision, which is why your grandchildren will recognize today’s Apple.

Apple wants to use the cloud differently than Amazon or Google, mostly by keeping it invisible. Amazon EC2 sells cloud services that let you can host your applications or content on cloud servers. Google serves you apps that are cloud hosted, so you can use them with a browser any time you are connected. Apple wants the cloud in the operating system, under the hood, and out of the way. To use the new tag line introduced at WWDC, it should “just work”. 

Apple has rewritten core apps with instant content replication built in. Note that it is never called synchronization or replication. Content is available everywhere, but never called content. Your music, photos, documents, presentations, or spreadsheets are not even called files — indeed Apple has rejected the whole idea of a file system in favor of devices connected to the cloud. A cloud is “much more than a hard disk in the sky” because “the truth is always in the cloud” and because you need pay it no attention at all.

It is, once again, an audacious vision. Among other things, it deprecates computers to mere devices — peers of tablets and phones. It also means that your Macs, iPad, and iPhone will soon become impossible to steal because they are joined at the cloud. As a result, every owner could brick then locate a stolen device. (You can do this today with software like Hidden, which helps people recover stolen computers by taking photos and screenshots of the bad guy. Local news reported a hysterical local example here). Like every major operating system upgrade– especially one that supports a revolutionary change in computing architecture, it  makes certain products and companies obsolete (Dropbox and Sugar Sync had a bad week — as did Instapaper). 

iCloud is the last piece of the vision Jobs brought to the company starting in 1997. The company will continue to grow geographically. It will continue to bring out innovative new products, including, one hopes, a giant flat screen TV, which is really just a large monitor. Software will improve forever and new books, music, movies, games, and magazines will always educate and entertain. Apple will acquire and integrate a few other companies including, hopefully, Netflix and Twitter.

But all of these activities will be coloring in the business that Jobs has now fully outlined. Jobs has been pushing new boundaries for Apple since he rejoined in 1997. With iCloud, the outline is complete and, in a profound way, Steve’s work is done.

Jobs did not look fantastic in his talk — but his trademark audacity was everywhere on display. He really would have made a good King of France, or even a revolutionary Danton (“De l’audace. Encore de l’audace. Et toujours de l’audace.”) Clearly he is suffering the effects of the Whipple procedure that saved his life from pancreatic cancer. Hopefully he has many productive years ahead of him. But even if he doesn’t, he can retire knowing that his vision, on display for many, many years, has given the world delightful products, a valuable company, and an exemplary and powerful brand. That Jobs has done this in multiple industries is inspiring. Reality distortion field or no, I feel lucky to be on the same planet as this guy.

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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.

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For good reason, California never shared my enthusiasm. Diesel engines coughed up a lot of particulate, which ended up suspended over Los Angeles, especially near the ports, where hundreds of trucks would idle for hours waiting to load and unload. In many areas, including Oakland, asthma rates near the port skyrocketed.

Europe didn’t mind a bit of soot. Partly because Rudolf Diesel was European, (born in France to German parents who fled to England) diesel was very well established in Europe by WWII, a war fought almost entirely with diesel engines on the ground, air, and seas. 

After the war, European cities often stank of diesel fumes from trucks, trains, and cars. Diesel is significantly cheaper to refine than gasoline (although the economics of limited distribution means it often costs no less in the US).

Soon the EU required that cars with engines bigger than two liters of displacement run on diesel. Today 60% of all cars in Europe are diesel, compared with 5% in the US. Over time, the EU forced diesel to clean up its act — reducing permitted particulate from 50ppm to 10ppm since the 1980s. The forthcoming Euro 6 standard meets California emission standards, which are among the highest in the world. Diesels in both the EU and the US now burn almost exclusively ultra low sulfur diesel and unlike clean coal, clean diesel is actually very clean.

The result of our different histories makes a visit to Europe torturous for American dieselheads. The roads are full of practical, attractively priced German and even French and Italian diesels. The BMW 520d, for example, is a spacious sedan or wagon that gets better gas mileage than a Toyota Prius — more than 50 miles per gallon. But you cannot buy a 520d in the US — only a 335d, which is a smaller car with a racer’s engine. Any Series 5 BMW sold in the US gets half the mileage of a 520d — if it is going downhill with a stiff tailwind.

To date, German carmakers have introduced diesel into the US only for vehicles that are either very big or very small. BMW carries the compact 335d and its SUVs; Mercedes offers the E320 or an SUV for about the same $60k price. Both have cramped rear seating and are chock full of fiddly gadgets that cost a lot to fix (heated windshield water for your rain-detecting wipers, anyone?). Audi sells the miniscule A3 in diesel as well as the overpowered Q7 SUV. 

Which leaves Volkswagen, Audi’s parent and my favorite car company. Most people know that Volkswagen was founded during the Third Reich. Fewer people know is that it was the Nazi trade union, the German Labor Front that developed plans for an affordable car and pressed Adolf Hitler to back it. At a time when the average German rode motorcycles, not cars, the union persuaded Hitler to sponsor a “Volkswagen” program. Hitler dictated that a “People’s Car” had to be able to carry two adults and three children at 100 km/h.

Hitler also backed an innovative scheme to make the cars affordable. Early VWs cost about 30 weeks income for the average German worker. The program enabled people to buy a VW by saving for it over four years and earning interest, not by borrowing and paying interest. (Germans learned to hate debt when the Wiemar Republic collapsed and hyperinflation helped usher in the Nazis). The slogan, still recalled when I lived in Germany in the late sixties was “Fünf Mark die Woche musst Du sparen, willst Du im eigenen Wagen fahren” — “You must save Five Marks a week if you want to drive your own car”. More than 330,000 people eventually paid into the Volkswagen program (VW reportedly repaid unclaimed deposits after the war).

Hitler built an all new factory for VW in what is now Wolfsburg and chose a famous Mercedes designer, Ferdinand Porsche, to design the car. Porsche and his engineers delivered an air-cooled, flat-four, rear-mounted engine housed in a distinctive round shape vehicle that emerged from his pioneering use of a wind tunnel to reduce aerodynamic drag. Porsche went on, of course, to found a legendary sports car company, which used many VW components over the years. It seemed only fair two years ago, that Porsche bought control of Volkswagen.

By rights, VW should not have survived World War II. It’s factory had been bombed and the Allies limited Germany to rebuilding only 10% of its former car industry (the logic of this was obviously political, not economic).

But Wolfsburg was in the British zone, and the British Major in charge, Ivan Hirst, discovered that much of VW’s machinery had survived the war. Attracted to the car’s clever design, Hirst organized and helped finance the resumption of production. He exported to Britain the first Beetles, as the cars were soon known. Today, Hirst is credited with saving Volkswagen.

By the early 1950s, sales of VWs were growing rapidly in North America and became a symbol of a new Germany. Success was due in part to a new factory in Canada and to the clever and stylish advertising campaigns by Helmut Krone and the upstart New York agency of Doyle, Dane, Bernbach.

By the 1960s and 1970s, VW busses and bugs had become powerful symbols of independence and even dissent for young people who bought the cars in droves. Many of us drove our bugs or buses until the engine died (the #3 cylinder never cooled well and always went first). No matter – you could rebuild the engine yourselfusing a hand illustrated book published by a hippie named John Muir (who took the remarkable step of assuring women that they were up to the task. Many discovered that they were). We developed a strong emotional attachment to Volkswagens that in my case has been reproduced by only one other large company — Apple. I have long suspected that Steve Jobs once owned a VW. 

VW pioneered not only a people’s air-cooled gas engine, they pioneered diesel technology as well. VW has sold more than 50 million vehicles powered by the company’s innovative TDI (Turbocharged Direct Injection) engine. Diesel engines are 30% more efficient than equivalent gas engines and emit fewer greenhouse gases. According to the Environmental Protection Agency, four of the ten most fuel-efficient vehicles available for sale in the U.S. in 2004 were powered by Volkswagen TDI engines.

I vividly recall driving a Passat TDI in Italy for six weeks in 2003, the year that VW introduced diesel engines. The car was fast, strong, and quiet. It got 40 miles/gallon (100km on a little more than 5 liters) even with luggage, kids, and hills. It was a stunning vehicle and nearly a decade later cars with a TDI badge populate every street in Europe and are common in South America, or Asia. 

I began dropping by VW every year or two to see when I could get one. But VW and Audi introduced diesel to the states only in very big cars and very small ones. The Jetta came with a TDI, bu was so small that I had to slouch to fit in it — not great for driving. And with large teenage boys, the back seat was a nonstarter.  

Until this weekend.

When my mechanic advised me that the continually flashing lights meant that my Audi wagon needed more work than it was worth, I paid another visit to VW. Again I tried sitting in the 2010 Jetta TDI Sedan and Sportswagen — a sweet design. I tried lowering the driver’s seat all the way and tipping the seat way back, but my head still smacked hard into the roof. I tested a car without a sunroof — slightly better, but the back seat was a disaster.

Then the sales guy said “instead of the 2010, try the 2011 Jetta – they made it a lot bigger”.

What!? It turns out that VW sized the 2011 Jetta for Yanks. It is 3″ longer and a half inch wider, but it they lowered the seats and made remarkable use of the added space.  (For 2011, the Jetta has to fill in for the Passat, which is being redesigned for assembly in Chattanooga, Tennessee and was just relaunched for 2012).

VW will finally offer the TDI engine, but in the meantime, the 2011, sixth generation Jetta is all grown up. It has a massive trunk and back seat — both bigger than the 2010 Passat, Camry, or Accord. It comes with the same 2.0 TDI engine that got me 40+ miles/gallon while tearing through Italy. And unlike my Audi wagon, VW sells the car with a manual transmission. 

Within 3 days, it was Auf Wiedersehen, Audi. I found a mechanic to hook up a PC and disable the annoying electronic beeps and chirps. Once the Jetta was jailbroken, I re-badged it from “JETTA TDI” to “JEDI” – which is what they shoulda named it anyway.

The force is with this car – and I have not had that reaction to an automobile since I was 18 and drove my first bug. The 2011 Jetta TDI is strong, precise, capacious, and green. The build and the appointments are good but not luxurious (the stripped down gas Jetta is $15,000 car; with TDI and goodies it’s $23k).

Like many of VW’s best sedans, Jetta is named for a wind — in this case the Jet Stream. (the old Sirocco was name for a Mediterranean desert wind, Golf is from Golfstrom or Gulf Stream, and Passat is German for trade wind). 

With an impressive diesel lineup and a new US factory, VW is preparing to confront the hybrid onslaught. They need to find a new Helmut Krone and bring back the ads because for the first time in awhile, Volkswagen has something to shout about.

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NUMBER OF EMPLOYEES WITH COLLEGE DEGREES

What is going on? Conservative economists have pounced: we are educating people for jobs that do not and will not exist. This is obviously a mad subsidy of the education monopolists by precious federal tax dollars.  Well, they may have a point. Why invest in a college education for someone who doesn’t need it? Indeed, if 17 million people have degrees but work in jobs that do not require them, were these individuals not defrauded?

The core of the economic argument is that the marginal value of a college degree and the average value are diverging sharply. On average, college degrees confer better jobs and higher earnings, so public policy and private preferences tend to urge kids towards college. But many perfectly decent (and in some cases perfectly vacant) jobs do not require college degrees. In a recession especially, some of those jobs are filled by people who are overqualified. 

In tighter labor markets however, you might get a different story. You might discover that a fair share of waiters, laborers, janitors, truck drivers, food preparation workers, and hotel desk clerks are recent graduates with no intention of turning their current job into a career. It ain’t evidence, but I held each of these jobs as a college graduate and many others not on the list. It didn’t kill me and probably made me a better leader when those opportunities came my way. Customer Service Reps often move into marketing and other jobs in their company — and there is a strong case that every manager should spend time as a CSR.

You also might learn that college grads hold some of these jobs because, shocking though it will be to economists to learn this, they are not maximizing their earnings. The reason that a quarter of all “Amusement and Recreation Attendants” have college degrees is almost surely that they like working at resorts. The economy is full of surf, ski, and scuba instructors with college degrees. There are days when many of us would gladly trade places with them. Flight attendants may relish an opportunity to travel. Parents may need jobs that give them flexible schedules. In short, the economics of the marginal employment decision may not reflect the average any better than the quality of the marginal college degree does. 

Then there is the question of whether education is an investment or an expensive act of personal consumption. Surely many people think of it as an investment. To the extent they do, professors should worry if returns on educational investments decline and/or the number of investors declines for demographic reasons. On the other hand, it may be that education is actually a consumer good with lasting benefits. Thinking about it this way has benefits. Economists may have trouble measuring it, but most people understand that education may be overconsumed — but it is rarely wasted. 

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Three years ago, I wrote a lengthy post describing Ferguson’s entry into filmmaking, a documentary on the Iraq war called No End in Sight. I disclosed that Charles is a friend and once invested in my company (it was not, I should add, a terrific investment for him). 

Charles became known in Silicon Valley as a difficult personality — a reputation sealed when he took up the pen and published a cri de coeur called High Stakes, No Prisoners.  Ferguson often describes himself as “pathologically direct” and the people he interviews on film soon learn first hand what that means (Charles can be heard off camera saying “forgive me, but that is simply not true” or “you cannot possibly believe that”). 

Although I had little sympathy for most of the people that Ferguson interviews, at some level I understand what they were going through. For a brief period of time a decade ago, I lunched weekly with Ferguson (I lunched; he grilled). A successful software entrepreneur, he at various times advised me to replace my entire board, my entire engineering team (“I would not have hired any of them”), and my VP of Engineering (“Marty, would it kill you to hire someone with a Computer Science degree?”). The problem was not that Charles was irritating — it’s that he was frequently right (or substantially right). Since an honest critic is tough to find, I sucked it up and kept meeting. In truth, I learned a lot.

As the title suggests, Ferguson wrote Inside Job as a heist flick. The movie begins calmly with reflections on a benign and happy Iceland. By the time the opening credits roll however, the pace of the whodunit is rocking, angry, and punitive. The laugh out loud interviews are supplemented by a great sound track, Matt Damon’s excellent narration, and crisp photography often shot at dizzying angles from helicopters. By the end you realize that this really is a movie about bank robbers — except that they paid off the cops and sent taxpayers the bill. At last night’s opening in Berkeley not far from Ferguson’s home, this lucid tale of unprosecuted criminality worked the crowd to a fever pitch. By the final credits, it was not just the local Baptists who were yelling back at the screen. 

Ferguson takes on some new ground by exposing the whores of the financial services industry — both those with PhDs in economics and those who offer high priced sex and cocaine to masters of the universe. In classic muckracking fashion, he interviews a Wall St. madame and a psychiatrist who in each their own way minister to Wall Street’s uncontrolled alpha males. He also skewers academic economists who serve on the boards of investment banks and publish “scholarly” research papers justifying their employer’s larcenous tendencies. Fredric Mishkin, a Federal Reserve governor and Columbia finance professor is revealed to be a complete imbecile. (His attempt at a rebuttal here confirms the verdict; Ferguson responds here). Democrats Laura Tyson and Larry Summers are exposed for making millions on Wall Street while advising policymakers. Harvard’s Glen Hubbard panics amidst his richly earned smackdown and tells Ferguson “you have three minutes left. Take your best shot”. Unfortunately for Hubbard, Ferguson does. 

Without ever becoming didactic, Ferguson uses the film to educate. He tells the comparative tale of Iceland and of EU reforms that resemble Obama’s campaign rhetoric more than our own financial reform bill. He tells the history of Wall Street, noting that Morgan Stanley used to be a small, thinly capitalized partnership consisting of moderately paid professionals who were famously conservative because they came to work each day and risked their own capital. He gets a great story out of financial author Charles Morris about a Wall St. trader in the sixties who had to hold down a second job as a train conductor because the pay was so low!

As often happens with films on a mission, Inside Job occasionally overshoots. It conflates the impact of repealing Glass-Stegall with the impact of broad financial deregulation. It paints mortgage securitization and the resulting derivatives with a very broad brush. (Simple derivatives like futures contracts and even collateralized mortgage obligations do exactly what academic economists say they do: reduce costs and risks. Unregulated derivatives built on uncollateralized securities into indecipherable collections of toxic waste that are misrepresented by banks and mislabled by rating agencies are rather a different story). Ferguson excoriates regulators, but generally ignores the government’s role in promoting subprime lending with easy housing credit, tax deductions, and lax monetary policy. And like most progressives, he treats every ill-considered loan as the result of a predatory lender, not a foolish or innumerate borrower. It’s the economic equivalent of blaming consensual sado-machoism on the sadist when in reality, it takes two to tangle. 

On balance however, Inside Job is highly informative, restrained, and entertaining. Its case against both Democratic and Republican regulators is devastating and infuriating. No End in Sight, Ferguson’s amazing debut film won on the war in Iraq him an Oscar nomination. I expect and strongly hope that Inside Job will earn him the statue. 

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Yesterday Apple crossed $300/share and became the most valuable company in America after Exxon — a company with no future. And I should still buy the stock.

Today, you are reading the first Jam Side Down post ever typed on a Mac. I have switched. You will switch. Nobody switches back. It’s not even that a desktop Mac is so much better than a Windows 7 desktop. It’s that as you move towards smaller, more mobile devices, Apple products are stronger and Windows is somewhere between weak and nonexistent. Microsoft is like GM: it owns the past. 

As an example, check out Atomic Tom. I never heard of them either, but this is one amazing video made with and by iphones and, so far as I know, without support from Apple. Atomic Tom are real musicians as you can see here — but the video, made aboard the New York City B Train, over the Manhattan Bridge into Brooklyn in one take using 7 iPhones leaves me gobsmacked...

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You would assert that like any other kind of pollution, our carbon output represents what economists like to term an externality:  the market fails because the cost of pollution is paid by the public while the benefits of pollution are enjoyed by individual companies. This is a textbook case for the government forcing the polluter to pay for the cost of the cleanup so that the company can make an intelligent decision about the full costs vs benefits of polluting.

For most environmentalists and many economists, putting a price on carbon means placing a tax on gasoline. But honest progressives acknowledge a serious problem: most driving is commuting, which is inversely correlated with income. The less money you make, the further you have to drive to get to work, on average. So a tax on gasoline is highly regressive. Even if gas taxes are made revenue neutral to government by reducing income taxes, the impact is regressive because people with long commutes are penalized more highly. On this debate (to say nothing of conservative opposition to taxes on gas or anything else), carbon taxes have foundered.

Another approach is to tax vehicles, not gasoline. For illustration, assume that this tax is revenue neutral — it generates no new cost or benefit to government. Here is now it might work: 

The annual registration fee of an automobile would be set according to its gas mileage as determined by the EPA. A fuel hog that gets, say, 10MPG might pay $2,000 per year and this number would decline as mileage approached the current state average.

Fuel efficient cars would get a rebate instead of a tax. Drive a Prius, get a check each year for $1,000 (or whatever it works out to after subtracting 2% for administration). The program can be either revenue neutral or it can be revenue generating — each state would decide. 

There are several benefits to taxing cars instead of gas.

• It rewards efficient cars, not short commutes. People with long commutes are no worse off for this tax (and are better off if they buy fuel efficient cars).
• It corresponds more closely to the relevant consumer choice. Consumers typically have much more choice about the vehicle they drive than about the distance they drive it. A tax that influences the choice of a car is thus higher impact than one that taxes gasoline. 
• It affects consumer behavior. A tax that is paid annually rather than weekly at the pump, will tend to have a much larger impact on consumer behavior — especially if auto dealers are required to fully disclose the ten year cost of the tax to potential consumers. A ten  year fee of $20,000 vs a cash credit of $10,000 will steer a lot of buyers towards fuel efficient cars.
• It will force fuel mileage upwards. The tax schedule would be reset each year as more efficient cars came on the market. A car with average mileage and a very low annual registration fee might become a below average efficiency car over a few years. The annual cost of several hundred dollars to register the car will encourage consumers to upgrade to more efficient cars more rapidly.
• It is only a tax if you want it to be — otherwise it is a credit. Many consumers would love to receive a check each year as a reward for driving fuel efficient cars. Gas taxes cannot achieve this.

The efficacy of mileage based registration fees would depend heavily on how steep the penalty is for inefficient cars and correspondingly, how great the reward for efficiency. Optimizing this is something economists are actually fairly good at. My own hunch is that annual fees or credits of $1,000 will influence a great deal of buying behavior.

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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. 

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