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.

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As an earlier post detailed, universities rarely go out of business. This is thanks to the magic of a three part lock that secures their position and protects them from institutional challenge. For centuries, universities have enjoyed the exclusive right to allocate valuable social capital.

• Select talent. There is no evidence at all that Stanford, Harvard, or Berkeley do a better job of training undergraduates than Ohio State, Texas A&M, or the University of Florida. But they select far stronger students. If colleges were assigned students randomly, the value of “elite” degrees would plummet overnight. Harvard delivers 90% of its value the day it admits a student, although the market recognizes the value only when the student graduates. In a previous post, I described an experiment I once proposed to compare students admitted to Harvard Business School who attended with those admitted who did not attend. Others have since confirmed what we all know: Berkeley selects strong students, it does not create them. You aren’t smart because you went to Berkeley; you went to Berkeley because you were a certain kind of smart.

• Credential talent. College degrees confer professional access and mobility. Since mobility is “path dependent” (your current options are constrained by past decisions, even if past circumstances are no longer relevant), it matters enormously what choices a credential opens up for you. Take it from a factory worker who went to Harvard Business School.

• Signal social standing. Signaling is a cousin of credentialing. A credential is a specific signal to the labor market that a person completed a course of study and mastered a body of knowledge. But it is relevant mainly early in a career. The broader social and economic signal conferred by a university degree extends well beyond the time when the details of the course work are forgotten. An honors degree from the University of Maryland confers standing, especially in Baltimore, that extends well beyond the knowledge gained from a degree in European History. There are very few signals of social standing as powerful as a college degree, even though very little evidence suggests that this should be the case. Powerful alumni affiliations reinforce this effect.

It takes decades for universities to establish these privileged positions, which is why, with rare exception, the top decile universities of fifty years ago are the top decile universities today. This is partly due to the place university degrees have come to hold in our culture. It is an unquestioned (but economically threatened) article of faith among middle class families, including mine, that providing children access to higher education is an essential to giving them a full range of life choices. Most people are disinclined to risk their kid’s future on education institutions with highly plausible training programs but unproven power to select, credential, and signal. (Yeah, I’m looking at you Minerva Project).

The paradox is that universities clearly add value (after all, college degree holders earn a million dollars more over their lifetimes than non degree holders and many economists declare it our single most competitive industry) but much of this “value” has nothing to do with learning, which is what employers presumably value. And if the credential cannot communicate what you know, then its signaling effects diminish. More accurate and effective approaches to credentialing and signaling become plausible. As detailed earlier, there are dozens of startups ramping up high quality educational programs that are either free or very low cost. But without credentials accepted by employers, all of the free online courses in the world will not translate into increased economic opportunity for graduates. To make these programs viable, they need a portable credential that is widely accepted by employers but not controlled by universities. Who would devise such a thing?

Universities, of course. As Kevin Carey describes in the current Journal of Higher Education, the future is full of badges, not unlike the ones you earned as a scout. UC Davis, together with The Mozilla Foundation and the MacArthur Foundation is prototyping the development of digital “open badges” that validate “skill, quality, or interest”. Badges would be online and would allow a potential employer to access details of a student’s written work, test results, videos, etc. Open badges would communicate a great deal more than “BA in Economics from Sonoma State”, which is what employers get today. The article failed to record any sense of irony among the rope makers at the University of California.

Under the Mozilla Open Badge framework, a badge “is a symbol or indicator of an accomplishment, skill, quality or interest” used to represent skill or achievement. Badges support a wide variety of learning beyond traditional classrooms including online courses, after-school programs, as well as work and life experiences. Badges not only signal achievement to peers, potential employers, educational institutions and others, but they are a way to recognize and document informal learning as well. Fully developed, badges should help people transfer learning across jobs, industries, and places and portray a richer, more complete profile of an individual’s professionals strengths.

Mozilla expects there to be many types of badges. Some capture specific skills, something traditional degrees do quite poorly. Badges can support specialized and emerging fields that do not yet credential learners. They can document a much larger diversity of skills, social habits, motivations, etc. Badges potentially represent an alternative to traditional degrees as a way to enhance identity and reputation among peers, find peers and mentors with similar interest, formalize camaraderie, teams, and communities of practice that today often form around universities or professional associations.

Open digital badges, unlike the scouting ones, are valuable because of their metadata. They link to videos, documents, or testimonials demonstrating the work that lead to earning the badge. They link to the issuing authority, which can be a school, a professional body, an international credentialing agency, a community of professional practice, a course, or a company. The supporting metadata reduces the risk of gaming and builds in a system of formal or implicit validation. In this system, a digital badge is backed by metadata that explain the badge, the issuer, the issue date, criteria for earning the badge, the earner’s work or evidence behind the badge, and the current validity of the badge, which, unlike a college degree, can be set to expire.

Mozilla is creating an Open Badge Infrastructure to serve as the core technical scaffolding for a badge ecosystem that supports a multitude of issuers, badge earners, and badge displayers. This infrastructure includes the core repositories and management interfaces (each user’s Badge Backpack), as well as specifications required to issue or display badges. Users can build a “Badge Backpack”, which serves as a repository for their digital badge data, accessible only to them, where they can view badges, set privacy controls, create groups, and share badges. Startups like BadgeStack, which gamifies badges, can build OBI compliant sites and award apps.

Open badges are a promising idea and one deserving of investigation by companies, entrepreneurs, universities, and investors. They threaten traditional university credentials because they are:

• Granular. Employers care what you can do; they care relatively little about what you study, except as an indicator of what you can probably do. Badges are likely to reflect specific skills (“architecting social media databases” or “PHP”). Some may complement licensure (“palliative care nursing”) others may document skills in areas where little certification is available today (“Thai cooking” or “cloud-based SQL database administration”).

• Open. To work, badges need an approval process and an ontology that reflects a hierarchy of skills. An licensed vocational nurse may be able to earn a badge in discontinuing intravenous drips, but I’d prefer that the Thai cook obtain his or her LVN certification before tackling this skill. Once these structures and privacy controls are established, the technology for making badges machine readable, searchable, embeddable, and portable is relatively trivial.

• Able to evolve. The structure of badges itself needs to be open. Today “Thai Cooking” may be a sensible badge. Tomorrow it may be “Kitchen safety and peppers” (I worked with a cook who accidentally sent 50 diners choking and gasping out the door, hospitalizing two of them for lack of this knowledge). Badges that are ten years old will frequently fade in value as others rise. Badges create a market in skill certification — precisely what should replace university degrees.

• Cumulative. A single badge may or may not signal a great deal, but a sash full of badges accumulated over many years of effort makes you an Eagle Scout. Employers are very likely to value particular combinations of badges for specific jobs. Today, resumes or transcripts do a notoriously poor job of communicating these capabilities.

• Essential to reputation markets. Badges form core elements of emerging reputation marketplaces, where professionals collect, curate, and disseminate information that reflects their professional skills and achievements much as Fair-Isaac today distributes information about your credit history. For some positions (VP Marketing for a startup, for example), leadership history may matter more than a documented set of specific skills, but badges will still contribute to the overall picture.

Badges are not a sure thing. At first they will complement university degrees, not substitute for them. Badges face nontrivial privacy and trust issues — many which Mozilla is addressing quite well. They are an essential foundation for a portfolio that documents a range of professional skills, achievements, experiences, and relationships.

One of the largest challenges facing open badges are cold start problems: early adopters will not have very few badges and employers will be unfamiliar with them. These are the sort of market development problems that entrepreneurs are good at conquering, although this makes them no less formidable. Mozilla may crack this market wide open.

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Blodget now leads Business Insider and last night presented a very good piece of research on the growth of mobile to a conference in San Francisco. Towards the end, he describes Draw Something, a game app that has created a buzz around here. Blodget argued that Draw Something, by a startup called OMGPOP, reveals just how explosive the combination of mobile, social, and games can be. He reminded us that Draw Something launched just six weeks ago.

• It has since been downloaded 20 million+ times. It is the #1 app in 79 countries. It has 12m daily users and generates $100,000 of revenue daily for a small team in New York.

• Users are highly engaged. They drew 3 drawings per second on Feb 12. Two weeks later, they drew 100 times that: 333 drawings per second. 10 days later, it was up to 3,000 drawings per second. Users bring in other users, who bring in even more users. This is what viral growth now looks like on global, Internet scale — and stories like this are about to become fairly common.

• The resulting growth rate is unhinged. It tool AOL nine years to acquire 1 million users. It took Facebook nine months to earn its first million users. Draw Something did it in nine days.

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A series of well-researched articles by Charles Duhigg in the New York Times that included a long article on sweatshop subcontractors put Apple on the defensive. It appears that hard working people risk their lives to make sure that our iPads are shiny. Apple responded by asking the Fair Labor Association to investigate working conditions at its Chinese suppliers. Back home, Mike Daisey’s professional self-immolation magnified the controversy by forcing NPR to retract a series of assertions about Apple’s Chinese suppliers. This week, Apple CEO Tim Cook visited a huge Foxconn assembly plant in China as the FLA issued its report. Cook knows a lot about manufacturing both as a global supply chain expert and as a former factory worker.

Cook played the event perfectly. When the FLA reported that, shockingly, Chinese factory workers endure long hours for low pay, he promptly gave workers a raise by pledging to cut hours without cutting pay. The audience applauded, the curtain dropped, and the world returned to its apps.

The story displays a confidence and an ability to turn crisis into yet another advantage that makes me wonder whether we are approaching peak Apple. Apple raised Chinese wages not simply because it cares so much, but because it can afford to care so little. They know that their move causes bigger problems for their competitors than it does for them. Apple cares less about Chinese labor costs than Dell, HP, Google, and many others who produce lower margin products that use more Chinese labor. Apple spends about $8.25 per iPhone on Chinese labor – a completely irrelevant number in the lifetime economics of an iPhone. Had Chinese workers targeted Apple for a campaign to increase their wages, they would have chosen well.

Is Apple’s move good for Chinese workers? Sure — for some of them anyway. Apple’s decision does not mean that Chinese workers will necessarily take home more money — just that they will work fewer hours. This may not sit well with workers at Foxconn and other subcontractors, most of whom move from the countryside, live in company housing at the factory, and want to maximize their earnings, not minimize their working hours. Duhigg’s excellent reporting cited a factory where workers rioted when hours were reduced under pressure from a western customer, acknowledging:

The other (workers) we talked to all seemed to regard it as a plus that the factory allowed them to work long hours. Indeed, some had sought out this factory precisely because it offered them the chance to work more.”

Does China benefit from this decision? Not necessarily. Manufacturing jobs are declining China in favor of Vietnam and Cambodia (the great promise of the campaign this week by Nobel Peace Prize winner Aung San Suu Kyi is that Burma will attract urban factories to relieve the punishing life of rural peasants). It surprises many Americans to learn that manufacturing employment in China is actually declining. With the Apple settlement raising labor costs, peasants in adjacent countries can cheer: soon they too can trade in their hoes and hats for a white coats and the opportunity to polish iPads. Nobody said economic progress was beautiful.

Apple’s decision to polish its “Think Different” brand built on images of Ghandi and Cesar Chavez is tribute to both the company’s high moral tone and to it’s willingness to indulge the low economic literacy of its Western customers. Apple sells products to people who prefer a world in which every kid can go to college and work eight hour days. Apple customers hate sweatshops, even those that are demonstrable vehicles of economic progress. We have a hard time acknowledging that countries in South Asia, sub-Saharan Africa, or Haiti demonstrably need more sweatshops. We commit what economist Harold Demsetz memorably called the Nirvana Fallacy: we compare the choices facing overseas workers to the alternatives we have, instead of to the alternatives they have.

As economist Eric Crampton notes:

Harold Demsetz warned in a beautiful piece of economic writing back in 1969 against what he called Nirvana Theorizing. He said there that we can’t say markets fail just because they deliver outcomes that we don’t like; rather, we have to compare the outcomes of markets to real-world achievable alternatives. We can’t just assume Nirvana on the other side of the scale. And, most of the arguments against sweatshops effectively assume Nirvana on the other side: if only we were to ban sweatshops or, more realistically, impose bans on the import of products produced by sweatshop labour, the employees would suddenly be freed to pursue fulfilling careers or to go and get that Bachelor’s in Cultural Studies that they’ve always wanted….. It’s only the evil sweatshops that are keeping them from achieving their dreams.

If only it were that easy. For proper comparative institutional analysis, we really have to look at how working in a sweatshop compares with what else these workers could be doing.

Inconveniently for the Nirvana view, thousands of people voluntarily line up outside of Foxconn’s gates when factory jobs open up. Those clamoring to work at Foxconn know that factory work is tough and sometimes dangerous. But, like factory workers everywhere, they know that farm work is worse. The Times documented a horrific aluminum dust explosion in a Foxconn plant. This is not something to take lightly (my grandfather, uncle, and kid brother all died on the job or from occupational illness; occupational safety has never been an abstract problem to me), but the risks of factory work are nothing compared to the risk of illness (especially malaria), injury, or poisoning faced by Chinese peasants. Just about everyone who has tried both farm and factory prefers the latter. I worked in several factories; most of the jobs were boring and some were wildly unsafe (I thought for awhile that Westinghouse had a “hire the handicapped” policy because so many of my co-workers were missing fingers or limbs. D’oh). But two days spent harvesting hay under idyllic conditions hurt me worse than any factory job I ever did. Former paper and aluminum mill worker Tim Cook also understands this extremely well.

Crampton cites recent work by Benjamin Powell on standards of living associated with sweatshop work showing that in most of the countries he studied, the average wages were equal to or better than the national average. In poor countries like Cambodia, Haiti, Nicaragua and Honduras, sweatshops paid twice the national average. This is why countries like Bangladesh, where 80% of the population lives on less than $2 per day, need more sweatshops, not fewer. Crampton reminds us of Nick Kristof’s reporting on workers in a garbage dump in Phnom Penh. Kristof gets it:

Another woman, Vath Sam Oeun, hopes her 10-year-old boy, scavenging beside her, grows up to get a factory job, partly because she has seen other children run over by garbage trucks. Her boy has never been to a doctor or a dentist, and last bathed when he was 2, so a sweatshop job by comparison would be far more pleasant and less dangerous.

I’m glad that many Americans are repulsed by the idea of importing products made by barely paid, barely legal workers in dangerous factories. Yet sweatshops are only a symptom of poverty, not a cause, and banning them closes off one route out of poverty. At a time of tremendous economic distress and protectionist pressures, there’s a special danger that tighter labor standards will be used as an excuse to curb trade.

When I defend sweatshops, people always ask me: But would you want to work in a sweatshop? No, of course not. But I would want even less to pull a rickshaw. In the hierarchy of jobs in poor countries, sweltering at a sewing machine isn’t the bottom.”

Tom Harkin, a progressive, pro-labor Senator from Iowa, introduced a law in Congress in 1992 that understandably prohibited the import of products made by children under age 15. In 1997, UNICEF investigated the effects of the Harkin Bill and found that even though the legislation had not taken effect, the mere threat had

“…panicked the garment industry of Bangladesh, 60 per cent of whose products — some $900 million in value — were exported to the US in 1994. Child workers, most of them girls, were summarily dismissed from the garment factories. A study sponsored by international organizations took the unusual step of tracing some of these children to see what happened to them after their dismissal. Some were found working in more hazardous situations, in unsafe workshops where they were paid less, or in prostitution.”

Once again, sweatshops are hardly the bottom of the heap — indeed the export shops targeted by Harkin are on average the better places to work. Most child labor is local production or rag picking, so if you ban exports, you may push some of the world’s most vulnerable children into the garbage dump, begging, child prostitution and starvation. This is not an argument for unfettered child labor or dangerous factories — just a note that exploitation is relative not absolute, protection is never free, and economic progress proceeds in steps not leaps.

Apple understands that paying slightly higher wages simultaneously pressures their competitors, appeals to western decency, and exploits economically ill-considered aversion to sweatshop labor. But in technology, companies with more competitive advantages than they can possibly exploit should worry about hitting their peak. Having watched first Microsoft and now Google decline after amassing what once seemed to be insurmountable advantages, it is time to ask whether peak Apple is now in sight?

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Welcome to American colleges and universities, which are both the envy of the world and ripe for disruption. It’s a big business (about $350 billion in the US alone) and a really soft target. It is, after all, run by tenured scholars whose idea of competition is a snarky jibe in the faculty lounge. The dons have allowed their costs to not only rise faster than family incomes, but faster than health care costs, which ain’t easy. That they have lasted this long is due to the monopoly they enjoy on certifying talent. As Kevin Carey noted in a recent New Republic article,

The historic stability of higher education is remarkable. As former University of California President Clark Kerr once observed, the 85 human institutions that have survived in recognizable form for the last 500 years include the Catholic Church, a few Swiss cantons, the Parliaments of Iceland and the Isle of Man, and about 70 universities. The occasional small liberal arts school goes under, and many public universities are suffering budget cuts, but as a rule, colleges are forever.

Small wonder that thousands of startups are now focusing on the market for higher education. Even the guy who discovered disruption, Clayton Christensen, has declared that online technologies will thoroughly disrupt education at all levels, predicting that half of all K-12 classes will be taught online by 2019.

During the past five years, online higher education has gone mainstream. The Sloan Foundation estimates that more 30% of all enrolled college students, some six million people, participated in on-line learning at accredited U.S. colleges and universities in 2011 and that the U.S. market for online higher education grew 12-14 percent annually between 2004-2009.

Many educators are realizing that the explosion of online education not simply due to its lower cost; it is often higher quality as well. Sometimes this is because of dramatically higher investment in course and instructor development. Christensen notes that the largely online University of Phoenix spends about $200 million each year developing online teachers and highlights a key difference with traditional universities: “..Harvard defines research as creating new knowledge, while The University of Phoenix defines it as finding new ways to provide knowledge. It blows the socks off of us in their ability to teach so well.”

Online education is quickly killing the in-class lecture, since recorded lectures have obvious advantages. Students can watch them when they are ready — after they are off work or when the kids are asleep. They can replay the confusing bits or skip the obvious parts. Most important however, is that the lectures themselves are more likely to delivered by world class teachers like Norman Nemrow, whose online accounting course has been taken by several hundred thousand students or by Walter Lewin, the MIT physicist whose lectures are shown on television. Supposedly over five million people have taken his intro to physics course (watch his promo reel below to see why. What? Your professor did not have a promo reel?)

It is not only lectures that fare better online. Instructors in online classes can measure outcomes and tailor the course to the needs of each student. Modern learning management systems provide live seminars with multi-location live video, backchat, social media, and many other capabilities not available in a classroom. Quizzes can be graded instantly so that both faculty and students get feedback fast enough to change course. Algorithms distill questions from thousands of students so that they can be answered either live or off-line. Students can undertake projects online with “classmates” who have never been on the same campus — or even the same country.

This is a time of vast experimentation with online education technologies. Two years ago, the Kahn Academy began to attract huge notice as a self-tutoring tool based on the brief lectures of one talented teacher. A year ago, 2Tor closed a large Series C and got very serious about providing major universities with technology, marketing, and course development assistance. A month ago, Google’s self-driving car maven Sebastian Thrun gave the talk at BLD in Munich that launched Udacity after 160,000 students from around the world completed his Stanford-based online computer science course (268 students achieved perfect scores on all the quizzes). In October, Knewton, an education technology startup, raised $33 million in its 4th round of funding to roll out its adaptive online learning platform. Earlier this year, Apple launched a suite of authoring and course scheduling tools to allow universities to move content to iTunes University. Only yesterday ShowMe launched its 2.0 platform that takes the Kahn Academy model and makes it social — anyone can use the platform to teach anything.

Universities are developing their own online education initiatives, often plagued by a terrifying thought: what if online education is just another form of digital media? They know full well that that as books, movies, and music, moved online, few incumbents survived. In each case:

• Content was disaggregated and mashed. Just as record albums were broken into songs, ringtones, and clips, educational content is unlikely to remain entirely within current disciplines or courses. Literature will not remain separated from history, nor calculus from chemistry. As technology makes it easier to recombine and repurpose courseware, it may become possible for two students to complete the same course without confronting the same content in the same sequence or manner. New forms of learning will produce certifications not limited to degrees, concentrations, or even courses.

• Engagement became social.  Digital movies benefitted Hollywood much less than YouTube and Netflix. It should not surprise us to see more learning become self-paced, socially certified, and delivered outside of colleges and universities. Startups may increase the demand for formal education, but they could also substitute for it just as many of the needs once filled by campus fraternities or alumni associations are now met by online social networks.

• Value shifted from content creators to aggregators. Book publishers and music labels learned that aggregators of content (Amazon and iTunes) hold a lot of cards. Will universities aggregate and distribute high quality educational content regardless of its origin? Or will universities, like film studios, attempt to remain relevant by offering exclusive, premium-priced, high-quality, proprietary content protected through careful online distribution and syndication? Top universities are betting on the Hollywood model, which is not only under sustained attack, but presumes producers who control their IP. Universities, in contrast, rarely limit the ability of their faculty to sell lectures and other courseware to the highest bidder, even though the university paid the professor to produce the content. In no other industry is such theft conceivable — a fact that Udacity will not be the last to exploit.

• The product went global. Books, movies, and music are licensed or sold in tightly controlled, nationally bounded markets, but digital media is naturally global because there are far fewer natural distribution barriers. This means more customers, which is why universities are now lusting after talented and wealthy Indian and Chinese students who are (at the moment anyway) willing to pay US-type tuition for a degree from a globally prestigious institution.

• Prices fell as comparison shopping became easier. It appears that the revenue optimal price for eBooks is between $2 and $5, depending on the author and in some cases the publisher. For songs it is between $1-$2, forcing record labels and publishers to seek entirely different business models to monetize their content. As a result, many of media markets actually shrank as they went online (if you only measure product sales. In music, for example, the market is about the same size, because concerts and merchandise make up for losses in record sales). Once

The response of universities to the rise of online education is like the response of Barnes and Noble to online bookselling. Faced with the rise of Amazon.com in the 1990s, the chain store simply created barnesandnoble.com. When Amazon launched the Kindle, they launched the Nook and merchandised it in their increasingly irrelevant bookstores. But the winner of this contest will of course be the company that is not forced to carry the cost of several hundred bookstores. Open Yale, MIT’s Open Courseware and MITx courses, Stanford’s Massively Open Online Courses including Corsera, and many others like it all share the Barnes and Noble problem: they need to price their offering to pay for extraordinarily high fixed cost institutions. Their disruptors do not.

Barnes and Noble charges customers for a wide range of activities unrelated to book purchases. It designed many of its stores as community centers where authors and  could meet readers. It built fun sections for kids to discover books. It integrated Starbucks in many locations. But books are simply not going to be sold in stores much longer, so these activities added more cost than value and ended up making the problem worse. Likewise, many institutions of higher education support multiple activities with tuition: research, sport, socialization, teaching, and credentialing. Online education exposes the fault lines between these different businesses, just as Amazon did with Barnes and Noble.

• Research. Top schools recruit faculty based on their ability to contribute new knowledge to their field not on their ability to teach. This is terrific for graduate students, who apprentice and occasionally indenture themselves to senior faculty, but suboptimal for undergraduates because the correlation between insightful research and capable undergraduate teaching is somewhere between weak and negative. Once undergraduates can receive a higher quality education at a lower cost by studying online, many will do so. Once Amazon made books cheaper, nobody wanted to pay for those kids play areas — not even people who liked them.

• Sports. That giant sucking sound is money draining from university budgets to support massively wasteful professional sports programs — while managing to abuse college athletes in the process. Intercollegiate sports are fine. Division 1 football and basketball is a scandal — and both universities and the NCAA know it.

• Teaching. Teaching and learning are rapidly becoming another online interactive social media. Some online learning will doubtless be indistinguishable from games. This part of what a university does will be rapidly mashed, commodified, and redistributed, just as books and movies have been. Universities often claim that they make use of these online technologies in “hybrid” classrooms. This is like selling Nooks in bookstores: the customers who buy will never come back.

• Socialization. Residential undergraduate programs deliver to young people a group of peers and the experience of learning independently with them. Some of what the university provides is in loco parentis — a structured environment for 18-22 year olds to transition to self-sufficiency as they learn. The question is how much families will pay for this service. As high quality online education becomes universally available, middle class families will be very tempted to forgo residential colleges for their kids. Now that families cannot enhance their incomes by working longer hours, sending a second adult to work, or borrowing easy money against overvalued homes, families will be willing to cut back on college expenses if it does not compromise the quality of their children’s education.

• Credentialing. Credentials are necessary for employers and future education institutions to distinguish between similar candidates. Many markets with this problem rely on brands or other signaling effects (watch how you select wine next time you are confronted with dozens of plausible choices). University degrees emerged long ago as a critical signal of professional capability independent of what the degree holder knows. Part of this is because of selection effects, as Malcom Gladwell explained some years ago:

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He was right.

Bardacke, a respected labor activist and educator based in Watsonville California, was first mentioned in this blog six years ago in connection with his research on Cesar Chavez. Like Bill Gates and Mark Zuckerberg, he dropped out of Harvard after his freshman year and moved west to change the world. Unlike them, he joined the Berkeley Free Speech Movement and has had an abiding interest in radical politics ever since. In the early 70s, I traveled to China with Bardacke to get a first hand look at Mao’s proletarian dictatorship. Frank admired all things proletarian; I feared the dictators. Bardacke often views the world through a different template than I do, but I have learned a lot from him and continue to have enormous respect for his views.

Bardacke became a farmworker – one of a handful of Anglos and surely the only former Harvard student to work the celery fields. He became fluent in Spanish and formed friendships with many of the union staff and farmworkers who appear in his book. He spent more than a decade interviewing every major participant in the drama, reading every known book on the farmworkers and scouring every archive. He received help in managing this massive project from faculty in history and politics at nearby UC Santa Cruz.

The result, Trampling Out the Vintage: Cesar Chavez and the Two Souls of the United Farmworkers, is the most complete account yet of the rise and fall of the UFW. It is also an epic, Shakespearean drama with all of the elements of a Hollywood blockbuster. The pitch meeting would be surreal:

OK, picture this: we have a conservative Catholic who fasts and marches like he’s Ghandi. He courts progressive clerics and hires liberal Jews and alienated Anglos to mobilize immigrant Mexicans and Philipinos to fight Slavic and Italian growers. At first David slays Goliath, but then he morphs into King Lear and destroys his newly built kingdom amidst slaughter and recrimination. We’ve got side plot romances between devotees who work for $5/week and bad food trying to raise farmworker pay. We’ve got violent Teamster, UFW, and grower thugs straight out of the Sopranos. We’ve got a certifiably batshit human potential guru who wreaks havoc getting everyone to criticize everyone else. And under the carpet here somewhere, we may even have communists trying to advance a proletarian revolution without a proletariat. How can we miss?”

Astonishingly, it is a true story and Bardacke delivers it with intelligence and compassion. Unique among labor historians, he grounds his analysis in “the work itself”, with brilliant, memorable descriptions of how different stages of production for different crops in different regions of California all affect the ability and willingness of different crews to self organize. He describes clearly why organizing was often sustained by the tight-knit, highly skilled lechugeuros or the celery cutters, not the garlic or asparagus workers or those in ladder crops. He describes the skill and endurance that the work requires, introduces leaders that arise from various crews, and captures in fine detail how they interact with a union that was built on a very different set of principles from farm work. In a decade spent organizing waiters, housekeepers, nurses, bartenders, machinists, cannery workers, and assembly workers, I observed precisely these differences. The work itself shapes our propensity to organize. Bardacke is the first writer to apply this principle to the fields and he does so with a deep understanding and compassion for the work.

Bringing an existing union into a workplace is an act of industrial combat not for the faint of heart — but starting a new union from scratch is a herculean task that almost always fails.  I started a company that has lasted more than a decade, a public agency that lasted three years, and a union (United Espresso Workers – I was a bit early) that lasted all of three weeks. With the proud exception of the United Farmworkers, I cannot think of a single independent union formed in the United States in the past 50 years that was not sponsored and controlled by an incumbent union (I can think of several that tried and died – but none who made it).

This was not always true — new unions once spawned regularly in the US. There are many reasons for the change, but the lack of competition between unions has positioned them nicely for extinction. Organizations evolve through the mutation, variation, and selection that is always produced by competition. The labor movement stopped growing the instant the AFL joined with the CIO and prohibited unions from competing with each other. When two teachers unions competed, both grew. The instant the Teamsters stopped raiding the UFW, growth stopped. I hated the Teamsters (who were kicked out of the AFL-CIO for corruption and are not subject to the noncompete provisions) and I took a nasty beating from them once, but like sharks or wolves, they have their place in the ecosystem. (I am aware of no union leader who agrees with this view, by the way. Most feel that they have all the competition they can handle from employers).

But for a brief moment following the civil rights movement in the 1960s, a new labor union arose in the United States and in the least likely place. If you had asked in 1960 where in the economy a new union might appear, you would never have selected the farmworkers of California. Organizers prefer workers who are tied to one place and to one employer, not workers who are seasonal and often itinerant. Probably wrongly, organizers prefer workers who are covered by labor laws, which had always exempted farmworkers. Organizers like English-speaking Americans, not Tagalog or Spanish-speaking immigrants or Braceros who are tolerated for a season then ushered back to Mexico. A dozen or so failed efforts by farmworkers to form agricultural unions seemed to validate Marx and Lenin’s belief that workers would organize once they were forced into factories and worked for a single employer.

Bardacke demonstrates that Cesar Chavez succeeded in organizing farmworkers because he was, at heart, a brilliant and hard-working Alinksy-trained community organizer. As a community organizer, Chavez pioneered an enormous innovation that had the potential to transform labor organizing: he mastered the secondary boycott (illegal for most workers under the federal labor law, which thoughtfully excludes farmworkers). Chavez tirelessly organized enormous boycott operations in grapes, lettuce, and against major retailers including Safeway.

Farmworker boycotts were the Occupy movement of the 70s and 80s – a way for college students, community activists, and middle class young people to participate directly in the tough work of social change. And credit Chavez’s brilliant leadership, it worked magnificently: faced with effective boycotts, growers raised wages and improved working conditions and politicians begged the army of grass-roots Chavistas to help register voters and turn them out on election day. The UFW became a powerful force for social change.

But the UFW was only briefly a powerful labor union. Bardacke correctly diagnoses the boycott as creating a formidable tension within the UFW. He frames the tension between labor and boycott organizing as a struggle between the “two souls” of the UFW. The metaphor is fraught. As Bardacke demonstrates, the UFW collapses not because it has two souls, but because none of its activities were organized, financed, or led in a manner that enable them to grow. The problem is not that community organizing is a distraction – most American labor unions lack a community service organization and are much the weaker for it. This is tragic: having discovered and refined one of the few recent innovations in union organizing, Chavez cannot let it grow. Instead, he strangles his own child.

One of the heros of Bardacke’s book is Marshall Ganz, one of America’s most innovative labor organizers. Ganz also dropped out of Harvard, but moved south to organize for civil rights before heading west. After his exile from the UFW, Ganz helped the Silicon Valley Central Labor Council build a powerful neighborhood-based political organization for the 1984 elections. He was terrific at posing fundamental questions – and at directing me and others to writers and thinkers who helped answer them. In 1984 he urged me to read, of all things, a business book, In Search of Excellence. I quickly developed an appetite for business writing. decided to get trained in it, and ended up working with the book’s authors. Marshall returned to Harvard, got his degree after a 28 year hiatus, and now teaches at the Kennedy School. (His version of the UFW story, told in Why David Sometimes Wins, is a fine companion volume. It suffers for being his PhD dissertation and dwells more deeply on theories of organizing and less on the dynamics of local struggles).

So let’s ask a Marshall Ganz-like question: what does it take for an organization to grow successfully? Venture capitalists, a group not deeply concerned with the welfare of those who produce their salads, obsess about this question. There are at least as many answers as there are VCs, but common elements include:

• A big market. If there is not substantial demand for the product or service an organization produces, the organization cannot get very big.

• Positive unit economics. If serving one more person imposes more cost on the organization than it generates in revenue, then growth makes no economic sense and the organization will depend for growth on funding from charity or government. Anyone can sell a dime for a nickel; selling a nickel for a dime means that an organization has to add at least a nickel’s worth of value if it wants to grow.

• Customer or member acquisition costs that scale. Every organization has a cost of acquiring a customer that must be repaid over the lifetime of that customer or member. Smart organizations exhibit declining COA: the cost of acquiring each incremental customer declines with scale. Very smart organizations (and effective social movements) are viral: COA approaches zero as current participants recruit new ones. See Facebook, Google, or Arab Spring.

• Leadership. Growth is very, very demanding on an organization. Everyone in a fast-growing organization has to grow with it: jobs change radically every few months. Not everyone grows at the same pace, so leaders must recruit furiously, communicate direction and values continually, promote and replace people regularly, and test what works all the time. It is stressful and a lot of fun – ask anyone who has been involved in a fast-growing company, boycott, strike, or organizing campaign.

Back to the fields. Boycotts have completely different economics than labor organizations. Boycotts have huge markets: liberals eager to shop their conscience. Churches and colleges do the recruiting at very low cost to the boycott sponsors. Every convert adds more value (the grapes they don’t buy) than cost (the very low cost of volunteers leafleting).

Unions are different. The market for a membership organization of farmworkers is not small, but it is small enough that the UFW needed to capture almost all of it because, as Bardacke notes, organizing half an industry penalizes the organized growers. A union has a responsibility to organize the remaining growers and will frequently be cheered on quietly by those who have signed. More fundamentally, unions need to grow big enough to achieve minimum economic scale: they cannot fund the fixed cost of their operations if they are too small. Unions with fewer than a half a million members are nearly always too small to operate efficiently across the US (meaning that most unions in the United States waste money because they are too small). The UFW never had 100,000 members — although its field operations were mostly in California. Bardacke would counter that the democratic character of the union matters more than its size, which is true, but creating organizations that are not economically sustainable is a bad idea. Unions do this all the time.

Unions have a second problem, to which Chavez developed a unique but ultimately unworkable solution: the economics of labor organizing are often unattractive. Campaigns, negotiations, and strikes are expensive and uncertain of success. If unions file for elections on half of the campaigns they run, win half of the elections they file on, and negotiate contracts successfully 80 percent of the time, then every successful contract has to finance four unsuccessful campaigns and potentially a strike. If the campaigns and the negotiations are labor intensive and the union bears all of those costs, then the economics of organizing turn heavily on the cost and productivity of staff and on the cost and duration of strikes.

The Chavez solution to this dilemma was simple but utterly unsustainable: pump talented people through the organization. Those of us who worked boycott operations worked 14-16 hour days, often 7 days a week. We were paid $5/week and had to beg for donated food to eat. Once we were burned out, the UFW happily replaced us in a process Chavez once compared with pumping water. At any given time during large boycots, hundreds of young people slaved on the campaigns for months and sometimes years. Staff at headquarters (located in the small misnamed town of La Paz), were likewise furnished with living quarters, food, and a miniscule stipend. Chavez personally approved all expenses. From here, it looks like a cult – although from inside the cult, it looked like La Causa and stands today as some of the best work many of us ever did. Regardless of how it feels or looks however, and regardless of the ethics of exploiting volunteers on behalf of underpaid farmworkers, an organization without a core of talented, motivated leaders simply does not scale. Volunteers are not enough — and finding people like Marshall Ganz and Eliseo Medina to fight year after year for farmworkers without paying them even farmworker wages is simply unrealistic.

Bardacke does not go deeply into union economics in part because there is a much bigger tension restricting growth: a command and control organization. Chavez not only micromanages, but much worse, he prohibits local labor or boycott operations. Centrally led boycott operations could work: boycotts demand a consistent message and negotiations with a single adversary and since allied organizations delivered most of the volunteers with help from a skeletal UFW staff, there were relatively few local issues to resolve. But labor organizations are built in hundreds of unique workplaces. This is in part due to the work itself: the problems of lechugueros are simply not the same as tomato workers or lemon pickers. More important however, is that without elected reps, stewards, and ranch committee members, contract negotiations suffer because strike threats lose credibility. Without a credible strike threat, backed in this case by a credible boycott threat, growers rationally refuse to negotiate. Chavez tried to run the union from the top, like he built and ran the boycott. When George Meany and others derided the UFW as “not a real union”, they were wrong at the level of the fields. But in their description of La Paz, they were right.

Bardacke reveals Cesar Chavez to be a brilliant community organizer who campaigned for farmworkers but did not empower them. Bardacke plots the tragic trajectory of the UFW from an authentic movement led by a charismatic leader to one paralyzed by demoralized staff that could see no way to grow a union beyond the constraints imposed by its increasingly unstable founder. Chavez died afraid of his own organization, which he had shriveled into a family business devoted to nonprofit services, La Raza not La Causa, and promoting the Chavez legacy. The union was all but gone.

Bardacke masters an enormous amount of material to relate these events skillfully. He salts his prose with stories and characters straight out of Steinbeck. He rarely leaves the reader guessing about his point of view: Walter Reuther, the brilliant activist who built the United Auto Workers (and marched with Cesar in Delano) is a worthless hack because he voted against seating the Mississippi Freedom Delegation in 1964 and drove communists from the union. Those who cross the US border illegally are noble immigrants deserving of union embrace; those who cross picket lines legally are scabs deserving of UFW tire-slashing and intimidation (but not of UFW efforts to call La Migra and send the illegals among them home). Teamster and grower goons are thugs; Manual Chavez, designated hitter for his nonviolent cousin and other UFW punks are charming rogues who firebomb field sheds and beat their opponents. Those who seek to impose Synanon’s destructive ideology on the UFW are obviously crazy and should be driven from the union; those who seek to advance various communist or nationalist ideologies within the organization are dedicated activists who should be protected. Trampling Out the Vintage is a beautiful work despite these caricatures; it would be even stronger without them. It is a book that deserves a wider distribution and better copy editing than Verso, a niche left publisher, can provide. It would also be nice had Verso published the book electronically (then again, Frank confesses in the postscript that he composed the early chapters of the book on a typewriter!)

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Journalist Chris McDougall wondered why he was getting hurt when humans have been running for two million years. His best-selling book, Born to Run, is a well-told tale of people who run barefoot without getting hurt and of researchers who discover a paradox: support can make you weaker, not stronger. The more support a running shoe gives you, the more it weakens your foot, ankle, and calf muscles and the more prone you become to injury.

McDougall presents the stories that led to the science and the science that has led to a resurgence of barefoot or minimal shoe running. He visits the Tarahumara, an impoverished clan of long distance runners living in the very remote Copper Canyons of Mexico. McDougall romanticizes their lives, describing men and women of all ages routinely running for dozens of miles in sandals over hot, steep mountains.

Scientists have studied the Tarahumara for years because their isolation makes them good subjects. As roads arrive, the Tarahumara embrace modernity: their diet goes from corn meal and long runs to pickup trucks and Hohos. Epidemiologists have documented the diabetes, cancer, and heart disease that result. McDougall looks past this, focusing instead on the propensity of the canyon-dwelling Tarahumara and some of their more crazed gringo brethren to race ridiculous distances wearing heuraches cut from old tires.

Back home, McDougall consults a Stanford track coach who refuses to let his athletes wear expensive running shoes and discovers data suggesting that both the extent and severity of injuries go up with the price of shoes. He interviews Daniel Lieberman, a Harvard biomechanics professor, who explains precisely how the support a of a running shoe makes most runners over stride and heel strike, which delivers a much sharper blow than a barefoot runner who lands mid foot. A good video of Lieberman explaining his research is below. The peer reviewed work is here in Nature.

Lots of testing and learning is still being done both by individuals and by researchers, but nobody these days takes for granted that running shoes are always helpful. Shoe companies are trying to shift their designs and their message to promote “minimalist” shoes, some of which are now best-sellers.

Is this just a fad? Of course any shoe can become a fad if well marketed. On the other hand, humans have run barefoot for two million years but have worn running shoes for only about 30. I would not bet against barefoot running, given the injury rates that shod runners experience.

Protection turns out to be deceptive. It seems completely normal to me that as a runner, I would prefer a protective shoe. I want lots of cushioning. I want to avoid pronation, which must be awful because it sounds so bad. It would be simple to sell me orthotics — hey, my knees hurt sometimes. Although some people surely do fine in running shoes, for many people, highly protective shoes are like a cast. They reduce your mobility and your foot gets continually weaker as a result.

Economists, of course, know that protection often makes competitors weaker. They believe instinctively that competition strengthens counterparties, be they muscles, individuals, teams, companies, or regions. I have even argued that those who want stronger labor unions need to force unions to compete. Economists left and right can show that trade protection weakens both parties, although this knowledge never stops companies, communities, or workers who are hurt by trade from seeking it. Doubtless some similar principal applies to parenting: too much protection weakens your kids. Fine, now buckle your damned seat belt.

To evaluate social programs or parenting, we need the equivalent of the Tarahumara — a group isolated from extraneous influences that can test whether social protections produce more benefits than costs. Fortunately, an impressive young economist has shown that many of our protective programs are testable. Esther Duflo is an MIT professor, a MacArthur genius grant winner, and the winner of the  2010 John Bates Clark Medal for the best economist under the age of forty. Watch her fascinating TED talk on how she tests programs to fight malaria, educate kids, and immunize children. This is barefoot economics at its best.

Testing of this sort requires an appetite for failure. Politicians, business people, and scientists each approach tests differently, depending on how failure affects them.

• Politicians pay a huge price for failure. This forces them to simplify problems and promise sound bite solutions. If they do not do this, they won’t be elected and they won’t be politicians. Politicians cannot say “wow, this is a tough problem. Let’s try a bunch of things, fail at most of them, and learn what works.” Most politicians suffer from what Tim Hartford calls the “God Complex”. Hartford writes the Undercover Economist column for the Financial Times. He has published a terrific book called Adapt: Why Success Always Starts with Failure. You can get a flavor of his thinking at his fantastic TED talk. The God Complex is the equivalent of intelligent design: certainty that complex systems can best be managed centrally and that complex questions can be answered without the painful process of trial and error. Parents, CEOs, physicians, gods, and anyone else who pays a high price for failure are especially vulnerable.

• Business people embrace trial and error mainly because markets force them to. Hartford notes that ten percent of all businesses fail every year.  A market economy can be looked at as a huge, ongoing experiment that evolves, like every complex system, because of variation and selection. The best leaders of complex systems acknowledge that leading edge problems don’t have obvious solutions and encourage a structured process of trial and error. Hartford’s book discusses the value of lots of small, low cost trials that are decoupled so that they don’t spill over and of carefully documenting and interpreting results. An important and highly recommended read.

• Scientists love failure. It’s how they learn. They understand that humans have evolved as complex systems through millions of years of variation and selection. They reason either deductively from data or inductively to ask have we evolved to run? Evolutionary biologists have long noted that the unique way we sweat for thermoregulation, our hairlessness, our odd bipedal design (more energy efficient than any quadruped), our unusual ability to breath multiple times per step, and our highly engineered feet, ankles, and hips all suggest anatomy designed to run.

But until the 1980s, researchers were stymied by one big problem: we are slow. Why on earth would running matter, when every mammal worth eating can outrun us? 

It fell to David Carrier, a graduate student at the University of Utah, to notice something that had escaped other scientists: we are built for endurance, not for speed. The case for humans designed for endurance running is now widely accepted. This is partly because we have discovered a story that backs the data. Hunter-gatherers in the central Kalahari Desert in Southern Africa still practice persistence hunting: they run their prey to death (there is one other group that practices persistence hunting — or at least remembers it. Our pals the Tarahumara). Running down a large mammal takes as little as an hour or as long as 8 hours, but if a human can keep a mammal galloping so that it cannot catch its breath, cool down, or rejoin its herd, it will collapse of exhaustion before the human does. It appears that before we invented spears, humans survived by high-endurance, persistence hunting. Barefoot.

The BBC managed to film a group of men in the Kalahari hunting a kudu this way. Despite the drums and the breathless narration, it is a stunning film. Notice that the runners are shod in cheap shoes that do not let them heel strike. They look a lot like the sneakers we all wore as kids.

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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. 

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Cryin' Time

As of tonight, it is not at all clear when the US debt ceiling will get extended or when the entirely artificial crisis caused by Republican House members will be resolved. But one thing is now very clear: the ham-fisted GOP tactics will raise interest costs for every American family and business. It is the economic equivalent of a tax increase — except that that it increases government expenses, not revenues. These higher interest rates are caused by Congressional flakiness.

Interest rates reflect perceived risk — and China and other lenders now see the US as a lot riskier than we used to be. Real risk is unchanged — but perceived risk is higher, and that’s what counts. The power to punish political stupidity with higher borrowing costs is what once caused Clinton advisor James Carville to announce that in his next life, he wanted to come back as the bond market, since it powerfully influenced all federal economic decisions.

It used to anyway. At least one rating agency, S&P, is poised to downgrade US debt. This is unlikely to be calamitous, but it is entirely avoidable and it will needlessly increase US borrowing costs. This makes government more expensive, not less. Worse, it increases interest rates for banks whose borrowing costs that are pegged to Treasuries, which is roughly all of them. It erodes our privilege of serving as the world’s reserve currency — the equivalent of a tax break extended by the world economy to Americans but to no other country. The President of France once termed it an “exorbitant privilege” — and he was right.

For Cryin' Out Loud

This is very likely to end badly for Republicans. There is no economic crisis — the US is obliged by self-interest, to say nothing of the 14th amendment, to pay all debt obligations. Obama will however, end up paying doctors and soldiers late or with IOUs, like California did a couple of years back. The fractious Republican Party will quickly begin to devour it’s Tea Party wing, which has already been denounced by Gingrich, McCain, and Anne Coulter — hardly left wingers.

If the market starts downward, plenty of people will buy stocks because many investors regard the “crisis” as temporary political insanity. Economic fundamentals, although not great and not helped by a spike in interest rates, are also not vastly changed. Treasury bonds have to remain the global fixed-income benchmark because there’s no good alternative. The $9.3 trillion of Treasury securities in circulation is five times more than the total debt of countries like France, Germany, or the UK and the $580 billion of US bonds that trade every day is 17 times higher than UK gilts, the next highest triple-A rated government debt security. The world is learning what every bank knows: if I borrow a small amount from you, I am your debtor, but if I borrow a large amount, I am your partner.

Still, Congressional perfidy will cost Americans billions of dollars in needless interest expense. Nobody benefits except banks and China — the banker to the US government. Perhaps there is after all a reason Speaker John Boener cries so often.

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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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