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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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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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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To grow and maintain the developer network, both companies  constantly upgrade their devices to reach more consumers with more applications. They will continually improve the tools they provide developers and provide them with specialized training and certification. They may create specialized tools for features like localization or security, for devices like the iPad, or even for big verticals like health care. Apple is either doing these things, or considering doing them, and we can safely presume that Google is too.

But applications deliver diminishing returns. The issue is not simply that most apps fail, sometimes after a brief success. The problem is that the first ten thousand applications make a device like the iPhone incredibly useful. But if the iPhone goes from a quarter million applications to a half million, it matters a lot less. At some point, good filters in the App store are more important than good applications. 

So increasingly, Apple and Google will look at their global network of consumers who trust them to process payments as an even more strategic asset than their developer network. At this point, both companies will look for more payments to process. 

 This is likely to happen in stages.

• Initially both companies process payments for media and online sales. Apple started with songs, books, films, and apps (not coincidentally, the same long-tail products that launched e-commerce in the late nineties) and is moving into payments for time, tokens, or avatars for online games. Google started processing payments and is launching a book, music, and movie store for Android.
• Both Google and Apple can make their payment processing businesses ad-supported. Both Google and Apple have the scale needed to clear payments directly with banks and presumably both can monetize the information contained in the purchase data and offer merchants much lower fees than Visa or Mastercard.
• Finally, both companies will go after Visa and Mastercard by providing merchants with a POS (point of sale) solution based on optical scanners that read a bar code tied to your bank or credit account. Apple is testing this with Starbucks now, as the adjoining screen shots show. Developers will come up with clever ways of showing you your current balance and even budget variances, so that as you pay for a bag of groceries you will know exactly where you stand financially.

Apple could attack this market quickly by  waiving fees for transactions between iPhones. The opportunities to integrate this offering with mobile advertising will not escape Apple — or Google). The barcode technology is not a challenge: you can already board flights at many airports with a boarding pass sent to your iPhone. Obviously the payment application needs to be PINned, but consumers already access bank balances and pay bills from their phones, so the necessary trust and security are already in place. Last week, Chase introduced an iPhone application that lets consumers deposit a check electronically by submitting a photo of it – so both banks and consumers are getting comfortable with paperless banking. 

Like PayPal, Apple or Google could avoid the most burdensome of state and federal regulations by not accepting deposits and not becoming a bank. Widely varying country regulations make payment processing a complex business to scale globally however, so Apple might logically acquire a business in this space, possibly including PayPal.

Both Apple and Google will be drawn increasingly deeply into payment processing — an industry plagued by a low b/c ratio that is ripe for disruption. Consumers and merchants can only hope that they hurry.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The New Taxonomy

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

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

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

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

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

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

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

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

What Apple Learned from the iPhone

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

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

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

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

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

Textbooks: The Tablet’s First Killer App

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

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

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

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

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

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

Will the Market Disappear?

How fast will the textbook market change?

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

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

Nothing happened. Encarta was a joke.

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

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

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Twitter revenues? Well, none. But someday we can serve ads to all those eyeballs, right?

Right. But the competitors are circling. And I don't mean Facebook trying to out-tweet Twitter or LinkedIn trying to become Facebook. I mean real, scary competition. I mean Flutter.

Check it out.

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

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

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

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

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

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

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

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

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

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

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

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

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

None. I always had more important priorities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

As for Josh Ritter — check him out on Letterman.

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Metcalfe’s Law is a lesser known but equally powerful law concerning not hardware but the economics of networks (specifically a telecommunications network, but the Law appears to apply more broadly). It says that the value of a network is proportional to the square of the number of users.  A telephone is an easy example: the first one is useless, the second one can call only one other machine, but the millionth one increases however slightly the utility of each of the other machines (assuming they can connect. You have to count Chinese phones as a separate network if you don’t speak Chinese). Plenty of people debate whether Metcalfe (who invented Ethernet and founded 3Com) got the math right, but the principle seems sound and goes a long way to explaining what economists like to call network effects: businesses in which each participant is better off when a new participant joins. This is a topic for another day, but Microsoft, Google, eBay, iTunes, and a lot of other "can’t live without them" businesses have taken powerful advantage of network effects and Metcalfe’s Law underpins a lot of the economics at work.

Even less well known than Metcalfe’s law is what arrogance and alliteration led me some time back to term Manley’s law, which states that all media wants to be digital, downloadable, and free. Like Moore’s or Metcalfe’s theorems, this is a hypothesis that can be falsified: Moore will be proven wrong the day chip density stops increasing, Metcalfe the day that bigger networks are not more valuable, and me the day that media stops becoming digital or freely exchanged. By now you have noticed that Manley’s law is in  some respects a corollary of the other two – I doubt that it would exist except as a by-product of Moore and Metcalfe.

Manley’s Law is having a good run lately. For simplicity, let’s define media as books, movies, and music — although you could apply it to photographs and several other media types. Music digitized first simply because the files are smaller and people want to listen to the same song more often than they want to read the same book or see the same movie. 

MUSIC

Manley’s law hit the music business so fast and that the New York Times referred this week to “the anarchy sweeping the music industry”.

Music became a digital media on August 17, 1982, when ABBA’s The Visitors became the first CD to roll off an assembly line at a Philips factory in Langenhagen Germany. In 25 years, analog vinyl LP albums have been reduced to an audiophile niche and cassettes and 8-tracks have mercifully disappeared altogether.

Five years ago, iTunes made music commercially downloadable and since then, Tower Records, Musicland, Sam Goody and many smaller retailers have disappeared or been absorbed by chain discounters like Wal-Mart and BestBuy.

This week Apple Computer announced that in January iTunes passed Wal-Mart to become the largest music retailer in the United States. CD sales have declined every year since Apple launched iTunes and in recent years CD sales have fallen in double digits each year. In 2006, 38% of US teens did not by a single CD. In 2007, the number was 48%. 

So music became digital and downloadable – but iTunes does not give
music away for free. The company has sold four billion tracks at a buck each, so what about the last part of Manley’s law – that nice bit about media becoming free?

Apple has sold perhaps 130 million iPods (it passed 100 million a year ago). That works out to an average of 33 iTunes tracks for each device.
But iPods hold somewhere between hundreds and thousands of songs, so even if you account for obsolete devices, you have to ask what
people are putting on their iPods if not paid music (or videos) from iTunes?
Answer: they are loading them with free content.

Some of the free content is ripped CDs — and not all of these were paid for (what, after all, are people buying hundreds of blank CDs for, anyway?).

Some free tracks come from MySpace, which according to a Forester analyst now has more than 8 million artists and
bands (and today announced a deal with several music labels to compete with iTunes). iTunes has the largest music catalog in the world with
6 million tracks — so 8 million bands and artists is a really large number. Some of these tracks have never sold a single
copy – but the experience of most long tail media markets is that there are a lot
fewer of these than you might think. Describing the role of MySpace in music, Forester notes that “Acts including Lily Allen,
Sean Kingston, Arctic Monkeys, and Dane Cook were discovered on the
site by users”. (I don’t know most of these artists, although I saw a fast-rising Lily Allen at South by Southwest last year and was
impressed).

P2P file sharing, denounced by the music industry as illegal downloading, continues to grow by double digits each year. Growth may be slowing, but only BigChampagne knows for sure. BigChampagne is a
smart company that has tracked file downloading for years. They sell information about which demographic
groups download what music in different parts of the country. Record companies pay handsomely for the information (thus admitting that sales of CDs and iTunes tracks are a poor indication of what people actually listen to). Record companies use the information to persuade local radio stations to play what is popular. The result is not necessarily more sales — often it just means that more people download the song for free but it really helps plan lucrative concert tours.

Musicians with recording contracts are starting to make their
music available for free – or accept that it is free anyway. Some use
free music to promote concert tours, merchandise, or albums.
Radiohead famously released its album In the Rainbows for direct download and asked people to pay whatever they wanted. About 1.2 million people downloaded the album and some paid. Nine Inch Nails did something similar.

Estimates vary as to how well the Radiohead experiment worked. The high estimates assume
an average price of $8, meaning the band grossed $10 million. The low
estimates assume an average price of $5 with 60% not paying, so the group took in
$2.4 million. Not a flop – but here is the punch line: even though the album was available for free, more than a half million users downloaded free it on a P2P site anyway. Habits are hard to break and free is a tough price point to beat. It turns out that not even free can always compete with free.

MOVIES

Up next: Hollywood. Movies went digital in the 90’s, when DVDs were adopted by consumers faster than any technology in history – DVDs became a majority of movie rentals within five years of its introduction as a consumer product. Note that in each of these markets digital content is not enough — you need a very easy to use device before digital media takes off.

Movies are now widely streamed and downloaded. In January, nearly 79
million viewers, or a third of all online viewers in the U.S., watched
more than three billion user-posted videos on YouTube, according to comScore’s latest report.

Making movies for YouTube has also become much easier with the advent of low cost video cameras like the Flip, which now accounts for 30% of all video camera sales on Amazon.
The little device is a point and shoot videocam that makes recording and
uploading video chimp simple. I am astonished at
the things one can usefully video when shooting becomes this easy.

Commercial films are already available for download at zero marginal cost. Vongo enables
free downloading of studio movies for subscribers, who pay a $10 monthly fee. BitTorrent hosts and clients distribute thousands of
licensed and unlicensed movies in a manner that is not economically different from P2P sharing of music files, although the underlying technology is improved. With iTunes video and cable pay per view offerings also increasing, will movie rental stores follow music stores into oblivion? Yes, they will – and fairly soon. This is why Blockbuster is trying to figure out an online streaming or download strategy. Your neighborhood DVD rental store is toast.

The film industry hopes that the move to Blu-ray Discs (which has now prevailed in the HD
format wars, much as DVD and VHS did before them) will enable stronger cryptography to prevent free sharing of movies. Blu-ray employ
several layers of digital rights management using a standard developed
by a consortium that includes Disney, Intel, Microsoft, Matsushita
(Panasonic), Warner Bros., IBM, Toshiba and Sony. Nonetheless, since it appeared in
devices in 2006, hackers have successfully broken the lock several times. It may be technically possible to encrypt a movie in a manner
than cannot be hacked, but in a war between movie studio
technologists and thousands of smart 17 year olds with too much time on
their hands, history is on the side of the teenagers.

BOOKS

Books will be the last media to go digital for a couple of reasons. First, consumers like the analog form factor. Books are portable, shareable, resalable, and don’€™t require batteries. They
have an emotional impact that only analog media delivers. Books sit on a shelf like Dumbledore’s Pensieve — evoking memories and old friends. You can browse them in
stores in a way that is still hard to duplicate on line.

That said, eBooks have advantages. They are searchable — which matters to researchers, students,  technicians, and search engines that help users discover content. They can be delivered wirelessly, instantly, and cheaply. They are obviously portable.

More fundamentally, analog books are not a great business. Most books lose money for a set of reasons that are very well known. It starts with economically delusional publishers who pay advances to authors that they do not recover in sales. 

Books turn out to be expensive to print, transport, and store.  Booksellers have an almost unrestricted right to return books to distributors –“ a right given to
no other retailer that I am aware of. As a result, 25% of all books in
the economy are moving backwards to distributors or publishers and away from retailers and customers. (These practices may not continue.  HarperCollins just announced a new imprint that will offer no author advances or return rights to retailers).

Worse, 500 new titles are published each day in the US – double the number of ten years ago. Most lose money for their
publisher — indeed most are read by a very small number of people (the
overwhelming majority of books in university libraries, for example,
never circulate at all). During the past decade, publishers have not
sold more books — they have published more titles and they have raised prices. This is neither healthy nor sustainable, especially in the face of strong evidence that all reading, and the reading of books in particular, is in long term decline in most countries.

The first books to go digital are those expected to sell the fewest copies. Lulu, Author House, Xlibris,
and others have developed business models that enable authors to
digitally publish specialized books (meaning books that almost nobody wants to
read). Lightning Press has persuaded a large number of publishers to
digitize their "€œback list"€ (books more than a year old) and and print them on
demand instead of warehousing and remaindering them. As the print on
demand market develops and as electronic readers like the Amazon Kindle or the Sony
Reader become easier to use and affordable, people will buy obscure books
either digitally (cheapest), used (cheap), or printed on demand (most
expensive). Many books will never be printed at all, as the
price of digital books follows music and movies to zero.

For good reason is Apple’s iTunes closely studied by people in the book industry. Apple is the first company to tightly control and seamlessly integrate five critical media assets:
digital content, metadata, a retail website, distribution economics,
and consumer devices. This is not simple game to execute and Apple does it in movies as well as in music. Steve Jobs has denied any
interest in producing a wireless book reader to compete with Amazon’s
Kindle – so you can bet that a team in Cupertino is hard at work building one (Jobs€™ frequently claimed to have no interest in developing a phone or
videos for iPods. For many people, vehement denials from Steve Jobs are the equivalent of product development announcements).

Digital book content is not especially hard to come by. Amazon has
scanned or acquired digital copies of hundreds of thousands of books, as have Google, Microsoft, and Lightning Press (although not all of
these scans are of commercial quality and most do not contain resale
rights). Amazon has high quality metadata (bibliographic information
about the book) but this most of this data is commercially available to competitors.
Amazon has a retail website, although it is optimized for physical, not
digital goods and Amazon has actually lost share as a music retailer
due to a weak download offering. Amazon set a $10 price point for digital books, which looks to me to be $3 too high, and Amazon’s wireless Kindle, although popular, is klutzy by Apple standards.

So figure that an iBook is on the way –
perhaps a jacket pocket version of the MacAir or a larger iPhone  or
both. Apple is likely to come out with a better device and a more
functional website, but Amazon learns fast, knows ecommerce better than
anyone, has powerful metadata, and knows the publishing community
better than Apple does. An alliance between Lulu or Lightning Press and Apple would surprise nobody –“ especially since Amazon has acquired a print on demand company,
BookSurge, and now requires that all POD books use BookSurge as a
condition of appearing on its retail website. This has produced the predictable uproar among authors (which
must make Steve Jobs laugh. It would never occur to him to sell
a media product on his website that he did not fully control).

Will digital books become free? Many
already are free – specifically books whose copyrights have expired. But
without a reader that is as easy to use as an iPod or a DVD player, a digital copy of a
book is not worth much. Once we have a reader that is easy and fun to use, free books
will proliferate. Unlike CDs and DVDs, books will not vanish any time soon,
even though most small bookstores and large bookstore chains are doomed to the fate of their music brethren. Regional bookstores with scale
will survive –€“ and they tend to be the best bookstores now anyway.

All media wants to be digital, downloadable, and free.
A writer, a musician, or a filmmaker has never been an easy vocation
and will be less so as technology makes it a widely accessible
avocation. Those who are used to selling books, movies, and music are in for a
shock –“ digitization has devalued their products and trying to prevent
or reverse this trend is silly and counterproductive. We can and surely will debate
whether this is creative destruction or just plain old destruction –€“ but media products will be increasingly available for free regardless of one’s view of the trend.

The result will be dozens of new business models. In music, concerts are becoming a huge business -– rapper JayZ (who names these guys?) is reportedly about to sign a $150 million deal with a concert promoter instead of a record label. Ozzfest, the annual heavy metal, hard rock tour and festival founded by Ozzy Osbourne and his wife Sharon makes more money now that the concerts are free because the promoters and the bands do very well from sales of food, merchandise, and yes CDs sold at the concerts.

Behind the new business models will be dozens of new ways to acquire media. As I noted in Gravity Lessons,
when I was a kid, I could consume video content only by watching
commercial television or going to the movie theater.

Today you can still
watch commercial TV or go to the cinema – although it is likely now a
cineplex showing a more movies to smaller audiences. Or you can record TV on your TIVO and skip the ads, you can subscribe
and watch the show ad-free on cable, you can pay-per-view, you can buy
a DVD new, buy one used, you can download a podcast, you can borrow a DVD
from a library, rent it from Blockbuster, download it from
Vongo or a P2P site, subscribe to Netflix, stream it on iTunes, YouTube, or
MySpace, etc. In some cases, you pay for your content – in others (P2P,
libraries, YouTube, Tivo) you do not.

The result is an explosion of choices and a hugely increased chance that you will produce as well as consume media. Consumers today  would never dream of trying to watch every movie available, listen to every song, or read every book. You have to go back to Thomas Jefferson to find a President who could have read every book available in English during
his lifetime. Franklin Roosevelt could have listened to every bit of
music recorded during his lifetime and Jack Kennedy could have watched
every movie. Today a person is almost as likely to create as consume writing, movies, and music during their lifetime. This is only possible because media is increasingly digital, downloadable, and free. 

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