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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They also produced a video on how they produced the video. Worth a look.

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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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Steve Jobs died

I felt like someone had unplugged my compass. Steve Jobs was by any reasonable measure the greatest entrepreneur and the greatest CEO in American history. He was a hero to his customers, but to most technology entrepreneurs, he was a God. He revered the Beatles and always reminded me of John Lennon: a genius with round glasses, a rebel with a mischievous grin, and an artist who showed the world things that it had not realized it wanted. With both, it takes years to absorb the full loss.  

Steve Jobs had the soul of an an artist. Like Leonardo DaVinci, Samuel B. Morse, or Edwin Land, he lived at the intersection of humanities and technology and could ruthlessly carve away marble until only his vision of beauty remained. He was a practical poet who understood that “real artists ship”. He accomplished his goal of “making a dent in the universe” — but his premature death has left a dent in the hearts of people the world over.

Steve was the rarest of creatures: a business revolutionary motivated by a deep love of technology and its power to change the rules. We always knew that his “Think Different” ad was really about him:

Here’s to the crazy ones. The misfits. The rebels. The troublemakers. The round pegs in the square holes. The ones who see things differently. They’re not fond of rules. And they have no respect for the status quo. You can quote them, disagree with them, glorify or vilify them. About the only thing you can’t do is ignore them. Because they change things. They push the human race forward. While some may see them as the crazy ones, we see genius. Because the people who are crazy enough to think they can change the world, are the ones who do.

Steve broke rules eagerly. He dropped out of college and dropped acid. He fathered a daughter and disclaimed her, much as his Syrian biological father had lost track of him. He followed very odd diets and lived on communes. At age 20, he made a sojourn to India to see a guru. He learned to focus and focus some more. Often, this meant removing features. The original Mac had no cursor keys. Steve was the first to take away keyboards, mice, modems, floppies, Flash, screens, and CD-ROMs. Reviewers raged and the digerati derided him, but Steve knew that “innovation means saying no to a thousand things”.

His passion often made him obnoxious. Seated next to him on a flight in 1979, he learned that I had made my Apple II usable for word processing by inserting a Z-80 card so that I could run WordStar under the CP/M operating system. He was appalled: “Why on earth would you ever do that?” he asked twice, shaking his long hair and making it very clear that I had flunked the bozo test. He publicly insulted competitors and employees. He launched huge products, including the iPad, with no market research (“it is not the consumer’s job to know what they want”.) At a dinner in 2006, he repeatedly assured me and others that Apple would never sell a telephone under any circumstances. Nobody believed him for a moment (six months later, he unveiled the iPhone), but any other CEO would have deflected the rumor instead of lying outright. This sort of behavior famously got him fired from his own company.

I harped constantly in this blog and elsewhere on his insistence that he control every aspect of the user experience. I recall construction workers building Pixar across the street from my company shaking their heads in awe every time Jobs would land on the property in his baby blue helicopter and take a pencil to their blueprints. He spent millions moving walls and even foundations at the last minute so they would end up precisely where he thought they should go.  He obsessed about details that few CEOs notice (when you upgrade your iPhone next week, notice that as you bring the message shade to a full close, a very tiny animation rounds off the squared edges. Nobody but Steve Jobs would bother to do that.)

Steve Jobs failed. A lot. The Apple III was a disaster. The Lisa sold so poorly that tens of thousands of computers named after his daughter ended up in a large land fill in Utah. You have hardly heard of the Pippin, the Newton, the Copeland, HiFi, the G4 cube, Mobile Me, and several other products that were complete busts. It didn’t matter. Jobs remained unbelievably self-assured and ridiculously demanding. Over the years, I met several Apple employees who worked insane hours and suffered nervous insomnia because they had to present a product or an idea to Jobs – and were terrified at the prospect. One such encounter, possibly apocryphal, was reported in The Atlantic.

When engineers working on the very first iPod completed the prototype, they presented their work to Steve Jobs for his approval. Jobs played with the device, scrutinized it, weighed it in his hands, and promptly rejected it. It was too big.

The engineers explained that they had to reinvent inventing to create the iPod, and that it was simply impossible to make it any smaller. Jobs was quiet for a moment. Finally he stood, walked over to an aquarium, and dropped the iPod in the tank. After it touched bottom, bubbles floated to the top.

“Those are air bubbles,” he snapped. “That means there’s space in there. Make it smaller.”

As I drove north towards San Francisco following the news of Steve’s death, the radio reported that mourners were gathering at Apple headquarters, at Apple stores, at Jobs’ house, and in Dolores Park. Tributes followed from around the world – many of them written and read on devices that Steve built. Here are some that resonated:

7. Of the statements by the famous, Obama called Jobs “…brave enough to think differently, bold enough to believe he could change the world, and talented enough to do it.” He shoulda said “think different”, but otherwise a good statement.

Bill Gates was quick and generous: “For those of us lucky enough to get to work with him, it’s been an insanely great honor. I will miss Steve immensely.” Gates ordered the flags at Microsoft lowered to half-mast. Microsoft joined Amazon, eBay, Google, and many other other sites in offering home page tributes.

6. Insanely Great  author Steven Levy wrote a colorful, articulate obit for Wired that is exceptionally well done. Sample: “If Jobs were not so talented, if he were not so visionary, if he were not so canny in determining where others had failed in producing great products and what was necessary to succeed, his pushiness and imperiousness would have made him a figure of mockery.”

5. John Markoff, the talented New York Times technology writer who has known Jobs for many years wrote a precise, careful, definitive obituary. That, of course, is why we have the New York Times.

4. Fake Steve Jobs, captures the Jobsian hauteur and poetry with surprising and touching verse. An excerpt:

3. Apple. Immediately revised its home page, as did Pixar. Very Steve. He probably approved it in advance, but still. I hope they keep up the tributes and his spirit.

2. The Onion: “The Last American Who Knew What the Fuck He Was Doing Dies”. “We haven’t just lost a great innovator, leader, and businessman, we’ve literally lost the only person in this country who actually had his shit together and knew what the hell was going on…” My kind of tribute. Not for everyone. But anything that makes me laugh at tragedy is +1 in my book.

1. Steve at Stanford. The YouTube video was watched 8 million times yesterday, as crowds paid tribute at Apple stores around the world. NPR played the speech in full at noon. It’s a classic believed by many to be the best commencement address ever given. Even if this is not such a high bar, it’s a great talk and worth watching again.

Many are memorializing Jobs as this generation’s Henry Ford because he did for computers what Ford did for cars — transform them from hobbyist toys to indispensable commodities. In his day, Ford was hugely popular — tens of thousands attended his memorial services in 1947. Some have declared Jobs a modern Thomas Edison, the great inventor who was buried by a small group of friends in rural Ohio (a group that included, ironically, Henry Ford).

Others compare him to Walt Disney, a technology and artistic visionary whose ashes are in Glendale (he is not cryogenically frozen, as widely believed) and whose largest shareholder ended up being Steve Jobs (Jobs made about twice as much money selling Pixar to Disney as he did selling Apple to the public — although these things change with the stock market and there is no evidence that he cared much in any case).

By a very wide margin, Steve Jobs earned first place in the pantheon of genius entrepreneurs. He utterly transformed not one industry but five or six: personal computers, music, telephones, tablets, and animated film. And possibly publishing. He  personally led extraordinary business turnarounds at both Apple and Pixar. When he stepped down as CEO, Apple was the most valuable company in the world. 

Steve was a national treasure and we should honor him in a big way: schools, parks, battleships, postage stamps — the whole thing. I’d gladly throw Columbus under a bus to give Steve Jobs a national holiday. I hope his forthcoming biography is the smashing success that everyone expects it to be.

We will miss this guy enormously.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

More significantly however, was the reason for this growth.

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

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

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

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

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

No longer: today, Amazon announced that 

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

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

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

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

Finally, storage is not a contraint. 

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

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

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

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

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

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A quick search will verify that JamSideDown has both criticized and admired Steve Jobs more than any other CEO. I dislike his high control business strategy and personality but I think that he is America’s finest CEO and that every leader should study his public presentations. He embodies “the intersection of liberal arts and technology” and has transformed several industries. Our grandchildren and their grandchildren will study his life and work. Steve Jobs will be a household name in a hundred years and still widely recognized in five hundred. Few can make that claim. 

The news yesterday that he would take medical leave from Apple was obviously very sad – you don’t take medical leaves unless you have medical challenges. The news has sent his Stanford commencement speech scurrying around the internet again — as it should. In it, Jobs reflects on lessons learned from setbacks: dropping out of college, getting fired, and getting sick. His advises graduates to follow the Whole Earth catalog maxim and “Stay Hungry. Stay Foolish”. Embedded below and worth watching.

The news of Jobs’ medical leave brought to mind a story told to me by a friend whose wife had developed a nasty cancer. She was receiving chemo and experimental treatments at Stanford and she felt miserable. Her hair had fallen out, she had a chronic cough, and she did not look her best — few cancer patients do.

One day my friend and his wife were taking a walk on a nice afternoon in their Palo Alto neighborhood. Most of the people they encountered averted their eyes and walked by, but one guy stopped them, asked his wife directly about her cancer, and proceeded to exchange ideas with her about different experimental treatments, medications, physicians, approaches to managing nausea, etc. After chatting for a few minutes, their paths parted and she thanked him for his thoughts. She remarked to her husband that it was rare to meet a stranger who could engage cancer victims so openly. 

You know the ending. My friend realized that his wife had no idea who the stranger was. He had to tell her that she had been speaking with Steve Jobs. 

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1. Facebook did not turn out to be “Farcebook”. 

In 2007 Microsoft offered to invest in Facebook and valued them at $15 billion. I all but shrieked at the fools from Redmond and ran a carefully altered Facebook logo that maligned their name. I quoted Kara Swisher and others saying that Facebook apps were as dumb as “a bag of hammers”.

Wrong. As of this morning, Facebook is worth $50 billion, which is more than Yahoo or eBay. It is a near certainty that Facebook will soon be more valuable than those two giant dwarfs combined. Goldman put in $450 million of its own capital and received common, not preferred stock. They have seen the financials, and they would only have invested at that valuation if they were deeply convinced that Facebook will be worth $100 billion within a year or two. It may, of course, be a bubble — when all assets get bid to unsustainable levels. But Goldman does not make illiquid investments into bubbles (it may sell into bubbles, even illegally. But it rarely buys.) Plus Goldman can see that Facebook has nearly 600 million users, is stealing talent from everyone in the Valley, and accounts for a quarter of all North American page views. According to Hitwise, Facebook  had more traffic in2010 than Google search and “Facebook” was the most googled term for the second year in a row. My “Farcebook” prediction was a clean miss. Facebook is a real company, an official technology giant, and a very serious threat to Google.

I hate it when that happens. So, you can bet, does Google.

2. The Kindle did not turn out to be “Kindling”. 

In March, before the iPad launched, I declared the Kindle to be toast as a device. I thought that it had a great future as multiplatform software, but that as a piece of hardware it would go the way of car phones. To be honest, I still think that general purpose tablets will replace most dedicated readers just like phones will replace most cameras — but if it plays out that way it will clearly take awhile. 

Amazon, as it turns out, sold about 8 million Kindles in 2010, and declared that the device beat out Harry Potter and the Deathly Hallows as the single most popular product that they sell. (How does the final Harry Potter outsell the first Harry Potter? Don’t get me started..).

Morgan Stanley surveyed consumers and discovered that for $139, many people will buy both a Kindle and an iPad, which is a little bit surprising, but makes sense if iPads are shared family devices and Kindles are personal reading devices.

Morgan Stanley’s data also show that 20% of all consumers buy a majority of all books. Since this 20% is more affluent and more likely to adopt e-Books, my prediction that book stores are going to disappear faster than music stores did looks pretty good. First chain to fail will be Borders, which should die in 2011. 

But as Yogi Berra said, it is difficult to make predictions, especially about the future. Check back in 2012. 

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