I'm speaking about ebooks in New York this month

I'm giving a talk on the ebook business at a publishing industry conference in New York in late February. I should have some spare time between sessions. If you're in New York and would like to chat during that week, please contact me here.

My talk is about the many ways the ebook industry has failed in the past, but my real focus is on how to avoid those problems in the future. As you know if you've read this blog for a while, you know I am pretty passionate on this subject (link). With all the recent goings-on between Apple, Amazon, Macmillan, etc, we have a lot to discuss.

Here's a synopsis of my talk. If you have any other ebook questions you'd like to see me cover in it, post a comment here.


Check Out My Scars: Seven Lessons from the Failure of Ebooks in 2000, and What They Mean to the Future of Electronic Publishing
1:40pm Tuesday, 02/23/2010
O'Reilly Tools of Change for Publishing (link)

The tech industry has a long history of celebrating its successes and forgetting its failures. We honor the IBM PC but forget the DEC Rainbow and Kaypro II. We put the iPhone and BlackBerry on a pedestal but sweep the Qualcomm PDQ and Ericsson R380 under the rug.

That selective memory is often helpful in the development of a new technology, as it prevents companies from being held back by other companies’ failures. But it also makes tech companies prone to repeating the same mistakes over and over again. So it’s useful to look back at previous efforts to make ebooks successful, both as standalone reader products and as software for other mobile devices.

When you do that, there are seven lessons that emerge for today’s e-publishers:

1. Beware the chicken and the egg. Purchasing a dedicated e-book reader is a major decision for most users. Even though reader devices aren’t all that expensive, they cost a lot more than a couple of books, and so the user needs to have a fairly high motivation before they’ll buy. But the most enthusiastic readers – the people most likely to pay for an ebook reader – are also the people who care the about having a wide selection of ebooks available before they buy the device.

Meanwhile, publishers look at the uncertainties and expenses of preparing an ebook edition, and are reluctant to convert their entire catalogs unless they’re convinced that a huge installed base of reader devices will be available.

This creates a classic chicken-and-egg situation in which the publishers won’t jump on board until there are a lot of reader devices, and users won’t buy the devices until there are a lot of books available. This was the root cause of the failure of ebook devices in 2000.

Amazon and Sony, to their credit, have been trying to power through the chicken and egg situation through very aggressive marketing and price subsidies. They have made progress, but the reader market is not yet self-supporting, in part because of issue #2:

2. Ebook customers are cheap. It would be much easier for book publishers to embrace the ebook market if they could charge more for an electronic edition than they get for a hardcover book. That way they wouldn’t worry about cannibalizing their traditional channels. The reality is just the opposite—consumers generally view an electronic edition as less valuable than a hardcover. Even though an ebook is easier to carry, it’s viewed as evanescent, without the seriousness and tactile quality of a hardcover. As a result, many people are reluctant to pay more than paperback prices for ebooks.

But the book enthusiasts who are likely to be interested in ebook devices are the sort of people who want to read the latest releases, rather than waiting for a paperback edition. They want hardcover content at paperback prices. So Amazon and Sony have been forced to subsidize the sales of ebooks, paying hardcover prices to publishers but collecting lower revenue from their customers.

This doesn’t bode well for the economics of the reader device market. Instead, a lot of people are hoping that other reader devices will emerge, like smartphones. That brings us to the third lesson…

3. Mobile usage patterns are hostile to most publishing. Most print publishing is built around the idea of an extended reading session – the customer settles down with a book or a newspaper and reads through it cover to cover. Mobile devices have a completely different usage pattern. People use them on the go – they pull out the device when they have a minute free, use it briefly, and then put it away.

The usage pattern is more like eating bon-bons than sitting down to a meal.

That means there are strong, natural limits on the amount of text content that many people will consume on a smartphone or other small mobile device. If you’re publishing a joke book, a mobile device may be the perfect distribution medium for you. But unless you are publishing in a country where most people commute by mass transit for long distances (Japan, Korea), extended reading on mobiles is likely to remain a niche for a long time.

4. Periodicals are promising. Combine points 2 and 3 and they indicate an interesting possibility for e-publishing: Magazines. Other than National Geographic, most magazines are viewed as disposable after they’re read. And many of them are read in short sessions rather than all at once. So there is not as much customer resistance to paying the full list price for an e-magazine, and the format is more compatible with a mobile device. Plus, an e-magazine can be delivered faster than a print version, giving the e-edition an advantage.

The challenge for magazines is that the ad-heavy format of a traditional print magazine does not translate well to an electronic device. On an electronic device, people expect to jump straight to content rather than thumbing past ads they way they do in a print magazine. That’s why software products that replicate a print magazine on screen haven’t taken off. The usage pattern is just different.

So the challenge for magazine publishers is to remake their business models, balancing much lower printing and distribution costs against reduced (or different) ad revenue. No one has perfected that balance yet.

5. How do you get a better experience than paper? Here are the first two sentences of Sony’s online pitch for its Pocket Reader: “Carry hundreds of books in your pocket. The Reader Pocket Edition lets you access up to 350 of your favorite books from anywhere.” The problem with this reasoning is that almost no one wants or needs to carry 350 books at once; you can only read one at a time. So Sony’s touting an advantage that’s not actually advantageous.

If they want to win over users, ebook companies need to offer a product that’s actually superior to paper. Amazon’s instant download of books is a good start, but another promising opportunity is the backlist. Even popular authors routinely go out of print on their less well-known titles, and once an author dies their work can virtually vanish from the marketplace.

For example, in science fiction the late Robert Heinlein is considered a giant in the field, but about half of his titles listed on Amazon.com are out of print.

The enthusiastic readers who make up the core market for ebook devices would respond very well to a device that made large numbers of out of print books available, but the process of getting them available has been very slow. This is another area where Amazon is making some progress through the application of money.

6. Beware the tipping point. For book publishers, there is an economic cliff lurking somewhere on the horizon. Once ebook reader devices do take off, there is a point where it will make economic success for a successful author to completely bypass print publishing and self-publish electronically.

The economics work like this: An author typically gets about 15% of revenue as royalties. But a self-published e-author could retain a much larger cut—up to 70% if e-book stores come to resemble the iPhone app store. At that royalty rate, an author would make more money as soon as about 20% of the book-buying public has e-readers.

The actual location of the tipping point will vary for different types of books, and the situation is quite different for new authors who can’t generate demand for themselves. But in general, e-publishing changes the economic balance between authors and publishers, and it would be healthy for publishers to get ahead of that transition rather than waiting for it the way the music business has done.

(In the session I’ll flesh out this analysis more, with pointers to help publishers identify where the tipping point is and what it’ll mean.)

7. Be careful what you wish for. Beyond the financial tipping point, there’s another trend that will likely affect publishing: the rise of free. In both music and consumer software, prices have been inexorably trending toward zero. On the Apple App Store, for example, ASPs are steadily declining. Authors and publishers both should be thinking now about how they’ll maintain the perceived value of written content, and what other models they might use to monetize it.

(In the session we’ll discuss what some of those models might be, based on what’s happening in other types of content.)

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A couple of unrelated links:

--We've posted the Rubicon "Competitive Idea Book," a collection of famous competitive strategies designed to help companies think about their businesses creatively (link).

--Thanks to WAP Review for including my post about the iPad in the latest Carnival of the Mobilists.

How to beat Google (and why Microsoft + Yahoo probably won't do it)

Could Yahoo be fixed and thrive as an independent company? I think it could, but now we'll probably never know, because Microsoft wants to buy it. There are reports that private equity firms, and possibly News Corp, also want to bid (link). Even Google has supposedly offered to help (link). But by declaring its desire for Yahoo, Microsoft has basically acknowledged that its own Internet business is failing. Now that Microsoft has said that in public, it has no choice but to outbid everyone else.

Which is a shame, because I think the combined companies are likely to fail. To explain why, I have to talk about the right and wrong ways to compete with an industry leader...


How to fight a leader

In my opinion, the best way to fight a dominant company at the top of their game is not to go head to head with them. You don't launch a competing line of mainframes against IBM in the 1960s, and you don't launch a consumer operating system against Microsoft in the mid-1990s. What you want to do is challenge them in a business they don't understand, or better yet an area where their own strengths make them weak. That's what Google did -- while Microsoft was focused on beating Netscape, AOL and the other first-generation Internet companies, Google quietly established a franchise in search advertising. It's now using this secure base to subsidize free online applications (and a mobile operating system) that compete with Microsoft.

Although Google's direct impact on Microsoft's applications business to date has been miniscule, Google's tactics will eventually present Microsoft with a Catch-22 situation: If it tries to hold the line on prices, its customers will gradually migrate away. If it matches Google on price, it destroys its own revenues.

Microsoft's response has been to try to get a piece of Google's advertising revenue. First it tried to build its own search and advertising business. Now that's failing, so it wants to buy Yahoo's to get critical mass.

The problem is that even with Yahoo, Microsoft will still be far behind Google in search advertising. Google has a huge lead, and is willing and able to spend lavishly to defend it if it has to. I think what Microsoft is doing is equivalent to leading an infantry charge uphill against an infinite number of machine guns.

If Microsoft really wants to spend $45 billion, I think it would be far better served by investing it to attack someplace where Google is weak.


Google's weaknesses

A dominant company's strengths are also usually its weaknesses. (For example, IBM was so deeply embedded in corporate big iron that it couldn't understand the PC business. Microsoft was so caught up in monetizing a computer platform that it couldn't picture someone giving away the whole thing.) Google's weakness is its beautifully managed and consistent corporate culture. Google hires only the best and brightest software engineers. It hires them young, so they can be molded, and it brags about screening them all for "Googliness." That consistent culture means it acts far more predictably than many technology companies, and it has very consistent blind spots.

One of Google's blind spots it that it can't tell the difference between usability and utility. Usability is the process of making software easy to learn without a manual or extensive training. Google is extremely good at designing for usability. Its interfaces are clear, uncluttered, and generally self-explanatory. Utility is the ability of a product to solve a major problem for a user. That requires the designer to get inside the head of the target customer, understanding not only his or her rational needs but also the emotional landscape. Google is terrible at designing for utility. It tends to attack problems that engineers care about, rather than normal people; and it often produces elegant technologies that don't engage people emotionally and fail to deliver the full solution they need. (If you want a great example of the difference between usability and utility, compare the old Google Video to YouTube. Google Video was cleaner and easier to use, but it was launched without sufficient content, and was about as emotionally engaging as a slab of concrete.)

One of the best ways to compete with Google, then, is to focus on utility -- to create online products and services that solve real problems for customers, and address both emotional and rational needs. That's what Amazon is doing with Amazon Web Services (although in this case the customers are developers rather than consumers.)

There are many, many more opportunities to create high-utility Internet applications. What you need is a critical mass of bright engineers, a product management culture that understands how to design for utility, and senior management that focuses the company on its best opportunities. Designing for utility takes more resources than just tossing a product out there, so management must restrict the number of projects the company undertakes.

Yahoo has plenty of bright engineers, and I think it understands utility better than Google. Ironically, Yahoo's attempt to make itself into a media company probably helped here, because it forced the company to learn about engaging people emotionally.

What Yahoo has lacked, in my opinion, is the awareness that it's actually a products company, not a media company; and the management discipline to focus on a small number of initiatives.

Will a buyout by Microsoft fix those problems? I don't think so. Microsoft itself isn't great at designing for utility. Mostly, it focuses on copying and adapting things that have been developed by others. One of the most depressing documents I've seen on the Web recently was the alleged plan for Windows Mobile 7 (link). Assuming that the plan is genuine, it shows that rather than trying to do something new in mobiles, Microsoft is slavishly trying to copy and "improve" on the interface of the iPhone (so, for example, rather than just using finger touches you can also shake the phone to make it do things). This comes after Microsoft spent the last couple of years trying to copy RIM, and before that Palm.

Even the bid for Yahoo is driven by Microsoft's desperate desire to copy and co-opt another company's business model. That's exactly what Yahoo doesn't need. Rather than focused management that can pick out the most disruptive embers in Yahoo's portfolio and fan them into bonfires, Yahoo is likely to get layers of well-meaning ROI analysis, a distracting flood of resources, political integration hassles, cultural conflicts, and a mandate to "concentrate on the core."

The process will probably strangle Yahoo and distract Microsoft. I really hope I'm wrong, but I think there's a very good chance that the merger will be the beginning of the end for both companies.