Quick Takes: The RIM Tragedy, Lame Market Research, Ebooks Closer to Tipping, Flip vs. Cisco, Google as Microsoft, Nokia and the Word "Primary"

Short thoughts on recent tech news...


RIM as Greek tragedy

I wrote last fall that I was worried about RIM's financial stability (link), but I never expected the company to start inflicting damage on itself.  RIM has always come across as a calm, dependable company.  Maybe not as flashy as some other firms, but reliable and smart.  But as we approached the PlayBook launch, the company has started to look like its own worst enemy.

It's clear that the PlayBook was designed initially as a companion device for people who have BlackBerry phones, and only those people.  That's an interesting choice -- not one I would have made, but I can see RIM's logic.  But apparently RIM decided late in the game that it needed to market the tablet to a broader range of customers.  It started talking up the features those users would need, without making clear that the features would not be included in the device at launch.  Many of the things the company has been touting -- such as Android app compatibility and the ability to check e-mail messages independently of a BlackBerry -- were not available when the device shipped.  RIM has been marketing vaporware.  That guarantees disappointed reviews that focus on what the device doesn't do, rather than what it does.  Check out Walt Mossberg's write-up (link).

While this has been going on, RIM co-CEO Mike Lazaridis has been compounding the problem by creating a personal reputation as a loose cannon.  His latest escapade was ending a TV interview with BBC when they asked about security issues.  The use of the word "security" was mildly provocative, but if you've ever dealt with the British press, you know they specialize in goading people to get an interesting reaction.  The more senior your title, the more they'll poke at you, to see if you can take the heat.

The way this game works, there are several techniques you can use to deal with an aggressive question.  You can laugh at it, you can calmly point out the flaw in the question, you can answer it earnestly and patiently, and you can even pretend not to understand it (I did that once on a UK TV show and it drove the interviewer crazy because he didn't have time to rephrase the question).  But the one thing you can't do is stop the interview.  If you do that, the BBC will post a clip of you online that makes you look like a gimlet-eyed prima donna (link).

The fact that Lazaridis did this means either he's losing personal control under pressure, or not being properly briefed by his press people, or both.  Whatever the cause, it is unprofessional, and it's making RIM's challenges harder.

If you want to understand the damage being done, you can read the forward-looking obituary of RIM that Slate just ran (link).  Or check out this column by Rob Pegoraro of the Washington Post (link). Rob's a very fair-minded, professional journalist who isn't given to hyperbole.  But he called Lazaridis' actions "profoundly foolish from any sane marketing perspective...Seriously, does RIM not realize whom it’s competing with? The company is all but begging to get crushed by Apple."

I haven't written off RIM by any means.  They have a huge customer base, a great brand, and a long history of overcoming skepticism from people like me.  I hope they can do it again.  But at a minimum, RIM's management needs to recognize that they do not have the marketing skills needed to play in the world of increased smartphone competition.  They need professional help, immediately.  And I worry that the marketing problems are actually symptoms of much deeper disorder within the company.


The lamest market research study of the year

It's still early in the year, but I think someone's going to have to work pretty hard to do a lamer market research study than Harris Interactive's EquiTrends survey of mobile phone brands in the US.  Harris says the survey indicated that Motorola has the most "brand equity" of mobile phone brands in the US, followed by HTC, Sony Ericsson, Nokia, and Apple.  Harris also provided a nice chart of the results (link):



There are a couple of problems here.  The first is that the reportedly best-selling mobile phone brand in the US, Samsung, was not included in the results (link).  Oops.

The second problem is that Harris doesn't directly measure brand equity (which is a pretty fuzzy concept anyway).  What it measures is "Familiarity, Quality, and Purchase Consideration."  Those three ratings were combined into an overall brand equity score.

So this is a made-up rating created through a mathematical formula that Harris hasn't shared with the public, as far as I can tell.  But Harris assures us that it's meaningful: "Those companies with high brand equity are able to avoid switching behaviors of those brands that lack brand equity."  (link).  So, according to Harris's research, people in the US should be switching from other phone brands to Motorola.

But in the real world, the exact opposite has been happening.  Motorola has been losing share.  The number three rated brand, Sony Ericsson, has barely any distribution in the US, so it doesn't have much share to lose.  The number four brand, Nokia, has lost most of its US share.

Harris argues that Apple's mediocre score is driven by the sophistication of the iPhone:  "There is still a large audience of consumers that aren’t interested in a smartphone running their life, and Apple doesn’t have a product to meet that need."  I think that's correct, but HTC also sells only smartphones, and it was ranked number two.

And oh by the way, what's the margin of error in Harris's survey?  I can't find it disclosed anywhere, but my guess is that it's several points plus or minus, in which case everyone except Motorola is in a statistical tie.  That wouldn't have made for a cool looking marketing chart, though.

It's been distressing to see websites pick up the Harris story and repeat it without questioning the results.  PC Magazine swallowed it whole (link), as did MocoNews (link).  A lot of other sites reprinted the Harris press release verbatim.  Even if you didn't dig into the flaws, the study ought to fail the basic sniff test of credibility -- does anyone really believe that HTC has a stronger brand in the US than Apple?

When I worked at Apple and Palm, we hated synthetic brand rating studies like this one (and the JD Power ratings, which are similar) because the results depend more on the secret formula used by the polling company than on the actual behavior of customers.  The polling companies construct these special methodologies because they can then sell long reports to the companies surveyed explaining the results, and also charge the winners for the right to quote the results in their marketing.  Check out the fine print at the bottom of the Harris press release: "The EquiTrend® study results disclosed in this release may not be used for advertising, marketing or promotional purposes without the prior written consent of Harris Interactive."  I don't know for sure that Harris charges to quote the survey, but that's the usual procedure.

The lesson for all of us is that you should never accept any market research study without looking into its background, even if it comes from a famous research company.


Ebooks: Here comes the tipping point

The continued strong sales of iPad, Kindle, and Nook in the US are bringing us steadily closer to the tipping point where it will pay an author to bypass paper publishing and sell direct to ebooks.  The latest evidence is from the Association of American Publishers, which reported that ebooks made up 27% of all book revenue in the US in January-February 2011 (link).  AAP correctly pointed out that the ebooks share was raised temporarily by people buying ebooks to read on all of the e-readers they got for Christmas.  The share will go down later in the year.

Still, at any share over about 20%, it will be more economical for an established author to self-publish through ebooks (where they can retain 70% of sales revenue) rather than working through a paper publisher (where they get at most 15% of revenue).  When we hit that point on a sustained basis, I expect that a lot of authors will move to electronic publishing quickly.

It looks like we'll hit that point sometime this year or next.


Flip aftershocks

Silicon Valley has the attention span of a toddler in a candy store, but it was interesting to see how people around here lingered on the story of Flip's demise several days after the announcement.  There were dark suggestions of ulterior motives at Cisco -- that they had bought the company to strip it of its intellectual property (link) or that they shut it down a viable company only so they could look decisive to Wall Street (link).  And that was just the stuff in the press.  I've heard even more pointed speculation from people working in Silicon Valley.

My guess is the real story is a lot more complicated and nuanced, but at this point it doesn't matter.  Killing Flip may have helped Cisco with Wall Street analysts, but the sequence of buying Flip and then shutting it down has seriously damaged the company's image in Silicon Valley as a leader and a partner.  Silicon Valley is a very forgiving place.  You can make huge strategic mistakes, and waste billions of dollars, and still you'll be forgiven as long as you did it in sincere pursuit of a reasonable business idea.  But Cisco's senior management is now viewed as either overconfident to the point of stupidity, or as the deliberate torture-murderer of a beloved consumer brand.  I've rarely seen this level of hostility toward a management team, and I don't think they will be forgiven anytime soon, if ever.

Does that have any practical impact on Cisco's business?  Not immediately; business is business.  But it will probably be a little harder for Cisco to make alliances and hire ambitious people in the future.


Google 2011 = Microsoft 2000?

It's spooky how Google is sometimes starting to remind me of Microsoft circa 2000.

The latest incident was a quote from a Google executive saying that the company wants iPhone to grow because Google makes a lot of money from it (link).  Microsoft used to say the same sort of thing about Apple, claiming that it made more when a Mac was sold rather than a Windows PC (link).  (The idea was that many Microsoft apps were bundled with Windows at low cost, whereas Mac customers bought Microsoft apps at retail.)
   
In both cases, the statements may be technically true, but what they really point out is that the company has deep internal conflicts between its various business units.  Yes, part of Microsoft wanted to make Macintosh successful, but another part of Microsoft wanted to kill Macintosh.  Microsoft as a whole wanted to do both at the same time, which created internal confusion.  Add in antitrust lawsuits by governments and Wall Street pressure for quarterly growth, and Microsoft quickly became distracted, inwardly focused, and slow-moving.

Parts of Google, I'm sure, think iPhone is great and want it to grow.  But I guarantee that the Android team is trying to kill iPhone (and Nokia, and HP/Palm).  Google has its own set of government distractions, plus a big old lawsuit from Oracle, plus legal action by Microsoft and Apple against Android licensees. 

There are huge differences between Google and Microsoft, of course.  Google is not under the same sort of Wall Street pressure that was applied to Microsoft, and Google's founders have not lost interest in running the company. 

But it's disturbing to see how quickly some of Microsoft's symptoms are showing up at Google.


Hey Nokia, how do you define "primary"?

Microsoft and Nokia said they have finalized the contract for their alliance.  There were a couple of interesting tidbits in the announcement:

--Both companies said they completed the negotiations sooner than they expected.  Usually that sort of statement is hype, but for an agreement of this size, it actually was a pretty fast turnaround.

--They went out of their way to say that Nokia will be paying royalties for Windows Phone similar to what other companies pay.  That's important legally and for regulators, so companies like Samsung can't complain that Microsoft is giving discriminatory pricing.  At the same time, the announcement also made it clear that Microsoft will be passing a ton of money to Nokia for various services and IP, which Nokia wanted on the record to help with its investors.  I think the net effect will be that Nokia gets a free Windows Phone license for a long time.  That will not please Samsung, HTC, and the other Windows Phone licensees, because it puts them as a price disadvantage.

--The companies are apparently cross-licensing a lot of patents.  I wonder if this will help Nokia with its IP warfare against Apple.

--In an interview with AllThingsD (link), Microsoft and Google Nokia said Windows Phone was Nokia's "primary smartphone operating system." That leaves open the door for Nokia to play with other smartphone operating systems, and it leaves completely unanswered the question of tablets.  I'm sure the Symbian/Meego fans will be all over that as a ray of hope for their platforms, but to me it just leaves some prudent wiggle room for Nokia in the future.  I'd love to know how the agreement defines the words "smartphone" and "primary" -- or if it even has definitions for them.

(Note: Edited on April 22 to fix an embarrassing typo.)

Will E-Readers Eat the Tablet Computer?

The consensus prediction in the tech industry is that tablet computer sales will swamp sales of ebook readers. The Huffington Post is taking bets on which e-readers are dead meat (link), and Informa predicts that e-reader sales will start declining in 2014 as tablets out-compete them (link). I've seen similar (and more pessimistic) private forecasts from other analysis firms. They all argue that it's just a matter of time until general-purpose tablet computers displace more limited e-readers.

Yes and no. I think tablet features will eventually take over, but it would be very premature to assume that tablet computer companies will be the long-term winners. They're actually at a huge disadvantage that almost no one is talking about.

What brought this home to me was a brief hands-on experience I had last week with the Barnes & Noble Nook Color. I usually think of Nook as the poor stepchild to Amazon Kindle, and in unit sales it certainly is. But Nook Color isn't just an ebook reader. It's a full tablet computer, or at least it will be if Barnes & Noble allows it to be. And it sells at a great price.

The easiest way to explain my reaction to Nook Color is to compare it to the Samsung Galaxy Tab. The first thing I noticed was basic ergonomics. As I wrote recently, when I first picked up the Galaxy Tab it worried me because it was hard to hold -- its slick plastic surface felt like it was going to slip out of my hand, and so I couldn't hold it comfortably without putting my thumb on the screen (link). The Nook Color is almost identical to the size and weight of the Galaxy Tab, so I expected to have the same problem. But the Nook has a brushed metallic-feeling surface that's much easier to grip. Attention to detail has a huge impact on mobile products, and Nook Color shows far more attention to detail than the Galaxy Tab.

The Galaxy Tab definitely has more features than the Nook: two cameras, 3G options, and an accelerometer. But Nook Color has all the basics, including Android OS, a touchscreen, and very nice color display that I think is the equal of Samsung's. And it has one important feature that The Galaxy Tab lacks -- an affordable price. A Nook Color with WiFi is $249, literally half the price of a similarly-equipped Galaxy Tab.

That's a stunning difference, especially considering that Samsung usually tries to be a price leader in new technologies. At $499, I think the Galaxy Tab will be a very difficult purchase for the average consumer. At $249, Nook Color isn't cheap, but it's a mainstream consumer product.

So how in the world does a book-seller get a 50% price advantage over a major consumer electronics company?

The difference isn't mostly due to features. I bet the accelerometer and cameras in the Galaxy Tab don't add more than $20 to its cost, probably less. The Tab probably has a faster processor as well, but no way does that justify the cost difference. I think two other factors are involved. The first is that B&N owns its own retail stores, and so it doesn't necessarily have to mark up the price of the Nook with the full traditional retail margin. In contrast, Samsung will be expected to fork over the usual 20 points or so of margin to its dealers, plus additional comarketing dollars to buy shelf displays and Sunday newspaper ads. Second, since B&N makes money from the content it sells to Nook users, it can afford to sell the hardware at lower cost.

In other words, the Nook is a subsidized product, like a cellphone. So is Kindle.

I think the people predicting that tablets will swamp e-readers haven't thought through the economics of the situation. As long as e-readers are based on e-ink displays, they can't compete directly with tablets, because the displays are grayscale and are too slow to display animation and video. But an e-reader with an LCD display is physically a tablet, at a much more attractive price.

Subsidized products usually beat unsubsidized ones. Even Apple had to move the iPhone onto subsidies after it first launched it without.

The only thing stopping Nook Color from competing directly with tablets is software. Although Nook Color runs the Android OS, same as Samsung, Barnes & Noble is reportedly planning to severely restrict the applications that will run on Nook Color. The idea is to keep the device focused as an e-reader rather than allowing it to become a general-purpose tablet.

It's unusual for a company to artificially restrict what you can do with a computing product, but there is a perverse logic to what Barnes & Noble is doing. If someone buys Nook Color as a tablet and doesn't buy any books or other content for it, Barnes & Noble will make less money. By restricting the apps, Barnes & Noble can chase away those lower-margin customers who aren't hardcore readers.

But I think that's a very short-sighted policy, for two reasons:

First, as a dedicated e-reader, Nook has important drawbacks. Its battery life is much shorter than an e-ink device, and it's a lot more expensive. If the apps are restricted, Nook Color is a tweener. It's inferior as an e-reader and as a tablet.

Second, B&N is missing a huge opportunity. It's not like they're losing money on Nook Color sales (the hardware cost is probably in the $150 range, or lower). As long as you're making some money per unit, I think it makes sense to grab as many customers as you can now, while you have a structural advantage in the market.

The ultimate payoff for an ebook distributor like B&N is to displace the publishers and start selling ebooks (and other content) directly to the public. To get to that goal, B&N should be trying to grow the e-reader installed base as quickly as possible. Instead of restricting Nook Color to people who already want ebooks, B&N should sell it to everyone and then entice them into becoming e-reading users.

Historically, some of the most successful computing products were sold first as single-purpose devices that then blossomed into multipurpose devices. PCs were first adopted in volume to run spreadsheets, and the first successful PDAs were sold as electronic calendars. Nook Color could be the e-reader that ate the tablet market.

And it's easy to do -- all B&N has to do is say yes to all types of third party apps. Get out of the way, and the customers will take care of the rest.

The future of publishing: Why ebooks failed in 2000, and what that means for 2010

This post is adapted from a speech I gave at the O'Reilly Tools of Change publishing industry conference in February.

It's a great time for ebooks. There are at least six ebook reader devices on the market or in preparation. A major business magazine predicts that up to seven million of these devices will be sold next year. A major consulting firm says ebook sales will account for ten percent of the publishing market in five years. And an executive at the leading computing firm predicts that 90 percent of all publishing will switch to electronic form in just 20 years.

But the year isn't 2010 -- it's 2000, and the ebook market is about to go into hibernation for a decade. What went wrong, and what can the failure tell us about the prospects for ebooks in 2010?

I had a front row seat for the last generation of ebooks: In 1999 I was at Softbook (one of the early ebook reader companies), and later I interacted with the folks at Peanut Press (an ebook publisher) after they were bought by Palm. My short summary of the lessons I learned: Although some of the barriers that stopped ebooks in 2000 have been reduced, most of them are still in place. So I think the market isn't likely to grow as quickly as many optimists are predicting. However, the economics of traditional publishing are very vulnerable to a paradigm change. That change is likely to happen later than most people expect, but once it happens it'll probably move very quickly indeed. So stay out of the avalanche zone.

Here are the details on why, and how to avoid the avalanche when it does happen.


Why ebooks failed in 2000

I know I'm going to get some comments reminding me that ebooks didn't ever completely fail. They've been around for a long time, and some people read books on their computers every day. Granted. But the market for ebooks and ebook reader devices utterly failed to take off the way that most observers expected in 2000. It's important to understand why, or we may be at risk of repeating history.

I think the failure of ebooks ten years ago was due to five problems:

1. Not enough ebooks. The core customers for an ebook reader are reading enthusiasts, meaning they like to read a lot of books. If you ask them how many books they'd like to have available for their reader, they'll look at you funny and say, "All of them, of course. What's the point in paying for an ebook reader device that doesn't let you any book you want to read?"

In 2000, we had a huge problem with ebook availability. They were expensive to convert to ebook format (hundreds of dollars per title), and publishers were reluctant to make that sort of investment. I don't have any statistics on the number of ebooks available back then, but I remember that it was an ongoing, major problem for the company.

Today, the situation is better but not ideal. Looking at the New York Times bestseller list for February 28, all but one of the top 10 books in hardcover fiction and nonfiction were available in ebook format. However, there is still a problem with the timing of availability. Barnes & Noble had 15 books on its "Coming Soon" list for March 10, but only six of them were to be released as ebooks at the same time as they came out in print. That's a poor ratio, and would be a significant annoyance to an ebook user.

Looking at older books, availability seems to be hit or miss. Many more books are available in ebook format today than in 2000, but there are weird gaps. For example, many of the most popular works of Robert Heinlein (one of the leading science fiction authors of all time) are not currently available in the Kindle store, but are available for Barnes & Noble's Nook device. For Isaac Asimov (another all-time great), only a small subset of his work is available electronically from either Amazon or Barnes & Noble.

This sort of confusion frustrates many ebook users.

2. Ebooks were too expensive. Many book buyers feel they get extra value when they buy a hardcover book. It's more substantial than a paperback, and has a nice slipcover. The pages don't turn yellow, and the printing is generally very clear. If they like the book, they can put it on a bookcase somewhere to show their friends how tasteful they are. An ebook has none of these benefits. To many users, it feels more like a paperback -- disposable, intangible, slightly cheap. But in 2000, many ebooks were priced the same as hardcover books.

Combine high book pricing with limited availability, and most people didn't feel ebook readers were a reasonable value. The market stalled right there.

The problem with ebook vs. hardcover pricing is that publishers bundle two sorts of value when they create a hardcover book: The physical product is more impressive, and you get earlier availability of the book, often a year or more before the paperback version comes out. Unfortunately, book buyers think most of the extra value they're paying for from a hardcover is the physical book. Meanwhile, publishers (and authors) often think the main value of a hardcover is early availability. Many authors and publishers don't want to say this to the public, but hardcover books are a tax on the most enthusiastic fans of an author.

E-publishing breaks that cozy little arrangement, by separating the early availability value from the better production value. Publishers couldn't figure out what to do about that in 2000. So they often did the conservative thing, pricing ebooks the same as hardcovers. To ebook customers, that felt like exploitation, if not outright fraud.

It still feels that way today.

The situation now is somewhat improved, in that ebook prices are often somewhat lower than hardcover prices. But it has not been resolved. For example, Amazon lists Payback Time by Phil Town as a hot new release. Its list price is $26.99 and the ebook price is $13.36, so that looks like a huge discount. But the hardcover version is already being discounted to $14.57. So the ebook price is about the same as the hardcover's street price. That's not acceptable to a lot of ebook customers.

Until very recently, Amazon had been subsidizing down the price of most ebooks to $9.99 in an effort to deal with conflicts just like this, but that arrangement broke down when challenged by Macmillan. The result was a very nasty public spat in which Amazon briefly pulled all Macmillan books (paper and electronic) from its online store. That drove many book authors into a frenzy, with most of them siding with Macmillan (examples here and here and here).

Hey, you want to know how to piss off an author? It’s easy: Keep people from buying their books. You want to know how to really piss them off? Keep people from buying their books for reasons that have nothing to do with them. And you know how to make them absolutely incandescent with rage? Keep people from buying their books for reasons that have nothing to do with them, and keep it a surprise until it happens. Which, as it happens, is exactly what Amazon did. As a result: Angry, angry authors. Oh so very angry.
Amazon apparently forgot that when it moved against Macmillan, it also moved against Macmillan’s authors. Macmillan may be a faceless, soulless baby-consuming corporate entity with no feelings or emotions, but authors have both of those, and are also twitchy neurotic messes who obsess about their sales, a fact which Amazon should be well aware of because we check our Amazon numbers four hundred times a day, and a one-star Amazon review causes us to crush up six Zoloft and snort them into our nasal cavities, because waiting for the pills to digest would just take too long.
These are the people Amazon pissed off. Which was not a smart thing, because as we all know, the salient feature of writers is that they write. And they did, about this, all weekend long. And not just Macmillan’s authors, but other authors as well, who reasonably feared that their corporate parent might be the next victim of Amazon’s foot-stompery.
--Science fiction writer John Scalzi

Hey, Amazon. When cutting off publishers, don’t start with the one that has the most science fiction writers. We will blog you dead!
--Science fiction author Scott Westerfield

What is it about the tech industry and authors? Both Amazon and Google have shown a unique ability to make authors bond with publishers, people they otherwise tend to view as parasitic scum.

The relationship between Amazon and Macmillan is very complicated, and I don't want to get into the details of their contracts here. There's ample evidence for labeling either one of them a villain and/or idiot if you want to. But my point is that ebook pricing remains screwed up today. Maybe not as uniformly screwed up as it was in 2000, but it's still a mess.

3. The hardware form factor was wrong. When ebook readers failed to sell well, ebook producers tried to focus on other electronic devices -- PCs, PDAs, and smartphones.

The trouble is that for most people, the ergonomics and psychology of reading are wrong on computers and smartphones. A laptop is the wrong size and weight to create an immersive reading experience, and the backlit displays on most laptops create eyestrain compared to reading ink on paper.

PDAs and smartphones are too small for immersive reading for most people, and besides people are usually in a different mindset when they use a pocket device. They use it briefly, in short spurts throughout the day, when they are bored or need to find a bit of information. It's like the information equivalent of snacking. A reference book might be useful in this context, and holy books like the Bible sell well in electronic form because some people take comfort in reading a bit of them every day. But for most people, a pocket device isn't something that you'd curl up with for a couple of hours, the way you would with a book.

This is an area where we're obviously making a lot of progress. Amazon and Sony have both been willing to subsidize their tablet devices for years while the ebook market develops, and Apple and other big computer companies are now entering the tablet market, not to mention a host of smaller startups.

Just remember that most electronics companies are sheep. If tablets don't sell well, they will exit the market as quickly as they entered it.

4. Periodicals weren't ready. Although we call these devices "ebook readers," if you look at user attitudes and usage patterns, in many ways they are a better fit for reading periodicals (newspapers and magazines) than they are for books. Most printed magazines and newspapers are viewed as disposable, so many people don't object to paying the same price for an e-version as they do for the printed version. And most periodicals can be read in short bursts, which fits the usage pattern for mobile devices.

Even better, an e-magazine can get to the reader faster than a printed version, because it doesn't have to be printed and mailed.

When I was at Softbook, there was a lot of user interest in getting magazines on our devices. Unfortunately, very few were available, and the effort to get them converted started too late to save the company.

Today, there are electronic versions of a number of publications targeted at the ebook readers. But a couple of additional problems have surfaced. One is that often the e-versions are inferior to the printed versions. On the Kindle store, 64% of the reviews for the e-version of The Economist magazine are a single star (the lowest possible rating). Here are some sample comments:

"I was very happy and interested in the Economist on Kindle despite the cost until I learned that the subscriber content on the Economist web site is not included....For the cost involved the Kindle subscription should at least equal the print subscription benefits."
"Why does it take a week to make the Kindle version available. I find it very convenient to read and search but do not want to be a week behind in reading."
"I only receive part of the magazine. Overseas users don't get images -- including the cover image and graphs/charts."
"Many of the charts and graphs are so small the legend is unreadable which in turn renders the displays meaningless."

Time Magazine, 46% of reviews are one star:

"This is a rather embarrassing electronic version of Time Magazine. There are NO pictures, no charts, no illustrations. Instead whenever you run into an article that has these in any decent amount, they've inserted an entry telling you to go get a PDF or print version....It looks and feels like some cheap RSS reader collected this rather than being an electronic version of the magazine."
"I'd like to read some parts of Time but not others, so I very much miss having a convenient table of contents. As it is, we have to (slowly) leaf thru all articles to find out what's of interest."

Wall Street Journal, 50% of reviews are one star:

"The pricing makes absolutely no sense: $99/year for the WSJ print edition with the Online Web edition included. $119.88/year ($9.99/month) for the Kindle edition.... That makes no sense because I could buy the Web edition and read it through the Kindle Browser for no additional charge."
"I also subscribe to the print and wsj.com which shows how the Kindle edition is very limited in his layout and pizzaz....Compared to the NYTimes Reader or even the wsj.com it is a sad commentary on their apparent lack of effort. There should be a more detailed table of contents instead of just very general catagories of articles. To find a specific article is sort of a blind proposition...being forced to go through the all article until you find what you're looking for."

In fairness, some other publications are better-reviewed. The Kindle version of the International Herald Tribune has an average rating of four stars, as does the New England Journal of Medicine. But overall, there are a lot of teething problems as the publishers figure out how to produce their e-versions and how to price them. This is likely to hinder customer adoption until the problems get sorted out.

5. Poor marketing. In my opinion, the right way to create a technology product is to identify a group of customers who have a major problem, and to solve that problem decisively. It's not clear that ebooks, especially as they are constituted today, do that. Paper books simply aren't broken, from the perspective of most users. S. David Mash had a good quote on this (link):

The reading device for the paperback is widely available for free (sunlight). This device can be used for other tasks as well.

A lot of the investment in ebook devices today seems to be driven more by strategy than by user needs. E-books are believed to be an important future business opportunity, and companies are maneuvering to be in position when that opportunity takes off.

The problem is, unless they solve a user problem, and communicate it to the users, the market won't take off in the first place. This tripped up the ebook companies in 2000, and I think it is still true today. Check out Amazon's pitch for why you should buy Kindle:



Can you spot the problem? It's a list of features, not a list of benefits. Now let's look at Sony:



They're doing a tiny bit better, in that they do list a user benefit. Unfortunately, how many people do you know who want to carry 350 books at one time? I call this situation "phantom value," and it's something that happens a lot to tech companies. They've made a product without really thinking through the value proposition. When it comes time to market it, they pick one feature of the product and try through brute force to persuade customers that they should care about it. Usually the only people they convince are themselves.

This same thing happened when the music industry was first trying to defend itself from MP3 players. There was a huge fuss over the superior audio quality of CDs, and a lot of people in the music industry put a lot of effort into talking up the quality aspect of CDs. The only problem was that the average music listener couldn't hear the difference and didn't care about it.


What it means for ebooks in 2010

Although ebooks are doing much better than they were in 2000, there are still very significant structural barriers to the broad adoption of ebooks. We're in a chicken and egg situation where the content isn't fully ready for use because there aren't enough device users to force investment, but people won't buy more devices until the content gets better. As long as Amazon and Sony continue to subsidize the market, I think it will continue to grow moderately. And I think the iPad and related tablet products may help. But overall, the prospects for near-term explosive growth don't look good.


What happens next, and what can we do about it?

First, let's talk about a couple of opportunities. Paper books published today are not broken, but there are a couple of notable places where the publishing industry as it works today really is breaking down, and ebooks could help.

Save the short story. The first problem is the market for short stories. I wrote about this several years ago at length (link), so I won't repeat the whole situation here. But a quick summary is that the magazines that used to produce a lucrative market for short stories have mostly gone out of business or moved on to other sorts of content. As a result, authors have relatively little incentive to write short fiction these days.

Speaking as someone who grew up reading and appreciating short fiction, this is a loss for readers and an opportunity for e-reader devices. Short fiction is a great fit for e-readers because it can be consumed in small bites, and if authors could sell directly to their readers, the revenue could eventually be good enough that people would go back to writing short fiction. Plus it would give e-reader devices a real benefit -- content that you can't get anywhere else.

What's missing is the marketplace to make that happen. We need the equivalent of an iTunes store for short stories, tied to a mass market tablet device.

Free the backlist. At the O'Reilly conference I heard a fascinating statistic from Brewster Kahle of the Internet Archive: 70% of all the books ever written in English are out of print but still under copyright. In other words, you can't legally make copies of them, but there's not enough demand for them that the publishers can afford to reprint them. They are orphans.

These aren't just obscure books. In science fiction, my favorite category, award-winning books from the 1950s and 1960s are frequently out of print, and forget about finding less-known books even from major authors. The best you can do is a used book search, which if you're lucky will get you a smelly and dog-eared paperback in the mail. And those are the famous authors! Books from many others are unavailable in any form.

In my opinion, this is appalling. And it's also an opportunity.

Kahle is working on a project to let universities lend out electronic copies of the books in their stacks, which include many of these orphan books. As I understand it, the idea is that the library owns the right to lend out one copy of the book. If a central server keeps track of that single electronic copy, it's possible to legally read e-versions of orphaned books. It sounds like an incredibly cumbersome approach -- and it is. But it's better than nothing, and once again it's producing content for e-readers that can't be obtained any other way.

The project is called BookServer, and 1,000 more books are being digitized every day (link). It's the most hopeful thing I've heard about the future of libraries in years.


Rethink the periodical

The Internet is flooded with videos of prototype electronic magazines that publishers have been working on. Most of them look pretty similar -- there's an electronic image that looks just like a printed magazine page. The user moves from page to page by swiping a finger back and forth on the device's screen. You can zoom in to look at a graphic more closely, and zoom out to a thumbnail view that shows several pages side by side. The pages include both ads and stories, just like the magazine. In some prototypes, static pictures are replaced by videos and animations. Most of the demo is made up of page swiping and zooming, and you're left thinking, "hey, that looks just like a print magazine on the screen."

I am reminded of this:



It's called the Horsey Horseless Carriage. Time Magazine wrote about it in 2007 (link). It was supposedly an early automobile design in which a horse's head (thankfully a carved wooden one rather than stuffed) was mounted on the front of an automobile. The idea was apparently to make the car look more like a horse-drawn carriage, so the real horses would not be frightened by it. Just as striking as the horse's head is the rest of the car's design. From the wheels to the body design to the weird tiller the driver uses to steer, it is a basically a horse-drawn carriage that has a motor affixed to it.

We laugh now because we know the carriage needed a total rethink to translate it into a car -- everything from the wheels to the controls to the seat designs had to change radically. And yet when it's our turn to create something new, we create electronic magazines that look just like printed magazines.

It's a failure of the imagination, in my opinion. Most of the design of a magazine was driven by the economics of printing and mailing a paper publication. Why are the ads and text arranged the way they are? Because in a paper magazine, you can force people to skim past the ads while they look for the articles. Why is a magazine that particular size? Because that's what the post office will deliver, it fits easily in mailboxes, and it's a paper size we're used to handling. Why does it come out once a month or once a week? Because you have to bundle up a critical mass of content and ads before it makes financial sense to mail it. And on and on and on.

None of those assumptions apply to an electronic publication. They are all rules that we've absorbed from the print world, so deeply that we don't even think to question them. Some of those assumptions may still make sense in the electronic world, but many of them won't. One area where I feel strongly that our assumptions are faulty is advertising.

People reading paper magazines are used to fumbling past ads while they read. It's a standard part of the experience. But people using an electronic device have been conditioned by the web to expect to click and jump directly to the content they want. Making them flip through simulated electronic pages full of ads simply won't work. That means the ads in an electronic publication probably can't be as numerous as they are in a print publication. What's worse, the ads that pay the most money -- the inside front cover and the back cover -- don't even necessarily exist in an electronic publication.

I think some magazines believe they can force the current ad experience on users. Some of them even have persuaded themselves that readers see the ads as part of the value of the magazine (see my discussion of phantom value, above). But publications need to understand that they'll be competing with a new crop of publishers who grew up online and are not hamstrung by the same thinking.

The best example of this new thinking is Yahoo. It's very trendy to dismiss Yahoo these days because it's not Google, but in reality the company is a very different beast. Google is all about search and direct-response advertising associated with it. Yahoo is basically an electronic publisher supported by "display" ads -- brand-building ads created by large national advertisers, targeted at the specific demographic groups Yahoo delivers.

Yahoo today runs a hugely successful electronic newspaper. It has a news section:



A finance section:



And a sports section:



All of them are totally supported by ads, with no subscription fee.

If you're a magazine or newspaper publisher, you may think that e-publishing finally gives you a path out of the free-web-content trap. But ask yourself what happens when companies like Yahoo realize they too can create electronic publications for ebook readers. Will they charge for subscriptions, or will they create completely ad-supported publications? What does that do to your business model?

I think the periodical has to be rethought much more thoroughly than it has been to date. At its core, the thing that makes a magazine or newspaper valuable to readers is its editorial staff -- a group of writers, editors, and artists who work in synergy to produce a unified product. Rather than asking how to make a magazine electronic, we need to ask what must be built around an editorial staff to make it viable in the electronic world. I don't know what the result will be, but I'm pretty sure it won't look like a print magazine scanned and transferred to a screen.


Publishers: Rethink your value

Although publishers today are focusing on what ebooks do to their distribution channels, the real threat to them, in my opinion, is the likelihood that in the future authors will publish their books directly to the public, bypassing the entire publishing value chain. To understand this challenge, it's necessary to look at the current value chain for books...

An author typically gets about 12% of the list price of a book. The rest of the revenue is consumed by the distribution channel -- the publisher's overhead, the cost of printing and shipping books, the expenses of the bookseller, etc. This is not to say that publishers and booksellers are getting rich. Typically a small number of bestselling books generate the revenue that covers the losses a publisher takes on everything else it publishes. Something similar happens to bookstores. The reality is that the whole publishing value chain is grossly inefficient -- it absorbs a lot of cash, and almost no one gets rich from it.

This distribution chain was stable only when it was the sole way to get a book to a customer. It's already under attack by Amazon, which avoids the overhead of a physical bookstore; and by discount retailers who skim off the best-selling books, absorbing the revenue that formerly supported local bookstores. But that's only a prelude to what's coming.

Because authors get such a small percentage of the sales price of a book today, any system that let them capture more of the revenue from a book sale will be very attractive to them, even if it sells a lot fewer books.

The chart below illustrates my point. For simplicity, I've assumed a best-selling author who gets 15% of the book's revenue, a bit more than usual. The author's new book is going to sell 100 printed copies through the traditional retail channel at $20 each. That means the total revenue for the book will be $2,000, of which the author gets $300.

But if the author sells the book direct to the public as an ebook, he or she will be able to keep 70% to 80% of the revenue (because that's what the online content stores are typically returning). If the store's cut is 25%, the author will make $300 after he or she sells only 20 books.



The red and blue bars show the author's revenue as ebook readers reach various levels of penetration in the book-buying population. The chart's kind of complex, but its main message is that once e-readers are in the hands of about 20% of the book-buying public, an author has a financial incentive to sell direct rather than selling through a publisher.

Fortunately for publishers, e-readers are far below 20% penetration today. They're probably at about 2%. So the business is stable for the moment. In fact, it's probably a little more stable than a lot of publishers believe. We're likely to have a latency period of at least several years while the e-reader installed base gradually grows. During this time nothing terribly dramatic will happen to publishers, and they may think they have the situation under control. But then we'll reach a tipping point, and suddenly established authors will have a financial incentive to go direct rather than bothering with paper publication of their books. Once that happens, all book buyers will have a very strong incentive to get e-readers -- some books by bestselling authors simply won't be available in paper form, or will be available first electronically. This will drive more rapid sales of e-readers, which will give authors even more incentive to bypass the publishers.

Once the dam cracks, the water will move very quickly.

Some notes on this scenario:

--I simplified the pricing story by assuming that ebooks are priced the same as hardcovers. They aren't, so the tipping point is probably a bit higher than 20%.

--On the other hand, Macmillan's move to raise the price of ebooks actually brings the tipping point closer. Every time ebook prices go up, that creates more incentive for an author to go electronic.

--The authors most likely to switch to electronic publication are the established names who don't need a publisher's help in marketing. Those authors are also often the most profitable for a publisher. That means the impact of the switch may be even greater than what I laid out here.

--Products like the iPad bring the tipping point closer, because they are tablets that do other things than just reading books. This bypasses the chicken and egg situation that killed e-readers in 2000. Every time Apple convinces someone to buy an iPad to do browsing or watch videos, that's another potential book-buyer who's ready for ebooks.

--The competition between Apple and Amazon will also probably bring the tipping point closer, because it holds down the cut charged by the online ebook stores. In January, anticipating the iPad announcement, Amazon cut its charge on self-published ebooks to 30%, matching Apple's terms on the iPhone app store (link).


Six critical questions for book publishers

Are publishers doomed? Not necessarily. I think we're going to end up with a range of situations in which some authors sell direct on their own, some use selected services to help them self-publish, and some partner with publishers for services similar to the things they do today. But the publishers will be dealing with new competitors and new economics, and they'll need to rethink who their customers are, and what unique value they can add from the perspective of those people. The time to do that thinking is now, before e-readers reach the tipping point. Here are the questions to ask:

1. Who is my customer, the author or the book-buyer? Most publishers today would say "both," and might add the bookstore to that list as well. But that reflects the print publishing channel structure. In the electronic world, those audiences do not have to be bundled together. There may be some publishers who partner primarily with authors, and are more or less invisible to readers. There may be other publishers that play a very prominent role in the eyes of readers (examples below). The point is to understand which type of publisher you are, and adjust your business accordingly.

2. How much value do my editing services add from the reader's point of view? I've seen quotes from publishers saying that ebook consumers will want to pay more for ebooks that are properly edited. If you believe this, I invite you to re-read the discussion of CDs vs. MP3s above. If a book is poorly edited, people will just blame the author. That means editing is actually a service for authors, not readers. Which brings us to the next question...

3. How much value do my editing services add from the author's point of view? Many authors acknowledge that their editors add tremendous value to their books; others hate their editors. But the key question is, could they hire a freelancer to do the same thing? Question for a publisher: What if some of the people you just laid off form an editing cooperative and then contact your authors with a cut-rate offer?

4. How much demand generation do we really do? This is a place where the perspectives of authors and publishers often differ. Publishers tell me that they do a lot to create demand for books. Authors typically say the publishers just shovel books onto the market and wait to see which ones sell themselves. If the publisher doesn't generate demand, then an author might as well self-publish electronically as soon as it pays more money.

5. Which brand are the readers buying? This varies tremendously from publisher to publisher. In fiction, the author's name is generally the brand that readers respond to. No reader cares who published Steven King's latest book; they just buy Steven King. But in other fields, especially nonfiction, it's more common for a publisher to control the brand. Think of the For Dummies franchise, or Sunset's How-to books, or the role that O'Reilly plays in technical books. I think e-publishing may make those brands even more powerful. A traditional publisher can help a paper book sell well by working behind the scenes to get bookstores to promote it -- put it on the table out front, place it on an endcap, and so on. Most of that promotional opportunity doesn't exist in an online store. Instead, your product is just tossed out there in a sea of other products, and it has to succeed or fail on its own. In that world, a recognized brand naturally floats to the top. That's why the Madden football game on iPhone costs $7 while many other iPhone games sell for 99 cents.

6. What sort of book am I selling? Writer/publisher Craig Mod wrote a splendid essay discussing the difference between books that have form and books that do not have form (link). Books that have form get some value from the physical book itself -- maybe it's the arrangement of text and images that creates a certain impression, or maybe it's the need for something physical (think of a coffee table book or a gift book). Those books are not going to be cannibalized easily by electronic publishing.

On the other hand, formless books (those that don't get any special value from the physical form of the book) are ripe for the picking. Think paperbacks and general-consumption fiction and nonfiction.

I'll leave you with Craig's hopeful picture of what this all means for the future of books:

You already know the potential gains: edgier, riskier books in digital form, born from a lower barrier-to-entry to publish. New modes of storytelling. Less environmental impact. A rise in importance of editors. And, yes — paradoxically — a marked increase in the quality of things that do get printed.

When we're confronted by all the downsides of change, it's important to remember that change also brings progress. If publishing gets a lot more efficient, we should see greater diversity of new sorts of publications, as well as the rebirth of a lot of old books and stories that we can't get to today. That's a future to look forward to -- as long as you can figure out how to keep your job during the transition.

How many Kindles have really been sold? (And other interesting tidbits about ebooks)

Although a lot of people are excited about ebooks, it's very difficult to get hard information on how the market for them is growing. We don't even know how many Kindles Amazon has sold, let alone more detailed specifics on the market.

So I was very happy Wednesday when the Book Industry Study Group (a publishing industry trade group) gave details from its recent survey of ebook adoption in the US. The survey was first revealed in January, but the press release was very sketchy and sometimes confusing. In its presentation at the Tools of Change conference, the BISG gave much more details on the results. My highlights from the presentation:

Ebook usage is growing fast, but it's still small. Roughly 2% of American book buyers over age 13 are active ebook users, meaning they obtained an ebook or a reader device in the last year. About half of those were first-time ebook buyers, so the usage of ebooks has probably roughly doubled in the last year. BISG is doing multiple waves in the survey, and says it found a 25% increase in ebook usage just over the holiday season, so it was a pretty good Christmas (and Hanukah) for ebooks.

The most-used device for reading an ebook is a personal computer (47%). Amazon Kindle is number two (32%), followed by Apple's iPhone and iPod Touch (21%).

Either there's something wrong with the numbers, or Amazon hasn't sold quite as many Kindles as some people think. More on that below.


What does it mean?

PC leadership is no surprise. There are so many PCs in the US that even a small percentage of PC users reading ebooks will swamp everything else. BISG said that the PC share of ebook reading is declining as other devices grow, also what I would have expected. I bet that in a year (or two at the most), a majority of ebook readers will be on non-PCs.

Apple is closer to Kindle than you might expect, but... A tidbit that jumped out at me was Apple's share of ebook usage. Kindle has gotten all the attention, but Apple has about 2/3 the share of Amazon in ebook usage without even trying. However, before we set off another round of "Apple uber alles" on the web, there are several big caveats:

--BISG didn't report on the number of books bought per platform. Based on my experience at Palm (which had an active e-reading community), I suspect that a lot of those iPhone book readers are pretty casual, buying a few books or publications to kill time when they are bored. I believe Kindle users are probably much more active readers.

(For comparison, about 4% of the Palm OS users in the US were reading ebooks at least occasionally in 2002. That total rose to about 8-10% if you included the Bible -- it was by far the most popular ebook. That amounts to about 1.5-2 million ebook users on Palm OS alone.)

--Apple and Kindle are also different demographically. After the presentation today, BISG told me that Kindle readers are older and more likely to be female compared to Apple readers. What we may be seeing is that if someone already carries an iPhone or iPod Touch, they're less likely to invest in yet another device just to read on it. Or maybe younger people just find it easier to read on a tiny screen. Either way, I think it's pleasant that Apple and Kindle are reaching somewhat different audiences rather than just stepping on each other.

--And of course the iPhone/iPod Touch installed base is a lot bigger than Kindle's. So as is the case with PCs, even relatively low ebook usage on the iPhone will add up to a lot of users.

How many Kindles are really in use? As far as I can tell, Amazon hasn't released any Kindle device sales figures, other than a quote referring to "millions" of users. Several analysts have jumped on the use of the plural as evidence that at least two million Kindles have been sold. But I think the BISG survey doesn't support that. Here's my math:

--About 2% of book buyers have ebooks and/or ebook devices.

--About a third of them have Kindles (that's 0.67% of active book buyers).

--If 0.67% of book buyers in the US is two million people, then there are 300 million active book buyers in the US. That is the entire US population, including infants and people who don't like books. I don't know what the base of active book buyers is in the US, but my guess is it's not over 200 million, meaning the installed base of Kindles would be about 1.3 million.

It's tricky to play with survey results when the percentages are this small -- the margins of error become very significant. But for now I think the BISG survey raises some questions, and I'm not willing to accept the two million figure for the Kindle installed base without some more rigorous evidence to support it.


Other tidbits

BISG is not going to release all of the information from the survey (that goes only to the companies that paid for it). So I took as many notes as I could during the presentation. Here's what I captured:

Ebooks are somewhat cheaper than hardcovers
On average, an ebook costs $6.25 less than a hardcover book. This is a huge issue to the book publishing industry, which worries that ebook sales will cannibalize hardcover book sales. My comment: Of course they do, get over it. The thing publishers should be looking at is the much higher margins they make per ebook sold. I don't know of many industries that resist moving to a higher-margin product, but publishing appears to be the grand exception. Of course, the thing worrying publishers is the decline of independent bookstores, and they're afraid ebooks will accelerate that. But the decline of the bookstore has almost nothing to do with ebooks -- it's being driven by online sales of paper books and predation by retail chains.

Demographics
-Ebook buyers are 51% men (compared to 58% women for paper books).
-Ebook buyers are higher income than paper book buyers. Not a lot, but significantly higher income. No surprise there -- most poor people can't afford several hundred dollars for an ebook reader. Betcha they don't buy a lot of hardcover books either.

Cannibalization
Among ebook buyers, 11% no longer buy any paper books. 8% buy mostly ebooks, and about 30% prefer to buy ebooks. So about half of ebook users prefer ebooks to paper books. That's actually a lower percentage than I expected for something that is supposed to take over the world. But remember, half of ebook users are reading on PCs. What I really want to know is the percentage of Kindle users who prefer ebooks; that'll tell us how satisfied Kindle users are.

Preferred device used to read ebooks
-PC: 47%
-Kindle: 32% (and rising in later waves of the survey)
-iPhone: 11%
-iPod Touch: 10% Hmmmm! iPod Touch really is a PDA.
-Other smartphones (including Blackberry) 9%
-Netbooks 9%
-Sony Reader 8%
-Barnes & Noble Nook 8% (the BISG folks noted that Nook was just starting to sell at this point; they believe some users confused Barnes & Noble ebooks with the Nook device)

Genres of ebooks
-General fiction, 31%
-Mystery 28%
-How To 25% (but #1 over Christmas)
-Science Fiction
-Biography
-Business
I don't know where religion and travel went. I need to learn more about how this question was asked.

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.)

================

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.

iPad: The (attempted) Windows killer

(Well, you've got to admit, that's not something you'll be reading on most other weblogs today.)

Ten hours after the Apple iPad announcement, my overall reaction is that the product wasn't necessarily better or worse than I expected, but it was definitely different.

I expected an upsized extension to the iPod Touch, with a focus on watching videos, browsing, and playing games. The device can certainly do all of that, but Apple spent a huge amount of time demonstrating features I didn't expect -- e-mail management, productivity applications, and typing with the on-screen keyboard.

I know many of you think those are just checkoff items, and you may be right. We're all trying to read Apple's strategic intentions from a single product announcement, and that's hard to do. But here's how I view it: I believe Apple is serious when it spends five minutes demonstrating a feature, and I believe they actually said what they meant to say during the announcement. Specifically:

--Apple's identity is as a mobile device company.
--Netbooks suck and Apple can do something better.
--It's amazingly comfortable and easy to type on a touch screen.

(I'm not sure I agree with the last one, by the way, but we're talking about what Apple believes, and Steve sold the onscreen keyboard thing hard.)

If they really believe all of those things, then the iPad starts to look like Apple's idea of the next logical stage in the evolution of personal computing. It takes everything Apple learned from iPod and iPhone and applies that to a redesign of the low-end personal computer. It's Apple's vision of the netpad done right -- not a PC accessory, but a lightweight portable device that can replace the PC for many basic usages. The idea wouldn't be to kill the PC outright, but to nudge it toward the workstation space, in the process gradually eating away at the market share of Windows.

Yes, I believe killing Windows is still very high on Steve's personal to-do list. Always.

If you start from that assumption, a lot of the other things Apple said today make more sense. Why did they spend a year rewriting iWork for the tablet? Because you need an office suite in order to displace a PC (you don't need it for a media tablet). Why price that suite at just ten bucks a module? Because that profoundly screws up the pricing for Office on netbooks (the only way Microsoft can match that pricing is to destroy the value of its cash cow).

Why didn't we get a more comprehensive media store? I was expecting an entertainment tablet, and so I thought there would be a much more aggressive push for third party media developers. Apple did create the iBooks store, but they don't seem to be reaching out to individual authors the way I expected. And other media (video and animation) remains in iTunes rather than getting its own purchasing experience. To me, the iPad feels more like a netbook replacement that also does books, rather than a media tablet that also does spreadsheets.


Will it work?

If Apple's plan really is to displace netbooks, it faces some interesting challenges. One of the greatest appeals of a netbook is that it is a fully functional Windows notebook computer (cramped and awkward, but fully functional). Computer users have historically been very resistant to compromising on some core features. Will they accept a netbook that doesn't have a physical keyboard or a hard drive, and that can't run Flash and Java? And as Chris Dunphy (link) asked me today, will Apple give iPad applications more freedom to multitask than they have on the iPhone?

I don't know. And so I really don't know how the product will sell.

It doesn't help that the marketing for the iPad feels muddled. Apple's website tonight reads, "Our most advanced technology in a magical and revolutionary device at an unbelievable price." Ugh, it's a big bag of features. As I asked in my pre-launch post yesterday, who is it for and what problem does it solve? The question hasn't been answered crisply.

At least Apple got the base price of the product right. It's still above what I think most consumers will pay for a tablet, but Apple's within the realm of believability, and over time I hope the price will come down further. If it does, and if Apple markets it strongly, the product may be able to find its own market.


Meanwhile, I'm sure the iPad will have an important impact on some other companies. Namely...

Nokia: Step your game up. Several years ago, Nokia said it was re-creating itself as a computer company. Now Apple says it has re-created itself as a mobile company. Not just a mobile company, but supposedly the world's biggest mobile device company as measured by revenue. Whether that statistic is actually meaningful or something Apple manipulated through clever accounting, it must have driven the Nokia management team nuts -- which was undoubtedly Apple's intent.

Now Nokia has to decide whether it wants to compete with Apple in yet another product category, at a time when it already seems a bit overwhelmed. It's a very tough decision. (And please don't tell me the N900 is an iPad competitor. It's too small.)

Is Kindle in trouble? Not yet. The Amazon Kindle vs. iPad competition is going to be very interesting. My first reflex was to say that Kindle is in trouble -- iPad is a much more capable device, and the convergence advocates will tell you that a general-purpose tablet will eat a single-purpose e-reader. But Kindle is half the price of the iPad, even less when you factor in the cost of 3G for the iPad plus a service plan. Plus its screen, although only black and white, produces less eyestrain than a backlit LCD display. I don't think Kindle takes a big hit in the near term. In the long term, I am worried about Amazon's ability to compete with general-purpose tablets, but maybe Amazon's goal is to own the bookstore rather than the book reader. In that case, they should make sure the Kindle app works really well on the iPad.

The one thing I'm sure Amazon should not do is attempt to compete with Apple in the general-purpose tablet business. That's like challenging the Australian national rugby team to a drinking match.

The mobile operators: Pay attention to your pricing plans. I think this will be one of the most interesting floats in the iPad parade. Apple is now making its second attempt to bypass the subsidy model used by the operators. If Apple had been willing to bundle a two-year wireless contract with the iPad, it probably could have gotten the device subsidized down to about $299 or $350. But the downside would have been a $60 or higher monthly service plan, with soft caps on the amount of video someone could browse. It will be interesting to see how customers react to Apple's choice, especially when other companies sell subsidized net tablets for very low initial prices. In the phone market, Apple had to give in and accept the subsidy. We'll see if history repeats itself.

It will also be interesting to see how AT&T makes out with the revenue from iPad subscribers. At first glance, $30 a month for unlimited data sounds like a bad deal for AT&T. But keep in mind that data plans usually include several hundred dollars for the subsidy; the operator supposedly doesn't even turn a profit until sometime in the second year. With these plans, AT&T makes money from day one. So it may be able to make a better profit than you'd expect. Still, it seems a bit odd for a company with a network as congested as AT&T's to be adding a device designed to stream high-quality video from the web.

PC application developers: Pain. If the iPad really is Apple's vision of the future of personal computing, it's an ugly world for today's PC application developers. By pricing the pieces of iWork at $9.99 each, Apple has effectively created a price ceiling for major productivity applications. How many PC app companies can make money at that price per unit? And remember, that's the ceiling. It's time to start rethinking your business model...


No matter how well the iPad sells, it's a very interesting experiment worthy of the Apple brand, and I'm sure it'll drive a legion of imitators from Asia. I wish we had a few more hardware companies like Apple who were willing to mix up the market like this; innovation would move a lot faster.