Microsoft Decides

Last November, I speculated as to which, if any, eBook format Microsoft would support in Windows 8 tablets.

[Mistakenly, I also ranked Windows Media Center as “more central” to Microsoft’s media consumption story. What? It’s just one piece of the puzzle. Anyway. Always willing to admit mistakes.]

And now it looks like we have our answer. A $1.7 billion answer, by the way. Call it the Nook. From Barnes & Noble.

Microsoft agreed to invest hundreds of millions of dollars in Barnes & Noble’s Nook division on Monday, giving the bookstore chain stronger footing in the hotly contested electronic book market and creating an alliance that could intensify the fight over the future of digital reading.

ePub is now the official winner in the eBook format wars. Why do I say that? It’s the eBook format supported by nearly everyone. Apple. Sony. Adobe. Kobo Reader. Blackberry Playbook. Everyone except Amazon, which uses a proprietary variant of the Mobi format; to be kind, they also support a command-line ePub converter called KindleGen. Woo woo.

Oh wait… I’m missing something… Amazon owns 60% of the eBook market. And the U.S. Department of Justice apparently wants to help them get back to 90%. Winner: Mobi.

At any rate, here’s what Microsoft has decided:

  • On the eBook format side, Microsoft chooses ePub by investing in the Nook Division. It’s the primary eBook format for the Nook Color and that’s the future. Winner: ePub.
  • On the device side, the news release says the Nook Division will create a Nook Reader for Windows 8. That reader will likely read multiple format types (the Android-based Nook already does), with ePub prominent among them. Winner: ePub.

eBook Prices & Monopoly

The classic construction has it that monopolies enforce higher prices. And in the current suit by the U.S. Department of Justice, accusing book publishers of price collusion on eBooks, the bad guys are the ones raising prices. By that definition, Amazon could not be a monopolist. They want lower prices. Way lower prices.

The reality is a little more complex. But, for the sake of argument, let’s assume that Amazon is not a monopoly. Where does that lead us?

The business literature is filled with examples of how firms use lower prices to gain market share or competitive advantage. In the Amazon case, we have the example of “penetration pricing,” or price discrimination. That’s exactly what they’re doing:

Setting lower, rather than higher prices in order to achieve a large, if not dominant market share.

The question, of course, is whether any of this can lead to an eBook monopoly for Amazon. This much we know:

  • When any firm gains competitive advantage, it can begin to dictate terms to its suppliers. Take Wal-Mart, for example. Or Apple’s iPhone/iPad supply chain.
  • Before Apple and agency pricing, Amazon had 90% market share. They had the eBook market to themselves and were pricing aggressively to gain competitive advantage. The adoption of agency pricing, to my mind, proves they were on their way.
  • With the advent of agency pricing, Amazon’s eBook market share fell to 60%. Barnes & Noble gained 25%, Apple gained 15%.
  • Almost as soon as the U.S. DoJ announced a settlement with three of the six parties on the collusion allegations, Amazon announced it would again lower eBook prices.
  • As it must. Under the settlement, the publishers are required to “to grant retailers – such as Amazon and Barnes & Noble – the freedom to reduce the prices of their ebook titles.”

REPLAY: Amazon gains 90% share of the eBook market?

The sad thing here is how many apologists (sorry, I lack a more elegant term) contend that there is “spin” involved when making the argument that Amazon is lowering prices to gain competitive advantage. In the most egregious example, Peter Scheer makes the specious claim that Amazon cannot be simultaneously selling eBooks AND Kindles at a loss.

Now, both of these statements can’t be true. It’s not possible for Amazon to both (1) sell e-books at a loss in order to reap big profits on Kindle devices, and (2) sell Kindles at a loss to reap big profits on e-books. It may be doing 1 or it may be doing 2, but it can’t be doing both at the same time.

Of course, Peter Scheer is correct. Unfortunately, he’s casting the question in such a way that the only logical answer is the one he wants. Getting to first causes, let’s pose the question differently:

To gain a dominant market share in eBooks, Amazon is willing to sell eBooks AND Kindle Readers at a loss. Because, really, you can’t have one without the other.

Still sound “impossible?”

Again, think Wal-Mart. They sell lots of things, make money on many of them and can afford a few losses elsewhere. Same for Amazon. The idea of using those few losses to gain a dominant position in one corner of a business has to be… Ummm… Appealing. And, up to a certain point, it is perfectly acceptable business behavior. There are other examples… Take Dell. Or Nokia, just for starters.

We grant that this strategy doesn’t always work, or doesn’t work forever. But it’s always nice to have powerful friends helping you out along the way.

Scott Turow on the DOJ

I am not really a fan of Scott Turow’s books. Potboilers, mostly. But hey, I still like crime mysteries, so… There you go. Maybe it’s just a case of professional jealousy…

But count me among those who agree with his stance as Authors Guild President that the DOJ, in its investigation into price collusion between Apple and major publishers, “may be on the verge of killing real competition in order to save the appearance of competition.”

One set of numbers tells the tale:

  • Before Apple entered the eBook market, Amazon accounted for an estimated 90% of eBook sales.
  • After Apple entered the market, that figure dropped to an estimated 60%.

Yeah, I know he’s been criticized… Called a turncoat… It’s the same rhetoric over and over… In the three-legged stool represented by publishers, authors and consumers… The consumer is king. Yeah, we all like cheap. And while we’re at it, let’s kill the goose.

An Open Letter to Mike Daisey

Mike is an artist, not a journalist. Nevertheless, we wish he had been more precise with us and our audiences about what was and wasn’t his personal experience in the piece.

Statement by The Public Theater on the controversy surrounding Mike Daisey’s play, The Agony and the Ecstasy of Steve Jobs.

Yeah you took on Amazon. Burned out on the Peter Principle, you told stories out of school, as former-Amazon colleague Matthew Baldwin so eloquently notes. What the hell. That’s theater.

Next? You put Apple in your sights. Why not? Lots of $$$ and Chinese factories that are a muckraker’s field of dreams. We all love tales of wealth’s evil side and the contradictions of our privileged existence. Plus, the halls of Amazon are filled with ex-Microsofties. Lots of Apple love/hate memories to surf on. You knew the drill.

But you have to get it right, Mike. This line you insist on drawing between journalism and the theater doesn’t exist. At least, not in the context of The Agony and the Ecstasy of Steve Jobs. Because it’s a work that provokes demands real-life changes in Chinese factory conditions, it demands real-life truths. Not fabrications, confabulations, dramatic malfeasance or the like. Phrases like “I’m feeling,” I’m thinking,” and “I read” are NOT weasel-phrases. They are part of the truth. And, no, this is not a case where the end justifies the means.

Ok, you made a mistake. We all make mistakes. You just make big ones. Huge ones. You’re forgiven. But you should have seen this coming. Brendan Kiley did, with a simple fact check. You only get so much free hubris. Eventually somebody sees through your shit.

So what’s next for you, my man? A prediction…

Next Stop: REHAB.

Hell, there’s another monologue in there about “truth,” “lies,” “damned lies” and “journalists.” Throw in the whole This American Life bit. Spin it for all it’s worth. Yeah. Rehab. It’s the quintessential American experience. You’ll be genius.

You already have a theme song. “The Biggest Lie,” by Elliott Smith. Like I said. Genius.

Placing Bets on Disruption: A Losing Game?

In 1998, Microsoft was under investigation by the U.S. Department of Justice for antitrust violations, including charges that it held a monopoly position in computer operating systems and used its market power to reach anticompetitive agreements with its partners.

In his defense, Bill Gates wrote a response piece in the June 13, 1998, edition of the Economist. It’s worth quoting:

The current popularity of Windows does not mean that its market position is unassailable. The potential financial reward for building the “next Windows” is so great that there will never be a shortage of new technologies seeking to challenge it.

In a similar vein, Gates told Forbes author Daniel Gross in 1997:

We’ve done some good work, but all of these products become obsolete so fast… It will be some finite number of years, and I don’t know the number — before our doom comes.

This notion that technological change comes swiftly, is unrelenting and has no sympathy for incumbents is a recurring meme. Certainly no one dared predict that Apple would overtake Microsoft back in 1997. But in the late ’90s, the Justice Department thought it should help shape the future of technology. There’s a cautionary tale here.

Recently, the U.S. Department of Justice has set its sights on Apple and a handful of publishers, whom they are accusing of eBook price collusion. Fair enough. Hell, let the EU jump on, too.

The danger here is that these well-intentioned bureaucrats may create another problem by solving the one allegedly at hand. As the esteemed Frederic Filloux points out in, “Ebooks: Defending the Agency Model,” Amazon’s Kindle format presently accounts for 60% of eBook sales. Sure, that’s not monopoly territory.

Yet.

But a ruling that undermines Amazon’s competitors, while giving it a leg up in the eBook market, may very well take things in that direction.

As Bill Gates pointed out many years ago, bureaucrats often tread on soggy ground when they jump into technology wars, especially those of the disruptive kind. Yes, the current battle is also about prices. And market share. But the underlying causality is something quite different. Oh ye regulators, be careful what you wish for…

Dear Amazon, Apple, B&N…

As I’ve said elsewhere, this eBook format thing is crazy. Now that the industry has roughly settled on the EPUB format, however, it might be time to start thinking about other things. Like our readers.

I know that you, Dear Amazon, Apple and B&N, are positioning yourselves as the new gateway to those very readers. You’ve had some success. Enough success that we’re already learning about the next generation of “e-readers.” Our children. Some of them, according to a recent Bowker survey covered by Laura Hazard Owen, are using iPads and eReaders. That’s good news.

But it’s no time to declare victory; a closer look reveals that some daunting obstacles remain.

Market for 0-12 Year Olds

  • The eBook market for 0-12 year olds seems to have considerable upside. Kids in this demographic think eBooks are “fun and cool,” cost less and make them want to read more. Not only that, but parents are sharing their tablet and eReader devices with their children — and handing them down as they upgrade.
  • Caveat: Only 37 percent of children’s books are purchased new, while 34 percent are hand-me-downs. Almost ten percent are borrowed from the library.
  • Caveat: Parents want to see books identified by grade level. Right now, that’s hit and miss on your download sites. Mostly miss.

Market for 13-17 Year Olds

  • This demographic lags behind all others in eBook adoption. Only 8 percent prefer eBooks compared to 66 percent who prefer print. There’s lots of upside here. Well, sort of…
  • Caveat: “Teens like using social technology to discuss and share things with their friends, and e-books at this point are not a social technology.”
  • Caveat: Teens are increasingly on record that eBooks are too restrictive, with 14 percent saying so in 2011, compared to 6 percent in 2010. Those are not frighteningly negative numbers. Yet. But they’re trending in the wrong direction.

What’s to be done?

Dear Amazon, Apple and B&N

  • Please fix the eBook lending mess. I know it means working with traditional publishers. Big prizes will go to whoever fixes this first.
  • Add the ability to readily attach grade-level information to EPUB and MOBI files. This one should be obvious.
  • Add social networking functionality to your eBook reader apps. As I write this, Facebook has 845 million monthly active users. While the value of those users is still being assessed (we’ll know more post-IPO), that’s a big starting point for sharing. Go there. Get there. While you’re at it, think Google+, too.
  • Enable in-app book discussions, not just for teens, but book clubs too. I say this from the perspective of someone who’s recently been asked to speak to a book club about “Butcher, Baker,” 20 years past its initial publication. (Hey, those movies have a way of renewing interest in almost forgotten things.) I’m not a huge fan of Apple’s Ping, but it points to an opportunity outside the Facebook-Google+ realm.

iBooks Author: First Look

Apple yesterday introduced a new eBook creation app, appropriately called iBooks Author. I say appropriately named because, if you charge a fee for the eBook so created, you can only sell it on Apple’s iBookstore. In other words, iBooks Author is not, nor is it intended to be, a general purpose eBook creation tool.

iBooks Author license

After a quick tryout and eBook creation exercise, I also conclude that the tool is definitely scoped for textbooks, NOT general purpose eBooks like trade or mass market fiction.

This has much to do with the constraints of the templates, which impose a structure that a straightforward eBook can do without. A Chapter and Section layout is pretty much required. This fits well with textbooks, not so well with other types of content. And, in its current iteration, iBooks Author offers no flexibility here.

Chapter and Section Layout Grid

iBooks Author layout choices

For example, take a look at the two template choosers below. The first is from iBooks Author; the second is from Pages (which, by the way, seems to have served as the code base for iBooks Author). Pages has, well, a ton of templates; iBook Author has six. That’s not intended as a knock; rather, it’s offered as proof of the latter’s limited flexibility.

iBooks Author Template
Six templates. That’s it. Six beautiful templates, though.

iBooks Author templates

Pages Template
Multiple templates. Including the highly flexible “Blank Canvas.”

Pages template

Push Pop Press Lives

After downloading the free E.O. Wilson Life on Earth textbook, created with iBooks Author, I can see where Apple is headed. The Wilson textbook is cut from the same cloth as the Al Gore Our Choice opus, available exclusively on Apple’s iBookstore. They share a very similar navigation, structural and interaction model. I wonder if Apple hired some of the Push Pop Press devs responsible for the Al Gore work. If so, Facebook got the company but Apple got the better deal.

Bottom Line

This leads me to my conclusion: iBooks Author is but the latest installment in the battle between Apple and Amazon over the future of eBooks. Both are moving toward HTML5, albeit in proprietary or otherwise restricted ways. Amazon is offering publishing deals to lock in authors to exclusive contracts. Apple is using its (so far superior) toolset to the same end.

This is not a case where I feel comfortable saying “let the best bookstore win.” Of course, I recognize that the traditional publishing model is also based on exclusivity. But both Amazon and Apple blur the lines between publishers and distributors. It’s difficult at the moment to see how the “best of both worlds” can emerge in this model. Too many walled gardens, I fear.

Other Views

The End of Print?

Long-term there’s no future in printed books. They’ll be like vinyl: pricey and for collectors only. 95% of people will read digitally. Everybody in publishing knows this but most are in denial about it because moving to becoming a digital company means laying off like 40% of our staffs. And the barriers to entry fall, too. We simply don’t want to think about it.

The above quote is from an anonymous publisher, who unburdened herself to writer Sarah Lacey. Sobering words. And at the heart of it is the observation that, unlike traditional print publishers, Amazon does think about the digital transition. A lot.

We’ve written about it before. Skirmishes over publication rights as they relate to Amazon’s eBook lending library. Legal battles over eBook pricing. Accusations of collusion between Apple and the Big Six publishers. In all of this, Amazon is either in the middle of it or standing close by.

As our anonymous publisher notes, the battle lines are primarily being drawn at eBook pricing — and author advances.

When ebooks started, we were pricing ebooks at the same price as the print book, and Amazon was selling them all for $9.99. So they were losing like $3-$4 per book. And they weren’t doing it simply to move Kindles, since they don’t actually make any money on the Kindle unit sales… I think they actually intend to keep print books at their current prices, and they want ebooks to be even cheaper. What they’re actually targeting is the publishers’ margin.

As many authors realize, it’s a select few celebrity writers who keep the lights on. They are the publishers’ margin, since they rake in big bucks and essentially subsidize everyone else. According to anonymous, Amazon is targeting these authors; we’ve said that ourselves. As tribute to how serious they are, they’ve signed Larry Kirshbaum to run their publishing arm. “He’s a savvy vet with 30+ years of publishing experience–and they have some editors, too. And they’ve been paying a ton of money for books.”

Well, not for all books. Let’s stay with the celebrity writer here. Amazon is paying lots of money for those books. Prices that few publishers can afford. Millions instead of six figures. Anonymous: “We can’t pay $1 million for books anymore. Amazon could probably afford to lose $20 million/year in their publishing arm just to put the other publishers out of business.”

I’m with Sarah Lacey when she says she doesn’t feel sorry for the publishing industry. But I am not fond of living in a one-company town either. Some commentators, notably John Gruber, are looking at Apple as the savior on a white horse.

Says Gruber: Apple’s opportunity with books is that there’s already a dominant money-winning bully at the table: Amazon.

The problem with that horse is it is now saddled with lots of legal baggage. Specifically, the U.S. DoJ, the European Commission and a host of states are all investigating possible collusion in eBook pricing. Apple is at the center of that investigation, along with the Big Six publishers; some people in legal circles think they’re the bully.

What to do? Lacey suggests a new publishing model will arise out of the ashes of the old. I suspect that Apple will be part of that, as their iBooks Author and textbook initiatives suggest. Building a better toolset will make it stupid-easy for authors to get onto Apple’s iBookstore; on that front, Amazon is still in the dark ages.

But the onus is still on the Big Six. Or, more precisely, their disaffected executives. Oh wait. I’ve said that before, too. It bears repeating.

The best strategy at the moment is for publishers to get their own houses in order, so they can take advantage of emerging opportunities. That means aggressively embracing new technologies and alternative distribution mechanisms. And building alliances that spread, not concentrate, opportunity.

The Mess That’s Called eBooks

As we wrote back in November, there’s a battle going on in the world of eBook publishing. The topic then was Amazon using wholesale pricing as a benchmark for author royalties as it promotes its Prime Program (and juices sales of the Kindle Fire). The upshot for content creators: You probably want to review your publisher contract and make sure you are fairly compensated (as a percentage of the retail price, not wholesale).

The battle itself, however, is being fought on multiple fronts. In August 2011, the Hagens Berman firm filed a class-action suit claiming Apple and five top U.S. publishers “illegally fixed prices of electronic books, also known as e-books.” They are demanding a jury trial, always a sign that they want the most generous settlement possible.

The basis of the Hagen Berman complaint is the claim that the five publishing houses “forced Amazon to abandon its discount pricing and adhere to a new agency model, in which publishers set prices. This would prevent retailers such as Amazon from offering lower prices on e-books.”

If Amazon defied the publishers and tried to sell e-books below the publisher-set levels, the publishers would simply deny Amazon access to the title, the complaint details. The defendant publishers control 85 percent of the most popular fiction and non-fiction titles.

The publishers, the complaint goes on, feared Amazon’s pro-consumer pricing, especially as it threatened the established brick-and-mortar model.

Now it appears that the European Union’s antitrust commission wants a piece of the action. The E.U. investigation will look into charges that “international publishers… have, possibly with the help of Apple, engaged in anti-competitive practices affecting the sale of e-books in the European Economic Area (EEA), in breach of EU antitrust rules.”

As Philip Elmer-Dewitt notes in this Fortune piece, the E.U. appears dead serious. “In preparation for the formal proceedings announced Tuesday the commission raided the offices of some or all of the five publishers named in the probe.” [Actually, the E.U. press release calls them “unannounced inspections.” Ah, so diplomatic.]

In case that isn’t interesting enough, back in August 2010, Connecticut Attorney General Richard Blumenthal also investigated potential anti-competitive e-book practices. The A.G.’s complaint?

Attorney General Richard Blumenthal is investigating agreements between the country’s largest e-book publishers and two of the largest sellers — Amazon.com, Inc. and Apple, Inc. — that may block competitors from offering cheaper e-book prices.

WTF? Who’s colluding with whom?

Takeaways
(Hey, I’m no lawyer, but I am an interested party. At least I think I am):

  • If you are a content creator, an Amazon win here means get ready for wholesale to be the new retail.
  • If you are a consumer, an Amazon win means e-books will fly off the shelves at giveaway prices, as Amazon juices its Kindle sales.
  • If you are a publisher, an Amazon win means they are one step closer to moving into the publishing business. As Philip Elmer-Dewitt notes, Amazon is the 500-lbs gorilla in the e-book biz.

And who knows, at the moment, Amazon may need all the help it can get. There’s already speculation that as many as a half-million Kindle Fires will be returned post-holiday (via Philip Elmer-Dewitt). Usability guru Jakob Nielsen, meanwhile, is reporting that “Amazon.com’s new Kindle Fire offers a disappointingly poor user experience.” It gets worse… Over the Black Friday sales season, iPad and iPhone were dominant [Chart of the Day].

Even 500-lbs gorillas deserve some good news now and then…

Anti-Trust

I was working at Microsoft when the Justice Department lifted the consent decree during the early days of the Bush II presidency. For all the bile traded back and forth during that time, the news was eerily anticlimactic. There was a small cheer and then everyone just went back to their jobs.

But the antitrust charge was a serious threat that held the potential to break up the company. Bill Gates and others argued at the time that Microsoft’s dominant position was always at risk from emerging technologies. Ten years on and we now see that the “bully” Microsoft was perceived to be now finds itself in a market that has largely moved on.

As the worm turns, the next villain in sight seems to be Apple. As Frederic Filloux writes in his latest Monday Note column, Apple seems to have an anti-trust problem. Publishers, in particular, are feeling the squeeze. So much so that there is talk of possible legal action before the European Commission.

The problem, in a nutshell, is the Apple ecosystem as redefined by the iPad. Lots of power now resides in that ecosystem. This has led to a situation where many in the industry simply don’t trust Apple to address their business needs. Some specifics:

The iPad’s sales trajectory has been so explosive that the “joke” in Silicon Valley is that there isn’t a tablet market; there’s an iPad market. If you want to move to the world of digital publishing, this is the device you need to be on.

At present, moreover, the best way onto the iPad is through Apple’s AppStore, if only because native apps offer a much richer experience than web-apps. But the AppStore brings a whole set of its own issues. Filloux says it well:

“Let’s face it, Apple has life and death power over the apps it harbors in its store.”

Given the situation, it’s worth examining the scope of the threat, as well as potential solutions. I think the two are closely aligned. Note that my bias here is toward more publishing options for authors. My ideal is a healthy ecosystem that’s not dominated by any one player.

The Threat Has Its Weaknesses

  • As Bill Gates pointed out more than a decade ago, ten years is a long time in the tech industry. Emerging technologies, as yet unknown, may well disrupt Apple’s current position. Faint comfort, that, but worth remembering.
  • HTML5 is still in its infancy. As it matures, it will take web-apps to greater parity with native apps. This eases the requirement to go through the AppStore to provide compelling content.
  • Amazon is an alternative, albeit with its own set of worries. The Seattle online retailer has been steadily building a compelling alternative to the Apple universe. It is not identical, but that may be its greatest strength. Still, be careful what you wish for.
  • Don’t forget Barnes & Noble. B&N doesn’t have the breadth of Amazon’s catalog, but as a book distributor, they have great depth. Don’t stop at books. This is a case where having several friends is better than having one. Books A Million also comes to mind here.

I doubt any of this will prevent concerned parties from lawyering up. But as Bill Gates pointed out, the technology business is highly fluid. By the time the legal system gets there, technology will have already moved on.

The best strategy at the moment is for publishers to get their own houses in order, so they can take advantage of emerging opportunities. That means aggressively embracing new technologies and alternative distribution mechanisms. And building alliances that spread, not concentrate, opportunity.