Store Wars: Opt out, opt in, sell out, capitulate?
Wed, Feb 16, 11
Apple’s new App Store rules now mandate that users themselves must decide whether they want to give their own personal info to publishers when they subscribe. What would be the reaction of the publishing industry to this? Straight from a publisher, Forbes:
Pam Horan, publisher of the Online Publishers Association, says the trade organization’s members — a group that includes Time Inc., Hearst, Conde Nast, Bloomberg, National Geographic and, yes, Forbes — are worried the new regime doesn’t give them the flexibility they need to serve their customers.
The flexibility to serve their customers
What does Apple do to deny publishers that “flexibility” then? One click to opt in to data sharing. Pam Horan, again:
Anything that requires the consumer to take yet another step is always going to reduce the number of people that participate in the process. It limits the ability to gather audience insights to build the right products. With this inability to know who your consumers are, it really affects the ultimate product for the consumer.
Put simply, publishers don’t want readers to opt in, because they know readers will prefer to opt out. Transparency is not a friend of publishers who for decades made a mint by selling out readers to advertisers and list brokers. Most readers may not be aware of this, but those who are don’t like it. Publishers know that and hate Apple for calling their bluff. If personal info harvesting isn’t essential for publishers’ business model and it is in the interest of readers, then why would they be against an instant referendum in the form of the opt in button?
Beyond the smokescreen
This, of course, isn’t about the readers. It’s not even about Apple’s App Store. It’s about the clash of two different business models. One that sells the customer to the highest bidder through a product and the other that sells a product directly to the customer. For the former, the product is a vehicle, often an excuse, since it holds no value for the publisher. For the latter, the product is the source of value, it lives and dies by the utility and delight it brings to the customer.
Transitioning from one format or platform to a new one is often a long, arduous and financially disruptive process. Lately, however, we are seeing a time compression in these transitions. For example, moving from dial-up to broadband or from landlines to wireless took quite a bit of time. Transition from analog to digital music or from featurephones to smartphones have been much shorter. Shorter the transition, bloodier the financial impact on incumbents. Print economics have been around forever, virtually unchanged for decades. All of a sudden, though, there is an incredibly convenient format (iPad) and a platform (iTunes) for what used to live in the dead-tree zone. No wonder we have publishers up in arms about the freight train suddenly in front of them.
The grand opening
We can also look at the new App Store rules as a grand negotiation being conducted in public. Apple’s iTunes and iOS ecosystem make it abundantly clear that there’s now a platform ready for transition. Table stakes: 30% cut for the platform owner. Publishers have several choices:
1. Set up their own stores — If the most business savvy of all publishers, Rupert Murdoch, who never shied away from big and expensive bets, has come to the conclusion that News Corp alone can’t set up its own independent online store, what chance do other smaller, cash-strapped, technophobic publishers have?
2. Collude to set up a BigPublishers-only store — This would be standard operating procedure…that has repeatedly failed. Disparate corporations banding together against a successful market leader nearly always fails. Witness myriad roadkill behind iTunes.
3. Negotiate with Apple directly — Murdoch did negotiate with Apple separately, but may not have received much in return other than some technical help and launch presence. Companies like Amazon and Netflix may try to negotiate with Apple directly to leverage their popularity to wring some concessions on rules or rates.
4. Wage guerilla warfare against Apple in the press — Adobe, Part Deux. This is inevitable since many of those who produce the anti-Apple hysteria write for the publications that would financially benefit from a change in App Store policies.
5. Ask for government help — Publishers will likely ask the government to intervene and conduct a threatening investigation of App Store policies to browbeat Apple into changing its policies. Also, as the last refuge of scoundrels, they will appeal to the Congress for tax payer support under the guise of saving jobs.
6. Give up subscriptions — Google would love publishers to just give up the notion of subscriptions and go ads-only, either as free apps supported by AdMob on mobiles or browser based apps supported by AdSense. Sadly, content providers aren’t immune to making monumentally stupid mistakes and…imploding.
7. Accept Apple’s terms — We heard similar, if not identical, complaints about the size of Apple’s cut or its intermediary position between content owners and customers at the onset of iTunes and later App Store. Nobody’s complaining much about those anymore, mostly because there have been no credible alternatives.
8. Create alternatives to iTunes/iOS — This is the perennial Plan B, if Apple doesn’t budge. The usual suspects are those with a store and the will to spend money liberally to undermine Apple, namely Google, Microsoft and Amazon. Google recently transferred its upcoming music store to Andy Rubin’s Android division and is now negotiating with publishers. Microsoft rolled Nokia’s Ovi into its own store and would be happy to bankroll publishers to attract Windows Phone users. Amazon has already tangled with Apple last year after the introduction of iBooks over the agency model Apple offered to publishers. These are all big competitive players with plenty of cash to render as absurd any notion that Apple somehow has a monopoly over digital stores. It is, however, a reminder that all such previous attempts to cut down Apple by direct competition has failed.
Rock and a hard place
Apple, the one company that makes bet-the-company type moves all the time, has done it again: they have decided to cull parasitic middlemen and aggregators from the ecosystem. What choice do publishers have then? They first have to ask themselves two fundamental questions:
1. What business are we in? — Are we in the business of creating scarcity in news and media to leverage it against eyeballs for advertisers? Can our current model survive the transition to digital? Are we capable of setting up our own stores? If not, do we understand we must change our revenue streams radically? What sorts of structural and financial remodeling do we have to undergo internally to adjust to giving up 30% to Apple?
2. Quo vadis? — If our current distribution has to change, on whose digital platform will we move? Is there, in other words, an alternative to Apple App Store?
Whatever conclusions the publishing industry may arrive at, there’s one undeniable fact staring them in the face:
By next year, Apple iTunes/iOS ecosystem will have over 200 million of the most lucrative online demographics ever assembled by a company.
Apple didn’t become the world’s most valued tech company by being naive. The fact that Apple’s longstanding discipline of selling products direct to customers aligns nicely with customers’ interests of accessing a well curated, efficient, price-competitive, easy-to-use store is just the icing on the cake. Nobody else comes close. You can’t do business by ignoring the App Store.
¶
UPDATE: In case there was any doubt that Google would step in to exploit the situation, the company introduced in less than a day after Apple’s announcement its own One Pass subscription payment plan, with a 10% cut. Google CEO Eric Schmidt: “We aren’t in this to make money, Google makes money in other ways.”
Apple’s Ambiguity: There’s an app for that
Wed, Feb 2, 11
Apple, even during Steve Jobs second coming, has done dumb things. Some are strategically insignificant, like the mercifully terminated eCards created to mollify the “Apple must do something out-of-the-box online” meme. Some are obviously much more detrimental to its ecosystem, like the persistently anemic nature of MobileMe.
On the same continuum, however, there have been moves made by Apple that were universally seen as shortsighted and even fatal at the time they were introduced, but turned out to be nothing short of brilliant. In hindsight, for example, Apple’s refusal to “open up” iTunes by licensing its FairPlay DRM to its rivals as well as its steadfast rejection of other DRM platforms notably from Microsoft and Real was a bet-the-company type move that had no shortage of extremely vocal critics. In under a decade, iTunes has become the world’s largest and most lucrative digital media platform.
Today’s episode in the continuing saga of “Apple’s evil” is the rejection of Sony eReader app from the App Store. This controversy, too, boils down to: “Why doesn’t Apple just publish a clear declaration of what it will and won’t allow in the App Store.” The subterranean accusation here is that Apple is arbitrary, capricious and abusive of its ecosystem partners.
Crystal ball
For any single iOS developer or company, it would certainly be best if everything was spelled out and stayed unchanged. Unfortunately, while Apple is the largest technology company in the world and one of the most nimble, it can’t foresee everything. About 65% of all Apple’s sales now come from iOS devices that didn’t even exist over three years ago.
This is not a problem just for Apple: Joost and Hulu were both derided at their launch. The former is practically gone but the latter has become an overnight success. In turn, Hulu is now so vitally threatened by Netflix that it’s contemplating changing its entire business model. Of course, Netflix is likely not amused by Amazon getting ready to stream movies at discount. All this, inside a couple of years. Sustaining large-scale platforms is a very dicey proposition given the breakneck speed of change.
Just as I can’t see how Apple could have become a $300+ billion company by making iTunes an “open for all” playground of its competitors’ commercial interests — given Google, Microsoft, Adobe, RIM, Samsung, Nokia, TimeWarner, NBC, Universal, Amazon and a host of other competitors suing or attacking Apple on a daily basis — I can’t see a way for the App Store to prosper by turning itself into a “neutral zone” app and media hosting platform.
Who’s your daddy?
Why then should Apple subsidize companies like Sony to park a free app in the App Store as a simple conduit to sell their own properties outside of the App Store? Some would argue that the mere presence of such apps enhances the value of the App Store which then sells more iOS hardware devices where most of Apple’s profit comes from. By that logic, unfortunately, Time Warner could also give away and heavily promote a free app in the App Store that whisks away iOS users to various Time Warner properties to purchase music, videos, movies, books and magazines. Apple gets nothing for footing the App Store platform expenses while Time Warner gets to leech on the huge Apple ecosystem for free. Now multiply this by thousands of other companies bypassing Apple’s cut, and see how attractive App Store becomes for Apple.
The App Store value proposition is simple: 30% of transactions done via an app go to Apple and in-app purchases is the method. That figure may change one day — lowered for certain media or split for app and in-app purchases at different rates — but not until there’s a better and more lucrative online store elsewhere. That day isn’t now. Obviously, if companies like Sony or Time Warner could build their own profitable media stores (not that they don’t try repeatedly) they wouldn’t even need the App Store to begin with. So who has the upper hand here?
The line in the water
Of course, there is a balance. Without sufficient and competitive content, the App Store would fail to ignite iOS device sales. Strategically, however, all the App Store controversy to date has not dampened the enthusiasm of app submissions or iOS device sales, which Apple can’t manufacture enough of. Digiterati teeth gnashing hasn’t been reflected in actual sales figures appreciably.
No lawyer worth his BMW would advise Apple to spell out precisely what is and isn’t permissible on the App Store. Any such prohibition would essentially pre-announce verticals or platform extensions Apple itself may be thinking of developing and, conversely, the lack of any such off-limits would prematurely handicap Apple.
Some people would like Apple to offer variable or different rates of commission based on media. That may sound reasonable at first, but what if apps in one category start arbitraging price, cross sell other vendors’ wares at a lower cut and keep the difference? What if clever developers come up with forms of transactions without downloads, conventional in-app purchases or even pinging servers by, say, converting QR Codes on physical media to real or virtual money? Should Apple spend resources to try to anticipate and police these potentialities? What if Apple is planning to bridge physical and virtual worlds in its upcoming iOS devices through its own NFC-aided payment infrastructure which may alter its 30% cut policy? Should Apple have disclosed this a year ago via its App Store rules?
Technology changes. Competitors change. Regulations change. Markets change. User preferences change. Apple’s needs change. A precise codification of what is and what isn’t permissible in the App Store at any given time period is thus neither practical nor beneficial, for Apple. App Store policies need ambiguity to keep pace and adapt. This is not Android, and Apple’s not stupid. After all, on the eve of its long-awaited entry into games, it was Google that just kicked out from the Android Marketplace the popular Kongregate Arcade app that allows downloading of — of all things — Flash games.
Adobe legal entanglements
Wed, May 5, 10
As a background to recent unconfirmed reports of Adobe asking the U.S. government to investigate Apple (presumably for excluding Flash from the App Store), here are a few of the legal cases by and against Adobe over the years:
- In the late 1980s, British high-end digital effects powerhouse Quantel sued Adobe for $138 million over patented aspects of its Paintbox it claimed Photoshop violated, but lost the case in 1997 due to prior art from Alvy Ray Smith, computer graphics pioneer and co-founder of Pixar.
- In 1998, the German printing systems giant Heidelberger sued Adobe for violating its photo retouching patents. The two companies settled out of court two years later.
- In 1998, Adobe settled its font software copyright and typeface designs case against The Learning Company Inc. for $2 million in damages.
- In 2000, Adobe sued Macromedia for having violated its “reconfigurable tabbed palette” patent to stop the launch of Macromedia’s Flash 5.0. The then Adobe president Bruce Chizen: “Adobe will not be the research and development department for its competitors.” Two years later, Adobe won damages of $2.8 million.
- Two weeks after that verdict, another jury this time found Adobe violated several Macromedia patents and awarded Macromedia $4.9 million. The then chairman and CEO of Macromedia Rob Burgess: “The score is now Adobe one, Macromedia one, customers zero.”
- In 2005, Adobe bought Macromedia in a $3.4 billion stock deal.
- In 2010, after Apple blocked Flash from the App store and Steve Jobs shared his “Thoughts on Flash” publicly, an Adobe platform evangelist blogged “Go screw yourself Apple” and Adobe is said to have asked for governmental intervention.
A Kindle in the wind: Amazon’s strategic dilemma
Fri, May 8, 09
Synergy cuts both ways
When Steve Jobs started his repositioning of Apple a decade ago, he used to repeat at every chance he got how much he admired Sony — the company that sold close to half a billion Walkman devices over the years, but missed the digital media era later by letting Apple dominate it with its iPod line.
One of the critical mistakes Sony made was to rely on its own propriatery Atrac audio compression technology instead of the popular MP3 format. Sony has been a major music label and it wanted to make money on both ends of hardware and content sales, so it crippled its players in various strategic ways until it was too late. Apple had no content to sell and thus it didn’t care what was on its iPods as long as people wanted to buy the hardware. The iTunes store was there to help sell iPods, not the other way around. If the primary format for shared or pirated music happened to be MP3 that wasn’t a major concern for Apple (as it also offered FairPlay DRM to music labels).
Nearly a decade later, we have a similar scenario unfolding, this time involving books, newspapers and magazines. To be sure, eReaders from Rocket, Gemstar, iRex, Sony and others have been around for a better part of a decade, but Amazon’s Kindle is considered to be the most successful one (even though no sales or profit figures have been released by the company yet).
DX is the new AOL
Amazon’s latest model Kindle DX ups the previous model’s screen size to 9.7 inches, adds native PDF support, and comes with an accelerometer for landscape viewing. Combined, these three new capabilities expand Kindle’s reach into technical publishing, magazines, newspapers and education.
What gives Kindle the edge among current eReaders is its unique integration of hardware, software and services. Amazon is not merely a device manufacturer like most of its competitors. Already synonymous with online book merchandising, Amazon is also America’s largest online retailer. It not only boasts a 275,000-book digital storefront, it’s also a leading mover of consumer electronics. Amazon has the reach in distribution and it isn’t afraid of leveraging it. Here’s what Dallas Morning News Publisher and CEO James Moroney said at yesterday’s U.S. Senate subcommittee hearing on the future of newspapers:
“The Kindle, which I think is a marvelous device, the best deal Amazon will give the Dallas Morning News — and we’ve negotiated this up to the last two weeks—they want 70% of the subscriptions revenue. I get 30%, they get 70%. On top of that they have said we get the right to republish your intellectual property to any portable device. Now is that a business model that is going to work for newspapers?
Moroney is not alone. News Corp. Chairman and CEO Rupert Murdoch also spoke on the crucial question of price and control:
“We will not be ceding our content rights to the fine people who created the Kindle. We will control the prices for our content and we will control our relationships with our customers. Any device maker or website which doesn’t meet these basic criteria on content will not be doing business long-term with News Corporation.”
While they may complain about loss of revenue and distribution, what choice do publishers have, if they are not willing to reinvent themselves? Kindle is clearly an interim, propriatery, DRM-protected platform for premium print content, much as Compuserve, Prodigy and AOL served the same purpose on the way to the WWW. It both scares and cajoles print publishers. The open web offers massive distribution via atomization, syndication, aggregation and re-aggregation of content. It requires real change and restructuring vs. re-purposing and re-pricing existing content, which seems to be publishers’ preference at the moment. Jeff Bezos is from Amazon and he is here to help.
What can derail Kindle then?
The first two versions of Kindle supported a propriatery format called AZW. Amazon does offer an email-based service that converts various other formats to its own AZW, but the commercial focus of its store has exclusively been DRM-restricted AZW. With the new Kindle DX, PDF is now added to the natively supported formats.
Unfortunately for Amazon, PDF is also the primary format for the huge digital ecosystem of pirated books, magazines, newspapers and textbooks. Constantly around the globe, protected digital versions of printed material are converted to unprotected PDFs or actual prints are scanned page-by-page as collated images or scalable digital text made available in PDF.
Indeed, for print, PDF is the new MP3. Amazon is trying not to repeat Sony’s earlier mistake with Atrac vs. MP3. By making PDF natively available, it’s positioning Kindle as a universal player, just as Apple did with the iPod. And therein lies the problem.
Razor or blades?
Jeff Bezos has just announced that 35% of books that have a Kindle version are sold in the digital AZW format, up from 13% just three months ago. That level of growth could point to a near-term future where the digital version of a book could outsell its printed counterpart. If only Amazon could hang onto that revenue.
If Kindle is a good reader for DRM-protected content, it would be just as good a device for pirated, unprotected and revenue-free PDFs. After all, Apple sold over six billion songs on iTunes, but that’s still dwarfed by the pirated music scene…much of it on its iPods.
So if what happened in the music business happens in the digitized-print business, can Amazon (or anybody else) make sufficient profit selling content? If not, Amazon will have to compete mostly on the value of its reader device. And yet Amazon is an utter newcomer to the hardware business, without much industrial design expertise, supply chain control, component price advantages or ability to leverage costs over multiple product lines like other CE companies. At $489, Kindle DX will not only compete with current eReader sellers like Sony, but also combinations of newcomers and publishers like Plastic Logic, News Corp, Polymer Vision and Hearst that are expected to unveil their own devices in the next 12 to 18 months.
The multi-touch elephant in the room
The specter over Kindle’s prospects, however, is (currently) a rumor. A rumor of a color, multi-touch device, offering not only static PDFs like Kindle but likely some combination of photos, 3D, games, telephony, networking, WiFi, Bluetooth, web surfing, 40,000 apps and millions of music, movies and podcasts from the world’s largest online media store. A “category-defining” device from a company whose CEO criticized Kindle in these dismissive terms:
“It doesn’t matter how good or bad the product is, the fact is that people don’t read anymore…Forty percent of the people in the U.S. read one book or less last year. The whole conception is flawed at the top because people don’t read anymore.”
If Kindle can provide evidence that there’s a profitable repurposed-print market that can fuel hardware sales with a healthy margin, Steve Jobs would be more than ready to jump into the fray. At which point — if PDF is the format equalizer — the battle shifts largely to hardware design, back-end service, user experience differentiation and overall value. Precisely the areas where Apple is peerless. Amazon’s revisionist “bookpad” vs. Apple’s recombinant “mediapad.” Rear-view mirror into a lethargic industry vs. windshield towards a non-print centric future.
Will the DiggBar instigator be fired?
Tue, Apr 14, 09
By now the furor over DiggBar — Digg’s naked attempt at stealing link juice via URL misdirection — and frame-busting counter-measures are well-spread.
The irony, of course, is that startups like Digg are supposed to experiment and fail often by the inevitable nature of statistics of success. In old industries like banking or automative, however, when we notice failure, albeit on a grander scale, we want the CEOs and the managers who made bad decisions to be fired, not rewarded with bonuses. Those names become public and focus of scorn in editorials and their houses are ‘visited‘ by angry tax payers.
But what happens to startup people who make serious mistakes and misjudge potentially debilitating risks to their companies and brands? What, for example, happened to the clever people who concocted Beacon for Facebook, the privacy debacle disguised as an advertising platform that comes once in a century? What happened to the folks who decided to build an architecture for Twitter that couldn’t possibly handle a real-time messaging system at global scale that nearly sank the company? Who at Yahoo thought it was a good idea to pay $5.7 billion to Broadcast.com in 1999?
Indeed, what will happen to those who thought people wouldn’t notice or didn’t care that Digg would now be appropriating link destination from original sites via DiggBar to boost up its own traffic so that it can justify the recent infusion of VC money into Digg? Digg VP John Quinn boasts that DiggBar has resulted in a 20% boost in unique visitors. Is this a time for celebration and bonuses?
The objective here isn’t individual punishment, of course. It’s a matter of ethics and transparency — all the things we’re asking of the old-line industries and our politicians — as though high-tech has a firmer grasp of our brighter future.
Are we naive or just jaded?
