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5 posts from April 2012

B&N and Microsoft: Why It's Not About Ebooks

Microsoft's $300 million investment in B&N's digital business is about more than ebooks. Much more. Or at least I hope so. Success in this venture will not be measured by sales of ebooks. Microsoft should instead use this as an opportunity to create an end-to-end consumer experience that rivals Apple's and has the advertising income potential to make Google jealous. But how will that happen by investing in the distant #2 player in the ereader space?

Microsoft has spent billions over the years as it repositions itself from the makers of Windows and Office into a much broader brand. They've done a good job as Microsoft is one of the most recognized brands on the planet. But is it really considered a consumer brand like Coke or (wait for it) Apple? Even though they've built an amazing customer base with Xbox and the innovative Kinect accessory, I'd say the answer to that question is "no."

Barnes & Noble isn't exactly up there with Coke or Apple, but the B&N brand conjures up other images Microsoft could benefit from (e.g., trusted in-person retailer, growing digital content retailer and even a place where you can get answers to your questions about nooks and books). The initial investment with B&N is about the .com world, but who says the larger relationship has to be online-only?

Think about the nook areas in today's B&N superstore and consider what they could become with a broader Microsoft alliance. I'll bet you didn't know that there are almost 20 Microsoft Store locations in the U.S. That sounds a lot like Apple's strategy, right? It remains to be seen whether Microsoft can create the same sort of buzz or ROI in their stores that Apple has managed to achieve, but why go to the trouble and expense of creating a larger standalone presence when a store-within-a-store might be even more effective? What if B&N stores added mini Microsoft Stores in each of their locations? The foot traffic is already there and what a great place to showcase and sell that new Windows 8-based nook they'll undoubtedly create.

This isn't just about selling Windows-based nooks in brick-and-mortar stores though. This new alliance needs to sell devices, ebooks, music, video, apps and more. The nook platform is almost exclusively about ebooks. Compare that to Apple's platform where ebooks are probably a rounding error for iTunes. B&N desperately needs to diversify their business beyond ebooks and Microsoft has the cash to help make it happen.

Let's also not forget about how the Xbox could fit into all of this. Xbox is one of the brightest stars in the Microsoft product portfolio and Microsoft needs to get some mojo in the mobile/tablet space. Given the ongoing decline of print book sales it might make a lot of sense for B&N to reduce their superstore title count inventory and make even more room for that Microsoft section I described above.

The brick-and-mortar presence is something Amazon doesn't have, at least not yet. This is a great opportunity for B&N to use that to their advantage, assuming the deal goes further than the digital investment.

All of this might never happen, of course. As a publisher and a consumer I'm still intrigued by the possibilities though, even if it only means B&N is now funded to be a more serious ebook retailing competitor for Amazon.

BookAnd: A Social, Virtual Bookstore

BookAndI must be more of a visual person than I'd like to admit. After all, I use Goodreads to store and share my book reviews/recommendations but I don't use it much to discover what my friends recommend. My behavior is largely because Goodreads is a list-based service and it doesn't offer an immersive experience. Don't take that the wrong way though...I still like Goodreads!

I've also heard plenty of skeptics who say reading/books and social don't mix, reading is a solitary activity, etc. That's true at times, but when it comes to discoverability there's no substitute for recommendations from your friends. And I seem to be interacting more with my friends via Facebook than ever before. So it still seems to me there's a big opportunity to solve the discoverability problem through the social graph.

I recently discovered an interesting approach to book discoverability. It's a service that's still in the very early stages called BookAnd. BookAnd is a platform where you can build your own virtual bookstore (see the sign-up form here). The screen shot at the top of this post shows my bookstore under construction. It's not just about putting covers on shelves though. You can design your store so that it reflects your personality. If it sounds a bit like Second Life for books that's because it is. I can add tables, stands, chairs, plants, lamps, etc., to my virtual store. And while that's kind of fun, the best part of is that I can feature my favorite books, face out on the shelf, just like how you'd see them in a brick-and-mortar bookstore.

OK, this isn't exactly revolutionary. But think about the experience it could create if this virtual world were embedded in your favorite ereader app. So when you finish that next book on your nook and you want to go find something new to read why are you limited to whatever B&N wants to feature? What if you could easily visit your best friend's BookAnd store, right within the nook app?

That app integration is key. I don't even want to have to go to Facebook to discover what my friends are reading. I'm in the reader app so give me the option of seeing it all right there. That's especially important since we live in a world where even the most sophisticated tablets don't like the idea of displaying windows for more than one open app at a time. (Imagine having to work in Windows or on your Mac with only one window displayed at a time -- it's crazy!)

It's hard to say whether BookAnd or a competitor will catch fire but I definitely think it all hinges on that in-app integration. I hope the big players in this space will jump on that soon. It will only lead to better discoverability and therefore more sales, so why wouldn't they be all over this?

What if DRM Goes Away?

TOC Latin America was held last Friday in the beautiful city of Buenos Aires. Kat Meyer, my O'Reilly colleague, and Holger Volland did a terrific job producing the event. As is so often the case with great conferences, part of the value is spending time with speakers and other attendees in between sessions and at dinner gatherings

Last Thursday night I was fortunate enough to have dinner with Kat, Holger and a number of other TOC Latin America speakers. We discussed a number of interesting topics but my favorite one was asking each person this question: What happens if DRM goes away tomorrow?

The DoJ suit against Apple and five of the big six has led to a lot of speculation. One of the most interesting scenarios raised is that if the government is intent on limiting the capabilities of the agency model, publishers need to figure out what other tools they can use to combat the growing dominance of Amazon.

Charlie Stross is right. DRM is a club publishers gave to Amazon and then insisted that Amazon beat them over their heads with it. So what if we woke up tomorrow and DRM for books disappeared, just like it has (for the most part) with music?

I was unable to reach a consensus at that dinner, but here's what I think would happen: Initially, not much. After all, Amazon has a lot of momentum. If current U.S. estimates are accurate, Amazon controls about 60-65% of the ebook market and B&N is second with about 25-28%. That only leaves 7-13% for everyone else. And if you've been buying ebooks from Amazon up to now, you're not likely to immediately switch to buying from B&N just because they both offer books without DRM. On the surface Amazon's and B&N's ebooks use incompatible formats, mobi for the former and EPUB for the latter. But that's where it gets interesting.

Converting from mobi to EPUB (or vice versa) is pretty simple with a free tool like Calibre. I've played around with it a bit, converting some of the DRM-free ebooks we sell on I didn't do those conversions to get our books in other formats. After all, when you buy a book from you're buying access to all the popular formats (mobi, EPUB and PDF, as well as others), not just the one format a device-maker wants to lock you into. I did the conversions because I wanted to see what's involved in the process.

If you've ever used Microsoft Word to save or convert a .doc file to PDF you'd find it's just as easy to go from mobi to EPUB in Calibre, for example. But just because the tool is available does that mean if DRM goes away we'd suddenly see a lot of Kindle owners buying EPUBs from B&N and converting them to mobi with Calibre? I doubt it. Those Kindle owners are used to a seamless buying experience from Amazon, so unless there's a compelling reason to do so, they're not likely to switch ebook retailers. And that leads me to the most important point...

Creating the best buying and reading experience is one way any ebook retailer can steal market share from the competition. Amazon has a pretty darned good one, that's for sure, but there's plenty of room for improvement, IMHO. I'm not convinced any ebook retailer has pushed the envelope on innovation and exciting new features in their devices or reader apps. In fact, these enhancements seem to move at a glacial pace. So what if B&N (or anyone else, for that matter) suddenly invested heavily in reader app functionality that puts them well ahead of the competition? And what if some of those features were so unique and innovative that they couldn't be copied by others? I'd much rather see a competitive marketplace based on this approach than the one we currently have where the retailer with the deepest pockets wins.

Innovation is better than predatory pricing. What a concept. The iPod revolutionized music, an industry that was highly fragmented and looking for a way forward in the pre-iPod days. The iPhone turned the cellular market on its head. Think about how significantly different the original iPod and iPhone were when compared to the clumsy MP3 players and flip phones that preceded them. I believe today's crop of ebook readers and apps are, in many ways, as clumsy and simplistic as those MP3 players and flip phones. IOW, we haven't experienced a radical tranformative moment in the ebook devices and app world yet.

Of course all of this innovation I'm dreaming of could happen today. We don't need to wait for a DRM-free world. Or do we? Amazon has no incentive to innovate like this. They already have a majority market share and it's only going to get larger when the DoJ dust settles.

This is more of a rallying cry for B&N, Kobo and every other device and ebook retailer. If DRM goes away tomorrow nothing much changes unless these other players force it to. But why wait till DRM disappears? It might not happen for a long time. Meanwhile, the opportunity to innovate and create a path to market share gain exists today. I hope one or more of the minority market share players wakes up and takes action.

DoJ: Consumer Hero or Predator Enabler?

Last week I got a better sense for why Clay Johnson, author of The Information Diet, recommends gathering the facts as close to the source as possible. When the DOJ released the final judgment with settlement terms for three of the big six publishers I was on a plane and was formulating my opinion based on what I was reading in the tweet stream.

By the time that plane landed my mind was made up. Or so I thought. At that point I felt the DOJ’s settlement terms were over the top and taking us right back to square one. It appeared that the agency model was going away, the deep-pocketed Amazon could continue selling ebooks at a loss, drive the competition out of business and create an ebook retailing monopoly.

I was also confused and led astray by this Wired article which reported, “Publishers can enter into one-year agency agreements that stipulate that the retailer can sell individual titles at a loss, but must show a profit overall for all the books it sells from that publisher’s catalogue.” That seemed vague since the article didn’t say how much of a profit had to be generated.

Then I read the relevant sections of the settlement terms (see section VI, Permitted Conduct, paragraph B).

The settlement document actually says that there are some restrictions in customer discounts going forward, but that “such agreed restrictions shall not interfere with the E-book Retailer’s ability to reduce the final price paid by consumers to purchase the Settling Defendant’s E-books by an aggregate amount equal to the total commissions the Settling Defendant pays to the E-book Retailer.”

In other words, the retailer doesn’t have to generate a profit on ebook sales and the agency model isn’t really going away. But the DOJ is altering agency so that it once again tilts the scales in favor of the deep-pocketed retailer. According to the settlement terms, Amazon will be able to forgo their cut of the transaction and pass that discount along to customers. So let’s say the agency model includes a 30% cut for the retailer. Instead of the publisher being able to set the final consumer price, as they can under the original agency model, the retailer is now able to discount the consumer price by as much as their 30% cut.

That might seem harmless because it doesn’t let Amazon sell ebooks at a loss under the new terms of the agency model. Once the terms kick in it seems certain Amazon will reprice all these agency titles from settling publishers to 30% off, thereby forcing their competitors to do the same and not make a nickel on ebook sales. That’s OK for Amazon because they’ve got loads of cash and sell a bunch of other products they can make money from. What does it mean for other ebook retailers though?

The wholesale model was accelerating the death of other ebook retailers. Amazon could sell all their wholesale model ebooks at a loss until the last competitor was run out of business. The agency model took control away from Amazon by not letting them sell at a loss. This new agency model is somewhere in between but will definitely put other ebook retailers at a disadvantage, especially if they’re not as diversified as Amazon and unable to make a profit somewhere else. We’re not quite back to square one, but we’re painfully close.

So while the DOJ feels they’re solving a price-fixing problem what they’re really doing is paving the way for a monopolist retailer. And don’t think Apple or Google with their deep pockets are going to save the day. Neither of them are selling that many ebooks, Apple will probably lose interest now that the agency model has changed and Google has already started their retreat.

Even though my employer, O'Reilly Media, doesn't use the agency model, I think it’s perfectly reasonable for a publisher to set the final consumer price, especially if they’re trying to prevent one retailer from selling at a loss to drive competitors out of business. I was also inspired by the letter Macmillan CEO John Sargent wrote about the situation. He feels Macmillan has done nothing wrong and that they plan to fight the accusations.  That makes me wonder about the publishers who have already settled. Either they’re guilty of collusion or unwilling to take a stand at this very important moment. Neither scenario casts them in a favorable light.

When I was on that plane I was ready to grab my own torch and join the lynch mob because the agency model was going away and Amazon could revert to selling those agency titles at whatever loss they wanted to. Now that I’ve read all the facts I’m not so much angry as I am disappointed in the DOJ. They haven’t completely nuked the agency model but they’ve changed the rules enough to all but ensure Amazon’s dominance.

There’s one question I’d love to ask Attorney General Eric Holder: When Amazon’s ebook market share climbs back to the 90% level it once was, and competitors are run out of business, will he consider these settlement terms a success?

Disappointed by Google

Last week Google announced plans to wind down the reseller component of their eBook service. As Google put it, the program "has not gained the traction that we hoped it would", so they're pulling the plug next January. Like any well-focused company, Google is smart to reinvest in successful products and kill ones that aren't working. I don't question Google's decision to end the reseller program but I do question whether they invested enough to give it a chance.

Google seems to have a corporate philosphy of planting a product seed and assuming others will embrace it and help it bloom. That might have worked with a superior search engine but it's not always the best approach in other sectors. Android is a great example.

Carriers and smartphone manufacturers embraced Android as a free alternative to the iPhone. Those carriers and manufacturers have sold a lot of phones but the customer experience isn't always that great. Some of the common frustrations are that Android OS updates are unevenly distributed (if at all) and some apps only run on certain devices. I often complain about Apple's walled garden approach but at least if you have an iPhone you know you'll get the new iOS version on day one and every app in iTunes will run just fine. Tablets have only exacerbated this problem. For example, I recently discovered Next Issue, a new all-you-can-eat e-magazine subscription app, but it's incompatible with both my Android phone and tablet. Very irritating.

I realize the decision to push out a new Android OS is in the hands of the carriers and device manufacturers but I think Google should exert more pressure on them to distribute those updates when they're available. Of course, if you're AT&T or Samsung you'd rather force someone to sign up for a new 2-year contract or buy a new device than just give them the latest OS. Notice how Apple doesn't let that happen in the iPhone world though?

I also think Google should have used some of that mountain of cash they're sitting on to build a better Android app ecosystem. Unlike iOS, Android doesn't have any unique killer apps. All the decent Android apps are simply copies of the iOS ones and most of the better iOS apps aren't even available on Android (e.g., Flipboard, The Elements, etc.) Google may have renamed their Android Market to Google Play but there's still no compelling app to lure customers away from iOS. Most developers will tell you there's no money to be made from selling Android apps; if that trend doesn't change it will definitely affect the long term viability of the Android platform.

Getting back to the Google eBooks reseller program... How much did Google invest in it to ensure success? They basically opened the service to booksellers and assumed it could be a hit. I would argue that the only way the reseller piece could succeed is if the larger Google eBook platform succeeds.

Let me ask you a question: Have you ever bought an ebook from Google? I haven't and I don't know anyone who has. You'd think Google would have become a major ebook player by now since they offer all formats. Well, actually...they offer all formats except for the most popular one. As you can see at the bottom of Google's supported reading devices page, they still don't support the Kindle. Doh!

In Google's defense, the only way they could support the Kindle is by offering DRM-free mobi files. Impossible, right? Even though all of our ebooks at O'Reilly are distributed DRM-free there's no way Google could have gotten other publishers to agree to doing so.

Or could they? Remember that mountain of cash I mentioned before? Wouldn't it have been cool for Google to have approached just one of the big six publishers and said, "Hey, we want to level the playing field so that DRM is no longer a weapon used against you to build an ebook distribution monopoly. Let us distribute your ebooks without DRM for 6 months. We'll use our amazing computing power to measure how much piracy there is of your content before, during, and after the test. If we determine a significant piracy increase on the torrent sites, etc., we'll pay you 10 times what you've earned through our service for that period and we'll immediately shut down the DRM-free distribution." Let's say a 10x payment isn't enough to make the publisher's concerns go away. OK, make it 20x. Or 50x. Google's got the money and could have really proven a point that DRM provides nothing more than a false sense of security.

In reality, I'm not convinced Google even cares about the ebook market. Ebooks were just another item on a product checklist they felt compelled to include so they could compete with Apple. Google eBooks doesn't appear to have any momentum so the reseller program could just be the first sign of a more significant retreat from Google. That's too bad. Google had a chance to do something special with this but, like the Android platform, they've relied too much on others and haven't invested enough of their own resources to make it as successful as it could have been.