Digitopoly

My TEDx talk

Joshua Gans — Tue, 18 Jun 2013 17:08:05 +0000

Filmed last month at TEDxUofT on entrepreneurial strategy. It reflects thinking about that topic that I have done with Fiona Murray and Scott Stern.

Someone later suggested the title of the talk should have been “A Vision for Relief.”

Here are some links to some of the topics touched on:

The Onion talks
The National Public Toilet Map and the toilet data.
Some apps: Sit or Squat, Show The Loo, Cloo
My original op ed on toilet data, a controversy and a follow-up
Netflix for Batteries
Lore and Coursepeer
Kira Talent and the Next 36

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Is Apple harming the feature innovation ecosystem?

Joshua Gans — Tue, 11 Jun 2013 13:34:56 +0000

Yesterday, Apple announced iOS7, the latest version of its mobile operating system. It was a large change but perhaps the most interesting bit was Apple’s continuation of its rather tense relationship with the app developer community. To be sure, Apple has enabled that community and handed them $10 billion in revenue since 2008. However, once again, it appears to have ~~taken~~ been inspired by numerous innovations that came from app developers.

These can be classified into two broad groups: innovations by app developers and innovations by hackers/jailbreakers.

For app developers, the Calendar app appears to have a new layout reminiscent of the Sunrise app although there are others as well. A flashlight is now incorporated as a feature whereas many had developed separate apps. The Camera app has filters just like Hipstamatic and Instagram but this is something that many apps now have. And the new Safari tabs have some similarities to Chrome’s tabs. Apple also seemed coy about its Mail app but it looked like its way of dealing with email was not dissimilar to the new and popular Mailbox app.

Finally, the new Weather app has animations of, well, the weather. This doesn’t exist in an app but if this story is to be believed, Apple rejected a similar app for reasons related to the experience the app provides.

All this is not new. Apple integrated Reader functions into Safari (like Instapaper) and HDR into its camera that had previously only been available in apps.

For hackers, the new control center has been a long standing jailbreak option and the multitasking UI seems also similar to a jailbreak version. There are likely important background issues in both of these but there is a pattern here.

The message all this is sending is worrying. This creates a perception that Apple is ripping developers off and so will impact on their incentives to innovate. I must admit I am concerned more about this for app developers than for hackers. The reason is that hackers are often putting in these changes to use them themselves and so if Apple integrates and improves upon them, they reap a benefit. For app developers, there is a clear monetary cost.

Ultimately, there appears to be an issue with attribution. Now I realise that the world doesn’t work this way and legal risks may prohibit acknowledgement in ambiguous situations. But it would be a far better world if Apple could use innovations and integrate them and also acknowledge their origins. The end result may be app developers innovating more if only for the kudos associated with credit. The App Store was a great innovation. It is time for Apple to innovate and apply its design focus to the ecosystem so that it can work in a cleaner and less apparently dirtier manner.

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The State of Performance-driven Management in America

Erik Brynjolfsson — Fri, 07 Jun 2013 00:16:13 +0000

I teach at a School of Management so you won’t be surprised to learn that I think good management can make a huge difference in the performance of companies, and ultimately the economy. But you may be surprised that there is very little economic research on the effects of management. Sure, there’s lots of speculation and countless management books and articles, but a recent review of the economic literature by Chad Syverson concluded: “No potential driving factor of productivity has seen a higher ratio of speculation to empirical study [than management practices].” The biggest problem has been simply a lack of a comprehensive, reliable data set of management practices.

To address this gap, I recently helped formulate the U.S. Census Bureau’s survey of management and organizational practices at more than 30,000 manufacturing plants across the country–the first large-scale survey of management in America. Along with Nick Bloom, Lucia Foster, Ron Jarmin, Itay Saporta and John Van Reenen, we examined three types of practices– performance monitoring; setting targets, and offering incentives—which we called “Structured Management.”Analysis of the data reveals several striking results about the relationship between performance goals and improved business. Specifically, setting business goals and monitoring results are among the practices that actually yield better business productivity and growth, according to this comprehensive survey of U.S. management conducted in 2011. The survey was funded by the National Science Foundation and had administrative support from the National Bureau of Economic Research and the MIT Center for Digital Business. It was a joint, academic-U.S. census bureau collaboration.

My fellow researchers and I set out to determine whether, and what type of management practices influence bottom-line business results such as productivity, output and growth. Based on the responses, we found a tight link between Structured Management and performance outcomes such as growth, expenditures and innovation as indicated by R&D and patent intensity.

Figure 1: Better Performance is Associated With More Structured Management

While the survey did not focus exclusively on digital technologies, the conclusions may partly reflect the increasing adoption of information technologies, like Enterprise Resource Planning (ERP) systems, which make data collection and processing much cheaper, easier and more effective. Structured Management scores for data use have improved the most, according to the data.

Figure 2: Average Management Scores Increased between 2005 and 2010, especially for Data Driven Performance Monitoring

Presumably this reflects the growing use of IT in modern firms.The study also highlights the important rise of data-driven decision-making, which the MIT Center for Digital Business has championed for several years. Most of the rise in structured management practices, for example, has come among businesses that have implemented data-driven performance monitoring.

It was also interesting to note that adoption of structured management practices has increased between 2005 and 2010, particularly for those practices involving data collection and analysis. This is consistent with my earlier research with Lorin Hitt and Heekyung Kim on Data-Driven Decisionmaking.

Among other key findings:

There is a substantial dispersion of management practices across the establishments. Eighteen percent have adopted at least 75% of these more structured management practices, while 27% adopted less than 50% of these.
There is a positive correlation between structured management practices and location, firm size, establishment-level measures of worker education, and export status.

Going forward we will continue to analyze the data and explore causality. Additionally, we may do another survey in 2015 to establish longer-term data and perhaps will focus on the retail or health-care sector.

Let me know what other ideas you think we should explore.

This post first appeared on the MIT Center for Digital Business Community site.

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A Puzzling Graph on eBook Prices and the DOJ Case

Joshua Gans — Thu, 06 Jun 2013 16:27:19 +0000

From a preliminary paper by Michael Baye, Babur De los Santo and Matthijs Wildenbeest:

What it shows is average book prices over time for paperbacks and then eBooks sold under the agency model and the wholesale model. Now I should stress it is average book prices and it is not weighted by quantity sold. As best-sellers are typically discounted this means that the prices involved are likely higher than what we normally observed.

The two relevant dates are when the DOJ first launched its case against the publishers and Apple and then when it settled with three of the publishers. Notice that the wholesale book prices jumped up around the time of the lawsuit. As the major publishers were all apparently operating under the agency model, the movement in wholesale model pricing, this suggests that either/and (a) smaller publishers saw the lawsuit and thought they were under pricing their books or (b) Amazon changed its retail pricing for books under the wholesale model. The latter seems to have a greater likelihood given that the prices then fell when the settlement arose and, in particular, the most favoured nation clauses were struck out.

Importantly, it should be noted that Apple and its actions are not part of any story I can think of for this very sizeable variation in prices observed in this graph. But what the precise story is, seems puzzling and worthy of more thought.

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Fighting back in cybercrime

Joshua Gans — Mon, 03 Jun 2013 12:17:39 +0000

Last year I discussed the economics of spam and suggested:

Seen in that light perhaps we should see [spam] as criminal entrepreneurship. What is great about that is we know a lot about how to encourage entrepreneurship and innovation and so to deal with spam we just need to throw that into reverse. Countermeasures make spamming costly. If spammers had great alternative opportunities — this time Wall Street may actually help in an appropriate allocation of talent — criminal entrepreneurship would be reduced. Maybe the whole mobile app revolution has already had this impact.

Finally, counter-attacks might reduce spam returns. A few years back I contacted Yahoo and Google with an idea to counter spammers. What if for each spam email that they picked up, they responded — perhaps entering details into phishing forms? This would overwhelm spammers and they would not be able to find ‘legitimate’ responses from the gullible few. That would really alter their returns. Unfortunately, it was explained to me that such a measure would constitute an attack by a US corporation and, apparently, that is against US law.

Today, the Wall Street Journal considers the ‘fight back’ option with respect to cyber-theft.

As companies weather a spate of high-profile computer attacks, support is growing for an option that for now is probably illegal: fighting back.

The Justice Department has long held that if a company accesses another party’s computer network without permission, for whatever purpose, it is breaking the law.

But the idea of allowing the private sector to retaliate against hackers, euphemistically known as “hacking back,” has gained momentum as U.S. companies wake up to the pervasive threat of cybercrime.

A commission led by Dennis C. Blair, President Barack Obama’s first director of national intelligence, and Jon M. Huntsman Jr., the former U.S. ambassador to China, said last month that “without damaging the intruder’s own network, companies that experience cybertheft ought to be able to retrieve their electronic files or prevent the exploitation of their stolen information.”

Apparently, there seems little traction for this in Congress. The issues are complex because you are permitting use of a weapon and, let’s face it, private law enforcement isn’t what we regard as good practice. That said, there is an issue as to whether some form of response — and rapid response — may assist. This would require a careful public-private effort that certainly looks worth investigating.

[HT: Jay Zagorsky]

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Art wants to be shared

Joshua Gans — Fri, 31 May 2013 18:57:45 +0000

The Rijksmuseum in Amsterdam would like its art to be used properly even if that reduces its commercial opportunities:

Many museums post their collections online, but the Rijksmuseum here has taken the unusual step of offering downloads of high-resolution images at no cost, encouraging the public to copy and transform its artworks into stationery, T-shirts, tattoos, plates or even toilet paper.

The staff’s goal is to add 40,000 images a year until the entire collection of one million artworks spanning eight centuries is available, said Taco Dibbits, the director of collections at the Rijksmuseum.

In this case, what is interesting is that the motivations are not purely commercial:

“We’re a public institution, and so the art and objects we have are, in a way, everyone’s property,” Mr. Dibbits said in an interview. “‘With the Internet, it’s so difficult to control your copyright or use of images that we decided we’d rather people use a very good high-resolution image of the ‘Milkmaid’ from the Rijksmuseum rather than using a very bad reproduction,” he said, referring to that Vermeer painting from around 1660.

Moreover,

“If they want to have a Vermeer on their toilet paper, I’d rather have a very high-quality image of Vermeer on toilet paper than a very bad reproduction,” he said.

This reminds me of Bill Gates’ similar statement that if people were going to pirate software he would rather than pirate Microsoft’s.

But they go further to argue that this type of use makes the art more valuable.

Mr. Dibbits of the Rijksmuseum maintains that letting the public take control of the images is crucial to encouraging people to commune with the collection. “The action of actually working with an image, clipping it out and paying attention to the very small details makes you remember it,” he said.

This is great. So I’ll celebrate by providing one example of their work that I like here.

[HT: Ariel Katz]

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Revenge Editing and Wikipedia

Shane Greenstein — Sun, 26 May 2013 23:23:17 +0000

Unless you regularly read Salon, you probably missed last week’s interesting article about anextraordinary case of revenge editing on Wikipedia. This article should matter to anyone who cares about Wikipedia, and, more generally, it should matter to anyone who cares about the long run success of open platforms for accumulating content.

Look, the world is not a perfect place. It is full of jealousy and envy, and all kinds of flawed human behavior. Wikipedia did not promise to eliminate such behavior, but it is remarkable how Wikipedia seems to survive in spite of human frailty.

Wikipedia has a strategy for human frailty. It does try to organize the accumulation of contributions and then it allows those contributions to be reviewed by many participants. It does let the opinions of the many alter the contribution of the one. That seems to hold abuse in check. Or so I thought.

To be sure, Wikipedia has gone forward more on a promise than any actual evidence or experience. So goes the mantra: if enough readers and contributors reviewed articles, the article would tend towards a balanced portrayal of topics. It is just a promise, but so many of us have bought into it. And it has been ten years since Wikipedia first started. It has seemed to work reasonably well.

Not that Wikipedia is perfect. Not that the model worked straight out the gate. As it has become more prominent some of the vulnerabilities have become more apparent. It has been tweaked along the way in order to make it better.

But this story is disturbing precisely because no simple tweak will solve it.

Two of Wikipedia’s biggest vulnerabilities play a role in in revenge editing. First, attention is skewed, so not all articles receive the same extent of review. Many articles receive less review – a lot less, as it turns out. Second, as in any project involving many participants, Wikipedia depends on etiquette, mature behavior, and the unwritten rules of civilized behavior. It has to, since every contributor gets a considerable amount of discretion.

Put those two together and you get the potential for massive chaos on some of Wikipedia’s more obscure entries and pages, where the crowd is not really paying attention.

More to the point, what happens when one person sets on a persistent and vengeful path and will not respect the truth? What happens when someone seeks to sully the name of a rival’s entry on Wikipedia? What happens when all this takes place on some of the less prominent pages of Wikipedia, where not many people are paying close attention?

Want to understand why Wikipedia would fall apart quickly if every contributor violated etiquette whenever they had the discretion to behave badly? This article describes one example. Check it out.

(A shout-out goes to Phil Weverka for passing this one along to me.)

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The Anatomy of a Digital Business Negotiation

Joshua Gans — Thu, 23 May 2013 19:03:34 +0000

The US DOJ’s pursuit of Apple as a “ringleader” in eBook price fixing continues to fascinate me. This week the DOJ released an email exchange between Steve Jobs and James Murdoch (of News Corp) that took place a few days before the launch of the iPad in 2010. Now Apple (and I should add Google) often had reputations out there for giving no ground in negotiations. This exchange demonstrates just how that took place. It is worth going over as others have already noted.

The opening position is an email from Brian Murray of Harper Collins to Eddy Cue of Apple (so it began with the next tier down negotiators).

Eddy,

Thanks for coming in again this morning. We’ve talked over the proposal and I want to make sure that you have a summary of the deal that HarperCollins would be willing to do in your timeframe.

1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiers in the contract. We will use our best efforts to meet the tiers we discussed.

2. MFN ["most favored nation" status]: In the event that HarperCollins and Apple disagree on a consumer price for a title, HarperCollins needs the ability to make that title available through other agents who support the higher price.

3. Commissions: We need a lower commission on new releases for the economics to work for us and our authors. We believe a 30% commission will lead to more authors asking for ebooks to be delayed a result that will not work for Apple or HarperCollins.

4. The new release window: We need to have flexibility on the agency window. We believe this window should be 6 months rather than 12 months in the event that one or more large retailers do not move to an agency model.

Leslie will be sending Kevin a contract that reflects these points in the event you wish to move forward on these terms.

Thanks
Brian

And in News Corp form it also tells us to consider the environment before printing the email.

Now remember the context here. Amazon were pricing many eBooks at $9.99 and taking a hit on them because publishers were receiving more than that. Apple had proposed a higher price ($12.99 to $14.99) as an industry equilibrium. So point 1 appears to be a desire from Harper Collins to be able to set higher prices than that if they so chose and that is confirmed by point 2. Point 3 is your standard “no, no, no, are you kidding me, I can’t afford that price, your bleeding me” counter and Point 4 is about some marketing flexibility.

It is at this point that James Murdoch of News Corp that owns Harper steps in and goes straight to Steve Jobs.

Steve,

Thanks for your call earlier today, and for the time last week.

I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]—and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short—we we would like to be able to get something done with Apple—but there are legitimate concerns.

The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13 and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the sale of the e-book on the Kindle.

[A portion of this email was redacted by the court.]

Basically—the entire hypothetical benefit of a book without raw materials and distribution cost accrues to Apple, not to the publisher or to the creator of the work.

The other big issue is one of holdbacks. If we can’t agree on the fair price for a book, your team’s proposal restricts us from making that book available elsewhere, even at a higher price. This is just a bridge too far for us.

Also, we are worried about setting prices to high—lots of ebooks are $9.99. A new release window with a lower commission (say 10[%]) for the first six months would enable us to proce much more kenly for Apple customers. We’d like to da that.

More on this below in Brian’s note to Eddy. We outline a deal we can do.

Feel free to call or write anytime over the weekend to discuss if you like.

I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check the email regularly.

Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) we would much rather be working with apple than not. But we, and our partners who produce, write, edit, and otherwise make all this with us, have views on fair pricing, and care a lot about our future flexibility. I hope we can figure out a way, if not now and in time for this launch of yours, then maybe in the future.

Best,
JRM

The email timings appear weird as the early email is at 6PM on the 22nd January and the later email is at 4PM the same day. I suspect there is a bunch of time zone issues going on. [Oh yeah, and anyone who complains about the typos on this blog, check out the professional letters being exchanged in business negotiations! So much for lessons we teach kids at school, right?]

In this email, Murdoch appears to put themselves in a position of agent for the author but as author deals are surely flexible this seems strange to me. That said, it is the redacted part that outlines Murdoch’s position here and they are pushing for a better deal again at least during the initial period when their books sales might be highest. And the last paragraph is a thinly veiled ~~threat~~ reminder of the breadth of News’ media interests. In other words, Murdoch is worried that if he gives into Apple now, they will lose ground in other areas too.

Now it is Steve Jobs turn to respond:

James,

A few thoughts to consider (I’d appreciate it if we can keep this between you and me):

1. The current business model of companies like Amazon distributing ebooks below cost or without making a reasonable profit isn’t sustainable for long. As ebooks become a larger business, distributors will need to make at least a small profit, and you will want this too so that they invest in the future of the business with infrastructure, marketing, etc.

2. All the major publishers tell us that Amazon’s $9.99 price for new releases is eroding the value perception of their products in customer’s minds, and they do not want this practice to continue for new releases.

3. Apple is proposing to give the cost benefits of a book without raw materials, distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple. This is why a new release would be priced at $12.99, say, instead of $16.99 or even higher. Apple doesn’t want to make more than the slim profit margin it makes distributing music, movies, etc.

4. $9 per new release should represent a gross margin neutral business model for the publishers. We are not asking them to make any less money. As for the artists, giving them the same amount of royalty as they make today, leaving the publisher with the same profits, is as easy as sending them all a letter telling them that you are paying them a higher percentage for ebooks. They won’t be sad.

5. Analysts estimate that Amazon has sold more than one million Kindles in 18+ months (Amazon has never said). We will sell more of our new devices than all of the Kindles ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony, etc., you will likely be sitting on the sidelines of the mainstream ebook revolution.

6. Customers will demand an end-to-end solution, meaning an online bookstore that carries the books, handles the transactions with their credit cards, and delivers the books seamlessly to their device. So far, there are only two companies who have demonstrated online stores with significant transaction volume—Apple and Amazon. Apple’s iTunes Store and App Store have over 120 million customers with credit cards on file and have downloaded over 12 billion products. This is the type of online assets that will be required to scale the ebook business into something that matters to the publishers.

So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon is currently paying. But the current situation is not sustainable and not a strong foundation upon which to build an ebook business.

[A portion of this email was redacted by the court.]

Apple is the only other company currently capable of making a serious impact, and we have 4 of the 6 big publishers signed up already. Once we open things up for the second tier of publishers, we will have plenty of books to offer. We’d love to have HC among them.

Thanks for listening.

Steve

It is actually pretty polite and very clear. He starts by claiming that Amazon’s current pricing is unsustainable. If the earlier figures are right, he has a point here. But then he immediately says that he doesn’t want everyone to go crazy on pricing. Apple have an assessment as to the sustainable price that is basically around the current wholesale price charged by Harper Collins. The claim is then that Apple will earn a slim margin on book sales but that must be because of infrastructure charges that would account for their 30% cut and it is hard to verify from what we know here. But in the back of their mind is that they are trying to preserve margins above distribution costs and give the cost savings from going digital to the customer. Again, that sounds like solid cost-based pricing but Amazon’s pricing behaviour is at odds (for all we know, correctly) with all that. Interestingly, Jobs is accusing publishers of pricing eBooks too high based on neutrality and wants to change that. In effect, if he is successful, Apple will reduce Amazon’s costs which has to be one of the strangest competitive business moves imaginable for a firm that is apparently exercising some sort of market power. That said, Jobs, as apparently is custom in these negotiations, reminds Murdoch of the source of their power. And it is pretty clear that Apple doesn’t need a deal with Harper Collins for the Day One iPad launch.

A day later, Murdoch blinks ever so slightly.

Steve,

I think the crux of this is our flexibility to offer product elsewhere at price-points you don’t like.

If we could offer to you that a certain percentage of releases (>50%) would be available within your pricing structure (< or = 14.99), does that give you enough comfort?

I think we are worried more about the absolute holdback of product elsewhere, and our ceding of pricing to Apple, than we are about the actual haggle over what the price will be.

I haven’t shared this with HC directly—so this is only hypothetical. But if you were willing to accept that a supplier can exploit other avenues (at prices not disadvantageous to you), with a guarantee of substantial volume through Apple—maybe I could work with HC to get to some common ground.

Please let me know.

A different question: we have four areas of discussion (related to our product) between our teams right now: Books, US Video, Int’l Video, and newspapers. All at different stages of maturity, these discussions are all centered, for us, around the desire to make our product widely available, and to make yours and our products more attractive for our customers. It seems though that we in each one we largely encounter a “take it or leave it” set of terms, and predictably we’ve so far failed to really strike the kind of partnerships that could move things forward.

Is it worth considering in the round, over the next few months or weeks, whether or not some of these loose ends can be tidied up? It’s clear that Apple is already becoming an attractive platform for so many of our customers—all over the world. As a creative company at our core, NWS [News Corp.] should be more engaged with Apple, and I think Apple could be more engaged with NWS, globally, than either of us are today.

Best,
JRM

Murdoch gets complicated here. He is nervous about Apple doing something and doesn’t want to give them some control rights. Again he pushes for higher prices on some books. It isn’t surprising that he is worried about an Apple price cap if we think about what happened in music. But the attempt to raise prices is precisely the sort of risk that I outlined in my paper on mobile app pricing and applies equally here. So it isn’t a surprise that Apple doesn’t want that. Amazon have used other ways of capping prices but Apple doesn’t want to subsidise things the way Amazon does.

The last two paragraphs are somewhat amusing. Murdoch would like a nicer playground. None of all this ultimatum stuff. He argues that that doesn’t produce nice partners. But again he shows the peacock feathers but also provides an interesting window as to what conglomerates think they are getting when they have multiple product lines.

In response, Steve Jobs lays out Murdoch’s options clearly — a perfect end to an extensive form game.

James,

Our proposal does set the upper limit for ebook retail pricing based on the hardcover price of each book. The reason we are doing this is that, with our experience selling a lot of content online, we simply don’t think the ebook market can be successful with pricing higher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and who knows, maybe they are right and we will fail even at $12.99. But we’re willing to try at the prices we’ve proposed. We are not willing to try at higher prices because we are pretty sure we’ll all fail.

As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?

Regards,
Steve

Interestingly, Jobs lays out the possibility that the demand curve for books is more elastic than they all think and that $12.99 may be too high a price. But he wants to keep prices for rising too much. He then says either (a) you are with Apple; (b) you are with Amazon or (c) try fighting with Amazon without Apple as a partner and see how that works.

Murdoch didn’t see any alternatives and chose door (a) a few days later before the iPad launch.

What is interesting about this exchange is that Murdoch did not resist the MFN agreement at least as it pertained to not discounting Harper Collins products elsewhere. The real sticking points in the negotiation are price (which Apple never appears to cave on) and retail price (which Apple actually resisted, successfully, a price increase). In my mind, this appears to be Jobs wanting to keep things clean. Everyone gets the same price and consumers don’t get confused. I suspect that he may have wanted to get book prices to $9.99 but new from Amazon’s failure to get publishers to agree to it, that that would be futile. He was picking a long-run equilibrium.

How this all pays in the antitrust proceeding is anyone’s guess. Remember, according to these email, Jobs got publishers to accept a lower amount that they received for books not a higher amount. But Apple was not going to subsidise the retail price the way Amazon had apparently done. But if Amazon persisted with lower prices, the publishers and Apple would share in the costs of that. This is something that Apple appeared to leave in the hands of publishers. Apple looks here like they capped publisher retail prices but did not set a floor. That has to be one of the strangest proposed alleged collusive arrangements ever. If it did work to increase prices that surely did require Amazon’s agreement. I remain perplexed by the story here.

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Tumblr and Yahoo’s portal strategy

Joshua Gans — Mon, 20 May 2013 14:49:03 +0000

Last week I posited that Yahoo were engaging in a renewed portal strategy: basically, trying to be in a position to capture readers’ attention for 30 minutes a day and, as a result, have a regular and manageable sales proposition to advertisers. Today, Yahoo announced it was buying Tumblr for $1.1 billion. Tumblr is generally thought of as a blogging platform. It is great on mobile, has a modern sharing interface but has not been successful at monetisation.

The general opinion is that the acquisition is about giving Yahoo users and growth (which Tumblr has in spades) and giving Tumblr a monetisation path in advertising (which Yahoo has experience and success in). At the same time, the commentators have noted that this is at odds with Yahoo’s promise to keep Tumblr independent and “not screw it up.”

I don’t see it that way. I think that what Tumblr gives Yahoo is another referral product — a product that refers users to Yahoo’s monetisation products (such as its email, news and home page that contain advertising) — but is a referral product that delivers a set of tools for social interaction that Yahoo doesn’t currently have. In that respect, it also gives Yahoo data of a social type that it was on the verge on being shut out from. For Tumblr, the acquisition allows them to persist as a non-monetised product and a clear customer; Yahoo itself. For that reason, Yahoo will not want to tinker with Tumblr in a way that stops user activity. To be sure, it may consider ways of advertising (Tumblr already has some of this) but I suspect that will be very cautious. In that respect, it has clear parallels with Facebook’s acquisition of Instagram. The natural home for platforms that are essentially tools for creativity and sharing is as a feature within a platform that includes platforms for economising and attracting attention.

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Google’s Multi-Front War

Joshua Gans — Wed, 15 May 2013 19:25:47 +0000

Today Larry Page at Google IO said he was tired of hearing about how Google is fighting with this company and that.

“We should be building great things that don’t exist. Not every new technology is zero-sum.”

But this was at the tail-end of Google’s keynote at the conference that introduced a ton of new products. The new products and services were terrific but the impression I had was that Google were fighting a war with many others on a number of fronts.

Let me just list the new assaults (if that is the right word) launched today:

Developers Tools (vs Apple): Google enhanced the tools for developers of Android apps allowing things like Beta testing and detailed analytics that iOS developers have been begging for but never received.
Google Play Game Services (vs Game Center): allowing developers to write games that can by properly synced across devices and allowing multi-player games across those devices (although the demo didn’t work at the time).
Google Play Music (vs Spotify, Rdio, Pandora, Amazon and iTunes): Google launched a streaming music service that was very customisable for $9.99 per month.
Google Hangouts (vs iMessage, Skype, Facebook): Google launched Hangouts as a multi-platform app that allowed sharing of text, photos and video chats. It is free and very slick with a focus on on-going conversations.
Google Maps (vs Apple, Foursquare, Facebook): the idea is to create a personalised map but also one that can filter your friend’s recommendations — say, for restaurants. It is a reason to use Google+.
Google+ Photos (vs iPhoto, Facebook, Instagram, Amazon): Google will sort through your photos, find the best ones and enhance them. It uses machine learning and looks really impressive. It solves a real problem people have with their photos.
Contextual Search (vs Siri): Google are embedding contextual voice commands into search. It basically looks like Siri and it is tailored to people who have their Calendar, Contacts and Email on Google. It works like Siri is supposed to but for Chrome users it has the added advantage of working without pushing a button. This may be very significant but it will be hard to tell until we get a chance to use it.
Educational apps (vs Apple and who knows who else): Google introduced a neat way of choosing and pushing educational apps for schools. If it works, it will be a money machine.
Google Wallet (vs PayPal): Google is using a feature to make it easier to pay for things on mobile devices and also to send money to others through Gmail.

Basically, Google have taken their enormous computational prowess and finally matched it with Apple-like design sensibilities. For one, Google+ is starting to make more sense and is dealing with problems that are not solved by others. That they have done all this, company-wide, this year says alot for Larry Page’s leadership. But they have chosen to do one thing that isn’t consistent with the strategy playbook: they have not focussed. They are pushing on multiple fronts with competitors who are more focussed on those fronts. This is wonderful news for consumers but stepping back it is a really difficult challenge to sustain. But think about this: what happens if they do succeed and win many of those fronts? Google are behaving very well and innovating strongly. Will that continue should competitive pressure be relieved? I like what I’m seeing but history makes me a little nervous. That said, in a couple of weeks, Apple will be under enormous pressure to deliver. This is a critical strategic juncture for them too.

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Will Yahoo! return to its portal roots?

Joshua Gans — Tue, 14 May 2013 14:53:50 +0000

My latest at Medium.

Many tech writers have a soft spot for Yahoo!. It was one of the first big dotcom companies and it didn’t succeed enough to be seen as a real threat to much. What is more, beyond its first few years as The Player in the portal market, it has been hard to parse precisely what market it is in. The closest perhaps is ‘media’ but somehow that never felt right. Nonetheless, despite the lack of what anyone might call a coherent strategy, Yahoo! has been a performance rock. For any other tech company that fell from potential leadership, the path has been to oblivion. But for Yahoo! they have retained and grown their user base. For instance, with respect to WebMail — which they largely pioneered — their world wide market share continues to rival Google and Microsoft. It is just that it, with some small exceptions, Yahoo! services are not the ones tech commentators use.

But there is some clarity emerging with regard to Yahoo’s strategy. When Yahoo CEO, Marissa Mayer talked with Steven Levy the other week, it was revealing. Mayer never used the word portal but she seemed to articulate a strategy that respected the elements of that. Mayer wanted Yahoo on every device and its 700 million customers, using Yahoo for their daily internet activities. It is this that suggested to me that the notion of portal might be back.

Portals

To see this, recall what a portal was supposed to be: a gateway to the Internet. If a company secured the portal for a consumer, that consumer would to the portal and be guided by it as to where to go next. Ideally, they might never leave the portal with the portal bringing what they need or want to them. The business model that sat side-by-side with this was a traditional one: grab the consumer, monopolize the advertising access. Just like the daily newspapers of old, portals were something business people could understand. You compete hard for consumer attention and then sell access to that attention to advertisers. Advertisers know what they are paying for and so pay up big.

Portals died quickly despite massive investment. In 2000, no one had enough muscle to work out what consumers wanted in a portal and so consumers went out on their own. Google certainly helped that and in the process took an advertising model to a non-curated content model. The end result is that consumers were everywhere, advertisers didn’t know where to find them and so they weren’t willing to pay up for the priviledge. It is no wonder that businesses — particularly, media —that were reliant on that advertising model struggled.

But the Internet and consumers have matured. They developed strategies to deal with information overload. Think what you do when you first get onto the net of a morning. For me, there is a set of five news tabs that open, along with my email, Facebook, Twitter and Google Reader. I am there every morning just as I used to be with a newspaper. For others, the strategy is different. However, I am willing to bet it is pretty stable.

Herein lies the opportunity. Being savvier than most, I could combine multiple services myself. For others, that is challenging and there is some demand for curation. Facebook has taken that role seriously and for many, that is where they need to travel. If I had to guess where the morning newspaper market went, it was to Facebook and the advertisers will eventually realise that. But news outlets like the New York Times probably still gets a good share of that.

Yahoo versus the rest

Here is where Yahoo comes in. If you look at its webpage redesign, it is very portal like. They want to be where people are going on a regular basis. The page is easy to lay out and with acquisitions like Summly, the content will be curated but at the same time help solve its user’s information overload problems. No other company appears quite so focussed on that role — media or otherwise. And if it pays off, Yahoo will be able to claim a large number of regular, predictable, daily visitors and make a pitch for advertising dollars to go with it.

In effect, Yahoo are potentially back to what is a focussed portal strategy and this hasn’t been lost on others. Facebook are doing the same thing but their strategy is focussed on the activity or news feed rather than information aggregation. Twitter is in a similar category but with a different claim on attention. Microsoft’s redesign of its services for browser access also appears to be looking toward customer acquisition but their goal is not advertising dollars but to siphon users onto paid premium services (i.e., what we used to call software programs but are now services). Apple is not in this game at all and are providing devices to enable any and all of these.

That leaves Google. Google are not in the portal business but are in the information overload business. For them, however, to provide better services to consumers, they need a window into each consumer’s activity. That is why Gmail is important to it; they can read consumer emails to tailor information and ads more effectively. Similarly, that is why Chrome, Android and Google+ are important to it. Google want people to use their services but are not aiming for the 30 minutes a day attention that Yahoo appears to be after. Nonetheless, despite very different business models and directions, the locus on competition remains the same: consumer activity.

One can imagine a world in which this current competitive pressure might turn around into mutual accommodation or even symbiosis. But for now, Yahoo appears to be back in something that looks alot like the portal market. That may not appeal to tech types but it will appeal to their parents. And there is gold there.

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Goodbye Software Ownership?

Joshua Gans — Tue, 07 May 2013 13:16:32 +0000

Adobe announced yesterday that it was moving to a subscription model for what appears to be virtually all of its software. A subscription model has existed for about a year now; basically, for $50 per month ($600 per year) you get all of their creative software. For students and teachers, there are discounts. I subscribed as I often use some of these programs and this was cheaper than buying them outright. But what is interesting here is that the subscription model will now be the only game in town.

This has been a long time coming. Software publishers have for years wanted a subscription model. Basically, if you need to have an account in good standing to use software that would make piracy that much harder. In addition, the stream of revenues would be easier to forecast reducing the need for a ‘hard sell’ each time a new version was released. The flip-side of that is that there may be reduced pressure to release upgrades; although publishers still have to keep people subscribing.

The question is: what took so long? One thing that has changed is the cost structure. Software is no longer bought in store and instead it is bought by download. That has made delivery more efficient but, if anything, that is pressure away from going to a subscription model. Instead, the change on the cost side is cloud access and use. Right now, compared to Netflix, the cloud usage costs for software like Adobe (and also Microsoft with Office 365) are not necessarily that high in terms of marginal costs. But keeping the infrastructure going is a bigger issue. That means that you can’t just make software and have no costs. Once you acquire more users, they cost you so you will want to make sure they are using wisely — that is, you want to do something akin to increasing usage charges and a subscription fee can approximate that.

But I think a bigger force for change is underway. For so many years, as we transitioned from physical modes of digital delivery to digital ones, people seemed to have a surprising attraction to ownership. Of course, it was a legal fiction. Music downloaded was licensed and, indeed, the same was always true for software. And consumers were reminded of this every time they accepted terms and conditions but somehow the fact that you never really had to ask permission to use software gave a sense of ownership. I suspect it is a form of repugnance to non-ownership that kept this model going. A decade ago, Microsoft experimented with subscriptions for Office in Australia and failed miserably despite the very high comparative cost of software ‘purchases.’ That suggests a non-economic constraint to me.

Thanks to streaming music and video, the world appears to have changed. The Internet connection is reliable enough that subscription can work without mishaps. Moreover, the strategy of subscribing and then disconnecting from the net while not paying future subscription fees just isn’t feasible or convenient any more. So software publishers (although apparently EA with SimCity was an exception!) have moved away from requiring an Internet connection to use subscribed to software. These factors have released consumers from a bias towards ownership with more confidence that access will continue.

There are dangers here. Could subscription fees escalate as consumers get locked-in? That was always a danger for upgrades but this seems more serious. But there are also opportunities. For instance, I don’t use Adobe each month and if I was a little more sophisticated I would subscribe only when I needed it. And if Adobe were more sophisticated they would offer options for consumers like me; for instance, they could tap network effects by allowing easy and temporary access to transient users precisely when they have to interact with permanent users. They could also offer family deals; at the moment, you can only have subscriptions active on a couple of devices and need to dance around to allow other family members to use it for a project. Microsoft has much better targeting here but then again, they are closer to home in the market than Adobe is.

The one trend away from this has been the mobile app market. If it existed before, it was subscription but not very large. It is now an ownership market and doesn’t show any signs of becoming anything more any time soon. I don’t have an explanation for that except that it is “just different.” But with Adobe and Microsoft moving to subscription, one suspects, this will creep into the mobile space too.

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