Death of Newsweek magazine: inevitable or self-inflicted?

Along with newspapers, we also have dead tree magazines going away — the latest being Newsweek announcing Thursday that its print edition is finite at the end of 2012. MarketWatch went out on a limb and said that Newsweek “won’t be the last venerable media organization to take this drastic action.”

The NYT notes that the 80-year-old magazine recently took an odd turn with its forced marriage with The Daily Beast, an online-only opinion site. This came after audio magnate Sidney Harman bought this once lucrative weekly magazine franchise for $1 from the Washington Post Company in 2010. Harman’s heirs indicated earlier this year that they were no longer throwing good money after bad.

From the 1960s through the 1990s, Newsweek was one of the country’s most influential national media outlets, the Avis to Luce’s Time magazine. (The #3 magazine, US News, ended its print subscription in December 2010.) Today, information is no longer scarce, and killing trees is an inefficient way to deliver such information.

It’s certainly true that a weekly magazine delivered two days late to supermarket checkstands is a difficult sale in this era of instant Google-fed gratification. However, some commentators wonder whether the death of Newsweek is as much a function of its final (print) editor, Tina Brown. As the AP reported:

They say it speaks to the magazine's trouble connecting with and keeping its readers.

That brings to mind some questionable covers, like the July 2011 what-if image depicting what Princess Diana would have looked like at age 50, or last month's "Muslim Rage" cover depicting angry protesters, which was roundly mocked on social networks like Twitter.

Newsweek is using a difficult print ad environment as an "excuse" for its decision to end print runs, said Samir Husni, director of the Magazine Innovation Center at the University of Mississippi School of Journalism. He lays the blame at the feet of Tina Brown, the editor who took control of Newsweek when it merged with the news website she ran, The Daily Beast, two years ago.

"Tina Brown took Newsweek in the wrong direction," Husni said. "Newsweek did not die, Newsweek committed suicide."

How much longer are atoms important?

We need atoms to power out laptops and cars and HVAC systems. We need atoms to nourish and rebuild our corporeal selfs. But how much longer will atoms be used to deliver information and information goods?

I’ve written about newspapers dying, but apparently the end is quicker than we thought. The journalism program at USC predicts only four major dailies will be in print in five years — nearly a decade earlier than expected. (I’m not sure why the Washington Post will survive, so perhaps it will be only three.) The only other survivors will be (they predict) hyperlocal papers, those serving communities of 20,000 or more. (The former dailies may survive a little longer as weekly newsprint magazine wrapped around department store ads.)

We know that most teens and young adults have never bought a CD — at best, having received one as a gift or used an iTunes gift card to buy a song. Now they don’t even have to rent videos, with online streaming by Netflix and its many rivals. After more than a century, Blu-ray is probably the last physical form of recorded entertainment our civilization will see.

Amazon is doing their best to kill physical books without (as Netflix did) cannibalizing its core business in the name of cost reduction. Unfortunately, citizens and policymakers have not confronted the desire of content owners to eliminate sale of content and replace it with DRM-infested rental. The established “first sale” doctrine (along with markets for used books, movies and records) will be moot if nothing is ever sold again.

What really surprised me was film cameras. When I gave my UCI MBA students a homework assignment on convergence devices a decade ago, we could see that video-still cameras and PDA phones would converge. But we didn’t see that phones would replace cameras

Over the Christmas break, I was prompted to consider how much longer the annual holiday letter will survive. This year we sent about 110 cards and received about 60. (The older generation no longer can send letters and the younger generation never got into it). We also got three electronic holiday letter-cards and one electronic greeting card. Will we be emailing a PDF in three years?

Even so, there must be some limits to this transformation? Between Christmas and New Year’s, someone mentioned a young man who e-mailed virtual flowers. (No one volunteered how effective this was in achieving his romantic goals.) Call me old school, but that seems like a bridge too far: the first young man who comes to escort my daughter better be bringing actual dead flora.

Google vs. Apple distribution price war

The first year of the tablet wars went entirely to Apple. Apple has the market share, installed base, the mindshare and the superior product. Most projections have Apple crushing the competition again this year, albeit by a lesser margin.

However, Apple needs to take seriously Google’s latest salvo in the tablet content distribution fight. If Apple hopes to keep the iPad the dominant tablet — in a way the iPhone and Macintosh never were and never could be — it needs to take this attack seriously.

Apple won many fans among software developers for its convenient app store in exchange for a 30% commission. But its proposal to extend commission to newspaper, magazine and all other subscriptions has been highly unpopular, and some have questioned whether this is really tenable in the long haul.

Then on Wednesday, Google said it would only take a 10% cut for its One Pass content store, a direct attack on Apple’s pricing model. (Isn’t competition great?) Although online distribution is a low value-added commodity — with oliogopolistic competition — I think Google can hold a 10% margin, because both Apple nor Amazon tend to prefer margins better than that.

If most of the online tablet media goes through such services, then Apple can make plenty of money on a 10% margin. The problem is protecting its margin for other App Store products. Already, publishers and developers have been trying to bypass paying Apple — using Apple to distribute free apps and trying to charge outside the app. Apple closing the loophole is fair — it deserves some compensation for its distribution — but its plan to keep 30% is not.

So will apps be 30% and content be 10%? Will everything be something in between? Will Apple be in denial about the price war until its share drops below 50%?

Apple already seems to have lost the book distribution fight. iBooks was stillborn, and I can’t see how it will ever catch Barnes & Noble, let alone Amazon or Google. Are magazines and newspapers the same distribution channel as books? I don’t think anyone can say for sure.

Apple was reasonably aggressive in responding to Amazon’s efforts to abolish DRM on music downloads, so I expect we’ll see their answer on or before the rollout of the iPhone 5 this summer. Will they protect their margins on the assumption they can hold the market another year, or will they respond aggressively to protect every bit of market share? That I can’t predict.

Hal and Eric want to save journalism

Author James Fallows has a long Atlantic feature story on why he believes Google is sincere in wanting to save journalism from its business models. (OK, long Atlantic feature is redundant, but at 9,000+ words it’s longer than most academic papers.)

While the author’s friend (and Google CEO) Eric Schmidt plays a central role, so too does chief economist Hal Varian. (Somehow Fallows doesn’t mention that Varian wrote the best-known information economics book and was the founding dean of Berkeley’s information school.)

Two excerpts from the article:

[P]eople inside the press still wage bitter …debates about whether…customers will ever be willing to pay for online news… But at Google, I could hardly interest anyone in the question. The reaction was: Of course people will end up paying in some form—why even talk about it? The important questions involved the details of how they would pay, and for what kind of news. “We have no horse in that race or particular model in mind,” Krishna Bharat, one of the executives most deeply involved in Google’s journalistic efforts, told me, in a typical comment. His team was already working with some newspapers planning to put their content behind paywalls, others planning to remain free and hoping to become more popular with readers annoyed when paywalls crop up elsewhere, and still others planning a range of free and paid offerings. For Bharat and his colleagues, free-versus-paid is an empirical rather than theological matter. They’ll see what works.

Some insights from Hal Varian:

…“Unbundling” is an insurmountable business problem for journalism. “Bundling” was the idea that all parts of the paper came literally in one wrapper—news, sports, comics, grocery-store coupons—and that people who bought the paper for one part implicitly subsidized all the rest. This was important not just because it boosted overall revenue but because it kept publishers from having to figure out whether enough people were reading stories from the statehouse or Mexico City to pay the costs of reporters there.

“Newspapers never made money on ‘news,’” Hal Varian said. “Serious reporting, say from Afghanistan, has simply never paid its way. What paid for newspapers were the automotive sections, real-estate, home-and-garden, travel, or technology, where advertisers could target their ads.” The Internet has been one giant system for stripping away such cross-subsidies. Why look to the newspaper real-estate listings when you can get more up-to-date, searchable info on Zillow—or better travel deals on Orbitz, or a broader range of movie showtimes on Yahoo? Google has been the most powerful unbundling agent of all.
…
Burdened as they are with these “legacy” print costs, [dead tree] newspapers typically spend about 15 percent of their revenue on what, to the Internet world, are their only valuable assets: the people who report, analyze, and edit the news. Varian cited a study by the industry analyst Harold Vogel showing that the figure might reach 35 percent if you included all administrative, promotional, and other “brand”-related expenses. But most of the money a typical newspaper spends is for the old-tech physical work of hauling paper around. Buying raw newsprint and using it costs more than the typical newspaper’s entire editorial staff.

The article also talks about Google’s ideas about changing the substance of journalism via Google News. Its head, a Bangalore native, hopes to reduce pack journalism and provide a more multicultural perspective for Americans and other English-speaking people around the world. (Sorry, it’s hard to take seriously any search engine that promotes RT — Pravda on TV — as co-equal with CBS or the NY Times.)

Still, Fallows does a good job of capturing the “deeply symbiotic relationship” that Google realize it shares with quality content provider. He also lists a range of initiatives, big and small, that Google is taking to help newspapers make the inevitable transition from dead trees to online as their primary source of revenues.

And more generally, Fallows and Google offer a more nuanced and sophisticated view of Web business models for the coming decades. Given the high failure rate of Web 2.0 business models, I were leading an online startup I’d make it a must read for my entire staff. The ideas about bundling, cross-subsidies, scarcity and pricing are also ones that are broadly applicable to any class on business models or information economics.

We deserve better commodity information

It’s no news that Wikipedia, with all its flaws, is the default information source of a generation of skulls full of mush. If this wasn’t obvious enough from my college students, it was brought home a week ago when interviewing FLL robotics contestants (ages 9-14), when nearly all said their project “research” consisted of Google and Wikipedia. (One team said Google and Yahoo).

However, since then, Wikipedia’s problem has been a front page Wall Street Journal story Monday (and blog entry) on how Wikipedia is losing volunteers, specifically 49,000 in Q1 2009. The Telegraph had the most comprehensive follow up stories although the Times of London had good coverage (including a great article on the four sources of error.)

The impetus for the original WSJ article was the academic research of Felipe Ortega, who is part of a group studying open source software but actually did his Ph.D. dissertation on Wikipedia (a related but quite different species). He’s been tweeting to offer his comment on the current news coverage. While the bulk of his research hasn’t gone through the peer review, the abstract suggests he’s taken seriously all the research design issues.

After all the articles and the academic study, the official Wikipedia response is pretty unsatisfactory. It changes the subject, arguing that while the tide of new volunteers roughly matches the ongoing losses, at least the site traffic and number of articles continue to grow.

However, none of this relates to two inherent problems in Wikipedia that the current management is unable to solve, plus the third (and potentially catastrophic) outcome of WIkipedia’s commoditization of information.

The first problem is that Wikipedia publishes content by persistent idiots. Now that there are dozens or thousands of individuals trying edit articles on almost any topic, there are chronic edit wars with rival editors taking out each other’s changes in edit wars.

Competition is healthy — if there’s a selection mechanism based on quality or performance. Wikipedia has no such mechanism. Instead, what gets published comes from people who whine and bitch and moan, who win out over people who know what they’re talking about but have better things to do with their life. This works well for chronicling Simpsons episodes but not for summarizing academic research or major historical controversies. (Yes, I know that there are capable contributors, but in every battle between idiots and experts, the idiots are winning.)

I tried to sell this angle to a reporter I spoke with Monday, but I guess he thought it was just the griping of a snobby college professor who gave up years ago after watching his work be mangled by twits. However, in the 27 comments (thus far) to the official Wikipedia response were these five comments:

1. Well, I have taken hours editing and polishing a biographical article about a scientist. There is nothing in the article now that is under dispute, yet it is probably going to be taken down and deleted as one editor is exercising his or hers petty power-plays.
2. My most recent experiences have been quite negative: edits reverted with no reason, pages tagged as grammatically terrible when they were no such thing, or tagged as “not up to WP’s standards” when they were stubs and in some cases *still editing*. These taggings tended to be “drive-by” in the sense that some other editor dropped the tag onto the page or made their reversion but then failed to respond to explanations on the talk page for days.
3. I used to spend a lot of time writing for Wikipedia, amending entries and creating new articles. Now it seems that a small number of self-appointed editors run the site. If I create new articles then they are nearly always deleted. If I correct information I know for a fact is wrong, it is reverted back and I am warned by the small sub class of elite editors
4. I took on editing the Albigensian Crusade page a while back, a fairly simple job because what’s known about it comes principally from three contemporary chronicles dealing with the specific subject. A chronicle is self-indexed by time, therefore it should have been adequate to simply point readers in the direction of the sources, but no, that was inadequate, full references please. I got started, went so far, and checked if this was right. The %*$^^@# responsible refused to take the time to feedback, and was quite rude about it, so I stopped. Other appeals to administration went nowhere, and I concluded this is a system full of chiefs who can’t be bothered to get their hands dirty actually editing,
5. I, for one, am one of those professional contributors who left Wiki in disgust. After spending a lot of time creating pages or adding a lot of content, some amateur came along and dumbed down the content and added fictious pictures that were purported to be of the creatures listed. It became a waste of my time to provide a lot of information that could be cut-and-paste into term papers, dissertations, reports, etc., and have some arm-chair contributor wreck it all.

This is a problem I’ve known about since soon after I joined Wikipedia in November 2003. The entire production process would have to be ripped up to fix this. Even Amazon has a way of providing feedback on user contributions so that readers know whose comments have been useful, even if it (and other processes) is fatally broken for highly polarized topics like politics.

One problem I didn’t see coming was the inevitable shift from original writing to maintenance mode. I started my main burst of Wikipedia contributions (2003-2004) by creating 11 new articles, from venture capitalists Eugene Kleiner and Tom Perkins to adding two missing campuses (CSULB, CSUSM) of the 23-campus CSU system.

Today, thanks to the law of large numbers (and the long tail) are very few significant articles left to be written. (Yes, Wikipedia has an article on only one Joel West — and it’s a lame one — but I don’t consider that a major omission.)

This reminds me of what I experienced in my first few years as a professional programmer: it is so much more more fun to write new code than maintain someone else’s code. In fact, as I became a manager I learned this is a major recruiting and staffing problem — even when you pay people, let alone when they’re volunteers. Over and over again, I saw that the manager or other “stuck” (high switching cost) programmers had to take the scut work so you could offer the new exciting stuff to attract the best talent.

Clearly, at Wikipedia existing volunteers don’t want to do the scut work, nor do the newcomers. If it’s de minimus, then (to use an analogy) perhaps good citizens will just pitch in and pick up the candy wrapper, but nobody’s going to spend a weekend clearing up the trash along the highway just for the fun of it.

Wikipedia is running out of good jobs to hand out. If you can’t give out fun work, how are you going to attract people? What I didn’t see six years ago was that inevitably Wikipedia’s content base would mature: first in English and eventually in all the major languages. When this happened, the opportunities for adding new content would mainly be limited to current events like new hurricanes or those Simpsons episodes.

However, I find hope in Wikipedia’s current troubles, as they suggest a solution WIkipedia’s most invidious problem: the commoditization of human knowledge. Monopolies are bad, even if they are for free goods. When I was interviewing open source leaders, the Apache (and most “open source” types) seemed to get this, while the free software types (Linux, OpenOffice) did not.

Competition is inefficient, but it provides choice. Monopolies at best mean benevolent dictators, and few benevolent dictators remain benevolent forever.

The mind-numbing ubiquity of WIkipedia is teaching a generation of kids to be lazy and uncritical consumers of information — whether it’s truth or merely wikitruth. They take what shows up on the first page of Google or in Wikipedia and assumes it’s true, even when it’s not.

When I was a kid, I would do my 5th grade reports using World Book, Encyclopedia Brittanica, usually one other encyclopedia like Collier’s or Compton’s, and also the Information Please Almanac. (If the report was important, I would also try to find a real book or two.) This wouldn’t make me an expert, but at least I would get multiple perspectives.

Today, Wikipedia’s commoditization of information means that Encyclopedia Britannica is struggling and its previous nemesis (the Encarta CD-ROM) is gone. At least a five-year-old version of the Columbia Encyclopedia survives as Reference.com.

Once upon a time, I assumed that the network effects meant that nothing would ever compete with Wikipedia. This week shows that in less than a decade it’s possible to create a significant body of knowledge with volunteer labor. None of the existing rivals have yet succeeded, whether Citizendium, Conservapedia, Liberapedia or Knol. However, with this large body of existing (or potential) body of would-be Wikipedia labor becoming available, they are certainly trying.

I will be curious to see if we can achieve success from volunteer organizations that focus on the quality rather than the quantity of contributions. In this direction, Citizendium (by WIkipedia co-founder Larry Sanger) is using a somewhat modified version of the Wikipedia process, while Google’s Knol is heading in a different direction by emphasizing authorial integrity over cumulative production.

Given the almost total lack of competition, anything that provides a viable alternative to WIkipedia is a good thing. It will be a good thing if a decade from now we have three or four online encyclopedias to choose from, much as today we can choose from three or four cellphone carriers.

It’s likely that one of these alternatives will be Wikipedia. Perhaps if its leaders take its current problems seriously, it will still be the most popular alternative out there and will be able to meet its current modest fundraising goals.

What happened to disintermediation?

A front page story in the WSJ Friday talked about Wal-Mart’s price war for online books, with $10 bestsellers. The money quote is pretty good:

"If there is going to be a 'Wal-Mart of the Web,' it is going to be Walmart.com," said Walmart.com CEO Raul Vazquez in an interview. "Our goal is to be the biggest and most visited retail Web site."

Wal-Mart is also planning on getting into electronic books. Amazon is responding every way that it can.

But there was one passage that I think that deserved more scrutiny:

The price war sent shivers through the publishing world. Wal-Mart's move, and similarly low prices for electronic books, may ultimately condition consumers to expect new titles to cost $10, a price that would force the publishing industry to re-scale its entire business, including the advances paid to writers.

"The endgame is rather scary for authors," said one book executive.

Here’s my question: why is it scary for authors?

Authors sell to publishers who (sometimes) sell to distributors who sell to retailers who sell to consumers. If there’s a price war that cuts the retail price to consumers, where is it written that authors are the ones who should suffer?

A decade ago, pundits and academic researchers and MBA teachers were saying that e-commerce would bring “disintermediation.” This means the starting and ending point of the value chain (content creator and content consumer) are essential, but one or more of the intermediaries is superfluous or obsolete.

Under this scenario, either the publisher or the retailer could get cut out of the detail entirely. For example, my favorite band released their latest album by self-publishing, cutting out its 30-year publisher Warner/Elektra/Asylum. (BTW, the album was initially released directly and exclusively to Wal-Mart, and sold quite well.)

So at best, for the publishers this suggests a three-way scramble between authors, publishers and resellers (mostly Amazon) to create a 2 vs. 1 coalition to squeeze the margins of the third. At worst, the top selling authors will emulate the top music artists and begin to bypass the publishers for direct distribution.

Of course, the returns and economies of scale are seriously skewed here. Amazon & Wal-Mart are running their price wars with the very top bestsellers, the same books that earn back their typesetting and printing setup costs in a day — and that keep the publishers’ doors open. Authors of million-copy novels can dictate terms to (or bypass) publishers in a way that authors of 500-copy academic books cannot.

Still, this re-opens the question of which intermediaries (if any) uniquely add value — and which ones have negotiating leverage. There are many publishers, but in the US only one Amazon. Even adding Wal-Mart and BN.com, the publishers don’t have a lot of options to disintermediate retailers. To me, the endgame for publishers seems scarier than a Stephen King novel.

Hat tip: Good Morning Silicon Valley on SJMercury.com

French open war against Google, Amazon

The CEO of French publisher Hachette Livre has declared war on both Amazon and Google’s efforts to commoditize (and perhaps disintermediate) book publishing, according to a front page story in Monday’s FT (quoted by Teleread, Barron’s, GigaOM etc. etc.). (Even the commentary en Français quotes the FT original).

Arnaud Nourry has two objections to the price-cutting American cultural imperialists. First, Amazon is selling best-selling books in the Kindle edition at $10 — less than the wholesale price. Since this Kindle pump-priming strategy is obviously not sustainable, Nourry is willing to say in public what American publishers (who perhaps fear Amazon) will not:

So, one day, they are going to come to the publishers and say: ‘by the way, we are cutting the price we pay.’ If that happens, after paying the authors, there will be nothing left for the publishers.

I remember back to 1998 when teaching the Amazon case — and writing my own BN.com case — we debated whether book publishers would disintermediate retailers or whether retailers would disintermediate publishers. I think this would be a good Five Forces question for MBA students: why is Amazon threatening to disintermediate publishers while the converse threat never got off the ground?

French publishers (including Hachette) are also hoping that a French court will toss out Google’s 10-month old settlement for giving away out-of-copyright books. The goal would be to force Google to negotiate more favorable terms with French (and perhaps other) publishers.

So in both cases, the French publishers don’t like commoditization of information distribution. Since such commoditization is inevitable, I guess they’re hoping to secure for themselves a tollkeeper role rather than being disintermediated by the big bad Americans.

My European history isn’t very good, but I don’t recall the French winning any wars against the Americans — only alongside the Americans (including their final victory over the English.) Still, fighting on home turf, under Napoleonic law, with Gaullist-inflamed passions against American cultural imperialism, I would bet $20 (not $500) that they’ll get the outcome they seek and extract additional payments from Google. The only wildcard is whether the Obama administration will intervene on behalf of the organization whose employees represented its 5th largest group of 2008 campaign contributors.

Newspapers show some spine

At the annual meeting of the Associated Press on Monday, a big issue was the problem of Google free-riding off local newspapers and thus commoditizing the value of daily journalism.

There is a great summary by John Murrell on Good Morning Silicon Valley (part of the Mercury News), and specific reports by Staci Kramer at PaidContent and Peter Kafka at All Things Digital. Ironically, these are all free online sites (although the former and latter are affiliated with newspapers).

The charge seems to be led by newspaper publisher Dean Singleton, CEO of MediaNews Group (owner of the Mercury News among others) and this year chairman of the AP board. Another irony is that the first serious effort to save newspapers and the jobs of journalists from the commoditization of their work is coming from Singleton, who has been long derided by journalists with being more concerned with the bottom line than the noble calling of the profession. Today, he seems to be doing more to solve the problem than A.O. Sulzberger, Jr., scion of the clan that controls the venerable New York Times.

The AP will use tags and other technical changes to trace the use of its content by those that are not licensing its content. Or, as Kramer quoted an AP executive earlier, “What we’re really talking about here is much broader use, the commercialization of news that is scraped.”

Kramer’s interview with Singleton includes this clear shot at the free news portals (without mentioning the G-word by name):

“I think our industry has been very timid about protecting our content, probably because we’ve done so well in the past few years that we didn’t recognize that misappropriation is as serious an issue as it is. As we’re now relooking at business models, it’s become clear that we must protect the rights of our content. ... We perhaps have been timid about enforcing [those rights]. No more. We own the content but we’ve let those who spend very little, if any, get the most advantage from it.”

Kafka thinks it’s all for naught:

The thing is, even if the news guys somehow stopped people from using Google to find information they need, it wouldn’t do anything to solve the essential problems plaguing their business. Such as:

• An overabundance of undifferentiated, commodity information.
• The wholesale evaporation of classified advertising and local retail advertising.
• Investors who paid too much for newspapers and other media assets during the last 10 years, using too much debt.

I find it encouraging that the news(paper) industry has decided to stand up for the value of its content, and (despite my disagreements with specific newspapers) wish them well at creating a business model to be compensated for their efforts.

Still, I agree with Kafka that this is not a problem that’s going away with a simple policy change. Clay Shirky wrote a column last month that documents 15 years of unsuccessful efforts by newspapers to deal first with online service providers (like AOL) and then the Internet as conduits for information.

One of the people I was hanging around with online back then was Gordy Thompson, who managed internet services at the New York Times. I remember Thompson saying something to the effect of “When a 14 year old kid can blow up your business in his spare time, not because he hates you but because he loves you, then you got a problem.” I think about that conversation a lot these days.

The problem newspapers face isn’t that they didn’t see the internet coming. They not only saw it miles off, they figured out early on that they needed a plan to deal with it, and during the early 90s they came up with not just one plan but several.

After considering various options, the papers were hit by a perfect storm:

As these ideas were articulated, there was intense debate about the merits of various scenarios. … In all this conversation, there was one scenario that was widely regarded as unthinkable, a scenario that didn’t get much discussion in the nation’s newsrooms, for the obvious reason.

The unthinkable scenario unfolded something like this: The ability to share content wouldn’t shrink, it would grow. Walled gardens would prove unpopular. Digital advertising would reduce inefficiencies, and therefore profits. Dislike of micropayments would prevent widespread use. People would resist being educated to act against their own desires. Old habits of advertisers and readers would not transfer online. Even ferocious litigation would be inadequate to constrain massive, sustained law-breaking. (Prohibition redux.) Hardware and software vendors would not regard copyright holders as allies, nor would they regard customers as enemies. DRM’s requirement that the attacker be allowed to decode the content would be an insuperable flaw. And, per Thompson, suing people who love something so much they want to share it would piss them off.

Whether or not the current initiative succeeds, the newspapers must try something different, and this seems like a good start.

Disruptee outlives disruptor

Based on content licensed from Funk & Wagnalls and Collier’s Encyclopedia, in the 1990s Microsoft used a sub-$100 Encarta CD-ROMs to wipe out most of the dead tree encyclopedias.

As Blown to Bits (2000: 2) recounts

The CD-ROM came from nowhere and destroyed the printed encyclopedia business. Whereas Britannica sells for $1,5000 to $2,200 per set (depending on the quality of the binding), CD-ROM encyclopedias, such as Encarta, Grolier, and Compton, list for $50 to $70. But hardly anybody pays even that: the vast majority of copies are given away to promote the sale of ocmptuers and peripherals. With a marginal manufacutirng cost of $1.50 per copy, the CD-ROM as freebie makes good economic sense. The marginal cost of Britannica, in contrast, is about $250 for production plus about $500 to $600 for the salesperson’s commission.

Today Microsoft announced that it’s pulling the plug on both the CD-ROM and the online version of Encarta. The crowd sourced Wikipedia is credited with its demise.

At one level, Clay Christensen has yet another example for his disruptive innovation commoditization story — in which a commoditized technology itself gets commoditized. We saw this with minicomputers wiped out by PCs and someday PCs wiped out by mobile phones.

But I also find it interesting that Britannica (at least in its online version) will outlive Encarta. While Britannica is in its own life-and-death struggle with Wikipedia, it appears (at least in the short run) that its emphasis on quality is being recognized. (Benkler’s Wealth of Networks p. 71 gives an example of that interest).

This means we'll at least have Brittanica (paid), the Columbia Encyclopedia (available free on Dictionary.com) and Wikipedia. Given both Wikipedia’s severe limitations as well as the inherent risk of a single source of information for the world, as a member of a free society I hope the market doesn’t collapse any further.

That river in Egypt

The Merc had two articles Sunday encouraging people to buy a car. The first article, on the front page above the fold, screamed

A New Car?
Are You Nuts?

Still, this story was pretty balanced, at least compared to the other story.

The personal finance story in the business section seemed esigned to sell cars. Within it, however, another incongruity jumped out at me:

WHERE DO I LOOK FOR USED CARS?
You can find used cars on dealers' lots, at independent used-car lots, through private-party advertisements in print publications like the San Jose Mercury News and online at www.mercurynews.com., and through friends and family.

Is this the only way people buy used cars today? Perhaps this quote was copied from an old story written during the last recession.

When I checked Google for “buy car” I got Edmonds, CarsDirect, Cars.com, CarMax, Autobytel.com. Oh, and there are also several thousand cars listed (in just the SF Bay Area) on Craigslist.

The Merc has a pretty educated readership — or at least they did before that pesky Internet thing came along. Are they thinking that denial is going to cause people to forget about online alternatives?

Kindle: 2 no greater than 1

Amazon has announced the Kindle 2,(due Feb. 24) which features the sort of technical improvements that you would expect from any consumer electronics device. It’s thinner, has a minimalist keyboard but is still over $300. It’s still sending data traffic to Sprint’s underutilized EVDO network.

A few IP lawyers are in a huff because the device has the ability to create derivative works:

Some publishers and agents expressed concern over a new, experimental feature that reads text aloud with a computer-generated voice.

"They don't have the right to read a book out loud," said Paul Aiken, executive director of the Authors Guild. "That's an audio right, which is derivative under copyright law."

What was interesting is what Amazon didn’t announce.

They didn’t announce open content to sell book readers for other platforms, like the iPhone. Google still hopes to rule the world with its own proprietary format, as the NY Times reported

“Our vision is every book, ever printed, in any language, all available in less than 60 seconds,” said Jeffrey P. Bezos, Amazon’s founder and chief executive.

although Amazon is passing on the manufacturing and distribution cost savings (of not killing trees) to the readers, over the objections of the publishers:

Amazon generally charges $9.99 for the digital versions of best sellers, although many publishers still sell the digital content to Amazon for the same price that they sell physical books. That means that for now, Amazon is taking a loss or making a small margin on the sale of some e-books.

“We do not agree with their pricing strategy,” said Carolyn K. Reidy, chief executive of Simon & Schuster. “I don’t believe that a new book by an author should ipso facto be less expensive electronically than it is in paper format.”

Mr. Bezos disagreed. “E-books should be cheaper than physical books. Readers are going to demand that, and they are right because there are so many supply chain efficiencies relative to printing a paper book,” he said.

Amazon also did not announce any sales figures, so everyone is using the speculation of 500,000 units. How do we know how big the market is or how much impact the reader had without sales figures?'

Speaking of speculation, we do have speculation that the shortage was not due to Kindle’s contract manufacturer, but due to Amazon being overly cautious in ordering a key component. As the WSJ reported this morning:

The $359 Kindle, which allows people to read books in an electronic format, has been out of stock on Amazon's Web site since November, which meant it was unavailable over the crucial holiday shopping season. Now clues from the contract-manufacturing industry in China and Taiwan suggest the Seattle company may have been blindsided by demand for the book-size device and that it has since been ramping up production for the launch of its new Kindle.

The maker of the Kindle's special screens, Taiwanese manufacturer Prime View International, says the Kindle shortages came from Amazon's conservative sales forecast for the device. Prime View adds that Amazon is now trying to avoid repeating the current shortage by asking it to pump out more screens, which it is now doing in case orders increase suddenly.

"It wasn't about delivery delay," says a Prime View spokeswoman. "The sales were just faster than expected," The company says the new version of the Kindle is set to have a slightly bigger screen than the first-generation model.

So the data suggests that the Kindle is a modest success so far, and that the new model is slightly enhanced but is ignoring (or forestalling) the Innovator’s Dilemma.

As I recall, the iPod started out as a modest success, and (as they say) the rest was history. The Newton also started as a modest success, but never crossed the chasm to the mass market.

Does Blu-ray have a future?

Matt Richtel and Brad Stone had a great article earlier this week in the NYT about Blu-ray, timed to the opening of CES in Las Vegas. It could have been titled: “After crushing HD DVD, why aren’t Blu-ray sales booming?” After all, people said “confusion” prevented adoption of HD pre-recorded video, and there’s no confusion any more.

The reporters wrote about how digital downloads are looming if not already here, and how manufacturers used price cuts on players during the Xmas season to stimulate demand. They really summed it up nicely:

Andy Parsons, the chairman of the Blu-ray Disc Association, a consortium of the format’s backers [said] “We think this year we’ll start to see the format really take off into the mass market.”

But evidence exists that many people either do not know enough about Blu-ray to buy or do not think the more expensive players and discs are worth the extra investment.

Going from the whirring VCRs of yore to a DVD player was a big leap in picture quality and convenience, while the jump from DVD to Blu-ray is subtler, at least for those who do not have the latest and largest high-definition televisions.

The question I want to know is: why is there such a price premium for the discs, as much as $10 a disc? (Or, as the article says, $1/month for Netflix?) If people really wanted Blu-ray adoption, they’d lower the price of the media, which quickly adds up to more than the player cost.

Most of the cost of the disk is the IP, the materials, the packaging and the distribution. Yes the manufacturing cost is a little higher: by one estimate two years ago, about 80¢ a disc ($1.30 vs. $0.50). That gap will only narrow over time — unless of course the studios get too greedy at trying to extract a premium for the HD content. (The actual cost story for digital downloads is more convincing: 1080i is 6.5x as many bits as NTSC, while 1080p is 2x more than that).

Yes, I know the difference between value and cost based pricing. DVDs are a commodity and Blu-ray are the (relatively) new and cool thing. But as the NYT article reminds us, adoption of expensive HD gear is going to be slower than expected due to economic troubles — sales of electronic and electrical goods were down 21% for Xmas 2008 over 2007.

In the race between discs and downloads, the movie studios don’t care what format people buy (as long as they buy). Netflix would love to run a proprietary video download store that’s as successful as Apple’s music store. So an early shift from discs to bits would most hurt the disc stampers (who have little influence over the retail price) and the player manufacturers (who have none). I think Wal-Mart and Target would also like to keep the discs alive if they can, because they are likely to play a minor role in digital downloads going forward.

The choice of extracting rents from price insensitive early adopters vs. priming the pump for mass market adoption is always a dilemma. But in this case, the threat of digitization means that the window will be closed if they wait too long to offer mass market prices.

Kindling competition

On Saturday, the WSJ published an interesting compilation of celebrity New Year’s resolutions, with major names (Mitt Romney, Martha Stewart, Wolfgang Puck) as well as prominent people who are mostly or entirely unknown to the general public. As they described their goals

For the New Year, The Wall Street Journal asked some influential people three questions: What professional project do you plan to complete in 2009? What personal resolution do you finally hope to keep next year? And what problem should your industry or professional community tackle more effectively?

One that’s directly relevant to readers of this blog (particularly after yesterday’s posting) is this of an Indian expatriate author:

Vikram Chandra, 47
Author, Mumbai and Berkeley, Calif.

PROFESSIONAL: I just started a new novel a couple of months ago, and in a magical, perfect world I'd finish it in 2009. But my last novel came in at 900 pages, so I'll settle for slow, steady progress.
PERSONAL: I'm the father of a 7-month-old baby, so I think it's time for me to get done with my driving lessons and face the terrors of the DMV.
INDUSTRY: I'd love the publishing industry the world over to accept fully and without further complaint that electronic publishing is here to stay, and to provide innovative, sophisticated and, above all, low-priced competition for the Kindle and Sony Reader.

His sense of realism about the future of dead trees is refreshing. His call for open standards (because that’s the only way the Amazon and Sony products will get competition) is the first I’ve seen from the content side, although such calls have been common from the consumer side.

Of course, there are two open e-book standards already, .epub and .opf, which are available to the maker of any reader. What’s missing is a content publisher building an infrastructure around distributing a large volume of content in an open file format.

Yes, it seems likely that the next entrant into online ebooks will emphasize open standards. As I noted in a chapter I wrote on open standards (in a 2006 book, openness is almost always a challenger strategy — not something firms do if they have a choice, but a weapon they use to gain leverage and increase the odds of success over established (proprietary) incumbents.

On ebooks, publishers probably don’t want Amazon exclusively controlling their channel to American readers, so perhaps (as record labels did for music downloads) they will support a challenger to Amazon.

So to compete with Apple’s iTunes and the lockin provided by its proprietary FairPlay DRM, the iTunes challenger promised in May 2007:

Every song and album in (our) digital music store will be available exclusively in the MP3 format without digital rights management (DRM) software. (Our) DRM-free MP3s will free customers to play their music on virtually any of their personal devices -- including PCs, Macs(TM), iPods(TM), Zunes(TM), Zens(TM) -- and to burn songs to CDs for personal use.

Sounds good? I think so. We could use the same choice for books as well, particularly since there’s only one Amazon reader to date (at least Apple has four different iPod form factors).

How would Amazon feel about this sort of competition? One might argue it should be all in favor of it — since the press release touting open MP3 downloads was to promote the Amazon music store. But, of course, now that they have a lead and lock-in built upon their market power and proprietary file format, for books (unlike music) Amazon probably considers open standards a bad thing.

Kindle shortage: What is Amazon hiding?

On Christmas Eve, the NY Times published a takeout on Amazon’s efforts this Christmas season to sell the Kindle. As with the 2007 season, the Kindle sold out, and won’t be available until February. The NYT notes that Sony is exploiting the shortage to gain its own sales, while other readers are either on the way or already here. In the latter camp are several iPhone book reading apps, such as Stanza and Classics.

Reading the NYT story on Christmas Day — in dead tree form syndicated to my in-laws’ newspaper — one paragraph jumped out at me:

It is difficult to quantify the success of the Kindle, since Amazon will not disclose how many it has sold and analysts’ estimates vary widely. Peter Hildick-Smith, president of the Codex Group, a book market research company, said he believed Amazon had sold as many as 260,000 units through the beginning of October, before Ms. Winfrey’s endorsement. Others say the number could be as high as a million.

Sorry, but there’s no excuse for such secrecy. In other consumer industries — such as MP3 players or PCs or cellphones (let alone records or automobiles) — reasonably accurate estimates of unit sales are taken for granted, and are the basis for strategic planning by the whole ecosystem. Amazon has been able to prevent any third party estimates of reader sales because it controls its own distribution, and has not chosen to share accurate information with shareholders or analysts.

The Kindle looks to be a big success. Why is Amazon hiding the truth? I can think of three reasons:

1. It doesn’t want its competitors to know. Somehow I suspect that at least Sony has the resources to find out what’s going on.
2. It’s saving it for some big splashy announcement. In other words, Jeff Bezos wants to be the next Steve Jobs.
3. The numbers are embarrassingly small. In other words, the Kindle has sold out because it’s doing a bad job of managing its production supply chain, not because it’s a smash hit.

I will certainly admit that not every schlocky Chinese factory can assemble a device as small and precise as a Kindle, but it seems like after 18 months it should have been able to find a way to make enough units to meet anticipated demand. Perhaps Amazon didn’t want to produce a large number of units because it’s flushing inventories for the next model, but the Christmas season seems too important to miss — particularly if you’re trying to see consumers with a platform to buy your content.

Consistent with their aversion to full disclosure, Amazon issued a vaguely-worded press release Friday with lots of cutesy factoids but not a single dollar figure. In fact, there was no discussion of overall season results, just a claim of “record-breaking” unit sales on the “peak day.” Despite such a lack of information, this PR was oft-remarked (e.g. by Forbes and Henry Blodget) and was credited with raising the stock price (although less than 1%).

From what we can measure, Amazon has clearly been greatly successful at getting content for its book at good terms, leveraging its market power as the country’s second largest seller of books.

As my buddy Doug Klein made clear in several presentations to my SJSU students, cajole (bludgeoning?) the publishers and the existing distribution channel (and its inertia) are key to the success of any company that seeks to shift the book industry from dead trees to electronic distribution. Doug should know, since he was president/COO of the company that made the Rocket eBook, which fought the publishers a decade ago.

Content deals, as with publishing (or music downloads) will tend to be nation-specific, so being the US leader is not assured (or even likely) to lead to Total World Domination of book publishing. This is where open standards will be nice, so that a reader purchased in the US can read content downloaded in the UK or Australia or even Japan.

Will Amazon get the same pressure to open up its proprietary-formatted content as Apple has? Perhaps if it stays out of France, it can avoid such difficulties.

Google: somewhat less a copyright scofflaw

Google has a reached a settlement with book publishers and authors that objected to its unilateral decision to scan their copyrighted works and give limited amounts of content away to the world with the Google Books program. The settlement, which includes a $125 million payment, settles a three-year-old lawsuit against the four-year-old service by the Authors Guild and the Association of American Publishers.

Google has posted online the official announcement and the official spin. The publishers have their own, more detailed FAQ. As the WSJ notes, the settlement is not yet final:

If approved, the agreement would expand online access to millions of in-copyright books and other written materials from the collections of libraries participating in Google Book Search - a project intended to make millions of books searchable via the Web - while also compensating copyright owners for allowing online access to their works.

Google's $125 million payment will be partially used to establish a Book Rights Registry under which holders of U.S. copyrights can register their works and receive compensation from institutional subscriptions, book sales and ad revenues. The settlement will also be used to resolve existing claims by authors.

The actual settlement seems a masterful compromise of rights. It could even serve as a precedent for settling Viacom’s lawsuit against YouTube.

Under this proposed solution, Google (which knows how to index information and run online systems) will sell access to pages beyond the free ones and share the proceeds with the copyright owners. This could be a new, permanent business model for IP holders to obtain compensation for their copyrighted material and thus compensation (and an incentive) for their time and efforts.

While that is all good, I’m still distressed by how we got here. This goes far beyond the Guy Kawasaki mantra of “ask forgiveness, not permission.”

Instead, it’s more like “I’m doing what I damn well please: if you don’t like it, sue me!” Or more precisely “I will unilaterally determine what is a proper use of the IP of others and act accordingly, without waiting for a license or any other agreement with the IP owner. The only recourse of those who disagree is litigation.”

This of course reflects the hubris of billionaires (with their own private 757) who feel entitled to effect social change on their own time schedule. So far all we have is a vague promise of good intentions (“do no evil”). Worse, there’s something profoundly undemocratic about such arrogance: it’s not a big leap from that sort of behavior to a band of oligarchs who decide to run a country.

Kindle-killing vaporware

When I was at MIT, our journalism advisor was Ed Diamond, who was (briefly) named editor of Newsweek. I didn’t have much interaction with him, but there was a story that stuck with me for a long time. Quoting from 16 months ago:

As I recall the story, he asked students to devise an information carrying device that could convey 10,000 (100,000) words with color pictures, be used in a variety of locations including under a tree, on a plane or in a bathtub, and mass produced and sold for only a dollar or two. His prediction has held up 30 years, and it could be another 10-20 years before e-book readers really become a practical replacement (except for the bathtub).

Clearly I was unduly pessimistic. With its magazine subscriptions, the Kindle has the content, although the current product is too heavy. Still, I should have extrapolated the trends to see what miniaturization will bring us in the next five years.

Monday at the Demo conference in San Diego, startup Plastic Logic demonstrated a product that is much closer to Diamond’s ideal. As the local paper reported:

The device, which has not been given a name, has roughly the same cover dimensions, thickness and weight of a typical issue of Newsweek. And like the magazine, it can store hundreds of pages of content.

In addition, the device is flexible — it can be bent (or dropped) like a magazine.

Not surprisingly, some are calling it a Kindle killer (or merely “thinner, less ugly” as Wierd put it).

It can be used on an airplane if not a bathtub. The marginal cost will be comparable to a magazine, even if the reader is hundreds of dollars. I’d be curious to ask Ed his thoughts about the new technology, but alas he’s been gone for 11 years.

Still, it has no distribution and no content. As with any vaporware product, the world will change between now and when it ships. It’s a cool technology, but a long way from being a product.

Cannibalization is hard

Cannibalization is hard. Really, really hard. But it’s often the only way to survive.

When a new technology comes along, the biggest problem for incumbents is being willing to cannibalize their existing businesses. We’ve known this for decades, and it was reinforced as a major theme of Clay Christensen’s 1997 bestseller. This unwillingness to cannibalize seems to account for the paralysis and the CFIT for a wide range of information goods.

In particular, I’ve been watching it happen in three industries within the US media sector. One that I recently blogged about is the newspaper industry, my former employer. The second I wrote a teaching case for my MBA tech strategy class back in 2001 — about how the record industry botched the MP3 challenge. The movie industry faces the exact same problems as records, but their files are bigger so pirating content has been less technically feasible (so far).

This dilemma was the topic of the first session today at a workshop I’m attending at USC’s Institute for Communication Technology Management. It was a killer media panel, of the sort you could only find in LA (or maybe NYC).

Leading off the panel was USC vice provost Adam Clayton Powell III (son of the famous Powell) who like me is interested in the newspaper industry. Also on the panel was Chris Gwiazda, CFO of Generate and Gerry Tellis, a USC marketing professor who’s studied disruptive innovation for more than a decade.

But the issue of why Hollywood (the movie industry) seems in denial about the digital world was the central focus of the final speaker of the panel: Steve Weinstein, founding CEO of Motion Picture Laboratories, Inc. (“MovieLabs”). MovieLabs is a 501(c)(6) cooperative R&D arm of the big six studios — Disney, Fox, Paramount, Sony, Universal, Warner Brothers — set up to come up with a quick tech fix to deal with piracy.

Weinstein made it clear: Hollywood has done such a good job of optimizing their revenue model that that it makes change nearly impossible. It uses a standard time schedule for release (versioning in the Hal Varian sense):

• In first 3 months, theatrical release earns 25% of total revenues but almost no contribution margin
• Hospitality (e.g. airlines), negligible revenues
• DVD, 6 months after initial release with 50% of the revenue and 60% of the contribution margin
• Pay TV such as HBO and Showtime a year after initial release, with 10% of revenue
• Commercial TV with 10% of the revenue, but two years after HBO.

(Don’t quote me on the numbers, I was typing very fast).

Weinstein identified three generic problems that the industry faces. To avoid putting words in his mouth, I’ll mark my own comments in italics.

First, although they have the highest growth potential, the new revenue sources are small — perhaps hundreds of millions of dollars a year. DVD sales, while declining, are $16 billion/year and provide the bulk of the profits and thus the bulk of the clout within a studio. With this relative share of short-term revenues and profits, “another year of selling 2 billion DVDs would not be so bad. Maybe it will be 1.9 billion,” as they watch this largest revenue source gradually decline.

Of course, this is straight out of Christensen’s Innovator’s Dilemma — sales execs and CEOs banking their commission checks up until the plane hits the side of the mountain.

The second issue is that all the contractual commitments restrict what movie moguls can do. If HBO has been promised no ad-supported distribution for two years, then you can’t give the movie to YouTube at any price during that period. Similarly, the union contracts — which include revenue sharing agreements — are extremely difficult to change (as the last few years of negotiations have demonstrated).

Finally, the uncertainty about the digital future — particularly with the unions and other conflicting stakeholders — has produced an institutional paralysis. To use Weinstein’s example: “How much are the rights to a theme song on YouTube going to worth? No one knows.” Without a precedent — or a fair way to price one — no one is going to be reasonable in trying to negotiate a deal or pricing.

As Prof. Tellis noted in the talk (for his earlier research), not only is cannibalization hard, but it’s necessary: cannibalization determines which firms will be able to survive a radical shift into the new era.

If any of the big six will survive, I’d have to put money on either Disney or Fox (NewsCorp.). Their respective CEOs — Bob Iger and Rupert Murdoch — were both mentioned today as understanding this brave new world better than the rest of the industry. I think Disney has more of a margin of error (i.e. time to fix things) than the other studios, given their unique positioning (particularly now with Pixar). Fox seems to be the most aggressive in moving into new media (NB: MySpace). So watch for one of these two to come up with a better revenue model for online media.

Nothing I heard today made me think that anything significant will change in the next two or three years. But if nothing changes in the next 10 years, they’ll all be sold off for a fraction of their current value to new owners who will find a better way to realize value from these assets.

Unstoppable commodization of information goods

Information goods tend towards zero price for two reasons: one economic, one legal.

The economic argument is that the marginal cost of reproducing information is zero, and thus (as Yannis Bakos famously observed back in 1998) competition will eventually cause producers to sell their products at marginal cost, i.e. free. This is the ultimate outcome of commodization if there is nothing to prevent it — i.e. a cost structure that prevents self-defeating competition.

The same point is at the heart of the excellent treatment of information goods in the Shapiro and Varian book, Information Rules. It is also the nominal moral (and theoretical) justification for the argument “information wants to be free,” which is plaguing the newspaper industry.

However, the second reason for free is more practical: information is given away free because people can steal it. For more than a decade, we’ve called this the “Napsterization” of an information-based industry. New digital representations of technology make copying costless and error free. In this new digital regime, Napster (and Kazaa and BitTorrent) demonstrated that even if there are copyright laws on the books, enforcing them is another matter.

This was a topic of my first published academic paper (back in 1995), where I was thinking about the converse case — societies that didn’t believe in IP laws but might someday:

Societal attitudes toward intellectual property are less easily changed than a mere regulation, and enforcement of intellectual property rights depends as much on moral legitimacy as the enforceability of legal sanctions.

My coworker, Prof. Randy Stross of SJSU, wrote about a new area of copyright enforcement battles in his Sunday New York Times column: college textbooks.

The law is the same, but practical barriers had protected the textbook publishers thus far:

Compared with music publishers, textbook publishers have been relatively protected from piracy by the considerable trouble entailed in digitizing a printed textbook. Converting the roughly 1,300 pages of "Organic Chemistry" into a digital file requires much more time than ripping a CD.

There are even websites dedicated to stealing textbooks, like Textbook Torrents and Scribd.

As Randy points out, the textbook publishers have angered their customers through aggressive monopoly rent-seeking and extortionate practices such as planned obsolescence. While some of their responses (such as renting online textbooks) may reduce the incidence of piracy, others will just make things worse.

So the $100/copy prices are used to subsidize the manifest stupidity and inefficiency of their scattershot marketing process — i.e. the vast majority of losers in their catalogs. I have a dozen of sample copies of entrepreneurship and strategy textbooks on my shelves, sent to me unsolicited by publishers. I am no more likely to use them than I am to recommend the 4th best book on open source licenses.

With high up front costs and (relatively) low marginal costs, textbook publishing is like other media: the big winners are obscenely profitable and the losers have no hope of turning a profit. Thus, textbook publishers are exactly like record labels: they grew accustomed to high profit margins on winners both to cover their losers, but also to transfer wealth to shareholders and executives.

Without practical or legal protection, that business model will be as extinct as the dodo bird. It happened to CDs, it’s happening to textbooks, and movies are next. The publishers’ anti-piracy czar said “It is troubling that there is a culture of infringement out there.” No duh.

I’m really furious at both the publishers and these student self-appointed Robin Hoods, because together they are creating a generation of information pirates. To all these students studying organic chemistry: would you really prefer a world without IP — that instead of having a job producing information, you will instead have a job making things, delivering personal services or digging ditches? Is that really your nirvana?

A few of these pirates are socialists or crypto-anarchists deliberately attempting to destroy societal institutions. But most of these pirates are ahistoric teenagers without regard for economics or the law of unintended consequences.

At this rate, historians will someday look back at the 20th century as the high water mark for the value (and profitability) of information goods.

Bad week -- and decade -- for newspapers

It was a week of bad news for the U.S. newspaper industry, just the latest installment of a decade of such bad news.

• On Monday, a study by former LA Times reporter Tyler Marshall documented the downward spiral of the nation’s 1,217 daily newspapers. After interviewing executives from 15 papers and surveying 259 newspapers, the study from the Pew’s Project for Excellence in Journalism showed that executives are cutting staff, national and international news, but don’t have a real plan to turn things around.
• On Wednesday, the industry’s premier property (The New York Times Company) announced dismal earnings. In just a year, the company’s stock price has fallen to half its earlier value, to the point that the flagship paper is valued nearly the same as its suburban rival, the much smaller Long Island Newsday.
• Finally, on Thursday, the San Diego Union-Tribune, the oldest business in my hometown of San Diego (and the second oldest newspaper in Southern California) went up for sale. Apparently his financial advisors convinced owner David Copley that he could more easily support his lifestyle if his wealth was in T-bills rather than an illiquid, privately held newspaper descended from papers his grandfather bought 80 years ago.

The problem for Copley — like other sellers — is that there are few buyers. Once upon a time, Copley might have hoped for a merger with one of the two nearest newspapers: the Orange County Register or LA Times (which ran a SD editon from 1978-1992). However, both are in trouble: like most family-owned newspapers, the Register has unhappy heirs that care more about money than journalism; the LAT went through this already, resulting in the paper being bought in 2000 by the Tribune Company (and being badly run ever since). Among other likely buyers, national newspaper chains like the Times Company, Gannett, and Media General are reporting declining earnings while struggling with high debt from previous acquisitions.

Of course, stress and realignment for the industry come with every major dip in the economy, when fewer housing sales and reducing hiring squelch the two major sources of advertising revenues. In California, the 1992 recession killed the San Diego Tribune and the LAT’s SD edition. I bailed out of the newspaper business at the end of the 1982 recession, only six months before my coworkers traded up to the bigger paper (and a $100/week raise) when classified ads rebounded.

However, in 2008 the real pressure is coming from long-ignored structural problems. Newspapers are the ultimate information good — lots of up front costs and near-zero marginal costs (even less than for software, which tends to generate support costs proportionate to the quantity sold).

So, as with any other network effect, the virtuous cycle on the way up (success increase profits which allows a better product which fuels success) becomes a vicious cycle on the way down (declining sales means cuts reducing product quality which lowers sales further). Of course, I watched this vicious cycle nearly put Apple out of business, first as an Apple ISV and then in my dissertation.

Newspapers have a particularly hard problem — escaping the complacency of the past four decades. With few exceptions, all the major newspapers in the US were either a monopoly or cozy oligopoly (usually a duopoly). They didn’t have to compete to make money, they just told advertisers “if you want to reach local buyers, we’re the only game in town” and (at least before television) told readers “if you want local news, we’re the only game in town.” (In two-sided market terms, this is called charging both sides, although advertising provided 70-80% of the revenue.)

Now, of course, we have at least a decade worth of young people that no more expect to pay for news than they would pay for music; somehow they still pay for movies, but that probably won’t last either. The papers have reached out to new readers with their online websites, but as U-T investigative reporter David Hasemyer dryly put it,

While many newspapers' Web sites have recorded jumps in readership, media analysts have pointed out that advertisers generally don't consider an online reader to be as valuable as a print reader.

Even for those newspapers that enjoy broader reach than ever — notably the New York Times — a shift from print to online means that revenue (and profit) per reader has plummeted.

Newspapers face two structural problems and have been unable to fix either one. Due to new web-enabled competition, newspapers have lost their pricing power both sides of the two-sided market — and there seems no turning back.

First, is there are so many other ways to reach readers via the web — whether CraigsList, Monster.com or Google’s localized version of AdSense. The cost of one impression has plummeted from the days of dead trees when there was only one regular way to reach a given household.

More seriously, online information is now a commodity: people get news free now from so many online sources. (One major sources is from Google and Yahoo news sites, that use AP news compiled from local papers). OK, the NY Times or the big city daily has better news, but how much better? If it’s $20/month (or even $10 or merely requires a login) will readers bother? Most won’t. As with other commodities, better loses to “good enough.”

Some newspapers think it’s just a matter of getting a good revenue model, or fixing website design to be more compelling, or some other tweak. After all, they argue, people want local news and there’s no other source. This argument has been made by insiders for years.

To this, I’d say: “where’s the existence proof?” The newspaper industry is notorious for copying each others’ design, circulation and advertising tips, so with 100+ newspapers with more than 100,00 circulation, one of them should have figured it out by now. Instead, newspapers are using the same online revenue models they always have.

The only exceptions are financial newspapers like the WSJ and FT (where business owners and investors are willing to pay a premium for slightly better information) and the free suburban weeklies and subway dailies (which pay little or nothing for content, and it shows.)

Of course, most journalism students (like poli sci or history students) know nothing of economics and little of business. (BTW, back in 1981-1983, that included me too). So they keep hoping that — since all their friends know they have a better product than the bloggers and the wires and the other free sites — someday the tooth fairy will come waive her wand and everything will be right. But it ain’t gonna happen.

For nearly a year, rumors have been swirling that a big city newspaper (such as the SF Chronicle) will stop killing trees and go online-only. The first one will get hit with a double whammy: someone else will swoop in and get the dead tree advertisers (in this case, the SF Examiner or the Bay Guardian or the Oakland Tribune) while the collapse of revenues will mean a cutback in the news staff and thus the quality of the online product. Maybe the paper could stabilize with an editorial staff of 150 instead of 500, but (as with any newspaper today) the process of downsizing would be bloody, shaking the confidence of employees, and both types of customers.

Some rich guys buy money-losing sports teams for ego reasons; perhaps someone will do that with a newspaper. The problem with this sugar daddy fantasy is that the pro teams are an appreciating asset, while newspapers are clearly a declining one. Also, there are no luxury boxes in the newsroom that billionaires can use to impress their friends.

Britannica in search of a business model

Encyclopedia Britannica is in a life-or-death battle of quality vs. commodity, and so far commodity has won every round. In the past 10 days, both Wired and the Merc have reported that its latest plan is: if you can’t beat ’em, join ’em.

The wonderful Merc article by Lisa Krieger spells out the details: sales of the once invincible Britannica dead tree edition peaked in 1990, and the vaunted door-to-door sales team got the axe in 1996.

About the only thing it left out is what happened in between — how the bookshelf of paper got supplanted by the CD-ROM encyclopedia: first, Microsoft’s Encarta, then EB’s World Book, and now its own CD-ROM edition. Of course, the potential audience for a $30 CD (now DVD) is a lot greater than for a $1400 shelf worth of paper.

More recently, the problem is Wikipedia, the free user-generated content that has more articles of lesser quality at no cost. A discussion of the relative merits of EB and Wikipedia is worthy of a journal paper — actually several — but after presenting at Wikimania back in 2006, I realized that I’m not going to have time to write one.

I used to contribute to Wikipedia but got tired of wasting time arguing with people who don’t know what they’re talking about who decided to “fix” my (economic historian’s) contributions. Suffice it to say that I use Wikipedia (it’s cheap and convenient), but never trust it due to its flawed production process. For example, the article on Symbian lists two companies as “founder shareholders” who didn’t come in until months later, something that takes about 2 minutes with the NYT (or WSJ or FT) database to verify.

However, as with other commodization, Britannica is finding it can’t compete with free. (Perhaps Chris Anderson will offer some advice in his new book). Its demonstrably better quality is preferred by serious researchers, librarians and even a few teachers, but today’s K-12 schools are raising a generation of dolts who think looking something up in Wikipedia (or even on the free Internet) constitutes research. I know, because I get them when they turn 20, and have to teach them what real research is — not always succeeding at the task.

Britannica has yet to solve its fundamental problem of not creating enough value that people are willing to pay for it, other than competing with Microsoft in the DVD-ROM market. However, this month Wired and Merc reported that Britannica would start supplementing its professional content with outside contributors. Unlike Wikipedia (but as with Google) its contributors would have qualifications beyond just being able to type like a room full of monkeys. This seems like it will ultimately be as successful as hybrid open source strategies (i.e. not), but I can see they have to try something.

As an author, I am so there — to be able to write on a few topics where I’m one of a small number of experts in the world and not have to worry about vandals. (Linkabit? Open source business models?) However, I could find no evidence of the new program on the Britannica website, or news coverage beyond these two articles (or direct copies). So either it was a trial balloon, vaporware, or it’s in private beta.

Even if they go live, over the next two months I have five more papers to finish up (all but one co-authored) and send off to journals. That leaves no time for EB, and probably less time than usual for the blog(s).