Chris Dixon has an excellent break-up of the “layers in the stack” for Search –
Human – device – OS – browser – bandwidth – websites – ads – ad tech – relationship to advertiser – $$$
It’s intended to be a rough break-up and it gets across the main idea i.e. a mix of –
- There are numerous layers between the starting point and the point at which people purchase a product.
- Companies want to dominate or commoditize the different steps.
Let’s apply this to eReaders. We’ll make two important changes –
- We’ll think of it as steps and as a progression rather than a stack.
- We’ll talk about it in terms of exchanging value rather than money i.e. the starting point where readers start off with good intent and the end point where they exchange money for value (ebooks).
Value Stack for eReaders aka the Pipeline
This is the Progression of Steps for the main pipeline for eReaders –
- A reader (person) with good intent.
- The eReader.
- eReader’s OS.
- A direct link to an eBook Store or a link via a Browser. This is hugely important (including which is the default option) so keep this distinction in mind.
- The wireless connection that connects the eReader to the Store in the Cloud.
- The Store and Cloud infrastructure.
- The actual point of purchase and the experience. This is also important because factors like ease of buying, credit card provider, method of payment, etc. factor in.
The 4th step is crucial because you choose between buying at the default book store the eReader company provides or buying from somewhere else.
There are also alternate pipelines which involve –
- Buying via a PC or a non-eReader device.
- Buying via a WiFi connection that is not provided by the eReader company.
- Searching for eBooks via search or another website not provided by the eReader company.
- Reading on a non-eReader device.
Profits at each step of the eReader Pipeline
The pipeline in its entirety provides value to customers i.e. lets them find, buy and then proceed to reading books.
Buying the eReader is a sort of initiation into the pipeline and also the foundation as it enables actual reading and also connects together the different experiences.
In return for the value they get from reading books, customers pay money for eBooks and eReaders –
- This money/value is split between every step of the pipeline and the content creators feeding the pipeline.
There’s always a struggle to maximize profits
Every company/individual is trying to maximize their share of the profits. This means –
- Content creators want most of the money readers pay for books.
- Publishers want to maximize their share.
- Retail Stores want to capture more and more of the pipeline.
- Bandwidth providers want to get paid 15 cents or more per MB.
- Search engines want to marginalize content and/or get user information to provide to advertisers.
For their part, readers want to minimize how much they’re paying.
The more of the pipeline you control or own the more you can profit
It’s rather simple –
- Ideally you want to own the whole pipeline so that you get the profits and the only people who share are content creators. This is the Apple and Kindle model.
- If you can’t own the whole pipeline you want to own as much of it as possible and weaken and marginalize the rest of the pipeline.
- In particular if you completely dominate one step of the pipeline you either make the other parts very, very competitive or you make them seem worthless.
Consider what the really big companies are doing –
- Apple are looking to provide the complete pipeline.
- Amazon are doing the same, except when forced by competition they make certain allowances like PDF support.
- Google are trying to make sure the Kindle doesn’t win out by supplying free books. At the same time they are putting things in place to point everyone to their own store.
- B&N are trying to set up their own pipeline – However, by embracing Adobe DRM and Android they’re leaving significant holes that can be exploited.
That leaves the other companies that don’t really have a grand strategy (often due to a lack of options) –
- Publishers are trying to kill ebooks.
- Smaller eReader makers are trying to sell just eReaders and enticing the other players to side with them by offering up an ‘open’ pipeline.
- Smaller eBook stores are trying to sell eBooks to all devices and making the ebooks ‘open’ to entice eReader companies and readers.
All 3 are leaving themselves completely exposed and will almost certainly be marginalized i.e. They’ll only be getting 5-10% of the total profits in eReaders and eBooks.
Openness based Monopolies and Economies of Scale
We get two extremes i.e.
- An open model where lots of different companies can profit (supposedly) but where everyone will get marginalized by either the starting point (the search engine) or the end point (the ebook store).
- A closed model where the owner of the pipeline will control everything.
Any model, even the most ‘open’, will end up with one or two big companies that can leverage economies of scale to marginalize everyone else.
Apple and Amazon feel they can win with a closed platform. Google feels it can win with an ‘open’ model where no other player has anywhere near the amount of control Google has.
The two models will lead to the exact same result – dominance by one or two companies.
The only difference is that in the former you know that a company has a huge advantage and in the latter there is the illusion of a level playing field.