It seems that Apple is killing the goose

The Kindle is the main concern of this blog so we’ve discussed Apple’s 30% tax decision mostly in terms of the possible impact to Kindle for iPhone.

There was also a post on The Dangers of Building on Someone Else’s Platform aimed mostly at developers though it’s doubtful any read this blog.

However, the most beautiful thing to come out of all of this might be how Apple, in the midst of an appalling lack of competition in both cellphones and Tablets, might be sowing the seeds of its ruin.

First, we’ll look at a principle called ‘I’m the movie star and everyone else is an extra’. This seems to afflict almost everyone who becomes successful but Apple has taken this to high art.

Second, we’ll consider what Apple is really doing at a very high level. The 10,000 foot view which really brings Aesop’s fable of The Goose that Laid the Golden Eggs to mind.

Third, we’ll wonder about what this might lead to. In particular, the consequences of Apple telling developers directly, and customers indirectly, that they ought to stick to their role of nameless extras livening up the scenery.

Apple is the Movie Star and Everyone Else is an Extra

In a sense we decide who are the stars in the stories of our lives.

We might not realize that it’s our decision to make, or that we are making the decision without realizing it – but we are. Some people hold up others as the stars. Some people only see themselves as stars. Some see both themselves and others as stars.

When a person or a company becomes successful there is a very strong tendency to start assuming that everyone else is just an extra meant to cater to the star’s whims and fancies -

  1. Apple had a bit of the ‘Everyone else is an Extra’ attitude even when it was doing nothing except selling glorified mp3 players.
  2. With the success of the iPhone and the iPad that attitude has begun to spin out of control.
  3. Apple has begun to go from ‘We make beautiful devices that make people feel happy and sexy and cool’ to ‘We make beautiful devices so we have the right to assimilate all possible profit’.

Regardless of how you feel about Apple or their products, it should be clear that Apple has begun to diverge a lot from the developer-Apple-customer win-win-win scenario.

Apple is forgetting that everyone wants to be a star. No developer wakes up in the morning and says – Let me work really hard today so that Apple can take all the profit.

Yet, that’s the direction Apple is pushing developers in. It’s just a platform that has let success gone to its head and has begun to believe that the successs of different apps is due to Apple, and not due to the developer and customers.

It affects customers too – As more and more self-respecting companies and developers ditch Apple’s platform for other platforms, and for the open web, we will see the quality of apps and the value customers get go down.

If Kindle for iPhone and Kobo and Sony Reader and Nook for iPhone all leave, that hurts the customer. The customer goes from the superstar who gets whatever store she wants to an extra whose only job is to buy books from iBooks and make Apple money.

Apple is missing the Big Picture

There are so many flaws in the way Apple is looking at this, it’s ridiculous. It’s like Steve Ballmer and Sergey Brin hypnotized Steve Jobs into blowing up the App Store.

  1. Firstly, the apps are the magic lure that sells iPhones and iPads. Companies and developers are taking a huge risk – 90% of them are going to fail. However, 100% of them help make the iPhone and iPad more attractive. That, in itself, is enough of a payment to Apple.
  2. Secondly, Apple makes a ton of profit from selling devices. All developers get is the chance of making a killing from apps, and most of them don’t. Apple isn’t sharing any of its device profits with developers, but it’s taking a 30% cut from app developers, whether or not they succeed.
  3. Thirdly, most subscription services and most apps selling content can’t possibly afford to give Apple a 30% cut. Most of them are making either a loss or a very small gain and there just isn’t room. They are already adding value by providing options. They are already spending money on developing apps. A 30% cut on top of all that is madness.
  4. Fourthly, only the top few companies in each niche actually succeed. For everyone else, it’s life and death and they can’t really afford a 30% tax. Apple is reducing the probability of success of developers by adding on this 30% tax.
  5. Fifthly, the App Store isn’t the only option. You have the PC, the web, and lots of other platforms. Apple is behaving as if it’s the only option.

The 30% tax isn’t ‘Apple getting its fair share’. It’s Apple tilting the app store model even more in its favor.

Apple gets – the right to refuse an app, 30% on the take, 30% on the subscription revenue, more device sales, a defence against rivals, free development resources, and a lot of other benefits. Apple makes money whether or not an app succeeds – it makes money on every sale. More importantly, it makes a ton of money from device sales.

Developers get – Well, it’s becoming less and less. All developers get is a chance to be amongst the 3% of apps that are winners. Already, they are likely to fail 97% of the time. Now Apple is adding on more and more barriers to success, and more and more taxes if they do succeed.

Basically, the app store model is already hugely tilted in favor of the platform. The Platform gets a cut on every sale – whether or not developers make back their investment. The Platform gets all the power – it can kick out any app or reject any app. The Platform has access to customers.

Just when you might think it couldn’t be any more one-sided, Apple makes a move to assimilate even more of the profit and power – to the point that developers will be forced to quit.

Will developers and companies keep meeting Apple’s demands?

Not really.

Even before this latest madness Apple had angered a lot of developers with its opaque review process. Quite a few high-profile developers had left the Apple App Store.

In fact, a lot of the people going to Android are people who don’t like Apple’s attitude – You’re just an extra. Don’t get too big for your boots. Do what we tell you. Think what we tell you to think.

The Apple 1984 advertisement couldn’t be more relevant. Apple has become Big Brother.

We have the App Store which is the golden goose. Device sales due to the strength and richness of the App Store are the golden eggs. Apple is forgetting how things work. It’s saying – Perhaps we can get more than just the golden eggs. Perhaps making billions of dollars in profit per quarter isn’t enough. Perhaps we can squeeze out another few hundred million by putting the goose on a diet.

At the very core of it – Apple is forgetting that it is developers and customers that have made the App Store what it is. Apple’s tendency to assume everyone else is an extra means it has begun to think that its devices are so perfect that apps would write themselves. That developers are just extras who can be kicked around and taxed like serfs.

Apple has always had some amount of disdain towards developers. This is why lots of the star and superstar developers stopped making apps for the iPhone and iPad. It’s a major reason why Android has become successful. As Apple has grown more and more successful, it’s becoming delusional to the point that it thinks it can gather up all possible profit from the app store – That developers will work just for the pleasure of making apps for Apple’s magnificent platform.

It couldn’t be more wrong.

If Apple doesn’t roll back this 30% tax it would have killed the goose that lays the golden eggs. It would take 3-4 years for this to become evident but the death could be traced back to this 30% tax. The funniest thing is that Apple has deluded itself into rationalizing this. It takes an astonishing level of detachment from reality to start believing that developers owe Apple almost every cent of profit. Yet, Apple has managed it.

Can you predict which book is going to be a winner?

The Kindle and other eReaders, and the Kindle Store and other online stores, have meant that instead of Publishers deciding which books get published absolutely anyone can get published.

This creates something rather interesting – Readers like you and me decide which books were worth publishing.

It’s very, very different from what happened in the past i.e.,

  1. Publishers decided which books were worth publishing.
  2. Those books got published. Then readers decided which of those were actually worth publishing.
  3. You never knew what might have happened if the books that Publishers rejected got published.

In the New Publishing World we have two very strange things (strange when viewed from the lens of the past) -

  1. Absolutely anyone can publish. Which means that readers are the only people who have the power to decide whether or not a book is worth publishing.
  2. A lot of authors only care about getting their book out and getting it read. The profit motive is a distant thought.

There are, obviously, a lot of good things, and some bad things, about this. However, let’s focus on one very specific thing i.e.,

Whether it’s possible to predict which book is going to be a winner, and whether Publishers were keeping out losers or winners or both.

This post is 100% assumptions, so feel free to leave a comment if you disagree.

Can you weed out losers and pick winners?

At first glance, the answer will be – Yes.

However, if you look carefully at all the markets, where we supposedly pick winners successfully, cracks begin to appear -

  1. Take markets like music and movies and books and there are always a lot more losers than winners.
  2. Take markets like the stock market and there are a lot more losers than winners. It’s a very different sort of market – but it’s the same question i.e., Can people accurately predict winners?
  3. We have no way of knowing what would have happened if we picked the ones we kept out. We see this all the time with stories of best-selling authors being rejected dozens of times.

So, we don’t really have an answer for our question.

We know that we definitely can’t get a 100% success rate. In fact, we know that even the ‘experts’ at picking winners, like Movie Studios and Publishers and Music Labels, only pick winners 10% or so of the time.

Can you turn losers into winners?

This is a bit of a trick question.

Music Labels and Movie Studios certainly seem to believe they turn losers into winners. The financial contracts and the profit shares certainly reflect that attitude.

However, we really don’t know. At this point we just don’t have enough information. We might never have enough information.

It’s also something that can’t be proven. We’d need two identical parallel universes to accurately test this.

Can you turn winners into bigger winners?

This is probably a Yes.

One thing that Publishers and Movie Studios can definitely do is put a lot of money into promotion and marketing. So, if there’s a book that people pick as a winner, the added marketing and promotion gets it to a lot more people and makes it a bigger success.

This is a definite big win for Publishers. If you’re 100% sure your book is a winner it might make sense to go with a Publisher to make it even more of a hit.

Can you really predict success?

Don’t know how to answer this question. There isn’t really any place where we’ve seen anyone creating success with 100% certainty. We know of things that increase the probability of success – But is there really anything that guarantees success?

How quickly do user tastes change? How quickly do circumstances change?

One of the big challenges in creating or predicting success is that there’s a gap between the ‘prediction/screening’ and the product actually hitting the market.

If it takes you one year to get a book out, the world might have changed in the meantime. People’s tastes might have changed. There might have been events that shrink the market the book was aimed at, or other book markets might have taken over.

You could create the perfect product for March 2011, and by August 2011 it might be totally irrelevant.

How large is the element of luck? Or is it randomness?

While we can work on elements that increase our chances of success, there are also random factors, factors outside our control, that play a big part.

Perhaps it’s two sliding switches and you slide the switch you control as much as possible. Then the second switch either goes against you or for you, and slides a random amount. You total up everything and you get a result.

That distinction – elements you control, elements outside your control – is an important one. If you don’t control all the elements, you can’t really guarantee success.

Screening books for winners is at best an inaccurate filter

Since we have no idea how to accurately predict winners with 100% accuracy, it’s likely that we can’t identify losers with 100% accuracy either.

The minute you start preventing some books from being published, you are, quite possibly, screening out winners along with losers. Add in the fact that a lot more books were rejected than accepted, and it’s quite likely that Publishers were keeping out more winners than they were picking.

A simple guesstimate

Let’s assume Publishers could predict winners with 90% accuracy. And that there was a factor, the chaos randomness factor, that turned 80% of the winners into non-winners when they were actually published.

  1. Publishers get 100,000 manuscripts. They pick the 10,000 that they think are winners.
  2. 90% of the time they are right so it means that 9,000 of these 10,000 books are winners.
  3. The books are published and the chaos randomness factor strikes and turns 80% of these books into non-winners. That leaves 1,800 winners published.
  4. Now, let’s consider the 90,000 manuscripts that were rejected. 10% of the time Publishers were wrong so 9,000 of these are winners. That’s the first interesting takeaway – Publishers are rejecting just as many winners as they are taking, even if they are 90% accurate.
  5. Out of those 9,000 winners, only 1,800 would have survived the chaos randomness factor. So, just as many eventual winners are rejected as are accepted.

Note that this is assuming that Publishers have 90% accuracy. What if we attribute a 75% success factor to them (which is still quite unrealistic).

What if Publishers are right only 75% of the time?

  1. They pick 10,000 out of 100,000 manuscripts and 7,500 of those are actual winners.
  2. Thanks to the chaos randomness factor only 1,500 of those 7,500 become winners in the market.
  3. Publishers reject 90,000 manuscripts and 25% of the time they were wrong. That means we have 22,500 books that were rejected but are winners.
  4. Again, the chaos factor plays its part, and only 4,500 of those books would have been winners in the market.

However, it’s a huge difference. Publishers are picking 1,500 books that become winners in the market and reject 4,500 books that would have become winners.

And this is assuming Publishers get things right 75% of the time.

Note: There’s a big flaw in this assumption i.e. Each of the 100,000 manuscripts submitted has a shot at being a winner. In reality, perhaps only top 25% to 40% are good enough.

Why hold back any book from being Published?

The Publishing model is based on a premise rooted in the past – that there’s a very high cost of failure.

However, with ebooks, we now have a very different situation – Failure costs next to nothing. It is now more costly to keep out winners than it is to let in losers.

From the author’s perspective it is a stark contrast – An author can release and then she has a non-zero chance of success, or she can not release and have a zero chance of success. There are lots of things she can do to improve her odds of success. However, fundamentally, the most critical step is to publish her book.

We know a lot less than we think we do

The biggest takeaway for me is that the entire Publishing model is based on a lot of assumptions. Perhaps the biggest of which is that Publishers can predict success and that retailers can create success.

In the end it’s only readers, and perhaps the chaos randomness factor, that dictate success.

Everything else is only increasing the probability of success. And it’s based on assumptions.

We’re dealing with people who are saying -

  1. X is going to make your book a winner.

When they really should be saying -

  1. My assumption is that X is going to increase the probability of your book having a shot at being a success. It’s one out of 100 different factors – some of which are constantly changing.

It’s understandable why they would take that approach. However, it’s an inaccurate approach. No one knows what book is going to succeed, and no one can identify the exact reasons why it succeeded if it does succeed.

What impact might bookstores and sites selling ebooks have?

As the Kindle faces up to the challenge of rival ebook stores it’s worth taking a look at two new players -

  1. Independent Bookstores that can sell ebooks.
  2. Sites that can now sell ebooks.

What impact will each of these have and how much of a threat is it to Amazon and B&N?

Independent Bookstores and Death by a Thousand cuts

Let’s say an independent bookstore sells 10,000 books a month with a cut of 35% of the sales price of every book and makes around $35,000 a month (we’re assuming each book sells for an average of $10).

Please Note: These are just random guesses – the analysis should still be dependable.

Here’s what happens with selling ebooks -

  1. The cut on ebooks is less – It’s supposedly 23% with 7% going to the eBook provider and 70% to the ebook publishers. That 23% is a lot less than the 35% or 50% independent bookstores currently get. 
  2. eBooks will undoubtedly sell for less than physical books do. That’s the second cut.
  3. Number of customers coming in to buy ebooks will be less than those coming in to buy physical books. That’s the third cut.
  4. Percentage of their ebook purchases that customers will make at independent bookstores will be much less than the percentage of physical book sales they used to make. That’s the fourth cut.
  5. Lots of sales like sales of books in a series and impulse sales will go to the ebook provider’s website and not to the independent bookstores that sold the first ebook. That’s the fifth cut.

If you’re absolutely desperate, and that’s really what most indie bookstores are, those 5 cuts are invisible. You just rationalize it away by pretending that ebook sales will add-on to physical book sales and that there are savings in selling ebooks.

Yet, those are very real cuts – Even if indie bookstores fantasize that customers will visit just as often – they can’t neglect the fact that they get a smaller cut and that ebooks will cost less. Their revenue is definitely going to go down significantly.

There aren’t enough savings to match the lost revenue

You still have the store rent. You still have to pay for electricity. You still have to have physical books to draw in customers and to sell. You still need employees.

The costs aren’t going down very much at all. Yet, there are 5 cuts being applied which reduce how many books and ebooks customers buy from you and which reduce how much you make per book/ebook.

What will really happen – Rough numbers

Those 10,000 sales will go down to 8,000 with 5,000 as physical books and 3,000 as ebooks. You’ll still make good money from the physical books ($17,500). However the other $17,500 will be replaced by a paltry $5,000 or so.

Bookstores will be losing 21.4% of their revenue. Perhaps more.

The independent bookstores are under the illusion that they are going to simply convert their physical book sales into ebook sales. That’s not true – They are going to lose most of those sales.

It’s death by a thousand cuts – common sense would tell independent bookstores that they can’t compete with eReaders and PCs once the latter two become bookstores. Yet, they persist in their fantasies.

Online Websites and the Perils of selling eBooks

Amazon has an associates program that gets a lot of websites (including this one) to send people to the Kindle Store and to the Books section of Amazon.com. All its rival has done is set up its equivalent.

In theory ‘sell ebooks from your own website’ seems very compelling. However, there are a few problems -

  1. There’s not very much money in selling ebooks. You make 4% to 8.5% at Amazon. You sell 100 books for $5 each and you make around $35. Note: It isn’t easy selling 100 books.
  2. If instead a site uses text advertisements or sends users to another site (such as Amazon or BestBuy) where they buy a TV they make more from 1 TV purchase than they do from 100 books sold from their site.
  3. Point 2. is why site owners prefer to send their users to Amazon – Perhaps the user will buy something that makes a lot more money than ebook purchases. If a blogger writes about a $1 book deal and 100 people out of 1,000 visitors buy that book he makes a grand total of $7. If he sends a few hundred of those 1,000 people to Amazon they are quite likely to earn him more than $7.
  4. Users aren’t used to buying from a random website or blog. Can they trust the site with credit card information? What about the features they are used to? What about the site that’s their favorite shopping site?
  5. To be more precise – If you go to a site to read the latest news you are unlikely to stop and do all your book buying from there.
  6. Adding an ebook store to your site is complicated. If a site owner is good at running a forum there’s a pretty high chance he’s terrible at selling books. His ‘ebook store’ is going to have all the qualities a great forum should have and very few of the qualities an ebook store should have.
  7. What are you going to specialize in – Your core competency or selling ebooks to your visitors?

While sending users to a store (any store) where they might buy other things is a good option, selling them ebooks at your own website is quite likely to be a losing proposition. 

Here’s an example -

Most banks offer a bounty of $50 to get a customer. Guess how many $7 books you have to sell to earn the same amount – around 100. If it’s a $1 book then you need to sell around 625.

If you assume 1% conversion you’ll need to get 10,000 people to make $50 from that $7 book. Even if you assume an unbelievable 10% conversion it’s 1,000 people.

For the $1 book you’ll need to get 62,500 people to make $50 from the book. In the best case a mere 6,250 will do.

There’s just not very much money in eBooks. All the efficiencies and price reductions result in there being very little left for site owners.

Indie Bookstores and Websites will still play a huge role

It’s a super interesting realization. They can’t really make much money but they can decide the winner. Whichever ebook store seems the better option to indie bookstores and websites will get adopted and that will mean -

  1. A lot more awareness for that particular ebook store.
  2. More customers (including easier and quicker customer acquisition) for the store that gets adopted by indie bookstores and sites.
  3. Customers stolen from the rival.
  4. Very cheap customer acquisition. Spend $100 per customer acquired OR give $1 per book sold. The end result, a new customer, is the same – There’s just a huge difference in what acquiring that customer costs.
  5. Continuous free advertising and branding. All those indie bookstores and sites are implicitly saying – You can trust this ebook store. We do. This is the best ebook store. We think so.

Indie bookstores are bound to lose and websites choosing to run their own ebook stores are likely to lose. Yet, they are the kingmakers.

They are giving the ebook store they choose everything – cheap customers, lots of customers, trust, branding, awareness.

Getting wedded to the lessons of Success

Reading Rework by the 37 Signals people and a third through the book it hit me that they are making the exact same mistake that they are accusing traditional businesses of i.e.

They feel that what made them succeed is the formula for success.

In Rework 37 Signals are assuming, at best, that what made them succeed is the smartest way to succeed, and at worst, that there is no other way to succeed.

It’s a very useful book – just the first one-third has paid back for its $9.99 price. It also helps illustrate why so many newspaper publishers and book publishers and Internet companies dependent on advertising are struggling so mightily.

We get trapped by what made us succeed

Take a book publisher. They look at a few of the things that made them succeed -

  1. Being gatekeepers. 
  2. Strictly limiting how readers could get books.  
  3. The profit-sharing arrangements with distributors, retailers, and authors. 
  4. The hardcover – paperback distinction which is at least partially artificial.
  5. Leaving branding and user interaction to retailers and authors.

And they continue to stick with it.

It’s not a bad choice – they don’t know what happens if they try out a new model. Perhaps they get destroyed like newspapers are being destroyed.

At the moment controlling the publishing and flow of books is the only way that is guaranteed to work for Publishers. New models may or may not be better. They’d definitely be better for readers and for authors – However, we don’t know what would happen to Publishers.

What made you succeed isn’t the ONLY thing that would lead to success

The Rework book is an instant classic in this lesson.

They focus a lot on working smart not hard and not taking investment money. However – How can they be sure that other methods don’t work just as well?

There are some companies that did take investment money – Google for one.

There are some companies that work inordinately hard – Apple and Steve Jobs are notorious for working people to death to get really well made and simple to use products.

The mere existence of those two companies means that 37 Signals are, at best, an example of an alternate strategy. At worst they might be one of the sole exceptions to the rule.

Repeating Things that fail will usually lead to failure

As opposed to repeating things that made you succeed, which has a lot of upside, repeating things that made you fail has little upside.

This makes it even more puzzling that newspaper publishers keep coming back to advertising.

  1. FT are launching a free iPad app – even though their online model is paid. 
  2. Skiff want their eReader to be supported by advertising.
  3. Newspapers are even going into clean channels like the iPhone and trying to launch advertising based products.  

Where is the big content company that is making a killing from advertising?

Newspapers are stuck to their advertising supported models of the past – Lessons from past successes.

It’s hard to know if to change and when to change

Take eReaders. Do Amazon and Sony and B&N release multi-purpose devices that can also read?

One possibility is -

  1. That $200 to $250 eInk eReaders will own most of the reading market.
  2. $300 to $350 color high-end eReaders will own a significant part of the rest of the reading market.
  3. Above $500 we’ll see multi-purpose devices take over.

Another possibility is that multi-purpose devices completely take over reading.

It’s hard for anyone to know what’s going to happen. It’s even harder to know when it’s going to happen and to move at the right time.

Is there a future for eInk and ePaper?

We probably have 5 million or so eReaders sold to date. Perhaps as little as a couple million.

What happens if eInk doesn’t evolve fast enough or gets outpaced by LCD screens’ evolution for better reading?

There’s no way for eReader companies to know. Moving away from eInk, and perhaps even from ePaper, is something they should consider though – so far eInk has shown an amazing ability to resist evolution.

How do you avoid getting trapped in the lessons of success?

It’s an interesting balancing act -

  1. You have to keep doing what’s working and what you’re good at. It would make no sense for Microsoft to stop selling Windows or for Apple to stop selling iPhones.
  2. You also have to build up other possible sources of success and revenue. Apple’s constant addition of new products and Amazon and Microsoft’s expansion into new verticals are good examples.
  3. You have to be aware that multiple models might work. This is something that every company succeeding with a particular model should try out.

The best way to avoid getting trapped is to realize there are multiple ways to succeed and there is always an amount of randomness and change.

Perhaps what helps most is to understand that at some level no one knows anything. The most specialized people in any field are aware of just how little they know – that you can increase your chances of success but you can’t find a magic method or get an exclusive path to success.

It is the semi-experts that get enthralled by their success and start claiming they have all the secrets. And it is the totally clueless or really desperate who jump to follow the semi-experts.

In a way that’s what we’re seeing with newspapers – they are desperate and anyone who is saying what newspapers want to hear gets to exploit them.

Book Publishers might be wrong in holding back progress – They do, however, deserve a lot of credit for not being stupid and not falling for the promise of untested models like advertising supported models. That at least guarantees books still have inherent value.

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