Amazon vs Apple AKA Jeff Bezos vs No Direction AKA The Evolution Economy vs The Leisure Economy

Amazon vs Apple isn’t really worth discussing. Yet, the main stream press keep discussing it.

There’s an article today from one of the TechCrunch guys writing about how much profit Apple is going to make in the holiday quarter and how little profit Amazon will make. It’s a general theme that constantly amazes me – Apple is finally successful. Why still try to show you’re superior?

If your sense of worth doesn’t flow from inside yourself then at least having $60 billion cash in the bank should fill that hole in your soul.

It makes you wonder exactly why Apple and Apple people need to trumpet how amazing and revolutionary Apple products are.

Did electricity have to send out a Press Release touting why it’s better than candle light? Did the wheel hold a fancy presentation to tout how much better it is than square-shaped transportation attachments?

When it strikes you the answer becomes apparent. When what you are doing isn’t really permanent then you have to constantly pretend it is. To feel good about yourself.

Bill Gates left the PC Wars to try to find cures for Malaria and Cancer and solve the really big problems. Perhaps nothing comes of it. Perhaps something does. If he does manage to achieve even one of his big targets (cure malaria, cure cancer, create a culture of billionaires pledging half of their money to such causes) then he would have done something that is perhaps far more important than putting a computer on every desk (which he did do).

Jeff Bezos is doing a lot of things that potentially have huge long-term impacts i.e. Blue Origin (space), Kindle (the future of books), AWS (a move to a cloud infrastructure), the future of retail. He doesn’t need to pose in a half-lit room and show the world how zen-buddhist cool he is. Because if Blue Origin ends up being one of the winners in the Space Race or Amazon takes over retail or Kindle replaces paper – every single person for the next 5,000 years will know who he is.

He’s even building a clock that will work for 10,000 years. Perhaps that helps explain why he doesn’t care what the leeches and parasites of Wall Street think about his plan to invest in the future.

Google, despite the distinct possibility that it becomes the Matrix, is doing Search and Maps and Self-Driven Cars and lots of Translation work and a lot of information organization and gathering.

***

When you do stuff that has really big impact and are focused on the really long-term – you don’t need the validation of short-term success. Things like popularity and acceptance and being cool are pretty meaningless.

Note: We aren’t judging here. Every person is different and some people want to be Prom Queen and some want to write a book that is timeless. Everything is fine. The problem is when you try to have your cake and eat it too. The Prom Queen should stop insisting that her winning the Prom Queen title is timeless and as significant as Shakespeare writing Macbeth.

Let’s consider someone who isn’t making pretty gadgets and isn’t considered the Technological God of the current generation and is relatively unknown – Elon Musk.

This is what he wrote about what areas he chose to focus on (courtesy Wikipedia) -

His undergraduate degrees behind him, and drawing inspiration from innovators such as Thomas Edison and Nikola Tesla; Musk then considered three areas he wanted to get into that were “important problems”, as he said later, “One was the Internet, one was clean energy, and one was space.”.

These are the companies he’s part of or owns (or was part of): SpaceX (which won that multi-billion dollar contract from NASA to handle space launches), Tesla (the electric car frontrunner, in most people’s opinion), SolarCity (one of the largest solar panel installers), PayPal (which did something pretty impressive).

Not many people know of him because he isn’t really focusing on ‘making people happy for the short-term with shiny gadgets’. Conversely, he probably has little need to gain ‘the love of the common people’ and be considered ‘the greatest technology person alive’. If even one of his two main bets works out – then every single person for the next 10,000 years will know who he is.

Here’s the crux of the argument:

If Elon Musk’s SpaceX and Jeff Bezos’ Blue Origin become 2 of the big winners in the Space Race. If Bill Gates cures some major disease and sets up the richest fund ever for the good of humankind. Will anyone remember who made the Walkman or made the prettiest Tablet?

That, in a nutshell, is why the consumerist culture engine is so focused on taking the Vatican of Consumerist Culture and portraying it as life-changing and revolutionary. It’s a futile attempt but impressive. There’s probably a maker of pure ivory tools from prehistoric times who wishes he had the same marketing engine – He’s convinced that if he did, then today his pure ivory nutcracker made from only the finest Mastodon teeth would be considered more important than the wheel.

***

All of this leads to a brief detour.

Amazon vs Apple is meaningless. Jeff Bezos is still here to build Amazon into something (and Charlie Rose really should ask him this the next time he goes on the show) that lasts longer than his 10,000 Year Clock.

Steve Jobs built something that now has no head. It’s literally a giant stack of money and 5 years of plans for fancy gadgets and then nothing. It’s a Validation Providing Engine without the one person who most understood the need for validation and how to provide it.

Jobs-less Apple will release an easier to use and prettier TV and will then claim that TV was nothing before this. That making remote controls easy to use was the real magic. That Baird and Farnsworth and everyone else were minor contributors. But no one at Apple now knows how to link Apple TV to people’s need for validation – not without letting people realize it’s just a pipeline of Validation sent out by and connected to the Vatican of Consumerism.

Without Steve Jobs there is only reality and reality does not treat Validation Engines very well.

Amazon vs Apple is such a concern for the main stream press for this precise reason. If Apple’s Press Acolytes really thought Amazon was not a danger they would be indifferent. Truth is that they are scared out of their wits because Jeff Bezos might beat Apple’s Validation Engines with his Value Engines.

It’s bad enough he doesn’t have Time Magazine spend 25 hours lining up the perfect photo to show how artistic and cool he is. What’s worse – he doesn’t care about profit or the short-term.

Enough of this pointless detour. Let’s get to the real story.

***

The Evolution Economy vs The Leisure Economy

There are two warring viewpoints trying to take over the world.

The Leisure Economy

Everything is fine. We are never going to have any problems. We have evolved enough and now we can just sit back and enjoy. The Human Race has reached its zenith and it’s either going to last forever OR it’s not our problem.

It’s the Leisure Economy. If it weren’t for those annoying greedy parasites on Wall Street – every person would have enough for a comfortable life and we could just worship Angry Birds champions and write about how the person who thought up virtual goods is more important than the person who invented the wheel.

It’s perfectly OK – We each have the option to choose any view-point we like. And we have the right to choose our heroes and Gods.

The Evolution Economy

Humans as a race need to keep evolving. All this worship of the present and thinking the American Idol winner is more important than your parents is getting out of hand. If teachers and policemen and doctors and librarians are considered worthless, and actors and musicians and people good at hitting a ball are worshipped, then it’s a warning sign.

People with this viewpoint look around and wonder -

What happens if we need another Planet? As in – really, really need another planet so we can survive as a species. Then they start thinking Space. Or, if they are elected officials focused only on the next election, and on pleasing their Wall Street overlords, they disband our Space programs and hope someone else will solve the problem.

What happens if we run out of Oil? Apart from minor inconveniences such as not being able to drive to MacDonalds we would have more serious issues like not being able to transport anything. Literally everything runs on Oil (including several governments ;) ).

What happens with our water situation? A lot of people are dying (literally) because they can’t get any drinking water. If the absolutely imaginary global warming continues/happens/magically appears and the areas affected expand – what then? Would Consumerist Culture Jesus appear and turn wine into pure water?

It’s quite a long list. It’s also a list that we should pay at least a tiny bit of attention to. If not for ourselves, then for our kids. If not for our kids, then for whatever reason excites your fancy.

The Leisure Economy is very seductive

Who wants to believe in a world where things are hard. Reality is terrible. It’s like that person you really like who is crazy enough to not like you back. Love only hurts the heart – reality hurts every single part.

It’s much easier to embrace the fantasies and imaginary adventures of the Leisure Economy.

To believe that the biggest challenges your grandkids will face is choosing what color of iCar to buy and deciding whether to enter the Google matrix at 11 or wait until 21.

Perhaps people like Jeff Bezos and Bill Gates and Elon Musk are wrong. We truly have reached a Leisure Economy and nothing will go wrong and everyone will wake up and the World Peace fairy would have made everyone good and kind and benevolent. The Earth will never change its weather patterns. Asteroids will always stop at red lights. Sea Water will become drinkable. And that crazy man who was turning leaves into Oil will turn out to be right.

It is however, a very dangerous bet to make. We can look back all through history and the few times a Civilization reached riches like ours (Roman Empire, Ottoman Empire, etc.) – it didn’t turn out well. The Barbarians at the Gate didn’t have iPads or Angry Birds.

On a long enough timeline the survival rate for everyone drops to zero.

What accelerates things is when a species starts believing the illusion that there is no timeline. We are God’s chosen people and unlike every other empire and species before us we shall remain untouched.

Dinosaurs never had iPads. Otherwise they could have just used the iPads as shields when the Asteroids hit. All our human experience of playing Space Invaders will surely pay off.

That really is the belief amongst people who believe a bit too much in the Leisure economy – the voices of the American Idol singers and the bats of the Red Sox and Yankees and the iPods we throw out into Space will stop the Asteroid. Then they will fall back as a mix of pure oil and pure water and also cleanse any thoughts of war from the minds of the entire human race.

Our Species is safe. If that annoying Ice Age starts creeping up on us our rappers will just smile at it and their gold teeth will scare it back.

***

Should we really be thinking beyond the next 50 years?

It’s a good question. Probably depends on whether you have kids. Whether you think the human race deserves to live on.

What about beyond today?

An even better question. Wish I knew the answer to that.

***

Reasons a Leisure Economy is Unsustainable

Even if we do magically reach a perfectly balanced and perfectly secure Leisure Economy where every single person is happy and has enough money to buy a Maybach with platinum rims and 3D TVs, there are still a few problems.

  1. A Black Swan event. Nassim Nicholas Taleb would explain this a 1,000 times better. In a nutshell – we might have the perfect world and annoying Earth might decide to go into an Ice Age and freeze us all to death. Or an Asteroid might hit. Or a virus might evolve faster than our defences and our medicines. Or a thousand different things. Low probability but if a black swan hits the Leisure Economy - The End, My Friend.
  2. Wall Street Banker Syndrome. We’ve spent so much time as a species fighting for resources and fighting with each other that it’ll be impossible for people to live happily in a Leisure Economy. You’ll want more and your neighbours will want even more and the chain continues until people think 100 million kids dying due to poverty is fine because they need to make money on commodities trading.
  3. War. This is not about inequality but a difference in opinions. Look at the world around us. The only thing saving us is that one country has huge military superiority. If we are unlucky enough to reach a state during our lifetimes where the Middle East and/or China become as powerful as the US, then all dreams of the Leisure Economy’s permanence will be permanently shattered. To be absolutely blunt – all those people working 70 hours a week making iPods and iPhones and Kindles and Xboxes might not treat us very well if they become the most powerful country in the world.

There’s a long list but it mostly stems from the fact that humans are used to competing with each other, for fighting for things, and to the Feudal model (Kings and Lords ruling over the peasants). There are also a lot of things going on that we ignore but shouldn’t (the race against viruses and parasites, the Earth itself, the energy situation).

Does that leave only the Evolution Economy?

That would be brutal. To find out that the only way for the human race to survive is to keep doing what it’s been doing (working and improving and evolving and doing things other than killing the time).

That people will have to keep inventing wheels and steam engines and electricity and airplanes and cars. That doctors and scientists will have to keep making medicines and discoveries. That we can’t all just sit and design ever prettier toys.

That’s a real bummer. Instead of having 7 billion people spending all their time figuring out how to amuse each other, we might be forced to evolve as a race and do boring things like explore space and the oceans and discover new technologies and sciences.

It almost suggests that we will bifurcate. This is where it starts getting really interesting.

The Evolution Economy AND The Leisure Economy

You could argue this is already happening.

25% of people choose the Evolution Economy. They build flying cars and fly to Mars and discover how to purify sea water and find new energy sources.

74% of people prefer the illusion that everything is perfect and they just need to think about the next ballgame and the next device upgrade and the next mortgage payment.

1% of people realize that there is a lot more money, in the short-term, in providing the above 74% people with the dream-illusion of the Leisure economy. That if you make a device shiny enough and market it well enough – the 74% will start thinking it’s as revolutionary as Electricity and the Steam Engine. That if you conjure up fantasies that are compelling and easy then the 74% will leave behind the harsh reality of the real world and embrace the fantasies.

That really is where I think the world will end up.

25% will choose reality and live in the real world and be part of the Evolution Economy.

1% will cater to the 74% that don’t like Reality - they will create a perfect matrix where you might be in vat of fluid the size of a coffin but you think you are flying to Switzerland for a ski in the afternoon and then walking on a farm in Wisconsin in the evening and finishing up by having dinner in Paris. Every day is just perfect and, to your senses, perfectly real.

It’s free choice – And it’s understandable.

It’s also completely natural that for people who choose the Leisure Economy the real heroes and Gods are the 1% who create it.

People in the Evolution Economy might find it strange that in the Leisure Economy the heroes are the ones who can allay the Satanic evil of boredom, even if just for a few minutes. But that really is the crux of the Leisure economy.

Everything is taken care of. No risks. No worries. Just Leisure. The highest goal anyone can achieve is fending off the terribleness of boredom and attaining the nirvana of being entertained. The 1% will figure out a way. To take all the drives and instincts built up over millions of years of fighting off saber toothed tigers and building cities and raising families. A way to channel them into fighting off Green Pigs and building virtual farms and raising imaginary children who never become ungrateful teenagers.

It’s inevitable and we just have to choose whether we are in the 25% who choose reality, the 74% who embrace total fantasy, or the 1% who keep the fantasy alive. Perception is reality – it’s debatable whether it’s the 25% choosing the Evolution Economy who are delusional or the 74%. Perhaps it’s the 1% who are truly delusional – they are the only ones who neither get to enjoy fantasy nor reality.

Dangers of building on someone else’s platform

Apple is making it pretty clear that it expects to get a 30% cut of content sales that happen via iPhone apps and iPad apps.

A few days ago Apple rejected Sony’s Reader App for not providing in-app purchases for ebooks (purchases from which Apple would get 30%). To add to that it released a notice regarding subscriptions today. This part is particularly interesting -

“Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing,” said Steve Jobs, Apple’s CEO. “All we require is that, if a publisher is making a subscription offer outside of the app, the same (or better) offer be made inside the app …

It should be pretty obvious that apps like Kindle for iPhone are next. Apple will demand -

  1. In-app purchase options that are equivalent to browser purchase options. Thus making in-app purchases the path of least resistance.
  2. A 30% cut on in-app purchases.

Amazon will have to make a hard, hard decision.

There’s a lesson in here that goes far beyond Apple vs Amazon and ebooks.

Fairy Tales – How Platforms start off

The Platform company tells all the other companies – You provide the software/apps/content/books and we provide the platform. There’s just a small cut for us if you’re selling your app. We sell tablets/phones/operating systems and make money. You sell your stuff and make money.

It’s like a fairy tale – everything’s perfect. 

The Platform assumes every company understands that eventually there will be a tax and that the tax always applies. The companies assume that the tax doesn’t really apply to them – that they are a special case. That they are providing enough benefit just by being on the platform.

This is how nearly every platform starts off. Companies think they can get a free ride on the platform forever. Platforms think they can attract all these companies and make their platform a success. They think they will figure out how to maximize profit later.

The Power is Asymmetrically Distributed

The first warning sign is that Platforms become powerful very, very quickly. If a platform will turn out to be a good investment for a company it will be because the platform has taken off. If a platform has taken off that means the company is at the Platform’s mercy.

The company is only in a position of power at the very beginning.

At the start there is a somewhat equitable power distribution – Platforms need companies and companies need platforms. However, as the platform grows a few things happen -

  1. The Platform gets more popular and more powerful.
  2. The Platform starts viewing companies that helped it grow as parasites and freeloaders.
  3. The Platform starts getting jealous that companies using the platform are making a ton of money.

It becomes very easy for the Platform to shift from ‘win-win’ to ‘Platform wins 80% of the profits’. The platform just interprets this shift as ‘the right thing’. It doesn’t see how power and a sense of entitlement make it feel this way. It just assumes the right thing to do is impose a tax and get a cut of every company’s profits.

Companies are dying to be fooled by the Platforms

There’s a fable about a scorpion and a frog that’s worth reading if you have the time.

Consider a company that is approached by a platform. The platform says -

Look. We have customers for free.

Look. It’s so easy. All you have to do is make one little piece of software and all these customers will start paying you money. Zero Acquisition Costs. Infinite Profit.

What it really means is -

Make us powerful. Make software to make us all-powerful. Work for us for free so we can sell products for not free.

Until we become all-powerful we’ll let you have a free ride.

What the company hears is -

Customers for Free. Lots of Customers. Lots of money paying customers. And we’ll live happily ever after.

Can you really blame the platform here?

It saw human weakness. A greed. A hope that without making much effort a company could gather up lots of customers. It played on that greed and on that hope. If it didn’t, someone else would.

Can a company really blame a platform for its own disconnect with reality?

A Company’s Efforts go into Building a Piece of the Platform

This is how the company interprets it -

  1. We’re building a great app.
  2. We’re getting customers for free.
  3. We’re creating a following of customers.
  4. We’re in control.
  5. We’re a success.

Here’s the reality -

  1. It’s building a piece of the platform. A piece the platform can throw away or replace with another near-identical piece.
  2. It’s getting customers for free only at the start. If it starts to profit from them and if the Platform gains power – it has to pay the Platform tax.
  3. It’s providing value to the Platform’s customers.
  4. The Platform is in total control.
  5. The Platform is a success.

We’ve seen a lot of examples of who’s really in control -

  1. Apple is giving a first class demonstration.
  2. Every website does it by imposing its morals and ethics and financial priorities on people using the website.
  3. Facebook forced all developers to start using Facebook credits.

The Platform controls everything. To forget this is madness. It’s the Platform’s job to keep developers and companies delusional. To pretend that they are the one and only company in the history of the world that is going to prioritize integrity over profit.

The Platform Rules

There are the boring rules -

  1. Everything follows the belief system of the Platform. Right. Wrong. Left. Right.
  2. The Platform makes all the decisions. 
  3. The Platform decides everything.
  4. It’s not nice to beat the Platform’s default offering.
  5. It’s important to prioritize the Platform over profit.

There are the interesting rules focused on profits -

  1. It’s rather improper to make a ton of profit without sharing with the Platform.
  2. It’s especially rude to make more profit than the Platform.

All of these are pretty obvious. They are a direct function of the fact that the Platform controls everything. However, companies are slow to recognize and accept these rules because companies are so wrapped up in the fairy tale they have been sold.

To a Platform every company is replaceable

When Platforms start off every company and every developer is priceless – an irreplaceable gem that is critical for the growth of the platform.

When Platforms take off every company becomes a small, very replaceable, very forgettable piece of the total platform.

At that point the platform starts to remind every company just how replaceable it is – It wants a cut, it wants its ‘rules’ to be followed, it wants the company to do what’s best for the platform.

The company still doesn’t get it. It’s still in the fairy tale where it is a rare and precious gem and absolutely irreplaceable.

Amazon spent all this time strengthening the iPad

AT&T’s CEO wants to give Amazon a prize for its decision of making a reading app available for the iPhone and iPad. So does Steve Jobs.

The prize is the privilege of giving Apple a 30% cut on every book sold to a Kindle for iPhone customer.

We can spin it any way we like. However, Reality has a way of tearing up our little fairy tales and smacking sense into us.

Every eReader company was happy to produce reading apps for the iPad and make it a device that could access every store. Now, Apple wants to thank them all for helping sell iPads – by sharing in their ebook sales. It’s a fitting reminder that they shouldn’t have been giddy with the joy of free customer acquisition.

Note how Apple first tried to introduce iBooks and take all the iPad owners who were readers and transfer them to iBooks. When that didn’t work out Apple decided to just take a 30% cut from every eReader app. Why bother making animated page turns and flying carpet bookshelves when you can just levy a 30% tax on each and every ebook app?

The signs were always there. The Platform just treats companies as testers. They test various ideas and if they find a vein of gold, as Kindle for iPhone did, the Platform steps in and tries to steal it away. If it succeeds, then great. If not, then it just levies a tax.

Why not focus on building channels you control?

Amazon has been spending time and effort on making and improving apps for iPhone and iPad.

Why not devote those resources to adding all the latest software features to Kindle 2 and Kindle DX? Perhaps it’s just 2 million Kindle 2 owners and half a million Kindle DX owners. However, they are Amazon’s customers and customers that can’t be stolen away. Their purchases are purchases that another company can’t tax.

More importantly, they are the customers who made the Kindle a success. Who cares about someone who owns an iPad and buys from the Kindle Store because it has the best range – those are not great customers. Great customers are those that bought a Kindle. They should come first.

Amazon has been working hard on making Kindle for iPhone great. Buying into the illusion that Apple exists to provide Amazon with a free ride. Now, soon, there will be a 30% cut and all of the effort Amazon put into the iPad will be seen for what it is – effort that makes Apple’s platform better, effort that sells iPads, effort that leads to Apple making 30% from every Kindle book sold via Kindle for iPhone.

90% time on your own platform and your own products

That’s the lesson. At least that seems to be the lesson to me.

The seductive option is someone else’s platform. A platform that offers untold riches and an endless stream of customers. It also offers taxes and rules and regulations and red tape and lots of pain once you realize you spent all that effort making someone else rich and successful.

It’s much harder to build your own channel. To make your own products. But if you put in the effort you get your own customers. Your profit is your profit.

Everyone’s seducing everyone. A Platform is the ultimate seduction for a company – millions of customers, customers of good intent, little effort required to reach them, zero acquisition costs, an unspoken promise that things will always stay rosy, a certainty. It’s only much, much later that companies figure out that platforms aren’t fairy tales.

2% of best Kindle books of 2010 under $9 or 35%?

Amazon has its Best Books of 2010 list and it’s included two interesting lists for the Kindle -

  1. Top 100 Editors’ Picks of 2010. 
  2. Top 100 Customers’ Favorites of 2010.

These lists are remarkable in how different they are from the Top Kindle Bestsellers List. In particular, we’re talking about the percentage of $10+ Agency Model books that make their way on to these lists.

Analyzing the differences between Best Books of 2010 lists and Bestseller lists

First, let’s look at the Editors’ picks -

  1. Books above $10 - 56. 56% – Really?
  2. Books at $10 (including books between $9 and $10) - 42. A healthy 42%.
  3. Books below $10 - 2. How could there be just 2 books priced below $9 that are good enough to make it to the Top 100?

The editors would have us believe that out of the best 100 books this year 56 were priced above $10 and still are (or are now suddenly priced above $10). They would also have us believe that only 2 out of the 100 best books of the year are now below $9.

Might as well call this the ‘We love the Agency Model’ list.

Next, let’s look at the Customers’ Favorite Kindle books list -

  1. Books above $10 –  47. Customers picked $10+ books 47% of the time? Guess the Ken Follett 1 star reviews were counted as up votes.
  2. Books at $10 –  38.
  3. Books below $10 – 15. Interesting that only 15% of customers’ favorites were books below $9. Apparently, Stieg Larsson and all the indie authors are getting ignored totally.

It’s really hard to believe that customers somehow picked 47 books priced above $10 as their favorites.

These two lists would indicate a colossal success for the Agency Model – Editors are picking 56 books priced over $10 as their favorites for the year and readers are picking 47. Publishers might as well try $25 Kindle Books next.

It’s so strange because there have been so many complaints and so many $9.99 boycotts - surely, all the protests must mean something.  

Are people just complaining and then buying books over $10? Have we bowed down to Publishers?

Well, that’s really, really, really hard to believe – that customers make the effort to give a 1 star rating and write on the kindle forums about an overpriced book and then turn around and buy the same book and vote for it as their favorite.

The second list (Customers’ Favorites) obviously isn’t using reviews because Ken Follett’s $19.99 opus is in there. A book with hundreds of 1 star reviews makes it to the Top 100 - That would only be possible if the list is based on raw sales and disregards reviews. That in turn would mean that all we have to do is look at raw sales and then we can confirm that the Agency Model has won out.

What books did Customers actually pay money for?

Surely, that’s the most reliable measure of ‘customer favorites’ – that all of us customers bought the book with our hard earned money.

Well, thanks to the Bestsellers Archive which has replaced the super useful Movers and Shakers section we get a picture of Kindle users voting with their pockets -

  1. Books above $10 - 31. What? Only 31% of the bestsellers were above $10. That seems rather different from the Editors’ 56%.
  2. Books at $10 - 32.
  3. Books below $10 – 35. This couldn’t be right. Didn’t the great editors tell us that only 2 books below $9 were worth reading? How dare we stupid readers challenge the authority of the Editors? How could we waste our money and time on 35 books priced below $9 when Ken Follett has decided we should spend $19.99 on his opus?

Please Note: 2 were not books so the total is 98.

This is a remarkably different list from the other two – Is it not?

Making sense of the discrepancy

Here are the results and a brief interpretation in italics -

  1. Editors’ Top 100 Books of 2010 - 56 are books above $10 and 42 are books between $9 and $10. The Agency Model has succeeded wildly and lower priced books have had no discernible impact (only two were below $9). It’s the dream world of Publishers. 
  2. Customers’ Top 100 Books of 2010 – 47 books above $10 and 38 books between $9 and $10 and a mere 15 book below $9. The Agency Model is doing very well and book prices are stable and lower priced books have a rather insignificant market share (15%) and are probably only a distant threat. Kindle users have complained but they’ve still paid higher prices.  
  3. Customers’ Actual Purchases aka The Reality List - 31 books above $10, 32 books between $9 and $10, and 35 books below $9.

So which would you trust more – Editors trying to save their fast disappearing jobs or Kindle owners like us who’re voting with our cold hard cash?

There are a few key things the Reality List tells us -

  1. The Reality is that customers are voting with their wallets and the Agency Model is failing miserably.
  2. There are now more books under $9 being sold than books over $10.
  3. There were more books under $9 sold than either books priced at $9.99 or books above $10. Not only is the Agency Model losing we are also losing the $9.99 price point.
  4. Ken Follet wasn’t just rewarded with a 2.5 stars review rating – his book is the 98th best-selling Kindle book of 2010. 90+ authors sold more than him – that’s got to hurt. 3 independent authors sold more than him. Don’t care how much he’s making from his $19.99 novels – that has really got to hurt.
  5. 3 independent authors made it into the Top 100 bestselling books of 2010 list. It’s the beginning of a very dangerous trend if you’re a Publisher.

Here’s the real icing on the cake – It’s getting even worse for the Agency Model.

A Harsher Reality – The Current Top 100 List 

This is how the Top 100 list looks right now -

  1. Books above $10 – 27. It’s a mere 27% – The market share of Agency Model books in the Top 100 is around half of what editors would have us believe.
  2. Books between $9 and $10 – 30.
  3. Books below $9 - 40. Dear Editors, books below $9 aren’t 2% of the Top 100 – They’re 40%. It’s a ridiculously huge difference and strong proof that the Agency Model and $9.99 are both toast.

Please Note: 3 non-books were on the list so the total is 97.

There are some remarkable things in here -

  1. The number of books below $9 in the Top 100 has actually gone up to 40 out of 97. That’s the reward Publishers get for messing with Kindle owners – 40% of the bestselling books are below $9.
  2. There is a bias towards new Agency Model releases – new books obviously sell more plus all the preorders add up and boost sales rank. Despite that there are only 27 books priced above $10 in the Top 100.
  3. In the mind of editors – 56% of the best books of 2010 are above $10 and 42% are between $9 and $10. Our reality list of actual sales in 2010 says that it’s only 31% for each with the majority of Kindle book bestsellers (35%) being priced below $9.
  4. The current reality list (our current top 100) says 40% of Kindle book bestsellers are below $9 and only 27% are above $10.

As things get worse for them Publishers and Editors get more and more detached from reality.

Kindle Owners are in the drivers’ seat – whether they realize it or not

There are two factoids that illustrate that all the power is in the hands of Kindle owners now -

Firstly, despite Publishers’ attempts to impose the Agency Model on us we made books below $9 the largest share of the Top 100. 35% of the Top 100 were priced below $9 while only 31% were priced above $10.

Secondly, we’re making things worse for Publishers. As of right now, 40% of the Top 100 are books below $9.

The Agency Model is failing miserably and it’s also led to the death of the $9.99 price point. Publishers can get editors to conjure up whatever lopsided lists they like – Kindle owners are the ones with the money and the power and they’ve destroyed Publishers’ attempts to con them.

Thoughts on bookstores thinking they’ll sell lots of ebooks

The Atlantic has a beautiful post on the potential impact of new ebook entrants on the Kindle and the eBook market. The most attractive part is the little thread on how independent bookstores will sell ebooks and have their own little websites.

Here’s a little bit from the post -

the American Booksellers Association, the trade association for the independents, has contracted with Google to be an e-book supplier and infrastructure back office.

So far, 225 of the ABA’s 1,400 members have signed on to the program, and more surely will over time.

Each of these stores will have their own website façade that will feature the full catalog of Google’s titles as well as features specific to the community being served.

 Here’s an ABA spokesman with his thoughts -

“For the first time, e-book buyers will be able to take full advantage of their local independents for the same reasons they always have: trust, knowledge and selection. . . .

Now you can buy e-books from someone you love.”

There’s also this final gem -

As a wholesaler for the independents, Google’s plan is to provide retailers with a single digit share of the revenue generated.

Let’s take a moment and take that all in.

Local Bookstores are not the path of least resistance for ebook buyers

First, let’s dispel the notion that lots of readers (or even half the readers) are going to stroll over to their local bookstore to buy ebooks.

Here’s the effort involved – if at home get dressed and drive out, if at work take time out and drive over. Here’s the cost – opportunity cost of your time, car life and gas. Here’s the annoyance – getting it on your Kindle, figuring out whatever system they use. Here’s the lack of instant gratification - it’s not a 60 second download like Kindle books are.

There is no reason a reader would prefer walking to their local bookstore to buy an ebook over downloading it wirelessly.

However, we’re saying that readers love their local bookstore so much they will sacrifice for it. They’ll waste their time and money and delay gratification to walk over. That’s one huge assumption.  

No matter how much people love their independent bookstore convenience wins out

You just finished a great book and want to read the next in the series – Do you wait till your next trip to your local bookstore? Do you get dressed and head out to buy the ebook right now? Do you download it to your Kindle and get it in 37 seconds?

The third option is easily the most appealing - it’s instantaneous, easy, and takes close to zero effort. No matter how much people love their local they are not going to wait till it’s next open to buy a book they want to read now. No matter how much readers care about local bookstores they are not going to exclusively buy from their local bookstore.

As far as local bookstores vs Amazon.com it’s worth pointing out that the 4 special, magical qualities of the independents mentioned by the ABA (trust, knowledge, selection, love) are matched by Amazon and B&N for the most part.

The gap isn’t as huge as the ABA would like to believe. Even if there were a huge gap it wouldn’t matter because convenience wins out. So we can forget the notion that people will stroll over to their local bookstore to buy ebooks.

No one’s going to buy ebooks from a Local Bookstore website

Second, let’s get rid of the wishful thinking that rather than download books directly to their Kindle or browse Amazon.com for reviews users are going to go to their local independent bookstore’s website and buy ebooks from there.

Local bookstores think users are going to learn how to use a brand new website, figure out how to get those ebooks working on their Kindles and Nooks, and then stick with these new websites and the hassle of trasnferring books over. That’s a pretty huge assumption (we’re beginning to see a pattern) and a particularly unreasonable one.

The current ebook delivery system is almost perfect – Both Kindle and Nook have in-built stores that wirelessly deliver ebooks instantly. There’s no market demand for a new system. There’s no room for an alternate delivery mechanism. To think that users would choose a less elegant delivery system because they love their local bookstore is madness.

What about eBook value add features?

Are the local bookstores going to provide syncing of notes? What about a Cloud users can access their ebooks from? Are they going to offer free Internet browsing and free Wikipedia access?

Local bookstores can’t provide all these value-add features. They’re bringing a knife to a gunfight.

How are local bookstores going to survive on a single digit share of revenue?

Last, let’s look at the enormous reward local bookstores get for teaching their customers to switch to ebooks and eReaders – A single digit share of revenue.  

Why are local book store owners not realizing that their prize is a puny 9% of book revenue?

How is that going to sustain them? Would have loved to listen in on the conversations that sold local bookstores on selling ebooks.

You know how you get 30% to 40% of list price on books. That isn’t sustainable. Everything is moving to ebooks and they’re already at 8.4% market share.

You should help hasten the switch from 91.6% physical books to 25% physical books.

You get only 9% of revenue instead of 40% – However, let’s not dwell on that.

The only thing local bookstores are providing is trust and their brand. The rest is outside their control - they don’t have the expertise or knowledge to build an ebook delivery system or an eReader themselves. They’re just helping move their customers from a system they excel in (physical books) to something they have no clue about (eReaders, eBooks).

Bookstores must be truly desperate and blinded by fear - Why else would they help accelerate the switch from physical books to ebooks?

What’s the reality of Publishing, eBooks, eReaders?

Jack Welch has this set of 6 rules and one of them is -

Face Reality as it is, not as it was or as you want it to be.

It’s ridiculously difficult to actually face reality because reality is often painful and we’re set up to avoid things that are painful – our natural inclination is to see things as we want them to be.

This inability to face reality is why you see people carry on with obvious delusions.

Reality about Publishing and eReaders

Here are things that readers might not like to face up to (that includes me) -

  1. There will always be some company or entity (or a group of companies) that controls most of Publishing. Truly open and non-profit focused systems are always taken over.  
  2. Publishers perform a very valuable function. 
  3. The shift from print to digital probably only saves 10 to 20% of costs.
  4. A benevolent, open type system like the Internet is more likely to kill authors than liberate them. Look at what is happening with blogs and content creators online.
  5. It costs a lot of money to create quality content.
  6. Quality will suffer if Publishers die out.
  7. A lot of people don’t care about reading. It might be as much as 70% of the population. For them video games and TV really are better than books.
  8. Young kids are growing up without as many books as we did.
  9. The most benevolent seeming companies are usually the most dishonest.
  10. Most of the companies jumping into books don’t care about books or about readers.

To expand a little bit on the first -

A corporation that makes profit will have more profit than someone doing things for free.

A company that builds a walled garden will have more control and revenue channels than someone who doesn’t.

The company with more profit and resources and a walled garden easily beats out the ‘doing everything for free’ company.

The only company that can threaten closed gardens is a company that pretends to be an open garden but focuses entirely on profit and path of least resistance. In a strange twist the only company that can beat an evil, closed company is a dishonest, apparently open company.

Publishers and Companies have their own delusions

Here are things that Publishers might not like to face up to -

  1. They can’t put the cat back in the bag.  
  2. As they are currently set up they just can’t compete.
  3. They are at the mercy of the platforms.
  4. By letting in Apple they are ensuring they end up with one or both of Apple and Amazon’s platforms.
  5. If they succeed in killing off eBooks they might get power but they’ll shorten the lifespan of Publishing.
  6. $10 ebooks on eReaders are a better business model than $25 hardcovers – even for Publishers.
  7. Readers just want to read books and couldn’t care less what happens to Publishers.
  8. Authors are much, much stronger brands than Publishers.
  9. Publishers contribute 20% of the value and get 80% of the control and 50% or more of the profits. It’s all due to having power and resources. A lot of their ability to earn is a function of having money and power and not any ability to craft books.
  10. They are replaceable. Quality will suffer – however, they are replaceable.

Here are things that Amazon and Apple might not like to face up to -

  1. Their enemies have a very strong argument about openness.
  2. The argument is strong because people are fundamentally opposed to paying for content. It’s about readers’ self-interest, not right or wrong.
  3. They will have anti-trust sooner or later because their models are too powerful. In the tech field exceptional excellence is always rewarded by anti-trust cases and accusations of being ‘evil’.
  4. Google will release advertising supported books and they will channel search users to Google Editions.
  5. People will flock to cheaper books. Even if they have advertising people will choose cheaper books (we do mean the majority of people).
  6. eReader companies are stupid enough to kill their eBook revenue channels (to compete with Apple and Amazon).
  7. Publishers are critical for quality.

Amazon and Apple are the most honest to themselves and do mostly see things as they really are. Here are a few examples -

  • They both realize that they have to control every aspect because otherwise they will become commoditized.
  • Amazon building up every aspect of Publishing including encore, print on demand, the kindle store, and kindle app store.
  • Apple leveraging Publishers to kill Amazon’s price advantage.
  • They don’t buy the hype about openness – They obviously see through the posturing.
  • They prefer to be honest and earn their money upfront. They realize that sooner or later people will become smart enough to realize there is no free lunch.

It’s not a random coincidence that Amazon and Apple are seeing more success than any web companies (with one obvious exception).

Reality about eReaders and eBooks

Here are the things about eReaders that eReader companies might find hard to swallow -

  1. eReaders are successful mostly because readers love to read. Otherwise, technologically they don’t meet the bar.
  2. The success of eReaders had more to do with meeting an unfulfilled market need than the beauty of the eReader.
  3. LCD based devices are evolving faster than eInk based devices. This includes value for money, app stores, and usability. It also includes reading experience. It means that it’s more likely multi-purpose devices kill eReaders than eReaders survive.
  4. Apart from the Kindle most eReaders are very difficult to use and have terribly unsatisfying user experiences. Even the Kindle pales when compared to the iPhone – It’s an unfair comparison because the technology and the stage of the device’s evolution are different – However, users don’t factor that in.
  5. eReaders don’t earn their $259 until eBook costs are factored in.
  6. Once the agency model kicks in eReaders will have to earn that $259 based on what they bring to the table (since there will be no $10 books).
  7. The third generation of eReaders are it – If they don’t get it right there’s a 90% chance eReaders die out.

There are two directions for eReader devices to go in – Make eInk based multi-purpose devices or make much better reading focused devices. They might have to do both to survive – perhaps not in the same device but both nonetheless.

Finally, we get the inconvenient truth about ebooks -

  1. Publishers (consciously) and eBook stores (unconsciously) are combining to create low quality and inconvenient to purchase ebooks.
  2. eReaders create a good reading experience. However, they don’t add as much additional value as they could – For example, only one eReader has text to speech.
  3. eBooks are probably going to die out with the Agency Model. 
  4. $10 eBooks only work because the used book market and sharing are cut out. In addition they might need a minimization of piracy to survive.
  5. A lot of people value ebooks at zero. Some of them will pirate books and encourage piracy.
  6. Without low prices and convenience very few people would choose ebooks.  
  7. Publishers have only one aim – to kill eBooks.

Not facing up to reality would mean a world without dedicated reading devices

Publishers who think they should get 70% of ebook prices and ebook prices should be $15. Readers who think ebooks should be $3. eReader companies who think they can take it easy and don’t have to evolve faster than LCD devices.

All three are combining to ensure the end of ebooks and dedicated reading devices. The Agency Model might do it all by itself.

The reality is that users aren’t forced to buy books, books are competing with other forms of entertainment, and eReaders are competing with other devices that can be used for reading. There are going to be winners and losers and even after facing and embracing reality eReaders might not survive.

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