The Newsonomics of Pricing 101 | Epicenter » Media

When the price of your digital product is zero, that’s about how much you learn about customer pricing. Now, both the pricing and the learning is on the upswing.

The pay-for-digital content revolution is now fully upon us. Five years ago, only the music business had seen much rationalization, with Apple’s iTunes having bulled ahead with its new 99-cent order. Now, movies, TV shows, newspapers, and magazines are all embracing paid digital models, charging for single copies, pay-per-views, and subscriptions. From Hulu Plus to Netflix to Next Issue Media to Ongo to Press+ to The New York Times to Google Play to Amazon to Apple to Microsoft (buying into Nook this week), the move to paid media content is profound. The imperative to charge is clear, especially as legacy news and magazines see their share of the rapidly growing digital advertising pie (with that industry growing another 20 percent this year) actually decline.

Yes, it’s in part a 99-cent new world order as I wrote about last week (“The newsonomics of 99-cent media”), but there are wider lessons — some curiously counterintuitive — to be learned in the publishing world. Let’s call it the newsonomics of Pricing 101. The lessons here, gleaned from many conversations, are not definitive ones. In fact, they’re just pointers — with rich “how to” lessons found deeper in each.

Let’s not make any mistake this week, as the Audit Bureau of Circulation’s new numbers rolled out and confounded most everyone. Those ABC numbers wowed some with their high percentage growth rates. Let’s keep in mind that those growth numbers come on the heels of some of the worst newspaper quarterly reports issued in awhile. Not only is print advertising in a deepening tailspin, but digital advertising growth is stalled. Take all the ABC numbers you want and tell the world, “We have astounding reach” — but if the audience can’t be monetized both with advertising and significant new circulation revenues, the numbers will be meaningless.

When it comes to dollars and sense, pricing matters a lot.

Let’s start with this basic principle: People won’t pay you for content if you don’t ask them to. That’s an inside-the-industry joke, but one with too much reality to sustain much laughter. It took the industry a long time to start testing offers and price points, as the The Wall Street Journal and Walter Hussman’s Arkansas Democrat-Gazette provided lone wolf examples.

The corollary to that principle? If you don’t start to charge consumers — Warren Buffett on newspaper pricing: “You shouldn’t be giving away a product that you’re trying to sell.” — then you can’t learn how consumers respond to pricing. Once you start pricing, you can start learning, and adjust.

We can pick out at least nine emerging data points:

• 33 to 45 percent of consumers who pay for digital subscriptions click to buy before they ever run into a paywall. That’s right — a third to a half of buyers just need to be told they will have to pay for continuing access, and they’re sold. As economists note that price is a signal of value, consumers understand the linkage. Assign what seems to be a fair price, and some readers pay up, especially if they are exposed to a “warning” screen, letting them know they’ve used up of critical number of “free” views. Maybe they want to avoid the bumping inconvenience — or maybe they just acknowledge the jig’s up.
• If print readers are charged something extra for digital access, then non-print subscribers are more likely to buy a digital-only sub. Why pay for digital access if the other guys (the print subscribers) are getting it thrown in for “free”? Typically, Press+ sees a 20-percent-plus increase in signups on sites that charge print subscribers something extra. That extra may be just a third or so of the price digital-only subscribers pay (say, $2.95 instead of $6.95), but it makes a difference. Consequently, Press+ says 80 to 90 percent of its sites charge print subscribers for digital access. The company now powers 323 sites and thus has more access to collective data than any other news-selling source.
• You can reverse the river, or at least channel it. The New York Times took a year, but figured it out righter than anyone expected. It bundled its Sunday print paper (still an ad behemoth) with digital, making that package $60 or so a year cheaper than digital alone. The result, of course, is that Sunday Times home delivery is up for first time since 2006. It’s not just NYT or the L.A. Times that have embraced Sunday/digital combos. In Minneapolis, the Star Tribune began a similar push in November. Now, of its 18,000 digital-only subscribers, 28 percent have agreed to an add on the Sunday paper, for just 30 cents a week, says CEO Mike Klingensmith (“A Twin Cities turnaround?”). So we see that consumers may well be more agnostic about platform than we thought. Given them an easy one-click way of buying even musty old print, and they will. Irony: If you hadn’t charged them for digital access, you probably wouldn’t have sold them on print.
• New products create new markets. 70 percent of The Economist‘s digital subscribers are not former print subscribers, says Paul Rossi, managing director and executive vice president for the Americas. That’s surprising in one sense, but not in another. Newspaper company digital VPs will tell you that they’re surprised to see how little overlap there is between their print audience customer bases and their digital ones. The downside here: Many print customers seem not to value digital access that much. The Star Tribune is finding a low take rate of 3 percent of its Sunday-only print subscribers willing to take its digital-access upsell. One lesson: The building of a new digital-mainly audience won’t be easy and will require new product thinking; it’s not that easy just to port over established customers.
• The all-access bundle must contain multiple consumer hooks. Sure, readers like to get mobile access as well as desktop and print, and maybe some video. Yet some may especially prize the special events or membership perks they are offered, as the L.A. Times is banking on (and start-ups Texas Tribune, MinnPost, and Global Post have applied outside the paywall model). Some will like the extras, like The Boston Globe telling its new 18,000 digital subscribers, as well as its print ones, that they now get “free” Sunday Supper e-books (“The newsonomics of 100 products a year”). Sports fanatics or business data lovers will find other niches to value — and ones that make the whole bundle worthwhile. Archives — and the research riches they offer — will prove irresistible to some. In 2012, a bundle may offer a half-dozen reasons to buy, casting a wide net, with the hope that at least one shiny lure will reel in the customers. By 2013, expect “dynamic, customized offers,” targeting would-be buyers by their specific interests to be more widely in use.
• While pageviews may drop 10 to 15 percent with a paywall, unique visitors remain fairly constant. We see the phenomenon of those who do hit a paywall one month coming back in subsequent months, rather than fleeing forever. “It may be the second, third, or fourth month before someone says, ‘I guess I am a frequent visitor here, and I’ll play,’” says Press+’s Gordon Crovitz.
• Archives find new life. Archives have lived in a corner of news and magazine websites for a long time. They’ve been used, but not highly used or highly monetized. Now, courtesy of the tablet, and a new way to charge, The Economist is finding that 20 percent of its single copy sales are of past issues. Readers will pay for the old in new wrappers, whether back e-issues, or niched ebooks. The all-access offer can be much wider than cross-platform, or multi-device. It can extend across time, from a century of yesterdays to alerts for tomorrow.
• News media is probably underpriced. Take the high-end Economist. CEO Andrew Rashbass — speaking to MediaGuardian’s Changing Media Summit 2012, in a recommended video — said that a survey of its subscribers showed that a majority didn’t know how much they were paying for the Economist. When pressed to guess, most over-estimated the price. At the Columbia (Missouri) Daily Tribune, an early paywall leader in the middle of America, a recent price increase to $8.99 from $7.99 has so far resulted in no material loss of subscribers. At Europe’s Piano Media, early experience in Slovakia and Slovenia is that price isn’t a big factor, says Piano’s David Brauchli. “Payment for news on the web is really more a philosophical mindset rather than economic. People who are opposed to paying will always opposed to paying and those who see the value of paying don’t mind paying no matter what the price is.” That suggests pricing power. It makes sense that publishers, new to the pricing trade, have approached it gingerly. Yet the circulation revenue upside may well be substantial.
• Bundle or unbundle — what’s the right way? Mainly, we don’t know yet, and the answer may be different for differing audience segments. The Economist started with print being a higher price than a separate digital sub. Then it raised the digital price to match that of print — to assert digital value. It now offers all-access: one price gets you both. Next up: You can buy either print or digital for the same price, but if you want both, you’ll pay more. It’s an evolution of testing, and so far, it’s been an upward one.

Overall, this is a revolution in more than pricing. It’s a revolution in thinking and, really, publisher identity.

The Boston Globe’s Jeff Moriarty sums it up well, as his company aims (as has the Financial Times before it: “The newsonomics of the FT as an internet retailer”) to emulate a little digital-first company called Amazon:

I think overall publishers have to start thinking more like e-commerce companies. More like Amazon. You can’t just throw up a wall or an app and expect it to just sell itself. We’re still building that muscle here at the Globe, and some of our colleagues in the industry are even farther along. We have extensive real-time and daily analytics and are employing multivariate testing to try offers and designs to refine the experience that works best for each type of user.

A/B Testing: Why Is a Financial Times Subscription So Expensive? | Epicenter » Media

Wired has a big article on A/B testing this month, which makes a good point:

Today, A/B is ubiquitous, and one of the strange consequences of that ubiquity is that the way we think about the web has become increasingly outdated. We talk about the Google homepage or the Amazon checkout screen, but it’s now more accurate to say that you visited a Google homepage, an Amazon checkout screen.

But it’s not just web pages that change with A/B testing, it’s prices, too. And Exhibit A in this regard is the Financial Times. Go to this page, laying out the cost of subscribing to the FT, and you could get any number of different prices. A standard online subscription in the United States, which excludes the Lex column and a handful of other extras, shows up for some people as $4.99 a week. Others see $5.39, $5.75, $5.79, or $6.25. Guan Yang reported this morning, for instance, that on his first attempt at viewing the FT page, he was given a price of $4.99; when he opened the same page in Chrome, the price was $6.25. Chrome for Windows, meanwhile, revealed a price of $5.39.

All of these prices are pre-tax, and are weekly based on an upfront annual commitment: the equivalent of those newspaper ads touting incredibly low airfares which are “one-way based on round-trip purchase” and exclude hundreds of dollars in taxes. When I subscribed to the FT last year, they charged me an extra 8.88% in sales tax — which means that someone buying a subscription at $6.25 a week will end up seeing their credit card charged a total of $353.86.

What’s more, Rob Grimshaw, the FT managing director who sets all these prices, tells me that in fact that annual price is “heavily discounted because those customers are paying a real price of an online subscription, by that measure, is $35 a month. Which, adding on sales tax, comes to $457.29 per year. And that includes no premium content at all.

By contrast, a basic online subscription to the NYT is $15 every four weeks, tax included: that’s $195 per year. And the WSJ charges $17.29 every four weeks, or $224.77 per year; it’s a bit cheaper, $207.48, if you pay by the year. It’s not the NYT which is the outlier, it’s the FT.

Even if you reload that FT page in multiple browsers on multiple operating systems and eventually get the cheapest possible $4.99 offer and pay a whole year up front, you’re still paying $282.52 for a year’s access, which is 36% more than the WSJ charges. The recommended retail price, or RRP — the default amount that the FT will charge me for renewing my subscription — is $353.86, or a 70% premium over the WSJ rate. And if I want the full FT online package, including Lex, then that’s $486.35 annually, or 2.3 times the cost of a WSJ online subscription. Alternatively, it’s $53.35 per month, which means that you end up paying more in four months than you would for a full year of the WSJ.

I don’t think it’s any coincidence that I run into the FT paywall much more often than I run into any other paywall. Grimshaw says that the problem of hitting the paywall when following links on Twitter or Facebook “was fixed some months ago and seems to be working well”; I’d beg to differ. He also says, more encouragingly, that there will be social login later this year, which will allow non-subscribers to view a (very) limited number of articles by logging in with their Twitter or Facebook accounts, rather than having to set up and remember an FT-specific username and password.

But I fear that so long as the FT keeps up this super-premium pricing strategy, it’s going to wind up chasing local maxima. Here’s how the Wired article puts it:

A/B tests might create the best possible outcome within narrow constraints—instead of pursuing real breakthroughs. Google’s Scott Huffman cites this as one of the greatest dangers of a testing-oriented mentality: “One thing we spend a lot of time talking about is how we can guard against incrementalism when bigger changes are needed.”

If you test lots of prices for your FT subscription, it makes sense that the higher the subscription price, the higher the revenues generated, and the higher the publisher’s profits. Most of the FT’s subscribers have very little price sensitivity: either they’re on expense accounts, or they’re incredibly rich, or their subscriptions are handled by some kind of support staff and they never even know how much they’re paying. In that world, it makes sense to raise the RRP as much as possible, since the RRP is the rate that all renewals get charged at, and most renewals are automatic. Even if the amount stands out on some expense report and eyebrows get raised, the FT, by policy, won’t refund the payment. “We do not provide refunds to customers who wish to cancel their subscription mid-term but the subscription will remain valid until the term of the subscription expires” is how Grimshaw puts it in the official FT email.

The result is that the FT’s readership will slowly drift further and further away from the 99% — something which has to affect its journalism at some point. When real people look at the price of an FT subscription, they’ll have much the same reaction as they do when they look at the prices at Cipriani. They won’t just refuse to pay, they’ll take away the understanding that the FT was never written for them in the first place, and that the readership of the FT is a chummy group of of rich people who probably like the exclusivity that a high entrance price provides. It’s like the membership fees at exclusive golf clubs, designed more to keep the middle class out than to actually pay for any particular service.

And while it’s possible to make the case that the global 1% is big enough and rich enough to comfortably support a publication like the FT, it’s dangerous to chase that demographic too assiduously, to the exclusion of everybody else. If you want to be a newspaper rather than a newsletter, you have to aspire to being more than a service vehicle for bankers.

After all, it’s pretty much impossible to make the case that the journalism in the FT — the product being paid for — is so better than the journalism in the WSJ or NYT that it’s worth twice as much money. Especially when much of the best FT journalism is still free, on Alphaville and Martin Wolf’s Economists’ Forum.

What’s more, at least for readers in the US, the FT isn’t remotely comprehensive enough to suffice as a one-stop shop for business news. The FT has some fantastic content, but it needs to be read in addition to, rather than instead of, the NYT / WSJ / Reuters / Bloomberg. As a result, you need to be really price-insensitive to buy it: you can get access to all four of those sources online for less than the price of a single premium FT subscription. When a five-course meal costs twice as much as a four-course meal, you generally go with the four courses.

And as I can attest, because news is social, you don’t end up reading the FT very much even after you’ve paid through the nose for your subscription. I read news which is shared with me, and the people in my social circles don’t share FT stories all that often. In turn, I want to read news I can share, and it’s very hard to share FT stories, since I can’t assume that the people in my social circles, or the people reading Counterparties, have FT subscriptions.

This I think is the real problem with the FT’s pricing strategy. In the old world, the more you charged for a subscription, the more it was valued, and the more your journal was read by its subscribers. In the social world, the more you charge for a subscription, the less it gets read by its subscribers. As a result, the amount I end up paying per story that I read becomes enormous. I kinda wish the FT had a ticker, like the NYT did at one point, telling me how many stories I’ve read this month. It would give me some kind of masochistic thrill, working out what vast sum I was paying per article. Either way, over the long term, the marginal cost of reading an FT article will become so high that even business-news junkies like myself won’t be able to justify it any more.

On the other hand, there could be a silver lining here. The FT’s pricing doesn’t make sense as a long-term strategy: it makes new-customer acquisition extremely difficult, and it only serves to remove the FT ever further from the minds of the global professionals it really wants to reach. As a short-term revenue-maximization strategy, on the other hand, charging people as much as $640 a year for an online-only subscription makes all the sense in the world. And if Pearson intends to sell the FT in the next year or two, it would surely love to be able to point to healthy profits and cashflows as a way of justifying some enormous purchase price.

I’m going to hold out hope, then, that the FT’s prices are a temporary aberration, a way of extracting some huge sum from potential buyers. I don’t really think that the FT will ultimately end up being sold on some multiple of profits or cashflows, but those things can never hurt when you’re deep in negotiations. Once the FT is finally sold, to Thomson Reuters or to somebody else, its subscription price will be able to revert to reality. But it’s not going to come down before then.

Update: My commenters have worked out that if you really want a cheap FT subscription, you can get one for less than $50 if you live in India, and you’re more than welcome to pay with a foreign credit card. This actually works, it seems, for people with VPNs.

Adobe Reaches Out to the Next Generation of Creatives | Epicenter » Media

NEW YORK — The Adobe suite (that is to say, Photoshop, InDesign, Illustrator and the like) has become part of the American lexicon, even for those who don’t need to use the software. Today, in a conversation with Wired Editor-in-Chief Chris Anderson, Adobe CEO Shantanu Narayen explained how the Adobe suite will move from being the tool of the creative professional to become the tool of creative amateurs.

Like the rest of us, Adobe is migrating from the PC to mobile, to what they are calling the Creative Cloud. “It always starts with the customer,” said Narayen at the Wired Business Conference.

“Before, creation was tethered to a PC. The creative process is no longer going to be there, and now it’s going to happen whenever creation strikes,” Narayen explained. By re-imagining the entire creative process, or by untethering it, companies like Adobe can take advantage of tablets as devices that are for creation, and not just consumption.

The Creative Cloud is really quite simple: subscribe and get access to the technology as it emerges. This way, because the tech can evolve at a faster pace, the business model will also change dramatically, becoming more of a pay-as-you-go subscription process.

Part of this new method, said Narayen, is addressing the next generation of creators, “who are far more comfortable with the uncertainty and ambiguity of the cloud.”

Part of opening up Adobe to mobile devices is about changing the business model. Narayen explained that Adobe, is part of a multi-step process, creating annual update cycles for a more regular cadence. In a time of such incredible innovation, he said, if Adobe kept up their regular 10-month cycles, they would fall behind. Even though new growth is expected to come from the cloud and new products that are only available on the cloud, Adobe will still keep providing its traditional desktop products.

“Wall Street looks at this and says, ‘Wow, this is going to be disruptive.’ I look at it and say, this will increase revenue over time, making the revenue stream more predictable.”

Part of what Adobe has been up to lately has been measuring user engagement. The cloud is what Narayen is calling a “do-over” for publishers. “How can we look not just as content creation but also as management and delivery and monetization? First we’ll help you create content, then we’ll tell you who’s been viewing it and how many times. We are looking at this as a natural extension of what the publishing community needs.”

As far as tablets as a new form of media are concerned, Narayen said that Adobe has learned that people are spending more time on these devices than on the web. But they have also learned that these devices and how they are used are still a work in progress. Currently, said Narayen, there is a tradeoff on richness of content and the bandwidth that is required to deliver on wireless devices. “Those are things we’re still working through.”

This is where Flash comes in. To be sure, there will be standalone apps that will emerge on all of these devices, enabling people to get the same experience across platforms and devices. HTML will evolve, Narayen said: “We are starting to see some incredibly rich animated interactive experiences on these devices, and more of that is going to happen with HTML,” on both browsers and on standalone apps.

Adobe’s relationship with Apple is still complex, a healthy combination of competition and collaboration, but Narayen maintains that Flash “is a great mechanism to push the envelop of what happens with richness and interactivity in two venues:” video and gaming for both PC and mobile.

The real growth for Adobe with the Creative Cloud, however, will come from education. “Moving to the cloud enables a huge new audience,” said Narayen. “There is no reason why individuals aren’t going to use the Creative Cloud for a paper.” Adobe wants to encourage a whole new generation of what they are calling “creatives,” or anyone that wishes to get their ideas out there, to use their software on whatever device they can.

This is clearly catching on: Adobe already has a new app for the iPad, Photoshop touch, which was the top-grossing app in the imaging and video category.

Photo: Shantanu Narayen, CEO of Adobe, speaks at the Wired Business Conference at the Museum of Jewish Heritage on May 1, 2012 in New York City. (Photo by Larry Busacca/WireImage for Wired)

Microsoft + Nook: It Just Got (More) Interesting … | Epicenter » Media

You think markets are efficient? Check this out: Barnes & Noble stock opened 2012 at $14.75 per share and falling fast; by January 5, the opening price was just $9.50. At that price, the entire company was worth just $550 million, and there was a very real fear that the entire company could go to zero, following in the footsteps of Blockbuster and other real-world retailers selling content more easily bought online.

Today, of course, all that has changed. Barnes & Noble has sold a 17.6% stake in its digital and college businesses to Microsoft, for $300 million — a deal which values B&N’s remaining 82.4% stake at $1.4 billion. And while the $300 million is staying in the new joint venture and therefore not available to help the bookstore chain with cashflow issues, the news does mean that Barnes & Noble won’t need to constantly find enormous amounts of money to keep up in the arms race with Amazon. That’s largely Microsoft’s job, now.

This deal is a bit like one of those high-profile investments by Warren Buffett in a distressed company: a vote of confidence by someone powerful enough to be able to fund the struggling firm through its troubles. Except in this case, the Microsoft investment is much bigger than that, since it comes with deep integration into the Windows 8 operating system. Barnes & Noble no longer needs to sell Nooks, or persuade people to download the Nook app on their iPad: everybody with a Windows 8 device will have the Nook reader built-in.

The e-book market is still young; if Amazon continues to be seen as the enemy, there’s no reason in theory why the Nook shouldn’t become just as popular, if not more so. It’s true that you can’t read Kindle books on your Nook, or vice versa, but over the long term, we’re not going to be buying Kindles or Nooks to read books. Just as people stopped buying cameras because they’re now just part of their phones, eventually people will just read books on their mobile device, whether it’s running Windows or iOS or something else. And that puts Amazon at a disadvantage: the Windows/Nook and iOS/iBook teams will naturally have much tighter integration between bookstore and operating system than anything Amazon can offer.

All of which has lit a real fire under the Barnes & Noble stock price, which opened at $25.79 this morning and looks as though it’s going to close somewhere between $20 and $25 per share. That’s an increase of much more than $300 million in market capitalization, and there’s upside, too: the valuation of the parent is now equal to the value of its stake in the subsidiary. So if the subsidiary rises in value, or if the rest of the company is worth anything at all, then the shares can rise further from here.

The one thing you can certainly expect, though, is volatility. Because Barnes & Noble is no ordinary stock. There are 60.2 million shares outstanding, but of that total the free float — the shares freely traded on various stock exchanges — is just 26.82 million. Meanwhile, at last count, the short interest in Barnes & Noble — the number of shares which had been borrowed by people selling them in the expectation that they would fall — was a whopping 19 million shares.

This, ladies and gentlemen, is what is commonly known as a short squeeze. All those shorts have lost a fortune today, and they’re going to have to cover sooner rather than later, driving the price up artificially. So at least for the next few days, it’s probably worth taking any market valuation for Barnes & Noble with a bit of a pinch of salt: technical factors are likely to overwhelm fundamentals until the shorts have retreated, licking their wounds.

After that, however, we finally have a real three-way fight on our hands in the e-book space, between three giants of tech: Apple, Amazon, and Microsoft. And that can only be good for consumers.

Photo: Barnes & Noble, Union Square, November 2011. By Tim Carmody

Microsoft Finds A New Nook in E-Books | Epicenter » Media

Microsoft announced Monday that it is investing $300 million in the Nook, the Barnes and Noble e-reader that is the closest competitor to Amazon’s Kindle. The investment gives Microsoft a 17.6 per cent stake in a new entity valued, based on the infusion, at $1.7 billion.

While they have yet to name the new company — it is referred to as Newco in the statement — the new partners did announce that there will be a Nook app in Windows 8, Microsoft’s next-generation desktop OS expected to launch with a near-final version in June. As part of the deal the two companies have also settled patent litigation. Microsoft previously announced the end of Microsoft Reader, effective August 30, 2012.

Unlike Borders, Barnes and Noble has managed to jump across book publishing’s digital divide, created by Amazon’s release of the first-generation Kindle not quite five years ago. But while the nation’s largest book retailer still operates several hundreds of stores — and earned $1.49 billion from them in its most recent quarter —  that amount represents only a two percent year-over-year increase (and was likely helped considerably by the dissolution of Borders). On the other hand Nook sales — which includes the readers, accessories and e-books — increased 38% to $542 million in the quarter.

Clearly it’s in the digital play that any real growth exists. That was the reason Barnes & Noble announced in January that it was exploring ways to somehow separate the Nook: The better to clear the field for a business with different needs — and prospects — than print and retail establishments.

“This is about requiring sustained investment in the Nook business to grow and expand internationally,” Forrester analyst Sarah Rotman Epps told Wired at the time. “A separate Nook business may be able to attract new investment and partnerships and innovate more quickly.”

Apparently so. Now B&N not only has new cash on hand but a global distribution partner whose desktop software — unlike the Nook — is used in every corner of the world. As for that separate Nook division? Like the name of this Microsoft/Barnes and Noble tie-up, that’s still up in the air.

“Barnes & Noble is actively engaged in the formation of Newco, which will include Barnes & Noble’s digital and College businesses,” the statement says. “The company intends to explore all alternatives for how a strategic separation of Newco may occur. There can be no assurance that the review will result in a strategic separation or the creation of a stand-alone public company, and there is no set timetable for this review. Barnes & Noble does not intend to comment further regarding the review unless and until a decision is made.”

Photo: The Nook Simple Touch with GlowLight makes makes it possible to read in the dark. Courtesy Barnes & Noble

Be Very Afraid: The Cableization of Online Life Is Upon Us | Epicenter » Media

Earlier this month, I had an evening meeting in D.C. followed by a class to teach in Boston the following day. I had just one choice for a flight: the US Airways 9 p.m. shuttle. Attempting to board right after the first-class passengers, I was blocked by the gate agent, who pointed to the viola on my back: “You’ll have to gate check that. That’s a musical instrument, and we don’t allow those on board.”

In case you don’t play a stringed instrument, take it from me: You can’t check them. They’re fragile and easily wrecked by very low or very high temperatures. Musicians had such a hard time with the arbitrary conduct of airlines that they persuaded Congress in 2012 to require airlines to accommodate musical instruments if they fit in the overhead bin.

There was plenty of room in the overhead compartments at that moment. Then came the moment of truth: I asked whether the case could travel in the closet at the front of the plane. “No,” she said. “That’s just for first class.”

Look, we all have travel stories. I just happened to confront a particularly crazy gate agent. (My colleague who managed to get on the plane that night told me that the agent later actually boarded the plane to force a passenger to remove from the overhead bin a bag that she didn’t feel should be there. “It was surreal; sort of how a B-movie would make Aeroflot customer service seem,” he said.)

After a night at a friend’s house in D.C., I went back to the airport to catch a morning flight. Same airline, same gate, different gate agent: No problem. I caught up with my luggage at Logan and taught my class.

Just imagine trying to run a business that is utterly dependent on a single delivery network — a gatekeeper — that can make up the rules on the fly and knows you have nowhere else to go. To get the predictability you need to stay solvent, you’ll be told to pay a “first class” premium to reach your customers. From your perspective, the whole situation will feel like you’re being shaken down: It’s arbitrary, unfair, and coercive.

Netflix CEO Reed Hastings is feeling just this way. He’s trying to get Americans to care about Comcast’s power to exempt “first class” streaming video delivered to Xboxes from its monthly internet usage caps.

Comcast here is playing the role of the gate agent: Video that Comcast directs down particular channels to particular devices won’t trigger the cap. So customers who watch Comcast’s stuff won’t have to worry about losing internet access — something they need to send e-mail and otherwise participate in 21st-century life — by blowing by the cap. (That closet was available to people flying first class with instruments, but not to me.) Same pipe, same function, same physical connection to your home, different treatment.

Although Comcast is doing its best to drag this conflict down into the weeds of network architecture technicalities, the big picture is clear: This is the leading edge of the cableization of online life.

Imagine what’s possible from Comcast’s perspective: If you can slice and dice traffic, play definitional chess (“that’s not the internet, that’s a specialized service!”), and be the only game in town, you’ll get to replicate the cable model by making sure that every successful online application owes its success in part to you and pays you tribute.

Remember, Al Jazeera can topple authoritarian regimes but cannot get carried by Comcast (and is available in only five places in the U.S.). Why is that? Because Comcast and the other major cable distributors get to decide who wins and who loses, and under what terms. Negotiation isn’t a real option unless the programmer has power or is willing to share a big chunk of its revenues (or both). Now that same construct is coming to the online ecosystem.

There will be online companies who will think this distribution mechanism is a great idea, because it comes with guarantees of service quality and the ability to reliably reach a relatively affluent demographic slice of our country.

They’ll all, online companies, programming entities, and cable distributors alike, call one another “partners.” And, as Johnny Ola says to Michael Corleone in The Godfather: Part II: “Hyman Roth always makes money for his partners. One by one, our old friends are gone. Death, natural or not, prison, … deported. Hyman Roth is the only one left, because he always made money for his partners.”

This is a good deal for a large group of large companies. But none of this is good for consumers or for upstarts. At the same time that streaming video is growing increasingly more popular, it’s also becoming clearer that Comcast and its essentially unregulated cable brethren don’t face competition for wired distribution other than from Verizon FiOS (which doesn’t exist in most of the country and is prohibitively expensive).

It’s increasingly clear that people who want to watch over-the-top video and drop their cable subscriptions will be left with leftovers, because Netflix doesn’t want to be shaken down by Comcast — and programmers can’t run the risk of being punished by Comcast.

In short, in a world of clouds and screens, only Comcast gets choices.

Comcast is a great American success story. It’s not an evil company; its motives just don’t necessarily align with the greater good. Reed Hasting’s full-throated attack on Comcast can be read as either self-serving or as a defense of consumers. However it’s read, it’s likely that very few people in power in Washington will step forward to join Netflix in this fight against arbitrary, unregulated power over an essential consumer utility — the high-speed wire to our homes and businesses.

That’s a shame.

Photo: Remote to a Comcast television receiver, By MoneyBlogNewz/flicker. Used with gratitude via a Creative Commons license.

Jimmy Wales to Hollywood: You’re Doomed (And Not Because of Piracy) | Epicenter » Media

GENEVA, Switzerland — Jimmy Wales has a message for Hollywood: You’re doomed, it won’t be piracy that kills you, and nobody will care.

Wales, delivering a keynote address at the Internet Society’s INET convention in Geneva, predicted that Hollywood will likely share the same fate as Encyclopedia Brittanica, which shut down its print operation this year after selling just 3,000 copies last year.

“Hollywood will be destroyed and no one will notice,” Wales said. But it won’t be Wikipedia (or Encarta) that kills the movie making industry: ”Collaborative storytelling and film making will do to Hollywood what Wikipedia did to Encyclopedia Britanica,” he said.

Wales hedged by saying predictions are easy — and he’s usually wrong. But he looks at a generation of kids growing up in a world of video and mastering editing software at a young age. His own 12-year-old daughter, Wales said, is already adept at iMovie and won a local award for a short film she made.

And just as Wikipedia has show that collaboration on the web is possible (despite the messiness, flame wars and turf battles found on Wikipedia Talk pages), the new generation will find ways to collaborate online to create movies to entertain themselves and their friends.

And, Wales says, they’ll do that with impressive special effects, CGI and even remote actors.

But telling a story and building a feature length film collaboratively is much different and much harder than collectively adding verifiable facts to a Wikipedia entry. So it’s unlikely that Hollywood’s going to pay much attention to Wales’ prognostication. Which means if the next generation turns out to find away to creating the next Titanic on a $5,000 budget, Hollywood won’t even see the blow coming.

Memeorandum Colors 2012: Visualizing Bias on Political Blogs | Epicenter » Media

I don’t watch sports, but every four years, I lose myself in the horse race of the U.S. presidential elections. That competition kicked off in earnest Monday, as Gallup started its daily tracking polls for the general election between Barack Obama and Mitt Romney.

In 2008, I was hooked on one drug for my daily fix: Memeorandum, a completely automated aggregator that surfaces popular stories from political news sites, often within minutes.

Codeword

Andy Baio

As you’d expect, the universe of political blogs is largely split in two, with conservative and liberal blogs rarely covering the same stories or linking to the same sites. But it can be very challenging to tell their political leanings at a glance, especially with names like “Balloon Juice,” “Weasel Zippers,” or “The Volokh Conspiracy.”

So, four years ago, I launched a project with Delicious/Tasty Labs founder Joshua Schachter to visualize the linking biases of various political blogs on Memeorandum by looking at their past behavior.

Using singular value decomposition, the linear algebra at the heart of your Netflix recommendations, we reduced the entire matrix of blogger-to-article relationships to a single dimension. Imagine a single line grouping like-minded blogs together based on the diversity of the stories they cover, with hardcore left- and right-leaning blogs on opposite sides of the spectrum.

Using those precalculated values, we load the data from Google Spreadsheets and color the links on Memeorandum, based on where they fall on the spectrum. The brighter the color, the more frequently they only cover stories by their counterparts.

This simple visualization leads to some interesting insights. Compare these two articles, which were trending on Memeorandum at this writing:
 Seeing each site’s potential bias provides the context for understanding how news is spread. Right-leaning blogs are eager to point out new evidence that George Zimmerman was hurt the day he shot Trayvon Martin, but left-leaning blogs aren’t covering that story. Likewise, only left-leaning news sites appear to be covering the news of Ted Nugent’s threatening remarks to the president, but conservative blogs aren’t. This visualization also makes it easy to spot outliers, the sources that are breaking away from their past behavior to link to something beyond their usual circle.

This browser add-on is free and open source. We’ve updated the data sources for the first time since 2008, and Memeorandum Colors now works natively in Chrome, in addition to Firefox.

You can try the browser add-on by following these simple directions.

Google Chrome

1. Click the memeorandum_colors.user.js link.
2. In the warning dialog at the bottom of Chrome window, select “Continue.”
3. Visit Memeorandum and wait a moment for the links to color.

Firefox

1. Install Greasemonkey.
2. Restart Firefox.
3. Click the memeorandum_colors.user.js link above, wait three seconds, and Install.
4. Visit Memeorandum and wait a moment for the links to color.

Four Years of Data

Along with this release, we now have four years of historical activity to work with. The collected scores are on Google Fusion Tables, and I’ve included a dump of the activity in Github.

Looking at historical activity can reveal some interesting trends, especially in how attitudes have shifted since the last election.

For example, Little Green Footballs is a long-running political weblog started by Charles Johnson, a web developer who aligned himself with the conservative right wing after the World Trade Center attacks. In late 2009, he publicly parted ways with the right.

That shift away from conservatism was reflected in his linking behavior at least a year before his public statement. If you look at the timeline below, you can see that Johnson started linking to a wider variety of stories outside the conservative conversation, until his activity was mostly neutral in early 2010. Now, his activity tends neutral but slightly favors articles popular in the liberal blogosphere.

Bias In Linking, Not Beliefs

Memeorandum was created by San Francisco developer Gabe Rivera, who followed its introduction with aggregators for media, celebrity gossip, and baseball news. The most popular of these is Techmeme, a daily destination for tech industry watchers.

A month after Obama’s election, Rivera announced he’d hired a human editor for Techmeme to help prevent inaccurate results from the algorithm. This editorial oversight would affect any link-based analysis on Techmeme, but he confirmed that Memeorandum is still completely machine-driven.

This automated analysis is not a commentary on the personal opinions and beliefs of any blogger — no amount of linear algebra can prove that. What this shows is the biases in their linking behavior: the stories that each site chooses to cover, or not cover, and their similarity to others like them.

If you’d like to learn more about the math behind how this works, there’s more detail and links to tutorials on my original blog entry.

Let me know if you have any questions and I’ll try to answer them in the comments.

Photo: A composite. (L) Republican presidential candidate, former Massachusetts Gov. Mitt Romney, speaks to a crowd during a campaign event, in Warwick, R.I., Wednesday, April 11, 2012. (AP Photo/Steven Senne). (R) President Barack Obama greets the crowd, Friday, March 30, 2012, in Burlington, Vt. Obama is in Vermont on a quick campaign swing that is going to include a series of fundraisers that are expected to draw more than 4,500 people. (AP Photo/Toby Talbot)

Jeff Bezos: ‘Even Well-Meaning Gatekeepers Slow Innovation’ | Epicenter » Media

Jeff Bezos’ annual letter to Amazon shareholders is a timely manifesto, unifying the company’s expansive range of businesses, justifying its approach to established markets, and marking as a target anyone who stands in its way.

The letter, released Friday morning, begins with extensive quotes from customers praising Amazon Web Services, Fulfillment by Amazon and Kindle Direct Publishing. The unifying thread? All three platforms are “self-service.”

“The most radical and transformative of inventions are often those that empower others to unleash their creativity – to pursue their dreams,” writes Bezos. “These innovative, large-scale platforms are not zero-sum – they create win-win situations and create significant value for developers, entrepreneurs, customers, authors, and readers.”

The only people and institutions who lose in this scenario, according to Bezos’ logic, are the intermediaries: salespeople, lawyers, publishers. These interests, whether they realize it or not, only stand in the way of the innovation and beneficence Amazon’s inventions help to unlock. At least, that’s how Jeff Bezos sees it.

“I am emphasizing the self-service nature of these platforms because it’s important for a reason I think is somewhat non-obvious: even well-meaning gatekeepers slow innovation,” writes Bezos. “When a platform is self-service, even the improbable ideas can get tried, because there’s no expert gatekeeper ready to say ‘that will never work!’ And guess what – many of those improbable ideas do work, and society is the beneficiary of that diversity.”

This is why I call it a timely manifesto, arriving on the heels of the Justice Department’s antitrust suit against Apple and five of the “Big Six” trade publishers, three of which have already decided to settle.

One can imagine Bezos and other Amazon representatives making the same argument contrasting Amazon’s approach to e-books to that of the publishing establishment to the DOJ. If you read the DOJ’s lawsuit and proposed terms of settlement, Attorney General Eric Holder and the Justice Department appear to agree entirely with Amazon. They argue that by moving together to an agency model and fixed e-book prices across stores, publishers and Apple robbed the American people of the social benefits of Amazon’s innovation.

In fact, publishers are singled out for particular abuse in Bezos’ letter. Kindle Direct Publishing, he argues, is better for both authors and readers than traditional publishing channels. The big trade houses, says Bezos, pay a lower royalty rate (a net of 17.5% of the sale price versus 70% for KDP) and gravitate towards authors who are already successful and established.

“[A]uthors that might have been rejected by establishment publishing channels now get their chance in the marketplace,” writes Bezos. “Take a look at the Kindle best-seller list, and compare it to the New York Times best-seller list – which is more diverse?”

But Amazon’s argument with the publishing establishment is old news. Another way to read Bezos’ letter is as drawing a sharp distinction between Amazon’s approach as a technology and media company and that of the ultimate “expert gatekeeper” in the industry: Apple.

Apple sells products; Amazon sells infrastructure. Apple, particularly under Steve Jobs, refined, edited and approved every detail of a customer’s experience; Amazon only cares about the portal and its business terms. Apple approves every app that goes onto each of its devices; Amazon doesn’t care what any of those apps do with the cloud services they buy from Amazon.

Taken to its limit, the contrast becomes ridiculous. Clearly, Amazon and Apple both seek to control whatever is in their ability and interest to do so. Amazon wants ultimate control over the price of everything in its store, including e-books; Apple created an entire new business model for e-books not least because as a company, it had absolutely no desire to assign even one employee to try to figure out what different books ought to cost.

Apple has its own argument as to how its approach benefitted e-book customers, which its spokespeople sent to various journalists Thursday night:

The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon’s monopolistic grip on the publishing industry. Since then customers have benefited from eBooks that are more interactive and engaging. Just as we’ve allowed developers to set prices on the App Store, publishers set prices on the iBookstore.

Ironically, it’s because Apple and Amazon actually aren’t so different that it’s crucial to draw philosophical contrasts between them. The narcissism of tiny differences is nothing new. But as Amazon continues to grow its way into Apple’s way, as the other giant company straddling technology, media and commerce, it will become essential to both camps going forward.

“Amazonians are leaning into the future,” writes Bezos. And he doesn’t care whether Apple, publishers or anyone else stands in the way.

Image by Joseph Moran for Wired

VIDEO: At Foxconn, An Exclusive Look At How An iPad Is Made | Epicenter » Media

Much has been written about conditions at Foxconn, the embattled Chinese manufacturer for Apple and a host of other hardware companies. But only a couple of reporters have had access to one of the sprawling company’s factory floors: Joel Johnson wrote Wired‘s March 2011 cover story, “1 Million Workers. 90 Million iPhones. 17 Suicides. Who’s to Blame?” after visiting the Foxconn plant in Shenzhen. Now Rob Schmitz, Shanghai Bureau Chief of American Public Media’s Marketplace, has also visited the Longhua facility in that city, spoke to dozens of workers and came back with a video which includes shots of the iPad assembly line and hoards of prospective employees lining up outside to get a job.

Schmitz’s reporting is neither glowing nor inflammatory but does add to the minuscule first-hand information about Foxconn from disinterested sources. And — no surprise here — he was clearly taken by the scale of the facility.

“The first misconception I had about Foxconn’s Longhua facility in the city of Shenzhen was that I’ve always called it a ‘factory’ — technically, it is,” he writes in a Reporter’s Notebook. “But after you enter the gates and walk around, you quickly realize that it’s also a city — 240,000 people work here. Nearly 50,000 of them live on campus in shared dorm rooms.”

Schmitz was of course not permitted to roam alone but he did seem to have some candid exchanges with workers and even with his tour guide, Louis Woo, described as a special assistant to Foxconn CEO Terry Gou. They spoke of the nets that are omnipresent at the facility, installed in the spring of 2010 after a spate of suicides first brought Foxconn’s working conditions to the world’s attention.

“I ask him if the nets have saved lives,” Schmitz writes. “‘After we installed the nets in the summer of 2010,’” Louis says with a sigh, “‘two workers jumped. One of them died. The other lived.’”

He heard some boosterism from employees — “When I gave examples of some of the American media coverage of the working conditions at Foxconn, many workers laughed, telling me it’s not really that bad” — but he also heard complaints.

“One of the most common complaints I heard: being treated unfairly by immediate supervisors. Some workers complained about being forced to work even though they were sick. Others said their supervisors didn’t let them bill the overtime they had actually worked. From dozens of interviews, favoritism seems common among Foxconn supervisors.”

Shenzen is where Fair Labor Association audits were conducted at Apple’s behest. The FLA described overtime violations, safety problems and workers being cheated out of wages in a report that the New York Times said received “received generally favorable reviews for its toughness.”

Apple CEO Tim Cook seems to be making a priority of dealing with the issue of working conditions at the manufacturing plants of overseas suppliers. In his keynote at February’s Goldman Sachs Technology and Internet Conference Cook even opened with the subject:

“Apple takes working conditions very, very seriously, and we have for a very long time… Our commitment is simple: Every worker has the right to a fair and safe work environment, free of discrimination, where they can earn competitive wages and they can voice their concerns freely. Apple suppliers must live up to this to do business with Apple. If we find a supplier that intentionally hires underage labor, it’s a firing offense.”

Jeff Bezos Should Send Eric Holder a Christmas Card | Epicenter » Media

I can imagine Amazon CEO Jeff Bezos in Seattle this morning, reading the Justice Department’s antitrust lawsuit on a gigantic Kindle Fire XL prototype, and grinning ear to ear, savoring every word.

When he’s finished, the grin comes off his face but lingers around his eyes. He quickly sets the tablet down, takes a sip of water, and says, to anyone and no one: “Okay. Let’s get to work.”

Between the DOJ’s lawsuit against Apple and publishers and the settlement three of five publishers have already agreed to, I’d go so far as to say that Bezos is having an even better week than Instagram CEO Kevin Systrom.

Sure, Systrom might be pocketing as much as $400 million in cash and stock from Facebook’s acquisition. But Systrom and his team have to figure out what to do with that windfall. They’re a tiny startup who suddenly have to answer to someone else. Now under Zuckerberg and with millions of new users, they have to figure out what’s next for them and their product. And what’s next for them is far from clear.

Jeff Bezos knows exactly what to do next. Jeff Bezos doesn’t have to answer to anyone any more. Everyone else, including his most powerful counterparts across the negotiating table, will have to answer to him.

Amazon as the returning hero

Officially, Amazon’s response to today’s news is fairly measured. “This is a big win for Kindle owners, and we look forward to being allowed to lower prices on more Kindle books,” writes Amazon spokesman Drew Herdener in an e-mail.

But if it’s “a big win for Kindle owners,” it’s a huge win for Amazon. If you read the text of Justice’s proposed settlement with e-book publishers, it sounds like an argument for Amazon’s business model.

The settlement gives Amazon everything it wants in its dealings with publishers, and enshrines it as part of an agreement with the federal government, and compliance with antitrust law.

With publishers who agree to the settlement, Amazon will have the right to set final prices of e-books for customers, including the right (within some limits) to set those prices below cost. It enshrines Amazon’s ability to charge publishers for promoting their e-books and to factor those costs into its total balance sheet with each publisher. It allows Amazon to stagger negotiations over time, so that it can’t be pressured by every publisher asking for better terms all at once.

Sure, Amazon loses the ability to negotiate its own most favored nation agreements with these publishers — but the agreement prohibits those publishers from establishing such an agreement with anyone else. Ultimately, Amazon’s market share let it pursue lower margins than its most robust competitors, so that’s a net win for Amazon, too.

In short, the settlement forces publishers who agree to it to go back to the negotiating table with Amazon while systematically taking away every piece of leverage those publishers have had — whether ill-gotten or not.

At the level of perception, too, Amazon comes off in these documents as a positive protagonist. It is not the tough-as-nails, dominant player in the e-book market that we all know Amazon instead. Instead, they are a white knight, nobly pursuing the interests of customers against an illegal cabal of fearful publishers and a predatory Apple.

Amazon’s beneficence even extends beyond its own customers: “consumers benefited from Amazon’s $9.99-or-less e-book prices even when they purchased e-books from competing e-book retailers,” reads the Justice Department’s report.

“Quickly, Amazon came to realize that all Publisher Defendants had committed themselves to take away any e-book retailer’s ability to compete on price,” according to the report. “Just two days after it stopped selling Macmillan titles, Amazon capitulated and publicly announced that it had no choice but to accept the agency model.”

We even learn (without much supporting evidence) that’s Amazon e-book sales have always made a profit for Amazon, and that publishers were primarily motivated by well-justified fears that Amazon would soon becoming a publishing powerhouse of its own and put them out of business. You know, just in case shareholders were worried that Amazon was too noble.

Meanwhile, Apple, darling of both Wall Street and the blogosphere, get its dirty laundry thrown in the street.

The limits of the DOJ’s suit and settlement

What’s left out of the Justice department’s lawsuit might be even better news for Amazon than what’s included. There is no broader look at any of the anticompetitive vagaries of the e-book market beyond publishers’ negotiations with retailers in the period before and after the launch of iBooks.

The suit blasts most favored nation agreements without noting that Amazon has aggressively pursued MFN agreements with publishing partners, including partners whose books it sells wholesale. It’s completely silent on retailers’ and device manufacturers’ use of DRM to lock customers into a single bookstore. Amazon is purely a market innovator, not a budding monopolist, even as the DOJ notes that Amazon’s pricing power helped determine pricing power across the industry.

Blogger Mike Cane wrote a powerful email to attorneys at the Department of Justice listed in the lawsuit titled, “Dear DoJ: You Need To Sue Apple Again.” It cites Apple’s in-app purchasing rules that prohibit Amazon, Kobo, Barnes & Noble and other retailers from offering books for iOS devices on the same terms that Apple can offer in iBooks, without browser workarounds.

This, Cane says, “is every bit as much restraint of trade as the collusive price-fixing that made the Department bring Apple and its co-conspirators before the court for remedy.”

But it’s actually great news for Amazon that the DOJ isn’t opening up restrictions on in-device purchases. Once thrown, that stone bounces back to hit Amazon in the face right away.

Not only does Amazon not permit purchases from other e-book retailers on its Kindle devices, it doesn’t permit them to read e-books from other retailers on its devices, at least if they’re sold with DRM. And even Apple blocking other retailers from selling directly through iOS apps indirectly helps Amazon. As the biggest retailer on the web, boasting the biggest e-bookstore, Amazon’s web site becomes the natural second choice for most customers, if not the first.

Android’s permissive policy even allows Amazon to offer its own app marketplace on unforked non-Amazon Android devices. Now, Amazon offers its own in-app purchases, which just like Apple’s program, takes a 30% cut.

So the Justice department’s findings turned out to essentially justify Amazon’s business model. Publishers setting fixed prices across all stores bear the sole blame for driving up e-book prices, and are tossed out. Device manufacturers locking in customers with hard or soft restrictions? Perfectly acceptable.

Bezos, a libertarian, has probably never had more reason to love the federal government than he does today. The only thing that could have made this better is if sales tax on Amazon purchases were permanently waived forever.

Bezos should send Eric Holder a Christmas card. And start calling the Attorney General “Santa Claus.” He got everything on his wish list more than eight months early.

Photo by Victor Blue for Wired.

DOJ Announces Terms of Settlement With Three Publishers in E-Book Suit | Epicenter » Media

Along with filing a lawsuit against Apple and five of the “Big Six” publishers for collusion over e-book prices, the U.S. Justice Department also filed terms of a proposed settlement in the suit with Hachette, HarperCollins and Simon & Schuster. Apple, Penguin and Macmillan have not accepted these settlement terms. The DOJ will continue to litigate its antitrust suit against them.

“For the growing number of Americans who want to take advantage of this new technology, the Department of Justice is committed to ensuring that e-books are as affordable as possible,” Attorney General Eric Holder told a press conference Wednesday afternoon. “As part of this commitment, the Department has reached a settlement with three of the nation’s largest book publishers – and will continue to litigate against Apple, and two additional leading publishers – for conspiring to increase the prices that consumers pay for e-books.”

According to the filing, settling publishers will be immediately required to do the following:

• Terminate its current contracts with Apple within seven days of the court’s acceptance of the settlement;
• Terminate any other contracts with e-book retailers that restrict the retailer’s ability to set final prices for books or contain a “most favored nation” provision prohibiting price competition, as soon as possible;
• Renegotiate contracts with Apple and other retailers, with a two-year prohibition on any contract that prevents retailers from discounting retail prices (see below);
• Notify the Department of Justice before entering into any joint ventures between it and another publisher related to e-books;
• Provide the DOJ with a copy of its agreements with any e-book retailers quarterly for an indefinite period of time.

Furthermore, any future agreements between the settling publishers and e-book retailers will have to observe serious restrictions, at least for a time. For two years, e-bookstores must be permitted to discount retail prices of books at their own discretion.

In particular, the proposed settlement states: “These provisions do not dictate a particular business model, such as agency or wholesale, but prohibit Settling Defendants from forbidding a retailer from competing on price and using some of its commission to offer consumers a better value, either through a promotion or a discount.” Discounts, promotions, and some control over retail pricing must all be at least partially under the retailers’ control, even if the agreement is technically an agency-commission model, rather than a wholesale one.

This doesn’t kill the agency model outright, but does modify it well beyond what’s widely recognized today. Suppose a publisher prices a book at $10 list price, and a retailer agrees to a 30% commission, or $3 on a full list sale. Under these conditions, those retailers would be permitted to sell the book below list price, presumably taking the discount out of their own $3 commission. The publisher would still net $7, but lose its ability to maintain prices.

The DOJ’s proposed terms expressly permit publishers to set a soft floor on discounts, but not a hard floor. Publishers can enter into one-year agency agreements that stipulate that the retailer can sell individual titles at a loss, but must show a profit overall for all the books it sells from that publisher’s catalogue.

It says that retailers must have some discretion to set prices and compete with other retail bookstores — that publishers cannot absolutely fix the retail price of books. And it opts, in virtually every case of potential uncertainty, for giving maximum discretion to the retailer.

For five years, the settling publishers are prohibited from entering into any agreement with retailers including a “most favored nation” provision, whereby it agrees not to sell books at a lower price or on more favorable terms to any other retailer. This was a key clause in Apple’s contracts with publishers, which both allowed and compelled them to insist on the same prices and terms with other retailers.

Finally, retailers must be allowed to stagger their negotiations with publishers, so they aren’t dealing with multiple publishers seeking similar agreements at the same time.

The bulk of the other conditions imposed simply prohibit any and all continued collusion between the settling publishers: direct or indirect communication, retaliation against retailers, and so forth.

This is the fine line the DOJ is trying to walk between dictating business terms to publishers and retailers and simply permitting the exact same circumstances to re-emerge after dissolving the contracts tainted under the appearance of collusion.

In fact, in five years, we may end up with exactly the same kinds of agreements publishers and retailers have today. But that will be a decision made by the market, not by any real or perceived conspiracy between publishers and a single retailer that imposed that model on the market.

Additional reporting by Mark Riffee in Washington, D.C. Photo by Mark Riffee for Wired

DOJ Files Antitrust Suit Against Apple and Five Publishers: Report | Epicenter » Media

The U.S. Department of Justice has indeed filed an antitrust lawsuit in New York district court against Apple and five major publishers — Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster — alleging collusion in e-book prices and sales models, according to Bloomberg.

According to this and earlier reports, Apple, MacMillan and Penguin intend to fight the lawsuit, at least for a time, strongly denying they colluded over prices and seeking to uphold the agency model that the launch of Apple’s iBooks helped introduce to the e-book market.

Meanwhile, publishers Hachette, HarperCollins and Simon & Schuster are said to be seeking to settle the lawsuit, through a separate peace from Apple and their counterparts, as soon as Wednesday. According to Bloomberg, the Justice Department said they would be making an unspecified antitrust settlement announcement.

At noon Wednesday, U.S. Attorney General Eric Holder, acting Assistant Attorney General Sharis A. Pozen and Connecticut Attorney General George Jepsen will make an announcement about a “significant antitrust matter” at Justice Department headquarters in Washington, D.C. Jepsen’s predecessor, Richard Blumenthal, was among the first to legally probe e-book prices in 2010, meeting with Apple, Amazon and publishers.

The DOJ has reportedly been seeking an agreement from Apple and the five publishers that would discard the current “most favored nation” clause in Apple’s contracts with publishers, as well as force the publishers and retailers involved to observe a “cooling-off” period, during which agency relations would be potentially halted and they could not renegotiate new contracts with retailers.

It is not clear what if any immediate effect the DOJ suit would have on the sale of e-books from any publisher through any store, or on negotiations between publishers and Apple rival Amazon, which are underway.

Image: Screenshot of Apple’s introduction of iBooks in 2010.

DOJ Could Sue Apple Today Over E-Books: Report | Epicenter » Media

The Justice Department could sue Apple as early as Wednesday over e-book price fixing, Reuters reports, citing “two people familiar with the matter.”

No final decision has been made, Reuters reports, and it said Apple declined comment.

Apple and five of the “Big Six” trade publishers are reportedly under investigation over staggered — but identical — moves to an agency rather than a wholesale pricing model. The difference can have a huge impact on the price that e-book retailers — like, but not exclusively Apple — can charge for titles.

Under a wholesale pricing model a seller can effectively charge anything it likes, and even take a loss, as long at it pays the wholesaler (the publisher) an agreed price. Amazon famously tried to enforce a wholesale pricing model and charge $10 for e-books. But it was forced to back down under intense pressure from publishers, and Apple’s entry into the business, with iBooks. Under the agency model, which has been used for decades among publishers and traditional bricks-and-mortar stores peddling books in print, the publisher essentially sets the retail price.

The legal concern relates to the possibility of collusion among nearly all the major publishers, which would introduce an monopoly effect on the retail cost of books. Publishing is made up of mini monopolies anyway, since a given title is available only from one and, unlike cars, there are no equivalents per se from another. But if publishers were to collude then any semblence of competition would disappear, and the market would have no say in the pricing of books at all. One significant market force unique to the digital market: retailers may be just fine with razor thin margins for e-books they merely convey in order to sell e-book readers they manufacture, as do Amazon and Barnes & Noble.

As reported by my colleague Tim Carmody, the DoJ’s investigation and a related civil lawsuit touch on issues bigger than rising e-book prices or even collusion between publishers. The cases are also about who has the right to sue e-book publishers, the nature of publishers’ bilateral interactions with Apple and other retailers, and whether it’s even possible for a true agency model to exist for virtual goods like e-books.

Photo: Screenshot from 2010 Steve Jobs iPad keynote introducing iBooks

NIM’s Morgan Guenther: ‘We Can Reclaim Leisure Time for Reading’ With Digital Mags | Epicenter » Media

This week, Next Issue Media released a new Android tablet newsstand for magazines from equity partners Condé Nast, Hearst, Meredith and Time Inc. According to NIM, an iPad version will be submitted to Apple’s App Store in roughly six weeks. For the first time, customers can subscribe to unlimited reading of as many as 32 titles from five different publishers through one app, with one user interface, at one price.

We’ve now had plenty of magazine apps and even some efforts at UI standards, depending on the device. Next Issue even brought out its first batch of magazines for Android tablets almost a year ago, offering seven titles from four publishers. Next Issue CEO Morgan Guenther now refers to that soft launch as a “beta preview,” a proof-of-concept to kick the tires for what the joint venture is offering now.

“If you look at where we started in June of 2010 to today, there’s been a ton of innovation,” says Guenther. “But about 95 percent has been on the hardware and operating system side. We went from iPad 1 to iPads 2 and 3, FroYo to Gingerbread, Honeycomb, and Ice Cream Sandwich. The Kindle Fire and Nook have sold a ton of tablets. But where is the consumer innovation?”

That’s why the all-you-can-eat pricing model is what’s attention-worthy here. Ten dollars per month (“Unlimited Basic”) fetches access to all the monthlies and biweeklies in the catalog (Popular Mechanics, Vanity Fair, Real Simple, etc.); $15 (“Unlimited Premium”) adds weeklies like Entertainment Weekly, People, Sports Illustrated, The New Yorker and Time for an extra $5. $180 annually may be a lot of money, but that’s a lot of magazines.

(Disclosure: Wired isn’t included in the initial group of NIM magazines, but other titles from our publisher Condé Nast are, and Condé Nast is a partner in the NIM joint venture.)

Next Issue also offers single issues, subscriptions to individual titles, and comped digital copies for current print subscribers — all things most of us are familiar with from existing mags for iOS or Android. The cross-title, cross-platforms subscriptions for a flat rate are the high-order bit.

What’s more, Guenther says the $10 and $15 price points are unlikely to change even as more titles from NIM’s publishing partners are added. “We’d never say never, but we feel very good about those prices,” Guenther told Wired. “If you look at similar offerings in other media, with Netflix at $7.99 and Spotify at $10, or what HBO costs, we think we look pretty good.”

Time, Inc. Executive VP Steve Sachs agrees. “We know from other content categories what happens when you introduce a new offer to consumers to buy on an unlimited basis rather than piece-by-piece,” Sachs told me. “Not only do they find benefit in that model, they consume more in that category.

“This is really about driving adoption of digital magazines to create a rising tide for the entire category,” added Sachs. “Our philosophy is that as a market leader in magazines, as that tide goes up we’ll get our share.”

It’s a typical Silicon Valley start-up strategy: Price for fast growth in the market and figure out how to finesse the profit and revenue side later. (It helps that Guenther and most of the engineering team at NIM are based in Palo Alto.)

It’s just the opposite of typical media start-up content. It’s not user-created or leveraging the “long tail” of niche publications or the back catalog. (NIM also has offices near its publishing partners in New York.)

Instead, it’s a return to content’s “short head” — you know, the other segment on the curve where you find big volume. NIM’s first 35 titles, Guenther says, already have a mostly print readership of 350 million, with $8 billion in ad revenue.

This is a pretty big deal. It’s a little like if Hulu Plus just included every new show from the four networks, HBO, Showtime, Disney, AMC and ESPN. Or to use a different metaphor: this is a cable subscription for the most popular magazines in the world.

By partnering together, the magazine publishers (plus News Corp., who has a stake in the joint venture but doesn’t yet have a title in the mix) don’t just get more eyeballs on tablet editions and a little more revenue. They also get the chance to experiment with new business models and delivery mechanisms.

After all, the biggest reason to try to grow digital magazine readership quickly is to grow digital advertising buys. But Guenther and NIM want to offer something more to advertisers than just more numbers, like better targeting and bigger reach.

“Right now, there’s no scale in digital magazines for advertising,” says Guenther. Currently, magazine titles sell their own ads for tablets, usually for all platforms (iPad, Android, Kindle, Nook, etc.), often bundled with print and/or web buys.

“With our platform, we have the capabiliity of showing cross-title engagement,” Guenther adds. “Instead of 18- to 34-year-old-males all going into individual apps, we can do group sales to reach that same guy over at Wired or Esquire, etc.”

Sachs at Time sees cross-publisher ad sales as “a ways down the road”: Next Issue’s partners could definitely “create a network offering that advertisers might find compelling. It would probably be a little different from what Hulu does now. It’s not really a focus of our strategy right now — maybe a year or two down the road”

For Sachs and Guenther, the real opportunity for advertising and subscription is to deepen engagement from existing readers, help move heavy readers of one title to another they might not have thought to read, and to help open up the category to light magazine readers who may not subscribe to any titles at all.

A big part of that is reducing friction. “Right now, in all of our app stores,” says Sachs, “if a customer wants to read multiple magazines, have to download an app every time they want to read that title for the first time.” Apple’s made things somewhat better on the discovery side with a separate “newsstand section,” but you still need to download an app for every title. It may not seem like a big deal, but every click matters.

Here as elsewhere, Guenther likes to look ahead. “For magazines, I think the native App Store is an interim solution for what will ultimately be all browser-based buying and reading,” he says.

Guenther makes with an analogy with TiVo, where he was president before joining NIM. “We always used to say, performance is better on the edge. We laughed at the cable companies doing streaming video, because they had to build all this cloud infrastructure to play the same HD content we were storing locally. But if you look now, HD streaming video is getting there.

“In 18 to 24 months, it’ll be the same with magazines,” he adds. “HTML5 templates and standards, the cloud infrastructure, wireless speeds, the devices will all get better. And with these new Retina Displays, you’re looking at 50MB per page. At some point, you have to leapfrog this whole thing. It’s shaking everything up. Luckily, we think the big guys see it.”

And here as elsewhere, Time’s Sachs is a little more rooted in the present. “App stores will continue to be a significant part of the retailing experience,” he says. “Customers love them. Apple, Google Play and Amazon are digital superstores. They’re one place to go to find everything. That won’t change. But when the technology gets there, so we can get real design and layout fidelity, we think HTML5 will be absolutely a new option our customers will find convenient.”

Here’s my prediction: Within two years, we won’t call newsstands like Next Issue’s “a Netflix for magazines” because it’s one price for a big catalog of content. We’ll call it “a Netflix for magazines” because instead of mail delivery or bulky downloads, the primary delivery mechanism will be streaming high-definition, through-designed magazines over the web.

Then we get into the stuff that’s really fun for Guenther. How do I do search? What about individual article discovery? Where are the recommendations? What does personalization look like in magazines? How do we interact with social media and the open graph? You don’t need to go to HTML web magazines to add these elements, but they all point in that same web-native direction.

They also all point to bringing magazines back to the center of public attention, social conversation and private enjoyment.

“At a high industry level,” Guenther says, “our job is to start to turn around the decline of magazine readership as a slice of people’s leisure time. With digital technology, web consumption has gone up, TV consumption has gone up, social media, and so forth — and a chunk of that has been at the expense of magazines.”

In Guenther’s mind, on top of efforts like NIM’s, a few things will help grow the share for magazines:

Tablets that reach price points that are accessible to everybody. “Everybody in the developed world can find and read magazines,” says Guenther. “We need to make that the same in the digital world.” But how do we get there?

Google doubling down on the Android tablet category. “We hear their new tablet will ostensibly be priced at $150, Guenther says. “Some guys can afford to subsidize, and Google is one of them.”

More devices with more firepower from Amazon and Barnes & Noble. “We’re told Amazon has two or three new Kindle Fire devices in the works right now, and we suspect they’re all running Android built on Honeycomb or above,” says Guenther. “When the Fire comes out with something that can run us, we’ll be all over that.”

The next generation Nook tablet, too, brings millions of magazine readers, including lots of upper-middle-class women, a demographic any magazine publisher wants to reach.

In short, even though people joke about the nonexistence of the Android tablet market, Next Issue had many very good reasons for starting with Android tablets as well as iOS. The greater market of Android-compatible reading devices can and likely will get very big in a hurry.

I’m also thinking (and probably will be thinking for a while) about the findings in this week’s Pew Research Center report on the rise of e-reading.

The two big takeaways of the Pew Report are, first, that more people are reading on digital devices than ever, including a bump from 17 percent to 21 percent of respondents over the recent holidays alone. The second is that people who read on digital devices read more, both digitally and in print.

There are methodological issues with the report that keep me from drawing grand conclusions even in e-books, let alone another publishing category. But it’s clear that in magazines as well as books, digital technology offers substantial opportunities for both growing share among casual readers and deepening relationships with intensive readers.

It offers those opportunities to both readers and publishers if both parties choose to take them.

This is important, because the only group that’s probably more fickle than magazine publishers are magazine readers, particularly once you enlarge that sphere to include the entire digital world.

Unlike books, a lot of magazine content is already on the web legally and for free, being sold against ads as we speak. Will customers pay $10 to $15 per month for magazines they may or may not read, when the competition for that last $10, whether from Netflix, Spotify, HBO or anyone else, is already so fierce?

Alternatively, what if instead of enabling new attachments, Next Issue’s gigantic pool of content simply erodes customers’ already fraying attachment to magazine brands? What does that do, not just to advertising, but to the still-emerging range of vertical opportunities within brands, from stores to conferences?

What happens if or when I stop being a Wired reader and become an 18 to 34 male?

Nobody knows. We’re discovering it now, readers and publishers and advertisers, together.