Friday, September 21, 2007

Mobile Linux fragmentation

InfoWorld has an article this morning about the fragmentation of efforts among all the various groups who want to standardize Linux for mobile phones. This was an area that I was actively researching in August before teaching responsibilities forced me to put it on the back burner.

Reporter Nancy Gohring tried to understand why there are so many different overlapping efforts, and came up with a lot of good quotes that suggest that such fragmentation is systemic and persistent. This reminds me very much of the Unix wars, in which various participants admitted that they were arguing over turf and control more than the petty technical details — and admitted that they ended the wars too late, after Windows had already taken over the low end workstation market.

About the only thing missing from the story is the suggestion that division is actually desired because each operator and phone maker wants something that’s different. Given such differences don’t create differentiation, why do they persist? Perhaps the hope is that they create switching costs and thus reduce commoditization.

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Thursday, September 20, 2007

Nokia spurs mobile network bypass

Nokia is releasing a handset that can handover a live cell phone call from a cellular network to a Wi-Fi network.

The Nokia 6301 supports a standard called “Universal Mobile Access,” which is endorsed by the main W-CDMA (UMTS, 3GSM) standards body, 3GPP. (See the UMA white paper by Kineto Wireless).

We know that carriers are fighting mobile VoIP including Cingular’s decision to remove Wi-Fi from the Nokia E61 and call it the E62. Of course, given Cingular’s (AT&T’s) deal with Apple, the iPhone won’t support this for years if not decades.

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NBC’s Brave New World

After deliberately picking a fight with Apple and getting its content booted from the iTunes Store, NBC has now shown its other card. It’s not really Amazon’s download service, but free ad-supported downloads.

The trial (with some shows) of the new service has already been ridiculed by at least one commentator:

The new service sounds, quite frankly, hilariously bad. Here’s some of the highlights:
  • commercials that can’t be skipped
  • files that lock after seven days
  • no transfer to other devices
  • Windows only
  • Man, we can’t wait to try that out.
Perhaps more interesting to me, it requires going to the NBC Direct website, and (in all likelihood) a dedicated player application.

So NBC is hoping to recreate on the Internet its 50+ year old business model from broadcasting: ad-supported content through exclusive control of distribution. It’s even a pre-VCR model with no ad skipping and limited time shifting. However, it’s also a verisioning strategy designed to support a lucrative (and more recent) business model: the subsequent sale of compilation DVDs at the end of each season.

In a final irony, the NBC announcement of its ad-supported business model was first reported on (as well as the dead tree version), which this week announced the demise of its paid TimesSelect service and its shift to an ad-based model.

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Tuesday, September 18, 2007

A looming EU-US trade war?

After reading online yesterday about Microsoft’s big loss at the hands of EU competition authorities, I thought I had the full picture. But an article in the dead tree version of the WSJ added a few points.

First, real lawyers (not just journalists and pundits) believe that EU Competition Commissioner Neeli Kroes is going to use the Microsoft win as a precedent to go after other dominant US firms — Intel, Qualcomm, Rambus and Google. Others worry about the precedent. European lawyers see as this as promoting a policy split between the EU and the U.S., while the US Chamber notes that the move will embolden other countries to move against American firms.

Action by other governments to hurt American companies could spark trade friction, assuming any US politicians care (or want to seize an issue for cheap political points). The Journal quoted Rep. Robert Wexler (D-Fla.) as calling this a “new form of protectionism,” but Wexler’s website makes no mention of this — only his campaign against Rush Limbaugh.

Two other tidbits on the case: with penalties, the €0.5 billion fine has become €2 billion. And while Microsoft appears to be have been stalling, it has already licensed competitors access to its server technology (the heart of the case). The catch is that those licenses have been paid licenses — which obviously wouldn’t help open source developers — but the EU wants that information available for free. Perhaps the EU could rebate two days worth of penalties (€6 million) to cover a fully paid license for the whole world.

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IBM drops the other shoe

After joining last week, today IBM dropped the other shoe: it’s shipping a new product “Symphony” based on OpenOffice. As InfoWorld notes, it’s the same name IBM used in the 1980s for its integrated office suite.

IBM’s effort will help promote its long-standing support for the Open Document Format (ODF). To me, it seems a little like an exit strategy (growth strategy? salvage strategy?) for the increasingly irrelevant Lotus division.

The biggest omission is that Symphony lacks e-mail to compete with Microsoft’s Entourage. How hard would it be to find an open source e-mail client to integrate? The Mozilla Thunderbird project is one such example, and late last month the Qualcomm-sponsored Penelope project released a new skin providing Eudora features to Thunderbird users.

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EU carriers pay dearly for iPhone exclusive

This morning, Steve Jobs unveiled the iPhone that will ship in the UK on Nov. 9. As rumored since July, the iPhone is exclusive to O2. With an initial price of £269 and an 18-month contract, that works out to a £899 commitment ($1795) vs. $1799 over 24 months for the US phone after the price cut (but everything in London is more expensive).

There were a few interesting developments. Unlike in the US, the iPhone will not only be sold by the carrier and by Apple, but by a third party store, Europe’s Carphone Warehouse.

Steve JobsSomewhat surprisingly, it’s still only 2.5G, which Jobs blamed on the power consumption of 3G. (Is this inherent to 3G, or just the current implementations?) Despite all this, the interest crashed O2’s online stores, as buyers rushed to be the first to get an iPhone: the 1,500 visitors a second meant “the website has had more hits today than we normally do in a week.”

As predicted, the world’s largest carrier Vodafone refused Apple’s terms, and so Apple went with other carriers — O2 in the UK, Orange in France and T-Mobile in Germany; Jobs reportedly will be making the other announcements over the next two days. Interestingly, these are all the former national monopoly phone companies (BT spinoff O2 is now owned by the Spanish Telefonica monopoly).

The London Times reports O2 will give Apple 10% of the revenue from the iPhone, while the Guardian put it at 40%. (I suspect that’s for data revenues or profits, not the gross). Telefonica’s CEO aggressively fought to get the deal away from Orange and T-Mobile (both with big UK operations).

Also odd is that in June Orange sounded angry at Apple’s control of the music download market, but now (according to Le Figaro) is willing to pay Apple more than 10% of revenues for exclusive rights in France.

The Guardian said that the carriers were annoyed at getting pitted against each other to pay Apple the highest possible price — exactly as Apple did with Verizon and Cingular in the US. Students, what would we call this?

Photo from SlashGear.

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Monday, September 17, 2007

EU vows end to Total World Domination

Today an EU court (roughly equivalent to the US Court of Appeals for the Federal Circuit) reaffirmed the March 1 administrative ruling against Microsoft seeking sanctions over Microsoft’s alleged noncompliance in its 2004 competition policy (antitrust) case, including the original €0.5 billion fine. The usual round of Microsoft enemies applauded the ruling. Notably absent from the cheering was Apple, which Microsoft threatened to put out of business 10 years ago as part of a negotiating tactic.

In fact, Fortune argues that Apple and Google are next, while Information Week adds Intel and Qualcomm to the pile. I’m not completely sure whether this is a realistic legal prediction or merely intended to stir up nationalistic resentment against Eurocrat meddling.

Certainly, if the standard is “fails to provide interoperability with a proprietary technology,” then there are a wide range of successful IT companies (nearly all American) that could be targeted, although claims of total world domination most often list Microsoft, Apple, Google and sometimes Qualcomm.

I have mixed feelings about this — I think interoperability is good but have an economist’s skepticism about government intervention. But one quote from the Information Week article set off all the alarm bells, as I find myself (for once) agreeing with a Microsoft lawyer:

“A significant drop in market share is what we would like to see,” European Competition Commissioner Neelie Kroes said at a news conference Monday. “When we observe a situation where one producer has a share of 95% of the market, it’s a monopoly. It’s not just a monopoly-like situation.”

In response to a question from a reporter, Microsoft general counsel Brad Smith bristled at Kroes’ words. “These are rules that speak more to how one competes more than who should win the race,” he said.
This is not an arcane philosophical debate, but a basic question of whether the government sets rules or whether the government determines outcomes. If Republicans still held the US Congress, there certainly would be official complaints (beyond a few Microsoft friends and some Libertarian-leaning activists) about the extra-territoriality of the EU action setting global constraints on a US company.

Twenty years ago (or even 14 years ago), such interoperability complaints were targeted at IBM. Today compatibility with IBM proprietary standards is only a slightly higher priority than compatibility with French or German ones.

I’m sure that the Microsoft situation will correct itself in the not too distant future. Apple will gradually lose its music domination (which is mainly in the US) after everyone gangs up on it. Google’s start is still ascendant, so I’ll probably be in the nursing home by the time people start to write it off. (Sergei and Larry won’t be collecting social security until after 2040).

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Sunday, September 16, 2007

Information economics on Bloomberg radio

Over the summer, I missed an important new part of Google’s strategy for total world domination. They hired one of the world’s leading information economists: Hal Varian, who spent 8 years as dean of the UC Berkeley information school. The general public knows Varian for his NYT monthly column, but my MBA students know him as the co-author of the Information Rules — the definitive MBA text on information economics.

Over the summer, Varian took leave from his chaired professorship at Cal to become the first “chief economist” at Google. Starting with a sabbatical at Google in 2001-2002, he has worked hard to help Google get even better at data mining:

I had a great time working with them on a number of projects, primarily involving quantitative analysis of one sort or another. For example, I’ve studied the Google ad auction quite a bit and that turned out to be very interesting from an economic point of view. …

Hal VarianDuring my time at Google we have built up a world-class group of quantitative analysts, and the economics team will complement these existing resources. Google has a great infrastructure for data analysis, and a management team that is very receptive to quantitative methods and willing to invest in this area. So what more could you ask for?

In addition to working on analytics, I’ve also worked on various business strategy and public policy issues, and will continue to do so as the occasion arises. This set of issues will only get more important to Google as time goes on, so I expect that this will also involve a fair amount of my time.
I learned of Varian’s new title when a PR person from Bloomberg Radio sent me notice of its interview with Varian, part of its interview series “Bloomberg on the Economy.” Tuesday’s podcast talks about the economics of data storage (improving faster than Moore’s Law), his new job, Google’s perchance for data experimentation, general macroeconomics. In general, he sounds aligned with Google’s party line (e.g. China censorship, its laissez-faire attitude towards copyrighted material).

The series also had two interviews Thursday following up on Varian’s June 28 column on the allocation of the value from the iPod, based on recent research done by Jason Dedrick, Ken Kraemer and Greg Lindenat the Sloan Foundation’s Personal Computing Industry Center.

One interview was with my good friend Jason Dedrick of UC Irvine, who talked about the allocation of the $150 wholesale price of the iPod to the trade deficit: the money is recorded to the China bilateral deficit, but most of the money gets passed to component suppliers to Korea, Japan, Taiwan. A related interview with Greg Linden of UC Berkeley compared the value flow of the iPod with that for laptops.

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Friday, September 14, 2007

The price of Apple’s closed iPhone strategies

Apple’s been showing its true colors this year with the iPhone and iPod Touch. While most of the songs on a typical iPod are using the (patent encumbered) “open” MP3 format, the new Apple products derive more of their value from closed, proprietary choices made by Apple.

Probably the most controversial choice is Apple’s decision to give Cingular (now AT&T) a reported five year exclusive in exchange for control of the experience and a share of the ongoing service revenues. This week, the WSJ interviewed a number of Mac fanatics (like me) about why they won’t buy an iPhone, and top of the list was unwillingness to switch carriers. In some cases, people are enduring terrible phones rather than incur the switching costs.

In the same article, AT&T bragged that 40% of its iPhone buyers switched from other carriers. OK, so let’s do the math:

  • 600,000 customers from AT&T (which has 27% share overall)
  • 400,000 customers from everyone else (which have 73% share)
That’s a high school algebra problem: 600,000 is to 0.27 as X is to 0.73.

Solving for X gives 1.6 million — so Apple would potentially have sold another 1.2 million phones if it weren’t exclusive, or more than twice as many as it actually sold. Would such openness have been more profitable? Right now we don’t know what % of Apple’s iPhone profits come from the undisclosed share of AT&T’s service revenues.

The other openness complaint this week comes with the release of the iPod Touch (the iPhone Lite). Beyond earlier complaints, there are additional complaints that Apple deliberately crippled the product to avoid cannibalization.

For example, the iPhone syncs calendar and contact information in both directions, but the iPT won’t allow you to create a calendar item on the device. A decade ago, a Palm Pilot would do this, and obviously this feature was in the iPhone. So what’s the point of taking it out of this PDA-MP3 player combo device? (Of course, since AT&T isn’t dictating terms for the iPT, it should be more open than the iPhone, not less.)

It’s not clear that potential buyers will notice these restrictions, or if they will hurt sales of the iPT. (Or if the people who care will find hacks to work around these restrictions). Apple has had some flops in the past, notable the Newton and the Cube. Usually these happen because it has overestimated either the market size or its ability to price gouge its loyal customers.

Apple gets one tiny bit of praise for openness from NYT columnist and Mac loyalist David Pogue. Pogue reports that Apple’s policy of $2 per cellphone ringtone is less exorbitant than other alternatives, and the prices seem to be set by the record companies. Like Pogue, I don’t see the reason to buy ringtones but obviously we’re both outside the target demographic.

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Tuesday, September 11, 2007

24 on iTunes this year

Unlike NBC, and despite previous rumblings, Fox is going to provide its TV shows to the iTunes store this season. News Corp. President Peter Chernin confirmed that 24, House, Prison Break and other popular iTunes downloads from last year will be back. He also downplayed (but did not deny) disagreements with Apple over pricing:

“Right now we have a perfectly good relationship with Apple,” Chernin told Reuters. “But let me say this, we’re the ones who should determine what the fair price for our product is, not Apple.”
Jack BauerI have been a big fan of Jack Bauer and 24 since one of my students introduced me to the show back in 2004. However, my fundamental cheapness makes me an unlikely candidate for any pay-per-view plan.

Still, in the spirit of today’s dead tree metaphor, let me ask one question. Given 24’s recent slumping popularity, if 24 is available for sale this season, is it the tree that falls in the forest but no one is around to hear?

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Slooow academic time

One of the most striking differences when I shifted from shipping software to academia is the difference in time scales, but not the way you might think. Academia actually has two (or three) time scales. One is very inflexible: I know what I’m doing tomorrow morning at 9am and tomorrow night at 6pm, and being an hour late (let alone a day) isn’t acceptable.

In research, a subset of academic papers nominally have inflexible deadlines — a special issue of a journal or a conference that requires submission by a particular date. But, as it turns out, some deadlines are a little squishy, and if you ask the right people, a few days’ extension is often possible.

But many academic time scales are long, slow or indeterminate. I’ve been on committees that met monthly in order to not resolve the same issue. Compared to journalism (when I wrote articles that appeared in print in 3 hours), or blogging (instant gratification), the time scales for journal articles are mind-boggling, as with the paper that I co-authored in 1997, which won a prize at an August 1998 conference and then appeared in print in June 2004.

Today’s example is the Academy of Management, a professional association for b-school professors in management (OB, strategy, HR) and some related fields, including innovation & entrepreneurship. Besides being huge (annual conferences of 7,000+ plus), it’s run entirely by academics — vs. some professional associations that I’ve belonged to where the leadership and membership are partly or primarily from industry (AMA, IEEE, PDMA).

AoM has a reputation of being highly socially conscious (critics would say “politically correct”) in the sorts of causes, movements and ideas that it supports. This includes special interest groups on “gender and diversity in organizations” and “critical management studies” (i.e. a postmodern critique of management theory).

So one would assume that it is an AoM priority to save trees — phasing out or at least making optional the dead tree version of their journals. Every member gets an annual stack of printed paper at least a foot thick, with the four Academy journals. I’m guessing that’s around 10 tons of paper mailed each year. The society INFORMS (which publishes Information Systems Research, Management Science and Organization Science among others) has had electronic-only subscriptions for at least 5 years, but then these are the operations research folks (former ORSA/TIMS) and thus would be expected to be more efficient.

The president of the Academy for 2000-2001 was across the hall from my Ph.D. student desk, so I asked her then if there was going to be an electronic-only option for the journals. (I can’t remember the answer). Two years ago, I e-mailed the AoM executive director and she said that investigating this would be a priority in 2006.

This morning I got an e-mail indicating that the Academy is now supporting electronic-only delivery, and on the website this option is marked “new”. However, unlike INFORMS, they will not pass the savings on to members who go electronic:

Will I Receive A Discount In My Membership Dues If I Select One Of These Options?

No. This is the case for three primary reasons.

  1. While the costs for mailing are reduced, the costs to produce the content remain (i.e., editorial offices, copyediting, page layout, managing editor salaries, etc.) And, electronic services are not without their own costs. They require IT staff, equipment, file preparation and conversion, and the like. Costs for mailing are being replaced by the costs for bringing this new type of value-added, convenient service to members.
  2. Dues are not the Academy's sole revenue source. The majority of the Academy's revenue comes from non-dues sources that are critical to the ongoing operation and provision of member service. A reduction in dues, which are already subsidized, means heightened reliance on non-dues revenue sources.
  3. We have no history providing members with electronic journals and it is premature to assume wide scale cost savings. Any cost savings realized would be reinvested in other member services.
I’m not convinced by any of the arguments, particularly the last one (we know better what to do with your money than you do). Still, this is progress — not fast progress, but progress nonetheless. I suspect if it didn’t have to do with killing trees (or saving money) it might have taken another five years.

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Just another Manic Monday

Monday morning classes are often difficult for all concerned, and bring to mind the 1986 observations sung by Susanna Hoff.

I went to two talks (the other one I’ll post after I’m caught up on grading) today. Tonight it was Mobile Monday, the Silicon Valley chapter. The program had three speakers:

  • Jordy Mont-Reynaud, the mobile dev lead for Bebo, talked about how this social networking site is going mobile in the next few weeks.
  • Sam Altman, the student entrepreneur founder of Loopt, who explained how location-based services support their “social mapping” service which allows people to socialize and get together. (The service has been live for a year with Boost Mobile).
  • Ain Indermitte of Nokia introduced Nokia Mosh (“mobilize and share”), a beta site for the Nokia developer community (or others) that seems like a cross between Flickr and SourceForge.
I didn’t get the point (USP in the words of Rosser Reeves) for Mosh, but I signed up anyway, getting this prompt:
In the future MOSH will be advertising supported. To ensure we show you the most relevant offers possible from our partners, please complete the following. We will never share this information with anyone and it will only take a minute to complete.
The first two speakers were more directly relevant, since they part of the sample of social media companies in the thesis project that I’m supervising this year. As a platform guy, what was most striking was the difference between the two in their view of mobile client software.

The Bebo talk was subtitled “If it doesn't work on a billion phones, don't bother.” He noted how hard it is — absent preloaded software — it is to get new applications onto mobile phones, using SMS as the least common denominator, and quoted a statistic (couldn’t find the original) that 61% of mobile games played recently were downloaded games — i.e., 39% of the games were the lame free games preloaded on the phone rather than from the $2 billion mobile game industry.

Loopt is going the other way — winning loyalty with various native applications (BREW, Windows Mobile, and various forms of Java) rather than the compromises necessary to run a WAP-based application. Part of the reason is that the location-based APIs vary by carrier, although attempts are being made to abstract the APIs across devices. (He also noted a series of privacy issues that sounded similar to those addressed by FireEagle from Yahoo).
[MoMo crowd]
This was the first time I attended a meeting of Mobile Monday, and I was quite impressed. The place was packed — we had about 150 people crammed into the Nokia Research Center (Palo Alto) — I counted 110 chairs while the rest was standing room only, and even with that they turned people away at the door.

Mobile Monday is the Nokia-founded networking group that began in Helsinki in 2000 and now has spread to a total of 45 chapters. Other than Helsinki, it seems the Beijing, London and Silicon Valley chapters are the most active. I helped start two local trade associations, and it’s rare that I’ve experienced a group with this kind of energy.

Photo by Mobile Monday organizer Mike Rowehl via Flickr.

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Monday, September 10, 2007

Enemy of my enemy 3

IBM and Sun haven’t gotten along much in the past decade. After all, Sun’s cofounder (and longtime CEO) Scott McNeily fancied himself the leader of the anti-Microsoft coalition, whereas IBM created Eclipse (get it) to wrest control of Java development away from Sun. (A mission that largely succeeded).

But then Sun has a new CEO, and as Jonathan Schwartz himself crowed last month, on Aug. 16 IBM committed to selling Sun’s Solaris OS to run on IBM hardware. (IBM also announced a less ambitious SOlaris reselling plan two years ago).

Now IBM is supporting another Sun anti-Microsoft effort. After backing the “Open Document Format” of Sun’s OpenOffice (and StarOffice), today IBM joined and committed programmers to develop OpenOffice.

Sun, Google, now IBM. Why do I feel that if Microsoft were gone, these three would be at each others’ throats? It reminds me of my high school days, when I got a chance to experience the backstabbing possibilities of European power politics prior to the Great War.

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Apple’s glass is half empty, too

In standing in a room full of (student) Windows users Saturday, I was reminded of how much of a pro-Apple cheerleader I’ve become. Yes, I prefer to see the glass as half full — Apple’s strategies are partly open like Microsoft, Symbian, Red Hat, Real Networks, IBM, etc. etc. And certainly in some markets (PCs, cellphones) Apple is trying to get single-digit market share that, by its nature, is likely to increase rather than decrease competition.

Despite the expensive make-good on the iPhone price cut, Apple has had some good iPhone news recently. It sold 1 million iPhones in its first 74 days. That is consistent with Apple being the top-selling smartphone in the US in July — even though that was only 1.8% market share. And apparently the 3G iPhone is going on sale in Germany in November.

Nonetheless, Apple’s glass is also half empty, i.e. partly (significantly) closed. Sometimes — even trying to put the best possible face on things — its actions are undeniably to increase lock-in and protect the proprietary (i.e. closed) aspects of their business model. I found two examples Saturday in catching up on the iPhone news.

First, last Wednesday Apple announced a new version of iTunes that allows you buy a ringtone version of your songs for 99¢. Clever hackers found out there’s an easy technical approach to converting an existing MP3 file into an iPhone ringtone. So Apple updated its iTunes software to 7.4.1 to block this, and others are trying to find a work-around to that block.

Now it may be that Apple is obliged by contract to share some of the incremental cost of the ringtone with its music suppliers. If challenged, one would expect they will, indeed, point the finger. Which brings us to the second criticism, also tied to last week’s announcements, in this case of the iPod Touch.

Chris Soghoian, a Kling-on from Indiana, reminds us of a previous excuse Steve Jobs used for selling a closed iPhone:

Conjuring up the 40-year-old ghost of AT&T, Apple CEO Steve Jobs claimed that the reason for this was because they didn't want poorly coded apps to damage AT&T/Cingular's fragile wireless network. He told Newsweek, "You don't want your phone to be an open platform," meaning that anyone can write applications for it and potentially gum up the provider's network, says Jobs. "You need it to work when you need it to work. Cingular doesn't want to see their West Coast network go down because some application messed up." …

Apple announced the new iPod Touch today, essentially an iPhone without the phone. …

If Apple's main excuse in locking down the iPhone platform was a desire to protect the wireless carriers' networks, that reason would seemingly not be an issue anymore. After all, the new device doesn't have the hardware to connect to those oh-so-fragile cellular networks. As Cory Doctorow has repeatedly noted, one of Jobs' gifts is being able to lock in his customers and blame it on others. Apple blamed the record labels for the DRM lock-in on the iTunes Store, and then passed the buck to AT&T for locking developers out of the iPhone platform.

Unfortunately, the odds are that Jobs will come up with another reason for keeping developers locked out of the iPod Touch, although who he'll pass the buck to is anyone's guess.
Soghoian’s criticism is not only fair, it’s unassailable. It reminds me of the advice I’m sure all of us parents have given to our kids at one point or another: it’s better to tell the truth, because otherwise you won’t be able to keep your stories straight and someone will eventually catch you in a lie.

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Saturday, September 8, 2007

Make NBC an offer they can refuse

Variety updates the NBC-Apple tiff with an interesting tidbit.

Sources close to people who resent the heck out of Steve Jobs claim that the price disagreement is not that NBC wants to raise prices, but Steve Jobs wants to cut prices — from $1.99 to $0.99. Apple (correctly) notes that volume will go up and (speculatively) asserts that profits will go up too. But of course there is the cannibalism risk too, in this case in competition with the DVDs. Since DVDs are the only major Hollywood revenue growth of the past decade, such cannibalism is a big concern:

Such pricing concerns echo the problems Apple has had recruiting movie studios to iTunes. Only Disney, in which Steve Jobs is the largest individual shareholder, has agree to sell new movies for $12.99 the same day they are released in homevideo. Others have balked at undercutting, and potentially angering, DVD retailers.

Despite those problems, Apple’s move to cut the price of TV shows indicates that it's only getting more aggressive on video pricing.

Insiders at several networks and studios, all of whom spoke only on the condition that their companies not be identified, seemed skeptical about Apple's price proposal -- but not completely closed to negotiations.

Some believe that prices on library titles could easily be reduced to the 99¢ price Apple wants. They admit that it doesn’t make sense to charge the same amount for an episode of “The Brady Bunch” as for “Lost.”
Notice how the story prompted by Hollywood leaks puts the best possible light on the proposal of different prices for different TV episodes. It continues in the same vein:
But Apple has proved to be resistant to multiple price points for video downloads, preferring to keep things as simple as possible. At the same time, the computer giant has shown some flexibility, allowing nets to cut prices on full-season collections of shows. Indeed, last month, iTunes offered several NBC shows at reduced prices as part of a summer sale.

If cooler heads prevail, it seems possible Apple and the nets will come to a settlement in which shows are sold via tiered pricing, perhaps 99¢ for library titles, $1.99 for current hits and $2.99 for megahits or shows on premium cablers such as HBO or Showtime.
Where the Hollywood spin contradicts Apple’s, the story reports the former as fact and the latter at the bottom of the page. The industry must be grateful to read its side of the story presented in the hometown paper, but of course what matters is how consumers will view things when the price of “megahits” (how is that defined?) is increased.

Hat tip: WSJ (and former SJ Merc) blogger John Paczkowski.

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End to Detroit's versioning strategies?

While my own research is about open source, open standards and open innovation, once a year I’m reminded of other aspects of innovation strategies when I teach my MBA tech strategy class. As Thursday’s posting suggested, price discrimination (or versioning) as the sort practiced by Hal Varian is top of mind for a few weeks and then will be forgotten for another 50 weeks until I teach it again.

And so, flipping stations this morning en route to work, the idea of price discrimination was frontmost in my mind when a Fresno radio station show talked about the long sad decline of the Mercury car brand.

Established in 1938, Mercury (with dealers that also sell Lincolns) is one of the two Ford Motor divisions. The numbers they put up were stark: 450,000 cars/year in the early 1990s versus a projected 160,000/year in 2007. Most Mercury dealers sell something else.

The car talk guys (not the Car Talk guys) were reporting speculation that Mercury will eventually die, and debating whether Ford should do a phase-out (as GM did with Oldsmobile and Chrysler with Plymouth) — giving people a chance to shift their investments but also setting up several years of selling orphan cars — or maybe should just pull the plug quickly and move on. (Would this mean Lincolns move to Ford lots?)

But this calls to mind the good ol’ days when I was a kid, and Americans bought cars that were as American as apple pie and the red-white-and-blue (to quote a Chevy marketing campaign). Ford had Ford, Lincoln and Mercury; Chrysler had Dodge, Chrysler, and Plymouth (before they bought AMC which had bought Jeep); GM had Buick, Caddie, Chevy, Pontiac and Olds. (I think GMC came later as a 2nd brand for the Chevy trucks, and of course Saturn was a creature of the 80s).

Of course, the collapse of market share by the American companies (plus, as I was reminded this morning, the lengthening of the replacement cycle in the 1980s as cars got more reliable) means that GM and Ford aren’t selling as many cars and thus don’t need as many dealers and brands.

Still, what was the proposition?

  • Chevrolet: basic entry level car, nothing fancy (Corvette excepted)
  • Pontiac: performance, cars like the GTO (my neighbor’s treasured 60s muscle car) and the Firebird (a Chevy Camaro with sharper corners) and Trans Am ( think Knight Rider)
  • Oldsmobile: at one point a performance car (think Rocket 88) but later a slightly upscale sedan
  • Buick: a near-Cadillac for the middle class that can’t afford a Caddy
  • Cadillac: a word synonymous with luxury, the “Cadillac” of brands
Of course, after GM went for modular platforms and manufacturing efficiencies, the Buick and Olds became indistinguishable and the Olds was killed in 2004 a few months shy of its 107th birthday.

My dad favored Fords (although we had also owned at various times Rambler wagon, a Fiat 128 and a Chrysler 300). Of the Ford purchases, we had one Mercury Maquis, three1963 Lincolns, a 1972 Lincoln and then the rest Fords. As teenagers, my sister and I between us drove a Pinto wagon, a Pinto hatchback (the 4-wheel molotov cocktail) and a Mustang II. My wife & I have bought two Fords and a Mazda since we got married.

What was the difference between a Mercury and a Ford? I guess the word analogy is Buick is to Chevy as Merc is to Ford. But other than a different grille and a different set of dealers (the Ford dealer in Carlsbad used to be really really bad) there wasn’t and isn’t much difference between the two. Being small volume, Mercury tends to get products later than Ford, including the Mercury Mariner (a rebadged Ford Escape or Mazda Tribute) and the Mariner hybrid. (Mercury seems to be dying despite the able services of Jill Wagner.)

How could GM or Ford manage it differently? One way is the old Detroit way, of different drivetrains and perhaps even chassis for each product family. But apparently (given manufacturing or R&D scale economies) that’s no longer cost effective. On the other hand, the move to a common platform for GM (and Ford) saved costs but has eliminated differentiation for decades. Even loyal GM customers wonder if GM can make it with so many brands despite its impassioned defense.

Toyota seems to make it work, as a V-6 Camry has an MSRP of $24K vs. $34K for the comparable Lexus ES 350. I think the problem is that no one wants to pay a premium for a souped up Ford or Chevy. I think that’s as much a problem with the base product line (and its innovation, quality, reliability, fuel efficiency, etc.) as it is with the bells and whistles being added to the “premium” brands.

Friday, September 7, 2007

HP wants to make smartphones, too

Lost in all the noise of Apple’s intro, HPQ unveiled a passle of iPAQ PDAs on Wednesday. All run some derivative of Windows CE and have WiFi, but I think the segmentation is a little more clever than that. At the high end of the product line are two smartphones:

They also have the iPAQ 310/314 ($450) which is like a portable GPS (with a 800x480 touch screen) running Windows CE 5.0. All three replace earlier models in these segments. Overall HP is targeting RIM and its Blackberry product line. However, HP badly trails both RIM and even struggling Palm in global PDA sales.

Microsoft has always wanted more impact on the US smartphone market, but it seems that their Windows Mobile sales leaned towards the carrier-branded (ODM-made) phones like the HTC 8525 even though Cingular also carries HP, Palm and Samsung WM phones. HP née Compaq is Microsoft’s best known licensee, so these new iPAQs have the potential to put portable Windows Media players into more hands than ever before. (Particularly if HP could someday leverage its PC distribution in Office Depot and Best Buy to sell smartphones).

Also on Wednesday, Microsoft quietly announced a price cut of its 30gb Zune MP3 player from $249 to $199. As Bloomberg reports:
Microsoft has sold more than a million Zunes since the player went on the market last November, less than 3 percent of Apple's iPod sales over the same period.

“If they're going to grow the Zune, they're going to have to offer a viable alternative to what Apple is offering,” said Michael Gartenberg, an analyst at JupiterResearch.

Microsoft, based in Redmond, Wash., held 3 percent of the portable digital player market in the six months ended in June, compared with Apple's 71 percent, according NPD Group Inc.
Clearly Microsoft’s greatest handheld success has been with business users, not consumers. Since HP was selling about 1.5 million iPAQs a year with its obsolete product line, its new family could easily outsell the Zune.

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Thursday, September 6, 2007

Best price discriminators around?

Apple loves to do price discrimination (ala Hal Varian’s advice in his book. They’ve been doing it for years, crippling low-end products to avoid stealing sales from the high end ones, setting prices that maximize yield per customer.

However, sometimes companies that try to squeeze their customers for every penny piss off their squeezed customers. Or, those that worry about cannibalizing themselves let competitors do it instead.

Posting late after class last night, I missed a couple of important points about the iPod Touch vs. iPhone price discrimination. Both have the same screen, form factor, virtual keyboard, operating system and roughly the same memory.

A point that I knew but didn't emphasize is that (although the iPhone is $200 cheaper and pissing off the innovators), Apple does not have a $399 8Gb iPhone. What they have is an iPhone which you can get for $399 down plus $1400 over 24 months (with voice and data plans thrown in). So the $299 8Gb iPod Touch is quite a bit cheaper than the "$399" Cingular-subsidized iPhone.

So thus Apple went ahead and really crippled the iPod Touch: the similarities are only skin deep. Yes, both can download music at Starbucks over WiFi. (So what?)

But the iPod Touch is not a phone because it has no microphone (unless Griffin or Belkin add one). It has no Bluetooth (which presumably could connect a Bluetooth headset), although hackers suspect it’s on the motherboard and can be enabled. Clearly many potential iPT buyers (not just me) want to find a way to add a mike or headset to their phone.

What I found particularly lame, however, was the plan to cripple the iPT software. OK, some think it’s idiotic to have a WiFi tablet without e-mail. It doesn’t bother me leave the e-mail out — I want a real keyboard and a real machine to do e-mail, not a portable device.

The one I can’t understand (or necessarily believe) is the statement that the iPT left out “Google maps”. What does this mean? Both machines have a web browser, so can’t you just go to like anyone else? If the experience is different, did Google cripple it? Did Apple remove something that enables AJAX-style Google applications? (The iPT does have WebKit, the underlying engine behind the Safari browser).

Maybe the application difference will be minor, either because Apple includes the apps or 3rd parties find a way to provide a work around.

Still, given the crippling of the iPod Touch, I think Apple’s made a big mistake for the Christmas sales season. The two products together could have provided a blowout, but now the uncertainty and confusion about the iPT threaten to limit it to people who want a video iPod with a large screen that has an undersized disk drive (and doesn’t play SciFi channel shows).

Other firms are not so clever in their price discrimination, and thus will take sales that Apple doesn’t want to make. The Nokia N800 isn’t intentionally crippled: Nokia made the best possible Internet tablet (but without a GSM radio), and so people who notice the iPT limitations will give it a second look. The Intel Moblin devices that the Taiwanese will ship in 2008 will also be designed to be the best possible product, rather than to protect an existing high-end product.

Once upon a time Apple wanted to win markets. Now they seem to be hung up on controlling their ecosystem, maximizing customer yield, or protecting their lock-in with the iPod and iTunes store — rather than aggressively fighting for new customers and to vanquish rivals. In other words, they’ve gotten too clever by half.

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Wednesday, September 5, 2007

Reach out and Touch someone

Apple made some big product announcements today. Three observations:

  1. Except for the entry-level product, Apple now has video in all its product line: Nano, iPod, iPod Touch and the iPhone.
  2. Given the new product line, Apple picked an interesting time to send NBC (and the Sci-Fi channel) packing off to Amazon.
  3. The iPod Touch — an iPhone without the GSM capabilities — is either brilliant or foolish (but given the leverage off the iPhone R&D, it was probably a relatively inexpensive experiment.)
Cutting the price of the 8Gb iPhone by $200 to $399 is either a sign of weakness (the old one wasn’t selling) or an aggressive attempt to steal share against high-end smartphones. Meanwhile, at iPhone Touch (slightly smaller and $100 cheaper) will cannibalize the iPhone — keeping business with Apple but shifting it away from AT&T. It certainly is a way to cater to people who hate Cingular’s network without violating the promise of an exclusive.

Nokia-N800-ThumbPersonally, I find the iPhone Touch most intriguing (although the name is terrible — it’s really an iPhone Lite). It is Apple’s take on the product category of the Nokia N800 WiFi tablet introduced by Nokia in January — a category also being promoted by Intel.

Interestingly, the N800 comes with Skype (unless of course it’s disabled by a carrier). How am I going to make VoIP calls on my iPhone Lite? With Skype via one of the two web-based solutions? With iChat? (Without a microphone, it will need a 3rd party adapter to work with a standard headset).

I wonder if Palm (headed by a former Apple exec) got wind of the iPod Touch and that contributed to canceling the Foleo. Both products are positioned between a smartphone and laptop, but the iPhone Lite is able to leverage off the iPhone’s enthusiastic reviews. Now Palm gets to watch Nokia, Apple and Intel try to establish the new category, and then decide whether it’s worth releasing the rumored Foleo 2 (or just use the new Linux OS for their phones).

iPhone DevCamp notwithstanding, the iPhone and iPhone Lite still badly trail the Nokia (and Intel and promised Palm) products in the ability to add native 3rd party apps. Moving more iPhones to more users (and developers) will either make this weakness so painfully obvious that Apple has to address it, or bring out the ingenuity of developers to deliver useful apps using WebKit.

Spurning Apple, Universal runs to Amazon

After reaching an impasse with Apple over 2008 pricing of NBC TV episodes, AP reports that Universal has run into the willing arms of Amazon with its Unbox service.

The latest announcement implies that Amazon will be selling the NBC shows for the $1.99 (retail) price that Apple claimed Universal was no longer offering.

There are several problems with flirting with someone to make your partner jealous. One is that you’re trading down — that your original choice was actually the better one, and getting emotional is hurting yourself to get even. Today Amazon’s download service certainly lacks the volume and customers of the iTunes Store, although apparently the new Sci-Fi/NBC content are off to a good start, with (as PC World reports)

three of its shows (Battlestar Galactica, Heroes and The Office) are among the top ten sellers, with Galactica and Heroes nabbing the top two spots.
Apple seems to have called Universal’s bluff, assuming that it has no better alternative. I suspect NBC content will someday be back on iTunes. If the pricing is the same as today, then Apple won. If Apple carries at least some episodes for more than $1.99, Universal won.

Now (in the AP story) Universal is claiming that it wanted the flexibility to sell its products for less:
NBC Universal … has said it wants to package programming in different ways at different prices, something Amazon is willing to consider, according to Jean-Briac Perrette, president of NBC Universal's digital distribution division.

In an interview, Perrette said NBC Universal might like to sell single episodes of two different shows together, for example, or let customers who have already purchased several episodes buy a full season at a prorated price.
That’s a red herring (not to be confused with a Red Herring). NBC (like Fox and other networks) wants more revenue from its content and the goal is obviously to push up the average selling price.

More plausible is when Ars Technica repeats the report that Universal thought Apple’s download policies (five authorized devices per household) were too lax (read: consumer friendly). To pick a fight with Apple, NBC must think there are a lot of households where mom and dad (or dad and junior) want to watch Battlestar Galactica or The Office — households that can be convinced to buy a second copy.

NBC is working hard to create a viable competitor to Apple, and will soon have many allies in its efforts. Competition is normally good for consumers because it gives consumers more choice. But what if competition is fueled only to allow suppliers to increase prices?

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Tuesday, September 4, 2007

Foleo was such a bad idea that…

I said in May and again last month that I thought Palm’s planned Foleo PDA-laptop was a bad idea. Apparently Palm’s CEO now agrees. As CNET reported:

Faced with biting criticism of the Foleo, a Linux-based psuedo-laptop gadget, Palm has decided to cancel the first generation of the device.

Palm CEO Ed Colligan broke the news on Palm's official blog Tuesday after the close of the stock market. Just last week, a financial analyst predicted that Palm would have to delay the Foleo's launch until September or October because of serious software-related bugs, but Colligan decided to kill the entire project instead.

"In the course of the past several months, it has become clear that the right path for Palm is to offer a single, consistent user experience around this new platform design and a single focus for our platform development efforts. To that end, and after careful deliberation, I have decided to cancel the Foleo mobile companion product in its current configuration and focus all of our energies on delivering out next generation platform and the first smartphones that will bring this platform to market," Colligan wrote. …

Palm unveiled the Foleo at the D: All Things Digital conference in May to widespread skepticism, despite the fact that Palm founder Jeff Hawkins considered it "the best idea I've ever had." The Foleo is basically an underpowered laptop that's designed to give Treo users a break from typing e-mails on a small phone keyboard. However, few could figure out why smart phone users — who ostensibly own a laptop already — would want to buy a separate $499 device that could do little more than send e-mails.
CNET blogger Tom Krazit called it an embarrassing admission of a company that hit “rock bottom.”

Rock bottom implies Palm has no where to go but up — which would be a good sign given how much trouble they’re in. I think the cancellation is a good thing: admitting you’re on the wrong course is very difficult for any firm, executive or individual, but it’s better to do so before you ship than after shipping another Newton (to recall the infamous PDA of a decade ago that also had functionality issues).
[Michael D]

The blog entry also implies that Palm realizes its future depends on saving its smartphone franchise rather than launching a new product category. Hoping for the best, perhaps this suggests that the grownups are now in charge due to the 25% private equity investment in June.

Chairman Jon Rubinstein used to work for the most demanding (if not most disciplined boss) in the valley — so if he’s imposing a new product discipline, that’s exactly what Palm needs if it hopes to reclaim its former glory. The only caveat is that it’s easy for Rubinstein to kill his predecessor’s bad idea, but will he apply the same discipline for ideas developed on his watch?

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Seeking world domination of social media

In researching PCs, cell phones, and other consumer products, I was struck by how the brands that are dominant in one country are not in another. The story usually wasn’t very complex, reflecting a domestic firm that succeeded in its home market but not anywhere else: Fujitsu was the dominant PC seller in Japan, HP & Dell in the US, Siemens in Germany, Acer in Tawian, Lenovo (née Legend) in China, etc.

There were a few brands that were able to become truly global by cracking some (thought not all) overseas markets, of which Nokia, Motorola and Samsung cell phones would be good examples. But it didn’t really match the pattern of IBM in mainframes or Boeing vs. Airbus in commercial airliners, where the same firms sold the world over. Some of it must have to do with economies of scale: the up front R&D costs for an A380 or 787 are unparalleled in any industry, whereas any teenager in a garage can assemble a Wintel-compatible desktop PC.

ValleyWag has posted a global map of the dominant social networking (aka social media) sites by major country. So it’s myspace in the US, facebook in the UK and Canada, Orkut in India and Brazil, friendster in Southeast Asia and LiveJournal in Russia. Yes, deliberate efforts to create a national champion have succeeded in France, Germany and Korea, but otherwise the story seems much more subtle than that.

At first glance, the social media are less nation- or language-bound than the old media (TV, records, newspaper, books, magazines). For one-to-many distributed content, you need long roots in a country to understand their tastes and generate an attractive assortment that consumers will like.

However, if you are Six Apart of San Francisco — makers of Movable Type blogging software and operator of the TypePad and LiveJournal services — you need to translate your software into Russian and then let Russian users generate their own content. Network effects take off after that.

I’m sure the story is more complex than the previous paragraph might imply. Some of my academic colleagues who are opportunistic econometricians (known as “data miners” in our trade) will want to study the social networking quasi-experiment — using factors such as market entry timing, localization (translation) and existing competitors — to systematically explain the success of various social media competitors.

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GooTube as a role model

A friend of mine tipped me off to a new music streaming site, It’s a relaunch of, a streaming site that was shut down by the record labels earlier this year for copyright infringement.

Deezer has an interesting business model: unlimited free streaming songs, paid for by ads and song click-throughs. Other webcast sites also try to do this, but (at least in the US) impose specific restrictions, like you can’t stream an entire album consecutively (so someone could just record it and download it) — companies like Live365 and Shoutcast.

The Paris-based Deezer has a license from the French music licensing agency SACEM – Société des Auteurs, Compositeurs et Editeurs de Musique. The press accounts don’t explain that SACEM only collects one type of royalty — as the name implies, the author/composer royalty (similar to ASCAP in the US).

However, Deezer has yet get a license for the performance of that music — paying the performers (e.g. a rock group). Those rights are usually held by the performers’ label, and thus requires negotiating (as would iTunes or any other service) with the label. Already, one of the major labels — Universal Music — has said non! to the plan. Oddly (given the usual French nationalism) Universal is the only French-owned major record label — having been sold by its Canadian owner Edgar Bronfman to French water company Vivendi.

So why is Deezer going ahead without a license from the record labels? Cofounder Jonathan Benassaya invoked the GooTube business model as his defense:

Asked if should have waited until the agreements were in place to launch the service, Benassaya countered that YouTube launched its service before it signed deals with content owners to distribute their video. He also said that has been operating since April and that only now has Universal raised its objection.
The Computerworld article also notes that Deezer is competing with Neuf (a Universal-licensed download service) which I’ll guess is the big reason that Universal is making a stink.

On this side of the pond, the Deezer launch must be galling (Gaul-ing?) to US Internet radio industry, which (unlike terrestrial radio stations) for the past five years has been paying performance royalties on all music streaming. The US Internet radio performance royalties (that Deezer is ignoring) are far more expensive than the composition royalties — the latest label demands are for 10-35% of total revenues, or potentially 6X that of the composition royalties. The new rates — set by a US copyright tribunal — would be retroactive to January 2006.

The stations (including many local NPR stations) lost all legal appeals, and have been negotiating past the July 15 expiration of their old license in hopes of getting a better deal from the labels. (Their next hope is that Congress will step in on their side — as promised if no deal was reached by Labor Day). Meanwhile, the record labels have asked for as much as 10% of revenues from financially struggling satellite radio companies.

The problem for the distribution of entertainment is that royalty rates are neither set by the market nor by government regulation. For the composition royalties, ASCAP and BMI come in and tell broadcasters how much more they should pay, and then a Library of Congress panel decides what is fair. The same process was used to set the last two rounds of Webcast performance royalties. The pricing of music downloads seems to be set by a small number of labels telling download companies (like Apple) what they will have to pay. Compared to this, the retail price of DVDs (where there is competition for user dollars) seems like perfect market competition.

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Monday, September 3, 2007

Living in a commoditized world

Searching the Internet, I came across another couple of sites that offer examples of how the U.S. was transformed in the 1960s, 1970s and 1980s by a shift to more competition, deregulation and commoditization.

One is “Bell System Memorial” group of pages at Porticus. It laments

the US Federal Government's deliberate destruction of the best telecommunications system in the world which lead to today's chaotic telecom industry with poor customer service and crappy telephone equipment not to mention the countless FCC and other mandated federal tax charges on your local phone bill - hidden and itemized.
I would be the first to agree that today’s telecom environment doesn’t deliver the 99.9% system reliability that The Phone Company once achieved. But Ma Bell was a monopoly with a sense of noblesse oblige that entitled it to tell us what we needed in telecommunications services. If AT&T had its way, there would be no Carterfone and no competition in handsets and we’d only be using home and business telephones manufactured by Western Electric.

AT&T also fought throughout the 1960s and 1970s to make sure there would be only one cellular carrier (i.e., TPC). This was tried in Japan and Germany in the early 1980s, and the result was overpriced service and no users. As it was, U.S. cell phone adoption was held back for most of the 1980s because it was not a priority for the Baby Bells (who got the cell phone franchise because AT&T didn’t think it was very important). It was only through the efforts of people like Craig McCaw that anyone realized there was a demand for cell phone service (before the 1995 entry of the new PCS carriers increased competition and predictably spurred adoption).

AT&T was filled with a lot of smart people, including (for 15 years) Claude Shannon, the father of the information theory that gave us deep space communications and digital cell phones. But no one company is smart enough to provide all the innovations, technical or economic decisions necessary to run a $14 trillion economy. So I miss Ma Bell, and there are many things she would have done better, but it’s hard to argue that the economy would be better off if she still had an iron grip on America.

The other example is the airline industry. Airlines were once luxurious, with many perks. In reviewing some old promotional material, the Telstar blog notes that service was priced accordingly:
Telstar Logistics came upon a 1954 brochure from Trans World Airlines promoting TWA's daily service to San Francisco. Included in the brochure was the table shown here, listing some typical fares to and from SFO.

Here's how those 1954 fares would convert in 2006 dollars:

San Francisco to New York, round-trip:
First Class: $2198
Sky Tourist: $1448

San Francisco to Chicago, round-trip:
First Class: $1587
Sky Tourist: $1106
TWA was absorbed by American Airlines in 2001. Today a SFO to JFK round trip is $379 ($358+tax) for 7-day advance purchase and $320 ($298+tax) for 14-day advance purchase, less than a quarter the 1954-equivalent prices.

In fact, these numbers seem suspiciously low (i.e. I think the TWA tickets would cost more in 2007 dollars). I ran a more personal example: a 14-day advance purchase round trip from San Diego to Boston today totals $350. During my first year at MIT (1975-1976) the advance purchase price was $400, but that $400 32 years later is worth $1,580.

AaplayingcardsThat extra $1200 buys a lot of McDonald’s-to-go, playing cards and inflight movies. A lot more people are flying now because they can afford it, and it’s my choice what to do with the extra $1200, not the airline’s. I’m told that if I’d like to enjoy good quality service again sometime, I can always fly JetBlue — but somehow that’s no longer as convincing a claim as it once was.

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Saturday, September 1, 2007

Testing iTunes supplier power

The iTunes [Music] Store has been so successful that the record companies are envious. Many but not all rival stores have failed (most recently Sony’s), and so the record company oligopolists find themselves at the mercy of Steve Jobs and his control of the most successful legal download site to date. Not quite two years ago, Apple got some of these same companies (through the overlap of the music and movie media megapublishers) to provide video for its site — mostly TV episodes — which met with immediate success. But that success has brought bitter complaints from Hollywood (and Nashville and New York).

One of the key issues has been that Jobs believes that $0.99 (or €0.99) per track is a magic number, and wants to keep a single simple price to promote adoption. Prior estimates have shown that (due to high royalties) Apple makes very little off the content but instead makes all its money off of hardware, and thus wants an ongoing supply of attractive content to sell more iPods.

Instead of a fixed price, the record companies have long argued for a range of prices, with higher prices for hot titles and less for run-of-the-mill titles. (Despite occasional claims to the contrary, it would appear that the 99¢ would be the floor and not the average price). Such a “versioning” strategy is very consistent with the work of economist Hal Varian in his book with Carl Shapiro entitled Information Rules. (Labels today are able to charge a premium for some tracks, in that they require download of an entire album to get one or two popular songs.)

Although the record companies have made threats to withdraw — and in July Universal decided to go month-to-month in supplying music to Apple — so far none of the music companies have been willing to cut off their nose to spite their face. Universal also decided to license its DRM-free music to everyone but Apple. But apparently this week NBC (i.e. the same Universal) decided to make a stand on licensing its television content.

NBC decided that it wanted a price increase on what it got for its TV episodes, and thus leaked it would not renew its contract at the current prices beyond the end of 2007. Apple claims that the net result would be to increases episodes pricing from $1.99 to $4.99 each. Whatever the number, it’s clear that NBC think the market will sustain a higher price — and it’s also clear that some outsiders believe NBC is overestimating the value of its content.

IP lawyer Chris Castle articulates what everyone knows: that the suppliers want to reduce Apple’s control over online distribution channels:

“I think there is a general perception in the industry that we need to get tough with Apple and break the lock they have on the consumer market,” Castle said. “I think what’s happening is that there is a general gestalt of ‘Apple is a pain in the (butt) so let’s help some other companies out. Let's do something to build up a retailer other than Apple.’”
Conversely, NBC may be playing a weak hand to challenge Apple on its own. Disney and its ABC subsidiary were first aboard the S.S. iTunes and will likely to be the last to leave — at least as long as Steve Jobs is a director, the largest shareholder, and a key player in its Pixar animation unit. Meanwhile, our local paper implies that NBC will blink now that Apple has decided not to carry any new NBC shows:
That said, NBC is in a tough position, too. The NBC network came in fourth place in the Nielsen ratings last year and has struggled to come up with new hit shows. Not only does iTunes provide an extra source of revenue, but it can serve as an important buzz generator and audience builder for new programs, something NBC arguably could use.
Apparently the biggest loss for Apple will not be NBC, but from its SciFi Channel subsidiary. (With the end of Stargate and the increasing absurdity of Galactica, it’s not clear who’s still watching SciFi anyway).

I happen to think that Apple is dead right on music prices —reasonable prices are necessary since the alternative is an illegal download. Video isn’t there yet, but that’s really a temporary question of bandwidth rather than some difference in practical enforceability or moral compunctions.

If Apple is right, NBC will do a deal to avoid giving ABC and Fox a huge advantage in generating word of mouth. If Apple is wrong, it will lose suppliers until it’s forced to capitulate to their demands to yield more revenue from every subscriber.

Where will it all end up? Gartner VP Allen Weiner predicts that eventually all the downloadable video business models will shift to advertising infested supported ones. As a consumer, I find the prospect appalling, but as an economist I think the logic is unassailable. Variable advertiser pricing is a lot easier to implement than variable consumer pricing, and of course this is the way that the entire industry is set up to monetize mindless TV sitcoms.

Apple is unveiling new iPods on Wednesday, so any doubts about the future of the iTunes store will take some of the wind out of its intro event.

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