Snarkonomics

Prolonged headbutt battles

Richard Curtis compares the ABC/Cablevision Oscars near-blackout to Kindle owners’ protests over the windowed release of Game Change:

The moral of Cablevision vs. ABC as far as the publishing industry is concerned is that consumers have no patience for such arcane issues as windowing, loss leader pricing or agency business models. They expect their book when they hit Download and they want it at a reasonable price. Educational initiatives are a waste of time. We need to get our pricing act together. Though there is no Academy Awards show to bring us to the brink of catastrophe, the e-book industry will not realize its full potential until we provide our products reliably and at prices that make sense to customers.

Likewise, Nat Torkington sees a similar squeeze in Amazon’s recent decision to discontinue its Associates program in Colorado, in response to the new sales-tax-for-online-retailers law there:

So let me get this straight: I’ve done nothing, and Amazon just fired me? Now, I haven’t used referrals a whole lot so it doesn’t hit me in the pocketbook but this should send chills down the spine of anyone who thought they were building a business, or at least an income, around Amazon services. It’s one thing to be fired for something you did (hey doofus, don’t cause a heap of MPAA infringement notices to land on Amazon’s desk because you were running the new Pirate Bay on EC2) but it’s entirely another to be fired for something outside your control.

A farmer friend told me that the goats to keep are female goats: when one doe headbutts another, the recipient then turns to the next in the hierarchy and headbutts them. With male goats, though, you get prolonged headbutt battles that are loud, intimidating, and potentially damaging. Amazon is obviously hoping the female goat scenario plays out: Amazon headbutts me, so I’ll go headbutt my representative— punish Amazon’s associates and hope they’ll pass the pain on. I wonder whether any of Amazon’s (former) Colorado associates will turn out to be male goats who, grumpy at being set upon, retaliate.…

I guess I might contend that what’s new about this, if anything, is that 1) disputes between corporations and governments are playing themselves out in consumers’ living rooms and 2) consumers are newly empowered to wreak havoc on… somebody (and it’s not always clear whom). I think Curtis’s take on this is basically right, because in the Kindle windowing cases, we’ve already seen Amazon’s customer base retaliate for this kind of e-gamesmanship — and that was without anyone moving to cut off their income stream. There is no clear hierarchical logic to follow. Just more heads to butt.

 

Undercapitalized

Here’s an idea Malcolm Gladwell throws out in a long back-and-forth with ESPN’s Bill Simmons that’s mostly about the NBA. Simmons argues that career longevity, European imports, and overachieving young players have helped make the current NBA particularly well-stocked not just with talent, but with well-used talent. Gladwell makes one of his trademark Gladwellian connections:

What we’re talking about is what are called capitalization rates, which refers to how efficiently any group makes use of its talent. So, for example, sub-Saharan Africa is radically undercapitalized when it comes to, say, physics: There are a large number of people who live there who have the ability to be physicists but never get the chance to develop that talent. Canada, by contrast, is highly capitalized when it comes to hockey players: If you can play hockey in Canada, trust me, we will find you. One of my favorite psychologists, James Flynn, has looked at capitalization rates in the U.S. for various occupations: For example, what percentage of American men who are intellectually capable of holding the top tier of managerial/professional jobs actually end up getting a job like that. The number is surprisingly low, like 60 percent or so. That suggests we have a lot of room for improvement.

What you’re saying with the NBA is that over the past decade, it has become more and more highly capitalized: There isn’t more talent than before, but there is — for a variety of reasons — a more efficient use of talent. But I suspect that in sports, as in the rest of society, there’s still an awful lot of room for improvement.

Noam Scheiber, writing in The New Republic this week, says basically the same thing (about management, not basketball):

A lot of people talk about reviving the domestic manufacturing sector, which has shed almost one-third of its manpower over the last eight years. But some of the people I spoke to asked a slightly different question: Even if you could reclaim a chunk of those blue-collar jobs, would you have the managers you need to supervise them?

It’s not obvious that you would. Since 1965, the percentage of graduates of highly-ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem. Harvard business professor Rakesh Khurana, with whom I discussed these questions at length, observes that most of GM’s top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost. As Khurana quips, “That’s how you end up with GM rather than Toyota.” 

In effect, what we’ve been doing in American industry is overpaying flashy ball hogs who put up great statistics but don’t know how to build teams or win games. In a similar vein, Umair Haque says that the whole model of a “leader” needs to be rethought, and what we really need are builders:

Leadership was built for 20th century economics. It’s a myth that leadership is a set of timeless skills. Is it? Abraham Zaleznik famously defined leadership as “using power to influence the thoughts and actions of other people.” Influence is the key word. The textbook skills of the “leader” — persuasion, delegation, coalition — aren’t universally applicable. Rather, they fit a very specific context best: the giant, evil, industrial-era organization.

Leaders don’t lead. How did this particular skillset emerge? Influence counts because the vast, Kafkaesque bureaucracies that managed 20th century prosperity, created, in turn, the need for “leaders”: people who could navigate the endlessly twisting politics at the heart of such organizations, and so ensure their survival. But leaders don’t create great organizations — the organization creates the leader. 20th century economics created a canonical model of organization — and “leadership” was built to fit it.

Haque actually doesn’t do a great job at articulating what a “builder” does differently, other than throwing out a few examples. (Yes, Obama isn’t as accomplished a builder as Gandhi — but saying that Gandhi “built” nonviolent resistance only scratches the surface.) 

But if you use Haque’s new-economy and Scheiber’s old-economy critiques of current practices, you get something very powerful. The pre-managerial, heroic-age-of-capitalism industrialists of the 19th and early 20th centuries didn’t always build things that were good, from our perspective — but coalsmoke aside, they BUILT things, creating real capital and value along the way. It’s this fifty-year-blip of late uncreative capitalism, milking old property for its dregs, reshuffling money to create something from nothing, that has culturally really screwed us up.

 

The secret levers of Condé Nast power

Erick Schonfeld at TechCrunch has the skinny on why magazine publishers are pushing for a “Hulu for magazines” to get magazines on the iPhone:

Why are these print publishers reinventing the digital wheel? A popular app store already exists. It’s called iTunes. And people don’t mind paying for apps there. By creating their own app store, the magazine publishers can avoid paying Apple its 30 percent cut of sales. But that’s not the real reason.

The real reason they want their own store is the customer data. Magazine companies may look like paper companies, with a little art direction thrown in. But at their core, magazine companies are database companies. The way they make money is by knowing who their readers are and marketing to them by where they live and who they are. For nearly every subscriber, they have a credit card number. And they have whole departments which do nothing but massage the data to figure out who to target for advertising purposes and where the profits are. I’ve seen this machine in action. The database people hold the secret levers of power inside magazine companies.

This shouldn’t be a revelation, but it feels like one: nobody working in print media makes money by selling print media. Newspapers sell advertising, bookstores sell coffee and calendars, popular novelists sell movie options, less-popular novelists sell creative writing classes, popular nonfiction writers sell lecture appearances, less-popular nonfiction writers sell humanities seminars, Ben Franklin sold bookplates, and magazines sell subscriber data. It all makes the movie industry’s reliance on box office and DVD sales seem downright purist, even after you consider product placement and crossover merchandizing.

Also worth noting: the fact that magazines’ core business lies in massaging and selling subscriber data makes them pretty good candidates to thrive on the web, once they get their s— together. That’s where the real money and potential for growth is on the internet, too.

 

Pricing e-books

Counterintuitive hypothesis: The most significant thing that Amazon and now Barnes & Noble have done for e-books hasn’t been the creation and updating of their dedicated reading machines. It’s the creation of a genuine marketplace for e-books, where consumers can pick up titles easily, publishers can offer them and make at least a little money, and [in Amazon’s case] even little guys can get their stuff out there. You might have needed the reading machines to push the marketplace, but the marketplace will continue to be relevant even if everyone decides tomorrow that they don’t actually want a Kindle anymore. You can already read e-books on computers, smartphones, and pretty soon video game consoles. Amazon sold the razors, sure, but they can sell you the blades even if you don’t buy a razor at all. That’s big.

But creating a marketplace isn’t just about syncing to a device and matching readers’ eyeballs to content. You also have to establish, respond to, and eventually stabilize readers’ and publishers’ expectations about sales, especially about price. 

This is harder than it sounds. How much should an e-book cost? How much should publishers have to share with the retailer? Just what are you buying? For hardcovers and paperbacks, these expectations have built up over a long time. This tweaked a bit when online sellers and big-box retailers started offering moderate-to-steep discounts over cover. None of this makes establishing norms for digital sales any easier.

For music, Apple pulled this beautifully in the early days of iTunes. At the time, CDs sold between 10 and 18 dollars for a typical album. This was actually really frustrating, because percentage-wise, it’s a huge variation. It was also an uptick from cassettes, which had rarely cost over $10. 

Apple just perched on the low end: every track is 99 cents, every album is $9.99. They were competing with the free (P2P or friend copies) and the physical (real discs with better sound quality that you could play in your car), and they found a way out. Round numbers (good retail numbers for any product), close to what we were used to paying (but still offering competitive advantage). And they held it there, even when big media companies huffed and puffed because they wanted to charge more for high-demand (or high-cost) products. Apple’s establishment of trust with the music-buying public won out. And held out. Singles still cost a single. Which makes the digital music marketplace oddly pure.

At Booksquare, Kassia Krozser argues that the same price-stabilization is beginning to happen with e-books:

At Digital Book World, I’m going to do a brief presentation called “The Case for the $75 eBook”, because there is a marketplace for high-priced ebooks. In fact, I think there’s a robust marketplace for higher priced digital books, and I believe I can make a strong case for these price points.

That being said (ha!), I don’t believe the publishing industry can make a valid, solid, logical case for pricing most narrative fiction (and some non-fiction) ebooks above $9.99. Not only is this price point being cemented in the minds of readers by retailers, but, let’s be blunt, publishers have done a lousy job of making the value argument. The near-cynical approach of publishers to producing and selling ebooks has backfired. The process, the pricing, the product has been weighed by consumers and they are not amused. They like the $9.99 and below price point. It makes sense to them.

So, yep, I’m predicting publishers will have no choice but to swallow this one and figure out how to make their business work with ebooks priced below $10. It’s better to initiate this change rather than scramble when the retailers start demanding better terms. You can do it, publishing industry, you can do it!

It’s true! Maybe it’s just because we’re already primed by iTunes albums, or because $10 is the low-end price of a good trade paperback, or that $9.99 is one of those psychologically great retail numbers (Just dollars and cents! Not tens of dollars!), but it’s got real power. 

For instance, I priced Stanislas Dehaene’s Reading in the Brain at both Barnes and Noble and Amazon. The book lists in hardcover at $27.95. At Amazon, it sells for $18.45 in hardcover and $14.76 for the Kindle. At Barnes and Noble, it’s $20.12 (huh?), or — yes — $9.99 for the e-book. 

Now this was easier because I like the B&N app for the Mac and I preordered the Nook. But if B&N sells its e-book for $18, I either buy the hardcover from Amazon or pass altogether. At $9.99, I bought it right away. I did the same thing for China Mieville’s The City and the City: Kindle $13.73, B&N $9.99. On the other hand, I sprung for The Complete Short Stories of Ernest Hemingway for almost $18 and still feel like I got hosed. 

Now, digital books also offer the possibility that books, like CDs, can be split and sold separately. Maybe I just want to buy a copy of “The Undefeated” and “In Another Country” — a taste of Hemingway, not the whole short-form corpus. Big publishers haven’t really done this yet. But among independents and self-publishers, the other price point that seems to be emerging — the symmetry with iTunes is astonishing — is the 99 cent short story. And again — this feels just about right, especially appealing to folks reading these things on their iPhones, who don’t want to leaf through a whole novel or anthology, right around the same price as a cheap iPhone app or a single song. 

But Krozser’s hypothetical $75 e-book suggests that there are still plenty of other price points and formats to be hammered out. Maybe $25-$40 is the perfect price for an e-textbook. Maybe a short, indie nonfiction pamphlet — 2011’s version of New Liberal Arts — could sell well for $3.99. Maybe digital copies of new books will be free for readers who buy the hardcover (factored into the sale price). It’s still wide open. But with competition between sellers and tug-of-war between customers and publishers, we’re bound to figure it out.

 

The Working Poor In America

… get stolen from, retaliated against, hurt at work and convinced not to complain, and paid less than the minimum wage, not just sometimes, but most of the time:

The study, the most comprehensive examination of wage-law violations in a decade, also found that 68 percent of the workers interviewed had experienced at least one pay-related violation in the previous work week…

In surveying 4,387 workers in various low-wage industries, including apparel manufacturing, child care and discount retailing, the researchers found that the typical worker had lost $51 the previous week through wage violations, out of average weekly earnings of $339. That translates into a 15 percent loss in pay…

According to the study, 39 percent of those surveyed were illegal immigrants, 31 percent legal immigrants and 30 percent native-born Americans… [W]omen were far more likely to suffer minimum wage violations than men, with the highest prevalence among women who were illegal immigrants. Among American-born workers, African-Americans had a violation rate nearly triple that for whites.

Excuse me; I need to go punch something. And then maybe throw up. Then punch something else.

 

How We Spend Our Days

Now I don’t remember who pointed me to this; it’s been abandoned in a tab all day. Best NYT infographic I’ve seen in many a day: a visualization of how Americans spend their time, hour by hour.

Update: Just looked at my RSS reader, and now I remember who pointed me to this … everybody in the world. Geez.

 

The Starbucks API

Lots of people seem to think Starbucks’ new “stealth stores” are creepy…

A Seattle outlet of the 16,000-store coffee behemoth is being rebranded without visible Starbucks identifiers, as 15th Avenue Coffee and Tea.

Two other stores in Starbucks’ native Seattle will follow suit, each getting its own name to make it sound more like a neighborhood hangout, less like Big Coffee, a Starbucks official told The Seattle Times on Thursday.

…but imagine that this was playing out differently:

What if Starbucks was offering up a Starbucks API—a set of hooks into a vast, efficient coffee shop support system with incredible economies of scale? You, the local coffee shop owner, simply plug in, and wham, your costs drop by thirty percent because you’re leveraging Starbucks’ insanely optimized supply chain. You can use as much or as little as you want.

The NYT cites the Huffington Post…

You can imagine where this un-branding campaign could lead. A little neighborhood burger place run by McDonald’s? A little neighborhood hardware store owned by Home Depot? A little neighborhood five-and-dime operated by Wal-Mart?

…and I find myself thinking, uh, yeah, wouldn’t that be cool? Swap out “run” and “owned,” and put in “powered” and “supported.” Wal-Mart’s back-end is as innovative and important as its front-end. Why not offer it up to indie retailers?

I know it’s a stretch, but consider the analogy: Amazon’s web services have been absolutely transformative in the startup world. You can store files and spin up servers without buying, or committing to, anything. It’s easy to try things and cheap to fail. The notion of plug-in infrastructures just as flexible for other businesses—real-world businesses—run by other goliaths isn’t unsettling. It’s exciting.

And yes, I realize that’s not what Starbucks is doing here. But it’s what they should be doing!

 

Link Love and the Viral Spike

Worlds collide! Both Current’s Sarah Haskins and Snarkmarket’s guest-blogger Matt Penniman are mentioned approvingly in this BBC Web Monitor post. (Via Tim.)

The BBC also points to an op-ed by Bill Wasik in the NYT, which I am drafting into service in our Snarkmarket Forum on Free (Related Topics Division). It’s about the new “big break”—the viral spike!—which is made possible, after all, by the friction-less power of free.

Well, that and the internet.

 

It Feels A Little Like Free

I had a stray thought the other day, related to Chris Anderson’s observation that what’s really radical about the idea of “free” isn’t its economic reality but economic psychology. Free things freak us out; either we think they’re worthless or scammy or we love them so much that sometimes they actually make us economically stupid. (I once stood in line for an hour for a free burrito when I was paying a babysitter $10/hour at the same time. Say what you will about whatever I was “buying” with my money, I wasn’t maximizing my utility.)

Anyways, here’s the idea:

If what matters about “free” is the psychology, then the solution is to make paying something feel like paying nothing.

Think about it! When the idea of free really works, it makes us forget that it ever even cost anything at all. Reading web pages is free — once you count the money you pay for internet access. Between my phone and my house, I pay more for internet access per month than I do books — and I read a lot. Add on to that all of the ways my free behavior is paid for with information from or attention paid by me, and a ruthless calculus would determine that the internet is expensive as hell.

Almost all free things are cross-subsidized in some ways. But if the cross-subsidy is obvious — “Free phone with a two-year plan worth at least…” — then free fails. If your website suddenly has a glaring and obnoxious banner ad, then it doesn’t matter if it is as free today as it was yesterday. It doesn’t feel free anymore.

On the other hand, you can actually make getting something you’ve paid for feel like something free. Casinos are terrific at this. Everything’s free, and you still spend money everywhere. Sometimes, governments are good at this too — although they sometimes create benefits that are so invisible that we don’t even think about them at all, except when they fail. (Free can’t work too well! Or people will still feel cheated!)

A classic example might be buying something — let’s say, groceries — with a credit card. I used to pay for all of my groceries with cash or check, so I always had to be aware of exactly how much I was spending and whether I either physically had enough money on me or at least had enough in the account (and enough to still pay rent, etc.). Then I got a credit card that gave me rewards at gas stations and grocery stores — the money is like invisible bullets. I don’t worry about each individual trip, I just pay the lot at the end of the month. This ramped up until I looked at a breakdown of my finances, and realized I was paying twice as much for food each month as I was a few years before. It felt more like free.

Digital media is catching on. I hardly ever used to buy anything in iTunes, because it was a total hassle. The terms of service had always changed, I had to log-in, add something to my cart, and then check-out. It was worse than going to a record-store! And a lot worse than Amazon, where I had one-click, free shipping… Anyways, I recently disabled all of the nag screens, and suddenly, I’m buying stuff on iTunes left and right. People talk about this with their Kindles, too — the fact that you can browse for, buy, and begin reading books so smoothly reduces the friction of every purchase, so you read one after another. It all goes through Amazon and you get billed at the end of the month. You know you bought something… but you kind of didn’t. To quote Flanders, “it feels like you’re wearing nothing at all.”

Software sort of works like this too. It’s easy to buy applications for the iPhone or iPod touch, because you do it all right through Apple — it syncs to your iPod and you’re ready to go. It’s much harder, psychologically, to go to a developer’s website, fill out all of your information, decide whether or not to use PayPal or your credit card, download the application, open it up, enter your serial (which went to your old email address), register the software again, etc… At every moment, it screams, “you’re paying something! You’re paying something! Are you sure there isn’t free software that could do the same thing?”

The real trouble, however, is advertising. If you have an ad-supported application or website, it’s going to feel the most free and probably be the most popular if the ads are so discreet as to be practically invisible — you don’t even realize that someone paid for you to see what you’re seeing. But advertising HAS to be attention-grabbing if it’s going to work.

Newspapers actually came up with a genius solution to this problem years ago — the classified ad. It’s an advertisement that feels like a service. In most cases, when you were reading classifieds, you actually PAID to see them (although each ad — for the reader — was free). Now, of course, classifieds are (almost) actually free (to place and read). But you still see things like job advertisements, etc., which play out to readers more like services than ads. And because they feel like services, they feel like free.

So here’s the (provisional) lesson. There is no such thing as a free lunch. But some lunches feel freer than others.

 

Ferguson/Fallows on China

This 75-minute dialogue between Niall Ferguson and James Fallows, about China and its relationship with the U.S., is nuanced, detailed, and thought-provoking.

(My view here is colored by the facts that a) James Fallows has been my favorite journalist since I started reading his Atlantic articles back in college and b) I want to somehow, somehow, learn to speak like Niall Ferguson. Scottish accent and all? I think so.)

Anyway, Ferguson and Fallows really argue here—in the way two smart people argue over dinner, not in the way that people argue (“argue”) on cable news. It’s always surprisingly thrilling to see people actually think on camera.

To set it up, the point they don’t dispute is that, right now, the world’s most important entity is “Chimerica”—the blended economies of China and America. At this point, even after the economic shocks of 2008 and 2009, they are still inseperable, and incoherent without each other.

Ferguson and Fallows disagree on what happens next. Ferguson says Chimerica is doomed, and get ready for a painful disruption. Fallows, fresh off of three years living in China, is more optimistic—he thinks the relationship is flexible, durable, and many-faceted.

I saw Niall Ferguson debate Peter Schwartz here in San Francisco, and all I gotta say is: I wouldn’t want to face off with this guy across a stage. He is erudite, to be sure; but he also carries and deploys his erudition in a particularly cutting way—like an Oxford don James Bond.

Anyway, I emerged from the 75 minutes mostly on the side of Fallows—but I always appreciate Ferguson’s gloomy, ultra-realist point of view. Also, Fallows follows up here.

 
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