Wednesday, September 28, 2011

Amazon and Apple in Asymmetric Competition

Today it is widely expected that Amazon will launch a 'next generation' Kindle. The rumor mill says that it will be called the Kindle Fire, it will be running an Amazon controlled and adapted version of Android 2.1, it will be priced 'competitively' a bit lower than the basic iPad, it will have a smaller form factor than the iPad (7") and may look much like the Blackberry PlayBook, but above all it will be a new and better way of consuming the books, films, music and other digital media properties that Amazon successfully sells to its large consumer following.

Many observers think that Amazon has perhaps the best chance of competing with Apple in the 'tablet space', which increasingly looks as though it might otherwise become an Apple preserve. As David Streitfeld in the New York Times points out, one of the reasons that Amazon has a chance is that it is not a straightforward competitor but an asymmetric competitor. The tablets that have abysmally failed to compete with Apple so far (and its a long list: Blackberry, HP a fistful of Android efforts) have failed because they have been competing head-to-head the level of hardware with a device that in every case, however serviceable the hardware, abysmally fails to match the content and software eco-system (its all about the apps) which sustains and grows Apple's market. Amazon will position its tablet not as a device that matches the iPad in specification and function, but as a better conduit to media resources and media consumption. Amazon does have a very significant content mix that it can channel through its device. In the books area it has a stronger and deeper selection than Apple, and although it may be lagging in its selection of music and film, it has nonetheless a respectable harvest. Books is a key strength and with its successful eInk Kindle track record Amazon has the potential to migrate millions of book lovers (and their purchased libraries) to the new platform. Apart from Apple no other media/tech player has anything like Amazon's content reach (not Google, not Facebook, not Microsoft or Sony).

But the competition will be intriguingly asymmetric "because Apple sells movies, music and books in order to sell devices. Amazon sells devices in order to sell books, movies and music. Apple has never faced an opponent with such a vastly different strategy." (New York Times 25.9.2011)

In fact the competition is deeply asymmetric in a number of ways. Amazon already provides access on Apple devices through its Kindle app, the chances are that Amazon will try to maintain the compatibility between its eInk-based Kindle app on the iOS platform and its native Kindle Fire app software. That could get to be complicated, it could inhibit development of better native-Android reading software, but this is an asymmetry that gives Amazon market reach. There is no chance that Apple will provide access to iTunes or to iBooks on an Amazon tablet app. Amazon would probably not allow that, and Apple certainly would not want that. If iBooks were to get a lot better, perhaps through taking advantage of hardware or system features, that would put some competitive pressure on Amazon's lead with eBooks. Asymmetric also in that Apple will stick to its 'agent' or facilitator role, whereas Amazon will act more as principal (Amazon is in fact becoming an eBook publisher). Apple will continue on its policy of levying a distribution tax from content that uses its iTunes marketplace (30%). Amazon will seek to maintain and re-introduce its 'merchant' role, wherein it can exploit and require deep discounts from publishers developers. Amazon will not lightly give pricing power to its publisher partners (its rules for the app market give Amazon the right to discount to zero!). Apple does give developers and publishers more pricing autonomy, because Apple knows that it will attract more developers that way and will sell more hardware and grow the ecosystem. Ironically, Apple will be able to move much more quickly to cloud-based services (Apple has struck deals which permit this streaming management of content with the permission of the music majors and publishers). Amazon will be more 'stuck with' a distribution and download model in which bits and megabytes are moved from server to device and copied to personal lockers. Ironic this, given Amazon's second to none services in cloud computing. Netflix (Amazon WSC's biggest customer) has been streaming film from Amazon cloud computers long before Amazon has the music majors signed up to a streaming approach for consumer music.

In fact the competition between Apple and Amazon at this point looks so asymmetric that one doubts that either side really needs to win a knock out. Mutually assured co-existence will be enough. Amazon will have an apparent success on its hands if it can migrate the majority of its existing and growing Kindle market to a better tablet Kindle Fire. It doesn't need to compete with Apple at this stage in the provision of the widest and richest form of app market. It has a lot of negotiating and catching up to do before it can hope to challenge Apple in music and film, and it is not interested in the new post PC computer market that Apple has in its sights. Apple may not mind Amazon getting further success in the books market (as Jobs said people don't read books anymore). The incidental benefit for Apple of a perceived to be successful Amazon tablet is that this 'success' will severely compromise and complicate Google's struggles to move Android from success in the smart phone form factor to successful tablets. If the first acceptable Android tablet is one in which Amazon have forked the operating system and taken control away from Google we can expect further fragmentation and frustration in the Android eco-system. Apple should be rather pleased about that.

From my standpoint, the most interesting area of conflict that now opens between Amazon and Apple is the one which touches on magazines and newspapers (and of course that interests us most at Exact Editions). It seems very likely that Amazon will have a strongish hand in the periodicals space for its new Kindle, and it will be very interesting to see how the Amazon commercial model for those periodicals works out. I doubt it will be easy to get an entirely satisfactory magazine/newspaper digital experience on a 7" tablet, and there will be some challenges in then moving a suboptimal experience to a 10" device in 2012, just about the time that Apple brings out its likely iPad 3. We live in interesting times!

Monday, September 19, 2011

Forking the Business

Reed Hastings the inspirational founder of Netflix just owned up to a big mistake in running his business (see his video apology here) and announced that in consequence of this misstep and failure of communication he would split his baby in two: Netflix (the old name for the new business) which would now solely be concerned with selling digital streaming video to consumers on a subscription basis, and Quickster (the old business with a new name) which would be solely concerned with shipping DVD's to customers who wish to have films on DVD.

In software parlance he is 'forking' the code base (the assets of Netflix and the employees will be divided between the two new businesses), and he is duplicating the customer base (users will have two accounts where they had one before) and he is potentially setting them against each other.

So we realized that streaming and DVD by mail are becoming two quite different businesses, with very different cost structures, different benefits that need to be marketed differently, and we need to let each grow and operate independently. An Explanation and Some Reflections.
This does seem like a pretty drastic change to a business that has been steadily evolving towards a streaming mode of delivery for film and TV. I hope it works out for the Netflix businesses and its customers, but it certainly seems risky.

It is worth thinking about these drastic manoeuvres because a similar distribution challenge faces the magazine industry as digital delivery becomes more important. Will it be necessary for magazine publishers to split their editorial, development and design teams, their commercial and sales efforts to build separate digital and print-based work-flows and subscription operations? Some magazine publishers are working now with separate editorial and design workflows? Will this result in an inevitable split between subscribers for print product and for digital editions? Can magazines afford this duplication? Do consumers want two products?

At Exact Editions we are convinced that such a split cannot work, is ruinously expensive and results in sub-optimal solutions for print subscribers and the digital audience. Perhaps magazine publishers have been too mesmerised by the possibility that magazines as digital resources on the iPad could be something completely different from the print object (and perhaps not quite honest enough about the talents that they have to produce something completely different and digital, some ghastly interactive apps have been the result). The key thing that magazine publishers have going for them is that they already (in many cases) have a strong and renewable subscription relationship with their print audience. Actually most music producers, film companies and book publishers would die for a situation in which they had a direct billing relationship with the digital audience. Magazine publishers have no idea how lucky they are. It is therefore vital to transfer this subscriber relationship to the digital sphere as soon as possible. Print publishers can do this because it can be very simple and straightforward to offer those print-subscribers who want it a digital subscription as a complementary part of their print subscription. Enfranchise the print audience as quickly as possible.

Consumer magazine publishers are in an extraordinarily privileged position because they 'own' their audience (subscribers who come to them direct) in a way in which very few consumer media operations are able to match (music, film, book and TV producers all struggle through not being able to bridge the gap directly between digital product and digital consumer). From this standpoint the concession that Apple has given to magazine publishers is extraordinarily important.
“Our philosophy is simple—when Apple brings a new subscriber to the app, Apple earns a 30 percent share; when the publisher brings an existing or new subscriber to the app, the publisher keeps 100 percent and Apple earns nothing,” said Steve Jobs Apple Press Release Feb 15, 2011
Although magazine publishers do realise the importance of 'owning' their digital audience, very few of them have yet made the transition that the prevalence of the iPad/iPhone and the army of Android devices affords to them. Relatively few magazines yet have 2% of their subscription numbers through digital subs. By Christmas 8% of the US consumer magazine market will have access to their own iPad, and 4% of the UK audience will be similarly placed. Surely it is time to get those subscription offers in place? No need to fork the business for that.

Friday, September 02, 2011

Financial Times Tablets

As a regular FT reader I watch their digital development with real interest. Paid Content has been following their strategy and has a note about the reasons why the FT has now withdrawn its app from iTunes.

Two months after the deadline for compliance hit, it’s now clear The Financial Times and Apple (NSDQ: AAPL) can’t come to a compromise over the new requirement that in-app subscription payments must go through iTunes Store. The paper’s iPad and iPhone apps have disappeared from iTunes Store. Apple says the FT took them down to comply with its new terms. Financial Times Apps Finally Pulled from iOS Paid Content

The FT has a really excellent HTML5 app designed for the iPad (and other tablets?) and subscriptions for this app can be purchased directly from the FT web site. Note that the headline is misleading, the FT has not pulled its app from iOS, the app actually works fine with an excellent touch-interface on the iPad. What has happened is that the app cannot be bought or distributed via iTunes. The reason for pulling out of iTunes? Well, it apparently isn't primarily about the 30% commission that the FT would have to pay for all subscriptions sold through iTunes:

“(Giving away) thirty percent of subscription revenue isn’t something we celebrate, but that was secondary actually - we already pay other distributors and agents; newsagents take a cut. Central to our whole strategy and all our aspirations is to have that direct relationship with the reader.” John Ridding CEO FT, interviewed by Paid Content, August 8, 2011.
But this is still hard to understand, because the newsagents and other distributors who sell the physical product not only take a cut, in aggregate much more than 30%, they deliver readers who have no direct relationship with the publisher. Refusing to sell subscriptions through iTunes and refusing to participate in the shortly to be launched Newsstand within iTunes is de facto hiding the publication from the 200 million people who have an iTunes account. The FT has lots of costs to get on to physical news stands but good product placement within iTunes is pretty much free for the publisher, so why turn that away? Sure some loyal readers who have purchased an iPad will be willing to go to the FT's web site and sign up directly there, through the Safari web browser, but everyone who has an iPad has an iTunes account and knows how much easier it is to use it to buy a subscription within iTunes than to transact with a web site using a credit card. The FT's move away from iTunes makes no sense in the context of customer acquisition, especially since Apple now allows publishers to provide free for subscribers access through an app. Apple has also stepped back from requiring that publishers who sell subscriptions should offer the best price in their iTunes sub. If the FT wished to promote digital subscriptions which include free access to the app, and at a lower price to direct subscribers who have given their demographics to the publisher, there is nothing now in the Apple rules to prevent this. They could have in-app purchasing within iTunes, but no reader demographics, and off-iTunes direct selling with complementary iPad access to those subscribers who complete the demographic form. Anonymous readers via Apple, and 'engaged' subscribers via their own transactional system.

The FT's stance in this matter is so puzzling that I wonder if there is some hidden explanation. One that occurs to me is this: the FT will have spent some time developing its HTML5 app and the service that delivers it. It surely will have done this because the FT expects there soon to be a range of media consumption tablets of which the iPad is merely the foretaste. So the publisher would like to manage the way in which subscriptions are handled across all platforms, collecting similar information from Android, Windows and iOS platforms on similar terms. That this may be the main concern is shown by this remark:
“You have to think about the customer - life is going to get pretty confusing if you have to have a different sign-on with all the different device manufacturers. John Ridding CEO FT, interviewed by Paid Content, August 8, 2011.

Sure there is a certain logic to this approach: the FT is going to do everything the FT way. This is a 'consistent' way of looking at distribution channels from the publisher's point of view, but it is an extraordinarily un-customercentric way of looking at the market. Suppose every publisher develops apps in a similar fashion. There is no likelihood at all that different publishers will offer their subscriptions on similar terms or have matching demographic requirements. So life is going to get very confusing for periodical subscribers who have to learn about the very different sign-on steps required from different publications. An approach that may appear to be simplifying matters for the publisher is vastly complicating the lives of consumers. One of the great advantages of iTunes for the customer and the publisher is that the terms and conditions for purchasing apps and subscriptions are pretty much standard. You know what to expect and its all very simple.

It will be interesting to see how the FT app plays alongside the terms and conditions that will be attached to the heavily rumoured Amazon Android tablet. Its hard to see how Amazon could keep an HTML5 app off the hardware, but it will be surprising if the publication is sold through the Amazon app store, because there is no likelihood of Amazon letting publishers collect all that demographic data that they would like to have from subscribers. So, rather than being a rebuff to Apple, perhaps the FT's stance in this matter is a statement of principle and a shot across the bows of the soon to be revealed Amazon periodical platform.

How much will it hurt the FT if they persist in their policy of not offering the app through iTunes? My hunch would be that iTunes availability with very modest promotional efforts could easily double the level of sales that they can achieve from a stance without iTunes. We are currently seeing a big step up in iTunes subscription purchases (mostly for the iPad). iPad sales are ramping up. There is a good chance that the FT app will go back into iTunes with 12 months. Apple will not have changed its stance, but the FT will have seen that it can work with iTunes and 'upsell' to customers who may have initially been reluctant to provide personal details to the publisher.

Thursday, September 01, 2011

The Changing Shape of B2B Services

In the last few months I have been hearing a bit about, which seems to be a Dropbox-type of solution for corporations, so I was interested to read a somewhat lengthy interview at Business Insider with Aaron Levie its youthful founder and CEO. Here are a couple of smart points:

(On why the big office Suite products that bundle email, social, CRM, collaboration, ERP etc in a big coalition -- are not such a threat) ...If you go to the average company in America, that's not what they've implemented. They've implemented Salesforce as their CRM, Google Apps for email—a large number of them, in the millions—they'll be thinking of Workday or NetSuite for their ERP. Each of those companies is or will become a multibillion-dollar company just focused on that best-of-breed aspect of what they're trying to solve. With the Web, you can connect these properties together, you can connect this information together, so you don't actually take a productivity hit by having different services. There might be a slight management complexity, but there's new technology that helps with that, we distribute our products is totally different from how Oracle and Microsoft distribute their products—we're direct to the customer, we're all over the Internet, you don't have to go through a whole network and channel of distribution. The way our applications are built—we release updates to our products every week. Microsoft takes 3 years to release a new product. So the whole DNA of our company is completely different. That will take some time to cycle it into Oracle and Microsoft.

(On why its not a problem selling into corporations that have pre-existing agreements) ...That [agreement] will expire and the customer will be ready to jump when it does. Companies that keep customers captive because of contracts aren't always the hardest to disrupt. Ultimately, it doesn't create a great customer-vendor relationship. There's a lot of fractures in the market where that exists. Business Insider August 26

These thoughts chimed with mine because we have in the last few months been seeing some RFPs (Request For Proposal) from larger magazine companies that we would love to work with and are to an extent already working with. It seems that the major magazine companies are now fully realizing that that they need a comprehensive digital magazine strategy and the Chief Information Officer who is often (but not always) charged with framing the strategy is inclined to look for a single contractor and a comprehensive solution from one supplier.

The perplexities we have with RFPs are quite instructive. The RFPs that we see are almost always too detailed (in one case 12 features are required for iPad app deployment). They omit crucial elements (no mention of search, subscription terms, or compliance with Apple iTunes policies in one RFP). They envisage a solution that is much more expensive and more front-loaded than one we would supply. They underestimate the absolute necessity of instant and rapid improvements to web or app services (an RFP that asks for timetables between software releases and 'support policies' for previous releases is thinking in years and quarterly release mode, when app developers need to plan month by month and web solutions have to respond within days to a new requirement). An RFP that covers the range of options that a digital magazine strategy now needs to address is fundamentally flawed if it does not take advantage of a modular development and deployment strategy. RFPs often have a 'completion date' in mind. Remember that this is a consoling fiction (put there for the benefit of Finance Directors and CEOs), successful digital development does not complete but builds for the next stage. Modular development and deployment can be guided by an RFP but it cannot be ruled by it.

We will continue to see RFPs and we will continue to dutifully respond to them, but we are increasingly finding that a bottom up strategy works best for us and the larger companies that we are working with. This means:
  • Start with one or two magazines
  • Start with one or two modular services (universal subscriptions or branded iPad apps for individual magazines)
  • Work with a contract which allows the publisher to give notice on the service whenever they choose. Software as a service means that the service can be terminated by the publisher/customer whenever they choose. In the medium term a service provider does not build a good relationship by 'keeping customers captive' with an exclusive contract.
  • Continue to develop and improve the services in response to environmental changes (iOS 5 or Android or Twitter or HTML5 or whatever comes along next....)
  • Minimise up front charges and have the accent on 'shared success', which means payment by results.
  • Respect the needs of the end-user first and foremost, and then provide close attention to the requirements of the publisher or the content owner.
  • Don't try to do everything and avoid customised solutions for individual publishers. That principle guides scaleable solutions but makes it hard to cater to individual RFPs!
  • Focus on the resources and integration that we can provide through web services (ours and those provided by other companies: Google, Twitter, Facebook, Dropbox, Amazon, Apple and yes Salesforce and
In short the API and the app store matter more to our publisher partners than the RFP.