Amazon's recently-announced tablets are interesting for a variety of reasons, including that Jeff Bezos made it quite clear that he's taking a very different approach to the market than the one Apple has taken. Lots of attention was (quite reasonably) paid to Bezos' key line:
"We want to make money when people use our devices, not when they buy our devices."
Bezos's we want to make money only when you use it framing works two ways. First, it explains the Kindle Fires' noticeably lower retail prices in a way that doesn't make them seem cheaper, only less expensive. It frames Apple's prices -- and profit margins -- as greedy. Second, it works as a sort of guarantee -- if you don't actually use it, we won't even make any money on it.
Later Gruber made a second point that got me thinking (and rethinking...)
Apple's goal is to sell as many iPads as it can. Amazon's goal is to sell as many Kindle Fires as it can to a specific audience: active Amazon.com customers.
I've talked in the past about how Apple's digital goods sales have really been about being the "low margin" leader (if not the loss leader) to drive more sales of the hardware. The digital goods -- content and apps -- make the hardware much more valuable and help drive up the amount people are willing to pay. And that tends to fit with the basic economics I believe in: focus on using the "abundant" (digital) to make the "scarce" more valuable, for which people will pay a premium, especially since that "scarce" can't be "pirated." Apple has, in many ways, put that particular economic concept at the center of how it does business, even if I'm uncomfortable with the closed nature of its overall setup around that.
Amazon, however, has flipped the equation. Their "low margin leader" is the hardware, and they basically appear to want to make their money up on the digital goods purchases. Just as Apple doesn't lose money on selling digital goods (it just makes a very little amount), it appears that Amazon will be making only a little bit on the hardware, but hopes to make the big money on selling the abundant: digital goods via the Kindle store.
I will admit that I struggle with this a bit. I find it hard to bet against Bezos, because on an awful lot of things I think he makes the right bet. Plus, frankly, I'm a lot more comfortable with Amazon as a platform than with Apple. Finally, from a consumer standpoint, I think Apple's hardware seems really overpriced, but Amazon's new prices are really compelling. But economically speaking, there's a voice in the back of my head that says that Apple has this right and Amazon has this wrong. Apple is betting on using the abundant to increase the value of the scarce and then selling that. Amazon is betting on using the scarce to increase the ability to sell the abundant. Perhaps it works because of Amazon's closed Kindle platform and its dominance in the market allows it to make this counter-economical bet. Artificial limitations allow for such things, and Amazon's got the power to control a large segment of the ebook market, which really helps the company out.
In the long run, though, if a competitive market is truly created, it seems more likely that there will be more pricing pressure on Amazon's bet than on Apple's. But, in the short term, Amazon's flip-flopped market certainly could make a lot of sense.
Of course, if you really want to make this fun, just add Google to the equation. It, like Amazon, seems to be focusing on cheap, barely profitable hardware, a la the Nexus 7. It's also put a big effort (recently) into selling digital goods via the Android "Play" store. But Google's business has always been about ads, so it actually adds a third factor to how it views the world, and which part of the business subsidizes which other parts of the business.
In the end, you're left with three big bets on tablets, with very different underlying business models*:
Apple: High margin hardware (scarce); make just a little on digital goods (abundant).
Amazon: Low margin hardware (scarce); make the real margins on digital goods sales (abundant)
Google: Low margin hardware (scarce); make some margins on digital goods (abundant), but cross subsidize both with the ad business.
* Yes, there's also Microsoft Surface tablets. For the life of me, I can't figure out where they place in this particular chart. Which may say something all by itself.
Which strategy works in the end may say a lot about how you view the world economically.
Nicolas Sarkozy had talked in the past about taxing Google, Microsoft and Yahoo to fund the recording industry. Apparently, in the meantime, he's just going to tax citizens instead. The EU has apparently given approval to a plan that will have the French government paying half the cost of special music download cards, with the goal being to attract users to pay the half-price fee to get them using authorized music services. Of course, it seems worth pointing out that Sarkozy's wife is a recording artist, so it does seem a bit unfair for him to have taxpayers forking over money which is going to end up with his wife. There are, of course, also anti-competitive concerns when the French government is subsidizing specific music services, but the EU apparently claimed that the "benefits" of the plan outweighed those issues. What benefits? If there are benefits to offering music for less then, um, shouldn't the record labels just be lowering their prices?
You may remember that the entertainment industry was able to get a nice little clause inserted into the Higher Education Opportunity Act of 2008 that required universities to educate students on the evils of file sharing, to try to block file sharing on campus and also to sign up for "legal" alternatives (i.e., charge students more money to filter it directly to the record labels and movie studios). Yes, you read that right. The law requires universities to push their students to use "legal alternatives," even to the point of having the university take "activity fees" from students for that purpose From the Department of Education's website:
34 CFR 668.14(b)(30) also requires that an institution, in consultation with the chief technology officer or other designated officer of the institution, to the extent practicable, offer legal alternatives to illegal downloading or otherwise acquiring copyrighted material, as determined by the institution. An institution must periodically review the legal alternatives for downloading or otherwise acquiring copyrighted material, and make the results of the review available to its students through a Web site or other means.
It was a clear case of the government creating subsidies for the entertainment industry, by taking money away from students and education. It's difficult to see how anyone can defend such a law. Universities that fail to do this face the possibility of losing financial aid for students. Seriously.
We hadn't heard much about this in a while, but Michael Scott points us to the news that the Department of Education has started sending out letters reminding universities and colleges that this part of the law goes into effect in July. The letter itself reminds universities of the various requirements to stay on the entertainment industry's good side. Higher Education Opportunity Act or Subsidize the Entertainment Industry Again Act?
Thank you, David, and thank you for putting some of those pirates behind bars. I know that regrettably capital punishment was abolished in this country some 50 years ago, sad it is, but a few years in jail is probably pretty OK...
This particular quote was highlighted on Boing Boing, and gets most of the attention, but it is really just a joke (we hope). What I think is a lot more worrisome is much of what he said, which is blatantly false and misleading, in the rest of his talk. It starts with this tidbit (also in the BoingBoing post):
To the industry I would say, we would be well advised to delete two or three words from our vocabulary entirely and they are 'promotion' and 'promotional value'. There is no such thing in the 21st Century. There is usage, there are benefits, hopefully often, if not always to both sides but there is no favour in it and no indulgence and no promotion.
That's early in the presentation, but he digs in deeper later on:
The only thing I would say (to broadcasters) is 'please, stop all that stuff about "promotion."' It really becomes incredibly tiresome and it's grossly overused and it's very old fashioned. It should have no place in the modern era.
Yes, please. Let's ignore the facts of what's happening in the market, because it goes against our business model. There absolutely is promotion and promotional value. In fact, many musicians have not just recognized this, but have embraced it. The problem, of course, is that PPL's entire setup is based on there being no promotional value of music. So it has to lie and tell people and itself that there's no such thing, despite mounds of evidence to the contrary. To then claim being factual is tiresome and "old fashioned" isn't just wrong, but insulting to people who actually understand the facts of the situation.
There's also the fun part where he rails against "free":
Now, whether it is the copyright tribunal or society in general, is it now guided by this foolish and, to me, entirely bogus concept of "for free." And, frankly, the music industry is no different than any other business or industry or service. Sir Terry Leahy, the phenomenally successful businessman, business leader and entrepreneur, would see his business in ruins after six weeks as would Lord Sainsbury, Lord Sugar and many others, if they were having to compete with free next door or across the road.
Of course, his examples are folks dealing in physical, tangible goods. Leahy and Sainsbury (if I'm getting the people right) both built up supermarket/grocery store-type businesses. Those are businesses that have always had to compete with others at near marginal cost, because they sell commodities. They were not given gov't monopolies, or had a gov't "tribunal" setting an artificially high price, which PPL enjoys.
And, it seems worth pointing out that PPL appears to have put this particular video out for free, as an attempt to promote its own services. But, I thought that there was no such thing as "for free" or "promotional value." Except, of course, when PPL does it for itself? Hypocrites.
Now, with no hostility, but with a touch of sadness, regret and frankly astonishment, I ponder, about the pronouncements of some -- perhaps a small minority -- of academics and various other thinkers and all the digital freedom fighters in terms of their arrogance, hostility -- usually deliberate -- and frankly, gross ignorance and naivete.
Um. Wait, you're the guy supporting sending people to jail for "free" and falsely claiming there's no promotional value to music and no legitimate concept of "free." And you blame others? From there he mocks the National Association of Broadcasters for being against the Performance Rights Act, while using copyright itself -- not realizing that just being against a performance tax is not the same thing as being against copyright. This guy basically seems to not actually be honest in his responses to anything.
Now, why is copyright so fundamental to performers and record companies? It should be obvious. It's the bedrock of creativity, because it is a property right. Please, don't listen to the demagogues among the digerati who, in a completely false way, try to present copyright as a monopoly right. A nonsense. Every intelligent person and a real legal person will tell you that it is a property right.
I'm sorry, but he's lying. Flat out lying. Plenty of very smart "real legal" persons will tell you that it's a monopoly right -- including numerous copyright experts and legal scholars. I recognize that Mr. Nevrkla might not like this fact, and that it contradicts with the way he tries to run his business, but he can't deny reality just because he doesn't like it.
Next up, he goes on to talk about the 300th anniversary of the Statue of Anne, and reads a selected quote from Daniel Defoe, often credited as being one of the first to use the term "pirates" to describe publishers who reprinted his poems without authorization. Not surprisingly, Nevrkla leaves out many of the important details of that story, including Defoe's statement that he actually had no problem with publishers reprinting his work and even selling it for money, as long as they "print it true according to the copy." That is, Defoe's real worry wasn't that it was taking money from him, but that people were making copies that were not accurate. In fact, Dafoe then figured out how to use the "pirate" copies to his own advantage. He used the widespread copies of his work to build up his own reputation and name recognition, allowing him to make significantly more money on commissions for future works. Dafoe is, in fact, one of the earliest examples of a smart content creator who did not need copyright, and actually learned to use the lack of copyright to his advantage.
Why do you think Nevrkla would leave all that out?
Nevrkla then goes on to whine and complain about governments not just rolling over and forcing everyone to give him more money. He does this with a straight face.
Now, not only are we desperately short on the copyright protection for sound recordings. Frankly, we are short on the basic PPL public performance rights environment. Several successive governments have failed us to introduce legislation which actually is a mirror image of European law. And we have done something about it. We have taken legal action and will pursue it until we get the right and just result.
Ah, the "right and just" result is to tax all music so PPL gets paid. Even if it harms musicians and the public. This is not the "right and just" result. It's the one that most benefits PPL and Nevrkla. Then he complains that most musicians don't make enough money, saying that they should have "the right to proper working conditions" which seems to involve extortionary powers on the part of PPL. Of course, he ignores that the greater fees PPL gets to charge, the fewer venues are willing to play music and the more harm done by PPL. He also ignores the fact that part of the reason so many musicians make so little money is because the way PPL is structured, where it often samples performances, such that larger artists get their songs noted as being performed, but smaller artists may get skipped over entirely. The problem isn't copyright. The problem is PPL.
Nevrkla then starts talking about copyright extension for performance rights, with a story that is almost certainly made up:
It has been said to my face several times, usually out of frustration when these people run out of arguments. So, when musicians get to their old age, can no longer play and exercise their profession, and are losing all their copyrights, just as they get old and infirm and ill. And you know what the answer is? "Let them sell more t-shirts."
He's being misleading here as well. I'm curious, when he's old and no longer working for PPL, if he thinks that PPL should keep paying him for the work he did in the past? He's making the false argument that copyright is a welfare system for musicians. It's not. When people get old and retire, they're supposed to have saved up money from back when they were working. And no one is actually saying "sell t-shirts" to make money in their old age. They're saying they should have a decent business model and not expect the gov't to tax everyone just because they did not have a good business model. That these musicians might not have done so is tragic, but is no excuse for copyright extension. And, of course, Nevrkla leaves out that studies have shown extension of performance rights go almost universally to the record labels, not to the musicians. He mentions session players and the like, but most of them were work for hire situations, who got paid for their time and that was it. They're not getting royalties anyway. If he wants to help them, perhaps he should fix that, not lie to everyone about what's actually happening.
Record companies need to make money. Let's not get deceived by some of that PC nonsense out there. It is not a crime in the United Kingdom in the year 2010 to make money and make a profit. That profit is not eaten by someone. It is plowed back into the business into new talent and new music. And I am delighted to say that as an industry, we have always been proud, self-reliant, successful industry which also enhances Britain's standing in the world.
Wait, what? Just a couple minutes earlier you were whining about how governments aren't giving you enough money, and now you claim you're self-reliant? I do not think that word means what you think it means. It's really quite incredible how he spends so much time demanding more privileges from the government, trashes the copyright tribunal for telling him he's charged too much, and then pretends they're some sort of "self-reliant" business that has any actual business sense. His entire revenue base is from the government forcing people to give him money. He doesn't have to convince anyone to buy, the gov't forces them to. Sickening. And it gets worse:
Now we are not, and I hope we never will, ask for subsidies or state handouts.... And please, let's not go down that way.
Uh, but you are. And have been, and continue to do so, and then when you don't get them you complain that it's not "just" and mock people who suggest you should have a better business model. Stunning cognitive dissonance.
But what we must demand is proper valuation of music and proper commercial valuation of the underlying rights in music. We cannot do DIY in copyright. For that we need the gov't, the civil service, the UK IPO, and other authorities in Brussels. And it is their responsibility at the end of the day to do the right thing, finally, by our community too.
Uh, wait. You just said you weren't asking for a government handout, and then immediately turn around and ask for exactly that, claiming that the government must give you a hand out and a subsidy. Your rhetorical trick is to claim that this "handout" is "proper valuation." It's not. Copyright is a subsidy. It's a purposeful breaking of the free market, in order to allow PPL to charge a higher than market price. It's not a "proper" valuation. It's a monopoly valuation.
To all those clever, smart, smug, cynical thinkers and others: HANDS OFF OUR COPYRIGHT. Hands off our employment opportunities, our income streams, our livelihoods and our future.
Um, ok. How about hands off our privacy. Our culture. Our ability to share and communicate and to express ourselves? Hands off our wallets (via the government). Hands off our ability to use new and smarter business models.
From there, Nevrkla goes into his "thank yous," naming lots of organizations and people who we normally see in these pages for trying to take away consumer rights and force the government to provide greater monopoly rights and subsidies. That's where the "capital punishment" joke comes in.
Overall, however, the speech is stunning in its blatant dishonesty and cognitive dissonance, railing against gov't hand outs while not asking for them, but demanding them, as the only "just" way. The capital punishment statement is ridiculous, but at least we think he was joking. The rest of the speech is just dishonest and misleading -- and, for that reason, is much more worrisome.
If you want to be frustrated by this ridiculousness, you can watch the whole thing (for free, for the "promotional value" of it), below:
You probably noticed that Apple announced the latest incarnation of the iPhone, the 3GS, earlier this week. It features mostly incremental upgrades over the existing model's features, alongside software enhancements that will work on earlier models, but it's still creating a lot of demand from existing iPhone 3G owners who want to upgrade. One speed bump, though: like any other handset it subsidizes, AT&T is only offering the lowest price for the new device to new customers, or people who are in the last six months of their contract. Since the iPhone 3G came out less than a year ago, that means users of the latest iPhone that want to upgrade will have to pay an extra $200. Which, of course, is making some of them unhappy. The iPhone's upfront price benefits from a hefty subsidy, like other devices AT&T sells, so the operator's going to treat its subsidy, and how it recovers it, pretty much like any other device. It may come as a shock to some iPhone users, but the device really is just another phone in the eyes of operators, and won't get them any special treatment. Another piece of evidence: the fact that some of the new features in the iPhone 3.0 software that Apple touted -- such as support for faster HSDPA data networks, MMS, and data tethering -- aren't yet available on AT&T, because the operator isn't supporting them (or hasn't figured out how to bill for them). That's more like the mobile world we're used to: innovation and new features from handset vendors making it to customers only with the approval of operators.
Mobile operators are increasingly looking to sell non-phone devices like laptops and netbooks with embedded or add-on wireless modems as a way to boost their subscriber figures and generate extra income. Typically, consumers buy the device at a discounted upfront cost, then get tied in to a long-term contract for monthly data service (2 years at $60 per month seems to be the norm in the US). If users quit paying their bills, in theory, they've gotten a laptop on the cheap, though of course they're still subject to the terms of the contract, and damage to their credit, and so on. But Ericsson, which makes a lot of the embedded modems, has announced some new technology it's calling a "kill pill" that allows mobile operators to remotely lock a laptop by sending a signal to it over their network. The company says it's ideal if a data user quits paying their bills, but it's not hard to imagine mobile operators coming up with more nefarious uses for the device -- like shutting a machine down if a user closes their account, even if they've fulfilled their contract.
We've wondered before why mobile operators say they hate the subsidies they pay to discount handset prices, but then expand their use of them to include laptops and netbooks. The trend looks like it's here to stay, as Verizon Wireless has now confirmed it will start selling 3G-equipped netbooks by the end of June, so now, in addition to tying yourself into a 2-year contract where you're paying back the cost of your cell phone, you'll soon be able to tie yourself into a long-term data-service contract to pay back the price of a laptop, too. Of course, once that contract's up, the device will still be locked to the operator from which you bought it, making it difficult (or impossible) to take your business elsewhere. Meanwhile, business is flowing the other direction, too: Dell is reportedly looking to set up a virtual operator in Japan, selling its customers network access on another operator's mobile network to use with their mobile-equipped laptops. It's an interesting contrast in models, because it's unlikely Dell will subsidize the hardware like the operators. Part of the issue with handset subsidies is that consumers are used to paying the lower subsidized prices, and so any change that raises prices will be met with disdain. But people aren't used to the benefit of subsidies for their PCs, so may be more open to paying a higher upfront cost for the hardware if it means they don't have to sign a long-term contract with a high monthly service charge.
There's been a constant clamor over the past few years from some consumer groups that want to see mobile operators forced to stop locking handsets they sell, so that phones will be able to work with any compatible operator. The argument is that locking handsets to operators diminishes the competition among the operators, particularly when operators compete by getting exclusive deals on particular devices (such as the iPhone, which is locked to AT&T). But it's always seemed that the groups are looking to have their cake and eat it too: the locked devices and contracts operators use allow them to recover the subsidies they spend to drop the upfront costs of handsets. So if the groups want to do away with locks and other techniques that support the subsidies, that's fine, as long as they're also willing to accept higher device costs. But somehow, that part always gets left out, just as it has in stories covering the latest push by the groups (via MocoNews) and some smaller operators to get the government to outlaw handset exclusives. If these groups want to eliminate cheap handsets for consumers, they need to explain that -- or explain exactly how these regulations they want won't serve to lower service prices, but offset that with much higher device prices.
A few years back, after noting the trend of laptop companies to start building in cellular data modems into their laptops, we wondered when it would reach the stage where mobile operators would subsidize the cost of a laptop, just as they subsidize the cost of mobile phones in many cases. In early 2006, we started to see such subsidized laptops go on sale in Europe, with the mobile operators selling the laptops directly for well below list price, as long as you bought into a long term data plan. The whole idea seemed a bit strange, as mobile operators have long ranted long and hard about how much they hate, hate, hate subsidies, and how they wish they could do away with them. So, why add them to laptops?
However, the idea has now traveled over to the US as well, in a deal between Acer, Radio Shack and AT&T allowing people to buy an Acer netbook for just $100, so long as they agree to a 2 year $60/month contract for an AT&T mobile data plan. It's still a little confusing as to why the mobile operators are agreeing to this, following so many vehement arguments against mobile phone subsidies, but perhaps they're finally realizing that those subsidies aren't such a bad thing when they get people using their services. Still, how long will it be until buyers start complaining about early termination fees for laptops like they do for mobile phones?
For a while now, we've been noting that whenever you hear people warning about the impending broadband crunch, it's politicians, consultants or lobbyists. When you actually talk to technologists, they point out that there's no problem and that normal upgrades will keep everything just fine -- even without having to do any kind of traffic shaping or violation of net neutrality.
Yet, that won't stop the lobbyists, consultants and top marketing execs from claiming otherwise. A trade group heavily funded by AT&T is out yet again, warning that the internet will collapse by 2012 if "something" isn't done -- with that "something" being basically big government subsidies to the telcos. Consider it the telco bailout plan of 2009. Hell, if we're already bailing out Wall St. and Detroit, why not telcos as well?