Fascinating doesn’t do justice to the spectacle, nor to the stakes. Taken in pairs, these giants exchange fluids – products and billion$ – while fiercely fighting with their other half. Each company is the World’s Number One in their domain: Intel in microprocessors, Samsung in electronics, Apple in failure to fail as ordained by the sages.

The ARM-based chips in iDevices come from a foundry owned by Samsung, Apple’s mortal smartphone enemy. Intel supplies x86 chips to Apple and its PC competitors, Samsung included, and would like nothing more than to raid Samsung’s ARM business and make a triumphant Intel Inside claim for Post-PC devices. And Apple would love to get rid of Samsung, its enemy supplier, but not at the cost of losing the four advantages it derives from using the ARM architecture: cost, power consumption, customization and ownership of the design.

At its annual investor day last week, Intel CEO Paul Otellini sounded a bit like a spurned suitor as he made yet another bid for Apple’s iDevices business [emphasis mine]:

“Our job is to insure our silicon is so compelling, in terms off running the Mac better or being a better iPad device, that […] they can’t ignore us.”

This is a bit odd. Intel is Apple’s only supplier of x86 microprocessors; AMD, Intel’s main competitor, isn’t in the picture. How could Apple ‘‘ignore’’ Intel? Au contraire, many, yours truly included, have wondered: Why has Intel ignored Apple’s huge iDevices business?

Perhaps Intel simply didn’t see the wave coming. Steeped in its domination of the PC business — and perhaps listening too much to the dismissive comments of Messrs. Ballmer and Shaw — Intel got stuck knitting one x86 generation after another. The formula wasn’t broken.

Another, and perhaps more believable, explanation is the business model problem. These new ARM chips are great, but where’s the money? They’re too inexpensive, they bring less than a third, sometimes even just a fifth of the price, of a tried and true x86 PC microprocessor. This might explain why Intel sold their ARM business, XScale chips, to Marvell in 2006.

Then there’s the power consumption factor: x86 chips use more watts than an ARM chip. Regardless of price, this is why ARM chips have proliferated in battery-limited mobile devices. Year after year, Intel has promised, and failed, to nullify ARM’s power consumption advantage through their technical and manufacturing might.

2012 might be different. Intel claims ‘‘the x86 power myth is finally busted.” Android phones powered by the latest x86 iteration have been demonstrated. One such device will be made and sold in India, in partnership with a company called Lava International. Orange, the France-based international carrier, also intends to sell an Intel-based smartphone.

With all this, what stops Apple from doing what worked so well for their Macintosh line: Drop ARM (and thus Samsung), join the Intel camp yet again, and be happy forever after in a relationship with fewer participants?

There appear to be a number of reasons to do so.

First, there would be no border war. Unlike Samsung, Intel doesn’t make smartphones and tablets. Intel sells to manufacturers and Apple sells to humans.

Second, the patent front is equally quiet. The two companies have suitable Intellectual Property arrangements and, of late, Intel is helping Apple in its patent fights with Samsung.

Third, if the newer generation of x86 chips are as sober as claimed, the power consumption obstacle will be gone. (But let’s be cautious, here. Not only have we heard these claims before, nothing says that ARM foundries won’t also make progress.)

Finally, Otellini’s ‘‘they can’t ignore us’’ could be decoded as ‘‘they won’t be able to ignore our prices’’. Once concerned about what ARM-like prices would do to its business model, Intel appears to have seen the Post-PC light: Traditional PCs will continue to make technical progress, but the go-go days of ever-increasing volumes are gone. It now sounds like Intel has decided to cannibalize parts of its PC business in order to gain a seat at the smartphone and tablet table.

Just like Apple must have gotten a very friendly agreement when switching the Mac to Intel, one can easily see a (still very hypothetical) sweet deal for low-power x86 chips for iDevices. Winning the iDevices account would put Intel “on the Post-PC map.” That should be worth a suitable price concession.

Is this enough for Apple to ditch Samsung?

Not so fast, there’s one big obstacle left.

Let’s not forget who Samsung is and how they operate. This is a family-controlled chaebol, a gang of extremely determined people whose daring tactics make Microsoft, Oracle, Google, and Apple itself blush. Chairman Lee Kun-hee has been embroiled in various “misunderstandings.” He was convicted (and then pardoned) in a slush fund scandal. The company was caught in cartel arrangements and paid a fine of more than $200M in one case. As part of the multi-lawsuit fight with Apple, the company has been accused of willfully withholding and destroying evidence — and this isn’t their first offense. Samsung look like a determined repeat obstructor of justice. My own observations of Samsung in previous industry posts are not inconsistent with the above. Samsung plays hardball and then some.

This doesn’t diminish Samsung’s achievements. The Korean conglomerate’s success on so many fronts is a testament to the vision, skill, and energy of its leaders and workers. But there has been so much bad blood between Samsung and Apple that one has a hard time seeing even an armed peace between the two companies.

And this doesn’t mean Apple will abandon ARM processors. The company keeps investing in silicon design teams, it has plenty of money, some of which could go into financing parts or the entirety of a foundry for one of Samsung’s competitors in Taiwan (TSMC) or elsewhere in the US, Europe, or Israel. If it’s a strategic move and not just an empty boast on PowerPoint slides, $10B for a foundry is within Apple’s budget.

To its adopters, ARM’s big advantage is customization. Once you have an ARM license, you’ve entered an ecosystem of CAD software and module libraries. You alter the processor design as you wish, remove the parts you don’t need, and add components licensed from third parties. The finished product is a SOC (System On a Chip) that is uniquely yours and more suited to your needs than an off-the-shelf processor from a vendor such as Intel. Customization, licensing chip designs to customers — such moves are not in the Intel playbook, they’re not part of the culture.

I don’t see Apple losing its appetite for customization and ownership, for making its products more competitive by incorporating new functions, such as voice processing and advanced graphics on their SOCs. For this reason alone, I don’t see Apple joining the x86 camp for iDevices. (Nor do I see competitive smartphone makers dropping their SOCs in favor of an Intel chip or chipset.)

Intel isn’t completely out of the game, but to truly play they would need to join the ARM camp, either as a full licensee designing SOCs or as a founder for SOCs engineered by Apple and its competitors.

These are risky times: A false move by any one vertex of the love triangle and tens of billions of dollars will flow in the wrong direction.

—JLG@mondaynote.com

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A forgettable election campaign just wrapped up: François Hollande is now the President of the French Republic. Time spent on foreign issues during last week’s one-on-one television debate mirrored the rest of the campaign: less than fifteen minutes in a 2hrs 50 minutes bout, one that left most viewers yawning. This campaign was petty, gallic-centered, oozing with demagoguery and completely devoid of great projects or ambitions for the country.

Mr. Hollande himself epitomizes this political flabbiness. He’s the default candidate. Last year, after Dominique Strauss-Kahn’s sexual implosion, Hollande kept running his tiny electoral diesel engine in low gear, bereft of grand ideas, unable to get into overdrive. He didn’t win because of his track record — he has no such thing. He was both a mediocre party leader and the weak manager of the poorest French department, which he left heavily indebted. Mr. Hollande didn’t win because he embodies any kind of grand aspirations either; other than getting into the Élysée palace, he has none. Instead, he portrays himself as a “normal guy” after — it’s also fair to mention — the hyper-kinetic, agitated, communication-obsessed, Nicolas Sarkozy.

Sure thing: with François Hollande, the country will rest; it will settle into gentle indolence as the rest of the world evolves and interacts. Most likely, the Euro zone crisis will heat up with a worsening situation in Spain where a quarter of the population — and half of the youngest citizens — are unemployed. Most likely also, ratings agencies will further downgrade French debt — since 1973, the country never had a balanced budget. Meanwhile, Mr. Hollande will fulfill his electoral promise of hiring 60,000 additional teachers; this while the country needs less teachers (there are less kids in front of them) but higher paid ones, along with higher respect and better working conditions. He’ll travel to Brussels and renegotiate the European Treaty, pitching the notion of growth (eureka!) against the “austerians“. On this, he might be right somehow (see last week’s Paul Krugman’s column in the New York Times titled Death of a Fairy Tale.)

All this doesn’t mean the Socialist presidency will be as dangerous as too many like to say. People making more than one million euros per year will indeed enter a 75% tax bracket: The new president claimed “[he] doesn’t like rich people” (a few years ago, he assigned a threshold of wealth to the equivalent of $60,000 a year). But vis-à-vis the much-bashed “Finance”, he’s likely to act as a pragmatist. A possible chief of staff for Hollande could  be Jean-Pierre Jouyet, currently chairman of the Financial Markets Authority and former minister of European affairs. There is no shortage of left-leaning talented people, and this middling leader is likely to surround himself wisely — on many counts, he can’t do worse than his predecessor.

France won’t fall from the cliff, nor will it shine brightly under the new regime.

And it won’t innovate either.

What made this campaign so depressing was both sides seemed to willfully ignore one of the most potent engines of the economy, that is innovation and a country’s ability to foster it. Both candidates seemed totally disconnected from critical challenges in which France is failing in every possible way.

Take higher education. The failure is unequivocal, regardless of political leanings. France might have about 80 universities, most of them second or third rate and producing mostly unemployable people. And if you dare a transatlantic comparison, you generate killer statistics. France’s budget for higher education and research is the equivalent of Harvard University’s endowment (€24 billion or $31 billion for French universities and public laboratories and $32 billion of cash reserves for Harvard). Overall, France’s spending per student is less than half of the US — and 15 times less if you compare to the Ivy League colleges. French faculty members, unions and politicians have made their best efforts to disconnect universities from the business world. They’ve been remarkably successful. As a result, Gallic colleges have become poorer, and largely unable to cope with the legions of students that land onto their benches, facing underpaid and unmotivated professors.

Of course, France has a different way to produce — and to reproduce — its elites. Two highways, actually: l’Ecole Nationale d’Administration (ENA) and l’Ecole Polytechnique. Mr. Hollande is an offspring of the first (so was his former partner, Ségolène Royal, the unlucky but picturesque 2007 presidential candidate.) As someone who grew inside this comfy seraglio and who traveled very little abroad, the new French president can’t envision an alternative to this trusted model for running the country. As for Polytechnique, it produces the top French engineers, a caste in itself, that has little to do with those graduating from top anglo-saxon colleges. The difference between a Polytechnique student and a Stanford one is the former will dream to manage, one day, a large industrial concern such as Thales (defense electronics) or the energy group Total, while the Stanford grad will want to see his/her name on a campus building — after a creating a successful business, needless to say. As the New York Times noted in a recent story about the return of class war,

Just under half of France’s 40 largest companies are run by graduates of just two schools: ENA,(..) and École Polytechnique (…). Together the schools produce only about 600 graduates a year. There are fewer than 6,000 ENA graduates alive today, compared with at least 160,000 Oxford alumni.

This doesn’t constitute the best soil for a start-up culture. And the venture capital activity is not likely to help either. In 2011, French VC funds invested €822 million in start-ups, a 21% drop vs. 2010. Even worse, 64% of these funds went to second or later rounds of financing, initial funding collected a mere 8% of the total. Not exactly a risk-prone attitude.

Again, international comparisons hurt. French VC invested last year about €13 or $16 per company and per inhabitant; that compares to $93 in the United Sates and more than $110 in Israel. Speaking of Israel, if we take into account the money flowing from abroad, the figures are even more staggering as VC funding per capita rose to $280 in 2011 according to IVC-KPMG data:

In 2011, 546 Israeli high-tech companies attracted $2.14billion from local and foreign venture investors, the highest amount in 11 years. This is almost 70 percent above the $1.26 billion raised by 391 companies in 2010 and 91 percent above the $1.12 billion raised in 2009.

In their excellent book Start-up Nation, the story of Israel economic Miracle, authors Dan Senor and Saul Singer also write:

Comparing absolute numbers, Israel — a country of just 7.1 million people –attracted close to $2 billion [in 2008] in venture capital, as much as flowed to the UK, Germany and France combined. (…) In addition to boasting the highest density of start-ups in te world (a total of 3,850, one for every 1,844 Israelis), more Israeli companies are listed on the Nasdaq [list here] than all companies from the entire European continent.

To complete this quote: about 250 companies originating from Israel had an IPO on the Nasdaq. Today 50 companies remain listed vs. 47 European companies including 3 French ones.

None of the above was mentioned, even remotely, during the French election campaign. Nicolas Sarkozy did very little about fostering innovation — he didn’t have a clue. As for François Hollande, the strongest part of its electorate (largely composed of teachers and other public servants) opposes any rapprochement between private sector and public higher education. And let’s not mention the underlying “ideology” of venture capital, carried interest, IPO’s, flexible employment rules, etc. Hollande’s supporters will also oppose any removal of cobwebs from the 102-year-old labor code that greatly complicates the management of companies employing 50 or more people. As a result, France has 2.4 times more companies with 49 employees than with 50, read this story in Bloomberg BusinessWeek.

This makes France a rather start-down nation. Nothing to celebrate.

—frederic.filloux@mondaynote.com

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There was a time when clever individuals could sustain themselves by exploiting people’s ignorance and anxiety. Augurs studied the flight of birds to explain the will of the gods; haruspices practiced divination by inspecting the entrails of sacrificed animals. For fear of bursting into uncontrollable laughter, so the joke goes, the fortune tellers studiously avoided making eye contact with one another in chance street encounters.

Not much has changed.

Our modern-day haruspices, the Wall Street anal-ists, must struggle mightily to keep a straight face (although perhaps not so mightily–they’ve had a lot of practice).

Before Apple’s April 24th earnings release, Wall Street observer Karl Denninger put on his poker face in a Seeking Alpha post:

Profit margins on hardware are very difficult to sustain over 10% for long periods of time. Someone always comes after you and this is not going to be an exception to that rule. But that in turn means that you either must cut your own prices (and margins) to compete or watch your market share get diced up into little tiny pieces by a bunch of guys wielding machetes.

Colorful. And with a disclosure of his own AAPL posture:

Lightly short and more likely to add to that position over time than cover it, eyeing major support in the $400 area.

The entire longish post is enlightening, in a “special” way, as is his September 2010 Seeking Alpha post where he predicted serious trouble for Apple’s new tablet (for which he uses a nickname that, we’ll assume, elicited schoolyard snickers from his cohort in the Tea Party, a group he helped found. New age male sensitivity be damned.) And what was the trouble he saw when he fondled the sheep’s liver? RIMM was “coming after” Apple; they had just announced the QNX-based BlackBerry PlayBook. Don’t laugh.

The idea, here, is that Everything Becomes a Commodity. It’s a common fallacy among the Street watchers, a meme, “a unit for carrying cultural ideas”, in Wikipedia’s words. It’s built on the idea that market forces—competition—will erase all advantages at a “molecular” level. Yesterday, customers were paying more for product A because of some unique feature or service. Tomorrow, a competitor will provide the same (more or less) at a lower price. Commoditization always wins, say the sages. QNX is better than iOS so the PlayBook will, clearly, murder the iPad.

Fun aside, Mr. Denninger is but a member, if that’s the right word, of a class of ideologists who seem to be curiously unaware of their surroundings. Where is the ineluctable commoditization they predict?

It isn’t a new idea. When I landed in Cupertino in 1985, the Pepsi and Playtex marketeers that tagged along with the new CEO insisted that the tech game was over, personal computers are now commodities, marketing would have to do for Apple what the Leo Burnett ad agency had done for Philip Morris with its Marlboro Man campaign.

True, the Marlboro Man was an exemplary marketing success that made a huge monetary difference for an otherwise commodity product. Marlboro didn’t make a “superior” product–blonde non-mentholated 100mm filtered cigarettes are all the same. The only pieces tobacco companies could move across the chess board were imaginary and romanticized.

But high tech isn’t a commodity market. In very French words I told the young commoditizing Turks how wrong they were: Moore’s Law and good software would create the opportunities that make a difference. Commoditization isn’t ineluctable.

Are clothes all the same? Tube socks at Costco, perhaps. But for the rest of our wardrobe, material and cut (and brand) matters.

Food? Do we buy commoditized calories, or do we care for the difference that the quality of ingredients and preparation make? Fresh string beans and asparagus, lightly fried in butter and properly salted—you can’t get that from canned vegetables packed in a margarine sludge, ready to pop into the microwave.

Do we buy cars because they go fast and the wheels are (most of the time) round? I can hear the young Turks claiming that people don’t buy cars, they buy transportation (all while jumping into their BMWs). But when Detroit began putting accountants at the head of car companies, they rode the steep downhill slope of commoditization. That Audi is now one of the most profitable car companies on the planet tells us something about the importance of technology, design, manufacturing, and quality.

I used to refer to BMW as a good example for Apple: Don’t worry too much about market share. A well-made, well-marketed product will see its difference rewarded by the marketplace. And, indeed, BMW became larger than Mercedes Benz. And now we have Audi.

Quality shows, and Apple continues to show quality. Last quarter they enjoyed an incredible 47.4% Gross Margin. Higher than expected and very unusual for a hardware company.

As an ex-entrepreneur and a venture investor, I’m a fan of Gross Margin—it’s what you can spend. Revenue is nice, but it doesn’t tell you when and how much you can eat. Because Apple’s Operating Expenses have become such a small percentage (8.1%) of revenue, Apple’s Operating Margin approaches 40%. As Horace Dediu notes in his Which is best: hardware, software or services? comparison of Apple to Microsoft and Google, this is unusual for a hardware company:

Can this growth continue unabated? Probably not, both Microsoft and Google have shown that there’s a plateau, a margin level that can’t be exceeded. But their examples also show sustainability.

Of course, Apple execs are cautious forecasters. Their much second-guessed guidance for the next quarter calls for “only” 41% Gross Margin, significantly less than last quarter’s. But the commoditization predicted 27 years ago isn’t about to happen.

I’ll quote Horace Dediu’s May 1st post once again:

Apple is the most valuable company in technology (and indeed in the world) because it integrates hardware, software and services. It’s the first, and only, company to do all these three well in service of jobs that the vast majority of consumers want done.

A mere matter of execution…

—JLG@mondaynote.com

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The digital advertising equation is outlined in the Nielsen graph below. The Global Trust in Advertising survey released this month (summary on Nielsen site and PDF here) underlines one key finding: For the vast majority of digital users, trust lies first and foremost in recommendations and opinions from their peers. As for the bulk of formats found on web sites or on mobile (such as various flavors of display advertising), they fall to the bottom of the chart. Nielsen’s study, based on 26,000 respondents in 56 countries, was conducted in Q3 2011.

Here are the expanded results (click to enlarge):

By themselves, these figures provide the perfect explanation for the current state of the advertising industry and, more specifically, for the digital ads segment.

Then, superimposing the ad revenue structure of most news medias companies would show an alarmingly symmetry: these businesses derive most of their revenue, allocate most of their effort to the least trusted ad vectors: display banners of various forms (on web, mobile or social), online video ads, etc.

The survey also provides a grim view of what people trust: they put more of their faith in a branded website (58% positive), a brand sponsorship (47%) ad, or even a product placement in a TV series (40%) than in a display ad on a website or on mobile (33% each)!

Even worse is the general distrust of advertising: on this list of 19 ad vectors, only 5 are are trusted by 50% of the respondents.

Let’s focus on a few items:

Recommendation from people I know: Trusted: 92% Not Trusted: 8%
Consumer opinions posted online: Trusted: 70% Not Trusted: 30%
Problem is: traditional medias don’t own these two segments. Social networks and consumer websites do. It’s a key Facebook’s strength to have people engage in conversations around brands and products. (IMO: a pathetic waste of time). Interestingly enough, the social network environment doesn’t boost the despised banners that much: When served on a social network, banners gain a mere 3 percentage points (at 36%) against a plain website or a mobile context. This must be a matter of concern for Facebook’s revenue stream: its unparalleled ability to pinpoint a target doesn’t raise the level of trust.

Editorial content such as newspaper articles. Trusted: 58%, Not trusted: 42%
Not surprising, but worth a bit more thought. It pertains to the level of trust readers put in the medium of their choice — carbon or bits. As expected, a fair and balanced product review written by a non-corrupted journalist (every word in the sentence counts) will be trusted. That’s what I call the Consumer Reports syndrome. This organization deploys 100+ professionals testers — and no ads beyond the ones for its own paid-for services and extra publications. Among its enviable base of 7 million subscribers, half pay $6.95 a month (or, a much better deal, $30 dollars a year) to access ConsumerReports.org — this is good ARPU compared to other digital medias who only make a few bucks per year and per viewer in advertising revenue.

What does this mean for online outlets? They should consider beefing up the volume of product reviews, while preserving the reliability of their coverage. This also raises the question of the separation between journalism, advertorial and plain advertising. By no means should a publisher accept blurring the lines: beneficial on the short term but damaging on the long run. Having said this, when I see a growing number of anglo-saxons magazines making big money from high quality advertorials, I tend to believe online medias should consider sections of their websites or applications harboring such content. But two requirements need to be met: (again) no confusion whatsoever; and editorial standards for what will indeed carry commercial content, but in a well-designed, informative, visually attractive package. One important point to keep in mind: this type of service is typically out of reach for a Facebook, a Google or a Microsoft. But moving in such a direction requires unified thinking between publishers, the sales house (and the ad agencies they are dealing with) and the editorial team. A long way to go.

Ads served in search engine results:  Trusted: 40% Untrusted: 60%
Speaking of Google, here’s another interesting finding in the Nielsen survey: by and large, readers doesn’t trust search ads. To many viewers, text ads popping up on pages, on YouTube video or on emails, are seen as intrusive and irrelevant (to say the least: look at this hilarious site featuring inappropriate ad placements.) Still, search ads account for about 60% of online ad revenues. Why? Essentially because it provides a cheap, convenient, and totally disintermediated way of promoting a product. On this count, Google makes no mystery of its intention to vaporize the advertising middleman thanks to its superior technology.

The digital advertising party is just warming up. The business will continue its ongoing transformation. Currently, digital accounts for 16% of the global ad spending. It is likely to gain 10 more percentage points over the next five years. Not all markets nor products carry the same potential: According to the Financial Times, Unilever currently spends 35% of its US budget on digital, compared with 25% in Europe and only 4% in India. For news medias, the opportunity is that brands and agencies are still searching for the right formula. Brands face an incredibly complex challenge as they have to play with many dials at the same time: traditional ads, digital, web, mobile, apps, social, behavioral. And all are tightly intertwined, creating flurries of new metrics: ROI naturally, but also engagement, sentiment, feelings.

Like elsewhere in the digital world, the most successful players will be the genuine tinkerers. Software giant Adobe is said to spent 20% of its digital budget on experimental campaigns. They test, measure, adjust and iterate.

It is up to digital medias to go from passive to active in the quest for the right model. Their economics depend on it.

—frederic.filloux@mondaynote.com

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In the weeks preceding the April 24th release of Apple’s quarterly earnings, a number of old canards sent the stock down by about 12%: Carriers are going to kill the iPhone Golden Goose by cutting back “exorbitant” subsidies; iPhone sales are down from the previous quarter in the US; inexorable commoditization will soon bring down Apple’s unsustainably high Gross Margin.

The earnings were announced, another strong quarter recorded, and the stock rebounded 9% in one trading session:

At least one doubter is finally convinced: Henry “The iPhone Is Dead In the Water” Blodget has become an Apple cheerleader, penning a post titled Yes, You Should Be Astonished By Apple. (Based on Henry’s record, should we now worry about the new object of his veneration?)

There has never been a dearth of Apple doomsayers. The game has been going on for more than 30 years, and now we have a new contestant: George Colony, an eminent industry figure, the Founder and CEO of Forrester Research, a global conglomerate of technology and market research companies.

Mr. Colony, an influential iPad fan, maintains a well-written blog titled The Counterintuitive CEO in which he shares his thoughts on events such as the Davos Forum, trends in Web technology and usage, and, in a brief homage, his hope that “Steve’s lessons will bring about a better world”.

We now turn to his April 25th post, Apple = Sony.

There are two problems with the piece: The application of a turgid, 100-year old “typology of organizations” that’s hardly relevant to today’s business scene, and an amazingly wrong-headed view of Sony and its founder, Akio Morita.

Colony offers the banal prediction that others have been making for a very long time, well before Dear Leader’s demise: With Steve Jobs gone, Apple won’t be the same and, sooner or later, it will slide into mediocrity. It happened to Sony after Morita, it’ll happen to Apple.

In an act of Obfuscation Under The Color Of Authority, Colony digs up (nearly literally) sociologist Max Weber to bolster his contention. Weber died in 1920; the 1947 work that Colony refers to, The Theory of Social and Economic Organization, is a translation-cum-scholarly commentary and adaptation of work that was published posthumously by Weber’s widow Marianne in 1921 and 1922.

From Weber’s work, Colony extracts the following typology of organizations:

1. Legal/bureaucratic (think IBM or the U.S. government),
2. Traditional (e.g., the Catholic Church)
3. Charismatic (run by special, magical individuals).

This is far too vague; these types are (lazily) descriptive, but they’re fraught with problematic examples, particularly in the third category: Murderous dictatorships and exploitative sects come to mind. What distinguishes these from Apple under Jobs? Moreover, how do these categories help us understand today’s global, time-zone spanning rhizome (lattice) organizations where power and information flow in ways that Weber couldn’t possibly have imagined a hundred years ago?

Having downloaded the book, I understand the respect it engenders: It’s a monumental, very German opus, a mother lode of gems such as the one Colony quotes:

Charisma can only be ‘awakened’ and ‘tested’; it cannot be ‘learned’ or ‘taught.’

True. The same can be said of golf. But it does little to explain the actual power structure of organizations such as Facebook and Google.

Instead of shoehorning today’s high-tech organizations into respectable but outdated idea systems, it would behoove a thought leader of Mr. Colony’s stature to provide genuine 21st century scholarship that sheds light on – and draws actionable conclusions from — the kind of organization Apple exemplifies. What’s the real structure and culture, what can we learn and apply elsewhere? How did a disheveled, barefoot company become a retail empire run with better-than-military precision, the nonpareil of supply chain management, the most cost effective R&D organization of its kind and size? And, just as important, are some of these marvels coupled too tightly to the Steve Jobs Singularity? That would be interesting — and would certainly rise above the usual “Charismatic Leader Is Gone” bromides.

Now let’s take a look at the other half of the title’s equivalence: Sony.This is Muzak thinking. It confuses the old and largely disproven brand image with what Sony actually was inside — even under Morita’s “charismatic” leadership.

I used to be an adoring Sony customer, bowing to Trinitron TVs and Walkman cassette players. But after I got to see inside the kitchen (or kitchens) in 1986, I was perplexed and, over time, horrified.

Contrary to what Colony writes, there was no “post-Morita” decadence at Sony. The company had long been spiritually dead by the time of the founder’s brain hemorrhage. The (too many) limbs kept moving but there had been no central power, no cohesive strategy, no standards, no unifying culture for a very long time.

Sony survived as a set of fiefdoms. Great engineers in many places. (And, to my astonishment, primitive TV manufacturing plants.) During Morita’s long reign, Sony went into all sorts of directions: music, movie-making, games, personal computers, phones, cameras, robots… For reasons of cultural (one assumes), Sony consistently showed an abysmal lack of appreciation for software, leaving the field to Microsoft, Nokia for a while, and then Google and Apple.

Under Akio Morita’s leadership, Sony took advantage of Japan’s lead in high-quality device manufacturing and became the masters of what we used to call the Japanese Food Fight: Throw everything against the wall and see what sticks. When the world moved to platforms and then to ecosystems, Sony’s device-oriented culture — and the fiefdoms it fostered — brought it to its current sorry state.

Today, would you care to guess what Sony’s most profitable business is? Financial Services:

How this leads to an = sign between Apple and Sony evades me.

This isn’t to say that Apple can’t be contaminated by the toxicity of success, or that the spots of mediocrity we can discern here and there (and that were present when Steve was around) won’t metastasize into full blown “bozo cancer”. But for those interested in company cultures, the more interesting set of questions starts with how Apple will “Think Different” from now on. Jobs was adamant: His successors had to think for themselves, they were told to find their own true paths as opposed to aping his.

From a distance, it appears that Tim Cook isn’t at all trying to be Jobs 2.0. But to call his approach “legal/bureaucratic” (in the Weber sense), as Colony does, is facile and misplaced.

If we insist on charisma as a must for leading Apple, one ought to remember that there’s more than one type of charisma. There’s the magnetic leader whose personality exudes an energy that flows through the organization. And then there’s the “channeling” leader, the person who facilitates and directs the organization’s energy.

Is the magnetic personality the only valid leader for Apple?

—JLG@mondaynote.com

[I won’t let the canards cited at the beginning go unmolested. See upcoming Monday Notes.]

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The New York Times Company’s latest quarterly numbers contain a rich trove of data regarding the health of the digital news industry. Today, we’ll focus on the transition from traditional advertising to paywall strategies being implemented across the world. Paywall appear as a credible way to offset — alas too partially — the declining revenue from print operations.

First, the highlights.

(See NYTCO’s press release here and stock here. Unless otherwise stated, all figures are for Q1 2012 and comparisons are Q1 2012 vs. Q1 2011.)

• Total Revenue is stable at $499.4 million.
• Operating profit is down by 23% at $19.6 million. When excluding depreciation, amortization and (generous) severance packages, OP is up 9.4% at $57 million.
• Print advertising for all properties and from all sources is down 8.1% at $238 million
• Circulation revenue is up 9.7% at $227 million.
• Digital subscriptions, launched just a year ago, reach 454,000. That’s a 16% growth vs. Q4 2011.
• Digital advertising for the entire NYTCO (this includes NYTimes.com, BostonGlobe.com, Boston.com, About.com, etc) is down 10.3% to $71 million.
• Such decrease is primarily due to About.com losing 24% of its ad revenue to $22.6 million, and 50% of its operating profit to $7 million. This online guide is entirely dependent on advertising.
• But the real bad news is the decline in digital advertising for the NYT News Media Group  consisting mostly of the NYT and the Boston Globe. Revenue dropped by 2.3% to $48.5 million for the quarter.
• Digital advertising accounts for 22.5% of the entire NYTCO ad revenue, and for 30% of the NYT News Media Group’s digital advertising revenue.

We can discern four trends:

#1:  Digital advertising is struggling, even for a major brand such as the New York Times.
Again the evolution :
FY 2010: +18%
FY 2011: +10%
Q1 2012 (Y/Y):  -2%

This confirms a much feared trend. By and large, in a news context, the performance of digital advertising is on the decline. All indicators are now flashing red: CPM (cost per thousand impressions), cost per click, volumes, yields, etc. The cause is well-known, and way more acute for digital than for print: ads and news contents do compete for the same eyeballs. The more attractive and eye-catching the content is, the lesser the ad yields. Behavioral advertising won’t change that much — at least for hard core, high value-added news environment.

This decline also announces a major shift in the way ads are sold. The advertising flow is likely to split: premium ads such as well-placed special packages will still be sold for high prices by in-house teams. But the bulk of the inventory will shift downward to bazaars in which gazillions of pageviews will be dumped into real-time exchanges supposed to optimize prices. The bad news: such schemes are likely to fuel deflationary trends for remnant (i.e. sub-premium) inventories. The good news: media organizations such as online news outlets or pure players are likely to join such marketplaces and perhaps gain an operating role of sorts — assuming they are smart enough to cooperate (I’ll address this in an upcoming column).

#2 Paywalls work. With roughly half a million paying subscribers, the NYTimes.com has captured the equivalent of 39% of its weekday print circulation of 1.3 million. In its financial statements, the Times doesn’t break down its revenue structure, but a significant part of the 13% increase in circulation revenue (print + digital) is attributable to digital subscriptions (the rest comes from the recent print price hike).
Estimates are difficult but here are some clues: on these 500,000 digital subs, it is estimated that 60% pay the basic $15/mo rate while 40% opt for the full $35 digital package. This would translate to digital subscribers contributing $34.5 million (18%) to the $190 million in NYT Media Group circulation revenue that appear in its quarterly statement. 18% is not that bad for a paywall that is barely one year old (even though this estimated revenue doesn’t reflect the cost of the NYTimes’ massive promotions for its paywall program). But again, compared to the $48 million of digital advertising, it is significant.

#3 A warning to paywall dreamers: some restrictions apply. In order to be successful, a digital subscription must check the following boxes:
– Own a sizable share of a given (and preferably solvent) segment of the population. In other words: start from a large built-in audience. Globally, the New York Times has about 34 million unique visitors per month – a large pool for conversions to the paywall.
Don’t expect a paywall to work for a small site or a niche product — unless it is a reference for its community. Even then, in spite of its reference status in New England, the Boston Globe shows a mere 18,000 paid-for digital subscribers.
– Allow time to grow the subscriber base. A paywall strategy must spread over several years. The free audience first has to be converted into registered users able to be thoroughly data-mined; then the paywall will be tightened with less and less articles available for free (the NYT recently lowered its threshold from 20 to 10 free articles); the entire process will take at least two to four years, depending on where you start from.
– Carefully manage porosity. That’s why some people refer to a “semi-permeable membrane” (see the interesting conversation between Clay Shirky and NYT’s Digital manager Denise Warren on NPR last January). While it is tightening its paywall, the NYT leaves willingly plenty of free access to its content: if you land its site from a search engine, from Facebook, Twitter, or from a blog, no limit applies (same for the FT.com, actually). Such tactic has two virtues: it doesn’t affect natural referencing and incoming traffic from search engines (which could weigh as much as 30-40% of the audience), and the brand remains exposed to many — such as social networks users.
– Quality is non-negotiable. A successful paywall requires exclusive, unique, authoritative, high-quality content. A paywall isn’t the right solution for streams of “commodity news” or user-generated contents. It won’t work for the Huffington Post. Despite its enormous audience, the HuffPo’s embryonic original content won’t do much to alter its “Left wing Fox News” positioning (Even though the HuffPo managed to score a Pulitzer Prize for National reporting for its remarkable Beyond The Battlefield series.)

#4 Print is still alive. While print advertising is drying up, the share of circulation revenue keeps rising (in relative terms.) The good news: price hikes don’t seem to matter: the recent increase to $2.50 had no effect on sales. Actually, the Times uses its weekend edition (priced at $5.00) to channel digital subscriptions by providing the best deal of its complex rate card. Which leads to two conclusions: a sizable reservoir of readers is ready to pay for quality-on-paper at almost any price (see a previous Monday Note Cracking the Paywall); and commercially strong weekend editions can be a potent vector for digital subscriptions.

Print and digital strategies are more intertwined than ever.

—frederic.filloux@mondaynote.com

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Nokia’s results for Q1 2012 are in: They’re not good. (See the earnings release here, Management’s Conference Call presentation here.)

Compared to the same quarter last year, Nokia overall revenue is down 29%, to $9.7B. And the company is now losing money, $1.8B, 18.5% of revenue. [Nokia’s official numbers are stated in euros, I convert them at today’s rate of $1.32 for 1€.]

One year after Nokia’s decision to jump of its “burning platform”, this yet another bad quarter and leaves one to wonder about the company’s future. Many, like Forbes’ Erik Savitz, think The Worst Is Still To Come.

I see three life-threatening problems for the deposed king of mobile phones.

First and potentially most lethal: Nokia is burning cash. As the chart above documents, Nokia’s Net Cash went down 24% in one year. From page 5 of the Earnings Release: “Year-on-year, net cash and other liquid assets decreased by $2B…. Sequentially [emphasis added], net cash and other liquid assets decreased by $.9B”. Here, the word sequentially means compared to the immediately preceding quarter, as opposed to the same quarter last year.
Elsewhere in the document, on page 6, we learn Microsoft provided $250M in “platform support payments”. If you back this amount out, you see Nokia’s operations have in fact consumed $1.15B, a significant fraction of the company’s $6.4B Net Cash. This cannot continue for very long and leads Henry Blodget to worry Nokia could go bankrupt in two years or less.
Henry’s view might be a bit extreme; Nokia has assets they could convert to cash, thus giving itself more runway for its recovery efforts. But, as we’ll see below, the company’s prospects in both phone categories don’t look stellar. And bad things happen to cash when the market loses confidence in a company’s future: vendors want to be paid more quickly, customers become more hesitant, all precipitating a crisis.

Second, the dumbphone (a.k.a. “Mobile Phones”) business, still Nokia’s largest, is now in a race to the bottom:

Volume is huge, 70.8M units; it dipped 16%, not a good sign. Worse, the ASP (Average Selling Price) went down 18% to $44 (33€). Mostly in developing countries, Nokia is now losing ground to the likes of Huawei and ZTE selling feature phones and smartphones, both very inexpensive. Unsurprisingly, Nokia claims they’ll counterattack with their Asha family of mobile phones. Few, outside of Nokia, or even inside, believe they can win a brutal price cutting fight against those adversaries.

Last, Nokia’s last hope: Their new Windows Phone “Smart Devices”.

As the chart above shows, Nokia’s smartphone business keeps sinking: -51% in volume compared to the same quarter last year. And, with a $189 (143€) ASP, it can’t make any significant money as $189 is about what it costs to build one.

As for the latest Lumia smartphones, the reviews have been mixed. So are sales, according to Stephen Elop, Nokia’s CEO. Going to the earnings release, I searched for the word “Lumia” in the document. It appears 29 times. — without any number attached to it, just words like “encouraging awards and popular acclaim”. Which can only mean one thing: Actual numbers better left unsaid.

Things don’t get better when, according to Reuters, mobile carriers in Europe pronounced themselves ‘‘unconvinced”, finding the new Lumia smartphones “not good enough”. It is worth noting things could be better in the US where AT&T appears to make a real effort selling Lumias, and where Verizon recently stated its interest in fostering a third ecosystem with Windows Phone devices.

Unfortunately, we also hear a puzzling rumor: Existing Lumia phones wouldn’t be upgradable to the next OS version, Windows Phone 8, code-named Apollo. Both Mary Jo Foley, a recognized authority on things Microsoft, and The Verge, an aggressive and often well-sourced blog, support that theory.

So far, in spite of the potential damage to their business, neither Microsoft nor Nokia have seen fit to comment. Should it be true, should current Lumia buyers find themselves unable to upgrade their software, Microsoft would be about to commit a massive blunder.

But why would they do this? Apparently, the current Windows Phone OS is built on the venerable Windows CE kernel. Setting veneration aside, Microsoft would have decided to use a more modern foundation for Windows Phone 8. And said modern foundation would not run on today’s hardware. For Nokia’s sake, I hope this is incorrect. The company already convinced its customer Symbian-based phones had no future. Sales plunged as a result. Doing the same thing for today’s Lumia devices would be even more dangerous.

A little over a year ago, in February 2011, Nokia’s brand-new CEO, Stephen Elop issued his ‘‘memorable” Burning Platform memo. In it, the ex-Microsoft executive made an excellent point: Having no doubt observed the rise of Google’s Android and of Apple’s iOS, he concluded Nokia was no longer in a fight of devices but in a war of ecosystems. Elop next drew an analogy between Nokia’s jumbled smartphone product line and a burning North Sea oil-drilling rig. To him, the company had no choice: instead of staying on the platform and dying in the blaze, he suggested plunging in freezing waters — with a chance of staying alive. Which, as he soon revealed, meant jumping off Nokia’s Symbian and Meego software platforms and joining the Microsoft Windows Phone ecosystem.

Today, Nokia bleeds cash, its dumbphone business in a race to the bottom, and its plunge into the Microsoft ecosystem isn’t off to a good start. What’s next for the company? Can it turn itself around, and how?

With hindsight, it appears the premature announcement of the jump to Windows Phone osborned Nokia’s existing smartphones. Their sales dropped while the market waited for the new devices running Windows Phone. Some, like Tomi Ahonen, an unusually vocal — and voluminous — blogger, think Elop should be fired, and Symbian and Meego restored to their just place in Nokia’s product line. This isn’t very realistic.

Closer to reality is Microsoft’s determination to get back in the smartphone race, almost at any cost. (For reference look at the billions the company keeps losing in its online business. $449M this past quarter.)

At some point in time, if Lumia sales still barely move the needle, Microsoft would have to either drop Nokia and look for another vehicle for Windows Phone. Or it will have to assume full control of Nokia, pare down what it doesn’t need, and do what it does for the Xbox, that is be in charge of everything: hardware, software, applications.

—JLG@mondaynote.com

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Facebook’s acquisition of Instagram — for one billion dollars — tells a lot about Mark Zuckerberg’s state of mind. Which is at least as interesting as other business considerations and was best captured by cartoonist Ingram Pinn in last week’s Financial Times comic. To illustrate John Gapper’s excellent Facebook is scared of the Internet column, Ingram Pinn draws an agitated Mark Zuckerberg frantically walking through a hatchery, collecting just hatched startup-chicks as fast as he can, while, in the background, AOL and Yahoo collect older chickens in larger carts.

In last week’s Monday Note, I hinted that I’d never put my savings in Facebook’s stock. (For that matter, I see writing on business and owning stocks as incompatible). When I read the news of the Instagram acquisition, I wondered: Imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cash-flow to buy an app with no revenue in sight, and manned by a dozen of geeks? Is this a red-flag symptom of Zuckerberg’s mental state?

Four things come to mind.

1/ Because he retains 57% of Facebook voting rights, Zuckerberg rules its board and can make any decision in a blink of an eye, no debate allowed. This can be a great asset in Silicon Valley’s high speed tempo, or it can stir up shoot-from-the-hip impulsiveness.

2/ Facebook’s founder attitude reminds one of Bill Gates during Microsoft’s heydays: no crack allowed in the wall of its dominance. The smallest threat must be eliminated at any cost. Where Microsoft used legally dubious tactics, Facebook unsheathes its wallet and fires a billion dollars round. In the startup world, this will have two side effects: For one, Facebook is likely to become the exit of choice Google once was. Two, the size of the Instagram transaction (some of it in stock) is likely to act as a beacon for any startup harvesting users by the millions. It sets an inflationary precedent.

3/ By opting for such a deal, Facebook’s management reveals its own feelings of insecurity. It might sounds crazy for a company approaching the billion users mark and providing an array of services that became a substitute to the internet’s basic functions. But, with this transaction, the ultra-dominant social network acted like an elephant scared of a mice. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half of it? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.

4/ From a feature-set perspective, Facebook might find itself in a quandary. Kevin Systrom and Mike Krieger designed the ultimate stripped-down application: a bunch of filters and a few basic sharing features. That’s it. It is both Instagram strength and main weakness. Such simplicity is easy to replicate. At the same time, if Facebook-Instagram wants to raise the feature-set bar, it might lose some of its users base and find itself competing with much better photo-sharing applications already populating Apple or Android app stores.
To put it differently, Facebook photo-sharing model had been leaking for a while. Zuckerberg just put  a serious plug on it, but other holes will appear. A couple of questions in passing: Will Facebook continue to accept and encourage loads of third parties photo-sharing apps that connect to its network? Some are excellent — starting with Apple’s iPhoto, especially the iDevice version that will always benefit of an optimized hardware/software integration. How does Facebook plan to deal with that? And if it chooses to grant some level of exclusivity to the Instagram app, how will the audience react (especially when you read comments saying “We liked IG because it wasn’t FB”)?

Lastly, the bubble question. Again, three things.

First, let’s be fair. If indeed there is a new internet bubble, Facebook isn’t the only player to fuel it; investors who lined up at Instagram’s doorstep did it too. A few days before the deal, IG raised $50 million at a half billion valuation; Zuckerberg snatched the company by simply doubling the bet.

Two, comparing the FB/IG deal to Google’s in 2006 acquisition of YouTube for $1.65 billion doesn’t fly either. From the outset, everyone knew internet video was destined to be huge; it was a medium of choice to carry advertising. Therefore, the takeover by Google’s fantastic ad-machine was likely to yield great results. YouTube became a natural extension of Google services — just look at how competing services such as DailyMotion in France, or Vimeo are doing without the ad rocket-engine.

Three, the metrics used in an attempt to relativize the deal are dubious at best. Instagram had no monetization strategy–other that a lottery-like exit. This says applying any kind of cost per user ($33 for the theory in vogue) is bogus. Being unable to project any sustainable revenue mechanism makes such a valuation process completely pointless. In Instagram’s case, the only way to come up with a price tag was guessing the amount of money a small group of suitors–Facebook, Google and Twitter–might be willing to cough up for Instagram’s eyeballs.

If this deal shows one thing, it is the frenzied, cutthroat competition these three players are now locked in. Mark Zuckerberg is not through with collecting hatching eggs. He won’t be alone either.

—frederic.filloux@mondaynote.com

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The best thing that happened to Apple in the last two decades was Steve Jobs’ 1997 return to power after he reversed-acquired the company he’d co-founded 20 years before.
And the best thing that has happened in the Apple 2.0 era is iTunes.

Without iTunes’ innovative micropayment system and its new way of selling songs one at a time, the iPod would have been just another commodity MP3 player. Instead, the iPod became Apple’s “halo product” and the genre’s king, with a lasting dominant market share (70% or more) and, in 2006, surpassing the Macintosh in revenues: $7.7B vs. $7.4B.

The iTunes-powered iPod rescued the company’s image. Then teetering on the edge of insignificance, Apple came to be perceived as a serious contender.

This was nothing compared to the contribution iTunes was about to make to the iPhone. A song is simply a string of zeroes and ones, so is an app; the only difference is the destination directory (I am, of course, simplifying a bit, here). The well-debugged iTunes infrastructure turned out to be a godsend for the new Jesus Phone: The smartphone became an “app phone” and the rest of the industry followed suit. iTunes App Store downloads now surpass music traffic:

But…

Today, the toxic waste of success cripples iTunes. There are times when I feel that iTunes has reached Windows Vista bloatware proportions: Increasingly non-sensical complexity, inconsistencies, layers of patches over layers of patches ending up in a structure so labyrinthine no individual can internalize it any longer. (Just like the Tax Code.)

iTunes’ metastasis happened naturally as it tried to incorporate new packaging and delivery systems. The media — music, videos, apps — is no longer the message. iTunes gives you TV seasons, college courses, audiobooks, podcasts; it passes files between Macs and iPads, syncs devices, uploading and downloading everything through the Cloud…and should we mention Ping, the unfortunate attempt at “social”?

iTunes has turned into an operating system — kludgier and uglier than many — a role it was never meant to fill.

This criticism might sound excessive. Apple is doing obscenely well, Mac and iDevices show impressive growth, the stock keeps climbing. Why worry about iTunes? Business is great!

That’s the line RIM and Nokia execs once took.

On the music side, do we like looking for music, managing it, fixing inexplicably broken playlists? Do we care for bizarre recommendations from the Genius? (No connection with the really helpful ones in Apple Stores.) Buying music from Amazon is easier, more informative, more pleasant — and downloads drop right into my iTunes library.

Admittedly, managing apps has become much easier…if you use WiFi sync to a Mac or PC where the larger screen helps when you’re sorting through dozens of programs (I’ll confess that I hoard a mere 170 apps…). But it still feels like it falls short of what an independent module, with its own tools and UI, should be able to do.

Things take a turn for the worse when it comes to transferring files between, say, an iPad and a Mac. The It Just Works motto doesn’t apply. While Keynote documents sync automagically between an iPad and an iPhone, there’s no such love between the iPad and the Mac. iTunes offers a kludgy solution, semi-hidden at the bottom of the Apps section, although I doubt anyone uses this method. E-mail and DropBox are faster.

The rumors of a new iTunes version (perhaps called 11, a versioning number increment that signals a major update) have rekindled criticism of the aging giant and invited suggestions for fixes or more radical structural changes. For a sampling, see iTunes: Time to right the syncing ship,  Erica Sadun’s TUAW post, and a counterpoint by Scott P. Hall who thinks ‘iTunes is well structured, and easy to use’. Most of us agree with pointed put-downs such as these (from Jason Snell):

Apple has packed almost everything involving media (and app) management, purchase, and playback into this single app. It’s bursting at the seams. It’s a complete mess. And it’s time for an overhaul.

….

And let’s be honest: iTunes is at its worst when it comes to app management. The app-management interface in iTunes is ridiculously slow. iTunes can fill up your hard drive with tens of gigabytes of iOS apps that can easily be downloaded from Apple. Syncing apps frequently destroys folders and makes apps disappear. The interface that shows where the app icons will appear on your iOS device is unstable, unreliable, and inefficient.

…and from Erica Sadun (emphasis added):

iTunes is an unwieldy behemoth, slowly suffocating from its own size and age.

….

Forget about launching iTunes: music browsing and playlist selection (not to mention creation) needs to migrate into Spotlight (or some similar always-on feature). Tunes should be part of the computing experience, not a separate app.

Let’s hope that “iTunes 11” does more than move furniture around and add another layer of patches. Personally, I’d vote for breaking it down into separate modules such as Music, Video, and Apps. This wouldn’t rub against the Apple grain: There’s the everything-in-one-app Outlook philosophy, and then there’s the Apple practice of separating Mail, Address Book, and iCal. Also, breaking up the iTunes “monopoly” would make fixes and upgrades more manageable.

But there are two possible flaws in this line of thinking.

First, it assumes that the iTunes problem is confined to the client app, to the software we run on our desktops and devices. This isn’t likely to be the case. We’re no longer in the era of PC desktop software where patiently redoing the Mac OS foundation got us OS X. It’s almost certain that many of the iTunes problems we experience in the client actually come from poorly designed applications in Apple’s Cloud, running on noble but out-of-date architectures such as WebObjects.

A possibly more significant impediment is Apple’s “Windows problem”. As Allen Pike explains on his blog (pointed to by John Gruber), Windows is iTunes’ ball and chain (emphasis added):

[…] they can’t split iTunes into multiple apps because many, if not most iOS users are on Windows. iTunes is Apple’s one and only foothold on Windows, so it needs to support everything an iOS device owner could need to do with their device. Can you imagine the support hurricane it would cause if Windows users suddenly needed to download, install, and use 3-4 different apps to sync and manage their media on their iPhone? It’s completely out of the question.

I remember my surprise when I bought my first iPod mini and saw iTunes software running on Windows. Imagine, Apple writing Windows software! Good UI, runs well, doesn’t feel like a dragging-one’s-feet port. But there’s a price: Some of the iTunes problems might stem from its use of cross-platform development tools, an approach that encourages (and sometimes insists on) a least common denominator experience. (I just checked, iTunes on Windows is very close to the Mac version.)

Allen Pike is right: iTunes, or its successor, must run on Windows. But I don’t see how that’s an unbearable burden on Apple, especially in light of the economics involved. If cross-platform tools are too limiting, Apple could develop “separate but equal’’ versions of iTunes as a way to keep selling iDevices to Windows users. (On this topic, the iPhone/iPad maker has done a much better job catering to Windows users than what RIM/Blackberry and Nokia have done for Mac users.)

Let’s hope Apple doesn’t become complacent, that they aren’t blinded by iTunes’ spectacular numbers. Let’s hope they deliver a really Apple-like iTunes experience. Paraphrasing a grand departed French politician, I like iTunes so much I want five of them.

—JLG@mondaynote.com

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Would you buy Facebook shares? A few weeks ahead of its mammoth IPO, millions of people probably dream of getting a slice of it. Spreadsheet jockeys have done their job and demonstrated with unanimous conclusiveness that, indeed, Facebook deserves its expected $100 billion valuation — or that gravity’s law will inevitably apply.

Facebook numbers are both fascinating and frightening. The social network will pass the 1 billion members mark this year and the capillarity of its services is creating an alternate internet before our very eyes. It has already become a credible substitute for email; it soon will be the dominant news channel for millions. At the same time, it is hugely profitable: Facebook’s margin reaches 62% and its $3.5 billion cash pile will allow occasional mistakes or, if you prefer, bold experiments.

Then, what could go wrong for the ultra-dominant digital rhizome? Two things: its contempt of privacy and Wall Street frothy expectations.

Two years ago, I interviewed David Kirkpatrick for Le Monde Magazine. He’s the author of the Facebook Effect, a book that remains a must-read if you want to understand the company and its founder. In our conversation, he described a Mark Zuckerberg perfectly aware of the sensitivity of privacy issues, but at the same time deeply convinced social norms would evolve towards nearly-total transparency. According to Kirkpatrick, Zuckerberg felt that, as long as users where given the proper tools to control it, privacy should not be an issue for his empire’s future. Put another way, Zuckerberg deeply believes in Facebook’s Grand Bargain: its core followers will accept full openness as a default setting and trade personal data in exchange of its features-rich service. He actually lived by this belief. And monetized it brilliantly.

Facebook’s most valuable currency is not the “Credits” used in its games, but its huge trove of consumer data.

The efficiency of this system comes form the “platform effect”, from Facebook’s federation of millions of sites that embed the “Like” button or allow their own users to register with their Facebook ID. Trying to protect one’s privacy while using Facebook is a hard Protean task as the company constantly changes its rules. Applications hosted by Facebook only make things worse as user personal data are allowed to leak to third party developers in a sneaky and overly abundant ways.

Last week, as a part of its remarkable What They Know series, the Wall Street Journal published a compelling story titled Selling You on Facebook:

A Wall Street Journal examination of 100 of the most popular Facebook apps found that some seek the email addresses, current location and sexual preference, among other details, not only of app users but also of their Facebook friends. One Yahoo service powered by Facebook requests access to a person’s religious and political leanings as a condition for using it. The popular Skype service for making online phone calls seeks the Facebook photos and birthdays of its users and their friends.

You might ask: What’s the connection between these privacy concerns and the upcoming IPO? Well, Facebook derives most of its revenue from advertising. And said advertising revenue stems from its ability to profile its users like no one else in the business. Still, in spite of its ability to serve an ad targeted to a South Texas single mother who likes Bob Dylan and Taco Bell, Facebook yields little revenue per capita. Where Yahoo makes $7 per user and per year and Google $30, Facebook’s ARPU actually amounts to a mere $4.39.

A further problem: Facebook does so after saturating its most solvent markets.

Now, let’s turn to Wall Street expectations. A $100 billion valuation would mean Facebook being traded at 27 times its 2011 revenue. For comparison, Google, Apple and Microsoft, all highly profitable, are valued between 4 or 5 times their respective revenue for their last fiscal year.

Hence the math: In a recent story published in Fast Company, Farhad Manjoo quotes a Dartmouth finance professor who said “[to justify Wall Street expectations] Facebook will need to see $70 billion in annual revenue by 2021, up from just $3.7 billion in 2011″, which translates into a 25% to 30% growth over the next decade… in the context of an advertising market growing at 4% per year, as Manjoo points out.

To meet these goals–even by going way beyond the one billion members mark–Facebook will have to extract more bucks from each one of its users. This means making an even better use of the data users traded for services.

This brings us to the biggest risk for the Facebook economics. If Facebook doesn’t play the privacy game well, two things are likely to happen. One, members will pressure the social network to limit its use (meaning the sale) of user data. Two, legislators will enter the fray. We already see early signs of political challenges with movements such as the Do Not Track initiative, one that is laying the ground work for legislations all over the world. This concern was reflected in the Risk Factor section of Facebook’s S-1 filing :

Our business is subject to complex and evolving U.S. and foreign laws and regulations regarding privacy, data protection, and other matters. Many of these laws and regulations are subject to change and uncertain interpretation, and could result in claims, changes to our business practices, increased cost of operations, or declines in user growth or engagement, or otherwise harm our business.

Facebook’s future relies in great part on its ability to wisely adjust the privacy dials. Even at the expense of its shareholders’ dreams.

—frederic.filloux@mondaynote.com

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The end of iPhone/iPad One Size Fits All, that is. So far, Apple has managed to sell more than 300M iOS devices using only a single size for the iPhone and another for the iPad. I’m becoming convinced this can’t last much longer. Soon, I believe, we’ll see a range of physically distinct iPhone and iPad models.

I’m coming to this conclusion from three angles.

Let me start with an analogy by anecdote. It’s 1974, I’m sitting across the street from Burberry’s Haymarket emporium in London watching a gaggle of tourists come out of the store, each wearing the same dark blue raincoat and distinctive Burberry scarf. Once an icon of British gentility (as perceived by non-Brits), the commissariat of trench coats, scarves, and other country squire accoutrements, Burberry had lost their cachet by sticking to a taste-numbing repetition. The company that had invented a true 20th century oxymoron — the mass-marketing of exclusivity – had lost the plot.

Louis Vuitton, on the other hand, is the epitome of the oxymoron. Vuitton stays on top of its game by ceaselessly coming up with product permutations that combine the differentiation customers need without losing the brand identity they crave.

For the past three weeks I’ve been traveling in the US, France, and Spain. In Spain, particularly, I was struck by the number of iPhones I saw in street cafés, airport lounges, hotels, and restaurants. One high-end eatery in Palma de Mallorca equips its waiters with iPod Touches on which they show pictures of dishes to patrons and, with a tap, take their orders. I’m generally careful about drawing conclusions from such anecdotal samplings –they might not be representative of a broader reality — but when I returned to the Valley, I heard a Marketplace® story (audio and transcript) that confirmed my observation: Spaniards are so taken with their iPhones that they’d rather cut other expenses amid the severe economic crisis than go without this indispensable component of their identity.

How long before customers look left, look right, see everyone with the same phone or tablet and start itching for something different? My friend Peter Yared contends that the trend has already started in the UK where the “18-25 class” now favors the smorgasbord of Samsung devices as a relief from the iPhone uniform.

And, lest we think this preoccupation with fashion identity is beneath Apple’s Olympian taste, a look at the shelves of Cupertino’s Hypergalactic Company Store will bring us back to Earth:

We can argue that one-size-fits-all simplicity has served Apple well. I hear one European retail magnate deplore Apple’s inflexible (he actually said ‘‘totalitarian’’) policies even as he marvels at the low number of SKUs (distinct product references) that have produced Apple’s monstrous revenue. (A connoisseur, he also envies Apple stores where, as he put it, the cash register follows the customer.)

But Apple has long ceased to be marginal, on the brink of disaster, imprudently challenging established giants. Apple has become a dominant brand whose rise to ubiquity now requires a differentiation it didn’t need in pre-iOS years.

For the iPhone, how will differentiation manifest itself without veering into capricious, superficial variation?

Screen size? We know the key argument against a significantly bigger screen: Our thumb needs to reach across the entire surface for one-hand operation, a requirement widely held as non-negotiable. As for a smaller screen, the loss of functionality, app compatibility trouble, and touch-UI difficulties make “downsizing” improbable.

Shape? The elegant iPhone 4/4S industrial design is by no means obsolete. I personally consider it a classic, more so than the earlier, less innovative design. Still, alternatives will expand the iPhone’s appeal, communicate newness and differentiation.

Another angle concerns the iPad. Unit sales are climbing faster than the iPhone and sameness is — or soon will be — an issue. There’s an “obvious” solution: Our old friend, the rumored 7” tablet (measured on the diagonal).

In an August 2009 Monday Note discussing Apple tablet gossip, I went so far as to measure the width of men’s jacket pockets (5.5” to 6”, typically) and concluded that a 7” (diagonal) tablet would be nice. But I’m prejudiced, I like small computers. I loved my Toshiba Libretto and yearned for a similarly-sized MacBook. I’d given up on the prospect of a “MacBook Nano,” but I still had hopes for a pocketable tablet.

Wiser minds prevailed and we got the 9.7” iPad.

Still, the yearning for a smaller tablet wouldn’t die. In October 2010, when queried about a smaller iPad during the Q4 earnings conference call Q&A, Steve Jobs famously dismissed the idea, saying “7-inch tablets should come with sandpaper so users can file down their fingers.” Behold the nerve — and the lack of same in the audience! No one thought of asking about the iPhone’s even smaller screen.

Seriously, what Jobs probably meant was that a simple reduction in the size of the tablet screen would mean a proportional diminution of the size of UI elements, a brute force solution Apple had avoided by allowing – and encouraging — device-specific resources. (As we know now, no one really uses iPhone apps in 2X mode on an iPad.)

Also, we ought to remember notable Jobsian ‘‘statements of misdirection’’: No video on the iPod; No body reads anymore (pre-iPad). And the vintage 2007  category winner: No native apps on the iPhone, use Web 2.0 technology!

When thinking about the insistent 7” iPad rumors, I start to worry that iOS developers will have to write or adapt their apps to a third target, the “iPad Nano”. (Don’t hold me to that monicker, I was sure the latest iPad would be called iPad HD, for its high definition Retina screen…) But when I consider the foreseeable volume for a smaller iPad, I become a bit more optimistic: Would multiples of 10M units sold in the first year induce a developer to invest in a new version? Very likely, yes.

Even more encouraging is this clever twist unearthed by A.T. Faust III in a March 21st blog post. If you shrink the original 9.7”, 1024×768 iPad display to a 7.8” diagonal screen, you end up with a 163 ppi (pixels per inch) display, higher than the original, lower than the new iPad (264 ppi), and exactly half the iPhone 4/4S (326). Most relevant, according to A.T Faust, 163 ppi is the exact pixel density of the first iPhone…which means that app developers won’t necessarily have to retool everything in their UI libraries. And the hypothetical 7” iPad would easily fit in a 5.5” -wide jacket pocket:

Lastly, there’s another reason for Apple to forget the sandpaper and, instead, throw sand into Amazon’s and Google’s (purported) 7” tablet gears. From the very beginning of the iPad and its surprising low $499 entry price, it’s been clear that Apple wants to conquer the tablet market and maintain an iPod-like share for the iPad. Now that Apple has become The Man, the company might have to adopt the Not A Single Crack In The Wall strategy used by the previous occupant of the hightech throne.

—JLG@mondaynote.com

While we wait, futilely perhaps, I’ve decided to do a bit of field research and bought a Samsung ‘‘phablet’’, the Galaxy Note, this after giving my 7” Kindle Fire to one of our children. The Note’s screen is a mere 5”, an attempt to combine a phone and a tablet — with an “unmentionable” stylus. I’ll report back in a few weeks.

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Fifteen years ago, Louis Gallois, the SNCF (French Railways) chairman decided to change the company’s lexicon: passengers were to be referred to as “customers” instead of the old bureaucratese “users” (in French: “clients” vs. “usagers”). The intent was to convey notions of choice and consideration for the rider. This being France, the edict led to convoluted debates. The upper management old guard held the company was on its way to betraying its traditional mission of service public. Unions—notoriously opposed to any forms of competition threatening their fiefdoms—saw the new word as a portent of evil mercantile designs. In Louis Gallois’s mind, a clientele should not be seen as captive herd but ought be shown respect and empathy. It took more than a decade to see the French railway system become more customer-oriented. The French Postal service underwent a similar transformation—largely under pressure from internet-based services. Today, when compared to most other countries, these companies have become good performers.

Back to my media beat, you see where I’m going: The transforming media industry is still stuck into a user’s culture. Media companies still believe this: One way or another, they own their readers (or viewers and listeners). Of course, this belief is not evenly shared among different corporate layers. In the C-suite, the comfy old view is long gone as numbers confirm, quarter after quarter, the industry’s slump. Most executives share a sense of vital urgency. But the deeper you dive into those companies, the more you see complacency still lurking.

As long as the old media culture still dominates and resists change, better business models won’t be able to gain traction.

It all boils down to a simple market place evolution.

In the pre-internet era, the media sector lived by its own rules: a captive audience left with no other choice but a bunch of well-entrenched media outlets. At the time, these companies didn’t feel the need to probe their audiences, let alone to market to them. People were listening, viewing, and reading, roughly at the same rate, year in and year out. Editors and publishers felt immune to any form of challenge. Newsrooms were a great place to be, filled with witty, smart people, most of them notoriously unproductive, but great to hang out with, caring very little care for the user’s state of mind.

Then, the digital wave unfurled. With it came a new business culture, completely antinomic to the legacy media’s thinking. At first, the tech/startup way of doing things was dismissed as a freakishly geeky and completely inapplicable to media organizations.

Then the two spheres—the new entrepreneurial culture and the old one— got closer and closer and began to intersect. The overlapping zone was, precisely, digital information. It began in chaotic but participatory (massively) and profuse ways. This led to the rise of “commodity news”—whose value evaporated in the process—at the expense of the original (and traditional) news sources that were slow to understand the scope of the upheaval. This put a brutal end to the widespread old complacency.

As the user morphs into a customer, s/he becomes more demanding of its media provider. There is a reason for that shift: a magazine subscriber is also an Amazon patron and s/he now expects the same level of service. Instead, for most magazines, it still takes 3-6 weeks for a monthly print subscription to start.

Today, the media industry must change its reference system. Every single day, traditional-media-in-transformation collides with companies (pure players, aggregators, portals, search engines, mobile applications, retailers, distributors) built on very different, opposed sometimes, values and principles. As a result, the competition on products (and audiences) leads to a competition on the processes of building and marketing these products.

This can be summed up to three notions.

The Customer (again).  He (she) is no longer a well-defined monolithic individual. Consider the structure of a digital audience: news consumption is scattered all over the day with different size and shapes. This should impact the way news is packaged. Most newsrooms are currently unable to adapt to the time-sensitive diversity that has become expected. Too many newsrooms don’t understand their output should be reformatted, re-edited, for different uses, at different times of the day, on different devices.

Competition / Speed => Leading the pack. The media business is now intensively competitive. Newsrooms should be obsessed with beating the competition in every possible way, exactly in the same fashion a tech company is constantly rolling-out new features for an application or a service. Unfortunately for the slowest and the weakest, the media industry is migrating to a “winner-takes-all” system, with very little oxygen left to the lower tier.

Responsibility / Empowerment / Focus => Better Execution. This implies two moves: First, a complete overhaul of the HR culture. The old media culture is plagued by poor accountability and dilution of responsibility. It’s time to shift to one project (or one segment of the business) = one Direct Responsible Individual, meaning true delegation, a clear mission, and the sanction (positive/negative) that goes with it. Two, it involves a change in the compensation structure, until then dominated by guild-management negotiated agreements that abhor genuine meritocracy. Again, the technosphere teaches us the benefits of the opposite: a human management system able to attract, retain and promote talented people. The combination of responsibility and reward (not only financial) is a non-negotiable requirement for better execution.

Before going back to spreadsheets and corporate dashboards, all the boxes above must be checked. Vaste programme.

—frederic.filloux@mondaynote.com

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Much has been written about RIM’s gloomy quarterly numbers, most of it sensible (with one brain flatulence exception). The attention is a testament—an apt word—to the place RIM once occupied. From its humble pager origins, the BlackBerry, rightly nicknamed CrackBerry, became the de rigueur device of enterprise users. Like most former BlackBerry fans, I have my own fond memories of its world-class mail/contacts/calendar PIM service and of the impeccable OTA (Over The Air) synchronization that freed my wife from her Palm USB cable and HotSync travails.

As always, Horace Dediu digests the numbers for us, adds insight, and comes up with a somber conclusion (emphasis added):

The selection of tools for workers by a group that claims to understand their needs better than they do is an archaic concept.
This was true even in 2005 when RIM began targeting consumers. It was then that they saw the writing on the wall–that their enterprise business was being commoditized. All of RIM’s growth since has been in consumer segments. By abandoning that trajectory RIM is effectively giving up on growth. And giving up on growth is simply giving up.

For the first time in seven years, RIM lost money, $125M; revenue is down 25% from a year ago; unit volume decreased by 11% from the previous quarter. The only somewhat positive sign is that cash increased by $610M leaving RIM with $2.1B in its coffers, a fact preeminently featured in their press release. The message is clear: Look, we’ve got plenty of cash to last us until “late 2012” when we’ll be back with new BB10-powered smartphones.

This is a dubious proposition.

RIM will undoubtedly undergo another two or three quarters of marketshare erosion and losses. Last quarter’s combination of positive cash flow in spite of losses can’t be repeated indefinitely, there’s only so much inventory you can liquidate—at a loss—before you see the bottom of the cash register.

This isn’t to say that Thorsten Heins, RIM’s new CEO, isn’t making an effort, starting with housecleaning: Much to everyone’s relief, former co-CEO Jim Balsillie is “severing all ties with the BlackBerry maker” after a brief stay on the Board when dethroned in January. Jim Rowan, the former co-COO (Heins was the other half before becoming CEO), is also leaving RIM. More significantly, software CTO David Yach is sailing away after 13 years at the helm. Nobody accused RIM of making poor quality hardware, it’s the outmoded and late software that fell the smartphone leader.

For too long, RIM execs (and not just David Yach) didn’t heed the software threat from Google and Apple, they thought their enterprise franchise was impregnable. But by 2010, reality could no longer be ignored; RIM panicked and looked for an OS to replace their aging software engine. They found QNX, a UNIX-like system hatched at the University of Waterloo next door and used by its then-owner, Harman International, for real-time audio and infotainment embedded applications. Dating from the early eighties, QNX is mature and well-tested — but no more adept as a smartphone OS than a vanilla Linux distro. Certainly, you’ll find Linux code at the bottom of the Android stack, but what makes Android successful are its thick, rich layer of frameworks that are indispensable to application developers.

When RIM bought QNX from Harman, the OS offered little or nothing of such vital smartphone app frameworks. David Yach’s team had to build them from the ground up (or, perhaps, adapt some from the Open Source world). This doesn’t happen quickly—ask Google why they acquired Android, or look at Apple’s years of stealth iOS development based on its own OS X. The difficulty in engineering a fully-functional foundation on which to build competitive apps explains why RIM’s “Amateur Hour Is Over” PlayBook tablet lacked a native email client when it was released last spring. And this is why the new BB10 phones are slated for ‘‘late 2012”. By that time, Samsung and Apple will have newer software and hardware—and an even larger market share.

The trouble for RIM is simply stated: Too little too late, while the money runs out. If only the cure were as easily put.

We won’t dwell on the contrast between what Heins said in his first press conference as CEO in January (“Stay the Course”) and the changes he now claims are necessary. He has had time to assess the situation and has declared “We Can’t Be All Things To All People”, by which he means abandoning consumer-oriented multimedia initiatives, a retreat Horace Dediu equates to a wholesale giving up on growth, to becoming hopeless.

For my part, I can’t help but wonder: What did Thorsten Heins see, say, and do since he joined RIM in 2007, right when the Jesus Phone came out? At the time, as his bio points out, he was Senior VP of the BlackBerry Handheld Business unit…

Today, RIM’s new CEO isn’t looking away. In public statements last week, he made it clear that all options are on the table. We can ignore the possibility that RIM might find licensees for its OS (what OS?). This leaves RIM with a single option: Sell the company…but to whom? Asus, Samsung, HTC? Why not ZTE and Huawei while we’re at it? None of this makes sense, these are not necrophiliac companies, they’re happily riding Android.

Disregard the talk of buying RIM for its alleged patent portfolio. This is the company that, after years of fight, had to pay NTP more than $600M, and Visto more than $260M in patent settlements. In any event, as the Nortel example shows, one can buy patents without getting saddled with the company.

Of course, there is one intriguing possibility left: Microsoft could do to RIM what it did to Nokia. They could convince RIM to abandon its unlikely-to-succeed “native” software effort and become the second prong in Microsoft’s effort to regain significance in the smartphone wars. We can picture the headlines: RIM Joins Nokia in Adopting Windows Phone, Microsoft Now Firmly Back in the Race…

We’ll soon know if Microsoft, after toying a few times with a RIM acquisition, now finds a more realistic management team and Board sitting across from them at the negotiating table.

—JLG@mondaynote.com

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This week’s most stunning statistic: In February, Facebook drove more traffic to the Guardian web site than Google did. This fact was proffered (I couldn’t bring myself to write shared) at the Changing Medias Summit Conference by Tanya Corduroy, Guardian’s director for digital development (full text of her speech):

Eighteen months ago, search represented 40% of the Guardian’s traffic and social represented just 2%. Six months ago – before the launch of our Facebook app – these figures had barely moved.

A recent Pew report echoed these figures, revealing that just 9% of digital news consumers follow news recommendations from Facebook or from Twitter. That compares with 32% who get news from search.

But last month, we felt a seismic shift in our referral traffic. For the first time in our history, Facebook drove more traffic to guardian.co.uk than Google for a number of days, accounting for more than 30% of our referrer traffic. This is a dramatic result from a standing start five months ago.

She made her point with a graph showing the crossing of the two traffic lines, even though the Facebook referrals now appear to be receding:

This is obviously a great achievement for the team who created the FB app. Overall, The Guardian’s relentless pursuit of digital innovation is paying off. Its last month traffic stats are staggering: more than 4 million unique browsers (+64% vs. Feb 2011) and almost 70 million unique browser monthly (+76% vs. Feb 2011). As for its mobile site, it is growing at a year-to-year rate of… 182%, with 640,000 unique browsers a month.

The Guardian Facebook App played a critical role in this rise in traffic. Over the last five months, 8 million people downloaded it and 40,000 are signing up every day, again according to Tanya Cordrey.

While it is the most documented, the Guardian’s case is far from being an isolated one. Scores of online news organizations are now betting on Facebook to boost their traffic. So far no one regrets the move. Not even the reader who can now enjoy for free what s/he is otherwise expected to pay. Take the Wall Street Journal: Against my objections, by forcing me to buy the mobile version, it abusively charged me €307 to renew my yearly subscription (which translate into a 100% price hike!) — this while most of it content is available on Facebook for free. And here in France, I know of one of the most viewed newspaper site about to go on Facebook with the following rationale: ‘We know we are not going to make a dime from this move, but we have to be there. We know our FB app will be a hit, and we’ll decide later what to do next…’ Once hooked on that eyeballs fix —even non-paying ones— it is safe to assume this company’s marketing people will be reluctant to lose their valuable new audience.

There are plenty of good reasons for large news organizations to be on Facebook. But the current frenzy also raises questions. Here is a sample:

#1: Demographics. As the Guardian example shows in the graph below, FB’s demographics are attractive: most of its social users are among the 18-24 group which, for this newspaper, is otherwise harder to reach:

(I found this graph on Currybetdotnet, a blog maintained by Martin Belam, the Lead User Experience and Information Architect at the Guardian. Martin wrote this great piece about the Guardian Facebook app).

#2: Control. Facebook apps are usually Canvas Apps. The pages are hosted and served by the publishers within a Facebook iFrame. This is the equivalent of an embedded mini site on the brand’s Facebook page. One of the key advantage is you retain control of all the relevant analytics (unlike working with Apple or Amazon). It can be quite helpful to see what kind of content the 18-24 group is interested in.

#3: Audience quality. In theory, being able to tap into Facebook’s 845 million users is attractive. But reaching readers in a remote African country, thanks to Facebook’s growing penetration in the region, makes very little economic sense from an advertising standpoint. More broadly, the web already suffers from of a loss of audience quality as publishers are pursuing eyeballs or unique visitors just for the sake numbers. A Facebook page (or app) doesn’t carry any stickiness: 8 out of 10 readers look at a single page and go elsewhere —and every marketer knows it. Being big on Facebook won’t translate into big money.

#4: Dependence. To me, that’s the main issue. Media should be very careful with their level of reliance on other content distributors such as Facebook, Google, Apple or Amazon. This can be summed up to a simple question: can we trust them?

The short answer is no.

It has nothing to do with any evil intent from these people. I’m just stating a mere fact: these companies act primarily in their own best interest. Everything they do is aimed at supporting their core business: building a global social rhizome for Facebook; extending its grasp on search and, as a result, on the related ad dollars for Google; selling more iPads, iPhones, and Macs for Apple; and up-selling high margin products and retaining the customer for Amazon. Everything else is secondary. If, at any given moment, distributing media content through deals attractive to publishers serves these goals, fine. But conditions might change and pragmatism always wins the day.

Facebook might decide to charge for hosting a media site, or require the use of its Credits currency for the transaction it carries. Amazon might alter its revenue sharing scheme without warning. Apple can decide overnight that some application features are no longer accepted in the AppStore, etc. Shift happens, you know.

Don’t expect any support from the legal side: all contracts are under US jurisdiction. You can challenge the big ones only if you seek seven figures damages. But let’s face it: for a media group form Sweden, or for a regional paper from the Midwest, it is completely unrealistic to consider suing a Silicon Valley player.

Of course, that doesn’t mean a media company shouldn’t work with large American tech companies. All have products or distribution vectors that result in fantastic boosters for the media business. But, updating the old saying: When you dine with one of these high-tech giants, bring a long ladle.
Naïveté is not an option.

—frederic.filloux@mondaynote.com

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The treatment for the blood disease called Polycythemia Vera (the name means “too many red cells”) goes back to the Dark Ages: Lance a vein and relieve the patient of a pint of blood. Phlebotomy treats the symptom but not the condition. There is no known cure; the blood-letting must be repeated indefinitely.

This is what comes to mind when I see how Apple intends to treat its Polycashemia Vera, its “too many greenbacks” problem. Over the next few years, Apple will bleed off $45B of excess cash through a combination of dividend payouts of $2.65/share per quarter and stock repurchase of $10B over three years. (Also, as Tim Cook has stated, the buyback is a means to “undilute” Apple employees’ stock grants. Horace Dediu has a perceptive analysis here.)

But why get rid of the excess cash? How dangerous is it? And what exactly is “excess”?

This is a matter of animated (and occasionally silly) debate.

On one side, you have die-hard company supporters who argue that there’s no such thing as too much cash, you never know what the future holds. Management should ignore the “evil Wall Street speculators” who call for dividends and stock buybacks, jeopardizing the company’s future just to line their pockets.

On the other side, shareholders (or, more accurately, the Wall Street fund managers who represent them) get nervous when a company’s cash reserves far exceed its operational needs (plus a rainy day fund). Management might develop a case of “acquisition fever,” an investment banker-borne contagion that breeds a lust to buy shiny objects for ego aggrandizement.

It’s a rational concern, and while Apple’s performance and cautious spending habits gives management a great deal of credibility, a cash reserve that’s rapidly approaching a full year of revenue (let alone operating expenses) became “really too much” and led to last week’s $45B announcement.

The $45B figure is impressive…but will it be enough to treat this chronic condition?

In Fiscal Year 2011, Apple grew its cash balance by $31B. Using very conservative growth estimates — well below the rates we’ve come to expect from Apple —we’ll assume an additional $40B for FY 2012, $50B in 2013, $60B in 2014…that’s another $150B. Even after the $45B phlebotomy, Apple’s mattress will swell by another $100B in the next three years, to a total of about $200B.

The patient will require repeated blood-lettings.

A gaggle of observers would like to remind us of their version of the Law of Large Numbers; not the statistical LLN, but the one that says, using a simple example, that while 50% growth is relatively easy for a $10M business, it’s nearly impossible at the $100B level. And, yet, this is very much what’s in store for Apple in FY 2012. With Q1 revenue of $46B already in the books we can expect the annual figure to peg at roughly $180B. (This isn’t a wild guess: AAPL pretty much sticks to the FY 20ZZ = 4 x Q1 FY 20ZZ formula.)

$180B would be an astonishing 70% increase in revenue compared to FY 2011 ($108B). Astonishing but not surprising; it simply continues a trend: 2011, the first full year of the iPad, was 66% above 2010, which was 52% above 2009. Even in the midst of the financial cataclysm, Apple’s 2009 numbers showed a 14% increase over 2008, which showed a “customary” 52% increase over 2007, the year of the Jesus Phone. FY 2007, in which the iPhone contributed a smallish $483M, generated a “mere” 28% revenue increase above 2006, the memorable year when iPod revenue surpassed Macintosh sales, $7.7B vs. $7.4B.

One conclusion sticks out: Apple has escaped the lay version of the LLN because it repeatedly breaks into new categories. The “foundation” Macintosh business couldn’t fuel such growth.

Can this last? Can Apple create (or co-opt) another $100B category, add a fourth member to its iTrio: iPod, iPhone, iPad? The rumored Apple iTV (whether it’s the black puck or a “magical” HDTV set) is offered as a candidate for another iPhone/iPad disruption. I’m skeptical. As discussed here and here, I don’t believe Apple can turn TV into another $100B iMotherlode. Unless, of course, Apple comes up with a $650 ASP (Average Selling Price) black puck that will be enticing enough to be bought in iPhone numbers and renewed as frequently. This would require content and (cable) carrier deals for which Apple’s cash might bend the wills of content and transportation providers.

Another possibility, advanced by a friend of mine, would be for Apple to disrupt the digital camera business. Not in the way the iPhone has already eaten into the “snapshot” market, but by offering a real, non-phone camera, with bigger sensors, lenses, and, as a result, bigger body. While technically far from impossible, a look at Canon’s and Nikon’s books shows this isn’t a $100B sector. Canon’s total revenue, including printers and professional non-camera optics, is $44B, with fairly thin margins (COGS in the 70% neighborhood); Nikon’s revenue is about $1B. Too small to move Apple’s needle.

So where does Apple turn for the next big iThing? Perhaps they don’t need to “turn,” at all. Recall Tim Cook’s oft-repeated party line: All our businesses have plenty of headroom.

Read the transcripts of past conference calls (here, here and here, courtesy of Seeking Alpha) or assay Cook’s recent appearance at a Goldman Sachs conference. The mantra is clear: We have a small market share in the huge smartphone segment; iPad sales are growing even faster than the iPhone’s; Mac revenue is growing at a healthy 25% pace in the (still) huge traditional PC market.

Up to the advent of what I can’t help call the Apple Anomaly, we had two bins for companies.

Bin One held stable companies, businesses with modest, predictable growth rates. As they didn’t require huge amounts of money to feed the engine, much of their cash flow was returned to shareholders as dividends. And, when they needed cash for inventories or plants, they could borrow it, issue bonds providing ‘‘guaranteed’’ income (I simplify).

Bin One stocks are boringly/pleasantly predictable.

Bin Two companies are ‘‘hot’’, fast-growing high-tech businesses. They require lots of cash, most often harvested on the stock market. Cash-flow and future requirements are such they rarely issue a dividend.

Bin Two stocks are pleasantly/dangerously hot.

Apple straddles both bins: it generates obscene amounts of cash and it still grows much faster than the rest of the high-tech world.

Summarizing Tim Cook’s position: Yes, we’ll pay dividends and buy shares back. And No: We have no intention of becoming a stodgy Bin One company.

Apple’s CEO implicitly assumes the people he leads will continue to come up with winners in each category, an assumption respectively disputed and wholeheartedly endorsed by the usual suspects. So far, doomsayers haven’t had a great run. But just you wait, they say: In The Long Run Apple Will Fail. They will be right, of course, but when?

In the meantime, the company is still left with a $100B cash “problem.”

This must be by design: Apple’s Board could dial cash down to, say, a healthy $40B. Why not do so?

One possible explanation is that Apple is playing a game of “projection,” they’re creating the perception that they can buy or do anything they want: Wage a price war against Samsung, corner the supply of critical components and force competitors to pay more, create a second source for key modules, buy major distribution channels.

The problem with such speculations is that Apple is already doing some of the above. For example, keeping the intuitively more expensive (display, battery, LTE module) new iPad at the same price points as the iPad 2 continues the price war Apple started with the original iPad’s surprising $499 pricetag.

Also, Apple has already disclosed that it has committed some of its cash as forward payments to suppliers. And strategically creating or even buying a semi-conductor plant to cut Samsung off won’t cost tens of billions. For reference, the latest Intel fabs cost in the neighborhood of $5B each. In any event, one can’t see Apple’s culture adapting to the esoteric semi-conductor manufacturing sector.

This leaves distribution. Could the company acquire, say, Best Buy or an international equivalent? These companies are (relatively) inexpensive: Best Buy’s market cap is less than $10B —for a reason: lousy margins that, in theory, Apple could prop up. But, in reality, hese are complicated businesses and would be a nightmare to restructure: Imagine getting rid of all the brands, pruning and retraining staff. Highly implausible.

We know Apple’s business model: Make and sell high-margin hardware, rinse and repeat every year, everything else is in service to the elegant hardware experience of the Dear Customer. If we stick to our search for places to invest $100B, we’re left with a big question mark.

The only scenario left for the big number is a hedge against political risk in China or against an economic Nuclear Winter. Apple would use its cash reserve to pull through and reemerge even stronger than its competitors.

—JLG@mondaynote.com

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This weekend, my ritual readings were dominated by corporate media culture issues: How to transition from the legacy media culture to the more agile and chaotic digital world? I’ve been reading up on this topic — and sometimes conferencing about it — for years. But, to my surprise, over time, I’ve been feeling lectured on those very issues. Sometimes irritatingly so. The last sermon was delivered early March by the Pew Research Center’s Project for Excellence in Journalism. The report –which I nevertheless recommend reading– reverberated over many other great online publications such as the Nieman Journalism Lab in a piece written by two journalism professors, Jonathan Groves and  Carrie Brown-Smith; their column is softly titled A call for leadership: Newspaper execs deserve the blame for not changing the culture.

For once, I’ll align myself with the blamed “Newspaper execs” and provide a perspective from this vantage point.

Since December 15, I’m in charge of digital operations for Groupe Les Echos which publishes the only remaining business newspaper in France. Together with a seasoned CEO and a team of managers in charge of business units and critical functions, we’re doing our best to put the company back on track.  All of us are here because we firmly believe in the strength of the company’s core products: a competent and highly specialized newsroom and a line-up of solid business-related products and services. The main idea is to revitalize everything, restore profitability, increase and secure market share and create an enviable working environment capable of attracting the talent required by our many fields of activity. That’s the plan.

I addition to this recent line in my resumé, thanks to numerous exchanges with foreign colleagues, my affiliation with several trade groups such as INMA or the Gobal Editors Networks has nurtured my reflection. We are all converging to a similar train of thoughts: morphing a legacy media business into a modern, digital-dominated company is a f*** (frighteningly) complicated endeavor.

Now I’m coming back to the lecturers of all stripes. When you look at their CVs, not a single one can claim any managing experience. They all have a remote view of what a P&L or a KPI is; they never had to fire someone or to agonize over picking up x vs. y to fill an open position; they never had to make a recommendation for investing several million dollars or euros in a project with an uncertain future. They probably never experienced failure and the ensuing humiliation and anguish. This doesn’t mean they’re not interesting (and sometime entertaining) to read, it simply says they propagate a theoretical and narrow view. In a way, some of their ‘‘obvious’’ prescriptions remind me of people who claim losing weight is easy: All you have to do is exercise more and eat less. Sure. But don’t tell me what, tell me how.

Let’s address a few items mentioned in the Pew Report.

First, the authors deplore the propensity of newspapers management to remain more print centric than prone to speeding up digital transition. There is a good reason for this. According to the survey:

The papers providing detailed data took in roughly $11 in print revenue for every $1 they attracted online in the last full year for which they had data. Thus, even though the total digital advertising revenues from those newspapers rose on average 19% in the last full year, that did not come anywhere close to making up for the dollars lost as a result of 9% declines in print advertising. The displacement ratio in the sample was a loss of dollars by about 7-to-1.

Then, of course, everyone is focused on increasing the $1 digital revenue, but it’s difficult to blame managers for not trying to slow down the decline of print activity that stills account for…92% of the revenue of the 38 newspapers surveyed by Pew.

Fact is, very few industries are suffering as the newspaper business does. According to the latest statistics released by the Newspaper Association of America the evolution in print ad revenue went like this:

2005 +1.5%
2006 -1.7%
2007 -9,4%
2008 -17.7%
2009 -28.6%
2010 -8.2%
2011 -9.2%

Since 2005, print advertising revenue has dropped by 56%. And the $20.6 billion it brought last year has to be compared with the $3.2 billion scored by digital operations. Overall, despite the growth of their digital business, American newspapers have lost 52% in revenue from advertising since 2005.

Such massive revenue depletion is supposed to call for serious restructuring — a move that, at the same time, has become increasingly less affordable. A couple of years ago, management at a French national newspaper briefly considered switching to 100% online, no more print. It made the following back-of-the-envelope calculation: of a €20 million investment for the switch, €15 million would have been swallowed by restructuring costs such as discontinuing print-related operations, buyouts etc. The manager quickly decided against even mentioning the idea to its owner.

Newspaper companies have to deal with the specificities of their workforce that complicates any strategic move. An aging staff, locked-in by layers of antiquated guild or union-negotiated contracts, doesn’t favor labor agility. The same goes for training, job reassignments, etc.

Those constraints, combined to a residual sense of entitlement within newsrooms, further complicate the transition. Regardless of upper management’s determination, you’ll never be able to steer a century-old company the way a young startup adjusts to changing circumstances, whether it’s explosive growth or adverse events.

As a result, management of a legacy media company is left with a dual agenda. On the one hand, going for the low hanging fruits, getting quick wins such as small, swiftly executed projects thanks to “agents of change” identified within the company. And, at the same time, setting deep culture-changes in motion.

One of the most compelling “culture statement” I’ve seen was designed three years ago by Reed Hastings, the CEO of Netflix, a company that rocked the streaming media sector like never before. Here is an excerpt of Hastings’ 126 slides presentation that I think deserves consideration:

– The “Behavior and skills” section is broke up into nine items “…Meaning we hire and promote people who demonstrate these nine:
1. Judgement
2. Communication: Listening others and articulating views
3. Impact: “You focus on great results rather than on process. You exhibit bias-to-action, and avoid analysis-paralysis”
4. Curiosity : “You learn rapidly and eagerly”, “You contribute effectively outside of your specialty”
5. Innovation: “You challenge prevailing assumptions when warranted, and suggest better approaches ”
6. Courage: “You say what you think even if it is controversial”, “You make tough decisions without agonizing”, “You take smart risks”
7. Passion: “You inspire others with your thirst for excellence”, “You celebrate wins”, “You are tenacious”
8. Honesty: “You are quick to admit mistakes”
9. Selflessness: “You are ego-less when searching for the best ideas.”

Other Netflix core values include:

– “Great Workplace [means working with] Stunning Colleagues : Great workplace is not espresso, lush benefits, sushi lunches, grand parties, or nice offices. We do some of these things, but only if they are efficient at attracting and retaining stunning colleagues.”

– “Corporate Team:  The more talent we have, the more we can accomplish, so our people assist each other all the time. Internal “cutthroat” or “sink or swim” behavior is rare and not tolerated.”

– “Hard Work = Not Relevant : We do care about accomplishing great work. Sustained B-level performance, despite “A for effort”, generates a generous severance package, with respect. Sustained A-level performance, despite minimal effort, is rewarded with more responsibility and great pay.”

– No room for what Hastings call “Brilliant Jerks“. His verdict:  “Cost to effective teamwork is too high.”

– About processes: “Process-focus Drives More Talent Out. Process Brings Seductively Strong Near-Term Outcome.  Then the Market Shifts… Market shifts due to new technology or competitors or business models. [Then] Company is unable to adapt quickly because the employees are extremely good at following the existing processes, and process adherence is the value system. Company generally grinds painfully into irrelevance.”

– “Good” versus “Bad” Process:
“Good” process helps talented people get more done.
- Letting others know when you are updating code
- Spend within budget each quarter so don’t have to coordinate every spending decision across departments.
- Regularly scheduled strategy and context meetings.”

“Bad” process tries to prevent recoverable mistakes:
- Get pre-approvals for $5k spending
- 3 people to sign off on banner ad creative
- Permission needed to hang a poster on a wall
- Multi-level approval process for projects
- Get 10 people to interview each candidate.”

And to conclude, I love this one about vacation policy and tracking days off:

– ” We realized… [that] We should focus on what people get done, not on how many days worked . Just as we don’t have an 9am-5pm workday policy, we don’t need a vacation policy.
No Vacation Policy Doesn’t Mean No Vacation.
Netflix leaders set good examples by taking big vacations – and coming back inspired to find big ideas.”

And my favorite, about “Expensing, Entertainement, Gift & Travel: Act in Netflix’s Best Interest (5 words long).”

“Act in Netflix’s Best Interest” Generally Means… Expense only what you would otherwise not spend, and is worthwhile for work. Travel as you would if it were your own money. Disclose non-trivial vendor gifts. Take from Netflix only when it is inefficient to not take, and inconsequential. “Taking” means, for example, printing personal documents at work or making personal calls on work phone: inconsequential and inefficient to avoid.”

I’ll stop here. I’m sure you get the point. I prefer rules as stated by Netflix’s battle-scarred chief rather than by unsoiled scholars.

—frederic.filloux@mondaynote.com

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In an August, 2010 Monday Note titled Smartcameras In Our Future?, I wished for smartphone-like apps running on a nice compact camera such as Canon’s S90 (now replaced by the S100). At the time, in-camera photo processing was limited and wireless connectivity required accessories like Eye-Fi, a clever but not so easy-to-use SD card with a Wi-Fi radio.

On the smartphone side, connectivity (Wi-Fi and 3G) was simple and mostly good (AT&T exceptions hereby stipulated) and, as a bonus, GPS geolocation worked. But when it came to picture quality, smartphones couldn’t compete with dedicated compact cameras. The phones’ inadequate sensors had trouble with high contrast scenes. Pictures in low light? Forget about it.

Since then, sensor technology has made incredible progress. A few years ago, ISO 3,200 was considered extreme; today, the Canon 1 DX and Nikon D4 reach ISO 204,800 sensitivity. Granted, these are big, expensive high-end cameras — and heightened sensitivity doesn’t always yield the best picture — but the new top number is 64 times the previous maximum. A low-light scene that once required a blur-friendly 1/2 second exposure can now be safely captured in 1/128th of a second.

Such progress stems from the silicon industry’s relentless progress, particularly, in this case, in silencing electrical noise. Stray electrons that are introduced by the camera’s circuitry are intelligently rejected; “authentic” electrons that capture the sparse photons in a low-light snapshot are no longer drowned in an electrical hubbub.

As expected, these improvements have ‘”dribbled down.” The advancements in silicon technology that have given us the 24x36mm sensors in our pro cameras are finding their way into the tiny sensors in our smartphones. ‘The Best Camera Is The One That’s With You’ is truer than ever. Esteemed photographers such as Annie Leibovitz have fun showing off what they can do with a smartphone.

But improved sensor technology is only one of the reasons why smartphones have eaten compact cameras alive. The other reason is software. Smartphone app stores now sport a huge number of photo apps. Search for ‘‘photo editor” in Google play (née Android Marketplace) and you’ll get more than 1,000 hits. The iPhone App Store yields an absurdly high number as well. Not all of these apps are useful — or even good — but the gamut is impressive. From collage to special effects, from panorama stitching to HDR processing (coaxing highlight and lowlight details into a “viewable” picture), smartphone camera software makes these better sensors even better.

Now add in the smartphone’s connectivity with its natural affinity for easy and automatic upload/download, such as what Photostream does for Apple devices… Compact cameras – which, by comparison to smartphones, don’t seem quite so compact anymore — are at an ever-growing disadvantage.

“It won’t last,” says Samsung. In the eyes of many, the Korean electronics giant has become the new Sony, or, better, the new Panasonic. Well-known for smartphones and tablets, Samsung also reigns in the HDTV market, they make PCs, refrigerators, cameras, all very good ones. As the king of Android phones, it’s no surprise to hear rumors that Samsung is preparing to launch Android compact cameras. It’s a terrific idea: Compact cameras have bigger sensors, better optics and zoom lenses. With better apps and connectivity (Wi-Fi at least), they’ll make great travel companions.

Canon and Nikon should pay heed…or risk sequestering themselves in the ultra high-end camera ghetto.

—JLG@mondaynote.com

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(Last of a series — for a while.)

Launching an antitrust probe against books publishers, as the US Department of Justice might do, can’t come at a weirdest time. In the two previous Monday Notes, we explained how Amazon is maneuvering itself into a position to dominate the entire book industry. The Seattle giant keeps moving up the food chain, from controlling ebooks distribution (in addition to selling print books), to competing against publishers and even agents by luring best selling-authors. No one would bet a dime on the printed book as it reaches its peak while ebooks sales keep exceeding expectations.

Then, why does the DOJ waves the threat of an antitrust action?

Five publishers –and one distributor, Apple– are in the the US administration’s crosshairs:  Hachette Book Group (a division of Lagardère Group), Simon & Schuster (CBS Corp),  MacMillan (Holtzbrinck GmbH), Penguin (Pearson PLC), and HarpersCollins (News Corp). All are said to be suspected of ebooks prices collusion. (The Wall Street Journal broke the story on March 9th).

First, some background. There are two competing distribution models for printed books, electronic books and electronic newspapers as well: the wholesale model and the agency model. Using the wholesale model, the publisher sells its goods to the distributor for a fixed price — say half of the suggested street price — and the distributor is free to decide the actual price to the public. In the agency model, the publishers set the retail price, the distributor gets a fee (30% or so) and that’s it.

Amazon is fond of the wholesale model. But, in order to effectively enter a new market, the company had to make concessions. For example, in the newspaper business Amazon reluctantly yielded to the demands of European publishers who preferred the agency model. French publishers went for this arrangement last year (but they priced their publications too high, forgetting that a real e-paper format has nothing to do with PDF facsimile or a digital edition loaded with features). In the UK, British newspapers went for the wholesale model, much cheaper for the customer: they are doing well with lower margins and much higher volumes. (Price elasticity is a proven concept for digital publishing).

In the US market, Amazon offers nothing but the wholesale model. You end up with absurdly low prices:

…While the French weekly Paris Match won’t accept any discount:

… At least on Amazon. On the Relay.com digital kiosk, the magazine is sold for €1.59 ($2.08) per copy.

When it comes to selling newspapers or books, the wholesale model doesn’t seem to favor the publisher, this for three main reasons:

– The wholesale model’s primary goal is to serve the retailer’s overall strategy. Let’s assume Amazon wants to strengthen its general e-distribution market share and to increase sales of its Kindle product line. Then, the price of the primary product becomes secondary: it is in the company’s best interest to price-dump ebooks top-sellers in order to stimulate the sale of other products, or to up-sell high-margin items through its incredible recommendation engine –something Amazon is extremely good at. The entire retail sector strategy is based on a similar combination of moves.

– This makes the wholesale model is a deflationary one. Once it has acquired the rights to distribute a book (print or digital), the retailer is free to lower its margin as it sees fit, even going into negative territory (provided there is no law, such as in France, that prevents dumping practices). As a side effect, consumers gets used to low prices, ignoring the fact such prices may or may not reflect the item’s true economic value: a bestseller acquired for $14 by Amazon will be sold for a discounted $9.99. Once the the consumer bites, the retailer catches up by selling other higher margin products and/or hooking the customer into its system.

That’s why, when Apple launched its iBooks Store, publishers stuck inside Amazon’s wholesale system were willing to take their chances. They asked Steve Jobs for the agency model: price set by them and Apple taking its 30% cut. Jobs obliged, he wanted to boost iPad sales and, to do that, needed to attack Amazon’s domination of the ebook market. (Kindle formats currently accounts today for 60% of total sales). Jobs’ move put publishers in a position to go back to Amazon and ask for the same conditions.

Coming back to the DOJ’s looming antitrust action, did the book publishing industry collude in trying to pressure Amazon to change its practices? I don’t know if they acted in concert (people talk, you know) but they moved in accordance to their best interest by taking advantage of the newcomer, Apple. Now it seems the dispute over pricing has resumed: last month, Amazon pulled out 4,000 ebooks from one of the biggest books distributors in the US, the Independent Publishers Group (story in the New York Times here).

Pricing an item should be left to the one who produces it. The case of the book publishing industry is not as simple as, say, an appliance maker looking for the most potent retail channel for its hair-dryers or its toasters. The book sector is entering a painful transition: First, it needs to respond to consumers who want a large catalog of inexpensive ebooks; two, there is a plateauing but still strong print market ($73 billion worldwide). Managing a smooth decline for this segment is key to the industry’s health, especially as the ebook market yields thinner margins. Legacy publishers are culturally ill-equipped for such a difficult transition: they now find themselves competing with the agile, cash-rich, data and technology-driven players of the digital world.

—frederic.filloux@mondaynote.com

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[First: No (new) iPad report, yet. In the meantime you can feast your eyes, or nurse your dyspepsia, by googling “iPad 3” or “new iPad”. This will tell you almost everything (minus the Fingerspitzengefhül, the all-important gut-feel) about the product, and definitely everything about the kommentariat. If we thought we’d plumbed the nadir with the iPhone 4S…]

Dictionary.com unfolds the historical and linguistic links to We Wuz Robbed, and translates: We were cheated out of a victory; we were tricked or outsmarted.

The gist of the carriers’ lament is this: We do the hard work and someone else is making all the money. And by someone else they mean a certain interloping personal computer company that has, without the slightest experience in the technical (and deal-making) intricacies of the mobile phone industry, inexplicably lucked into the smartphone business and pocketed an unfair share of the cash.

The PR flacks go to work and give us this “rich” WSJ article, “How the iPhone Zapped Carriers”, from which I extract a few of its many gems:

Americans are glued to their mobile devices, obsessively calling, texting, emailing and downloading applications. So why is the U.S. wireless industry in such straits, as shown by AT&T Inc.’s crucial but failed plan to buy T-Mobile USA?
A big reason is that carriers are losing power to the device and software makers riding the smartphone boom.
…..
For the most part, it’s really been a wealth transfer from AT&T shareholders to Apple shareholders…
…..
Device makers and app developers are having the fun, while the carriers are doing the grunt work.

Nowhere does the churnalist entertain anything other than the carrier party line. Not a word from users, from Google, from the device makers and software freeloaders who are “riding” the boom and having all the fun.

The article’s bias is clear, in its language and innumeracy. First, AT&T’s “crucial but failed” attempt to buy T-Mobile was a bid to restrict competition and raise prices. Had the merger gone through, customers would be the ones crying “We wuz robbed.”

Second, the article mentions a decrease in the sacrosanct monthly ARPU (Average Revenue Per User) to $46.09, down $2 from the previous year. Behold once more the lack of respect for the reader exhibited by the fake four-digit precision. But beyond the attempted intimidation, what is the meaning of the $46.09 average, what ingredients does it mix together?

Curious, I ask the oracle a simple question: ATT ARPU. The first hit is a happy — triumphant almost — AT&T press release for Q4, 2010:

AT&T Reports Record 2.8 Million Wireless Net Adds, Strong U-verse Sales, Continued Revenue Gains in the Fourth Quarter
…This marked the eighth consecutive quarter AT&T has posted a year-over-year increase in postpaid ARPU.

And the news gets better. The Q4 2011 investor presentation (download it here) yields these morsels:

…and…

The average ARPU for smartphones on AT&T’s network is 1.9 times that of the company’s non-smartphone devices.

The $64 ARPU is for all wireless devices, smart (with their 1.9x revenue premium) and dumb. Two years ago, AT&T CEO Randall Stephenson pronounced himself happy with the “over $100” ARPU from iPhone subscribers. So how much does AT&T get for its iPhones today?

From Apple’s latest earnings release, we know the iPhone ASP (Average Selling Price) is about $660. AT&T subscribers pay $200, plus $20 or more in accessories, directly to Apple. This leaves $440 to be fronted by AT&T. Subtract that $440 number from $2880 (the customary 24 month x $120 agreement), and there’s $2440 left — or about $100 per month of “real” iPhone ARPU.

But there’s a problem with my back-of-the-envelope calculations. Data consumption makes up 40% of AT&T’s service revenue; I can’t prove it, but I suspect that iPhone subscribers are more ‘‘generous”, they consume more data, than AT&T’s other customers. In Q4 2011, that probably worked out to a nice ARPU of about $120 per iPhone.– and users will pay even more now that the “unlimited’’ plans are no longer offered.

What about Verizon? Are they being “zapped,” too? The oracle obligingly responds to “Verizon ARPU” with a few good links, such as this one, trumpeting Verizon’s robust health:

US carrier landscape in Q3: Verizon records biggest ARPU

Jumping to Verizon’s Q4 2011 numbers and to the January 24th earnings call transcript (courtesy of Seeking Alpha), we needn’t shed tears. The company’s smartphone business is doing well:

Ever since the iPhone barged in, we’ve heard carriers cry extortion; they complain that Apple’s prices — to them — are too high. But they took the iPhone and its prices for two simple reasons: higher ARPUs and fear of losing subscribers to a competitor, the cost of watching your most “productive” subscribers — the ones who contribute to the 1.9x ARPU factor — go elsewhere. It’s better to bet the company on the iPhone than on not having it.

Sprint agrees. According to our WSJ story, Sprint has committed $15B to the purchase of iPhones for a period ending in 2014. (Another WSJ story says $20B, but what’s $5B these days?) As obverse evidence, we have T-Mobile’s simple explanation for its subscriber losses: No iPhone.

Carriers subsidize smartphones because it’s what their customers want, and they put up with the iPhone’s higher price because it’s what their customers want most. Just last week, a T-Mobile exec called for an end to smartphone subsidies — but refused to go first. When/if the iPhone becomes less desired, the carrier subsidies will subside.

I introduce this thought by way of providing context for another statement in the WSJ article:

‘’… subsidizing a customer buying an iPhone would cost 40%, or about $200, more than another kind of phone, on average.”

(Let’s see: $200 divided by 24 months, that’s about $8 a month. Will an iPhone customer yield the extra $8 in monthly ARPU? The carriers’ accountants seem to think so.)

Still on subsidies, try this thought experiment: You walk into an AT&T or Verizon store with a fully-paid unlocked phone. Will you get a lower monthly deal? I asked and, in both cases, the answer is a polite no. See this on-line chat with a Verizon person:

No deal on an unsubsidized phone. The logic is impeccable: We complain about subsidies while using them to tie customers up.

Carriers want to imagine a world in which the ‘‘excess’’ $200-per-iPhone subsidy moves back to its rightful home: the carriers’ coffers. With 180 million iPhones sold so far, that’s $36B of pure carrier profit…and Apple would still enjoy an ASP of more than $400 for its iPhone. Cosmic order would be restored.

Back in this reality, carriers complain about excessive subsidies and threats of disintermediation, of attempts to make them ‘‘dumb pipes’’. But nowhere do we see a discussion of the ratio between the cost of an additional cell tower and the new revenue it generates. We can be sure carriers know this number, but they’re not sharing. It must be a good one: We now see carriers eager to offer their new LTE infrastructure as data pipes for the (unsubsidized) new iPad.

As a final offering, regard this handy chart from Fierce Wireless:

Some observations and a little math, in no particular order.

• The first four carriers, Verizon, AR&T, Sprint, and T-Mobile, have 295M subscribers, 90% of the total US market.
• If we multiply each carrier’s ARPU by its number of subs, sum the results, and divide by the 295M, the overall ARPU works out to about $50 (our journalist would write $49.69).
• For the two leading carriers, the churn rate (people leaving) is quite low, about 1%. Compare this to the iPhone-less competitors: Before Sprint got the iPhone 4S, Sprint’s churn was about twice AT&T’s; T-Mobile’s is close to three times that of Verizon’s.
• AT&T continues to benefit from its early bet on the iPhone and, in Q3, added more subs than Verizon.
• Both Verizon and AT&T get about 40% of their service revenue from data.

—JLG@mondaynote.com

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(Second of a series)

Last week, we looked at the ebook’s Giant Disruption. A new ecosystem in which Amazon eats publishers’ and agents’ lunch by luring authors into self-publishing.

Today, we examine the new regime’s impact on book-making and distribution processes.
The outcome will surprise few readers: Over time, the new book publishing business will look more and more like the software industry.

1/ Managing abundance. Traditional publishing’s most salient feature is the maintenance of high barriers to entry. The journey from manuscript to bookstore is an excruciating one. Publishers are deluged with books proposals; a quick glance at a few pages and the bulk of submissions is rejected. Still, far too many books get published. Several Parisian booksellers told me they sometimes have to return unopened boxes of books to distributors, simply because they don’t have enough space for them. Therefore, the 80/20 rule applies: most of the revenue comes from a small assortment of books. Digital publishing removes those barriers –brutally so: the floodgates are now indiscriminately open to every aspiring writer. This will have two effects: more difficult choices for the reader (see Barry Schwartz TED’s talk on The Paradox of Choice) and, on average, lower quality products.

Overtime, two factors will help solve the problem of the choice: search engines and manual curation. As semantic search rises, books content gets treated like data, searchable not only by words clusters, but by variations of meaning, pitch and, at some point, style. Put another way, a search engine will soon be able to differentiate and to attribute texts written by two novelists working in the same segment of literature.
Such breakthroughs will impact recommendation engines systems that already act a serious sales booster. Again, tech companies, such as Amazon (more than Apple, which does not seem to “get” search) will ride the wave thanks to their past and future investments into search and data analytics.

Semantic recommendation engines won’t kill the need for human curation. Like the app business where abundance creates a need for more human-powered guidance and suggestions (see Jean-Louis’ idea of a Guide Michelin for Apps), book sections of magazines and newspapers will have to adapt and find ways to efficiently suggest e-readings to their audience.

2/ The need for editing. The most potent selection tool will remain the quality of the product. In the iPhone/iPad AppStore, Apple guarantees the overall technical quality of what lands on its shelves. Apple’s primary motive is to avoid poorly coded apps that crash or, worse, interfere with the inner core of the iOS. No such things on Amazon. Once a manuscript is properly formatted (not very complicated), it’s eligible for sale. That’s where reality barges in. Many self-published authors insouciantly flog texts replete with grammatical errors and typos. Very few seem to rely on proper editing and proofing, this is the main divide between amateurs and pros. Editing is both a mandatory and costly process — but worth every penny. It is probably the most critical part of the value added by traditional publishers. In the digital world, it must remain a key component of the process.

3/ Segmented manufacturing. Self-published ebooks won’t escape the laws of digital economics, of decentralized and specialized crafts. Here again, ebooks publishing and the making of applications converge. The entire process will be handled by dedicated freelancers focused on specific tasks: manuscript formatting (easy for text, but complicated otherwise); cover design — it will become more important as digital bookstores gain in sophistication; editing and copy-proofing the manuscript by a competent and well-paid professional, etc.

At a higher level of complexity for a book production (rich media contents, interactive learning features and more), two forces will kick-in: cloud computing and offshore outsourcing. The most recent example is the San Francisco-based startup Inkling: last month, the company made its own cloud publishing setup Habitat available to the general public. It went a step further by relying on companies such as Aptara, a US corporation with the bulk of its 5000+ workforce located in India. Note that Aptara is a contractor for almost all traditional publishing houses such as Hachette Livre, Pearson, Oxford University Press… Inkling will bypass publishers by connecting customers and contractors through a collaborative platform that provides highly sophisticated correction and versioning tools. It is no incident that Matt McInnis, Inkling’s CEO, is an alumnus of Apple’s education division, as told in this recent Bloomberg BusinessWeek story.

Ebook publishing is often linked to value depletion for the entire food chain. Ebooks obey the other digital law: low price, high volumes. In this case, extremely low prices. But evidence shows professional authors can find their way in the new world.

Take thriller author and self-publishing advocate Joe Konrath. His blog is a well-documented plea for getting rid of what he calls “legacy publishers”. A year ago, he posted a 13,000 words dialog with his pal Barry Eisler. Eisler, is a former CIA operative; at the time, he was making headlines for turning down a $500,000 deal from his traditional publisher and taking the self-publishing road instead. I recommend reading their conversation, especially when the two discuss business strategies, such as the time-to-market problem:

— Barry Eisler: [Time to market]  was one of the reasons I just couldn’t go back to working with a legacy publisher. The book is nearly done, but it wouldn’t have been made available until Spring of 2012. I can publish it myself a year earlier. That’s a whole year of actual sales I would have had to give up.
— Joe Konrath: We can make 70% by self-publishing. And we can set our own price. I have reams of data that show how ebooks under $5 vastly outsell those priced higher.
— Barry Eisler: This is a critical point. There’s a huge data set proving that digital books are a price-sensitive market, and that maximum revenues are achieved at a price point between $.99 and $4.99. So the question is: why aren’t publishers pricing digital books to maximize digital profits?
— Joe: Because they’re protecting their paper sales.
— Barry: (…) Fundamentally, it’s extremely hard for an industry to start cannibalizing current profits for future gains. So the music companies, for example, failed to create an online digital store, instead fighting digital with lawsuits, until Apple–a computer company!–became the world’s biggest music retailer.
— Joe: I was in love with the publishing industry. It was my dream to land a Big 6 deal. And I still believe the industry is filled with intelligent, talented, motivated, exceptional people. I’m grateful to have sold as many books as I did (and continue to do.) My switch to self-publishing isn’t personal. It’s just business. I can make more money on my own.

For context, among tons of books Joe Konrath wrote, one, The List, was first rejected by a New York Publisher in 1999. In April 2009, he self-published it on Amazon for $2.99 and sold a first batch of 25,000 copies. Then he took the price further down (!) and had sold 35,000 copies at the time of the interview (March 2011). Today, The List is now available on Amazon for $11.97 (paperback, 310 pages) or $4.01 in Kindle format.

Before wrapping this up, I’ll answer a Monday Note reader who asked what would I do if I had to publish a book today. Like most journalists, I’m not short of ideas; my two most advanced projects are a global techno-thriller and an essay about internet economics. (Because of my day job, they are likely to stay untouched for quite a while…)
To me, it’s a no brainer: I’d go digital, especially if I publish in English.
Among the reasons:
– Time to market: I’m not exactly the patient type who’ll wait for a release window that will fit my publisher.
– Pricing: I’dont want to compete against well-established authors releasing their opus in the same format for the same price. Mine has to be lower.
– Size and scope: I want to be able to publish a book with a number of pages based on the subject’s scope, as opposed to antediluvian dictates saying books should have x hundreds of pages.
– Updating capabilities: for a business book, being able to quickly make a new version with fresher data (or thoughts) is a must.
– Control: I like the idea of picking the professionals who will help me with editing and design; no such freedom with a traditional publisher. Same for marketing and promotion; there, given the level of frustration I often see authors endure, I’d rather go by myself, or hire the right person to do it.
– Permanence: an ebook never dies; it’s as easy to find as a new release in digital bookstores. Great for personal branding.
– Revenue: I’d rather bet on volume than on a small number of high-priced copies.

But I still might print a small limited edition on dead trees. Because despite all rationale I’ll always love paper books.

—frederic.filloux@mondaynote.com

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It’s the rumor that refuses to die and the myth that keeps on giving…pageviews. Serial Apple-rumorist Gene Munster is at it again: In a 15 minute Bloomberg Radio program (obligingly summarized here by Business Insider’s Henry Blodget and here by 9to5Mac) the PiperJaffray analyst issues his umpteenth version of the prediction:

Apple’s TV is real. It will be ‘The Biggest Thing In Consumer Electronics Since The Smartphone’.

As if this weren’t bold enough, Munster also predicts that Apple’s TV set will be announced this year and will ‘freeze the market for five months’. Naturally, the design will be bold: ‘… just a sheet of glass, no edges or bevels’.

Let’s start with a bow to the power of desire and the company’s reputation: Wouldn’t it be grand to have a magical TV-done-right? A Jony Ive hardware design, a UI purified of the ugliness and complexity foisted upon us by operators (cable or satellite) and set-top designers (Motorola, General Instruments), iOS-based, controlled via Siri, fed by a completely remodeled iTunes and App Store…

Apple keeps barging into existing markets it didn’t invent — MP3 players, smartphones, tablets — and manages to go home with a big share of the game. It does this by skillfully rethinking the device, inside and out. With the iPod, the iPhone, and the iPad, Apple offered sleek, elegant, cohesive form factors…and it did more: It provided a new ecosystem. The process started with iTunes (selling separate songs and micro-payments), which provided a debugged foundation that made the iPhone the first ‘‘app-phone’’ and paved the way for the iPad.

Why can’t Apple do something similar for its hypothetical TV set? Is it just a lovely, comforting fantasy?

Today’s TV experience is far from magical. A few weeks ago, I bought a 47” LG Smart 3D HDTV on post-Xmas sale at Fry’s. At $990, the thin, easy-to-install, internet-connected TV sounded good.

WiFi set-up isn’t too hard:

Using the Web browser is another story (although, to be fair, in a world of smartphones and tablets, why would you browse the Web on your TV?):

Still, there are plenty of embedded applications…

…and the “management’’ UI is cheerful, if a little disorganized:

For the Skype application circled above, you can buy a dedicated webcam. I did, it’s expensive — it adds 15% to the TV’s price — but its really Plug-and-Play, no software added.

All the parts are there…but a $49 or $79 Roku, a $179 Boxee Box, a $179 Xbox, or the $99 Apple TV offers more content, flexibility, and modularity, to say nothing of a more accessible UI.

Does this make a case for yet another category reinvention by Apple?

Not so fast.

As discussed in previous Monday Notes (here and here), there’s one strong, clear reason to bet against an integrated or smart Apple TV set: To perform the expected magic, a computer must inhabit the otherwise “dumb” TV. Very quickly, in a year or two, Moore’s Law will obsolete that computer. To get a new computer — more powerful, more fun –  you’ll need a whole new TV set. We might be willing to buy a new phone, tablet, or laptop every other year, but not a new 47” HDTV.

I believe Apple TV’s magic will be performed by a separate box, a descendant of today’s $99 Apple TV black puck, perhaps in combination with a new version of Time Capsule. This will enable the no-longer-a-hobby Apple TV to bring its magic to the millions of HDTVs already in homes all over the world — and to be replaced with better/faster hardware without drama.

(While we wait for the grand new Apple TV, we’re likely to get an updated version of today’s black puck Real Soon Now: The vintage 2010 model is no longer available online at Amazon, Best Buy, or Radio Shack — I just checked. If, as I hope, the upgrade outputs real 1080p HD — 1920 by 1080, versus today’s 720p — 1280 by 720, it’ll be an easy sell. Especially as an AirPlay companion to something like an iPad HD with twice the linear resolution of today’s tablet, 2048 by 1536 versus the original 1024 by 768.)

So, no grand integrated device…but the next-gen Apple TV, the next black puck, will certainly have that iOS/Apple Store magic, right? With three success stories in the books, the process of writing and distributing iOS apps is well understood, billions of dollars have changed hands through the App Store, developers and customers are standing by!

Again, not so fast.

Most of what we do with our PCs, smartphones, and tablets is related, it’s one form or another of personal computing. Yes, we also play games on our phones, but our posture is primarily ‘‘lean-forward’’: productivity, communication, organization, learning.

A TV, even when running iOS, isn’t a personal computer. We won’t be typing The Great American Novel or answering email, but we will play games, tune into channels-as-apps, video-chat with our friends and families running Skype or FaceTime. The TV is entertainment, it’s a ‘‘lean-back’’ experience. As one wag put it, the PC helps us think; the TV relieves us from our thoughts.

To gain acceptance, the Apple TV ecosystem will have to offer a library of entertainment apps tailored for TV. The company has made inroads in the genre – see the 60 Minutes iPad app, or MLB.tv for Apple TV (a great boon for naturalized fans who occasionally spend time in repatriation). But most entertainment content providers – TV networks, event producers, movie studios – are proceeding with caution. They know the history: Steve Jobs managed to convince music ‘‘majors’’ to let Apple distribute the content. Over time, the content distributor became more important than the content owner, giving sharper meaning to the old Hollywood saying, “If content is king, distribution is King Kong.”

No one knows if, when, and how Apple will succeed in building an Apple TV App Store that will have enough content to displace the old set-top box, its bundles, and its “lovely” navigation.

But can we, at least, hope for a separate, “dumb” TV set from Apple, elegance we can hang on the wall?

Here we run into the business model question. For Apple, only hardware margins matter. Everything else — software, content, stores — is there to serve the topmost goal. It’s doubtful that Apple can “maintain the hardware lifestyle to which it is accustomed” with such a product.

Today, the TV hardware business shows signs of desperation with its gimmickry and price wars. Even at the high end where Bang & Olufsen makes “exclusive” sets that sell for 3 to 4 times as much as technically comparable Samsung devices, life isn’t too comfortable. Take a look at B&O’s latest investor presentation and you’ll see that TV sales make up less than half of their $500M revenue, and show a slight decrease year-to-year. Operating profit is a modest 4% or so.

With this in mind, could Apple achieve its ‘‘customary’’ 37% Operating Profit selling a “dumb” TV? For help in answering the question, let’s compare the price of Apple’s 27” Thunderbolt Display to its competition. The Thunderbolt is “more than HD” (2560 by 1440) and has some features that aren’t found on other monitors — power to another device; extra USB, Ethernet, Firewire, and Thunderbolt ports; an integrated 720p camera — but at $999 it’s selling in middling quantities even though it demands a significant premium. At Amazon, a Samsung 27” (1920 by 1080) monitor sells for $329. Some competitors go as low as $250.

Now imagine a 47” or 55” 1080p TV set version of the Thunderbolt Display with fewer ports and better sound, perhaps. Today, Samsung’s top-of-the line 46” sets sell for $1,800; the 55” model is $2,000. Would Apple get a 50% premium over those prices?

But even more than price and margins, there’s volume. Going back to Gene Munster’s ‘Biggest Thing In Consumer Electronics Since The Smartphone’ claim, would Apple’s elegant, slightly better connected, webcam equipped, but nonetheless dumb set sell in iPhone or iPad quantities? I seriously doubt it.

If Apple succeeds in building the right content-and-apps ecosystem around a next-gen Apple TV box, the new device will be in a position to eclipse today’s ungainly set-top boxes, it will have a chance to sell in large quantities at good margins — and thus stop being a ‘‘hobby.” Then, yes, Apple might also sell a few (almost) dumb but definitely elegant sets on the side — as a recreation.

JLG@mondaynote.com

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(Part of a series)

In the last twelve months, I’ve never bought fewer printed books — and I’ve never read so many books. I have switched to ebooks. My personal library is with me at all times, in my iPad and my iPhone (and in the cloud), allowing me to switch reading devices as conditions dictate. I also own a Kindle, I use it mostly during Summer, to read in broad daylight: an iPad won’t work on a sunny café terrace.

I don’t care about the device itself, I let the market decide, but I do care about a few key features. Screen quality is essential: in that respect the iPhone’s Retina Display is unbeatable in the LED backlit word, and Kindle e-ink is just perfect with natural light. Because I often devour at least two books in parallel, I don’t want to struggle to land on the page I was reading when I switch devices. They must sync seamlessly, period, even with the imperfect cellular network. (And most of the time, they do.)

I’m an ebook convert. Not by ideology (I love dead-tree books, and I enjoy giving those to friends and family), just pragmatism. Ebooks are great for impulse buying. Let’s say I read a story in a magazine and find the author particularly brilliant, or want to drill further down into the subject thanks to a pointer to nicely rated book, I cut and paste the reference in the Amazon Kindle store or in the Apple’s iBooks store and, one-click™ later, the book is mine. Most of the time, it’s much cheaper than the print version (especially in the case of imported books).

This leads to this thought about the coming ebook disruption: We’ve seen nothing yet. Eighteen months ago, I was asked to run an ebooks roundtable for the Forum d’Avignon (an ultra-elitist cultural gathering judiciously set in the Palais des Papes). Preparing for the event, I visited most of the French publishers and came to realize how blind they were to the looming earthquake. They viewed their ability to line-up great authors as a seawall against the digital tsunami. In their minds, they might, at some point, have to make a deal with Amazon or Apple in order to channel digital distribution of their oeuvres to geeks like me. But the bulk of their production would sagely remain stacked on bookstores shelves. Too many publishing industry professionals still hope for a soft transition.

How wrong.

In less than a year, the ground has shifted in ways the players didn’t foresee. This caused the unraveling of the book publishing industry, disrupting key components of the food chain such as deal structures and distribution arrangements.

Let’s just consider what’s going on in self-publishing.

“Vanity publishing” was often seen as the lousiest way to land on a book store shelf. In a country such as France, with a strong history of magisterial publishing houses, confessing to being published “à compte d’auteur” (at the writer’s expense) results in social banishment. In the United Kingdom or the US, this is no longer the case. Trade blogs and publications are filled with tales of out-of-nowhere self-publishing hits, or of prominent authors switching to DIY mode, at once cutting-off both agent and publisher.

And guess who is this trend’s grand accelerator? Amazon is. To get the idea, read these two articles: last October’s piece in the New York Times Amazon Signs Up Authors, Writing Publishers Out of Deal, and a recent Bloomberg BusinessWeek cover story on Amazon’s Hit Man. The villain of those tales is former übber-literary agent Larry Kirshbaum, hired last May by the e-retailer giant to corral famous writers using six-figures advances. (By the way, BBW’s piece is subtitled “A tale of books, betrayal, and the (alleged) secret plot to destroy literature”, a hard-sell come-on…). Of course you can also read the successful self-publishing poster-child tale in this excellent profile of Amanda Hocking in the Guardian.

Here is what’s going on:

– Amazon is intent on taking over the bulk of the publishing business by capturing key layers of intermediation. At some point, for the market’s upper-crust, by deploying agents under the leadership of Mr. Kirshbaum and of its regional surrogates, Amazon will “own” the entire talent-scouting food chain. For the bottom-end, a tech company like Amazon is well-positioned for real-time monitoring and early detection of an author gaining traction in e-sales, agitating on the blogosphere or buzzing on social networks. (Pitching such scheme to French éditeurs is like speaking Urdu to them.)

– For authors, the growth of e-publishing makes the business model increasingly attractive. Despite a dizzying price deflation (with ebooks selling for $2.99), higher volumes and higher royalty percentages change the game. In the too-good-to-be-an-example Amanda Hocking story, here is the math as told in the Guardian piece:

Though [a $2.99 price is] cheap compared with the $10 and upwards charged for printed books, [Hocking] gained a much greater proportion of the royalties. Amazon would give her 30% of all royalties for the 99-cent books, rising to 70% for the $2.99 editions – a much greater proportion than the traditional 10 or 15% that publishing houses award their authors. You don’t have to be much of a mathematician to see the attraction of those figures: 70% of $2.99 is $2.09; 10% of a paperback priced at $9.99 is 99 cents. Multiply that by a million – last November Hocking entered the hallowed halls of the Kindle Million Club, with more than 1m copies sold – and you are talking megabucks.

Again, aspiring (or proven) authors need to cool-down when looking at such numbers. The Kindle Million Club mentioned above counts only 11 members to date — and most were best-sellers authors in the physical world beforehand.

– But at some point, the iceberg will capsize and the eBook will become the publishing market’s primary engine. Authors will go digital-first and the most successful will land a traditional book deal with legacy publishers.

Shift happens, brutally sometimes.

—frederic.filloux@mondaynote.com

Next week: the editing equation and how the rise e-publishing will segment the craftsmanship of book-making.

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Why is HP still in the PC business? It must be for the sport, because the money isn’t there. Looking at the quarterly figures released this past week, we see PC revenue down 15% year-to-year, with a low 5.2% Operating Profit:

HP can explain. In the earnings release conference call (transcript obligingly provided by Seeking Alpha), CFO Catherine A. Lesjak invokes the floods in Thailand and their impact on hard disk production as one excuse for the PC revenue shortfall. For her part, CEO Meg Whitman ‘‘opens the first envelope”: She (subtly) blames her predecessor for his PSG spin-off announcement and the ensuing on-again-off-again business disruption.

But the Thailand floods didn’t seem to have much of an impact on Dell, whose latest quarterly numbers show 3% Y/Y growth for Desktop PCs, let alone on the Cupertino neighbor where the Mac business grew by more than 20%. And as a member of HP’s Board of Directors at the time, didn’t Whitman approve the decision to dump the PC?

None of this answers the question: Why stick with a declining product line within a declining industry? Part of the answer lies in the weight of PSG:

The PC is still HP’s biggest business…and its least profitable. The only explanation for staying in the game, to quote Meg Whitman in her conference call remarks:

‘It gives us great return on invested capital and a lot of synergies.’

Perhaps, but what happens to the enjoyable cashflow if the PC business continues to deteriorate, as an industry in general, and as a challenged product line at HP?

Personal computing now comes in three flavors: traditional, tablets, and smartphones. The latter two are dynamic and thriving while the traditional segment stagnates. HP has failed to gain any presence in tablets and smartphones, and now finds itself the biggest player in a market that’s in a race to the bottom.

HP’s absence from the tablet/smartphone segment isn’t for want of trying. When then-CEO Mark Hurd decided to acquire Palm, he was making a clear strategic move for HP to become a major player in smartphones and tablets, to gain independence from stodgy Microsoft, to control its destiny in the newer and more promising personal computing segments. The move was reinforced last August when HP’s Board supported Léo Apotheker’s decision to exit the unprofitable PC business, a gambit inspired by IBM’s similar decision years earlier.

Unfortunately, not-so-small matters of implementation compromised the grand design. Palm’s WebOS tablets and smartphones didn’t fly; Apotheker’s exit-without-an-exit-path announcement was followed by a hasty retreat and Léo’s no less hasty exit. Epaulette mate.

All HP can do now for its PSG business is pray. And, indeed, Meg Whitman bows to the Microsoft altar:

‘So we’re rooting for a fantastic Windows 8 product that’s delivered on time that we can get to the market before the holiday season.’

What does HP have to say about tablets? Not a word. Browse the conference call transcript; CMD-F, ‘tablet’, Enter… Nothing in Whitman’s prepared presentation, no T-word in the Q&A section. (A bonus finding: The silence of the analysts. Let the record show how lamely choreographed these Q&A sessions are. No analyst even dared to ask HP’s CEO about, you know, iPads, Kindle Fires, Android tablets… For once, the elephant-in-the-room metaphor applies: For Apple’s most recent quarter, iPad revenue rose to $9.15B vs. $8.87B for HP’s PSG. Definitely not worthy of a discussion for the benefit of HP’s concerned shareholders.)

At a WSJ event the same day, HP’s CEO finally admits the existence of the iPad…and gives it a patronizing pat on the head:

The iPad is terrific; I have one. I use it to read books or watch TV but I don’t use it to really get work done.

In another interview, as reported by Business Insider, Whitman recycles the old Blackberry enterprise security argument:

‘I think our sweet spot has to be around security. This whole security thing is a big worry, not just for big enterprises but also for medium enterprises and small and medium businesses. So if we can provide devices that consumers really want — and by the way, employees are consumers, too — and we can provide a tablet offering, then we have an opportunity to solve problems for the enterprise and small- and medium-business segments, with products that their employees like and are also secure in terms of protecting the enterprise’s data.’

The S-word paranoia stopped working for the BlackBerry some time ago. Enterprise users have embraced the iPad because, thanks to Apple’s ‘‘control freakery’’, the new tablets are more secure than laptops. I know of one giant oil company that deploys thousands of iPads (and iPhones), complete with the corporation’s own internal App Store, chock-full of homegrown applications for its office workers and road warriors.

It sounds like HP’s CEO is aping the best-of-both-worlds posture affected by Microsoft for its upcoming tablet software: We give you the productivity of a traditional PC plus the portability/fluidity of a touch-friendly tablet. She seems to have ignored the reason for the iPad’s success in business: Be better at less. The iPad doesn’t try to do everything a PC can do, it’s simply better at the things it does.

Business users have figured this out on their own, without waiting for the market research – or the blessings of their IT departments. In this post, TechCrunch reviews a new Forrester report on mobile and personal devices at work:

[T]he report notes that today’s I.T. departments think they have only a handful of devices out in the field: a PC and smartphone for most users, and maybe a tablet for a handful of execs. But in reality, one-half of info workers report using multiple devices, often behind I.T.’s back.

These workers prefer a set of tools to a Swiss Army knife.

Later in the same TechCrunch post:

Employees today are bringing their own devices largely outside of BYOD programs, Gillett says. While 73 percent of workers pick their own phone, 53 percent their own laptop, 22 percent their own desktop, and 66 percent their own tablet, significant numbers of workers report paying for the devices themselves. In the case of smartphones, for example, 57 percent report paying the full price for the device themselves, and 48 percent report paying full price for their own tablet.

There was a time when HP, Dell, and others could sell fleets of PCs because employees had to take what IT gave them. Today, users/workers are more inclined to decide for themselves which devices they want and, in many companies, management supports the initiative because it improves productivity without an increase in risk or cost.

Does HP stand a chance to become a viable supplier of the kinds of devices business users choose for themselves? We know the official answer: We’ll try harder; we’ll eliminate silos and inefficiencies in the supply chain; we’ll innovate again. Some of that may work for a while…but will it work faster than the competition? Also, with the exception of the departed CEO, most of the people who got HP in its current situation are still there. Will the same crew cause the same effects?

I still think HP’s initial intuition was right, that the PC business, as driven by Microsoft and Intel, will increasingly become a race to the bottom — with the two Wintel allies sucking all the profits. Instead of ‘‘rooting for a fantastic Windows 8”, HP should root around for a buyer for its PC business.

— JLG@mondaynote.com

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How should large media organizations handle their blogs? As editors struggle to increase their news coverage, to generate the indispensable serendipity and raise the “fun side” (much needed for legacy media that are often too stiff), how do they strategize their use of blogs? For an online media, is there an optimal number of blogs to carry? Should editors adopt a Mao Zedong “let thousands blogs blossom” posture? Or, on the contrary, be rigorously selective?

Unsurprisingly, there is no easy answer, no one-size-fits-all strategy.

A note before we dive into the question: I choose to set aside independent professional bloggers. This is no reflexion on the quality of their work: it is often excellent, and sometimes better than what traditional media blogs offer. But I want to narrow the scope of this column.

When asked to explain what a legacy media blog should be and how it should relate to the general newsroom-produced content, I venture into the following set of requirements (in no particular order):

A Byline. Because the power of a media is often associated with the trust placed in it, readers tend to connect with “their” columnists. Moreover, the writer should provide more personal content, quite different from his/her “official” production (columns, editorial, analysis, opinion page).

Dedicated writing style. In a blog, no one wants (or expects) to find pontification — even by a celebrity author. A blog is an ideal fit for first person accounts and, if not for completely untrammeled stream-of-consciousness writing, at least for a good measure of casual, intimate stories.

A good example is Nobel Prize for Economics Paul Krugman in the New York Times: he combines a great byline, specific writing and a clear-cut editorial distinction. His weekly  column is, as expected, a neat and insightful production. And his blog, The Conscience of a Liberal, checks all the boxes. (In addition, Krugman — who builds his content without anyone’s help by adding photos, charts and video all on his own — is quite prolific: he wrote 21 posts over the last seven days!)

A concept. I always liked former Vanity Fair and New Yorker editor Tina Brown‘s phrase about the key attribute of a good story: it must be “high concept”, she said, i.e. reducible to one sentence. This property, often ignored or downplayed by editors, is at the core of our business and must also apply to blogging: if the writer’s blogging intention cannot be boiled down to a straightforward idea, maybe the idea needs rethinking.

An insider’s view. Many blogs are valued because their authors are so specialized they border on being insiders. Their access, their expertise give them plenty of material that won’t find its way into the main site structure but is a great fit for a blog. See the Guardian Defence and security blog or, on the same subject, Wired’s Danger Room or, on legal affairs, the excellent WSJ.com Law Blog.
More broadly, behind-the-scenes blogs, or reporter notebooks often produce good results. Foreign correspondents are usually the first to use the blog medium. To them, blogs are the ideal vector to write about campaign-trails, being immersed in a remote place or group, with first-hand “you are there” accounts.

An ultra-sharp angle. Blogs are good vectors for ultra-specialized views or angles. To name but a few:  The Numbers Guy in the Wall Street Journal pores over statistics, or FT’s Datablog on data-driven journalism. For lighter fare, let’s mention WSJ’s  Heard on the Runway about fashion (one of the most viewed), or WSJ’s Juggle on “choices and tradeoffs people make as they juggle work and family”.

What a blog shouldn’t be: a dump of disorderly news contents belonging to established home page sections, random bursts of disorganized thoughts, or a receptacle for journalists’ frustrations. As for the question of collective blogs vs. individual ones, I favor the individual blog: better gratification for the writer and, for management, more accountability and quality control.

Let’s now turn to metrics. Is there a rule of thumb for the quantity of blogs a news media should host?

I live and work in France where newsroom managers tend to be lax on blogs, and writers are quite voluble. The result is a record high number of blogs. To take one example, Le Monde hosts 61 blogs manned by its own staff, 26 guest blogs, and they select 30 readers’ blogs out of… 753 blogs “updated over the last 60 days” (this is more a page view strategy than an editorial one). All strong newsrooms, such as Le Monde or other prominent French newspapers, host great blogs. But, for all of them, the audience structure is a classic “20/80”, one in which a small fraction of the blog production makes the bulk of the audience. I don’t see the point in such a long tail, especially since advertising tends to price blogs at the very low end of their rate card.

Here are some numbers based on my analysis of publications I read on a regular basis:

– New York Times : 68 blogs. Its Blogs Directory shows the best possible arrangement. Those guys clearly believe in the blog medium and their news staff of 1200 provides great quality and a good mix between serious and more entertaining fare. Some are more than mere blogs: the excellent Dealbook, manned by a staff of 16, is more like a business site than a blog. Or Lens is my favorite spot for photojournalism as it rises above the level or an ordinary blog.

– The same goes for The Guardian (61 blogs) whose newsroom seems to enjoy manning its own blogosphere. Their baseline says it all: “The Sharpest Writing, the Liveliest Debate”.(Plus, OK, The Guardian hosts a small set of independent blogs such as The Monday Note…)

– High on the score (quantitatively speaking) is the Washington Post (102 blogs), with a weird focus on religion thanks to an ecumenical catalog of 13 blogs.

– WSJ.com has 54 blogs, officially. Plus what looks like a cemetery of 45 more. On the WSJ.com blogs home page, click on the Most Popular or Commented and the Latest; you’ll see which ones are the most active (Washington Wire on politics and the entertainment blog Speakeasy). This should make business pundits even more modest…

A random sample shows that a large number of blogs doesn’t equate with great quality. Too many blogs hosted by large media brands seem loose or rarely updated. That’s why a few specialized outlets prefer to focus on a small number of blogs: the FT.com (only 14 blogs) or the Economist (23 blogs) have opted for a selective approach — which more often ensures a better execution overall.

—frederic.filloux@mondaynote.com

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Apple just announced Mountain Lion, the 10.8 version of the Mac operating system, scheduled for delivery in late summer of this year. I dutifully installed the developer preview; it works, mostly (see here for PCMag’s list of notable features, and here for a quick video tour.). More important is that less than a year after the introduction of OS X 10.7, we now have two data points and can draw a line…and the slope confirms our expectations: Mac OS X begat iOS but, now, iOS fathers Apple’s Unified User Experience.

iOS leadership came about for two reasons.

First, the numbers. You’ve probably seen this “viral” Asymco graph, compliments of Horace Dediu, that compares the installed base growth for various Apple products, alive and historic:

Quoting Horace:

The iOS platform overtook the OS X platform in under four years, and more iOS devices were sold in 2011 (156 million) than all the Macs ever sold (122 million).

No one, Apple execs included, expected such an explosion. But here we are: The son of OS X is now the Big Daddy and everything else must line up behind it. Imagine an alternate universe in which Scott Forstall, Apple’s iOS czar, hadn’t won the decision to pick a version of Mac OS X as the software engine for the iPhone. (Scott is also the “father” of Siri. He convinced Jobs to buy the company and to put substantial resources behind it after the acquisition.)

Just as important, iOS provides a fresh (or “fresh-ish”) start. iOS is a rebirth, rid of (many) sins of the past. Because it must run on less of everything — RAM, MIPS, screen, power –engineers were “forced” to shed the layers of software silt that accumulate inside any OS. This gave iOS designers and coders the opportunity to rethink the User Experience (UX), and to pass these ideas back to the Mac.

As examples: The multi-finger trackpad gestures, inherited from iOS, are welcome additions to OS X, they help us find our way in a maze of application windows. So are the full-screen apps with their felicitous and subtly size-conscious ways of hiding and revealing menubars and the Dock. The animation may differ between the smallest 11.6” MacBook Air and a large 27” screen, but physically it feels the same.

Under the hood, we discern an iOS-inspired ways of installing and uninstalling applications. In another trick learned from iOS, Lion manages application state from fully on to fully off and, more interestingly, various levels of readiness in between.

[For an in-depth and opinionated discussion of the technical aspects of OS X Lion -- including glimpses into the Mac’s possible future -- you can spend $4.99 on Mac OS X 10.7 Lion: the Ars Technica Review. It’s available in Kindle e-book form, but not as an Apple i-Book. You can also turn to Fraser Speiers’ lucid discussion of iOS multitasking here, with videos here.]

In 2007, while clearly coming from the same company, the Mac and the iPhone had markedly different UXs. The phone’s small screen was the biggest reason for the differences. When the iPad came out in 2010, some folks joked that the new device was simply a Brobdingnagian iPhone, perfect for the fat-fingered. But the size-appropriate translation of the iOS UX onto a much bigger screen hinted at things to come…and, indeed, later that year Apple announced its intention to further adapt iOS user interface ideas and fold them into the Mac.

If the Mac is a now-traditional personal computer, the iPad is a more personal one, and the iPhone is really personal. (This should please Messrs. Ballmer and Shaw at Microsoft. According to their hymnal, there is no shift to a post-PC era, it’s turtles, err… PCs all the way down to smartphones.)

For a company that prides itself on simplicity and elegance, it only makes sense that Apple would offer a consistent UX across all its devices, a GUUX, a Grand Unified User Experience. Apple customers should be able to move easily and naturally from one device to another, selecting the best tool for the task at hand. Add another unification, iCloud storage services, and Apple can offer more reasons to buy more of its products.

It’s a lovely, soothing theory.

In reality, the Grand Unification isn’t there yet. We still face antiquated limitations, bad bugs, aging applications, and capricious flourishes.

Let’s start with the menubar at the top of the OS X screen. It worked well on the original Mac with its small screen and lack of multitasking, but on today’s 21.5’’ or 27” displays and the many applications they contain, the menubar is bad ergonomics and leads to confusion. Novice and experienced users alike are often misled: If you unintentionally click outside the app window, the menubar at the top of the screen becomes associated with another app, or with the Finder:

On apps such as Pages, it gets worse: You have to deal with two menubars, the one inside the app window, and the one at the top of the screen. Why does Apple cling to this antiquity?

(Friends tell me that it would be difficult to move the top menubar into the app. Perhaps…but more difficult than moving from the undebuggable OS 9 to the Unix/NextStep-based OS X?)

In Microsoft’s Windows, each app window carries its own menubar, there’s no need to move to the top of the big screen to access the File menu, there’s no confusion about the context of your action. Furthermore, when you close an app’s last window, the app quits. Apple recently started doing something similar, but it’s apparently limited to a few utility programs; big apps don’t quit when their last window is closed.

Why not take a few good ideas from Windows?

Moving to bad bugs, the Mac’s Mail app is still an abomination, an app that was either poorly architected or poorly implemented or both. It keeps quitting or freezing on my machines. All on its own — meaning with no prodding by this user — Mail will spin the dreaded beachball for tens of seconds. Is it talking to itself?

Another of my favorite apps, Preview, will suddenly lose part of its mind:

With the Mountain Lion announcement, Apple execs tell us that OS X is now on a once-a-year release regimen. Great…but what about iWork apps? When will they be updated?

I have a long list of iWork bugs, and some are really embarrassing. Take a simple Numbers graph and copy it into Pages:

Works fine…but it loses its title and legend when copied into Word. It must be Microsoft’s fault, right? No, the same thing happens when the chart is moved to Apple’s own Preview:

(When I tried it again, just to make sure this wasn’t a “luser” error, Preview crashed on me.)

Speaking of Microsoft Word, the US version knows the punctuation rules for both US English and French. Not my version of Pages…which is why I have to keep Word around.

Some apps aren’t merely not improving, they seem to be going downhill. The Lion version of Address Book made it harder to manage multiple books, and the app ignores some of Apple’s own UI conventions, such as double-clicking at the top of the window to minimize it.

I’ll finish this litany with Apple’s skeuomorphic flourishes. This apparently is a new fashion: Make computer objects look more like the “real” thing in order to provide familiarity. Sometimes, as with the faux stitched leather and bits of torn paper in the iCal app, familiarity breeds contempt:

The Address Book is even worse, I won’t reproduce it here.

Sure, a good UX needs to extend a welcome mat, but we don’t need extraneous, functionally pointless simulacra of the physical world. Perhaps these details are just a case of brainstorm hysteria in Cupertino: “Idea: Put a rod and hoops at the top of each window, hang drapes on the side and give users a choice of styles!”

Apple must choose between its established Bauhaus elegance and 70‘s Rich Corinthian Leather:

Let’s end on more measured notes.

• Bugs and brain flatulence aside, a Grand Unified UX is the right idea. Who will argue against making it easier to move from one Apple device to another? Especially when using fresh and successful iPhone/iPad constructs as the model.
• Lion and Mountain Lion are transitional versions, and the awkwardness shows…but they’re moving in the right direction. Mountain Lion, even in its buggy preview form, shows a large number of nice improvements over Lion.
• It’s been a very long time – three years — since the latest iWork release. But this lull is very likely due to Apple’s focus on the first set of iOS releases. Sooner or later, we’ll see a fresh iWork that cures the most glaring bugs — and that makes OS X and iOS file formats more compatible.

Lastly, having spent a little more time with Mountain Lion, I hope we’ll get the newer version of Safari ASAP. At the top of the list of neat improvements: we’ll be granted the ability to search directly from the URL bar. Yes, finally, just like Opera, Firefox, Chrome and Internet Explorer…

—JLG@mondaynote.com

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Here is the latest Twitter scam I’ve heard this week. Consider two fictitious media, the Gazette and the Tribune operating on the same market, targeting the same demographics, competing fort the same online eyeballs (and the brains behind those). Our two online papers rely on four key traffic drivers:

1. Their own editorial efforts, aimed at building the brand and establishing a trusted relationship with the readers. Essential but, by itself, insufficient to reach the critical mass needed to lure advertisers.
2. Getting in bed with Google, with a two-strokes tactic: Search Engine Optimization (SEO), which helps climb to the top of search results page; and Search Engine Marketing (SEM), in which a brand buys keywords to position its ads in the best possible context.
3. An audience acquisition strategy that will artificially grow page views as well as the unique visitors count. Some sites will aggregate audiences that are remotely related to their core product, but that will better dress them up for the advertising market (more on this in a forthcoming column).
4. An intelligent use of social medias such Facebook, Twitter, LinkedIn and of the apps ecosystem as well.

Coming back to the Tribune vs. Gazette competition, let’s see how they deal with the latter item.

For both, Twitter is a reasonable source of audience, worth a few percentage points. More importantly, Twitter is a strong promotional vehicle. With 27,850 followers, the Tribune lags behind the Gazette and its 40,000 followers. Something must be done. The Tribune decides to work with a social media specialist. Over a couple of months, the firm gets to the Tribune to follow (in the Twitter sense) most of the individuals who already are Gazette followers. This mechanically translates into a “follow-back” effect powered by implicit flattery: ‘Wow, I’ve been spotted by the Tribune, I must have voice on some sort…’ In doing so, the Tribune will be able to vacuum up about a quarter or a third — that’s a credible rate of follow-back — of the Gazette followers. Later, the Tribune will “unfollow” the defectors to cover its tracks.

Compared to other more juvenile shenanigans, that’s a rather sophisticated scam. After all, in our example, one media is exploiting its competitor’s audience the way it would buy a database of prospects. It’s not ethical but it’s not illegal. And it’s effective: a significant part of the the followers so “converted” to the Tribune are likely stick to it as the two media do cover the same beat.

Sometimes, only size matters. Last December, the French blogger Cyroul (also a digital media consultant) uncovered a scam performed by Fred & Farid, one of the hippest advertising advertising agencies. In his post (in French) Cyroul explained how the ad agency got 5000 followers in a matter of five days. As in the previous example, the technique is based on the “mass following” technique but, this time, it has nothing to do with recruiting some form of “qualified” audience. Fred & Farid arranged to follow robots that, in turn, follow their account.  The result is a large number of new followers from Japan or China, all sharing the same characteristic: the ratio between following/followed is about one, which is, Cyroul say, the signature of bots-driven mass following. Pathetic indeed. His conclusion:

One day, your “influence” will be measured against real followers or fans as opposed to bots-induced accounts or artificial ones. Then, brands will weep as their fan pages will be worth nothing; ad agencies will cry as well when they realize that Twitter is worth nothing.

But wait, there are higher numbers on the crudeness scale: If you type “increase Facebook fans” in Google, you’ll get swamped with offers. Wading through the search results, I spotted one carrying a wide range of products: 10,000 views on YouTube for €189; 2000 Facebook “Likes” for €159; 10,000 followers on Twitter for €890, etc. You provide your URL, you pay on a secure server, it stays anonymous and the goods are delivered between 5 and 30 days.

The private sector is now allocating huge resources to fight the growing business of internet scams. Sometimes, it has to be done in a opaque way. One of the reasons why Google is not saying much about its ranking algorithm is — also — to prevent fraud.

As for Apple, its application ecosystem faces the same problem in. Over time, its ranking system became questionable as bots and download farms joined the fray. In a nutshell, as for the Facebook fans harvesting, the more you were willing to pay, the more notoriety you got thanks to inflated rankings and bogus reviews. Last week, Apple issued this warning to its developer community:

Adhering to Guidelines on Third-Party Marketing Services

Feb 6, 2012
Once you build a great app, you want everyone to know about it. However, when you promote your app, you should avoid using services that advertise or guarantee top placement in App Store charts. Even if you are not personally engaged in manipulating App Store chart rankings or user reviews, employing services that do so on your behalf may result in the loss of your Apple Developer Program membership.

Evidently, Apple has a reliability issue on how its half million apps are ranked and evaluated by users. Eventually, it could affect its business as the AppStore could become a bazaar in which the true value of a product gets lost in a quagmire of mediocre apps. This, by the way, is a push in favor of an Apple-curated guide described in the Monday Note by Jean-Louis (see Why Apple Should Follow Michelin). In the UK, several print publishers have detected the need for independent reviews; there, newsstands carry a dozen of app review magazines, not only covering Apple, but the Android market as well.

Obviously there is a market for that.

Because they depend heavily on advertising, preventing scams is critical for social networks such as Facebook or Twitter. In Facebook’s pre-IPO filing, I saw no mention of scams in the Risk Factors section, except in vaguest of terms. As for Twitter, all we know is the true audience is much smaller than the company says it is: Business Insider calculated that, out of the 175 million accounts claimed by Twitter, 90 million have zero followers.

For now, the system stills holds up. Brands remain convinced that their notoriety is directly tied to the number of fan/followers they claim — or their ad agency has been able to channel to them. But how truly efficient is this? How large is the proportion of bogus audiences? Today there appears to be no reliable metric to assess the value of a fan or a follower. And if there is, no one wants to know.

—frederic.filloux@mondaynote.com

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Let’s go back to Spring 2010. Nokia friends invite me to their US headquarters in White Plains, NY, where we’ll discuss Apple with an audience of local management and remote viewers in Europe.
As the conversation proceeds, I’m struck not by what I hear but by what I don’t. They’re right to wonder about Apple, about what makes it tick…but they have an even bigger problem called Android.
I venture a few politically impolite suggestions:

1. Replace your CEO. Olli-Pekka Kallasvuo, a little too proud to be a lawyer and an accountant, is way past his “best if used by” date.
2. Drop all your aging software platforms, your Symbian S60, S^3 and S^4, your Maeemo/Moblin/Meego chimera (I didn’t say clusterf#^k). You’re doomed by pursuing so many projects…and you might want to consider that your competitors are a bit better than you are at writing system software.
3. Go Android right now. Join the winning OS team.
4. Focus on your strengths: Hardware, industrial design, manufacturing, worldwide distribution.
5. Move to Silicon Valley, that’s where the action is. The future of smartphones won’t be decided in White Plains, NY.

People don’t appear overly upset. Actually, quite a few heads nod when I mention kicking the mercurial OPK upstairs. Judging by audience reaction, the Go Android suggestion isn’t news, it’s been debated already, heatedly it seems.

I get two kinds of pushback: “We’ll lose control of our destiny!” and “How will we achieve differentiation?”

With the regard to the former, by 2010 Nokia is already past the point of controlling their destiny; sales are “gaining vertical speed”…in the wrong direction. And to the differentiation objection, I suggest that the audience share my faith in Nokia’s proven hardware strengths and in their Finnish tradition of sparse, elegant designs.
It becomes an open — if occasionally pained – exchange. My hosts are visibly as concerned as I am about Nokia’s current direction.

On my way back to the Valley, I try to put a humorous spin on the discussion: I pen a Science Fiction: Nokia goes Android piece that shows the great company waking up and turning itself around. But, inside, I know humor is the politeness of despair, and I can’t avoid a somber note at the end of the otherwise lighthearted article:

In a more plodding reality, Nokia is likely to continue on its current course, believing their problem is one of execution, of putting more faith in their sisu.
The king will be deposed, Google and Apple will divide the spoils.

A few months later, Nokia’s situation worsens, OPK is deposed and Stephen Elop, a former Microsoft executive, replaces him.

A year ago exactly, Nokia’s new CEO writes his infamous Burning Platforms memo. In it, Elop makes three crucial statements:

1. The smartphone war isn’t one of platforms any more, it is a war of ecosystems.
2. Our current system software won’t win.
3. To win the war, we’re joining the Windows Phone ecosystem via a special alliance with Microsoft.

The first point is beyond dispute. Two successful ecosystems, Google’s for Android and Apple’s for the iPhone, have settled that score.
To outsiders, Elop’s second statement is merely a frank assessment of Nokia’s failure to play in the same software league as its Californian competitors. A few insiders and fans take offense but…numbers are numbers.

Things take a turn for the worse with the jump to Windows Phone. In the abstract, the decision is defensible, but by announcing the switch ten to twelve months ahead of actual shipments, Elop has effectively osborned his current product. Who will buy Symbian-based smartphones when Nokia’s own CEO tells the world it’s a has-been platform with no future? Nokia’s fans are furious; so are the shareholders. (See Tomi Ahonen’s blog for a rich, vocal, well-argued compendium of everything wrong with Stephen Elop’s move.)

Nokia’s market share and profits drop precipitously. The December 2011 quarter shows a loss with little hope of a turnaround in the short term.

But the wait is finally over: Nokia now ships Lumia smartphones running on the latest Windows Phone 7.5 release. A Nokia friend asks if I want to try a Lumia 800, the top-of-the-line model in Europe. Having read good things about both hardware and software, I jump at the chance.

When the package lands on my desk, I ask myself The Question: Is this the phone that will put Nokia and Microsoft back in the race? By late 2011, Microsoft’s share of the smartphone market stood below 2%. Does the Lumia line of devices have what it takes to regain the ground lost to Samsung’s Android devices and to iPhones?

What follows, here, is a highly impressionistic diary, with no pretense of objectivity, chronicling a week of abuse of the Lumia 800. (I’ll skip over the phone waking up speaking Finnish, or that it arrived with a European plug for the power adapter. Not a problem, we have Google Translate and I have my own stash of euro-gizmos.) For a dispassionate and professional discussion, please turn to AnandTech’s exhaustive review (12 pages).

At first glance (literally), very good: Elegant, sleek hardware with equally elegant type on the welcome screen, followed by the clean Metro UI (Nokia UK provides a nice tour here). All it takes to get a pre-paid month-to-month subscription and micro-SIM is a short walk to the T-Mobile store.

I encounter my first problem when looking for ways to take screenshots for today’s note. The documentation is mute on the subject, and all Google can offer is that I need software developer tools. Is there really nothing for normal humans? I email my friends, I tweet nokia-connects (as recommended in a nice handwritten note that came with the phone)…still nothing. A simple two-button procedure, followed by a no-hands Photo Stream upload – in other words, the iPhone method — seems to be the type of solution to aspire to.

Cognoscenti will argue over details, but I was impressed by Lumia’s email presentation and management. Setting up my Exchange, Google, and iCloud accounts is as simple and reliable as the best of what I’ve seen with Android and iOS devices. So is the polished use of type, the ease of linking and unlinking mailboxes, handling single messages, and bulk-editing an inbox loaded with spam. Office attachments read well, naturally — as they do on all leading smartphones. But while competitors read PDF docs natively, Windows Phone tells you There’s An App For That. It’s free and installs easily, as every other app I tried. But, for such a basic function, rendering PDF files, why not make it part of the device?

Surfing the Web proves less satisfying. Tabbed browsing isn’t as intuitive as on an iPhone 4S, and there’s no “Reading List” of pages you can save for later or sync with your PC. Worse, there appears to be a purplish tinge on the screen as I read Web pages and the type rendering is lackluster — I wish I had screenshots to better explain what I see. I don’t know enough about what’s under the hood to place the blame, but perhaps it’s the lower screen resolution (480 by 800 vs. 640 by 960).

Music, at least on the device I got, is also disappointing. Contrary to the claims of the Nokia Music support page, there’s no Nokia Music Streaming on my Lumia. Perhaps this is just a temporary or regional situation. Downloading music from iTunes is theoretically possible, although it seems one needs a DRM Removal Tool, followed by a batch conversion to Windows Phone music files. Spotify offers a Windows Phone application, or one can turn to the Microsoft’s Zune Unlimited Pass, both with a $9.99/month subscription. Opinion will differ as to the attractiveness of these music offerings. In any case, there’s no ‘‘iPod Inside”, as I hear an AT&T salesperson say.

The Lumia 800 features an 8 megapixel camera with a “Carl Zeiss Tessar” lens. As a test, I took side-by-side pictures using the Lumia and an iPhone 4S, both in idiot mode (auto white balance mode, auto everything else).

First, my two pigs. I found them 20 years ago in an antique shop in Arcachon, France, and christened them Victor and Charles, as in VC. This was in my early entrepreneurial days, when I thought VCs were…you know. Now that I’ve gone over to the Dark Side, I still keep them on my desk and show them to entrepreneurs who give me lip about my brotherhood.

The Lumia photo:

…and the iPhone:

To the inexperienced viewer, the iPhone 4S picture looks better

I tried another subject: Handwritten numbers on a piece of paper.

The Lumia:

…and iPhone:

Take a close look at these pictures and you’ll see that the iPhone images are marginaly sharper.

The rather dull tint of the Lumia pictures can be corrected using any decent photo processing program (I just did it in iPhoto, it works quite well). Of course, that means moving the pictures to a “real” machine.
Perhaps the dull tint is unique to the phone I got. If it isn’t, it needs to be fixed in order not to disappoint. The Autofix feature in the phone’s camera software didn’t fix the picture.

I used Microsoft’s SkyDrive, a free “drive in the Cloud” that appears as one of the sharing options in Windows Phone. It’s not as clever as DropBox, or as automated as parts of iCloud, but it works well (and reliably) on PCs, Macs, Windows Phone, Android, and iOS.

Still on the camera topic: unlike other leading smartphones, there is no front-facing camera. As a result, no video calls in Skype or FaceTime fashion.

Using Nokia-owned Navteq maps, navigation work as expected: very well.

Last item for this cursory review: battery life. The Lumia’s screen dims in a matter of seconds and shuts down soon thereafter. My unscientific impression is that the battery drains quickly if you do a lot of browsing and downloading on 3G or WiFi. A glance at AnandTech’s thorough numbers shows that this is indeed the case.

…or nearly the last item: I forgot to mention phone calls, we use smartphones for those, too. Nothing to report; voice, SMS…everything works as expected.

This is a well-made, elegantly designed, and capable phone. But let’s return to The Question: Is this the Killer Phone? Will the Lumia 800 and its siblings put Nokia and Microsoft back in contention? My answer is, regretfully, No.

The Lumia contains neither the revolutionary new features nor the fresh approach that any serious smartphone needs to compete with the two new giants, Samsung and Apple. The Korean company is very, very determined; it takes no prisoners — ask Sony. And Apple is no longer Little David fighting the Microsoft Goliath: Last quarter, the iPhone alone generated more revenue and profit than all of Microsoft.

I can’t help but retro-fantasize an alternate reality: In 2010, Nokia starts a secret project with Google and an Asian contract manufacturer. The industrial design is done in-house, the rest in collaboration. In February 2011, Elop announces a special relationship with Google — and starts shipping the device immediately. No osborning, no revenue gap.

This fantasy comes with a bonus: Google doesn’t have to buy Motorola and it gets Nokia’s patent portfolio – infringement of which Apple has paid more than $600M — as part of the “special relationship”.

Back to reality: Without a clearly superior product and a dominant ecosystem, Microsoft and Nokia are now forced to shell out big marketing dollars against richer adversaries. This isn’t going to be pretty: Microsoft can ill afford to be a bit player in the smartphone revolution and Nokia can’t keep bleeding money, squeezed between the new giants and the emerging Asian providers of entry-level devices.

—JLG@mondaynote.com

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Exactly three years ago, Charlie Rose interviewed Marc Andreessen, the creator of Netscape and Facebook board member. In his trademark rapid-fire talk, Marc shared his views on Facebook. (Keep the February 2009 context in mind: the social network had 175 million users and Microsoft had just made an investment setting Facebook’s valuation at $15 billion.)

About Mark Zuckerberg’s vision:

The big vision basically is — I mean the way I would articulate it is connect everybody on the planet, right? So I mean [there are] 175 million people on the thing now. Adding a huge number of users every day. 6 billion people on the planet. Probably 3 billion of them with modern electricity and maybe telephones. So maybe the total addressable market today is 3 billion people. 175 million to 3 billion is a big challenge. A big opportunity.

Indeed.
About monetization:

There’s a lot of confusion out there. Facebook is deliberately not taking the kind of normal brand advertising that a lot of Web sites will take. So you go to a company like Yahoo which is another fantastic business and they’ve got these banner ads and brand ads all over the place, Facebook has made a strategic decision not to take a lot of that business in favor of building its own sort of organic business model; and it’s still in the process of doing that and if they crack the code, which I think that thy will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot for normal advertising today, it’d be doing over a billion dollars in revenue. So it’s much more a matter of long term (…)  It could sell out the homepage and it would start making just a gigantic amount of money. So there’s just tremendous potential and it’s just a question exactly how they choose to exploit it. What’s significant about that is that Mark [Zuckerberg] is very determined to build a long term company.

In another interview last year, commenting on Facebook’s generous cumulated funding ($1.3 billion as of January 2011), Andreessen said the whole amount actually was a shrewd investment as it translated into an acquisition cost of a “one or two dollars per user” ($1.53 to be precise), which sounded perfectly acceptable to him.

Now, take a look at last week’s pre-iPO filing: Marc Andreessen was right both in 2009 and in 2011.

Last year, each of the 845 million active members brought $4.39 in revenue and $1.18 in net income. Even better, based on the $3.9 billion in cash and marketable securities on FB’s balance sheet, each of these users generated a cosy cash input of $1.53 dollars.

How much is the market expected to value each user after the IPO? Based on the projected  $100 billion valuation, each Facebooker would carry a value of $118. Keep this number in mind.

How does it compare with other media and internet properties?

Take LinkedIn: The social network for professionals is fare less glamorous than Facebook, a fact reflected in its members’ valuation. Today, LinkedIn has about 145 millions users, for a $7.7 billion market cap; that’s a value of $57 per user, half a Facebooker. A bit strange considering LinkedIn demographics, in theory much more attractive than Facebook advertising wise. (See a detailed analysis here). Per user and per year, LindkedIn makes $3.5 in revenue and $0.78 in profit.

Let’s now switch to traditional medias. Some, like the New York Times, were put on “deathwatch” by Marc Andreessen three years ago.

Assessing the number of people who interact with NYT brands is quite difficult. For the company’s numerous websites, you have to deal with domestic and global reaches: 43 millions UVs for the Times globally, 60 millions for its guide site About.com, etc. Then, you must take into account print circulation for the NY Times and the Boston Globe, the numbers of readers per physical copy, audience overlaps between businesses, etc.

I’ll throw an approximate figure of 50 million people worldwide who, one way or the other, are in some form of regular contact with one of the NYT’s brands. Based on today’s $1.14 billion market cap, this yields a valuation of $23 per NYT customer, five times less than Facebook. That’s normal, many would say. Except for one fact: In 2011, each NYT customer brought $46 in revenue, almost ten times more than Facebook. As for the profit (a meager $56 million for the NYT), each customer brought a little more than a dollar.

I did the same math with various media companies operating in print, digital, broadcast and TV. Gannett Company, for instance, makes between $50 and $80 per year in revenue  per customer, and, depending on the way you count, the market values that customer at about $50.

Indeed, measured by trends (double digit growth), global reach and hype, Facebook or LinkedIn are flying high while traditional medias are struggling; when Facebook achieves a 47% profit margin, Gannett or News Corp are in the 10% range.

Still. If we pause at today’s snapshot, Facebook economics appear out of touch with reality: each customer brings then times less than legacy media, and the market values that customer up to five times more. And when News Corp gets a P/E of 17, Gannett a P/E of 8, Facebook is preparing to offer shares a multiple of 100 times its earnings and 25 times its revenue. Even by Silicon Valley ambitious standards, market expectation for Facebook seems excessive: Apple is worth 13 times its earnings and Google 20 times.

Facebook remains a stunning achievement: it combines long term vision, remarkable execution, and a ferociously focused founder. But, even with a potential of 3 billion internet-connected people in 2016 vs. 1.6 billion in 2010 (a Boston Consulting Group projection), it seems the market has put Facebook in a dangerous bubble of its own.

—frederic.filloux@mondaynote.com

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We’ll look at the other side of the coin in a moment, but first let’s give credit where it’s due and admire the obverse: I’m delighted to see Facebook going public, just deserts for Mark Zuckerberg and his group of very smart techies.

If you have the time and inclination, take a walk through Facebook’s SEC S-1 filing in preparation for its IPO, you won’t regret it. Pay particular attention to the manifesto Zuckerberg calls The Hacker Way and allow this aging geek (I’ll soon be 28) to sing its praises. Consider this verse:

We have a saying: “Move fast and break things.” The idea is that if you never break anything, you’re probably not moving fast enough.

Where others have stumbled as they shuffled, Zuckerberg and his gang have raced to create a technical giant. The infrastructure required to support 845M “monthly active” users that upload 250M photos each day might not be Google-size (yet), but it’s definitely Google-class. To show off this plumbing, Zuckerberg & Co. took a few pages from Apple’s (and Google’s) stylebook: They stuck to a simple, clean UI, unlike Myspace and their pavement pizza chic.

Facebook’s success isn’t just a sweet retort to Zuckerberg’s critics, it’s a confirmation of what makes Silicon Valley tick: techies, geeks, and nerds. While the technoïds aren’t always right — far from it — the great ones end up making and running great companies. The establishment bluestockings may roll their eyes at the hoodies and bare feet, but look at what happens when the suits take over. Look at HP, Yahoo!, or Cisco; regard Apple during its dark age

It wasn’t very long ago, I recall gleefully, that the kommentariat cluck-clucked disapprovingly over the founder’s “obvious’’ immaturity, his tactless management style, his poor public-speaking manner. But when you read Facebook’s S1, you’ll realize how good a negotiator Zuckerberg must have been early on. Since its inception, the company has raised about $1.5B, an unusually large amount for a start up, and well above the threshold that usually translates into management castration as investors demand a bigger share of the spoils, ransom for their assumption of greater risk.

Instead, Zuckerberg got investors to go for the radius of the pizza as opposed to the angle of the slice, their ownership percentage. Zuckerberg may own “only” 28% of Facebook, but he manufactured agreements that give him effective control of the company with 57% of voting rights

Some will downplay the achievement: ‘He must have gotten good advice’ . Of course…but he followed it. When you’re in charge, the quality of the advice is no excuse for bad performance; conversely, good advice shouldn’t be used to dismiss good results.

Speaking of which, in 2011, the company’s revenue was $3.7B, with a tidy $1B profit and $3.8B in cash – to which they’ll be adding at least $5B in the upcoming IPO. This is a nicely profitable company. The Washington Post’s Wonkblog put Facebook’s performance in graphic perspective:

Take a look at the number of employees: a mere 3,200. With 3.7B in revenue, that works out to $1.2M per worker. Turning to cash per worker ($3.9B / 3,200 = $1.2M), Facebook is about as rich as Uncle Apple’s $1.3M cash per “full-time equivalent” employee. It’s a remarkable achievement for any company, and unheard of for one so young.

But it’s not all roses.

As Zuckerberg’s Letter To Investors properly contends, Facebook can “change how people relate to their governments and social institutions” and “improve how people connect to businesses and the economy”. Making tons of money in the process is totally legit…as long as a key condition is met: informed consent. And “informed consent” mean just that: Information that a reasonably attentive individual — as opposed to an Apple patent attorney — can understand.

On this count, Facebook’s actions have been less than transparent. Perhaps it’s a consequence of the Hacker Way: Ship first, ask questions later. Or perhaps Facebook is betting we’re too lazy and ignorant to read the fine print, just like wireless carriers who try to dazzle us with their sleight-of-plan hoodwinks.

Furthermore, Facebook’s ubiquity and power raises the spectre of yet another Walled Garden: Is Zuckerberg’s company killing the Open Web by superimposing a proprietary lattice of connections between users, including companies that use Facebook to do business with its community? Many have noted that Google can’t really index the Facebook web. As John Batelle puts it:

Sure, Google can crawl Facebook’s “public pages,” but those represent a tiny fraction of the “pages” on Facebook, and are not informed by the crucial signals of identity and relationship which give those pages meaning.

(True. But does Google want to index Facebook? Behind the Open posture stands Google’s real aim: Bulldozing anything and anyone standing between their ad engines and their targets.)

Lastly, let’s consider the Web 2.0 proverb: If the product is free, You are the product. With that in mind, I couldn’t help wince at the opening of Zuckerberg’s Letter To Investors:

Facebook was not originally created to be a company. It was built to accomplish a social mission — to make the world more open and connected.

It reminded me of the Don’t Be Evil puffery in Google’s own S-1:

Don’t be evil. We believe strongly that in the long term, we will be better served — as shareholders and in all other ways — by a company that does good things for the world even if we forgo short term gains. This is an important aspect of our culture and is broadly shared within the company.

When I read those words back in 2004, I thought Google was either incredibly naive or a little too obvious in their do-good posture. Either way, we know what has happened: Google needs to be all things to all people, all the time, everywhere, on every device, in order to irradiate us with their advertising photons. Google’s motto should be Disintermediation R’Us. Instead, their mission statement reads:

Organize the world’s information and make it universally accessible and useful.

…all in the name of selling ads.

In his letter, Zuckerberg comes up with a similarly lofty sentiment:

There is a huge need and a huge opportunity to get everyone in the world connected, to give everyone a voice and to help transform society for the future.

I don’t mean to diminish Zuckerberg’s accomplishments. He’s built an epoch-making company, I’m delighted by the team of highly skilled technologists he’s assembled — a team that includes some dear friends of mine — and the tech culture they evince. He’s surrounded himself with sharp business people and extracted oodles of money from strong investors; he’s Bill Gates/Larry Ellison/Page+Brin caliber or above…and I’m thrilled to see the former naysayers now eating out of his hand.

So why not just say something like…

We help people connect in safe, convenient, and innovative ways. In doing so, we’ve built a business of historic proportions. We make money selling advertising that is finely tuned to reach our users in cost-competitive ways. Because we believe in Facebook’s unlimited potential, we will manage ourselves for the long term rather than for short-term profit. We have built an ownership and control structure to accomplish this goal.

There’s good evidence that the people who buy Amazon, Google, and Facebook shares are willing to let these companies run for the long term rather than for the next quarter. Smart people don’t need lofty mission statements to guide their investments, they watch what the execs do and decide if they’re using “the long term” as an excuse or if they’re really aiming for it.

—JLG@mondaynote.com

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Let’s come back to the business model question. My January 15 column featuring a Simple Model for digital newspapers triggered a number of emails and comments, many  questioning my assumptions (my thanks to readers of the Monday Note who take the time to make insightful contributions to the discussion).

Let’s see if we can sort through the questions and come up with a few helpful answers.

1 / Advertising revenue. Let me set the backdrop here. My model projects what I’ll call a mature market. First and foremost, time spent vs. ad spending for print, web and mobile, which currently looks look this…

Source: Internet Trends, Mary Meeker, KPCB Oct 2011

… will have morphed into a graph showing more balance between categories. In my projections, ad spending converges to time effectively spent on various medias. Also, we’ll see a sharp rise of the mobile segment, and a sub-segment made by tablets will carry its specific business model (apps, subscription, ads).
This will happen at the expense of the print media, a sector that, considering the time people now spent on it, is still vastly over-invested. Dailies are bound to suffer more than weeklies (or Sunday editions) because their primary function (delivering news) collides with mobile devices. Having said that, newspapers will survive (after further shrinkage) thanks to an unabated base of loyal readers ready to pay almost any price for their favorite daily. This is the rationale behind recent price hikes (see Cracking the Paywall). In Europe, I see all quality papers priced at 2€ within two to three years and I don’t believe such prices will accelerate reader depletion. Holding print prices up might be critical for survival.

On this topic, this is the email I received from Jim Moroney, publisher and CEO of the Dallas Morning News:

• On May 1, 2009, The Dallas Morning News raised home delivery rates across the board by 40%. The price increase was even greater for the most geographically distant delivery.
• We doubled daily single copy price to $1.00 and Sunday single copy price to $3.00 in two steps each.
• Today we yield 93% of our retail rate, i.e., we are doing very little discounting. Lots of papers claiming to raise their home delivery rates and then turnaround and offer discount after discount. If the most valuable asset we have is the content we originate, as an industry, why do we keep deeply discounting it as if it were damaged goods?
• Our home delivery rate is $36.95 per month, making it the third highest priced metro in the U.S. after NYT and Boston Globe.
• In March, we made all access to what we distribute digitally paid access.
• Website, iPad and smartphone are $9.99 each per month. All digital access is $16.95 per month.
• So there is a lowly metro doing something akin to the NYT and FT.

Also, because of its unique advertising value proposition, I won’t sell short print media. In a nutshell, no one expects a Dior campaign to look as gorgeous on the screen of a computer or on the 4-inches display of a smartphone as it does on quality print. For such high-priced ads, print is likely to remain vastly superior for a long time — and should therefore be part of any well-rounded business strategy.

Coming back to digital media, in my view, a mature market also means a clean one. Today, many news websites URLs have very little to do with editorial. In places, the number of URLs whose only purpose is to gather “eyeballs” represents as much as 30% to 40% of all page views.
Look at what Le Monde does: when you look at a web page through Readability (an app that basically extracts relevant text), you see every verb appear in red and linking to… Le Monde’s grammar conjugation service:

That’s good for SEO shenanigans. Nothing is too petty to churn audience numbers (and Le Monde is no worse than its competitors)

To sum up, here is why I think prices on the internet are likely to go up in a near (2-3 years) future :

• a cleaner internet will yield a much better performance advertising-wise than it does today,
• inventories will have to be limited (read: closed down). No market whatsoever can withstand the type of unlimited supply we see today on the web. In our current oversupply situation, we often see more than half of the pages sold for a CPM below one dollar or euro,
• as discussed before, we can expect a strong adjustment on ad spending vs. time spent, it will benefit digital media,
• the ad market suffers greatly from current economic conditions (debt,  political tensions abroad, elections in several countries, uncertainties everywhere…) Those won’t last forever.

My mention of a $20 CPM sounded overly optimistic to many readers? It is by today’s standards, no doubt. But once a number of adverse factors are attended to, I think the $20 assumption will hold (and, by the way, I’m referring to revenue per page, not per module).

2 / Subscription revenue. Many are challenging my 10% transformation rate (one reader out of ten willing to pay $10 a month in my model.) Objection taken. Again, my projections go beyond today’s deflated market. It will take a while to get to 10% when a large site such as the New York Times is at 1% or 2%. And converting readers to pay something/somehow will require imagination beyond single pricing; I’m told large newspapers charging $15 or $25 a month are considering low-cost subscriptions plans as low as $5 per month to capture young readers and boost their conversion rate. From an editorial product perspective though, I’m a bit skeptical. What will such a downgraded offer look like: stricter paywall; low-cost apps?

3 / Mobile apps. Although I explored this issue in previous Monday Notes (see The Capsule’s Price and Mobile First, and a Mag), I should have been more forthcoming about mobile apps. My belief is this: overtime, thanks their greater ability to carry subscriptions and high yield ads, apps, not web sites, will be the path to decent ARPUs.

I will acknowledge another misconception in my plans and leave it to Vin Crosbie, new media professor at the S.I. Newhouse School of Public Communications at Syracuse University, New York, who commented my piece in the Guardian.

Here’s the crux: Even if Federic’s model could work for a national daily, will it scale to work for the average newspaper? Maybe NYT, WSJ, or USAToday could eek out 2% profit margin using it, but what of the other 1,412 daily newspapers in the U.S., the average-sized of which is 18,000 daily circulation? Do the math. [...] Look at the paltry signup rate NYT has achieved. Scaled to a 18,000 circulation daily, NYT’s results would mean less than 180 paying online subscribers.

Vin is basically right. One of the tragedies of the digital media model is this: unlike the newspaper model, it doesn’t scale down well. There are plenty of local web sites faring well, but none comes close to supporting a 200 staff newsroom costing $25 or $27 million to operate.

—frederic.filloux@mondaynote.com

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