As a member of the Washington Post’s board of directors, Buffet knows quite a bit about converting trees into reading material. He saved the Washington Post Company, literally, by suggesting the acquisition of Kaplan Higher Education. Now, Kaplan accounts for 57% of the Post’s revenue and its operating income exactly offsets losses at the newspaper division (see 2009 earnings report).

A week ago, echoing Warren Buffet, Netscape co-founder and multi-board member Marc Andreesen, reiterated his recommendation: “Burn the Boats”. In a statement reported by TechCrunch, he used Hernan Cortes as a model. This is the explorer who, in the 16th century, after landing in Cuba, wanted to remove any other option than moving forward: he ordered the destruction of all ships.

Andreessen gets credits for persistence. A year earlier, he called publishers to “stop the presses tomorrow”, saying to TV host Charlie Rose: “…I’ll tell you what. The stocks would go up. The investors are through [with] the transition. You talk to any smart investor who controls any amount of money, he will tell you that the game is up. Like it’s completely over. And so the investors have completely written off print operations. There is no value in these stock prices attributable to print anymore at all. It’s gone. (…) How many years of chronic pain do you want to take to avoid taking a year of acute pain?” (video and transcript here).

Let’s take a closer look at delivering the final injection to print. In the United States, if we consider the newspaper industry as a whole, it’s a no brainer. As Alan Mutter explains on his blog, “some 93% of the industry’s $45 billion in sales were associated with the legacy print product”. True, but that’s for all US newspapers, including a large chunk of local outlets who offer nothing more than a token presence on the web.

Now let’s refine our thoughts by adding two ideas to these facts. The first one is the size factor. The bigger the media brand, the higher its online revenue climbs when compared the core business. And, at the same time, the more likely its online operation is to be profitable. Going back to the Washington Post, the entire newspaper revenue landed at $679m for 2009, including $317m in print advertising and $100m from the online operation. Interesting. We are no longer in the old configuration where one-tenth of the revenue came from online operations, we’re now at 14% of the entire newspaper revenue; and the online advertising share is now 31% of the paper advertising revenue. This changes the landscape.

The second idea pertains to the Innovator’s Dilemma theory, with dealing with disruptive technology: maintaining both the old and the new at any cost is usually lethal. Preserving co-existence is often pointless. Take the classifieds business: clear winners are the ones who deliberately accelerated the natural depletion of the paper medium in order to provide more oxygen to the emerging e-classifieds. My former employer, the Norwegian group Schibsted ASA, did just that. Consequences? It now enjoys a dominant market share in many countries and has a bunch of high margin units in its portfolio. These healthy businesses supply the cash needed to quietly restructure the newspapers, invest massively online, experiment, innovate and secure its position in the news business. (This even though the revenue distribution is shifting in favor of classifieds – in the same way the education business now dominates in the Washington Post’s P&L). This evolution dramatically contrasts with French media groups who stuck to their free paper-classifieds business and now face a dire situation.

Is it therefore realistic to accelerate the shift toward online news? Probably not: the ad revenue erosion affects both print and online. Again, the Post’s example: last year its print ad revenue dropped by 23% but online ads also declined by 8%. More broadly, data from the Newspaper Association of America for Q3 2009 vs Q3 2008 show a steeper drop: –29% for print ad revenue and  –17% online.  As long as the online part of the business is evolving downward, it doesn’t make sense to implement a “forced shift”.

However, two things must be considered:

1 / The adjustments for media consumption time allocation and for the distribution of advertising expenditures are just beginning. Once the economy restarts, let’s forget about the looming global debt for a moment, the transfer will inevitably benefit the internet. And the shift will be massive.

2 / Selling advertising online is about to change. On this, ad agencies and media buying outlets have dropped the ball. For the former, the level of creativity has hit bottom; this is the feeling of every new media executives in France, Scandinavia, Asia or in the US I spoke with over the last months.

The worst consequence is favoring the Google deflationary model: no creativity whatsoever, but a measurable efficiency improvement. In France, for instance, Google ads accounted for 34% of online ads expenditure last year vs. 17% for banners, generating a hefty €800m in revenue.

As for media buying agencies, many of them displayed an inability to go beyond cheap, price-centered intermediation. Many are facing extinction as media will continue to move up the food-chain, working more closely with brands. (See our stories about Australia’s Fairfax Digital and the French social network Syrock to see two companies actively engineering the middleman’s death). Unless it reinvents itself quickly and decisively,  the most traditional part of the advertising community faces a music industry-like fate.

Coming back to this column’s subject. There are alternatives to envisioning the transformation of the print media as only a choice between euthanizing the paper product or putting it on life support. Next week, we’ll see how newspapers’s tendency to become daily magazines could breed a fruitful transformation.

—frederic.filloux@mondaynote.com

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This week, no iPad disquisition, no large companies engaged in contorted Kama Sutra embraces, no Google-Apple-Microsoft love triangle. We’ll revisit these topics in due course but, for the time being, let’s go back to a geeky topic unadulterated by geopolitics or markitecture: software and brakes. Last month, we looked at the software invasion of automotive braking systems. More specifically, we looked at the interplay between braking and kinetic energy recovery in the Toyota Prius.

Today, we’re going back to “soft brakes” for another set of applications: differentials and stability control.

Differentials. Fifty years ago, they wore out, they made noises, they had to get careful periodic checks and special lubrication. Now, with progress in metal allows, high-precision machining and modern lubricants, they’re rarely seen or heard of. Yet, they perform and important role and their basic design suffers from one no less critical flaw.

(Here, we’ll assume a rear-wheel drive car. The concept applies to all drive configurations.)

The important role goes like this: when the car turns, the two wheels on the same axle draw circles of different radii, smaller radius for the inner wheel, larger for the outer. As a result, the outer wheel must turn faster that the inner one. This is no problem for the front axle whose wheels are “free”, not driven. But, for the rear axle, we’re in trouble: the drive shaft attached to the gear box connects to the axle through a 90 degrees angle gear. This causes each wheel to be driven at the same speed. This is fine in a straight line but causes wheel slippage when we turn as the wheels must rotate at different speeds.

This was the arrangement when the very early automobiles mimicked horse carts. On carts, wheels on the same solid axle did slip in a turn, but said wheels didn’t have to provide any traction, the horse did. In a car, the axle provides traction and wheel slippage works against stability and comfort, to say nothing of tyre wear.

So, the differential was invented. It’s a little counterintuitive at first but it works beautifully.

See this touchingly kitsch Chevrolet video. Or this learned Wikipedia article. Relatively simple, once you get the hang of the planet gear’s role. And universal.

But trouble starts right away.

The differential provides “on-demand” difference in rotating speed. Great, but what happens if one wheel is in the mud, or snow and the other on solid ground? The differential is tricked in “believing” the wheel on slippery terrain needs more speed, all the speed. We end up with the wheel on solid ground not rotating at all and the wheel in the mud spinning madly. Just the opposite of the required solution: stop the madly spinning wheel and direct all the power to the “good” wheel, the one on stable terrain.

As you can imagine, the problem was discovered right away.
One crude but effective solution: temporarily locking the differential, that is preventing the “differentiating” planet gear (see the illustration in the Wikipedia article) from rotating. Many real 4 by 4 SUVs offer locking differentials. The crudest arrangements force you to get out of the vehicle to lock a wheel hub, but it gets you out of the hole.
More refined, automatic or semi-automatic arrangements are called limited-slip differentials. A mechanical device, a kind of centrifugal speed governor “notices” the excessive difference of speed between the two wheels. By construction, we know the minimum turn radius for the car, this gives us the maximum difference in wheel rotation. Anything more, we must intervene. The Limited Slip Differential was born. Helpful but complicated, fragile, expensive and, a more recent concern, adding a bit of weight to the car.
Enter software modulated brakes.

As discussed in the February 7th Monday Note, modern cars feature individual wheel speed sensors and fast electrohydraulic actuators reducing or applying brake pressure.

The differential’s birth defect is now a “mere matter of software”. The central computer detects wheel spin and, instead of letting the differential be fooled, the software applies brake pressure to the spinning wheel. The “good” wheel keeps receiving torque and we get out of the hole. As you can imagine, programmers delight in applying delicate variations to the braking action, thus providing a barely visible intervention.
Software being “free” we have a neat, inexpensive solution, not as good as straight mechanical locking in extreme off-road situations but good enough for many everyday situations.

Stability control. By this we mean helping drivers stay on the road. Oversteer is when the “tail” comes out, when the rear-end of the car gets outside the intended trajectory. This can end up in a spin, in the ditch or into the inner guard rail. It depends more on the car than on the driver whose instinctive reaction can make things worse. (“Lifting”, that is reducing throttle, can result in weight transfer from rear to front that exaggerates the spin.)

The same applies to understeer, when the car “pushes”, that is when it turn less than what the driver wants. Here, instinctive driver reactions are a little less problematic as they usually increase traction for the drive wheels; this is the origin of the “safer but duller” reputation of front-wheel drive cars.
Enter more sensors.

Modern cars have accelerometers sensing yaw (horizontal let-right movement) and steering wheel angle sensors. Using these, the central computer can compare intention, where the driver points the car, and result, what actually happens to the cars direction, oversteer or understeer.

For example, if the nose doesn’t want to come in, understeer, we apply braking to the rear wheel “inside” the intended turn. To complicate things, the computer also plays (gingerly, think weight transfer trouble) with the electronic throttle.

Over time, “resolution” has increased everywhere: sensors capture more delicate nuances, actuators offer finer control steps, software models of car motion become more detailed and Moore’s Law makes electronics less expensive. That’s why all modern cars feature some permutation of the devices we just discussed. This annoys some drivers who think it deprives them of fun, of the opportunity to sharpen and demonstrate their driving skills. Manufacturers react by providing ways to turn these “electronic nannies” off. Or, so they say, because attorneys are watching. In fact, the Off switch ought to be labelled Partially Off, even in German sports cars…

There is more, much more, as in amazing feats of hardware and software used to improve engine efficiency and cleanliness. Fodder for a future Monday Note.

—JLG@mondaynote.com

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Last week, I spent a couple of days at Microsoft’s Redmond campus, near Seattle. I was part of a small group of foreign journalists given access to Microsoft Research scientists and top engineers. Every year, in Redmond, they hold their Techfest reunion, a private, by invitation only gathering. This is the venue where they show off their work and exchange their findings.
In a way, Microsoft Research functions more like a university where a group of 900 PhDs is encouraged to publish in science journals or to speak at conferences. These are not product people, they’re more like scholars in disciplines such as oceanography or molecular biology. Those fields can be quite far away from Microsoft core business – even though the proportion of hard core computer scientists is significant. Engaging such people in discussion is an exhilarating experience. I’ll come back to it in an upcoming Monday Note.

Of my many meetings, a notable one entailed a visit to the Microsoft Live Labs. The group aggregates about 80 people, two thirds of them engineers, on the 12th floor of a building in Bellevue, ten minutes away from the Microsoft campus. The Live Labs are a kind of intermediate layer between research people and product teams. They focus on transformative web experiences (read their manifesto, here). Their work stems from three technologies : Photosynth, which allows the user to stitch digital photos into 3D models; Pivot, a stunning way to organize large collections of data (to get an idea, watch this excellent TED’s talk by Gary Flake, Live Labs founder). The third pillar is Seadragon a technology acquired by Microsoft in 2006 and refined into an actual product now integrated into some Microsoft services, something anyone can play with.

The most spectacular integration of Photosynth and Seadragon can be seen on the latest version of Microsoft’s Bing Maps (if you connect from the US). As I visited with the Bing Maps group in Seattle, they showed me its newest features: a mash-up with the huge Flickr digital photo library and, even more spectacular, the prospect of integrating live video into the navigation experience. Go to this newly released TED presentation by Blaise Aguera y Arcas, mind blowing.

Let’s go back to our topic du jour: new ways to navigate news contents. Note that I’m merely discussing a browsing experience here — exactly as you do when you flip through the pages of a publication, in a random, non sequential fashion, which is actually the best way to graze our daily information fix.

Seadragon is based on a simple concept: infinite zooming. To jump from one element to the next, instead of navigating through links and pages, you zoom in and out. To grasp the power of Seadragon, just look at the image below.

This is called a gigapixel image. While your digital camera typically captures a 10 million pixels image, this one is 2.6 billion pixels big, 260 times larger that the one you’d shoot staying at the same Sierra Nevada vantage point. Translated into the physical world, obtaining such resolution (i.e. being able to see the white Jeep) would require a 25 meters wide image.

This is what Seadragon is about: it lets you dive in an image down to the smallest detail. All done seamlessly using the internet. The Seadragon deep-zooming system achieves such fluidity by sending requests to a database of “tiles”, each one holding a fraction of the total image. The required tiles load as we zoom and pan. And because each request is of a modest size, it only needs to cover a fraction of our screen, the process works fine with a basic internet connection. You can actually try on this map + photos of the Yosemite National Park.

To understand what it means for media, Bill Crow, manager of Live Labs group and Beatriz Diaz Acosta, senior engineer, showed me what lies ahead. In a prototype, they used a set of 6400 pages of the final editions of the Seattle Post Intelligencer, the local daily that folded few months ago.

Let’s picture this: a one year of a daily newspaper entirely shown on one screen. 365 days x 50 pages of newspaper on average, that is about 17 800 pages to navigate. At first, this collection is represented using a series of thumbnails that are too small to be identified.
One click breaks up the stack by month, another click organizes it in a much more manageable set of weeks. Now, I pick up an issue and dive in. The only tool I’ll use is my mouse’s scroll wheel, or whatever system allowing me to go deeper. It could be a trackpad, it could also be the stunning Microsoft Surface interface, a sort of coffee table covered by a large 30 or 40 inches glass top allowing multi-touch manipulations.

Unlike the hyperlink system I use when going from one page to another, in the Seadragon-based interface I’m not leaving my “newspaper”. I’m staying inside the same zoomable set of elements. As I land on a page of interest, again, I can zoom in to a particular story (which, in passing, reconstructs itself in order to avoid the “old-style” jump to the article’s continuation on another page).

Back to monetization and business models: A key byproduct of this innovative browsing experience is its ability to reinvent the online advertising. As I mentioned in a previous Monday Note (see The Web Design Problem), online advertising suffers from an inherent flaw: its main purpose is to take the reader away from the content page. Imagine a TV commercial forcing you to switch channels to see the ads. Seadragon’s resolution yields the ability to zoom in down to the fine print of an ad. From there, the same add is blown up to the size of a billboard. This breeds really new ways to advertise in the Web. As Bill Crow takes me through the navigation experience, the endless zooming can be used to display more layers of information such as rates or detailed offers that become discernible only if you zoom deep enough. See this example of the Yosemite map, with the enlargement of the box in the lower right corner of the map.

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This is an old dream: making the tax code shorter, simpler. From time to time, a politician of the populist persuasion comes out and promises to get things right. The ultimate expression for this drive towards simplicity is the Flat Tax movement: a single fixed (as opposed to today’s progressive, accelerating) tax rate for everyone. Google ‘‘flat tax” and you get more than 40 million hits. A popular fantasy. And not one just held by kooks, conspirationists and other End of Times prophets. Stanford University hosts the very serious right-wing Hoover Institution, a think tank that publishes scholarly papers such as this one. Or we have Steve Forbes, as in Forbes Magazine, proudly posing, postcard in hand, on the cover of his book: Flat Tax Revolution: Using a Postcard to Abolish the IRS.

Fun stuff, or sad, you pick your perspective. (Speaking of fun, this note’s title is a reference to a cult movie: Honey, I shrunk the kids!)
The basis for the agitation is a feeling of hopelessness. Year after year, we add articles to the tax code, to adapt to new circumstances, to new projects, to plug loopholes. As a result, the code grows and buggier.

This latter phrase, “the code grows fatter and buggier”, also applies to our high-tech spaghetti code: operating systems. Every new rev served with fresh bugs!

Software is… soft, malleable. Next to hardware, adding/changing features is comparatively easy, tempting. With features added upon features, bug fix patches over earlier generations of patches, the whole edifice soon starts to look like the accumulated layers of a Babylonian archeological dig.

Over time, the mess resulting from this “organic” growth gets worse and worse because OS developers are caught between the past and the future.
Looking forward, happily fueled by relentless technical progress, our industry constantly comes up with new hardware features and more modern software techniques. These improvements result in new ways application programs “talk” to the system. We use the acronym API (Application Programming Interfaces) for the way application software accesses OS resources.
Looking back, companies and individuals have huge investments of money and people in application software. OS improvements can’t come at the expense of backward — an ominous adjective — compatibility.

When making improvements, the system must add new APIs and keep the old ones around. Add but never subtract: he result is bloatware.

Let’s try a metaphor using musical instruments. The musical score is the application software. The API is the set of rules the composer must use to write music for a particular instrument.
Using the violin as an example, beside simple notes, its API allows glissandi, pizzicati, col legno (“with wood”, meaning using the bow’s wood instead of the side holding horse hair) and other subtle pitch variations.
Now, moving to the piano, we could say it has more expressive power than the violin because it can play more complicated scores, with a wider range of notes. Does this make its API a simple superset of the violin’s? No. While these instruments have many capabilities in common, there is music written for the violin that can’t be played on the piano and vice versa. You’ve got to keep the two ways, the two APIs around. So do operating systems.

Not a problem for music, we love baroque music as well as the saxophone.

For computers, the accumulation of API’s starts as good deed, compatibility, and ends up as a punishment, unfathomable bloatware. We’re sentenced to OS code that becomes so entangled that it ceases to be understandable, so complex that even the sharpest of programmers can’t build a mental representation of its architecture, let alone its implementation. As a result, patches, bug fixes come with prayers they won’t make things worse.

There is no easy way out of this cancerous growth.

Most of the time, OS makers work hard at stabilizing the patient. From time to time, they manage to excise some really old bits that finally fell out of use. One such example is Apple obsoleting (most of) the PowerPC compatibility bits out of OS X, after the 2005 move to Intel.

OS builders ca also carefully rebuild a module, they do what’s called a “clean rewrite”. Simplifying a bit, an OS module is like a administrative office with many windows. You present a request at a window, it’s processed inside and results come out. The windows are the APIs already mentioned, the results are actions such as drawing an object on the screen, updating a file on disk or sounding a beep. In theory, you don’t need to know the inner workings of the office. All you need is knowing the rules, knowing how to deal with what goes in and what comes out of the “black box”. So, in theory, the place where one of my engineers said he wanted to move “because everything works in theory”… In theory, then, if you’re unhappy with the way an OS module works, if you now have better ways to implement a given “black box”, if you have a new programming language, off you go with a clean rewrite.

But, in reality, “where things don’t work so well”, bad things happen between clever programmers and OS modules. Looking for performance, or ways around limitations, or defending against known or suspected bugs, programmers reach inside the “black box”, they devise their own tricks. Going back to the admin office metaphor, imagine someone discovering the internal phone directory. Then, instead of dialing the main number and presenting a “well-formed”, general request to the operator, they direct-dial the nurse and request an aspirin. Clever, simpler, quicker.

But… later, the admin office is reorganized, this is the clean rewrite. The nurse’s office is subsumed into a more general-purpose HR (Human Remains Resources) department, the old internal phone directory is obsolete and, in any event, the request for an aspirin must be done in two steps, not one: first ask for HR, then as for an aspirin.

Back to computerese, we use the phrase “private API” for such tricks. Sometimes they’re discovered by enterprising application programmers; sometimes their hidden by the OS programmers for their own use; sometimes they’re devised by OS makers for “competitive” purposes. Microsoft was accused of letting Office or Internet Explorer programmers use “OS hooks” unavailable to competitors.

In any event, the clean rewrite isn’t as (conceptually) simple a task as one initially imagines: the “black box” is grey, its messy insides are visible.

So, OS makers seem to be left with a stoic, resigned fight: palliative care against malignant code growth.

There could be one exception, though: the iPhone OS. When I first saw the January 2007 iPhone demo at Macworld in San Francisco, I thought Steve Jobs was having his way the facts: about 8 minutes and 30 seconds into his presentation, he claimed the iPhone was running OS X. Impossible, I thought. Six months later, geeks opened the iPhone and its software and found out: indeed, the iPhone was running a version of OS X recompiled for the ARM processor. A pared down version, but the real thing nonetheless. And, three years later, the iPhone OS having matured, will now run inside the iPad.

OS X successfully “shrunk”!

This wouldn’t be too important if the iPhone and the iPad were mere sideshows in the huge computer industry. But what’s happening before our very eyes is a new beginning: smartphones are the really personal computers, they are the new wave of computing. You’ll recall these slides from the Mary Meeker’s Oct 20th, 2009 Morgan Stanley presentation:

A look at Apple’s financials shows their iPhone business is now the most important one: largest revenue, biggest profits and fastest growth. No longer a sideshow, smartphones are now the main act.
Let’s compare market capitalizations. Dell: about $27B, Acer, the rising PC maker from Taiwan, about $8B. RIM, the Blackberry smartphone maker, $39B. Nokia,  $51B. (Apple’s market cap is $190B but it contains PC, smartphones and MP3 players components that make a straight comparison difficult. Still, if you only attribute half of the total amount to iPhones, it makes a nice $95B number to compare to a straight PC maker such as Dell.) Wall Street seems to agree smartphones are the next PC wave.

Put another way: Steve Jobs reboots its PC business using a “shrunk” OS X.

Apple achieved two unusual feats: paring down its OS and taking a lead position in a new computing platform race.

Microsoft couldn’t pare downsize its desktop OS to create Windows Mobile. And now, for its “Windows Phone 7 Series”, it wisely went with a really new, unencumbered OS. Wags will say the new mobile OS is no longer afflicted by System 32 directory filled with DLLs.

But…

As sharp-eyed readers have already detected, there is a bit of “now you see, now you don’t” in the way I’m presenting Apple’s OS shrinking feat. The company didn’t really manage the double exploit of drastically paring down a desktop OS that takes about 4 gigabytes on the distribution DVD and maintained applications compatibility. In rebooting to a new platform, the iPhone/iPod Touch/iPad, Apple breathed a heavy sigh of relief while leaving existing applications behind and creating a brand new, well (some say overly) controlled applications world. No more begging for application software like in the early Macintosh days.

And other no less attentive brains will have seen another nuance in today’s story: Linux on smartphones. Android is based on Linux, so is Nokia’s Maemo, even before gobbling Moblin, Intel’s also Linux-based Mobile Internet Device platform. The desktop or server Linux OS, in one or more of its many forms, was pared down to fit smartphones. And just as in Apple’s case, there was little concern for backward application compatibility.

One last twist: OS X is a certified Unix 03 operating system. See here and here. Apple got a nice certificate to put on a wall somewhere in the Infinite Loop campus in Cupertino:

Seriously, I don’t think Apple will seek Unix certification for the iPhone OS. But he parallel between three of the leading smartphone brands, Nokia, Android and Apple, is interesting.

And, of course, after the OS reduction comes the sad, ineluctable adding of layers and patches. Further down the road, we’ll have hardware incompatibilities, more modern APIs having to coexist with old ones for the sake of backward compatibility with hundreds of thousands of App Store titles.

As we say in English: Plus ça change…

—JLG@mondaynote.com

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Fairfax Digital is, by far, the leading online group in Australia and in the region. It is a division of Fairfax Media Ltd., with the following perimeter:
- 434 publications between Australia and New Zealand (for a country of 21.3m people!)
They include:
- 248 newspapers in Australia: among them two of the country most influential dailies, The Sydney Morning Herald and The Age published in Melbourne
- 80 newspapers in New Zealand
- 46 magazines in both countries
- 15 radio stations
- 24 printing plants
- 284 web sites (229 in Australia, 51 in NZ and 4 in the US).

Below are basic numbers for FY 2009 ending in June 2009 (the annual report is here), in US dollars and in euros (conversions are at today’s rate)

Fairfax Digital (FD) accounted for about 10% of Fairfax Media Ltd. revenue and 16% of its EBITDA for FY 09 (and a hefty 52% for the first half on FY 2010). This give FD’s chief executive Jack Matthews and his crew a great deal of pride — and sustains their fierce independence. This American-born TV and digital media veteran is passionate about the business he’s been building within Fairfax. “We treat this change as a point of singularity, he says, you know, when rules break down, and nothing make sense anymore. Usually, in technology, we tend to overestimate the short term impact and underestimate the long term”. For Jack Matthews, it is more a question of transformation rather than a matter of development or evolution of existing lines of business.

And the rules he bends. Of the most visible, one involves the organization within the Sydney Morning Herald galaxy. As many Western newspapers are still debating the integration of digital and paper newsrooms, Fairfax Digital has made a decisive move: no integration whatsoever; no subordination to the broadsheet editors (although a great newspaper); all editorial decisions are taken independently by each media boss.

When it moved into a brand new building facing the stunning Sydney skyline, Fairfax Media built a hub-and-spoke Daily Telegraph-like newsroom. Everyone knows what everyone else is doing but there is no subordination. As such, the Sydney Morning Herald site, www.smh.com.au, claims that 65% of its traffic stems from original contents produced by the digital crew. Jack Matthews and Mike van Niekerk, editor in chief of the SMH site readily admit this strong autonomy has not gone without friction. But rivalries now seem to be eclipsed by a shared sense of common interest in the news gathering process (and against competition, read: Murdoch’s papers).

And this tactic seems to work. Today, as a brand, the Sydney Morning Herald’s footprint has never been larger: each day, it reaches 2.2m readers.
Among them :
- only 19% look at the paper and the website
- 39% stick to the paper only
- 42% are exclusively online consumers.

And Fairfax Digital’s media director Pippa Leary says the web enjoys a more qualified audience: younger, with a higher income.

To put things in perspective, when we compare audiences for NYTimes.com and  smh.com.au in their respective markets, the Australian news sites has roughly three times the penetration of the NY Times. And if we compare advertising market shares: the SMH is doing twice as well as the NY Times.

Some lessons can be drawn from Fairfax Digital’s performance:

1) Accept the coming digital domination. Today, digital is a fraction of the revenue, yes; but it is the bulk of the profits. Like with the BBC or the New York Times, digital drives growth and strategy. The digital takeover is inevitable. Resistance is futile. So is nostalgia.

2) Focus on reader engagement. Says FD’s media director Pippa Leary: “Engagement rewards content and design”. Therefore, FD’s primary focus is the time spent on its online properties. Its video traffic, for instance, is rising exponentially thanks to a greater volume of targeted productions.

3) Be an online company. Period. “We are switching from an online media business to an online business only”, says Jack Matthews. Today, the transactions part of the business, as opposed to traditional ads, is rising sharply. Transactions will soon reach half of Fairfax Digital revenue with the huge margins that come with them. Apart from that, classifieds account for a big third and the rest is display ads, mostly in news content.  Of course, this has ruffled feathers among journalists; but pragmatists acknowledge it is the only way to support the cost of quality reporting.

4) Bet on multiple business resources. FD had no less than 15 revenues streams: advertising, subscription, commission on auctions, paid by the transformation of a contact, listings, e-commerce, mobile fees, etc. In New Zealand alone, FD’s classifieds and auction site TradeMe serves 70% of all the country’s web pages.

5) Capture readers and users one group after the other. Fairfax Digital has mapped its readership by all possible definitions: type of usage, geography, platform, type of growth, monetization potential… FD captures group after group with a specific product, a specific revenue model and a specific brand.

6) Control your advertising innovation. FD runs an entire team devoted to strategic advertising. They customized all possible campaigns, working directly with brands, creating new formats, adjusting rate cards. Each month, the FD strategic ads team creates 6 new products for specific needs or clients. By next year, predicts its CEO, half of FD’s advertising revenue will come from customized ads. (If they don’t react, Sydney’s ad agencies might see their business drying up like a pond in the Outback — exactly as everywhere else).

7) Stay awake. Fairfax Digital’s is constantly balancing its contribution to the bottom line against investing in the next five years’ cash-cow, through ex nihilo creations or with acquisitions. This doesn’t happen by itself. It requires vision from management and trust from its board — and from financial markets (over the last 12 months Fairfax Media shares are up by 65% when other global media indexes remain basically flat).

—frederic.filloux@mondaynote.com

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This is a new approach for Microsoft — with some old tricks mixed in.

So far, on the desktop or with mobile devices, Microsoft has played the evolutionary game,  trodding  (1) the cautious backward compatibility path. To this day, the message always has been: Stay with us, your investment in your (or our) applications is safe.

Since the 1.0 release of Windows CE in 1996, the credo was: Stretch but don’t tear; improve, expand but don’t break existing programs. See this Wikipedia timeline.
But three factors came to break the faith.

First, in mobile phones, Microsoft never managed to establish the kind of dominion it enjoys on the desktop. On PCs, the company first used tied sales, or bundling: if an OEM  (Dell, HP) bought Windows but not Office, the OS license price was much higher than with a Windows + Office combo. Then, to thwart competing OS such as Linux, it used licensing agreement tricks. Yes, you, the OEM, could sell dual boot PCs, meaning a PC that could launch Windows or Linux when turned on. But, an important but, the Windows license contained a clause obligating you to only use Microsoft’s Boot Loader, the program that loads on start-up and manages the process of choosing which OS to boot. An even more important ‘’but’’: when you looked into the Boot Loader’s license language, you found it was licensed to you for the sole purpose of booting Microsoft OSes. You were forbidden to use the MS Boot Loader to boot Linux. If you wanted to have a Windows license, you had to agree to the exclusive and exclusionary use of the MS Boot Loader. This explains why, to this day, Dell and any other OEM don’t sell a dual-boot Linux/Windows system. It’s not because Linux is bad or expensive. Most users, reasonably, would want the safety of Windows as the fall-back toolkit as they experiment with a different platform they’re not sure of: see what happens on the Macintosh with virtual machines running Windows. Microsoft managed to prevent such experiments on Windows PCs.

No such “luck” with Windows Mobile, Microsoft “failed” to find a leverage point for tied sales or for exclusive licensing practices. In great part, this happened because, at the time, mobile applications didn’t have the weight, the sine qua non role Office and other similar software had on the desktop. This allowed Windows Mobile competitors to flourish unimpeded: Palm with its PDAs and, later, the Treo Smartphone, Nokia with its Symbian platform (mostly outside of the US) and, of course, RIM, with its Blackberries. Actually, while Windows + Office dominated the enterprise desktop, the Blackberry became the de rigueur mobile device for Corporate America. InformationWeek, in a survey published in a December 2009 article, finds the “BlackBerry continues to dominate in business settings, with 61% of the respondents who are deploying smartphone applications citing widespread BlackBerry usage’’. (InformationWeek adds: “What shocked us, however, is how quickly the iPhone has penetrated enterprises: 27% say the iPhone has widespread use.”)

This Chart Of The Day, from our friends at Silicon Alley Insider, summarizes Microsoft mobile predicament:

Forget yesterday’s bombastic pronouncements such as the iPhone being a passing fad or Windows Mobile going to a 40% market share in 2012. RIM had won the battle with better hardware, more carrier coverage, better services and, ironically, impeccable Microsoft Exchange integration.

Now we have a fresh start: Windows Phone 7 Series. The new platform offers really interesting features, some original, some unavoidable.

The user interface is a refreshing departure from what we’ve seen since the iPhone came out. You can go take a look there. Some even claim the UI “out-Appled Apple”. And, indeed, gone is the lame attempt at shoehorning UI elements from the Windows desktop, such as the Start button.

It looks both inviting and functional.

Another interesting fact: the consumer is now the focus, at least initially. No more bragging about enterprise applications, perhaps because, for a nascent platform, the mature, well-debugged RIM/Blackberry is too formidable an adversary.

Still smarter, unlike the previous platform, Windows Phone attempts to create content tie-ins with its modestly successful Zune HD mobile player, see the UI relationship here. More important is the Xbox Live connection: Microsoft’s game console is a successful one, supported by a strong online service. In practice, you can expect a good supply of music, videos and games on your Windows Phone handset, served with a fun and functional UI.

This is all very encouraging. But many questions remain.

We’ll skip quickly over the obligatory items. Multi-tasking? Depends how you choose to read the kind of, sort of answers couched in execuspeak. Same for Flash: We’re not opposed to Flash. (But we have Silverlight, “a web application framework that provides functionalities similar to those in Adobe Flash”.) Cut-and-Paste? Not clear yet.
Later this month, March 15th to 17th, in Las Vegas, Microsoft will hold its software developers’ conference, MIX. We’ll know a lot more about what’s inside the sausage after geeks get into the factory. The good news is Microsoft freed itself from the past, the result should be a truly modern mobile OS, technically on par or better than its competitors. More on that in a few weeks.
From what we hear, it looks like Microsoft is taking application security very seriously, severely restricting third-party code access to the machine’s hardware and software code. This is consistent with a trend towards using mobile devices as payment and authorization platforms. You don’t want spy software surreptitiously injected into your electronic wallet.

Moving past technical treats, there is the dollars and cents, or sense question. How do you sell this to handset manufacturers? This was called “Joke of the Week” by Business Insider. Indeed, when Android is free and popular, and customizable, we’ll get to that in a moment, how do you get a handset manufacturer to give you money? The answer can’t rely on the platform’s technical merits, it’s got to involve some tie-in with other Microsoft properties. Which gets us to the ‘‘Series” in the infelicitous “Windows Phone 7 Series” name. The 7 probably is a wink towards the desktop, the Series could telegraph another instance of the dreadful version proliferation we see on PCs, 4 Windows 7 versions, not counting the 32-bit and 64-bit variants. More specifically, there could be an Windows Phone 7.3 Enterprise Edition in our future, once the initial consumer version is suitably debugged.

The trouble with customization: Microsoft is well aware of the “linuxification” problem, of the babelization that besets Linux and that threatens Google’s Android. So, Microsoft, besides exerting tight control on applications, will restrict front-end (UI) customization and is making it clear it wants to restrict hardware variations to three “chassis” definitions.

Lastly: some criticize Microsoft for announcing their new mobile OS in February with availability “in time for the Holidays”, meaning October 15th. The naysayers claim this will give Nokia, Google, RIM and Apple plenty of time to sharpen their knives, as if they were not honing those already as they fight one another. And, as discussed above, the old Windows Mobile was dead or worse: the walking dead spreading the bad news of Microsoft’s lameness. An early announcement is the right move in this context.

—JLG@mondaynote.com

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For all publishers, many obstacles remain. The first one is dealing with Apple. Media executives I talked to in Sydney are unanimous: Steve Jobs’ company is difficult to work with. It is utterly secretive, willing to give only minimal information to content providers. “When we met with the Apple people here, said an executive of Fairfax Digital, they didn’t bring an iPad with them, they were telling things like “it has a ten hours battery life“… C’mon guys…” Fairfax Digital operates 284 websites in Australia, including the two big dailies’s sites – The Sydney Morning Herald and The Age – viewed by 24m uniques visitors each month, which is not bad in a 21m people country.

Apple needs the publishing industry, it should treat it better. When it launched the iPhone in January 2007, the device was a revolutionary product just in itself, one that could wait for more than a year to open its platform to third party applicatios. This isn’t true of the iPad. Unlike the iPhone, the iPad will leave or die by the content it will deliver. Especially for a device priced between $500 and $800.  As for today, everyone is excited by the platform’s technological promise. But being able to offer a reader experience such as the Bonnier Mag+ concept or the recently released Wired demo is one thing. Finding the right economic model is another.

Publishers are expecting some kind of iNews Store or iMedia Store built on the iTunes’ framework: a friction-free payment system allowing flat-fee transactions (I buy an app once for all, maybe paying for major upgrades), but also pay-as-you-read (I’m navigating in the app and I click and pay for the high value contents I want). In the process, Apple takes a 30% fee for handling all the back office stuff (registration, application delivery, payment, etc.) Some publishers find such toll a bit high. Well, this has to be considered in the context of: a) an industry that has never been able to design a common transaction system for cross-branded contents in any country, and b) an industry that allocates more than 50% of its costs to industrial tasks (printing, shipping and delivering a dead-tree product). All of the preceding having nothing to do with the core product nor with any competitive advantage (being better printed or distributed makes little sense nowadays). Considered as such, 30% isn’t that expensive.
But from a publisher’s point of view, there are two other key elements to factor in. One is the device’s price, the other is the marketing possibilities.

As for the price, publishers see it as high. But this is not a matter of concern. First, over time, the price will drop, it always does. See what happened with the iPhone, it started at $599. According to iSuppli, a research firm that specializes in hardware cost analysis, the mid-range 3G version of the iPad contains $276 of electronic components and costs $11 to assemble (iSuppli is by the way showing remarkable tele-kinetic abilities since it didn’t made an actual autopsy of the iPad…) On a $730 device, that leaves a comfortable $442 gross margin per unit. The $499 entry-level version isn’t a loss-leader either.  Apple has plenty of room to cut the the iPad’s price when needed.

Another question for publishers: subsidizing the iPad, just like the cell phone industry does with its handsets. Problem is: unlike the telecommunication industry which is good at organizing cartels, the media business is bad at cooperating. Hence there little chance a group of publishers would cooperate around a subscription bundle aimed at lowering the “price” of the device. Try mentioning such idea in Australia where the resentment against Rupert Murdoch borders hysteria; you get the same reaction as suggesting cooperation between the two Koreas. To a lesser extent, the same applies to many other countries. For example, the New York Times and The Guardian, with potentially much to share, are unable to find common ground.
From a big media group perspective, that’s a different story, though. Hachette, Condé Nast, Hearst, might consider bundling a subscription to their key titles to lower the price of the iPad to, say, a netbook level. Although complicated to implement, it deserves consideration.

But the key issue is marketing data. Apple generated a great deal of frustration for iPhone application makers by refusing to handle any data other than basic sales figures. That won’t work for the media industry. Publishers are used to pore over tons of numbers from their subscribers databases; they now data-mine internet traffic numbers. When selling iPad applications, they’ll need to know who gets them, in which markets, what parts of the content readers actually look at, for how long, all of the above broken-up demographics, location, time of the day/week, etc. If publishers want to switch to a test-learn-adapt mode, Apple ought to handle such data. By cutting off access to marketing information regarding its Kindle’s content sales Amazon shot itself in the foot. Apple must avoid this. It should soften its paranoid stance, and help the publishing industry embrace this potentially huge market. It’s in everyone’s interest.

—frederic.filloux@mondaynote.com

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They often amount to worse than nothing: agitation, confusion, hard-to-reconcile cultures, hidden agendas and fears of losing control of one’s destiny.

In the best of cases, the product of the announcement is the announcement, a short burst of mildly favorable publicity. I know whereof I’m speaking, I’m hereby pleading guilty to the Apple-Digital Equipment Strategic Alliance, that was in the late eighties. We know what came out of it: nothing. Luckily, once the talking heads left the stage, the engineers in both companies, in their usual fashion, disregarded executive orders and decided they had better things to do. No monstrosity was created.
Unfortunately, it doesn’t always work like that. There are countless examples of companies making a huge, expensive mess of a forced attempt at harnessing groups, cultures with different agendas under a politically correct standard, in the name of a warm and fuzzy goal.

Remember AIM? Apple, IBM and Motorola, an early nineties strategic alliance. (I had no part in that one, having left Apple.) The idea was to harness the technology and people of these three companies to create a new object-oriented operating system, Pink, running on the IBM/Motorola PowerPC architecture. The whole thing was folded into a new company,  Taligent — dissolved in 1998. The whole thing cost hundreds of millions of dollars. (Fortunately, in 1997, Steve Jobs masterfully crafted a “reverse acquisition” of Apple; he promptly put the NeXT software engineers in charge and we know the rest of that story.)

In our parlance, such tremulous embraces are known as clusterf#^vs. See definitions for the term here and here. The military sanitizes the word into Charlie Foxtrot, or CF, an abbreviations we’ll use going forward.

Last week’s MWC (Mobile World Conference) provided  a couple of sorry instances of the C-word in the title. Sharp-tongued Valley geeks had a grand time last week, starting with the Intel-Nokia announcement.

Do your eyes glaze over when you read such BS?

“Global leaders Intel Corporation and Nokia merge Moblin and Maemo to create MeeGo*, a Linux-based software platform that will support multiple hardware architectures across the broadest range of device segments, including pocketable mobile computers, netbooks, tablets, mediaphones, connected TVs and in-vehicle infotainment systems.”

Relax, you’re normal. Who are they kidding? Themselves, most likely.

All the holy words are there: Linux (mandatory), based (to male things clearer), platform (the p-word), multiple hardware architectures (we don’t know what we’re doing so we’re covering all bases), broadest range of device (repeat the offense just committed), segments (the word adds a lot of meaning to the previous phrase), including pocketable mobile computers, netbooks, tablets, mediaphones, connected TVs and in-vehicle infotainment systems (only microprocessor-driven Toto toilets are missing from the litany).

You think I’m harsh? Read this piece from the NY Times Bits blog. The reporter, Ashlee Vance barely contains a smirk as she quotes an Renee Jame, an Intel exec:
“Android may be fantastic, but it’s quite specific,” Ms. James said. “I don’t think they are trying to solve multidevice interaction or how people will use mobile computing over the next horizon.”

Multidevice interaction, mobile computing, the next horizon? As if Google’s intent wasn’t precisely to cover that ground with Android and its sibling, Chrome OS.
And, as the piece points out, Intel’s CEO, Paul Otellini, is on Google’s Board of Directors. Oops.

Here’s what’s actually taking place.

Intel is getting zero traction in what they call the MID (Mobile Internet Devices) segment, that word again. There, the ARM processors reign. As Intel very well knows, smartphones (and closely related products) are the “next PC, only bigger”. We’ll soon have 5 billion cell phones around the world. Intel is nowhere to be seen on these devices, they’re in great danger of missing the next big wave — while living very well off the current one, personal computers.

So, Intel went to work and wrote a mobile Linux version, called Moblin, running on its low-end x86 processors, in hopes of demonstrating the viability of its current or future microchips in the emerging world of MIDs. So far, no joy.
The ARM architecture yields low-power CPUs, one advantage, and is more flexible, another. You’re not tied to one hardware vendor or even to a processor model. You license the architecture (and basic designs), customize it to your heart’s content and get a “foundry”, a semi-conductor manufacturer to make it for you. For example, Samsung makes the ARM-derived processors in today’s iPhones.

Turning to Nokia. They are still the worldwide king of cell phones, but having trouble with the US market. Once upon a time, in the late nineties, Nokia’s famed 8810 was what the iPhone is today: an icon of the genre. But, today, the cell phone king’s supremacy is hotly contested by the likes of RIM, with their class-leading Blackberry, Goggle, with their Android smartphone (they like to say superphone) OS, now said to be shipping 60,000 units per day and, of course, Apple. Nokia acquired full rights to Symbian (see the June 30th, 2008 Monday Note here) and decided to make it an Open Source platform for all to enjoy. In parallel, the company declared it was staking its future on a Linux derivative, Maemo. Now, the two Linux derivatives, Moblin and Maemo are to be merged into one, MeeGo. Wikipedia defines it as “a short-lived American science-fiction sitcom”, I’m not kidding, see here.

I have a sneaking suspicion the Google guys are being cheeky again: in spite of all the fresh MWC publicity, the results page puts the “wrong” Meego at the top. You have to scroll down the page to get the “right” results. See Endgaget here.

When asked which Nokia OS is the “right one”, Symbian or Meego, the poor Nokia executive uneasily equivocated: “Symbian is the chosen platform for us for smart phones,” said Kai Oistamo, Nokia’s executive vice president for devices, in an interview. “MeeGo is about the next wave, where wireless devices will go next.”

Goo luck with the following two CF tasks: merging two OS and convincing people to keep investing in the one without a future, Symbian, while the next platform, MeeGo, is being merged. (More geeky details here.)

But, wait, there is more!

The MeeGo CF is one of modest size: it only involves two companies, managed with great authority by take-no-prisoners CEOs. Now, take a look at the WAC (Wholesale Application Community): 27 companies unite “against Apple’s insanely successful app store, currently being stuffed with tens of thousands of e-books ahead of the arrival of Apple’s iPad tablet on which to read them.”. See the VentureBeat piece here.

I must immediately make amends an apologize to our friends at Intel and Nokia. Compared to this WAC CF, MeeGo is eminently rational, streamlined and inexpensive.

Who sold this WAC thing to carriers and device manufacturers? Do the top execs know it’s utter BS? I hope so. If they don’t, it doesn’t shed a good light on their intelligence or attention.

The “idea” is to imitate Apple’s App Store and take it many steps further. Apple’s creation only works for its iPhone OS (running on the iPhone itself, the iPod Touch and, soon, the iPad). With more than 3 billion downloads and 150,000 apps in a little more than 18 months, the App Store’s success took everyone by surprise, Apple included. This is scary to carriers (“operators” in Europe), because it gives Apple the upper hand in negotiating subsidies, data plans and content sales. And it worries handset makers: how do they compete with an app-rich handset such as the iPhone.

Not to worry, said a bunch of PowerPoint and Excel jockeys, we have the solution: the universal App Store, offering all carriers and (some) handset makers a cornucopia of smartphone applications. Never mind the technical details, it’s a mere matter of software. We’ll interpose an “abstraction layer” between the universal software and the hardware or network details. (We have this today with browsers and web apps, but never mind, we need a “native but universal app store.) And never mind the diverging agendas of ferociously competitive carriers and handset makers. We’ll all have these apps! Sure. And our differentiation will be… price. Let’s race to the bottom!

Most Valley observers dismiss the whole thing as a charade, at best, or, at worst, a disaster in the making.
How does the WAC compete with, or completes Android’s Market, for example, or Nokia’s Ovi, the WACos aren’t saying.

The best comments came from the “real” players, RIM, Google, Nokia and Apple. They said strictly nothing. In public. In private they must have a good laugh.

—JLG@mondaynote.com

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In recent weeks, I’ve gained a first-hand media perspective on anti-piracy technology. The technology is Attributor’s, and the media is Agence France-Presse, one of the big three global newswires along with AP and Reuters. (Disclosure: I produced recently a 15,000 words report for AFP covering its strategy and its future. I’m no longer working for AFP but I keep close links with this news company).

Every day, AFP sends about 400 news items to Attributor – a fraction of its daily production. These items are then matched against a set of web sites, both subscribers and non subscribers of the newswire’s services. Using a simple interface, Attributor ranks the sites by their propensity to reuse contents. For regular clients, the system shows how stories are used, what percentage is utilized and if they are properly credited or even linked. For non-clients if offers a great way to track down stolen content and to make the distinction between minor abuses, honest mistakes and systematic infringement, since the data are viewed from statistical and time-related angles.

For obvious reasons, I can’t disclose the medias I’ve been reviewing in detail. Let’s simply say that results are stunning. AFP material is widespread. To make it short, there are three types of abuses of copyrighted material.

- The first one is insufficient attribution by a client. Typically, a journalist puts his or her byline on a story largely taken from a newswire. On most cases, the byline will be reduced to initials along with “avec agence” (with newswire) mention, like this one for instance where the borrowed text form AFP is automatically highlighted….

For this piece, we can safely say that “M.D.’s” input was minimal and it would have been nicer to simply put the mention “AFP” at the bottom of this cut & paste performance. (It that particular case, the newswire story is itself an explicit recycling of a scoop by Le Figaro, a typical illustration of the Internet’s endless content loop). From a legal perspective, there is no particular issue. It’s only an ethical matter.

Another case involves misuse of contents by bloggers. In most case, bloggers have no clues about the meaning and use of copyright. And big medias who host them don’t really help. Typically, a young an passionate blogger “covering” his beat will simply take in good faith an entire AFP (or AP or Reuters) story and paste it on his blog, this time with a proper attribution. Except that he has no right whatsoever to do so. I’ve seen one big French site, whose boss loathes the AFP, ending up with 60% of its content illegally “borrowed” from the AFP (confronted with facts, the site has made serious efforts to correct the situation). Hypocritically, many sites shield themselves behind the fine print of the term of services buried deep in their site reminding bloggers not to steal copyrighted content. Fact is, most of them, including big medias, do not properly educate their legally challenged blogging contributors.

The third case involves pure and deliberate looting. It could be anyone: foreign based sites, activist groups with small audiences, all sort of people who hope to avoid detection.

How important is this stolen content? “For newspapers and the three main wire agencies, the net present value of stolen content is about $250m on the American market alone”, says Jim Pitkow whom I met last week in Paris. To come up with such estimates, Attributor counts the advertising associated with the infringing content and multiplies it by the CPM (cost per thousand) and the audience of the site. Last December, Attributor released a study that showed for the first time the extent of the illegal reuse of news material.

The study covered a corpus of 100,000 articles from 157 American newspapers monitored for one month. Here are the key findings:

- 112,000 unlicensed, full copies of US newspapers articles were found on more than 75,000 sites across the internet. Full copy means more than 80% of illegal reproduction of the original article.

- If we extent the notion of copy to excerpts (i.e.: less than 80% of the original story but more than 125 words — roughly half a typewritten page), we add 163,000 more references.

- On average, an article is illegally reused 4.4 times, whole or in part; but for large national papers reuse can go up to 15 times per story!

- On the money side, not surprisingly, Google captures 53% of the value that is unrealized by publishers; next is Yahoo (19%); Microsoft (5%); scientific sites (5%); AOL (3%); the rest is atomized. Bloggers represents only 10%.

Books are not spared. Again according to another research project conducted by Attributor, online book piracy represents about 10% of total book sales in the US. The most stolen genres are business and investing books with an average of 13,000 downloads per title, followed by professional and science titles. On these categories, Attributor found out that each title was losing over $1m to online piracy!

Which leads us to the last question: which part of this face value can realistically be collected? Let put aside book publishing which shares the same characteristics as music: massive peer-to-peer availability and poorly protected files. The rise of ebooks should slow down the problem.

Attributor’s CEO Jim Pitkow admits that only a fraction of the potential loss of news content can be reclaimed. Most of it lies in the abundant newswire production. Pitkow says the face value loss for news agencies – again calculated for the surrounding ads – amounts to roughly 40% of the worldwide revenues of AFP, AP and Reuters Media combined.
The recovery operation goes like this. Phase one: detection & evaluation of the most obvious copyright violators (individual bloggers are left out as well as accidental violators, which are too widespread to collect). Phase two: an attorney letter is sent to the core abusers saying: cease right away or negotiate.

How much will it yield? Too early to tell (AFP for instance just started the enforcement phase). But it could be around 10% of the face value loss, translating into millions for each market.

This is just the beginning. Attributor is in close contacts with Google who, like in the rest of the internet, hold the keys of the vault. Aside of that, an important part of Attributor’s strategy will involve ad networks who aggregate unsold inventories and resell them at a bargain price to advertisers. Ad networks play an important role in the general deflation of the advertising on the web. One of them, Ad Brite, has joined the Fair Syndication Consortium set up by Attributor to get some money back. Several more could follow. Call it the redemption of the bottom feeders.

—frederic.filloux@mondaynote.com

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I was tempted to agree. But a friend stopped me in my tracks as I was starting to point communication rules violations such as bragging statements better left to third parties. As the French like to say: Don’t make claims about your performance, leave it to grateful third parties. (You guessed it, the French are a tad more specific, but this is a family oriented newsletter.) ‘Look, said the friend, you’re in Steve’s office. Among the papers on his desk, you see his bank statement. Being an experienced businessman, you know how to look without looking and how to read numbers upside down. On that bank statement, do you see a line saying: Steve, you’re screwing up? No? See: there is no reality feedback telling him how wrong he is and how right you are.’
Skipping over rare exceptions, yes, my friend is right. This got me to take another look to the on-going “iPad conversation”. Using a different perspective, I come to a different conclusion. Conscious design, luck, instinct or, more likely, thanks to a retroactive, reverse order combination of all three, it looks like Apple is crowdsourcing its propaganda, its promotion of key iPad issues, its product positioning.

But, first, what is crowdsourcing?
For us, non-native English speakers, it is yet another manifestation of the great creativity, plasticity of American English, of its ability to constantly invent very practical, very compact words and phrases. Behold astroturf: it designates not artificial turf, the original definition, but fake grassroots political movements. We have outsourcing for the practice of moving the making of goods or services outside, to have someone else make those for you. We’ve all encountered the outsourcing hell of customer support. We also read the label on an iPod: Made in China, Designed in California.
Moving one more step in the continuous deformation of language: using the Web, we’ve come to see the crowd as a source of ideas and, in some cases, services such as answers to questions, guidance, directions. Wikipedia is one good example. Actually, it offers a good definition for crowdsourcing. A direct quote from the crowdsourced encyclopedia: “a neologistic compound of Crowd and Outsourcing for the act of taking tasks traditionally performed by an employee or contractor, and outsourcing them to a group of people or community.”

Back to the iPad stories, what do we see? Or what do I choose to see?

First, an amazing feat of PR buzz, especially when compared to the dollars invested in its creation. Pre-launch rumors didn’t cost much and the January 27th announcement, done in the customary sober luxury fashion, can’t have cost more than a few million dollars. Now, less than three weeks later, Google iPad: over 18 million hits. (Strangely, Microsoft’s Bing, their ‘we’ve got it right this time search engine’, returns a mere 415,000 hits.)
Success. At least on the quantity scale.

But what about quality? Does so much debate take the tiller out of Steve’s hands?

Actually, it looks like the brownian motion of ideas of ideas allows questions to receive answers of progressively increasing clarity. Experts, ankle-biters, kibitzers, kremlinologists and ayatollahs of 720 degrees of persuasion move ideas, factoids and opinions in every possible direction. Natural selection works and the better ones last the others out, get to the muddy pond’s surface and stay there for us to see.

(Lasting conspiracy theories could contradict my point, see 9/11legends or Obama’s birth certificate. But consider who and how many cling to those delusions.)
For example, see this neat blog post, titled The Failure of Empathy. There, the author, Mike Monteiro, takes on the iPad critics fixated on the (apparent) length its feature list. On the other side of the debate we have my dear friend Lee Gomes at Forbes, whose sharp mental scalpel helps us dissect high-tech culture tissue. In his latest piece, Lee argues: “The iPad has fewer capabilities than a netbook, in a similar size. Not a good start.” To which Mike Monteiro replies, in effect: “This is a geek’s view. Normal users, who (will) outnumber geeks, have different knowledge and appetites”. Monteiro says the iPad and netbooks address different people, different cognitive styles.

Going back to the iPhone’s history, if we can say this for a product that’s barely 3 years old, Apple sold more than 50 million devices in spite of “shortcomings” such as the lack of Flash rendering or the absence of multitasking, to name but a few of the more popular limitations. The crowd voted against the geeks. (Actually, I should write some of the geeks.)

Which gets us to another crowdsourcing item: Flash. At issue: can the iPad succeed in spite of its inability to play Flash, to connect to Web sites using Adobe’s Flash?

A blogger, Sarah Perez of the noted ReadWriteWeb is republished by the New York Times here. This is both helpful and unfortunate. The latter because the Grey Lady didn’t bother fact-check the piece, therefore hurting its credibility. For example, Ms. Perez claims “video websites like YouTube don’t work on the iPad”. Well, another blogger, John Gruber, in his February 2nd Daring Fireball piece, tears into the Fist Draft of History, as the NY Times likes to call itself: “Why in the world would The New York Times re-run this tripe? The iPad is “closed” because it has a web browser and the App Store, and Chrome OS is “open” because it has a web browser and no native apps whatsoever? And why compare the actual, real, soon-to-ship iPad to a not-at-all-like-the-Chrome-OS-we’ve-seen concept video rather than to the actual, real, soon-to-ship Chrome OS? And it’s premised on glaring factual mistakes, like that the iPad doesn’t support YouTube.”

Our blogger isn’t done with the establishment, in another post, on February 10th, he turns to the Wall Street Journal’s and to his arch-conservative columnist. Holman W. Jenkins Jr.:  “So his argument is that no matter how bad Flash is technically and experience-wise, Apple should add it to the iPad so people can watch Hulu.”
The fact is the iPhone runs YouTube, and so will the iPad, as can be seen on the iPad’s screen. Go to apple.com and see the YouTube icon on the screen, or in the video.
There is more: news come out Disney’s CEO, Bob Iger, is excited about the iPad and its ability to foster “essentially new forms of content,” since it has a high-quality display while being distinct from a TV or a normal desktop computer.

Regarding Hulu, another noted blog, TechCrunch, seems to think there’ll be a Hulu app ready for the iPad launch.
Technically, this isn’t as surprising or even as important as one might think. Consider the following: YouTube is a Flash-based site; how come it “runs” on the iPhone in spite of its lacking Flash? Two answers to this, one “geopolitical”, one technical. The former stems from Google’s decision to free itself from Adobe’s standard-but-proprietary Flash technology. There are some technical problems with Flash but, essentially, Google and Apple agree on open source technologies such as webkit and HTML 5 for the future of Web browsing.

The technical side is simple. Flash, in many ways, is a document description language, not unlike HTML. The latter says things like: Put this character on this position on the page, with font Lucida 12. The former composes rich documents including videos. Adobe sells the composition tools and makes the rendering one available for free.

Rendering? Once you composed the rich Web page, you need to send it to the user’s  browser and the browser needs to render, that is to play the rich document as composed. To do this the server sends a Flash “language” description and the browser, using the free Flash plug-in, interprets the language and re-creates the intended document on your screen and loudspeakers.
With this in mind, what Google does with you YouTube is simple: they do the rendering “at home”, that is in their servers. Then, instead of shipping Flash “text”, they send H.264 (another standard) data to the iPhone. The iPhone does render H.264 data very easily as the “heavy-lifting” has already been done inside Google’s servers. The same, obviously, applies to the iPad.
Moving to Hulu, or Disney, it’s a rather simple matter for them to do for their content what Google did for YouTube’s. The WSJ and the NYT could have seen this by looking at what Google did three years ago.

Now, you’ll say I’m becoming part of the crowdsourcing process. You’re right. We’ll see if today’s view survive the natural selection process.

—JLG@mondaynote.com

No related columns.

I live in a country (France) where censorship is a big deal. It comes mostly from greedy celebrities (sorry for the truism); they use a legal system that largely favors them. Often, they find a compassionate judge when it comes to extracting money as compensation for a supposed privacy violation or for some other unauthorized disclosure. Convictions are frequent and expensive; they can lead to the seizure of a magazine or even of a book. France has a long history of such practices. In the early sixties, the country was waging a colonial war in Algeria. Then, for the most avid news readers, the game was to get the weekly magazine l’Express at the kiosk as early as possible before French authorities seized it. (No such risk with today’s Gallic newsmagazines).

Let me reframe this in the context of an upcoming iPad era. An iPad newsmagazine publishes an investigative piece that triggers a legal injunction: remove that from the publication or face a $10,000 penalty per day. No, says the publisher, who has guts and money (proof this is a fiction), we want to fight in court. The plaintiff then turns to Apple. Same talk: face a huge fine, or remove the offending content. Furthermore, says the plaintiff’s attorneys, thanks to your permanent and unique electronic link to your proprietary devices and the fact that the electronic kiosk now resides on the device – yes we can argue that point, they say– , you must extend the deletion to each user’s tablet. C’mon, you keep pushing updates, and various contents bits to these gizmos, you can push a delete instruction code.

What would Apple do? This is a question of balance of power. If the legal action involves some neuron-challenged celebrity, chances are Apple won’t balk. But what if Nicolas Sarkozy or his whispering-singer wife are the plaintiffs? Truth is, given the pattern of legal actions against the press in France, it is more than certain a French judge will be tempted to request an immediate remote deletion of a presumed infringing content. Then we’ll see a replay of what happened last summer in the 1984 case, when Amazon remotely deleted a copy of George Orwell’s novel in the Kindle of buyers for copyrights issues. Amazon’s founder Jeff Bezos apologized profusely for the mishap (plus it involved 1984 not Alice in Wonderland, tough luck).

With the iPad structure, Apple is creating the absolute control for product, delivery and even ownership that can be revoked at will. Apple allows or rejects the application (the container), it can remove all or part of any content from its servers, and it could even remotely delete the stuff you purchased. Imagine: you go to a bookstore, spend $25 on a book that a court of law later finds illicit; a bookstore employee then goes to your place, takes the book from the shelf and leave three dollars bills on your kitchen table. Wouldn’t you be slightly uncomfortable with this?

Such kind of mechanism poses no risk for music or entertainment materiel. But it does so for news. As opposed to entertainment, news consists in deploying ways and means to obtain the best and most balanced set of informations collected on things that somehow, someway, somewhere an individual or an organization is willing to conceal. This is the essence of journalism.

Therefore, it requires money to collect the information, edit it, package it. And it requires channels of dissemination that cannot be vulnerable to any kind of leverage. For free (as in free speech, not free beer) content, platforms and networks must be neutral. Any closed, proprietary system contradicts this imperative.

Some will retort: but your content could still be freely available on the internet, therefore in a neutral platform/network environment. Yes and no. Yes, of course, I might be able to post hot stuff on a blog.

But let’s project ourselves five years from now. I’m the publisher of a digital only magazine. The iPad and the iNews Store have become the de facto standard for paid news distribution with a market share of 74%, equivalent of what the iPod had in 2010. Most of the news that’s fit to be pixelized has found refuge under Steve Jobs’ umbrella. One day, we publish a piece that a triggers an irate response from the story’s subjects. Inevitably, a judge finds it objectionable. Since my editors are careful professionals, we know exactly what our writers are holding up their sleeves and we are ready for a legal fight. But if Apple balks, we are screwed. Of course, we have the option to go on the internet, but it is exactly as if, in the sixties, the journalists of L’Express would have mimeographed and distributed their Algerian war stories by hand in the streets of Paris: nice move, but tiny audience, and no money.

That’s why Apple’s choice for a closed system changes slightly the game. In Steve Jobs’ mind, the iPad is meant to become the ultimate personal computer, replacing most of the devices that we currently use to get music and entertainment. And news. And knowledge. For the publishing community, the choice is therefore:
a) go for it with a flurry of applications — and thus contribute to erecting a tightly controlled gated content community; the more publishers will join the fray the better the iPad will fly;
b) put some eggs in other’s baskets (Amazon’s, PlasticLogic’s for instance), which are neither neutral nor philanthropic. In addition, each of them has its own standard. It’ might be economically tricky to design a write-once-publish-everywhere content fitting every platform.

This leaves us with three conclusions:

1 / Undoubtedly, the iPad could be a fantastic publishing platform with a powerful transaction system attached to it. As many do already, I’m personally considering a purely digital magazine built on great content, beautiful layout and supported by a mixture of paid-for and clever and graphically attractive advertising (see previous Monday Note) . But we’d have to bet that Apple will always position itself as a neutral platform. It is likely to be the case, but it’s a bet.

2 / It might not be economically feasible to publish on several platforms just to hedge such a remote risk. The variety of formats, the technologies (LCD display like the iPad or e-Ink like the Kindle) would make such on-the-fly content adaptation far too costly.

3 / Therefore it is a good idea to keep considering web-based paywalls – whatever the forms – and mobile applications on multiple platforms. After all, the internet is the one vehicle that is the most likely to remain open and neutral.

—frederic.filloux@mondaynote.com

No related columns.

When I mentioned this to my Monday Note boss, he jumped: ‘Why don’t you write a piece on cars becoming soft, that is an exposé of the total invasion of software in today’s cars?’
We’re both geeks, you see. And, yes, I could sing the praise of Toyota’s PSD (Power Split Device), the clever Continuously Variable Transmission (CVT) used by the Prius. (That type of transmission was invented in the 60s by TRW, Thompson Ramo Wooldridge, a Texas company. The patent has expired.)

But there is more urgent than software-driven transmissions in the news. Toyota is hit (or has hit itself) by one problem after another. After recalling something like 8 million cars because of a combination of pesky floor mats and sticky gas pedals, we now hear Toyota’s crown jewel, the lated model Prius has buggy brakes.
How come?
Software, of course. And the need to score high numbers in the mileage tests.

Here is how the problem builds.

First, brakes.

Once upon a time, brakes were simple: you pushed on the pedal, the pressure was hydraulically transmitted to the brake itself. Assuming a disc brake, the pressure caused calipers to squeeze the disc between two sets of pads, thus slowing the car. For convenience and safety, your foot’s pressure is multiplied by a brake booster.
So far, no microprocessor.

Then we invented anti-locking brakes, ABS. As you know, when wheels lock, the car skids, braking is impaired, stopping distance increases. ABS uses sensors to monitor wheel motion. If the wheel abruptly stops moving, it’s locking. A software program then directs the brakes to lower the pressure on the disc pads, the wheel starts moving again, until it locks again and the unlocking cycle restarts. You can sometimes sense a vibration when the ABS quickly repeats the sequence, trying to keep the car just at the edge of maximum braking without locking the wheels. Nice. Modern implementations have faster actuators, the device that temporarily reduces hydraulic pressure, and smarter software, to better deal with road surfaces with gravel or snow where some amount of wheel lock is the better strategy. There is even newer code that detects a panic stop and forces the kind of maximum pressure normal drivers are reluctant or unable to apply.

Now on hybrids.

These cars reduce gasoline consumption by storing and re-using the otherwise wasted kinetic energy dissipated when the car slows down. Kinetic energy is a fancy name for the energy you must spend to give the car its movement. That energy manifests itself when you use the brakes: the car slows down, the kinetic energy is now heat in the brakes.

Let’s do some numbers.

At 100 km/h (62 mph, 27.8 m/sec), the kinetic energy of a 1,379 kg (3,042 lb) late model Toyota Prius is approximately 520 kilojoules. See a kinetic energy calculator here. If it takes 3 seconds to bring the car to a complete stop, on average, the power dissipation will be 520 kilojoules divided by 3 seconds, 173 kilowatts! (A watt is a joule per second). That’s a huge amount of “instant” power. For scale, the Prius features a 73 kW gasoline engine and needs to use it for a little less than 10 seconds to bring it to 100 km/h.

To recover and store kinetic energy, hybrids use a motor/generator: you give it electric power, it produces motion, you apply motion to it, it produces electricity. In other words, recovering kinetic energy uses something similar to engine braking on a conventional gasoline engine.
So, to slow the Prius, the car’s computer engages a clutch, the motor/generator is connected to the wheels and, for three seconds, converts the car’s motion to 173 kW of electric power to be stored in the hybrid’s battery for future use.

Not quite.

For the storage of recovered kinetic energy, the Prius uses a 201.6 volts battery (168 NiMH cells at 1.2 volts each). Divide 173 kW into 201.6 volts, to get the current intensity, the amperes used to transfer the electric power to the battery. You get about 806 amps! No battery can withstand such a charging current. The 6.5 amp-hours NiMH Prius battery shouldn’t be submitted to more than a few amps of charging current, not hundreds.

This leaves us with two solutions: lengthen the slowing down process and/or letting some of the power/energy go to waste.
But you can’t take 60 seconds or more to slow the car just to get a more manageable number of amps produced by the electrical engine braking process.
In real life, we need to stop when we need to stop, not when the computer feels it’s better for the battery. That’s where the computer, the barking and energy recovery software come in. When I hit the brake pedal, it does its best to blend “wasteful” disc braking and “good” regenerative braking, all as invisibly as possible.

To summarize: braking isn’t braking anymore, especially in a hybrid. Hitting the brake pedal triggers software processes that involve optimizing kinetic energy recovery while maintaining safety and comfort in a wide range of circumstances, including slippery roads and panic braking.
The the latest Prius, the so-called ZVW30 model, a.k.a 3rd generation Prius launched in 2009 is slightly heavier, 62 additional kilograms, and sports a beefier engine, 1.8 liter vs 1.5 liter displacement for the 2nd generation. Yet, it claims better EPA combined mileage, 50 mpg vs. 46 mpg.
Take a guess. How did that happen? How does a slightly heavier car, with a bigger engine and no appreciable aerodynamic or rolling resistance improvement over the very optimized  2004-2009 model get almost 10% better mileage?
Software.
The brake system and engine braking software has been “improved”, yielding better kinetic energy recovery by sacrificing some “classical” braking performance.
Unfortunately, it looks the optimization has been a little too aggressive, yielding brake performance trouble.

Speculation on my part?

Perhaps.

But take a look at this Autoblog report of braking trouble with a Ford hybrid:

As one of our senior engineers slowed for a stop sign at the turnoff to our test facility in East Haddam, Connecticut, the brake pedal went unexpectedly further down than normal but the car barely slowed. He zoomed through the turn, with brake-system warning lights illuminated on the dash. The car more or less coasted to a stop, with what our engineer described as minimal brake feel.

Ford announces they’ll fix the software on their hybrids’ braking systems.

Toyota had discreetly updated the software on “factory-fresh” Prius, they’ll do the same, one hopes, for their customers who bought the 3rd generation Prius thinking they were safe with the Japanese automaker.

—JLG@mondaynote.com

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Many blame the media industry for not being able to come up with such an ecosystem. This is an unfair criticism. Building a universal payment system for the web, even at the limited scale of a single country is already complicated. Let alone an interconnected system allowing users to jump from one country to another. Even the music industry — can’t we think of more global product? – couldn’t do it. As for agreeing on a set of specifications for a device, it would have been impossible. Too many views, ideas, concepts, priorities to unify. To say nothing of egos.

Hence the reliance on Steve Jobs’ vision. As the media industry kept unraveling, such reliance mutated into a desperate hope. Can he save us? Can he do for the media business what he did to the music industry with the iPod + iTunes magic combination?

In this respect, the January 27th release of the iPad fell below expectations. The device is great, it has all the attributes of an Apple product: a sleek design and a gorgeous interface. But Steve Job’s presentation was short on contents. We had a glimpse of the New York Times reader apparently crash-coded in three weeks, but no magazine, nor mind-blowing hybrid content (I’ll come to that notion later). Given the hype, maybe Apple could have waited until May or September to roll-out its magic slate fully loaded with ready-to-purchase news contents. Evidently, Apple is hampered by its obsession with secrecy and its habit of making deals on its own terms – a “here-is- our-device-now-here-is-the-deal ” posture.

Granted, the product won’t ship for two or three months, depending on the version (wifi or 3G). Then, let’s give Apple and its partners the benefit of the doubt and let’s move the clock forward to spring 2011 to see what a true news media game changer could look like.

Here is the general backdrop. In 2011, the typical news site largely remains freely accessible. For the most part, publishers see their sites as mass audience products. These are built on a basic design, relatively light features and supported by all possible forms of advertising. These free sites are targeted at occasional readers who come from search engines or various referrals, and see one, two or four pages once in a while. It’s delusional to expect them pay for anything. If they hit a paywall, they’ll simply go elsewhere to find the news they want. For them, information is just a commodity that can be found more or less in the same form all over the web. They have no brand loyalty.

Most publishers don’t want to conceal their product behind a paywall. As the Guardian Editor Alan Rusbridger explains in his brilliant Hugh Cudipp lecture (an absolute must-read):

“If you erect a universal pay wall around your content then it follows you are turning away from a world of openly shared content. Again, there may be sound business reasons for doing this, but editorially it is about the most fundamental statement anyone could make about how newspapers see themselves in relation to the newly-shaped world”.

But as pragmatism finds its way to the P&L, paywalls have started to show up on the web. They are targeted to the 10 or 20% fraction of heaviest users, those who are willing to pay for slightly more content, perhaps, and, definitely, for a better user experience.

A great mobile one, for instance.

Enter the iPad application. In this spring 2011, all major news brands have one. I’ve got many on my brand new device. Here are some of the common features I enjoy.

1 / Triple play access to my favorite news brands. I can access them on a dedicated version of their web site when I’m at the office, on my iPhone in the subway and on my iPad when on the couch at home, or waiting at the airport, or in a bar. One transaction (subscription, metered account), three ways to access my news.

2 / The iNews Store. Let’s see: in 2010, I was paying online for:
- The Wall Street Journal
- The Economist
- Le Monde
- Les Echos (#1 French business paper)
- The MIT Technology Review

I happened to buy a pass for a specialized publication for a specific project I’m working on: mostly business, scientific, or higher education stuff.

In the physical world, I regularly pick-up Vanity Fair, Wired, Digital Photo Pro, Fortune Architectural Digest and Wallpaper. I occasionally get (yes) the Economist, Business Week, The Atlantic, The New Republic, etc. Question you might ask: why the hell paying for stuff that is freely available on the internet? a) because I can afford it, b) because of the incomparable user experience of a magazine: glossy pictures, layout, reading and browsing comfort, even the ad pages are attractive. Which leads us to….

3 / …My iPad Applications. As I pay now for most of those publications, I get roughly the same content as everyone else, but in a much better package. First of all, my iPad updates itself automagically. It detects when a known wifi is available (I don’t use 3G, even in France, it sucks) and it gets the contents in a timely manner. I get Wired before it hits the stands in NYC, the New Yorker every Monday and my newspapers contents gets regular updates. If the connection is good, I keep the magic of the web within my app: I’m able to post a comment for instance or to get a live streaming of an event.

Needless to say, I’m spending more since I decided to get the apps for most of the contents I was used to view for free: I’ve got the one for Le Figaro, The Guardian, and a couple of others - mostly because the reading experience is hundred times better.

It’s worth it: unlimited access, a fantastic and intuitive search engine, a recommendation system that learns the way I read thanks to its statistical algorithm, intelligent folders, all sorts of alerts, endless catalogs of topics, rich multimedia contents, a readers community, etc.

I no longer carry the glossies I used to pick up at the newsstand. Vanity Fair and the likes are loaded in my iPad. I subscribe to most them — or I get some by the copy, depending on the offers and the contents. I even enjoy particularly creative but not invasive ads: in VF, I just clicked on a Paul Smith teaser which took me to their shoes and accessories catalog. Serious spending in sight, I’m afraid.

4/ A new breed of contents. In 2011, new book formats began to show up. The hybrid type. A year earlier when the device was introduced, I was reading Too Big to Fail a remarkable account of Wall Street’s rescue. Great book by New York Times’ Andrew Ross Sorkin: 600 pages, 700 grams. With the public debt global crisis hit back the world economy, Penguin Books decided to publish a sequel — with an iPad version. Instead of yesterday’s “official” players’ black and white photographs extracted from the first paper version, now the iPad-format book comes with 16 video clips of decisive moments — provided by Bloomberg and Reuters. In addition, I’m getting 12 interactive graphics from the New York Times. It didn’t cross my mind to orders the books from Amazon as I did 18 months earlier. I’ve got my enhanced electronic version for the same price as the physical book (for the publisher, the extra cost of multimedia content was offset by savings on print and distribution).

A new kind of publications called “Books+” turned out to be a great success in the iBooks Store: compact books, 80-150 pages of text, greatly enhanced by rich multimedia contents. These new Books+ percolate into every segments of the publishing industry: current affairs books are released much faster than before (therefore increasing their value for the reader); all sorts of guides, how-to’s, do-it-yourself manuals have switched to hybrid publications, all updated as needed.

New device. New transaction system. New business models. New editorial products integrating multimedia contents. The iPad is loaded with all these hopes. But we are not there yet. It is an expensive product, impossible to subsidize by an ailing news industry, the iPad won’t be the swift economic miracle many are hoping for. At most, by squeezing cash from a marginal portion of heavy users, it will limit the inexorable deflation that plagues the information business. Even such a limiting achievement will require a great deal of imagination and boldness on the part of editors and publishers. Given the state of the media sector, it better happen fast.

—frederic.filloux@mondaynote.com

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Customers come in two categories: cats and dogs. Put new cat food before your feline companion, she’ll walk around the dish, indifferent to your entreaties, suspicious, bidding her time. Dogs aren’t that complicated: they jump on the new dog food and greedily scarf it down.
I’m a dog, I’ll try (almost) any new high-tech product. But, as the advertising lore likes to say: Will the dog come back to the dog food? That’s how you know you have a viable product. We’ll see in a couple of months if I keep my new iPad or if our daughter Marie resells it for me on eBay - for a fee, she’s a businesswoman.

In the meantime, five thoughts.

First, we have no idea of what the iTunes App Store will do for the iPad. As usual, the temptation is use derivative thinking: The iPad is like ___ only bigger, or smaller. A bigger iPod Touch is the more common thought. So, yes, most iPhone or iPod Touch apps will scale nicely. But this much bigger XGA (1024 by 768) screen is “more enough” for iPad applications to be genuinely different as opposed to mere derivations of iPhone apps. Apple comes up with their own iWork apps showing but one example of uses that aren’t just an extension of the iPhone world.

Gizmodo has one of the few posts, among the tens of thousands of iPad-related blog entries, focusing on in-app purchases. Last Summer, a new iPhone OS release introduced the ability to make purchases from within an application, without jumping out to a Web site. As a counter-example, look at the current iPhone Kindle app: when you want to buy books you leave the app and go to a dedicated page on Amazon’s site to order the book and direct its digital delivery to your iPhone. Apple offers a simpler mechanism: buy what you need, weapons or lives in a game, virtual reality clothes, furniture or buildings from within the gaming or VR app. Apple smoothes out the transaction, billed to your iTunes account, takes 30% for its services. This is great for some merchant but Amazon doesn’t see it that way.
This is relevant to Frederic’s point about newspapers and magazines in today’s note: the Financial Times could deploy a free FT app on the iPad, complete with teasers for today’s paper or for a special research report. Click and you download the paper, or a magazine. See here what the Swedish group Bonnier thinks of the new possibilities afforded by powerful tablets. The Mag+ demo is very Apple-like, I’ll even say Jon Ive-like, complete with a veddy Briddish accent.
I can’t wait for the things I can’t imagine coming out of the brains and loins of my fellow geeks.

Second, real users, paying customers, as opposed to geeks and braying critics.

I’m going to get in trouble for this, but hear me out.

Apple has sold 40 million iPhones or so in less than three years and is likely to sell 50 million this calendar year. (Frankly, I don’t care much about Dear Leader’s latest posturing:  according to Him, Apple is now the largest “mobile” company in the world. How about the best one, to start with? And do Apple would-be customers get up in the morning and say to themselves: Let me look for the biggest mobile company and, once I find it, I’m gonna buy their stuff?)

Back to critics.

Do real users really care about the Apple Store approval process? Are they bothered by Apple being “closed”, lacking Flash or multitasking? Some might, but Apple’s latest revenue and profit numbers don’t seem to say they are in the majority.
I watch what normal humans do, I have one or two in my family. My wife Brigitte designs, builds and sells houses. As a result, after mastering Skype and Facebook, browsing the Web for parts, appliances and materials, she bravely downloaded Google’s (free) Sketchup. She taught herself 3-D design because she was motivated. She grew tired of pencil, paper and ruler and did want to control the dialog with contractors, suppliers and even, hope springs eternal, the People’s Republic of Palo Alto.
But she hates dealing with the plumbing under the apps, the way and places where files are stored, named, duplicated. She doesn’t care about the directories, smart folders and the like.

The iPhone introduced a much simpler way of using what Apple once calls pocket computers. Well, the iPad doesn’t fit in a pocket, but it certainly fits the iPhone simplicity model where there is much less plumbing to contend with. This “limitation” is experienced (not an expressed thought, just a feeling) as a strength.
Many critics make the same mistake Microsoft did when they thought of their smartphone OS as Windows Mobile. Apple didn’t do a Mac Mobile, they did the iPhone. Even if the iPhone OS shares some parts with Mac OS X, real users don’t see it.

Third, the price. $499 for something that so clearly costs more than an iPod Touch says one thing: subsidies. Yes, the $130 supplement for an added 3G radio looks like an attempt to recoup a better average margin, assuming many buyers will take the $499 bait and switch to the more expensive 3G model. Still, priced as it is, without a carrier contract (the 3G $30/month deal is month-to-month, no ugly ETF, Early Termination Fee), the iPad isn’t going to make the kind of money the iPhone brings to Apple’s shareholders.

Without carrier subsidies, we’re left with iTunes revenue. This could be a new bet, a change from the established iTunes business model. So far, see the iPod and the iPhone, iTunes is an investment Apple makes to prop hardware margins up; iTunes costs money to run but doesn’t have to make tons of it. The famous 3 billion App Store downloads don’t change that. More than half of those are free: why would Apple, the noted philanthropist, go through the pains of approving those free apps, updating and downloading them?
For the paid ones, take your pick: $1 average price, $2? That’s still “only” $2B or $3B gross revenue. Take 30% of that for the past 18 months, subtract the operating expenses, people and servers and you’re not left with something that moves the needle.

Now, let’s say I take 50% of what I spend on books, newspapers and magazines and apply it to iPad Store revenue. A conservative $50 a week divided by 2, times 30%, times 52 weeks yields $390/year in net revenue (before expenses) to subsidize my iPad. Over time, the net content revenue could represent billions of dollars. (Don’t hold me to this number, my actual habits “deviate” from it, I’m just trying to get a feel for the subsidy model.)

Fourth, the AT&T 3G problem. Oh my god, they’re doing it again! Apple is staying with the lousy AT&T network, the wireless data connection performance is going to be terrible. Well, I’m not a fan of AT&T myself and constantly endure disconnected calls. But we’re mixing two topics here: voice and data. Digitized voice calls need the bits to arrive exactly at the right time, otherwise the call fails, our brains need what is call isochronous connections. Browsing the Web, getting email, downloading content does accommodate stuttering links, the uneven data transmission is invisible, it is smoothed by the connection protocol, by a buffer. I’m not enchanted by AT&T’s data performance but it’s not nearly as bad as their voice service.

Further, let’s look at numbers: in your mind’s eye, do you picture lines going five times around the Apple stores the day of the iPad’s release? No. If iPhones sell in tens of millions, iPads will do well to sell a small number of millions this year, worldwide. Nothing that will create insurmountable wireless data performance problems.

Fifth and lastly for today, the mysterious A4 processor. A couple of years ago, Apple acquired PA Semiconductor, for their processor design expertise. The iPad comes with the first visible result from that investment. In some ways, this isn’t earthshaking: the ARM architecture is the basis for many designs and Apple’s own processor is an ARM derivative, current ARM-based apps from the iPhone run on the new chip.

Is cost the motive? Probably not. Apple’s purchasing power does get the best prices from silicon foundries making ARM processors. Apple isn’t manufacturing its new processors, just designing them.
One factor is integration, getting as many subsystems, graphics, memory management, power management and other features all on a single chip. This could help explain the unusual (to be verified) battery life numbers.

Security is a very likely motive. Security as in protecting from unwanted processes such as viruses. Security as in DRM, as in securing content, something that will help Apple’s dealings with content providers. And security as in payment systems.
In truth, no system is 100% immune to penetration. It’s a percentage game. A fully open system where anyone can install any application on your machine, PC or smartphone, has a much higher percentage chance of being compromised. Think key loggers, for example, surreptitious programs that record and transmit your keystrokes as you make purchases, enter passwords.
We still don’t know much about this new chip, it is said to contribute mightily to the iPad’s “lightning fast” performance. We’ll see if we find it, or a derivative, inside this year’s iPhone. Remember, one iPhone a year, that’s all we ask…

—JLG@mondaynote.com

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Why such weird timing? For the biggest online newspaper in the United States, announcing such a move just a week before the likely roll-out of the Apple Tablet is bizarre. OK, we get it, the New York Times won’t join other publishers aboard the Apple bandwagon. As I’m writing this, there are persistent rumors that big players such as Condé Nast, Harper Collins, McGraw Hill, Hachette could sign up — but not Time Inc., according to All Things Digital. Then, either The NYTimes is showing its fierce independence or it is hedging its bets by preparing its own offer, competing with a putative Apple publishing hub. According to New York Magazine, the Times is not joining Journalism Online (see previous Monday Note How to make readers pay for news), nor is it teaming up with the Wall Street Journal in its effort to pressure Google for a better deal. Another question: Why wait so long to deploy the NYT’s paywall? A year to build a digital subscription system sounds quite a long time.

Let’s throw some numbers at the “metered model” – as it is now referred to.

Which part of its audience does the Times actually target? Last November, the Times got 16,5m unique visitors and 2.98 sessions per month, according to Nielsen. As for the number of pages viewed by each visitor, we must rely on a more global figure, again from Nielsen: for the top US newspapers, an average of 43 page views per month (1).

The problem with the Times is we can’t go further down in the analysis because its quarterly financial statements don’t breakdown the economics for the company’s 50 online properties. Then, let’s turn to Washington Post. This newspaper releases numbers for its own web site, numbers we can use to try and model how a metered paywall.

For the full 2008 year, the washingtonpost.com made $122.7m in advertising revenue. Applied to a monthly audience of 11m unique visitors (we’ll assume this stable audience is a yearly average), this translates into $11 per visitor per year. That’s the ARPU (Average Revenue per User) for the Post, it comes only from advertising; and it’s 20 times less than the ARPU for print readers. You see the idea, the goal: having people pay for content is a way to close this 20X gap between ARPUs.

Now, let’s look at the problem from a different angle: who would be willing to pay for the Post’s or the Times’ prestigious content? Not that many. First of all, a large percentage of the audience lands on these sites though search engines and therefore are not likely to consume a lot of pages. Such visitors, about a third of the total audience, must be removed from the pool of readers likely to pay for content.

How much would people pay? According to a Boston Consulting Group survey, readers would agree to pay $3.00 per month on average. Interestingly enough, the BCG found the upper limit to be $6.00 for the “heavy print consumers” category. (The intentional amount is higher in Europe than in the US). As we explained in last week’s Monday Note (See The Death of Joe Average), the notion of mean value doesn’t make much sense here.

Coming back to the Washington Post, using the remaining 66% of total users likely to pay for content (7.34 mUV/month), the expected revenue impact is modeled below (in blue, the revenue boost when compared to the 2008 advertising only numbers):

Some will object: the site’s advertising revenue will be affected by the paywall. True and not true. Yes, the site’s overall audience (as considered in page views) will decrease slightly. But if the paywall only targets the viewership’s top 10%, the loss will be minimal. Second, experience shows ads placed behind a paywall yield much more money than those in the free part. The Wall Street Journal is said to charge 30% more for ads displayed in its pay zone. Advertisers set a higher valuation for this loyal audience.

In conclusion: a carefully set up paywall significantly increases revenue as long as:

• it doesn’t block access for the general audience (minimum traffic loss)
• it doesn’t discourage linking from other sites (preservation of the page rank)
• it targets only the heaviest users, those willing to pay $6.00 rather than $2.00 per month, and those ready to be charged for ad-free content on mobile. Or on a Tablet.

frederic.filloux@mondaynote.com

( 1 ) Strangely enough, Nielsen/Mediametrie in France is showing only 11 pages per French reader of the online NY Times – OK, the language problem might lower the page count. But, for October 2009, (November data are not available down here, Gallic computers are slow, you know), Nielsen grants only 19 pages per person and per month for Le Figaro and a mere 15 pages for Le Monde. These two big sites are comparable by their scope to the NYTimes or to the Washington Post. How come French readers view half as many pages as their American counterparts do - for the same type of sites (if I may ask)? — An update: the cause of the delay to get the French Nielsen data is said to be bug in the US. As for the discrepancy in the page count between US and French, I’m on it.

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I’ll approach today’s topic, mobile payments, using an Apple Store moment.

Some cables keep disappearing. In particular, the ones that connect MacBooks of various vintages to conference room projectors. As much as some of us admire Apple’s minimalist fixation, the parade of video-out connector generations can grate. The world outside of Cupertino is inelegant, imperfect, we know. But that world features one universal projector connector standard: VGA.
In recent years, Apple moved from mini-VGA to DVI to mini-DVI to micro-DVI to mini-DisplayPort, creating the need for a (dis)array of “to VGA” adapter cables - see the links earlier in the sentence. Elegance at a price. Let’s hope the mini DisplayPort will stay blessed for a while.

So… Entrepreneurs come to our office for a presentation; they forgot the VGA adapter for their MacBook, I lend them one from my private stash. You know what happens next, they’re entrepreneurs. I go back to the Apple store for a replacement.
Adapter in hand, I approach an Apple Store employee with a hip-mounted sales terminal, whip out my credit card; a couple of minutes later, we’re done. No bag, receipt by email, life is good.
But, why use a credit card?
I have an iPhone, the Apple sales terminal is an iPhone as well, why can’t I just touch an icon, enter a PIN and be done? That’s what I do when I buy the Inglorious Basterds movie, a Bo Diddley Blues album or the (very buggy) Kayak application via iTunes on my iPhone.

The iPhone (as well as many other devices) contains a micro-SIM, a Smart Card module similar to what you’ll find in many European payment cards. Insert one of those in the payment terminal, key your PIN and you’re done. Why can’t we do this with a smartphone and get rid of credit cards? Simpler transactions, neatly listed on the device, if desired, and in an on-line account, as it’s done today.

The idea isn’t new.

You’ll recall: once upon a time, with Ericsson and Nokia, Norther Europe was the land of advanced cell phone technology. There, about 20 years ago, putative mobile payment systems were demoed by standing in front of a soft drinks vending machine, dialing the particular drink’s phone number from your cell phone. Clink, the drink came down the chute and, clink, its price was incremented on your phone bill. The unique ID (SIM module) inside your GSM phone provided security. This was the future.

Unfortunately, it’s still the future.

We use a physical token, a credit card, to tag, to “verify” transactions - the signature is optional or irrelevant. But we don’t seem to be able to use another physical token, our phone or smartphone, with its unique ID, as a way to validate transactions.
Why?
We have the “card not present” problem. This term of art mostly refers to on-line transactions, ones where the merchant doesn’t get to see and touch the card. With all notebooks and netbooks now having both WiFi and Bluetooth (another Norther Europe invention) connectivity, it’s hard to see why my I can’t use my cell phone as a credit card wirelessly connected to my computer. Some agitate the fear of hacked wireless connection: a pirate would listen in to the exchange between the “credit card” inside the smartphone and the computer being used for the on-line purchase. IMHO, that’s bunk: such exchanges are encrypted, just like the transaction between your computer and the merchant’s server.
Again, the wireless terminal in the Apple Store seems secure enough for large numbers, transactions and amounts, it’s a smartphone with a bigger battery and a credit card reader.
Another more serious obstacle stems from customer and merchant behavior. We’re used to credit cards, they’re well understood, easily identified, separated from one another, one for business expenses, one for personal purchases, one for this merchant, one for another. Smartphones are still novel, expensive and somewhat complicated. We’re creatures of habit.

Fortunately, entrepreneurs challenge the status quo.

Obopay, a Redwood City company (we failed to invest, much to our chagrin…) was founded after Carol Realini observed people in Africa carrying a cell phone but no wallet. From that insight, she started a company that helps people send and receive money using cell phones and, now, an iPhone app. Anyone with a mobile number can send and receive money; this is pretty close to the soft drinks vending machine demo - only on a wider scale. Obopay is doing well, got a sizable investment from Nokia last year and is partnering with a large European bank for mobile payment solutions in Africa.

PayPal, the eBay subsidiary now offers a mobile version; it’s not a mobile to mobile system per se, more like a mobile version of their successful desktop process.

Zong is a “purer” mobile payment service. Unlike PayPal, it doesn’t require a pre-existing credit card account, just a mobile phone subscription, see their FAQ; it works in 26 countries, US included.

Boku, another mobile payment player, appears to focus on “digital goods”, see their blog and their demo. By digital goods they mean games and related virtual worlds transactions. Boku just received a new $25M venture round, proof the “sector” is seen as promising.

Almost next door, on Palo Alto’s University Avenue, we have Bling Nation, with a mobile solution requiring additional hardware added to your mobile device, see here how it works.

By now, you see the “customer behavior” problem. As one of our engineer used to joke: ‘What I like about standards is there are so many to choose from…’ If mobile payments are to displace today’s credit cards, we can’t expect merchants and customers to navigate a maze of disparate solutions.
Today’s magnetic stripe on the back of credit cards works almost everywhere: I remember how I felt when, on impulse, I tried it on a door in Beijing. The door unlocked and I was inside a bank’s ATM lobby, ready to get cash out of their array of dispensers - made in Germany, by the way.

Today’s mobile payment systems scene is a bit messy, some of the hundreds of millions of venture money invested will be lost, that’s the nature of the game. But the winner or winners will rake in huge wins when a standard or two finally coalesce as the smartphone market keeps exploding. Which one? Your guess is better than mine, I’m too much of a geek to intuit normal human behavior…

JLG@mondaynote.com

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In today’s marketplace, every single piece of information lies the open, naked, stripped of a set value. People don’t buy contents by the bulk, they peck at it, leaving to a third party (the unstable advertising market), the burden of financing it. As the content scatters on the internet, so does the audience. The money has shifted as well, with an expense of $260 per US household per year for digital services (cell phones, cable, broadband, satellite) that didn’t exist a generation ago. (Even the poorest families still spend $180 a year). This, in itself, makes it hard to hope for an extra $20 a month for news content that is widely available for free.

But the real competition is now for time and attention. Last December, in the United States, people spent 64 hours online, but stayed only 57 seconds on each web page, according to Nielsen. OK, it’s an average, and I’m about to kill this very notion in a minute. But still, it points to the time allocation challenge we face. Again, last December, American web users spent 6:24hrs on Facebook, 2:56hrs on Yahoo properties, 2:21hrs on various Google sites and 2:03hrs on Microsoft sites. As for the time spent on newspapers, it remains stable: around 20 minutes a month, whether you look at US or the European markets.

The shift seems to accelerate towards Facebook, which is becoming the absolute internet attractor: the amount of time spent per person on Facebook has tripled in just one year; in the meantime, Google gained only 10% and Yahoo and Microsoft slipped slightly. Interestingly, the Facebook time explosion even occurred at the expense of online video: with 3:13hrs per user last December, it remains quite high but it is down slightly, by 3.4%. And the Facebook effect probably explains why people are visiting a smaller number of web sites: 83 domains visited last month, a surprising 23% drop in just a year.

The advertising spending is shifting as well. In the US market, between August 2008 and August 2009, the amount spent online by brands decreased by 2%, as  the money spent on top social networks and top blogging sites increased by 119%. Unfortunately, this is done on the cheap: based on 2009 revenue estimates, Facebook is grossing about $1.5 per user and per year in ad revenue. Just to put things in an unpleasant perspective, this compares to the $647 a newspaper such as the Washington Post gets from its print advertising for each of its buyers or subscribers. Make that $215 for each of its readers assuming a rate of three readers per copy. (This is based on the full 2008 year).

Coming back to the title of this column, analyzing trends has become more complicated: audiences are no longer monolithic, their breakdowns are hard to ascertain. This uncertainty makes an average a less and less relevant notion. For an online newspaper, what is an average reader? Consider two readers and focus on their different level of engagement. One is glued to the New York Times, Le Monde or Aftonbladet on his/her iPhone during a 30 minutes daily commute. The other, at 7 pm, casually glances at headlines while sipping a glass of chardonnay with TV providing the ambient noise. In this particular example, the level of engagement makes a crucial difference to the value of a reader.

As a result, the notion of heavy users becomes a critical one. The top 10% or 20% can be tied to a type of platform, a time of the day, in addition to the age group, socio-demographic profile, etc. Here are some examples:

Broadband consumption: according to Cisco, the average worldwide household consumes 11.4 gigabytes of data per month. Right. But 10% of those account for 60% of the total bandwidth consumption; and the top 1% of the heaviest users consume 20% of the whole bandwidth. The difference lies in the peer-to-peer volume that accounts for 38% of the traffic. (Interestingly, this number is down from over 60% two years ago.) Another factor is the rise of network-hungry video connection tools that cause the demand for bandwidth to explode during internet peak hours (which are 21:00-01:00 local time).

- Cell phone usage. According to AT&T, the top 3% of smartphone users – most of them iPhone users – account for 40% of the data usage. Again, video and audio exchanges and downloads are responsible for the imbalance.

- Twitter and Facebook. For the first one: 5% of users account for 75% of all Twitter activity and 10% for 86%; one half of all users never tweets, and the same proportion doesn’t not follow anyone.
As for Facebook, a research conducted by BLiNQ Media found out that, for a specific viral application used as a test, only 6% of the user’s accounted for 56% of the traffic associated with the app. In addition, it appeared that this group of heavy users was centered on 37-year olds vs. 25 for typical Facebook addicts.

- Time spent (again). Remember the 64 hrs spent on the net by the average user according to Nielsen? Well, the Digital Future Report came with roughly the same figure (which is reassuring), but with a slight distinction between the lightest users who spend 11 hrs a month online and the heaviest users who spend about 168 hrs – fifteen times more.

When assessing a business model, the importance of knowing the top grossing 10 or 20% of an audience is key. For traditional media with bundled-contents delivered on single platform, it used to make sense to consider the average group of users. In those days, the structure of the media led to an even distribution of revenue, regardless of contents and users. This no longer works for internet audiences: they are more scattered,  segmented than ever and their specific value can make a critical business model difference.  —frederic.filloux@mondaynote.com

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The spread of legends gets worse with the Web. Stories, I’m avoiding the word “information”, travel fast, I’ll sidestep “light-speed”. Yarns bounce around a world-wide echo chamber. If I hear it from five sources, it must be true. Never mind the so-called sources heard it from one another in sequence. Worse indeed, as the Web never forgets, everything gets cached, archived and will be unearthed by search engines.
This creates a need and entrepreneurs pop out of the quantum vacuum ready to fill it: a Google search reveals at least three companies, reputationrestore.org, reputationrestorer.net and restore-reputation.com who promise to clean up your besmirched Web image. Actually, these three look like the same company and, at the risk of unfairly tarnishing their own rep, they look like one of these only too frequent scams purporting to protect you from scams. Ah well…

So it goes for a tenacious legend, the one that Apple “lost” the market because it failed to license the Mac operating system to “everyone” and thus get to own the market instead of losing it to the “obviously inferior” Microsoft product.
A few days ago, no less than über-blogger Henry Blodget, the Internet Bubble repentito now head of Business Insider blog hub fell for it. This industry observer who admitted he never set foot in an Apple Store, not a sin if your territory is the quick oil-change industry, chides Apple for “making the same mistake again”. In Dear Henry’s view, just like in the 80’s, Apple insists “on selling fully integrated hardware and software devices, instead of focusing on low-cost, widely distributed software”. As a result, Apple will lose to the Open Source Android, just like Apple lost to Microsoft.

I know we shouldn’t let facts get in the way of a good story, but let’s take a closer look at today’s as well as yesterday’s data.

Today, Android is free. This, in effect, sets the market price for smartphone licensing deals. Ask Microsoft. How do you tell Motorola or HTC they ought to fork $25, or $15 for a Windows Mobile license while Android is free (and arguably better…).

In this context, how does Apple charge for the iPhone OS? How do they replace the $400 or so they make per iPhone (approx. $600 they get in direct $199 plus $400 or so in carrier “revenue-share”, minus $180 in hardware costs)? As the joke goes, do they make it back in volume? Or in App Store revenue, an estimated net $500M in 18 months? Great but no match for the tens of billions (multiply 50 million iPhones and iPod touches by $400…) of hardware sales.

Apple could indeed end up “losing” the smartphone market to Android, just as it “loses” the PC market today, making more money than Dell and HP combined, they with a 33% market share and Apple with less than 10%. (More details in the November 1st, 2009 Monday Note.)

Ask GM how they feel about a “tiny” Bavarian automaker.

Of course, Apple can make an inferior product and lose for good. No customers, no market share, no margins.
Which isn’t too far from what actually happened with the original Macintosh. I know, I was there.

We’re back in 1981. IBM introduces the PC . At the time, it’s pretty much a clone of the Apple ][, slots, a cassette tape interface, game controls and all. The big difference is a 16-bit Intel processor, the 8086, whose four digits where used for the ending of Microsoft’s original corporate phone number, I’m not kidding. The then reigning Apple ][ has the 8-bit 6502 processor, a dead-end architecture, as the supplier, MOS Technology, can’t provide a credible transition to a 16 or 32-bit world, markitecture BS notwithstanding.
The PC evolves, gets faster with newer Intel CPUs, with the crucial inclusion of a head disk and the even more epoch-making advent of the first “killer app”: Lotus 1-2-3. Written in assembly language, lightning-fast, Lotus 1-2-3 is called an “integrated application”, the rage at the time, as it incorporated a spreadsheet, a word processor and a database. I know, because to some people’s chagrin, in a small cubicle behind my office at Apple, I maintain a PC.

When the Mac comes out in 1984, this is what it faces. The original Mac clearly shows great promise, its user interface is clearly superior and it builds on the lessons learned from Lisa’s failure. (Lisa was Apple’s first bit-mapped screen and mouse driven machine of 1983.)
But the first Mac, for all its promise and sexiness, is slow, buggy, with a small screen, no hard disk, no color and no application software that could compete with Lotus 1-2-3.
When Steve Jobs came back at Apple in 1997, he brought in a team of experienced engineers from NeXT, promptly killed the half-hearted licensing program that was siphoning off the company’s hardware margins - you can’t be in both the hardware and the licensing businesses at the same time. Over the years, a steadily improved product and a tight control of the layers of the user experience, including the Apple Stores, produced the revenue and profits we know.

But legends live on. How about that almost forgotten one? IBM licensed key parts of the original PC design and, for its reward, lost the PC market in spite of its effort to regain control with a new bus architecture, Micro Channel and a new software platform, OS/2, called “better DOS than DOS” and “better Windows than Windows”.  —JLG@mondaynote.com

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This time, the selected authors of the report titled “Création et Internet” (available here) are: Patrick Zelnik, a music producer, Jacques Toubon, a 69 years-old former all-purpose minister (including Culture in1993-1995) and Guillaume Cerutti, the CEO of Sotheby’s France. Not exactly digital front-runners. As a music producer, Zelnik has brilliantly missed the digital train; Toubon has seen more mice in government offices than on his desk and Cerutti is running an auction house where sales are concluded with a hammer blow, not a touchpad click.

One of the most spectacular strokes of inspiration involves the creation of a taxpayer-subsidized “Online Music Card”. It could work like this: a young internet user, compulsive music downloader, buys a card for €20-€25. But the card carries a face value of €50. Then, after a while — expect a few years for roughly a million of young people above 24 — the magic happens: this crowd mutates into legal download addicts and forgets the appeal of illegal Net music (which, in France, is 20 times more important than the legal variety). That’s a hell of a good news for Apple, its iTunes cards could be bought by the bulk using French taxpayers’ money. Bear with me: that’s Christopher Columbus’ Egg. How come we didn’t think of it earlier? Flooding the young addicted-to-free generation with subsidies to reverse the anything goes, culture-copyright-looting tsunami! You know what? Sometimes, I’m proud of my country.

Second idea, my favorite: taxing Google. The concept, so to speak, is the following. Google is one of the biggest media buyers in the French market with an estimated 2008 revenue of €800m. It comes from small text-ads, that most of the sites carry. If we assume a net profit margin of 27% as in Q3′09 (gross margin is 35%), that leaves more than €200m in profit for the French operation alone.
As a global company, Google optimizes its tax strategy; since France is afflicted with one of the highest corporate tax rate in Europe (34,4%), most companies choose to avoid declaring too much revenue here. As expected, Google leaves only about 5% (€40m) to the French tax system; the bulk of its profit is filed in Ireland where the tax rate is set at 12,5%. These practices, although legal, lay the ground for all sorts of criticism. Not only Google sucks up about 40% of the French internet advertising market, but its huge position doesn’t even benefit the French Treasury. Hence the idea of imposing a tax of 1% to 2% on revenue coming from internet advertising. Of course, all big players would be targeted: Google, but also Yahoo, Facebook, Microsoft, AOL.

Nicolas Sarkozy, always prompt to jump on an opportunity for demagoguery when he spots one (those two were impossible to miss), not only endorsed the report, but also upgraded it. He mentioned a €200 face value for the Music Card instead of the proposed €50, and urged the French antitrust authority to investigate Google’s position in advertising and see if distorts competition. Our “hyper president”, also urged the Minister of Economic Affairs Christine Lagarde to take a serious look at a Google Tax. (Mrs. Lagarde, former chair of the Chicago law firm Baker & MacKenzie must feel very lonely sometimes). She, and the Minister of Budget will have a hard time to come up with a workable solution.

Google is not, by far, the only company to take advantage of the international tax system. Last fall, the French Accounting Office issued a survey of the tax system that triggered a national outrage. In short, when a small business pays 30% in corporate taxes (on average, deductions included), big industrial groups listed in the CAC 40 Stock Index, pay only 8% in taxes, thanks to optimization techniques elevated to an art.
In addition, according to an investigation by the magazine Alternatives Economiques, this very same group of “French Champions” (L’Oréal, Danone, Total, major banks such as BNP or SocGen…) maintains about 1500 tax-optimizing subsidiaries in offshore tax heavens. Even la Banque Postale, the retail banking arm of the state-owned French Postal service is present in the controversial Luxembourg. Is Google really the bad guy in such a context?
The authors of the “Internet and Creation” report acknowledge that the implementation of such tax will be tricky in the context of European regulation (then why the hell floating such an idea?).

This could be funny but it’s not.

Such kind of idea propagates the image of France that, as a country, is unable to adopt once for all a sanely regulated pro-business attitude. Let’s set aside the Online Music Card idea. It is merely a neuronal burst of imagination-challenged lobbyists. As for Google, the question is not the harm it could do — a mosquito bite on a elephant. Rather, the problem is the damage to France’s image in the tech and media world.

By every measure, France is lagging behind the rest of the industrial world in terms of technological innovation. Of course, its elitist education system produces good engineers, but, as Jean-Louis Gassée puts it in a previous Monday Note (see The Other French Paradox), the French taxpayer ends up subsidizing Silicon Valley. More broadly, the rate of private research and development is about 2.1% of GDP; that is below the UE target of 3% and below the OECD average of 2.3%. In France, 38% of the R&D is state-sponsored vs. 29% in the OECD.
At the same time, large French companies tend to increase the share of their R&D performed abroad (it accounts now for 39% of total). And to add insult to injury, the share of non-French multinational companies doing R&D outside of their country of origin is much lower in France (25,3%), as compared to Ireland, Belgium or Sweden which enjoy a share of 40% of their R&D done by foreign companies (needless to say, Google maintains research facilities in Switzerland, UK, but not in France).

The French “Google Tax”, as it is dubbed, generated its share of notoriety (156,000 pages indexed by Google as of Saturday). But there is no matter to rejoice here. Considered in the context of poor attractiveness for high-end tech jobs, this new subsidies/tax eruption is about to become a Gallic business joke as persistent as the beret and the bread baguette. And that’s tragic.

— frederic.filloux@mondaynote.com

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Let’s start with the product.

It’s not really a Google Phone. Its real name is Nexus One and it’s made by HTC, the well-regarded Taiwanese handset maker that produced the first G1 and G2 Android phones — as well as their Sidekick ancestor from Danger. Microsoft bought that company but the CEO, Andy Rubin joined Google as head of the Android team.
But, you’ll object, most cell phones and smartphones are made by one company, a manufacturing subcontractor and branded and sold by another. Apple doesn’t make its iPhones, nor does RIM make any of its Blackberries, to use but two well-known examples. Indeed, the Nexus One is sold by Google at www.google.com/phone. If you already have a Google Checkout account, the purchase process can’t be simpler.

Still, take a closer look at the Terms of Sale. There, you’ll find you have 14 days to return the phone (unless you live in comfy California where it’ll be 30 days). An even closer look at the return instructions reveals you must call HTC’s Service and Repair department, not Google, to return the phone or to get it repaired.
How this will fly with customers used to a retail presence and personal service remains to be seen. When I had trouble with my trusty Blackberry, I walked into the Verizon store and quickly got my unit exchanged. Same when my iPhone suddenly heated up and drained its battery in 45 minutes. Diagnostic software at the Apple store confirmed the problem; I walked home with a new unit and reloaded my backed-up data and applications using the ecumenical iTunes desktop client. This is today’s state of the art and I wonder how Google expects to compete without a retail presence.
Things look even stranger when you recall how Google’s first G1 phone was sold and supported: through T-Mobile’s retail network, one whose good reputation for competent service I could verify when I bought a G1 more that a year ago. Why did Google take what looks like a step back? Especially when the Nexus One is designed for T-Mobile’s 3G network.

One possible explanation: Google is worried about the linuxification, the babelization of the Android platform and applications. Android being an Open Source platform, handset makers and carriers are free to modify it as they please. And, in their view, modify they must because they need to differentiate themselves, to create exclusive hardware, applications and UI features. Otherwise, they’re doomed to a race to the bottom, to ever decreasing margins as Google benignly smiles on. But the G-smile disappears if Android applications don’t run everywhere. Imagine how much less money Microsoft would make if PC makers were free to modify Windows as they pleased.

All this puts Google into a challenging position: they put out a reference product, the Nexus One, with full control of the “stack”: hardware, OS, applications and UI, arguably better than what’s available to their “partners”. But they let said partners modify Android as they see fit.
Will this last?
We’ll have to see what happens with other carriers such as Verizon, one that is ferociously opposed to interlopers telling it which handset and what applications run on its network.

Google could become a softer Microsoft, one that manages by example and minimize Android babelization. As a result, the platform would offer enough consistency: key Google applications would run well enough on a large enough variety of handsets giving the advertising giant the manageable playing field it needs.

Or Google could decide to become more like the older, harder Microsoft. In practice, licensing terms would change and force handset makers (and carriers) to use one and only one version of Android and Google applications. For free but for sure. This would guarantee the compatibility and clean advertising playing field just evoked. But would handset makers and carriers accept a mere iteration of the Microsoft PC ways? A better Windows Mobile, free.

In its quest for dominance, Google faces two well-managed and very focused adversaries, RIM, whose Blackberries are the US best-sellers, and Apple. In the coming months, we’ll see which path Google picks to gain the upper hand over those two: the Linux way (today’s strategy of record), the softer or the harder Microsoft.

—JLG@mondaynote.com

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Paywalls. 2010 could see a significant number of newspapers jumping into the paid-for option. Among the conditions to be met:

- Grouping around a toll collector. It could be Journalism Online in the US, a big media group in Europe, or even Google — should a truce occur between the search giant and publishers. From the user’s standpoint, the payment intermediary must be friction free, able to operate on any platform (web, mobile) and across brands.
Publishers will have to devise a clever price structure. If a knee-jerk move takes them back to the tired basic-content vs. premium-content duality, they are doomed.
- State-of-the-art web analytics affords much more refined tactics around users, platforms segmentation, etc. In addition, a paid-for system must be able to deal with many sources of income, such as monthly subscriptions, pay by-the-click, metering system based on downloads, time spent, etc.
- Publishers must act in concert. In every market, the biggest players will have to carefully coordinate their move to paid-models: everybody must jump at the same time. This is easier said than done: there is always the risk a rogue player will “cheat”, that is break the pact in order to secure a better market position. Also, too much “coordination” could encourage a disgruntled competitor to sue on anti-trust grounds.Daily newspapers shifting to periodicals. How many dailies in the world will shift from seven or five issues a week to three or two? Undoubtedly, many. This is a better trend than it sounds. For breaking news, print is no longer relevant, but it will remain the medium of choice for long-form pieces. Newspapers publishing a few times a week will gain by becoming more magazine-like in their news coverage; they’ll save their story-breaking capabilities for web versions. In this regard, the mobile web will soon become bigger than the original, PC-based variant.
The “instant web” such as Twitter and its offspring will thrive in 2010. The likeliest offshoot is video-twittering as pocket size camcorders continue to spread (see Gizmodo comparison here). These will be supplemented by an upcoming generation of high-definition devices with Net connectivity through wifi or 3G networks.

Advertising Disintermediation. The media buying side is definitely not the sector to be in for the next decade. First of all, ad spending will continue its adjustment to the actual time spent on various medias. In 2008, print captured 20% of advertising dollars for only 8% of the time spent; in comparison, digital got 29% or our time but 8% of ad spending. Those numbers, those discrepancies tell us the correction is far from over.
Unless they devise smarter ways to analyze web audiences (see below, the audience measurement issue) and, as a result, clearly define the true value of each group of users, there is no longer a need for the media buyers’ costly intermediation. The trend is there: the most agile web sites will go directly to brands and advertisers, they will propose sophisticated integration mechanisms for their sites and mobile platforms. So do social networks such as the 25m users French Skyrock (see our case study).
Anyway, Google will settle the intermediation issue as its boss candidly puts it in Ken Auletta’s books (1): “Google wants to be the agent that sells the ads on all distribution platforms, whether it is print, television, radio or the internet. (…) As our technology gets better, we will be able to replace some of their [large companies] internal captive sales forces”. Media buyers, consider yourself notified: you’re toast.
As for the creative side, we hope advertising agencies will, at last, wake up and think of new ways to integrate their messages in digital media layouts (as in print), rather than trying to divert users away from media sites (see previous Monday Note on the inherent design flaws of the internet).

Audience Measurement. The mediocrity of internet audience measurement tools is largely responsible for the collapse of CPM (the cost per thousand page views). As long as the approximation level stays as high as it is today (30% - 40% margin of error), as long as the market keeps relying, for the most part, on a single stats providers (Nielsen) without further questioning its methodology, prices on the internet will remain low. Publishers’ passivity is just incomprehensible. The shrewdest ones manage to artificially inflate their audiences — but their games won’t last. Again, Google could settle the issue. The search engine is the biggest single repository of internet traffic data. It could decide overnight to team up with a panel-based system and give away web sites statistics, better numbers than the ones sold today at high prices. That day, Nielsen will be in serious trouble — and it won’t be mourned.

User-generated content and the blogosphere. For the “citizen production”, the most likely evolution is a clarification between an ever more corrupt amateurish ecosystem and an increasingly professional amateur segment. The former will become less and less credible. On the general news side, irrelevant “noise” is getting louder. And for the consumer news, a growing segment of the blogosphere is venal, i.e.: sold to brands. In the consumer electronic segment, for instance, the number of a good reviews a product gets is increasingly disconnected from its actual virtues; instead, such number is tied to the brand’s ability to carpet-bomb the blogosphere with free samples, which are lent, of course, but never claimed back (see our story Rotten Apples in the Reviews Barrel). In other words, you should trust Consumer Reports or your usual sources more than that the average “independent” soldier from the “blogger army” (the latest term of art devised by marketers).
On the other hand, the blogosphere will remain an endless supply of true expertise, analysis and opinions that will challenge and stimulate old media. But it might become trickier to sort the good from the bad. We can expect (and hope) to see this small segment of the blogosphere to become increasingly professional, with more fact-checking and editing. If only monetization could follow… (About the blog ecosystems, see Technorati annual State of the Blogosphere with tons of data and analysis).

Tablet Expectations. This Christmas season, Amazon sold more electronic books than physical ones. That’s a milestone, for sure. But today’s Kindle looks like the Trabant of the digital age. What seems to be the first iteration of the device might likely flourish in vertical markets such as education (see the Monday Note about The e-book tractor application). But to achieve mass adoption, an electronic reader for books and magazines might have to look like this spectacular concept envisioned by the Swedish publisher Bonnier with its “Mag+” project. Hence the high level of anticipation with the tablet expected to be introduced by Apple on January 26th. Two looming questions: a) How close could it come to the Bonnier Mag+ concept? b) For the publishing business, can Apple emerge as a disruptive force comparable to the one it became for the music industry? The introduction of a tablet or a slate is likely to be boosted by contents agreements with partners such as Condé Nast and other leading publishers. After all, Apple could come up with the killer technology, it already owns the content distribution and transaction platform: iTunes. This might turn out as our n°1 topic in 2010.

Finally, you are now about 3000 reading the Monday Note every week. Let me thank you all for your support and your insight and wish you a great year 2010 full of unexpected innovation.

—frederic.filloux@mondaynote.com

(1)Googled, the end of the world as we know it, by Ken Auletta, Penguin Press, 2009. In my view the best business book of the year.

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Microsoft 2.0 a.k.a. Google.

What is known: In its heyday, Microsoft strived to be all things to all people, from Office applications to Consumer Electronics (Windows CE), to Enterprise Computing (Exchange, Windows Server, SQL and Jet Servers and more), to mobile phones (WIndows Mobile just re-christened Windows Phone), to games (MSX and now the Xbox), to the Internet Explorer, .Net and now various Windows Live offerings and the Bing search product. And even more, such as various attempts at image processing for pros and consumers.
Now, we have Google with a similarly all-embracing land grab on the Web, from books to smartphones, from CAD software (yes, Sketchup) to music, video, “office” applications, collaboration, digital photography, application hosting, a payment system and more.

What is worth watching: When will Google’s “organic” growth start showing its limits? No tree ever reaches the sky. Google’s current strategy is eerily similar to Microsoft’s old “jump on anything that moves”. And, yes, it is smart to make Google a universal destination by using advertising revenue to finance free offerings that, in turn, channel more viewers to Google advertising.
But, eventually, the organism starts drowning in its toxic waste, meaning Google will face management tasks beyond its reach, or advertising revenue wont be able to subsidize everything else for ever, or it will slip and miss an important emerging trend such as social networks, see Facebook below.

Or, Google will become too powerful for the public good, destroying competition only too well and politicians will have their way with the Mountain View company. Unless Google learns, gets the better lobbyists and has its way with us like Wall Street, Big Pharma and Telecom companies, to name the best, do.

Microsoft 1.0.

What is known: The company makes tons of money but fails to be a player in the new world of smartphones, search, advertising, media players, content sales and social networking.

What is worth watching: How long will Microsoft’s Board keep supporting its current CEO, Steve Ballmer. Is the Board too influenced by the Bill and Steve team, or will it realize it needs a Carlos Goshn?

The Linuxification of Android.

What is known: Linux promised to take over the desktop but failed to do so. The main reason? There is no real enforcer with the power to impose one and only version of Linux. Not of Linux the OS, but Linux the total end-user solution: OS + UI (desktop User Interface) + a minimum set of standard applications. As a result, Linux succeeds inside server farms where IT organizations control it and mold it to their requirements. But, on the desktop, Linux is babelized and fails to achieve significant market weight against Windows and Apple’s OS X.

What is worth watching: Android is an Open Source Linux derivative for smartphones. As such, handset makers are free to modify and adapt it to their own needs. Handset makers desperately need differentiation; otherwise, they’ll all race to the bottom, to infinitesimal margins. As a direct consequence of such urgent quest for differentiation, they’ll babelize Android in the same way netbook makers have fragmented Linux (and refocused on Windows as a result).
Google is well aware of the risk, that’s why they’ll introduce a Google Phone this week, a handset made by HTC but whose design, hardware and the whole software “stack” (OS + applications) is under their total control. Ironically, “à la Apple”.
What this will do to other Android adopters such as Motorola (even if the Droid suspiciously looks like it’s made by HTC) and carriers such Verizon is definitely worth watching.

Facebook becoming the Internet.

What is known: Facebook now has more than 350 million users and generates one in four pageviews on the Net. Sometime this year, Facebook will reach half a billion users. Even more interesting: Facebook is no longer a network for college kids and young adults, recent Web analytics show the category of users aged 35 to 54 has grown 190% and the 55 years and older segment grew an astounding 513%. For many users, Facebook is the destination, the jumping point from which they see the Web.

What is worth watching: What happens once Facebook gets more assertive in selling ads to their user population? What if Facebook ends up launching a neat micro-payment system. Could they sell digital content as effectively as iTunes does? Could they take significant advertising revenue away from Google who missed the social networking wave?

iTablet consequences.

What is known: Tablets (or e-readers, e-books) are touted as the next “in” gadget. No self-respecting electronics company can be seen without one. I don’t know if Apple execs will show one late this month and, if they do, if it will be successful. (See the Jesus Tablet note.)
In any event, Apple manages to top the pre-iPhone rumor frenzy with (third party) predictions of 10 million units for 2010. I hear Apple execs having a good laugh and a few grateful thoughts for the free advertising. Playing the mysterious diva clearly works.

What is worth watching: The business model. This will be an expensive product, it will require subsidies. Will it force newspapers and magazines to rethink their paywalls and subscription models to go for single copy sales? Will it force a “paradigm shift”? I mean moving from a paper-centric design with the Web version as a secondary product to a Web centric design (see the Bonnier demo Frederic points to) with the paper version being secondary, culturally and financially. I hope the establishment wakes up and does it. But you know I’m being polite.

For today, I’ll conclude in wishing you a better 2010. 2009 was a difficult year, let’s hope it planted the seeds for a healthier economy, more and better jobs in 2010. Thanks for reading and commenting.

—JLG@mondaynote.com

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• 4bn page views (a big news site makes between 100-300m pages views)
• 9.4m unique visitors
• 1:10 hour spent per visitor (vs. 16-20 minutes for online newspapers)
• 38 pages views per visitor
• for each visit, a viewer will look at 37 pages, and will stay 16 minutes on the site
• every single day, 300,000 new classifieds are posted by 200,000 users
• in a single month, more than 2m people will place a classified ad.
• the site carries an inventory of 9.5m classifieds (vs. 0.8m for ebay.fr).

All of this has been achieved in three years and by a team of 15. Leboncoin is part of a European strategy developed by the Norwegian media group Schibsted ASA: it started with Blocket in Sweden, and expanded to Segundamano in Spain, Subito in Italy, and more recently Custo Justo in Portugal. In France, Leboncoin is a co-owned with Spir Communication (2).

After a careful look at this business and lengthy discussions with Leboncoin’s general manager’s Olivier Aizac, here are some ideas worth considering for news sites.

1 - Simplicity. All these free classifieds websites share the same concept of a bare-bones interface: a map of the country divided by region. Unlike eBay where you pay first, then struggle to retrieve your item, here, you are strongly encouraged to deal in person; hence the local and sometimes hyper-local approach. The search mode has proved its efficiency: you select region, postal code, 40 categories, and price. One sign such clarity is key: eBay copied it for its classifieds  business.

2 - Confidence in the concept. In other words: “our brand, our users”.  When free classifieds took off, so-called “meta search engines” appeared. Like Google News for the news, meta engines aggregate classifieds from other sites, make them accessible through a good search interface and send traffic back to the original sites. In the process, they make lots of money thanks to Google text-ads. In France, one of the biggest such meta engines is Yakaz: it carries about 3.3m classifieds from a thousand sites. This fast growing site is well served by a remarkable search interface (Leboncoin’s search is weaker: it generates lots of noise, i.e. unwanted ads).  “We quickly decided that we’d be better off building our own traffic”, explains Leboncoin’s Olivier Aizac, 35. “We prevented Yakaz and the like to crawl our site. These guys built their brands on the back of others. In the beginning, they send traffic back to you, for free. Then, once you’re hooked, they propose to charge you by the click for the traffic they funnel back to you. We believe it is not in our best interest to help them since we might end up competing head-to-head”.  This has to be compared to the way publishers attempt to manage their relationship with Google. These publishers keep trying a wobbly dual (neither completely for or against) strategy directed at aggregators: see a previous Monday Note, The misdirected revolt of the dinosaurs.

3 - Exclusive, proprietary value proposition. “We spend a great deal of our brain cycles thinking in terms of what is really exclusive to our concept, and how to keep it that way”, says Aizac, who is a business school graduate and an avid news consumer. He believes that online newspapers haven’t worked enough to develop and display their uniqueness. (To a large extent, he’s right: under the pretense of adhering to established “users habits” and “navigational codes”, news sites do not look for differentiation, their structures are too much alike).

4 - It’s the software, stupid. Leboncoin serves 150m page views per day, roughly 2000 pages per second. That’s about 30 times the rate of a news site. Despite these numbers, leboncoin is lightning fast. Its software is written is C language, much faster than PHP for instance, but more complicated to write and maintain. “Media have a content approach, say Aizac, we have a software one”. He suggests that news medias remain in some kind of post-Gutenberg thinking and that they need to reframe their view by being much more software driven. (I can’t agree more: medias should bring in more software engineers, search, language and data-mining specialists, the ROI is guaranteed).

5 - Free… with paid-for options. Here is an interesting bit. On each euro leboncoin makes (for 2009 revenue, expect a triple digit growth on last year’s 5.5m€, says Aizac), about 40% comes from advertising (Google ads and banners); 20% from services to professionals (real estate brokers who post listings of properties); and another 40% from paid-for options. The idea: people who sell their stuff have different needs. Some are in a hurry and want to quickly unload their items; others face serious competition on their local market (used cars, for instance);  some must move large inventories. For each, there is a service, priced from €1.50 to €4.00. These services keep a classified at the very top of a page, or allow it to be modified at will, to be labeled it as “urgent” (usually pointing to good bargains), etc. Leboncoin’s development staff spends time fine-tuning such options. The idea is to increase the number of sellers who see it’s in their interest to pay for these services. “Between advertising and paid-for options, we don’t know what will be mix in the end”, says Leboncoin’s boss. “But we are going to test everything: new options, pricing, efficiency”.
In our discussion, Aizac suggested that online news sites should consider the same approach: a free basic service supplemented by a vast array of low-price, paid-for services targeted to the heaviest, most hurried, or semi-pro users. It is all about testing & learning. Something that big medias are still woefully shy of.

—frederic.filloux@mondaynote.com

(1): It ranks n°9 after Facebook, You Tube, Jeux (Games), You, Yahoo, TV, Orange, and Meteo (weather forecast). Leboncoin is also the third fastest growing search term for 2009(A question in passing: Who is dumb enough to search for Facebook on Google?)

(2): Schibsted also co-owns with Spir the free daily 20 Minutes which I edited between 2002 and 2007. Then I’ve been working for Schibsted International over the last two years. –

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As promised last week, let’s dig into a venture fund’s key numbers.

Limited Partners, LP, institutions or individuals put money into the fund. We, the General Partners, GP, make and manage the investments and we split the profits with the LP as the sole compensation for our services.
Over time, the split has varied with the industry’s prosperity and the fund’s reputation, it went as high as 35% of the profits for the GP but, as this WSJ story belatedly explains, is now back to about 20%. In our vernacular, that number is called the Carried Interest or, for short, Carry.
A second number, the Management Fee, needs a bit more elaboration.
As the Carry did, it varied and went up to 2.5% of the fund’s capital; it is now pegged at a fairly standard 2% per year. The Management Fee provides the money needed to run the firm’s operations, pay the rent, associates’ salaries, travel expenses and the like. It also provides fodder for misunderstandings.

The Management Fee is a loan, not a stipend. For the GP to get its 20% of the fund’s profits, both the capital, the money invested by the LP and the Management Fee must be repaid first.
When funds become very large, say a billion dollars or more, the Management Fee gets correspondingly large and can encourage spending habits, thus generating criticism the GP is more interested in the fee than in making money for its investors.
But, you’ll object, the advance must be repaid before profit-sharing kicks in. Yes…, and what happens if the fund doesn’t make money? Are the LP losing money while the VC enjoys a good time, living off the Management Fee? The answer depends upon the way the fund agreement is written. If it contains a Clawback clause, the GP is obligated to return the “unearned” fee. As you can imagine, this leads to interesting exchanges during the fund’s formation and, much later, if it turns out it loses money.

To summarize: profit sharing (Carry) of 20%, a yearly advance of 2% of committed capital (Management Fee), to be repaid before profit sharing kicks in.

Let’s move to the heart of the matter: making investments. Here, let’s focus on a basic, oversimplified but usable formula:

We like to invest between $3M and $15M to end up with 20% of a company worth $250M when it “exits”.
“Exit” can mean going public through an IPO (Initial Public Offering). IPOs are rare these days, they’ll come back when the economy does. In the meantime, exits are achieved through M&A (Mergers and Acquisitions) deals, that is the company is sold to a larger one such as Cisco, Google and countless others who thus get access to valuable technology and/or people. In may respects, we, the VC, have become an engine of “externalized” R&D, of technical innovation for larger companies. We make and manage speculative investments in riskier technologies on the big companies’ behalf. This is a meaty topic all unto itself, maybe for a future Monday Note.

Going back to the numbers, they need three qualifications. First, they’re only valid for a mid-size fund, in the $200 to $400M range. Larger funds, billion of dollars, can’t make “small” $5M investments, they deal with bigger projects requiring larger amounts of capital such as infrastructure investments, semiconductors or biotech.
Second, the $3M to $15M bracket covers the total amount poured in over the life of the investment, that is 2, 3 or more rounds, over 3, 5 or more years.
(Add to this we never invest alone, for financial reasons, more capitak, and psychological, we don’t want to “fall in love”, a small (2 to 5) group of investors, called a syndicate, provides more viewpoints, more objectivity.)

Lastly, the $3M, $5M, 20%, $250M set of numbers is a neat simplification, reality gets much more complicated, from outright failures, to so-so, middling results, to the occasional “out-of-the-park” success. It’s not called venture capital (capital risque in French) for nothing.
If we invest “only” $3M and get 20% of $250M, that is $50M, this is more than 15 times our investment. If we risk the “full” $15M, we get about 3 times our money. Either way, it looks good, even if you keep in mind a few hard failures.
But you need to introduce time: how many years did the adventure take? 3 times your money over 7 years yields “only” 17% in compound interest, but 44% if the exits happens after 3 years. (Readers interested in geekier Excel simulations of cash-flows can go back to the May 17th, 2009 and May 24th, 2009 Monday Notes.)

The permutations, the possibilities for success and failure are, pardon the bromide, endless; they make our profession so fulfilling as it engages so many dimensions of human endeavor, from technology to psychology, from the fleeting desires of customers to the hard realities of time-expiring cash.

Finally, on job creation as a result of venture investments:

• A study by the North American Venture Association (NVCA).
• Research by the European Venture Capital Association (EVCA)
• US Census Bureau data analyzed by the Kauffman Foundation showing the net positive impact of startups on jobs while more mature industries lay off tens of thousands.

In Europe and in the US, venture investments are the engine of job creation.

— JLG@mondaynote.com

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Dave Drummond after his speech (photo FF)

In a nutshell, publishers keep complaining about Google’s relentless copyright violations. Tireless Google robots crawl the internet, indexing and displaying snippets in Google News, without paying a red cent for the content they post. As a result, said Gavin O’Reilly, “Google makes tons of money on our back”.
Dave Drummond’s reply: “We send online news publishers of all types a billion clicks a month from Google News and more than 3 billion additional visits from Search and other Google services. That’s about 100,000 business opportunities - to serve ads or offer subscriptions - every minute. And we don’t charge anything for that!” He added that Google practices were fully compliant with the Fair Use principle.
Fair Use is “A tired rhetoric”, snapped O’Reilly.

At this point the discussion gets technical. And interesting. At stake is this a crucial evolution of copyright, from a binary form (authorized ≠ forbidden) to a more fuzzy concept (use is allowed but restrictions apply). This evolution of copyright is tied to the Creative Commons (coined by Law professor Lawrence Lessig), which define a sort of shape-adjustable notion of intellectual property.

Here is the first catch: how do you translate an intellectual construct such as flexible copyright into a computer protocol ? In Hyderabad, publishers re-ignited a nerdy quarrel over the best way to protect their news material. That’s the Robots.txt vs. ACAP issue.  Non-techies, please stay with me, I’ll do that in plain English here (and I’ll pursue in French next January on Slate.fr).

Robots.text is a 1994 protocol (two years before Google was incorporated), these were the early internet days. It works like this:

Say I’m an online publisher. In the tree structure of my site I decide to open selected branches (directories) to search engines robot crawlers. The result of the crawling can be regurgitated by aggregators like as GoogleNews.  But, for reasons such as copyright restrictions on material I don’t own, parts of my site need to be kept out of Google’s sight.
For total prevention of unwanted crawling, I’ll just insert two lines of code at the root of my site:

User-agent: *

Disallow: /

The first line carries the name of the robot I want to exclude (”*” means all) and the second line specifies the directories I want to protect. For example :

User-agent: Googlebot

Disallow: /sport-foot-ligue1/

Disallow: /sport-football/

Disallow: /sport-rugby-top14/

Disallow: /sport-rugby/

Here, the site of the French paper Le Monde will prevent the Google’s indexing robot from crawling sports directories about football and rugby.

It’s simple as that. To get an idea of the various protection policies implemented by news sites, just type the extension  “robots.txt” after the url. Example: http://www.timesonline.co.uk/robots.txt. There you see the list of all the robots the London Times wants to “disallow”. Interestingly enough, even though Rupert Murdoch is at the forefront of an anti-Google crusade, his notorious British media property is not excluding Google at all ; same as The Australian, another historical Murdoch property which is rather robot tolerant (see by yourself). I love such duplicity — sorry, pragmatism. (Actually, the fight is about a MySpace-related advertising contract).

Facing our clunky but straightforward robots.txt protocol, here is  a much more modern one: ACAP. It stands for Automated Content Access Protocol, and was created in 2006. But more importantly, it is backed by 150 publishers and by the WAN.

Here we are.

ACAP and Robots.txt look similar: lines of simple code, put at the right place to define the bot(s) and /, that is the directories to be excluded. Except that ACAP is way more sophisticated. Specifically, it can tell:

• how many lines of an article the robot is allowed to suck in
• assign a specific abstract (snippet) to be taken by the bot
• at what time the bot can crawl what part of the site, for instance “0700-1230 GMT”
• at what rate it crawls
• block links to a part of the site
• assign a term limit for the validity of the abstract
• decide which country (IP numbers) should be allowed to see what (here comes the balkanization of the internet : bad idea)

… etc.

Which one is the best ? ACAP in theory. It dramatically increases the granularity of the terms of uses of any given contract. To get a full and, I think, balanced perspective, go to this detailed article of Search Engine Land.

But here is the second catch: Google superbly ignores ACAP; the company’s position is the Robots.txt protocol does enough to protect contents. Hence WAN’s president’s ire.

I asked to François Bourdoncle, CEO of the French search engine Exalead for his view of the discord. In 2007, Exalead became the technical partner for the publishing consortium that wanted a better system than Robot.txt. (Exalead did the prototype pro bono).  If we consider the best protocol is the one that is the most widely adopted, ACAP is toast: its version 1.1 has been adopted by 1250 publishers, compared to the 20,000 sources that went on GoogleNews.

François Bourdoncle offers the best analogy to describe the antagonism between the online media and Google: “It is the  craftsmen of the information world vs. Industrialists”, he says. On one hand, you have the publishers: they manage thousands of documents on each of their web sites. They signed complicated copyright contracts, with clauses defining the nuances in authors’ protection. On the other hand, you have the likes of Google. For them, the unit of measurement is the billion of documents. There is no room for finesse, here. The problem is  one of massive processing, one that can be only be dealt with powerful algorithms. I mean: The Google way. Publishers want to be able to define the number of lines a bot can draw out from a story? Google will say: I want to be the only one who defines how my search or crawl results (in Google News) actually look like ; if site x wants abstracts limited to 3 lines and site y agrees to 9, that’ll be a mess. When the Googleplex geeks decide it’s time, they’ll upgrade the Robots.txt protocol to bring it closer to ACAP — and to keep the widely adopted protocol their own.

Fact is, Google is playing bad politics here. It is stunning to see such deployment of raw brainpower so badly messing up its relationship with an important and significant partner such as the media industry. Here are some measures that Google should consider to lower the tension:

1. Robots.txt is an old thing. OK, it does the job someway, but Google should adopt ACAP pronto.
2. Alternatively, it should work out something close to it, along with the publishers. Contrary to what the WAN says, it won’t change the deteriorating economics of online news but that will be a welcome symbolic gesture.
3. Google should organize ASAP a serious gathering at the Googleplex to listen the publishers’ position on copyright, but also on traffic and revenue sharing and pay walls. In every major news organization in the world, there is plenty of smart people managing big news sites who don’t carry an anti-Google bias. They should be asked to come up with real proposals and be allowed to expect real answers.

The worst mistake Google can make at this stage is to continue to ignore publishers’ claims. Every news organization got it: Googles now rules the online publishing world. But with dominance come obligations. Displaying magnanimity could be a good tactical move. Because a new factor has come up. It’s called Microsoft Bing (the search engine), and it is waiting to capitalize on the ailing publishing world’s anger. The Googleplex engineers should integrate that in their master algorithm.

— frederic@filloux.com

(1)  I received many emails regarding last week’s mention of the Mirror.co.uk ’s strategy  on how to deal with Google. Readers challenge Mirror’s Associate Editor Matt Kelly sometimes in a rather documented way (thanks for the contributions). I’ll address the issue in January.

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This week, as promised, I’ll deal with “mere matters of implementation”, questions and objections.

Sadly, I’ll explain the adjective in a moment, the first objection my compadres and I get is one of jobs outsourcing, or délocalisation: “When you transplant these companies to the Valley, French jobs disappear in the process.”
Understandably, if the company’s management team pulls up stakes and move to Mountain View or Palo Alto, there is a sense of loss, they’re gone, their salaries used to feed the local economy.
But, that’s where the “sadly” comes in, there seems to be little faith in the company’s success and in the resulting job creations back in France. Sometimes, I wonder if this lack of faith can’t be summarized thus, using a metaphoric pizza slice: to get a  bigger share, one can worry about its angle, is it 12 degrees or 15 degrees, or one can work to increase the pizza’s radius. Do we prefer a healthy but smaller company, all located in Brittany, or do we want an even healthier, larger enterprise, creating more jobs, both in France and in the US? Posed like this, the rhetorical question fails the “can you disagree” test, it’s framing.
For a way out of the frame, let’s turn to economic interest; in plainer English: making money.
The way we structure our investments in “transplanted” French startups keeps at least 50% of the engineering work, jobs, in France. We don’t do this because we’re nice guys, we want this because it makes economic sense. Let’s review.

First, Valley engineering projects are always “distributed”: parts of the team are local, others are all over the world. The Internet, VOIP, teleconferencing, “virtual presence” is now the term, all help teams work on a single project from several locations. The “day shift” works on the next version (release) of the operating system and, at 7pm, clicks on “build”, assembling the software modules into a testable object. This is a  complicated/automated process, it can take a couple of hours.
Back in Montpellier, France, the “night shift” comes to work at 7am (they’re engineers, not the normal type) and start load-testing the latest build. They log bug reports on the system, issue pithy email challenges to the day shift team’s intellectual virility and generally do their share to improve the product. The next morning, the day shift comes back to work in California and, as we say here, moves to the “rinse and repeat” procedure. Being 9 time zones apart is a blessing, it increases productivity, keeps people at work or at sleep instead of idly watching over each other’s shoulder.

Second, there is the small matter of cost: today, Valley engineers cost more than their French brothers and sisters. This is due to a combination of high demand, Google, Apple, Facebook, Twitter, Cisco, HP and so many others are hiring, and cost-of-living issues, mainly horribly expensive housing. Palo Alto real estate is more expensive than Paris’ or Beverly Hills’.
There is more than raw cost. I now have to tread delicately. As much as I love my fellow Valley geeks, I sometimes feel a je ne sais quoi in the air, a faint sense of entitlement, an occasional bout of me first coupled with a not-so-sporadic relaxation of the legendary work ethic. In other direct words: French engineers in France are good for business because they’re less afflicted with the Valley attitude. Our formula calls for transplanting the management team so they become part of the multicultural Valley brotherhood. And for keeping as much engineering work in France as possible.

Sometimes, in his presentation, an entrepreneur falls into what I call “explanation overload”, the fifteen (unranked) reasons why the business model will work. Not a good sign. What follows could expose our thesis to such overload criticism.

I have trouble with the notion of French engineers and business people leaving the country  is a bad thing. French technology needs ambassadors, the French culture virus needs carriers. Already, in a study already quoted two weeks ago, the Invest in France agency shows how insignificant France’s “brain drain” is (2% for scientists to North America), when compared to other European countries where it is as much as 4 to 8 times higher.
People who leave come back, they encourage a movement of ideas and wealth, their example creates hope, it motivates others to take more risk. Innovation breeds innovation. We already know we’ll reboot out of the current crisis through innovation, not “more of the same, only better”.

—JLG@mondaynote.com

Next week, we’ll dig into a venture fund’s business model and we’ll look at European and US venture-related job creation statistics.

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Then, the tide reversed.

Publishers soon realized the Google windfall was not as high as expected. As the search giant kept thriving, their own revenue plummeted. Over the last 12 months, newspapers print and digital advertising revenues have melted: -16% in Western Europe, -19% in Central/ Eastern Europe and -21% in North America.  At the same time, Google is still cruising at a 35% operating margin altitude. The economic crisis and the structural problem of web sites (endless inventories inducing low prices) caused CPM (revenue of an ad per thousand viewers) to drop. This convinced publishers the advertising-based free model wasn’t going to fly. They told themselves that sometime, somehow, readers will have to pay, and that Google, with its all-you-can-eat, free-for-all system, was in fact “doing evil” to they dying business.

That was the backdrop for last week’s 62nd Conference of the World Association of Newspapers (WAN) Congress and for the 16th World Editors Forum (WEF) I attended and spoke at, in Hyderabad, India.

As expected, this 2009 edition of the WAN/WEF was open season against Google. There, Dow Jones’ CEO Les Hinton went after “the false Gospel of the web” and urged the audience: “beware of geeks bearing gifts”. “It is true that Google is at the heart of the crisis confronting journalism today”, he said, although he acknowledged “that the industry is the principal architect of its greatest difficulty today”.
The conference ended with a debate, “What to do about Google?“, the title which, after all, honestly sums up the industry’s embarrassment. Gavin O’Reilly, the elected WAN’s president, delivered a passionate but unconvincing speech. A few years ago, at the Frankfurt Book Fair, Mr. O’Reilly had called Google “kleptomaniacs”. This time, he chose to turn the heat on the copyright issue, denouncing “the countless thousands of bots and spiders that trawl through cyberspace should not presume that “our content is simply their content”.

In doing so, Mr. O’Reilly displayed a great deal of bad faith. He deliberately avoided the publisher’s addiction-to-traffic contradiction that actually is at he heart of the question. For most part, publishers have actually chosen to handle Google as much content as they can. They even paid to do it.

And they had the choice not to. (In the next issue of the Monday Note we’ll explain the ways and means to shield contents form indexing robots)

At the Hyderabad conference, a British media executive delivered the most damaging blow at the Google-guilty-of-everything theory. Matt Kelly, the associate editor in charge the internet operations of the Daily Mirror, has a lot to say about handling the Google dope.  Mr. Kelly’s Hyderabad keynote speech is an absolute must-read for those who want to deal with the Google issue in the best possible way. His take:

• “In our great frantic headlong rush to accumulate users at any cost, many of us were all too quick to sacrifice anything that stood in the way of search engine optimization.”
• …”Content wasn’t king. Traffic was.”
• …” The very CPM model we’d prostituted our brands for online, began to punish us”.
• About the word “users” employed to describe the online audience: “…Online, “users” is about right. They find our content in a search engine, they devour it, then they move back to Google, or wherever, and go looking for more. Often, they have no idea which website it was they found the content on. This was the audience we’ve been chasing all that time. A swarm of locusts”.

Unlike Gavin O’Reilly who seeks refuge in legal quibbles about copyright, Matt Kelly and his Mirror crew decided the audience degradation process could actually be reversed. First of all, 18 months ago, they relaunched the Mirror.co.uk site focusing on the key attributes they considered crucial to the Mirror’s brand. It turned out to be a great success: their mostly UK-based audience grew 100% year-to-year.
Secondly, they spun-off two properties, Mirror Football and 3am, a showbiz gossip website, both designed without regard for Search Engine Optimization considerations. “And the hell with SEO”, says Matt Kelly. “We’re chasing passion, here, not page impressions”. And here is the interesting thing: after just 3 months of operations, Mirror Football enjoys a nice 2m UV/month and 3am about 800,000 UV/mo. Even more interesting: only 15% of the football site’s traffic comes for search engines; for the gossip site, the ratio is below 10%. (For such sites, figures for search dependency would usually hover around 40% to 50%).
To sum up, what Matt Kelly and his crew did is “putting SEO in its rightful place as a tool to be used when appropriate, [and] focusing our main attention on what is unique and brilliant about what each of these properties represents”.

Don’t get me wrong here. I’m not an anti-Google zealot. I actually believe the search engine has, by far, brought more good than bad to the internet in general, and to the news-related contents carried by the worldwide web. Having said that, I also believe Google is a cold-blooded, engineering-driven company. Nothing personal, we’re just doing algorithm optimization, here. Problem is, Google is built on a market-share capture model that turned out to be inherently deflationary.
What I don’t like is the duplicity shown by legions of publishers: pouring huge sums in SEO/SEM to develop questionable audiences, on one hand, and, at the same time, whining about copyright violation and fair use abuses simply because this styrofoam audience is not monetized enough.

“What to do about Google”, demagogically asked WAN’s chief Gavin O’Reilly? With all due respect, Gavin, do what the Mirror.co.uk did: work on what your constituents’ publications can do best in terms of contents, uniqueness, relevance, competence and passion. And stop whining. It’s beside the point and, in the end, embarrassing.

— frederic.filloux@mondaynote.com

I’m not through with this. Next week, I’ll come back to the subject, parse Google’s pathetic defense and analyze the complicated technical issues surrounding flexible copyright.

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First, the Valley aura helps a tiny Palo Alto start-up sell its technology in France. But it doesn’t work the other way around: a Lyons high-tech company will get a polite reception but no orders from the likes of HP, Google or Oracle. While the Valley does sell in France, to sell in the Valley you need to be of the Valley.
Second, French taxpayers unwittingly subsidize VC-backed Valley startups. Graduates from public universities or grandes écoles such as Polytechnique, Centrale and many others come to the Valley and contribute their skills and energy to the companies we, American venture capitalists, invest in. (In passing, thanks to a reader who reminded me HEC, one of the leading French business schools is a private institution.)

The French speak of “refaire le monde au Café du Commerce”, the phrase refers to a suitably lubricated theorizing of the World As It Ought To Be. In moderation, a healthy way to pass the time with friends and to keep one’s debating skills sharp. With little risk of dealing with the “mere matter of implementation” - the one I’ve decided to address today.

After a quarter century in the Valley, after meeting countless French entrepreneurs, students, executives, elected officials and high-level civil servants; after indulging in more than a few of the Café du Commerce sessions mentioned above, in the Valley and in Paris; after more than seven years inside a Palo Alto venture firm, I finally had an idea, one of those that come with the pleasant sensation of the retroactively obvious.

Here goes: Resolve the paradox, build a venture firm exclusively focused on helping French high-tech companies become full members of the Valley ecosystem. And open the firm, its first venture fund, solely to French investors.
This isn’t theory, I’m doing it. As we speak, my co-founder and I have assembled a team, we’re polishing our pitch and prepare to go “on the road”. In early 2010, we’ll be meeting with potential Limited Partners, LPs, the accepted term for investors in a fund like ours, called ArèsVentures.

For French taxpayers, the fund reverses the flow of money; its profits, plowed back in the French economy, provide a return on their investment in higher education; we put the Valley to work for them.
For French entrepreneurs who want to see their work achieve its full potential, who want to see their young company spread its wings on the world stage, we provide the fuel for the journey, the knowledge, the cultural bridge, a crucial ingredient, and the ecosystem connections.

For our investors, we feature what is known in our jargon as a “proprietary deal flow”. In plainer English: Valley VC don’t go to France looking for French start-ups to invest in; French VC don’t go to the Valley looking for young companies to put money into. We invest in companies US VC don’t look for, in ones French VC may view as no longer meeting their risk profile as their management team moves to the Valley.
In addition to the deal flow advantage, we invest in plants, not in seeds, and we help the plants move to the Valley. Less metaphorically, where I work, we often make what is called seed investments. An entrepreneur comes to us with an idea, we like both and decide to risk a relatively small amount of money, say $250K to $500K, into developing, debugging the idea or the prototype. If things go well, we put together a group of VC, a syndicate, and we invest “a few”, 2 to 5, millions of dollars in the company. This we traditionally call a Series A round.
In our experience, making seed investments remotely doesn’t work, these need to be closely monitored in the early formative stages of the idea, of the business model. What I meant by using the word plants above is we’ll invest in companies that have grown past the seed stage, ones with a product, even if it’s not yet fully mature, and with a legible business model, even if it’s not yet generating substantial revenue.

As a result, for our investments and our investors, our LPs, the product and business model risks are lower than they are in investments made at an earlier seed stage. And liquidity happens sooner: for our portfolio companies (the term we use to designate the collection of startups we invest in), it will take less time to “exit”. One possible exit is an IPO (Initial Public Offering, becoming a publicly-traded company). IPOs are not as likely as they once were; they might come back when the economy really recovers. Right now, the more probable exit is an acquisition by a larger enterprise in need of innovative products and people.
My statements about the lower risk need to be nuanced:  we move a French company’s management team to the Valley. (Note I don’t say the whole enterprise, more on this later.) Such relocation comes with non-product, non-business model risks. We plan to mitigate these by having enough financial resources to deal with the transplanting challenges.

Speaking of which, financial resources, we’re raising 250M€, enough invest in 25 companies over the course of the 4 year investment period of the fund. In practice, this represents an average of 20M€ per company. You read this number right: as we always invest in a syndicate, our co-investor doubles the average 10M€ our firm deploys, hence 20M€ per company, considered a solid number in our industry.

Today, I leave many questions unanswered. What about jobs in France? What do I mean by moving the management team vs. transplanting the whole enterprise? What is the business model of a venture fund such as ours, its mechanics? To say nothing of our differentiation and of the challenges we’re staring at.

Stay tuned for upcoming Monday Notes.

— JLG@mondaynote.com

See also JLG’s blog Arès Ventures (in French)

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The second breakthrough happens as I immerse myself in the Life Science course for the same text-message freak, Abercrombie-clad kid who happens to be my offspring. Then, an epiphany. His science professor is an internet fan. Don’t get me wrong, here. As 90% of the 1.3m members of L’éducation Nationale (the world’s biggest employer after the erstwhile Red Army or, worse, today’s Wal-Mart), I’m sure the lady loathes the internet. You see: the net flaunts apalling attributes of foreign technology, it is the vector of free market ideology. Sorry, Larry and Sergei. Your Google is definitely evil, down here.

OK, the web can be convenient for educators. Actually, there is ample evidence the science teacher I’m referring to doesn’t understand what she teaches but, at least, she tries. Parts of her course come straight form the net. To the point where kids systematically google (sorry) excerpts to see where they come from. Needless to say, this is a powerful boost to the teacher’s credibility — to be found in one of the trash bins at the school’s gates.

Stay with me please, I’m coming back to this column’s subject: e-books. Last week, as my son and I lose ourselves in the genome’s arcana for an upcoming school-test, I get my own revelation. As I struggle to decipher the absurdly complex definition of amino acid in a textbook totally deprived of any practical example, my son browses the web in search of an explanation designed for normal humans. He googles genetic terms, lands on Wikipedia, which sends him to Inserm, a world-class French medical research lab. There, the lab’s site links to a better definition which, in turn, opens the door to a more detailed explanation, and so on. All the beauty and grandeur of hypertext, whose structure a 15-year-old boy navigates as if he were born in it — which, actually, is the case: the browser was invented about 15 years ago.

The e-book needs its tractor application and textbooks might be the “killer” one. Way better than the press (its time will come, but at a second stage). Still, media could benefit from a switch to the e-book form.

Here is how it could work.

Technology and price trends are on the learner’s side. Amazon’s Kindle costs $259 for the standard version and $489 for the larger DX model. That’s still a lot of money. According to the research firm iSupply, the basic version carries $185 of technology. Most goes to the screen. Now, factor this:

a) In 1992, ten years after the birth of the PC, a laptop cost $5000 in today’s dollars. Now it is down to a twelfth of that — and every student has one.

b) Competition: Kindle was the pioneer for a mass market product; now, Sony, PlasticLogic and many others are jumping on the bandwagon. Not to mention the next hypothetical iteration of the iPod Touch/tablet, one that could lead to a decisive evolution in the field (picture an iTunes for educational material). Prices will drop as performance increases (there’s room for improvement, e-books are still in their Stone Age).

c) Now, let’s consider the cost of textbooks. According a report from the National Association of Campus Stores, an American college student spends about $702 a year on textbooks (a quarter of which is purchased online); that’s a national market of about $9bn. The breakdown goes like this: all publisher’s costs (including production): 32%; college store operations (margin, taxes, personnel): 23%; author’s income: 12%. Even if we assume that half on the publisher’s expenses is printing, roughly 40% of the total cost of textbooks costs are removed by switching to electronic delivery on e-books. For our demonstration, let’s settle on 30% of $9bn. This yields $3bn. Divided by 18m US students, this leaves $166 to be spent on e-books, which is easily consistent with the price of a mass produced device.

Granted, these are back-of-the envelope calculations. But it shows that, applied to the educational market, e-books make sense, especially if you consider the inherent advantages of the platform: size/weight, net connectivity, “infinite” capacity with Cloud storage, shared annotations…

E-textbooks can boost the media sector as well. Think about the bottomless inventory of historical moments compiled by big medias. Imagine a history course on the fall of the Berlin Wall, academic texts written by professors supplemented by a vast range of material from media organizations: on-the-spot accounts from papers or newswire agencies, photographs, radio sound bites, TV networks footage, animated infographics, all of it structured in a multi-layer reading system.  There is no single discipline that can’t be greatly enhanced by digging into the media archives of trusted media sources.

My son’s life sciences courses would definitely look better. He would see an animation of the DNA’s double helix, learn about its discovery in 1953 by Drs Watson and Crick. More entertaining, he would read a profile of Craig Venter who sequenced the human genome and now hopes to created synthetic life. He would see the impact of modern genomic on our society through great journalistic stories such as this one.

I would love for all teenagers in the world to discover the extraordinary appeal of life science that way.  — frederic.filloux@mondaynote.com

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Foie gras, crême fraîche, butter, red wine — and lots of it! All these excesses leading to a higher life expectancy, to say nothing of the joys of sinning. That’s the legendary now official French Paradox. Scientists strain to explain the phenomenon: ‘It’s the phenolic compounds in the red wine’, they say. Me, I look at eating habits in my adopted country: restaurant chains like the Cheesecake Factory, “family-style” servings,  food everywhere, everyday, at all times in offices like Google’s.
Methinks there is no paradox just quantity, 360 degrees and 24/7 availability, as the recent but unmistakable widening of French bottoms attests.

No doubt, these must be Thanksgiving hangover-induced thoughts. Let’s turn away from arteries-clogging food and contemplate another set of incongruities.

Silicon Valley VCs (like me) are subsidized by the French taxpayer. Yes, bear with me, no fancy science, no magic involved.
It goes like this: a young kid performs well in high school, s/he is “tagged”, put on the higher education track, prep classes, “grandes écoles”, top-level business, government and engineering schools such as Polytechnique, HEC or ENA and their many local siblings. Such education is essentially free, that is paid by French taxpayers.
The young graduate starts working at one of the big French companies, Thales, France Telecom or Airbus. Soon, an alumnus calls: I’m at Google, or Apple, or Cisco, or this little Silicon Valley VC-funded start-up, come and join the fun. Indeed, graduates from prestigious French higher-education institutions are everywhere in the Valley. VCs have learned long ago to look beyond the “35 hours” and “5 weeks paid holidays” reputation. Actually, we know the “locals” got a little lazy over time, like New York Jewish families wondering why their sons and daughters now lose the Math Prizes to the children of Chines immigrants. First generation immigrants are naturally hungrier than the more prosperous third generation families. The famed Silicon Valley work ethic is too often a pose; new immigrants, in general, and French ones, in particular, are viewed as harder-working than some of the too-cunningly-adapted natives.
Paradoxically, that word again, the constraints, the obstacles of a highly state-regulated culture tend to sharpen creative skills — highly valued ones in our entrepreneurial Valley. In  France, defeating regulations is a national sport, a point of manhood.

The bottom line is we VCs like those French graduates and we know why: they’re “fundable”, meaning it’s worth investing in projects they’re involved in, we’ll make money together. As for the French taxpayer who provided what we sometimes call seed money, well, how do you put a price on pride?
Is this a brain drain issue? Not really. You can’t and you shouldn’t close borders. People carry viruses. And they also carry ideas, culture, reputations, technology. If France wants to export its technology, its culture, these viruses need carriers. Actually, in Western Europe, France is the country whose citizens emigrate the least. Further, people, ideas, technology, culture don’t leave, they circulate, they leave and they come back to enrich the soil they come from.

We’re not done: there is another “unfairness”.

Picture Khufu, Inc. This is a tiny (fictional) company from Mountain View, right next to Google. Khufu, as befits its name, sells civil engineering modeling software. They fly to France and knock on doors at Bouygues, Bertin, Areva and other large French engineering companies. They’re seen and, when their product fits a need, they have no trouble doing business, no one questions their credentials: they’re from Silicon Valley, you see.

Turn the thought experiment around. A bunch of polytechniciens and normaliens left the CNET, near Lannion, in Brittany. At CNET, a world-class telecom research lab, they got an idea for a multi-platform network security agent; as a result, they started a company, Uzec, S.A. The product is good, Uzec gets glowing French customer references. Now, they fly to Silicon Valley and pitch their product to the likes of Oracle, HP, Google, Cisco and Apple. ‘Great stuff, interesting, we love what you do!‘ The French entrepreneurs come home thrilled: ‘Look at all the business cards, we met the Business Development VPs of all these great companies, we’re going to score. And big!’
Predictably, nothing happens. Follow-up emails aren’t replied to, same for voice-mail messages.
The reasons are simple: ‘This is great’ or ‘interesting’ means nothing. This is California-speak, the West Coast equivalent of the Japanese ‘Hai!’
How do you know we’re actually interested? Only when we argue about price.
The second reason is more serious: Uzec founders think they’ll be treated like Thales and Bertin treated Khufu. Wrong. The Valley is rather parochial, we buy from people we know. Where is Lannion? Who are these Uzec guys?

Now, there is a solution: when the Uzec management team moves to Milpitas, in cheap offices, everything changes. Speaking English fluently isn’t a requirement, look or, rather, listen to the accents from around the world. But being, becoming local is a must. And, by being local we don’t mean the proverbial, expensive and ultimately doomed to failure sales office. The locals know the joke and won’t fall for it: the company, its founders aren’t committed to Silicon Valley. Have a nice day.
This doesn’t mean Uzec must pull up stakes and move everyone to Milpitas, au contraire. Today, engineering projects are run by geographically dispersed teams. With salary and lodging inflation, engineers in France are now less expensive than their Valley counterparts. But the management team must be local. Then and only then, it will be accepted and allowed to do business among peers.

‘I don’t make the rules, here, Honey!’ That’s how a bookstore employee once stopped my recriminations as she declined to cash a traveler’s check. We don’t make Silicon Valley rules, we deal with them creatively.

In next week’s Monday Note I’ll discuss what we’d like to do to take better care of French taxpayers and to better deal with the “being local” requirement. —JLG@mondaynote.com

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