Macmillan CEO Fires First Shot in eBook War Against Amazon.com

Th eBook War has begun.

On January 30, Macmillan CEO John Sargent took the unusual step of going public in his company’s dispute with Amazon.com. To explain why Macmillan’s books were taken off of the Kindle and Amazon.com, Sargent took out an advertisement in Publishers Lunch, an increasingly influential blog that covers the publishing industry.

The heart of the war is increasing tensions between publishers and Internet retailers such as Apple and Amazon over the pricing of books in the digital age, an issue that I focused on in my BusinessWeek feature, eBooks: Averting a Digital Horror Story. Amazon has deeply discounted ebooks, typically charging $9.99, and sometime going as low as $7.99. However, publishers don’t take a loss. They are typically paid about half the hardcover’s retail price, whether a digital book or hardcover is sold. But Amazon has been pushing to pay them less, and many publishers think cheap digital books undervalue their product and will open the door to lower industry revenues in the future.

That’s the problem that Sargent tackled in his note. In the ad, Sargent proposes moving to a different business model in which publishers set the price of ebooks and split the revenue with retailer, with the publisher keeping 70%, and 30% going to the retailer.

This is precisely the type of business model and revenue split that Apple is reportedly offering publishers who offer ebooks on its new iPad tablet computer. The growing battle between Amazon and Apple over digital content distribution is going to be one of the most important tussles of the Digital Age. It will shape the future of electronic culture. This is just the beginning.

And publishers should be careful what they they wish for. Many publishers are worried that Amazon will end up with the same kind of pricing power in books that Apple has in music, and that the book industry will suffer the same kind of bruising decline. Now, with the iPad, they are clearly trying to use Apple as a wedge in that fight. But as Tim O’Reilly told me, Apple could very well end up being the dominant player in ebooks.

One reason: More than 50 million people have the company’s iPhone or iPod Touch, which can be used to read digital books, compared with just four million who have electronic book readers. O’Reilly says his company is generating far more sales from Apple customers than Kindle users. O’Reilly currently offers 500 books on the iPhone, compared with 350 Kindle titles. Another 500 iPhone titles are in the works. the iTunes/App store and the iPad.

Whether one company will end up benefiting content providers more than another over the long run is the big question.

Check out Sargent’s letter:
Editors’ note: This message ran as a paid advertisement in a special Saturday edition of Publishers Lunch

To: All Macmillan authors/illustrators and the literary agent community
From: John Sargent

This past Thursday I met with Amazon in Seattle. I gave them our proposal for new terms of sale for e books under the agency model which will become effective in early March. In addition, I told them they could stay with their old terms of sale, but that this would involve extensive and deep windowing of titles. By the time I arrived back in New York late yesterday afternoon they informed me that they were taking all our books off the Kindle site, and off Amazon. The books will continue to be available on Amazon.com through third parties.

I regret that we have reached this impasse. Amazon has been a valuable customer for a long time, and it is my great hope that they will continue to be in the very near future. They have been a great innovator in our industry, and I suspect they will continue to be for decades to come.

It is those decades that concern me now, as I am sure they concern you. In the ink-on-paper world we sell books to retailers far and wide on a business model that provides a level playing field, and allows all retailers the possibility of selling books profitably. Looking to the future and to a growing digital business, we need to establish the same sort of business model, one that encourages new devices and new stores. One that encourages healthy competition. One that is stable and rational. It also needs to insure that intellectual property can be widely available digitally at a price that is both fair to the consumer and allows those who create it and publish it to be fairly compensated.

Under the agency model, we will sell the digital editions of our books to consumers through our retailers. Our retailers will act as our agents and will take a 30% commission (the standard split today for many digital media businesses). The price will be set the price for each book individually. Our plan is to price the digital edition of most adult trade books in a price range from $14.99 to $5.99. At first release, concurrent with a hardcover, most titles will be priced between $14.99 and $12.99. E books will almost always appear day on date with the physical edition. Pricing will be dynamic over time.

The agency model would allow Amazon to make more money selling our books, not less. We would make less money in our dealings with Amazon under the new model. Our disagreement is not about short-term profitability but rather about the long-term viability and stability of the digital book market.

Amazon and Macmillan both want a healthy and vibrant future for books. We clearly do not agree on how to get there. Meanwhile, the action they chose to take last night clearly defines the importance they attribute to their view. We hold our view equally strongly. I hope you agree with us.

You are a vast and wonderful crew. It is impossible to reach you all in the very limited timeframe we are working under, so I have sent this message in unorthodox form. I hope it reaches you all, and quickly. Monday morning I will fully brief all of our editors, and they will be able to answer your questions. I hope to speak to many of you over the coming days.

Thanks for all the support you have shown in the last few hours; it is much appreciated.

All best,
John

Tablet Mania: Why The Tech Industry Thinks Their Time Has Finally Come

Here’s a story I wrote that gives some perspective on the long and mostly disappointing history of tablet computing.

The Next Big Thing, 20 Years Later
The tech industry thinks the time is right for tablets, thanks to lower prices and friendlier features

By Spencer E. Ante

If there was a land of misfit gadgets, the tablet computer would be one of its oldest residents. The tech industry, though, refuses to give up on these slate-like portable PCs. Tablets from Hewlett-Packard, Dell, and others were some of the stars at this month’s Consumer Electronics Show in Las Vegas, while the buzz around Apple’s long-awaited entry into the market, due out this spring, is already deafening. “The industry understands better how people can use tablets,” says Roger Kay, president of Endpoint Technologies Associates.

Yet PC makers have been trying to sell consumers on the utility of tablets for decades—with little success. In 2001, Microsoft Chairman Bill Gates predicted that tablets would be the most popular form of PC sold in the U.S. within five years; in 2009, they made up less than 1% of the market, according to estimates from research firm IDC.

The first generation was doomed by a combination of big price tags, short battery life, and clunky interfaces. Tablets’ capabilities have since evolved, as have the tastes of consumers. Portability is paramount, and the latest crop are lighter, boast longer battery life, and better screen technology. Software is more sophisticated, too, and Web connections have improved. “The timing is right for this,” says Philip McKinney, vice-president and chief technology officer of HP’s Personal Systems Group. “We wouldn’t go into a market that we felt wasn’t going to be widely adopted.”

Read the rest of the Bloomberg BusinessWeek story here.

Exclusive: Apple in Talks with McGraw-Hill, Hachette over Tablet

Apple in Talks with McGraw-Hill, Hachette over Tablet
The maker of the iPhone is discussing ways to include McGraw-Hill and Hachette e-book titles on its tablet, due to be introduced Jan. 27

By Spencer E. Ante

Apple is in talks with the McGraw-Hill Companies and Hachette Book Group to include educational and trade titles on its planned tablet computer, according to people familiar with the negotiations.

McGraw-Hill Education, the third largest educational publisher in the U.S. by sales, is discussing getting electronic textbooks and parts of its online learning system onto the tablet, say two people. Apple has also held talks with trade book publisher Hachette Book Group about distributing e-books on the tablet, says one person involved in the discussions.

Apple’s tablet, due to be introduced Jan. 27, is likely to feature content from a wide range of book, magazine, and newspaper publishers, as well as entertainment. “Everyone is expecting e-book capabilities and services,” says Roger Kay, president of Endpoint Technologies Associates. “This generation of tablets is all about the consumer and media consumption.” As it has pushed deeper into consumer electronics, Apple’s strategy is to combine cutting-edge hardware design with access to music, video, games, and other applications.

The company’s interest in educational content underscores the longstanding popularity of Apple products among schools and institutions of higher learning.

Read the rest of the story on Bloomberg BusinessWeek.

Never Mind Silicon Valley: Boston’s Thriving Startup Ecosystem

ReadWriteWeb just wrote an intriguing post pointing out that venture capital investment and startup activity grew in the state of Massachusetts during the last half of 2009.

In a video of a speech that Jeff Bussgang of Flybridge Venture Partners gave at Harvard Business School, Bussgang contends that Boston has a superior startup ecosystem compared to New York.

He claims Massachusetts is the number one generator of patents on a per capita basis in the U.S.–more than California or New York. “Imagine a steaming mass of innovation,” says Bussgang.

In almost every talk I have given related to Creative Capital, I am asked why Boston has fallen behind Silicon Valley as America’s center of innovation. This talk by Bussgang provides one of the best counterweights to that argument I have ever heard.

Bussgang says there are four factors that help create a vibrant ecosystem:

1. Intellectual Capital: ideas, industries and universities
2. Venture Capital: the fuel that fires startups
3. Angels, advisors and accelerators who swarm around and help startups lift off
4. Successful Companies to partner with, poach talent from and/or sell

The Coming E-Reader Shakeout

Fresh from his first Consumer Electronics Show, here’s my colleague Doug MacMillan’s new story about the growing number of electronic reading devices:

Johnny Makkar is intent on buying a digital book reader. Yet he won’t consider any of the more than two dozen new devices introduced in recent months, many of them at the just-completed Consumer Electronics Show (CES) in Las Vegas. For Makkar, a resident of Fairlawn, N.J., with a background in marketing, only two manufacturers will do, and one has yet to unveil a reader. “I want the e-book buying process to be as effortless as possible,” says Makkar, 26. “Only Apple or Amazon are going to be able to provide that.”

Standing out may prove challenging for many new entrants to the market for e-readers, expected by Forrester Research to double to 6 million devices this year. “Half the e-readers that have been announced [at CES] won’t be around a year from now,” says Forrester analyst James McQuivey.

Click here to read the rest of the story.

Preventing Another Christmas Bomber, Part Deux

Wall Street Journal columnist Gordon Crovitz wrote a great column on Monday with the biting title “Intelligence Is a Terrible Thing to Waste” criticizing the Obama Administration’s policy of treating terrorism as a law enforcement issue. I’ve mostly been a supporter of this approach but Crovitz got me thinking hard about the limitations of such a strategy.

One problem he highlights is that our legalistic approach is harming our ability to thwart terrorist plots because we are giving foreign nationals Fourth Amendment protection against unreasonable searches. U.S. intelligence agencies are using this standard when deciding if and when to put suspected terrorists on a watch list or a no-fly list.

“The result of prohibiting hunches was that [Umar Farouk] Abdulmutallab was waved through. Information about suspected terrorists flows into a central Terrorist Screening Database, which is then analyzed by the Terrorist Screening Center, where FBI agents apply the “reasonable suspicion” standard to assign people to various watch lists including “selectee” lists and the “no-fly” list,” writes Crovitz. “It’s at this point where an approach based on domestic law enforcement trump prevention, undermining the use of information.”

While I agree that U.S. citizens should be afforded these rights, it seems foolish to give suspected terrorists these same privileges. Clearly, we need to have a more flexible standard for determining whether or not suspected terrorists, who often live outside the U.S., deserve to be placed on any of these government security lists.

Crovitz concludes that we face a stark choice. “We can limit how information is used or we can allow smart use of information to prevent attacks,”" he writes. “If we continue to choose to limit how information can be used in our defense, we shouldn’t be surprised when our defenses fail.”

Inside Amazon.com’s Love-Hate Relationship with Book Publishers

e-Books: Averting a Digital Horror Story
Amazon.com’s growing might and the sizzling success of the Kindle has publishers terrified. Hachette, Harlequin, and others are fighting back

By Spencer E. Ante

On Christmas Day, for the first time in its history, Amazon.com (AMZN) sold more digital books than the old fashioned kind. It was a watershed moment for the book industry—but it’s scaring the hell out of traditional publishers. Even though they make the same amount on sales of both kinds of books, they see Amazon’s digital dominance as a looming threat to their business, and with good reason. Their big worry: Amazon will end up with the same kind of pricing power in books that Apple has in music, and that the book industry will suffer the same kind of bruising decline.

One goal for publishers is to dilute Amazon’s power. Hachette is selling e-books through more than a dozen partners, including Sony, Apple, and small retailers such as Fictionwise. By partnering with multiple outlets, publishers hope to regain control over pricing and gather purchasing data that could fuel future sales. They’re unhappy Amazon has dropped the price of some new digital best-sellers to as little as $7.99, compared with $35 for hardcovers. Hachette and Simon & Schuster plan to delay the release of certain digital books for several months to avoid undercutting the sale of best-sellers. “We are giving away the family jewels,” says David Young, chairman and chief executive of Hachette Book Group, which publishes authors Malcolm Gladwell and Walter Mosley.

Publishers are typically paid about half the hardcover’s retail price, whether a digital book or hardcover is sold. But Amazon has been pushing to pay them less, and many publishers think cheap digital books will open the door to lower industry revenues in the future. Amazon, for its part, says publishers’ concerns are overblown. “We are selling a lot of books for publishers. We feel like that relationship continues to be a good one,” says Ian Freed, Amazon’s vice-president for the Kindle business.

Read the rest of the feature and see pictures here at Businessweek.com

Preventing Another Christmas Bomber

Like a lot of Americans, I’ve grown increasingly disturbed by the story of the Yemeni-trained Christmas Al-Qaeda bomber and the failure of our nation’s counter-terrorism security to thwart his plot to blow up a plane flying to Detroit. Today, the news came out that the U.S. and Britain closed their embassies in Yemen over threats from Al-Qaeda. And former U.S. officials are making the rounds of the talk shows this morning discussing the breakdown.

I know U.S. officials have broken up other plots, and this a very difficult job. But we can and must do better.

I agree with my former colleague Steven Baker that this was partially a failure to connect the dots. Intelligence officials should have done a better job at figuring out that Umar Farouk Abdulmutallab, the Nigerian man accused of attempted terrorism on the Christmas flight to Detroit, was connected to the terrorism operation involving a Nigerian man in Yemen that officials from the National Security Agency picked up on in their wiretaps.

But more than that I think it is a failure of weak rule-making. As soon as the Nigerian man’s father warned the American Embassy in Abuja (he even met with an official of the Central Intelligence Agency) that his son was being radicalized and had disappeared in Yemen, he should have been placed on the smaller no-fly list or selectee list–instead of the least-restrictive and far larger American watch list that flagged him for future investigation.

This is about as bright a red flag as you get. When he bought his ticket and showed up at the Amsterdam airport, U.S. officials should have never let him on that plane. But even if he wasn’t on a no-fly list, our software and intelligence rules should have identified him as a person who needed to be thoroughly searched before he boarded that plane. A search would have probably turned up his explosive kit.

A law enforcement official told the New York Times recently that “it was not unusual that a one-time comment from a relative would not place a person on the far smaller no-fly list, which has only 4,000 names, or the so-called selectee list of 14,000 names of people who are subjected to more thorough searches at checkpoints.”

So what changed? Why did we weaken our list rules? Al-Qaeda remains determined to kill Americans so our rules should be just as strong as they were after 9/11, and perhaps they should be stronger.

And here’s what really scares me: If this guy was not considered enough of a risk to get on the no-fly or selectee lists, then what have the several other hundred thousand people done to get on that list? And what are we doing about those people?

When I was reporting a lot on counter-terrorism security after 9/11, security officials talked a lot about the need for layering security. The idea was that even if one layer failed, then another layer would spot the risk. Clearly, this case shows we either need to strengthen our existing layers and/or add a few more to lower the risk of being attacked by another terrorist.