Life as a beta geek

This is the third in a series of posts with my notes from 2008 Tools of Change conference, including presentations by Bob Young, Tim O’Reilly and Kirk Biglione.

The Iceberg: Content and Creators Under the Market’s Surface

Bob Young, lulu.com

lulu.com and other online publishing ventures are not going to replace the existing publishing industry. They are going to serve markets the existing publishing industry was never set up to serve.

• Lulu is not trying to compete with the existing publishing industry.
• Their opportunity is in markets which conventional publishers don’t serve.
• Example of eBay — $66b sales, largely new revenue.
• Traditional auction houses have never been more prosperous.
• Young sees Lulu as eBay and publishers as the traditional auction houses — the tip of the iceberg.
• Young wrote a book on Linux which generated $500k in revenue and $2k in royalties on 20k sales.
• If that’s the model on 20k sales, what about books which sell only 1k?
• That’s where Lulu comes in — Long Tail, specialist topics.

Free is More Complicated Than You Think

Tim O’Reilly

After putting Dilbert online for free, Scott Adams reported, “Free is more complicated than you think.” In this talk, Tim O’Reilly does the math: just how many page views do you need to support an e-book with advertising? How popular does your blog need to be? What percentage of customers who sample a free product end up paying for more?

• Scott Adams piece in WSJ — Adams spent a significant time blogging for relatively modest increase in income.
• When he had ad-supported model, readers found ways to circumvent ads.
• When Adams released a free book, readers liked it so much that they asked when the next free book would be available, not buying it.
• Free is more complicated than you’d think.
• It makes publishers nervous. But it’s still a good thing, and we forget how much we rely on it within our businesses.
• The root of web advertising is free access to information on products and services.
• Can conventional online advertising support free content?
• O’Reilly is a $50m business.
• To build a $50m ad-supported business online takes 4b page views at $1CPM, 800m page views at $5 CPM and 200m page views at $20 CPM.
• 200k books sold per month should equal 90m page views.
• However, the reality is that people only read 5% of content — so 4.5m page views.
• Advertising is not an easy model for publishers.
• So what are the other possible models?
• Sponsored content — e.g. corporate-backed websites such as java.net.
• 15% of O’Reilly’s revenue come from this channel.
• Subscriptions — such as O’Reilly’s Safari joint venture with Pearson. This is O’Reilly’s third largest channel, behind Amazon and Barnes & Noble, and ahead of Borders.
• Similar margins to print.
• Represents 20% of O’Reilly’s revenue, and is growing 30% per year.
• Make Magazine — masses of free content, and events, drive subscriptions of magazine.
• E-commerce — content drives users to products. E.g. asos.com, gossip website which links to relevant products such as clothes or cosmetics.
• Formula is R = P x C x V, where R is revenue, P is price, C is conversion rate and V is visitors.
• O’Reilly’s experience is that C remains largely constant regardless of P.
• Free content is used to raise V, and drive consumers to high-P products such as conferences and training solutions, as well as books.
• O’Reilly regards Mission, Community, Brand and Processes as more important than Intellectual Property.
• Free is a strategic tool — pick the model to suit the math.

DRM, Digital Content, and the Consumer Experience: Lessons Learned from the Music Industry

Kirk Biglione, Medialoper

When it comes to digital content everyone agrees that no one wants to make the same mistakes the music industry made. But what exactly were those mistakes, and what can be learned from them?

• DRM creates passionate users — but the wrong sort of passion.
• The future of all media is digital.
• At some point, there’ll be an iPod moment for the book trade.
• Content producers fear piracy and changing business models.
• However, everyone says that they want to avoid the mistakes made by the music industry.
• Some people in the music business still believe that they were victimised.
• CD sales peaked in 1999 at just short of 1b units.
• By 2007, CD sales had fallen back to 500m units.
• Historically, consumers bought what they were told - from vinyl through cassette to the CD.
• But a funny thing happened on the way to the twenty-first century: the Internet. And consumers started to set their own priorities.
• The recording industry’s mistakes:
  1. Mistaking consumer demand for piracy. And treating this piracy the same way they had treated organised piracy of physical product. But these new pirates had different priorities — it wasn’t about making money, but social currency.
  2. Failing to offer a viable legal alternative. (Though Sony did offer a limited range of proprietary, DRM-ed tracks for $3.50 each . . .)
  3. Declaring war on MP3 because it wasn’t their format.
  4. Making litigation a business model (which works only if one is a lawyer . . .) Over 17k suits against consumers, and 4.5k+ pre-litigation settlement.
  5. Assuming that DRM was the solution.
• DRM, myth versus reality:
• Myth: “DRM prevents piracy.”
  • Every DRM scheme is hacked, and all piracy requires anyway is physical product to rip. (Gave example of Harry Potter where there are no commercial e-books, apparently because of priacy concerns, but plenty of consumer-made e-books on Bit Torrent and other sources).
• Myth: “DRM enables a marketplace for digital content.”
  • DRM doesn’t enable a marketplace. It is enabled by content, distribution channels, widely available media devices and consumer demand.
• Myth: “DRM-free = free.”
  • Consumers will pay for DRM-free files.
  • 50% of Fictionwise revenue comes from DRM-free e-books.
• Why do consumers hate DRM?
  1. Too many locks and restrictions.
  2. Too many proprietary formats and a lack of interoperability.
  3. DRM is too risky: there are too many ways to lose access to purchased content. Early adopters have been left high and dry by Virgin Digital, Rocket e-books, Major League Baseball video, when the DRM servers are turned off.
• The elephant in the room — what about iTunes?
• The majority of files on iPods are ripped MP3 rather than purchased DRM files.
• Apple DRM is the most consumer-focused and least restrictive on the market.
• Apple gave the major labels exactly what they wanted in terms of DRM.
• In exchange, Apple got control of the pricing, distribution and future direction of the music industry.
• What do consumers want?
  1. Reasonable pricing.
  2. Wide selection.
  3. Interoperable, preferably DRM-free files.
• The twenty-first century consumer always gets what they want.