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Datamining Twitter

On its own, Twitter builds an image for companies; very few are aware of this fact. When a big surprise happens, it is too late: a corporation suddenly sees a facet of its business — most often a looming or developing crisis — flare up on Twitter. As always when a corporation is involved, there is money to be made by converting the problem into an opportunity: Social network intelligence is poised to become a big business.

In theory, when it comes to assessing the social media presence of a brand, Facebook is the place to go. But as brands flock to the dominant social network, the noise becomes overwhelming and the signal — what people really say about the brand — becomes hard to extract.

By comparison, Twitter more swiftly reflects the mood of users of a product or service. Everyone in the marketing/communication field becomes increasingly eager to know what Twitter is saying about a product defect, the perception of a strike or an environmental crisis. Twitter is the echo chamber, the pulse of public feelings. It therefore carries tremendous value.

Datamining Twitter is not trivial. By comparison, diving into newspaper or blog archives is easy; phrases are (usually) well-constructed, names are spelled in full, slang words and just-invented jargon are relatively rare. By contrast, on Twitter, the 140 characters limit forces a great deal of creativity. The Twitter lingo constantly evolves, new names and characterizations flare up all the time, which excludes straightforward full-text analysis. The 250 million tweets per day are a moving target. A reliable quantitative analysis of the current mood is a big challenge.

Companies such as DataSift (launched last month) exploit the Twitter fire hose by relying on the 40-plus metadata included in a post. Because, in case you didn’t know it, an innocent looking tweet like this one…

…is a rich trove of data. A year ago, Raffi Krikorian, a developer on Twitter’s API Platform team (spotted thanks to this story in ReadWriteWeb) revealed what lies behind the 140 characters. The image below…

…is a tear-down of a much larger one (here, on Krikorian’s blog) showing the depth of metadata associated to a tweet. Each comes with information such as the author’s biography, level of engagement, popularity, assiduity, location (which can be quite precise in the case of a geotagged hotspot), etc. In this WiredUK interview, DataSift’s founder Nick Halstead mentions the example of people tweeting from Starbucks cafés:

I have recorded literally everything over the last few months about people checking in to Starbucks. They don’t need to say they’re in Starbucks, they can just be inside a location that is Starbucks, it may be people allowing Twitter to record where their geolocation is. So, I can tell you the average age of people who check into Starbucks in the UK.
Companies can come along and say: “I am a retail chain, if I supply you with the geodata of where all my stores are, tell me what people are saying when they’re near it, or in it”. Some stores don’t get a huge number of check-ins, but on aggregate over a month it’s very rare you can’t get a good sampling.

Well, think about it next time you tweet from a Starbucks.

DataSift further refined its service by teaming up with Lexalytics, a firm specialized in the new field of “sentiment analysis“, which measures the emotional tone of a text — very useful to assess the perception of a brand or a product.

Mesagragh, a Paris-based startup with a beachhead in California plans a different approach. Instead of trying to guess the feeling of a Twitter crowd, it will create a web of connections between people, terms and concepts. Put another way, it creates a “structured serendipity” in which the user will naturally expand the scope of a search way beyond the original query. Through its web-based application called Meaningly, Mesagraph is set to start a private beta this week, and a public one next January.

Here is how Meaningly works: It starts with the timeline of tens of thousands Twitter feeds. When someone registers, Meaningly will crawl his Twitter timeline and add a second layer composed by the people the new user follows. It can grow very quickly. In this ever expanding corpus of twitterers, Meaningly detects the influencers, i.e. the people more likely to be mentioned, retweeted, and who have the largest number of qualified followers. To do so, the algorithm applies an “influence index” based on specialized outlets such as Klout or Peer Index that measure someone’s influence on social medias. (I have reservations regarding the actual value of such secret sauces: I see insightful people I follow lag well behind compulsive self-promoters.) Still, such metrics are used by Meaningly to reinforce a recommendation.

Then, there is the search process. To solve the problem of the ever morphing vernacular used on Twitter, Mesagraph opted to rely on Wikipedia (in English) to analyze the data it targets. Why Wikipedia? Because it’s vast (736,000 subjects), it’s constantly updated (including with the trendiest parlance), it’s linked, it’s copyright-free. From it, Mesagraph’s crew extracted a first batch of 200,000 topics.

To find tweets on a particular subject, you first fill the usual search box; Meaningly will propose a list of predefined topics, some expressed with its own terminology; then it will show a list of tweets based on the people you’re following, the people they follow, and “influencers” detected by Meaningly’s recommendation engine. Each Tweet comes with a set of tags derived from the algorithm mapping table. These tags will help to further refine the search with terms users would have not thought of. Naturally, it is possible to create all sorts of custom queries that will capture relevant tweets as they show up; it will then create a specific timeline of tweets pertaining to the subject. At least that’s the idea; the pre-beta version I had access to last week only gave me a sketchy view of the service’s performances. I will do a full test-drive in due course.

Datamining Tweeter has great potential for the news business. Think of it: instead of painstakingly building a list of relevant people who sometimes prattle endlessly, you’ll capture in your web of interests only the relevant tweets produced by your group and the group it follows, all adding-up in real-time. This could be a great tool to follow developing stories and enhance live coverage. A permanent, precise and noise-free view of what’s hot on Twitter is a key component of the 360° view of the web every media should now offer.

frederic.filloux@mondaynote.com

Behind RIM’s $485M Write-off

On December 5th, three days ago, RIM announced a $485M write-off “related to its inventory valuation of BlackBerry PlayBook tablets”. Wall Street didn’t like the news and dumped the stock, it went down 9.7% in one session. One of the last analysts supporting RIM, Scotia Capital’s Gus Papageorgiou, finally gave up and turned vocally bearish. Others, as in this Reuters summary, grumble and suggest “necessary changes at the top of the company.”
Those are rote comments over an half-expected development: everybody knew PlayBook tablets weren’t selling well and the latest stock movement was but another step in a year-long descent:

But a second look at the numbers and at RIM’s communiqué itself raises more questions, ones I’m surprised analysts didn’t ask. Was it because RIM’s disclosure took place on a Friday, an oft-used maneuver to limit the spread of bad news?
We’ll focus on the $485M number and a look at RIM’s two previous quarters. As the company’s fiscal year starts March 1st, we have Q1 (ending in May 2011) numbers here and Q2 (ending in August 2011) results here.
For Q1 the company claims it sold 500,000 PlayBooks; for Q2, RIM says it sold 200,000 of the same tablets. Sold, in accounting parlance, is a precise term: this isn’t just a shipment, it’s a financial transaction whereby the buyer now owes RIM money, and RIM counts this as revenue and, after costs, profit.

We now turn to the cost of the PlayBook tablet. We know it’s made by Quanta, a reputable Taiwanese ODM, with approximately the same contents as Amazon’s Kindle Fire, also made by Quanta and, reportedly costing around $200 to make. Other reports peg the Playbook’s manufacturing cost around that same $200 number
Accounting rules say inventories are to be valued at the “lowest of cost or market”. If my widget costs $100 to make and sells for more, the accountants will value the inventory at $100 per unit. If, sadly, I can only sell it for $50, the inventory valuation must be $50. And, if an optimistic valuation of $100 was once used, it must now be “written down” to $50, causing a loss, even in the absence of commercial transaction. This is an inventory write-off or write-down. (This type of cashless loss mystifies normal humans who have trouble with the notion you can be profitable and go bankrupt. It’s ‘‘easy”: You make a profit the moment you sell a product for more than it costs. And you go bankrupt if your customers don’t pay but your suppliers insist on being paid. And there’s Uncle Sam to whom you owe tax on your “profit’’.)

Turning back to RIM’s $485M write-off, how many PlayBook tablets does it represent? Using the $200 cost figure as an assumption, we get 2.4 million tablets all written down to zero! This doesn’t quite make sense.
First, why write the inventory down to zero? HP’s TouchPad fire sale demonstrated the existence of demand at the $99 price level. Admittedly, Amazon’s $199 price for its Kindle Fire makes it difficult for RIM to get to that price at this stage of the PlayBook life and tattered reputation.
Second, even if we accept a write-down to zero, 2.4 million tablets is a strange number. How could RIM have accumulated such large inventory? And if the inventory hit is less than $200 per device, this increases the number of tablets in RIM’s cellar: $100 write-off per tablet yields 4.8 million devices. Impossible.

A possible explanation lies in the way ‘‘sales’’ were reported in previous quarters. Perhaps these transactions weren’t totally final, meaning they shouldn’t have been recorded as revenue because the buyer had the right to return Playbooks to RIM. Faulty reporting of revenue could spell trouble with shareholders, the SEC and hungry attorneys.
Still, RIM only reported a total of 700,000 tablets “sold” for the Q1 and Q2, they can’t have all been returned and massive returns would have been disclosed previously, one hopes.
RIM’s Q3 numbers will be released in a week, on December 12th, giving the company an opportunity to explain this strange $485M number. This should be interesting.
There’ll be more to watch, such as the year-to-year change in smartphone sales, the state of relations with applications developers and, crucially, how much cash is left in RIM’s coffers. For the last reported quarter, it was $1.15B, down from $2.1B the previous period. This isn’t much to wage today’s smartphone wars.

JLG@mondaynote.com

Unaccounted For Readers

Newspaper publishers need to quickly solve a troublesome equation. As carbon-based readership keeps dwindling, the growing legion of digital readers is poorly accounted for. This benefits advertisers who pay less for their presence.

Putting aside web sites audience measurement, we’ll focus instead on the currently ill-defined notion of digital editions. A subject of importance since digital editions are poised to play a key role in the future of online information.

First, definitions. The International Federation of Audit Bureaus of Circulation (IFABC) makes several distinctions that are adopted by most certification agencies around the world. The most straightforward is the “Digital Version” of a publication based on PDF. To be counted in the paid circulation of a newspaper or a magazine, a Digital Version must carry the same editorial content as well as the same advertising (volume and placement) as the paper version.

The second category, “Digital Edition”, is much fuzzier. Digital Editions come in different sizes and shapes, tailored for tablets or smartphones. Examples include The Guardian for iPad, Bloomberg Business Week+ and The Economist versions for iPad or iPhone (see previous Monday Note The Capsule’s Price). These editions have little to do with the print version. They are usually loaded with the same set of stories as their paper sibling, but add more pictures and, sometimes, animated infographics and video. The layout is designed to fit gesture-based navigation. Ads are different, too: far fewer modules, but with multiple screens and multimedia packages. The idea is less ads carrying more value per unit.

Here comes the absurdity.

Digital Versions (in PDF) are often hosted by digital kiosks carrying hundreds of publications, most often magazines in PDF facsimile. On many such kiosks, the best-selling product is the all-you-can-eat flat plan; for users, the 20 dollars or euros per month plan encourages indiscriminate downloading. I chose the word users on purpose. Readers would be presumptuous. On their first month, users will download about 60 to 80 publications. After a quarter or so, downloads stabilize to about 30 publications a month. Are those actually read? Maybe some, but the rest of the bulk is barely leafed through. As a result, the value of the advertising carried by these glanced-at publications trends to zero (the value of an ad being — at least in theory — a function of the eyeballs it will capture). It’s ridiculous to expect a “reader” who gulps down 30 publications to memorize a stack of 40 ad pages.

Nevertheless, such Digital Versions fall into the crucial “paid circulation” category which is still, unfortunately, the main gauge of market performance.

Noticing the absurdity of the open-bar kiosks, various circulations bureaus across the world have worked on ways to account for the behavior of this super-fly-by readership. In France, the OJD says that, in order to be counted as sold, the revenue derived from a digital publication must be higher than 25% of the single copy price, all taxes included. As an example, let’s take a user who opted for a €20 monthly unlimited plan, downloading 40 magazines in one month, each priced at €4.00 in a physical newsstand. To be counted as a valid sale, each magazine should bring at least €1.00. But a consumption of 40 magazines for €20 will only yield €0.5, half of the required minimum. Therefore, the OJD will only count half of the volume sold.

These audit agencies efforts are fine but, regardless of all the tweaks in the way copies are counted, they don’t solve the problem of ads that remains vastly inefficient.

Turning now to Digital Editions, their adaptation to the needs of tablets and smartphones much improves advertising performance. Modules will be fewer, but far more engaging. Interactive ads will lead to what marketers call transformation, which is when someone actually orders an item or interacts with a seller (by requesting a test-drive of a car, for instance). All such things are impossible with a static ad embedded in a PDF.

In addition, Digital Editions can point to an individual reader. When I subscribed to the iPad version of the Guardian, or of BusinessWeek, I actually gave permission to what I consider trusted editorial brands to get my coordinates from Apple. (For high quality publications, the rate of opt-in is said to be above 50%. Not bad.) Practically speaking, it means the publisher will be able to directly interact with me. And, in the near future, for my very own digital edition, that same publisher will inject ads tailored to my socio-demographic profile, my location, etc. (don’t rush folks, I can wait for this type of targeting).

Summing-up: We have Digital Versions that are basically PDF images of the original print publications and Digital Editions that are more sophisticated and built — for obvious reasons — on different structure.

And guess what? Most circulation bureaus segregate the two products; static ones are counted in the paid-circulation line — and consolidated with the paper’s global  circulation — but the tablet or smartphone-designed versions appear in a separate line.

No big deal, you might say. But it actually is.

Problem is, media buyers almost exclusively consider the aggregated figure. They tend to overlook the value of itemized lines. As a consequence, the most sophisticated products, the ones able to deliver engagement and value to advertisers are simply ignored.

Hence the publishers’ furious lobby to convince circulation bureaus to include Digital Editions in their global circulation numbers.

The British Audit Bureau of Circulation was quick to understand the importance of aggregating all forms of circulations on the sole basis of the editorial content. Probably because many UK publishers developed good tablet and smartphone editions. Just a year ago, they issued this unambiguous communiqué:

ABC announced today that it has agreed new Reporting Standards that will allow publishers to present both print and digital editions on one certificate. This offers more flexibility to publishers in how they can claim digital editions.

The new Cross Platform Certificate of Circulation enables publishers to provide a single view of their circulation figures. This includes the circulation of digital editions of magazines designed especially for mobile devices such as Apple’s iPad.

In many countries the issue is still on the table. To their consternation, newspapers and magazines publishers see the constant erosion of their paper versions; at the same time, they are required to serve the booming tablet and smartphone markets with dedicated digital editions that remain undervalued by the advertising community. Frustrating.

frederic.filloux@mondaynote.com

A Facebook Smartphone – Why?

At the end of last week’s Monday Note, I briefly wondered about the rumored Amazon smartphone. Would it follow the Kindle Fire strategy: Pick Android’s lock and sell the device at or below cost in order to lubricate the wheels of Amazon’s e-commerce of tangible and intangible things?

This week, we have the rebirth of another story: the Facebook phone. All Things D, the Wall Street Journal’s site dedicated to… All Things Digital, aired a series of posts focused on Facebook’s hypothetical jump into the smartphone fray. Given the site’s reputation for reliable sources and real writing, this must be more than idle speculation floated for pageviews.

But what’s going on? Why would Facebook — or Amazon — create its own smartphone?

(For the time being, I’ll set aside the 4-year parade of “Google phones”: T-Mobile’s G1 and G2; the ill-fated Nexus One built by HTC and sold by Google; Samsung’s Nexus S and now the Galaxy Nexus. Sign up here; Steve Wozniak got his a few days ago, my turn will surely come soon.

What HTC thinks of its erstwhile beautiful friendship with Google isn’t known, neither is Samsung’s view of being last year’s model now that Google owns Motorola. Nor is Moto’s serenity, or lack of it, when competing with the muscular Korean for the sultan’s favors. This brings back memories of the sorry parade of companies touting their shiny new partnerships with Microsoft, only to be discarded for the next pony in the carousel. We need a little time to figure out who’s playing whom.)

Looking at the PC market, we wonder: There’s no Amazon PC, or Facebook notebook, so why would these companies launch their own Really Personal Computer? What changed?

Google.

When Microsoft unified the PC industry under its tender care, the Web — and thus Web advertising — didn’t exist. For Microsoft, the game was the two-way Windows/Office leverage; the rest of the industry picked up the crumbs that fell from the Wintel table.

When the Web changed the game in the mid-90s, Netscape emerged as the dominant player, at least until Microsoft added Internet Explorer to the Windows/Office engine. Then Google entered the market with what initially looked like a search engine but turned out to be a huge, highly efficient advertising money pump. This left Microsoft (and others) reeling. The Redmond company’s online business keeps losing large amounts of money: $8.5B in the last 9 years!

Although Google confused things by attacking the Office franchise with its Google Docs service, the company’s true M.O. is nonetheless very clear. Advertising generates 95% of Google’s revenue and, probably, 105% of its profits. Google will say and do everything needed to ensure we’re exposed to its advertising radiation pressure at all times, in all venues, and on all devices. Everything is either a means to that end, or an obstacle that must be leveled, disintermediated.

Enter the smartphone.

Google saw it coming. Whether it did or didn’t get the idea because Eric Schmidt, Google’s CEO at the time, sat on Apple’s Board of Directors doesn’t matter for today’s purpose. In August 2005, Google bought Android, a company started by Andy Rubin and others after they sold Danger (no pun) to Microsoft. Google’s first smartphone, the aforementioned G1, looked a lot like Danger’s Sidekick device. After the iPhone came out in 2007, Google’s products took a distinctly Apple bent. Unsurprisingly, Google disagrees with Steve Jobs’ strongly expressed opinion of their “sincere flattery.”

Regardless, Google was right, the smartphone wars are on: This is the new PC, only bigger because it’s smaller, more ubiquitous, more connected, more personal.  Google doesn’t want anyone (but themselves) to control the smartphone market the way Microsoft dominated the PC; they don’t want anyone to stand between the viewer and the ads they serve up. With Android, they engineered a Trojan Horse: The ‘‘free and open” smartphone OS came with mandatory Google applications that guarantee the vital revenue-generating exposure to advertising. As Bill Gurley explains in his memorable “The Freight Train That Is Android” post, Google wants its smartphone OS to flatten everything in its path — and they’re succeeding: Android now has more 50% of the smartphone market. That dominant position was taken from Nokia, the former king; from Palm, now deceased; from RIM, sinking fast; and from Microsoft, struggling to get in third place with its truly modern but late to the game Windows Phone 7, this after losing the market because of its creaky Windows Mobile.

(Apple plays a different game. In the quarter ending in September 2011, they had a mere 14% smartphone share, but managed to get more than 52% of smartphone profits.)

Back to Facebook. Both Google and Zuckerberg’s company vie for the same advertising dollars. This makes Google Facebook’s biggest, most direct competitor. The Trojan Horse applications on Android-powered smartphones are a direct threat to Facebook’s advertising business. Just like Google, Facebook wants to maximize our exposure to ads that are finely-tuned using the personal data we provide as a payment for the service. For this, the company needs a well-controlled smartphone.

Apparently, Facebook’s first home grown project was ditched and a manufacturing partner such as HTC is now being considered. For the software, let’s assume that Facebook will following Amazon’s lead and develop an Android “fork”: Open Source code without the Android license and obligations.

The Amazon parallel is useful when considering the technical solution, but it breaks down when we think about revenue generation. Amazon’s forked-Android device, the Kindle Fire, is a way to sell more content by lubricating the purchase and consumption processes. They sell more physical goods as well, all integrated into their very successful Prime deal. We see no such processes and revenues for Facebook. The only justification for a Facebook smartphone would be a better user experience and a more effective vehicle for its advertising business.

It boils down to a comparison. On the one hand, an Android-powered smartphone — a Samsung Galaxy device, perhaps — with one good Facebook application and all the Google applications, the “evil” Google+ insinuating itself everywhere. On the other, a Facebook smartphone, with the Facebook experience on top of everything, its own app store, a Facebook browser, and Facebook Cloud Services.

I can’t help but think that there’s more to this hypothetical Facebook phone than a play against today’s Google+ in defense of today’s Facebook money pump. There must be something else in Facebook’s future, a new revenue stream that it will eventually need to promote/protect. But what?

JLG@mondaynote.com

PS: If we needed confirmation of the impact of smartphones on e-commerce, we just got early reports on Thanksgiving shopping behavior. According to Forbes and IBM Mobile Sales Hit It Out of the Park on Black Friday.


Apple’s Antitrust Problem (Part 2)

Last’week’s Part 1 column about Apple’s dominant’s position in the tablet market triggered an abundance of comments and emails, both on the Note’s blog and on the Guardian. All interesting, most well reasoned. But, for some people, it’s always funny to see how an Apple topic can turn religious. Question a few basic facts and you’re automatically labeled as a foe, as a member of the anti-innovation camp.

At the risk of repeating myself, here’s my perspective: my day job is to try and find sustainable news media business models in the digital world. No more no less. I set aside the fact that I’ve been a big fan of Apple products since 1986 and that I’ve always admired Steve Jobs. I don’t let such feelings impair my judgement or my ability to question Apple’s ways in the digital world…
And I’ll begin by reviewing the latest statistics documenting Apple’s dominance over the tablet market. The numbers are compelling: according to hosting provider Pingdom, which monitors global traffic, the iPad controls 88% of the tablet-based internet traffic worldwide; in the US, it’s 95.5%. For a device that represent only 1.2% of the worldwide web usage (desktop + tablets), that’s not bad. Then, setting aside the hectoring of zealots, we’ll examine what this position means for content providers and end-users.

Today, we’ll take a closer look at  two issues:
#1 Apple’s publishing business models
#2 Customer data

The 30% Fee

Let’s settle this one quickly: according to a lawyer I spoke with, regulatory bodies have nothing to say about how much a company charges its partners. Apple can charge whatever it wants to media providers willing to be on its platform, the market is supposed to regulate this, and judging by the number of apps and books in the iTunes Store, it has voted.

Ok, then, it’s legal. But is it fair and, more importantly, sustainable for Apple?

The 30% fee is part of Apple’s simplicity obsession. It undoubtedly played a key role in  the iTunes Store’s success. But this system essentially favors the vast market of small to medium-size companies unencumbered by legacy products and unwilling to bother with the tasks of distributing, marketing, and invoicing their customers. As for the news business, I keep telling my journalism school students who consider an e-publication based pay-for model: ‘Go for it! In your case, 30% is fair and convenient’.

It’s a very different story for large established companies. When probed about the 30% for online media, Apple cinder-block answer is: don’t complain fellows, we charge much less than you’re used to spend in the physical world.

Wrong answer, for three reasons: ad-related ARPU, retail price and distribution costs. On the Average Revenue per User side, we know that advertising revenue, as calculated per digital user, fall to a fifth or a tenth from what it is (soon: was) for print. Two, ask a twenty-something how much s/he’ll be ready to pay for the convenience of a digital edition landing on her iPad. I did it with my Sciences-Po students as I was showing a variety of digital products ranging from the precambrian PDF to brand new iPad design-for publications. They’d accept to pay no more 30-50 Euro cents per copy. Take 30% of this — actually, 39% with taxes — and you end up with 18 or 30 cents — again with a largely depleted advertising revenue. Plus, still worth mentioning, the cost of distributing a file is negligible compared to printing and shipping physical product to users’ doorsteps.

What about market trends? A good agency-model deal (in which the publisher sets the price) can land around a 20% commission fee and Google will be more like 10%.At some point, my take is Apple will have to adjust its fees to market conditions. Again, while 30% is fair for a startup with no marketing and distribution system whatsoever, it remains quite high for big companies who already have large infrastructures.

The same goes for its applications review system. $99 for a developer account wether you are the Wall Street Journal or some students e-zine makes little sense. Large companies should be asked to pay way more and to get different services, such as an interoperable transaction system instead of iTunes passage obligé. As long as it pays Apple for its apps-related service, the publisher should have the right to use the transaction system of its own choosing. If Google, PayPal, or some local system is cheaper, the content provider should be entitled to direct its customer to it — at least antitrust lawyers believe so. For Apple, the problem is it won’t collect precious customer data, which brings us to the next point.

Accessing the Customer

The genesis of this hot issue between Apple and the publishers is to be found in Walter Isaacson’s biography of Steve Jobs. The author recounts the meeting with Time Warner CEO’s Jeff Bewkes. The discussion focused on publishing Time Inc.’s magazines on the iPad. Bewkes had agreed on the 30% (this was early 2010, Jobs was not ready to yield anyway), then the main subject arose:

“I have only one question,” Bewkes continued. “If you sell a subscription to my magazine, and I give you the 30%, who has the subscription—you or me?”

“I can’t give away all the subscriber info because of Apple’s privacy policy,” Jobs replied.

“Well, then, we have to figure something else out, because I don’t want my whole subscription base to become subscribers of yours, for you to then aggregate at the Apple store,” said Bewkes. “And the next thing you’ll do, once you have a monopoly, is come back and tell me that my magazine shouldn’t be $4 a copy but instead should be $1. If someone subscribes to our magazine, we need to know who it is, we need to be able to create online communities of those people, and we need the right to pitch them directly about renewing.”

In fact, access to the customer could be another antitrust issue. Specialized attorneys I spoke with say Apple has no right to retain customer data the way it does and it should make the transfer customer information much easier. Today, you can’t engage into a direct relationship with a customer via the application. Furthermore, the opt-in system Apple sets up for apps-subscribers yields meager results and, when it comes to use the info, “some restrictions apply”. That’s a double jeopardy.

Some readers of the Monday Note liked to refer to Wal-Mart in defense of Apple’s position. First of all, I don’t see the comparison as particularly flattering. To me, Wal-Mart is one of the worst companies on Earth, built on below-poverty-level wages and third-world enslavement (I encourage the reading of this 2003 Pulitzer Prize winning series in the Los Angeles Times). Compared to Wal-Mart’s founder Sam Walton, Steve Jobs was Mother Teresa.

Except for one thing. Wal-Mart allows a box of corn-flakes sitting in its shelf, to be loaded with everything needed by the brand to engage a relationship directly with its customer: coupons, games, toll-free numbers, emails and web addresses, samples, all sorts of incentives designed to further tie the customer to the products whether or not they are sold in Wal-Mart stores. On the contrary, in the app-world, you can’t even have a link sending the user to a customer-relation pages. On this specific matter, Apple is doing worse than the worst retailer in the physical world.

Elusive Attitude

What’s next for Apple regarding the anti-competitive issue? Not very much. First of all because Apple is cornering only one segment of the digital devices. And, unlike Microsoft in the nineties, Apple is playing a clever chess game. “They have a well-defined elusive strategy”, said a European antitrust lawyer, “their goal is avoid the European Commission opening the case. They are closely monitoring the other players’ moves, and they will budge accordingly, one inch at a time. In doing so, they are buying time. And six months here and there is a big deal in the digital business.” On the publishing side and the customer relationships irritant, I bet the Cupertino guys will calm everyone down with minor adjustments in the coming few months.

frederic.filloux@mondaynote.com

Apple’s Antitrust Problem

(First in a series)

Will Apple face the type of antitrust issues Microsoft had to contend with in the 90′s? Possibly, but not with the same magnitude. Apple is by no means locking up its market the way Microsoft controlled the personal computer field with Windows. Still, the question arises for the iTunes Store, the App Store and their tightly controlled transaction and subscription systems.

Today, we’ll take a look at the issue from a news business perspective.

The fact that scores of publishers are flocking to the iTunes system doesn’t mean they are happy with it. For any publisher willing to access the burgeoning tablet market currently dominated by the iPad, a presence in the AppStore is mandatory. But I never met a publisher happy with his relationship with Apple. For most, what started as an enthralling partnership is slowly morphing into a feeling of servitude.

That perception is tinged with schizophrenia. Media people are usually fond of Apple products. From top bosses to tech reporters, they cherish their iPads and their iPhones. Then, each time Apple introduces a well-polished new device, it gets glowing coverage worth hundreds of million dollars if converted in media space.
Enjoying great products and admiring Apple for its many achievements does not prevent anyone from taking a stern look at the way the Cupertino folks do business. In a nutshell, publishers feel increasingly locked-in, and sometimes abused by Apple’s tight ecosystem.

As always, there are excesses on both sides. Difficult as it might be, let’s try and take a balanced view of three majors issues:
#1 the Application ecosystem
#2 the validity of a business model build on a 30% commission
#3 the issue of the customer data.
(We’ll start with #1 today, and address #2 and 3 next week)

The following is based on my ongoing contacts with publishers and conversations I had with lawyers specialized in antitrust and intellectual property. They spoke anonymously as they are quietly loading their guns for a possible legal action before the European Commission.

#1 The App Ecosystem

The context. Apple set up a huge technical and human infrastructure in order to provide tools to anyone, large of small, willing to build an application and yearning to make it available to any market. Amazingly, from the outset, Apple decided to provide all this machinery (software development kit, tracking system, testing) for free (let alone the symbolic cost of a $99 developer account).
Entrepreneurs voted with their keyboards and mice: there are 500,000 applications in the AppStore today, and counting. It created a huge new business. As Apple gives back 70% of the revenue for paid-for applications, by June 2011, the company had paid over $2.5B to developers, many of them individuals or very small companies.
Well, is there really a matter to complain about here?
Surely not for the developer working from a high rise in Seoul or a barge in Amsterdam. But for the large publishing company, it’s another story. Once it enters the system, two keywords begin flashing : “discretionary power” and “locked-in”.

Let’s face it, Apple has life and death power over the apps it harbors in its store. Its approval system it completely opaque, left at the discretion of an elusive army of people working at “undisclosed locations”. Welcome to the kingdom of the arbitrary. The same set of features that once raised a red flag triggering a rejection will be accepted the next time around — without explanation. Approval delays vary widely, making it difficult to plan the roll-out of a critical product. What is acceptable for a mom and pop operation becomes anxiogenic for large organizations.

The question of “choice”. To those who criticized its “black box” system, Apple’s retorts we evolve in a free market: if a publisher is not happy with its App Store it can: (a) go to the Android market, or (b) build its own web-app, i.e. an app that will live and function independently of the iTunes Store.

Antitrust lawyers don’t see things that way. Their argument: for someone controlling 75 % of the tablet market, invoking such a marginal alternative isn’t relevant. A publisher willing to join the tablet business has no choice but being available on the iPad. In practical terms, this means investing serious money to join a platform operated in a discretionary and opaque way, with unclear and changing rules.

As for the web app, antitrust attorneys suggest they represent a degraded and dangerously uncertain alternative to the iTunes Store. Degraded because a web app such as the Financial Times’ — the poster child of the “resistance” to Apple — doesn’t work as well as a native app. And this notion of “slightly less good” is absolutely critical. Given the sate of HTML5 (the programming language used for independent apps) and whatever the skills of its developers, a web-app will never be as fast, as fluid, as features-rich as a native application. As for the uncertainty, it lies in the fact that a web-app depends on features Apple can change without warning, such as the ability to use its browser (no choice here, it’s Safari) to store content. Put another way, web-apps are likely to work — no more than OK — until Apple decides otherwise. Again, it’s difficult to build a sound business upon such quick sand.

Evidently,  Apple is entitled to defend the integrity of its operating system by not giving independent applications access to critical layers of its iOS. This precaution provides better security against rogue code such as viruses and other malware; it is an indisputable justification for tight control. Agreed, said the antitrust lawyers, but: (a) for the native apps, rules could be more transparent and stable, (b) as for web apps, such rules should evolve within a framework of well-documented Application Programming Interfaces (APIs), a set of coding conventions used by programs to communicate with each other and with the underlying operating system. These APIs would be controlled by Apple on the sole basis of technical concern in order to protect the integrity its OS while creating a clear and well-defined framework for publishers.

Evidently, these suggestions sound a bit naïve. Apple has no business interest whatsoever in easing its allowance for independent web-apps. Most likely, it will carefully adjust the cursor to appear reasonably open while, at the same time, protecting its own ecosystem.

Things are likely to get worse before they get better: Apple is likely to unleash features that will benefit only applications and services of its choice in order to preserve its position. The best example is its Newsstand’s background downloading for publications (your iPad automatically wakes up to download the publications you subscribed to in the Newsstand, see a previous Monday Note on the matter). Lawyers says this is the perfect example of a feature that creates an unfair advantage favoring Apple’s own distribution channel.

Apple’s attitude towards competition epitomizes a often-seen scenario of the technological evolution: a company acquires a dominant position in a given market (in today’s case, several ones) thanks to superior products and services. As the company further gains ground over its competitors, the admiration for its quick success morphs into growing suspicion. Features that once were lauded as innovative market boosters begin to be seen as instruments of a market lock-down. At the same time, competition tries to imitate the leader as fast as it can. As it feels both unfairly copied and threatened, the market leader reacts by further tightening its grip on its business, using whatever it takes to buy time. In doing so, it triggers more hostility, etc. A vicious spiral begins.

Next week, considering market domination, we’ll see why Apple takes a different approach from the one Microsoft once used. Unless it becomes completely intoxicated by its own success, a clever “cursor adjustment” could preserve Apple’s lead and, at the same time, favor healthy competition.

frederic.filloux@mondaynote.com

The Discreet Shift to Twitter

You hear things about Facebook. You see things. As its audience matures, a subtle shift might be underway. Of course, numbers remains staggering. Facebook is heading toward the 800 million users mark, mostly by conquering new markets. The growth is distributed as follows : Middle-East Africa, Asia-Pacific and Latin America grow by around 60% per year; Europe by 35-40%; and North America by 25%. And demographics are shifting: older people are joining in Western markets while a younger audience grows in emerging ones. More changes are underway as the internet spreads on both landlines and mobile devices: over the last 3 years, China added more internet users than exist in the United States today. Furthermore, in the fastest growing markets, Facebook captures over 90% of all social network traffic. So, for the near future, Facebook doesn’t have a growth problem.

On mature markets, the future looks bright as well. In the United States, unique users grew by 22% between June 2010 and September 2011, reaching a total of155 million. Notably, the average time spent per person grew from 6:02hrs to 7:42hrs.

And…

When you speak with grownups and young adults who used to be Facebook enthusiasts, you hear the following :
– Facebook’s interface, its features have become overly complicated. The result is it takes more time to do the same old things.
– Managing friends leaves you with two choices: spending a lot of time delicately pruning lists, circles and groups, or being swamped.
– Constant and insidious changes in Facebook’s privacy features keep taking people off-guard: all of a sudden, you find many things about your digital life, mostly mundane stuff such as what you read and listen, being broadly available outside your initial circle. Quasi-paranoid caution has become a must. And again, since “opening” is the default setting on Facebook, recovering your own privacy gets increasingly complicated.
– A rise in the advertising presence, which reinforces the impression of being tracked down: users don’t have the slightest idea of the breadth and depth of Facebook’s mining of their personal activities.

It now seems Facebook’s usage is undergoing a split. Active Facebookers become increasingly engaged, spend more time doing more stuff, while “reasonable” users (above 25) become more reluctant and careful.

Who benefits from such shift? Twitter, primarily. Globally, Twitter’s microblogging/social network is much smaller than Facebook, with a reported 200 million users, only a fraction of which are really active. Business-wise, Facebook is 30 times larger than Twitter and is expected to gross $4.27bn this year, according to eMarketer ultra-precise estimates; that’s more than twice last year’s revenue. As for Twitter, its advertising strategy is gaining traction: again, eMarketer expects Twitter to make $139.5 million, up 210% from the previous year.

Given the differences in size and reach, does it make sense to compare the two?

Let’s consider the news media sector. From a pure quantitative standpoint, Facebook remains a solid referral for news sites as people “Like” and link to stories. But Facebook encourages fly-bys, i.e. viewers that  won’t stay on the site. Twitter’s referrals to a news content is of a different nature. Tweets and retweeets usually come from people who have chosen to follow a given individual, a news organization or a specific subject. The referral is therefore much sharper, more targeted than the impulsive “throw-on-my-Facebook-wall” type.

For what it worth, let’s look at an essay published last Saturday in the Wall Street Journal. Titled Why Can’t Wall Street Handle the Truth, it is written by Mike Mayo, a long time banking analyst who made repeated calls to dump banks stocks.

The essay generated 795 Facebook “Likes” — which is small for a story that is freely available in the WSJ Social Facebook application:

In the meantime, the same piece (and the mention of Mayo’s book) has been indexed 140,000 times in Google, thanks to only 392 tweets.

Still using the Wall Street Journal as an example, let’s have look at Walt Mossberg’s presence. (He is the Journal’s world-famous tech writer.) On Facebook, his page got 874 “Likes”. On the WSJ Social application, where Mossberg appears as an editor, he got 252 readers as the app has been able to collect a total “23K Readers”

Not very compelling.

But, on Twitter, Walt has 264,000 followers.

Another key element in Twitter’s favor: the mobile factor. Twitter’s 140 characters format turned out to be a killer on smartphones: it is growing faster on mobile (+75% Year-to-Year) than LinkedIn (+69%) and Facebook  (+50%). That’s the privilege of simplicity and straightforwardness over feature-itis.

frederic.filloux@mondaynote.com

From Heaven: iTV

Search for the word ‘‘cracked’’ in Walt Isaacson’s biography of Steve Jobs (or flip to page 555 if you have the bricks-and-mortar version). The second hit yields the following:

It will have the simplest user interface you could imagine. I finally cracked it.

“It” is the mythical Apple iTV. Even though Walt’s report of the July 2011 conversation didn’t hint at Steve’s solution, the eleventh hour revelation has rekindled old rumors and set the blogosphere on fire. “If Steve said he ‘cracked’ the problem, it must be true!”

At first, I had impure thoughts: I imagined Dear Leader, taking a moment away from redesigning Saint Peter’s abode, had foisted a prank upon us abandoned mortals: “That’ll keep ‘em busy…and will take their attention away from embarrassing topics such as the incompatibility between iOS and Mac file formats.”

A few days later, however, I read two posts that made me rethink my dismissive views.

First, in “Apps Are the New Channels”, John Gruber floats the idea of channels-as-apps (powered by iOS, of course):

Imagine watching a baseball game on a TV where ESPN is a smart app, not a dumb channel. When you’re watching a game, you could tell the TV to show you the career statistics for the current batter. You could ask the HBO app which other movies this actress has been in.

Second, in his good-natured pout post “Fine. I will talk about Apple Television or iTV or whatever it will be or will not be called.”, Brian Hall led me to a Nielsen Wire article that contains this graph:

40% and 42% of smartphone and tablet users, respectively, use their devices while watching TV — on a daily basis. The statistics themselves are hardly surprising, particularly to parents who have watched their multimedia-tasking children grow into young adults. But as I looked at the charts, a retroactively-obvious connection, a compatibility, struck me: Smartphones, tablets, and the iTV all use apps. [I’ve given up using the precautionary “putative” when speaking of iTV, and I use the present tense with license.]

With this in mind, what will the iTV look like?

As discussed in a previous Monday Note, if the iTV is an integrated device, the computer inside will become outdated long before the monitor does. Once you’ve graduated to Full HD (1920 by 1080 pixels) any other “improvements” –“240 Hz” display frequency and the like — are markitecture gimmicks that are invisible to most users. In other words, you won’t want to upgrade your TV after 18 months the way many of us do with laptops, tablets, and smartphones. (One could imagine a replaceable iOS computer module inside the iTV, but it sounds clunky, a source of problems.) Even more important, an integrated iTV would orphan the millions of HDTV sets already in place.

Furthermore, I still don’t see a 50” TV set walking out of an Apple Store. It’s hard enough to carry a 27” iMac out — or back in when trouble strikes. And I don’t see battalions of Apple field service people coming to our homes to fix these things.

If there’s no integrated iTV, let’s consider the iTV as a separate module, the next-generation Apple TV. In order to really work in the marketplace and achieve an iPod-like status, the module would have to “swallow” the set-top box, DVR included. If it didn’t, we’d still have to fight the multiple device/multiple remote battle: The set-top box, the primary source of TV fodder, has to be connected to the Input 1 HDMI connector, relegating iTV to Input 2. Certainly not the elegant solution Steve had in mind.

However, swallowing the set-top box and its DVR would entail making agreements with cable operators, business that are more numerous, less sophisticated, and more afraid of Apple than are the wireless carriers. While the wireless carriers have seen how smartphones can increase their ARPU, cable operators know only too well what would happen to their barely legal and definitely distasteful program bundling schemes once Apple gets in the game. (Try adding a single channel to your existing Comcast bundle: in Palo Alto, with Comcast, you must fill and email a form. It can’t be done on the phone, even if you manage to get to a human after a 20 minute wait.)

Ah, but maybe there is a way: Connect the set-top box to the HDMI input on the iTV, then connect the iTV to your HDTV’s prized Input 1. That gets us partway there, but it still doesn’t solve the multiple remote problem.

That’s where apps come in for the first but not last time: Download Apple’s iRemote application to your iOS, Android, or Windows Phone smartphone or tablet and you’re done.

Smartdevice-as-remote has been attempted before, of course. One example is the Xfinity iPad/iPhone app. You prep each set-top box in your home, download the program guide to your iDevice, and you’re good to go. When you issue a channel-change command from your smartphone, it’s sent through the Net to the Comcast cloud, and is routed back to your set-top box via Comcast’s cable:

Why the detour through Comcast? Because your smartphone/tablet and your set-top box don’t understand each other. The former speaks WiFi and Bluetooth; the latter only understands infrared.

Unfortunately, in my case, it worked once and never worked again.

Judging from the comments in the App Store, I’m not alone.

Furthermore, counting on the cable operator – and there are more than 25 in the US — to let the smartphone/tablet app control a multitude of set-top box models via the circuitous route described above probably isn’t the type of elegant solution Jobs had in mind.

How about translating between the smartphone/tablet and the set-top box by inserting a mediating device, a WiFi or Bluetooth-to-I/R converter? With the iTV connected to the set-top box and TV via HDMI, you still end up with a complicated arrangement: Your home WiFi base station provides a Net connection to your smartphone and iTV, and the WiFi-to-I/R converter listens to your smartphone and speaks I/R to your TV and set-top box:

This looks ugly, and it gets uglier: Since there’s no two-way connection between the TV/set-top box and the “remote,” the remote has no idea whether the TV is on or off, which input it’s using, which channel it’s tuned to. As a result, it’s easy to have a system in an unknown state, frustrating most mortals and forcing ‘‘harmonizing remote” makers such as Logitech to use complicated workarounds.

For most users, chances are slim that the set-up I just described will work and keep working.

Now let’s consider channels as apps. Why should TV on an iTV be like the TV we get through a set-top box? Newspapers and magazines on tablets (and smartphones for some publications such as the NY Times) aren’t mere replicas of the paper-based product. The adaptation to the new medium isn’t always pretty, but there are some great examples: See Bloomberg Businessweek or The New Yorker Magazine on a tablet.

The same will apply to TV. Not all channels will adapt equally well or equally quickly, but as “channel apps” evolve, we’ll see new ways of using the medium. As Mr. Gruber pointed out, imagine a football game as an app on an HDTV screen with the on-demand stats he mentioned plus the Twitter and Facebook streams we’ve grown to expect. (Personally, I’m not crazy about having too much “other” content on the screen as I watch a game, but I might be in a minority.)

Delivering channels as apps liberates our “viewing experience” in two ways: It breaks today’s narrow channel delivery format and it bypasses the set-top box. Today, I can watch the “straight” version of 60 Minutes on my TV (in real time or from my DVR), or I can go to my computer and watch a recent episode plus the additional “60 Overtime” content…or I can buy the $4.99 iPad app and get all of that through a much better UI that includes great navigation to the vast library of past episodes. Port that iPad app to the iTV device and you’re done. With channels as apps, all you need is a net connection (sometimes provided by the cable operator). You can throw the set-top box away.

Will consumers pay for iTV apps/content as I did for 60 Minutes? Probably, and we won’t have to pay for everything, just as with today’s TV with its combination of free and pay-per-view programs.

Of course, there’s the notorious “simple matter of implementation,” here: Someone has to write the apps that encapsulate the channels. But once the movement gains strength and tools become widespread and understood, it will be easier than you might think. 500,000 iOS apps attest to the availability of institutional knowledge.

In the meantime, if you don’t have an iPad, borrow one, spend $4.99 for the 60 Minutes app, and imagine the experience on an HDTV. Is this the TV future Jobs had in mind?

JLG@mondaynote.com

[In a future Monday Note and/or in comments on our site, I’ll cover variants to the approach described above, infrastructure issues, and also potential reactions from carriers/operators and competitors.]

Steve’s Bio: A Personal Perspective

Let me jump to the conclusion: This is an extraordinary book on many levels: informative, entertaining often, insightful, sympathetic but not indulgent; it rises to its unusual subject and manages to render its complexity in a straightforward manner that attests to the biographer’s talent.
Get thee to a physical bookstore, if you can find one, or to Amazon’s or Apple’s online dispensers, you won’t regret it. And if you don’t have the time or patience, start with Chapter Thirty-Six: The iPhone, Revolutionary Products in One (page 465 on paper, easily searched on electrons).

Last year, Walt Isaacson called to talk about the bio Steve had asked him to write. No surprise there, Dear Leader always wanted the best, and Isaacson had written world-class biographies of Ben Franklin, Einstein, and Henry Kissinger.

I told Isaacson how sad this felt, how I perceived Steve’s decision as ‘‘putting his affairs in order’’ before leaving this Earth. Walt didn’t answer directly, but he did say something shocking: Steve had relinquished all control over the book, all decisions were Walt’s. I didn’t believe it. I couldn’t see Steve giving up control on anything. His fanatical attention to detail is, sorry, was a key ingredient of his success. But Steve’s editorial grip on the book went no further than his picture on the cover. In Isaacson’s words:

“He had never, in two years, asked anything about what I was putting in the book or what conclusions I had drawn. But now he looked at me and said, “I know there will be a lot in your book I won’t like.” It was more a question than a statement, and when he stared at me for a response, I nodded, smiled, and said I was sure that would be true. “That’s good,” he said. “Then it won’t seem like an in-house book. I won’t read it for a while, because I don’t want to get mad. Maybe I will read it in a year—if I’m still around.” By then, his eyes were closed and his energy gone, so I quietly took my leave.”

To be sure, this isn’t your typical CEO encomium where the slightest achievements are remembered as world-changing deeds, and unseemly details are airbrushed into endearing idiosyncrasies.

The arc of Steve’s life is the stuff of legends: Abandoned at birth; raised in Silicon Valley; an acid-dropping, ashram-dwelling college drop-out, hacker, and co-founder of the most iconic of personal computer companies; fired at age thirty; re-inventor of animated movies at Pixar; the struggle to create the NeXT big thing; the return to Apple in the most stunning turnaround the industry had ever seen; reshaping the music industry; building a world-class retail network in his own image; re-inventing the smartphone industry and grabbing half of its profits; and, finally, after thirty years of false starts, making tablets a reality and grabbing iPod-like market and profit share as a result. An arc that saw the unmanageable hippie become the head of one of the world’s best-managed companies. And he died just as he reached the pinnacle.

This could tempt both subject and his biographer to produce a statuesque book, a North Korean monument to Dear Leader’s achievements. But instead of The Life and Miracles of Saint Steve, we get the gift of truth. We are forced to stare at the reality, or realities of the actual man. Thinking of his children, for whom Steve said the book was, so they got to better know him, this book is a great present. Judging oneself only by comparison to the better side of a parent is a terrible burden. Walt’s book gives them an independent look into the incredibly luminous Steve as well as into his sometimes repulsive dark side. Steve’s must have hoped to free them from his legend.

On the one hand, Isaacson shows the man who thrilled us with his (almost) unerring taste, with his sense that computers of various sizes and forms were more than merely utilitarian, that they were the objects, the vehicles of an evolving culture. Visionary, artist, leader, innovator… the list of meliorative words goes on, and rightly so: Steve was all these.
On the other hand, Isaacson manages the feat of being, by turns, empathetic, even affectionate and, in the next sentence, unblinkingly factual. The book will confirm everything you’ve heard about Steve’s unpleasant sides, and then some. When learning of his truly pathological eating habits, for example, you’ll wonder about his sanity. I don’t use the word pathological lightly: you’ll see how delusional Steve was when, for eight months, he refused surgery for his diagnosed pancreatic cancer, choosing instead a strict vegan diet, acupuncture and “herbal remedies, and occasionally a few other treatments he found on the Internet or by consulting people around the country, including a psychic”.

In a similar vein, you’ll read what Jony Ive, Apple’s Sr. VP of Design, Steve’s soulmate had to say about his dark side:

“… his way to achieve catharsis is to hurt somebody. And I think he feels he has a liberty and a license to do that. The normal rules of social engagement, he feels, don’t apply to him. Because of how very sensitive he is, he knows exactly how to efficiently and effectively hurt someone.”

Yes, that’s also the way Steve was. With everyone, family included.

Knowing or having known many of the characters in the book, I can vouch for its accuracy. But, even more important, I can vouch for its voice. Walt Isaacson got Steve right. He didn’t get intimidated, he wasn’t seduced into being a groupie, he didn’t get nauseated or angry. Instead, he delivered the truest rendition I’ve read of one of the most complicated people I’ve known.

His subject’s complexity didn’t rob Isaacson of his dry wit, such as this when observing Jobs after his liver transplant:

“As Jobs got better, much of his feisty personality returned. He still had his bile ducts.”

Or from recording memorable Bill Gates quotes such a this one:

“I’ve been predicting a tablet with a stylus for many years,” he told me. “I will eventually turn out to be right or be dead.”

(Not so fast, Bill, we love to have you and Ballmer around.)

In my view, the only way to keep one’s sanity when dealing with Steve was to stay ambivalent, to force oneself to harbor contradictory feelings about him. Easier said than done. In my case, over time, feelings of admiration and affection have taken over when watching the feats and the struggle. Reading Walt’s book was a helpful and, at times, painful reminder of who Jobs actually was.

JLG@mondaynote.com

[For a small compendium of Walt’s best-selling Steve Jobs bio reviews, look here.]

You Cheat. We Cut Prices

Surprise: To boost its circulation, Rupert Murdoch’s Wall Street Journal Europe engaged in massive channel stuffing. No kidding. It sounds like everyone discovers, all of a sudden, how medias (old and new) actually work. Granted, when it comes to cheating, News Corp is in a class all by itself. The phone hacking scandal pushed the practice of checkbook journalism to the pinnacle of massive corruption. As for the circulation scheme unveiled last week by the Guardian, WSJ Europe has pushed the envelope of bogus circulation numbers much farther than any other newspaper in the world.

From May 2009 to April 2011, the WSJE had a deal with a Dutch company called Executive Learning Partnership by which ELP purchased thousands of copies of the Journal for a price as low as 0.01€. If such deal is not uncommon, the scale was: 41% of the WSJE’s total audited circulation was inflated via this little scheme. The deal also involved a positive coverage of ELP. On Tuesday October 11th, Andrew Langhoff, the publisher of the Wall Street Journal Europe handed his resignation out.

The next episode is likely to unfold inside the soundproof walls of News Corp’s boardroom. While the phone hacking scandal might still hold more juicy bits in reserve (Guardian’s full coverage here), the circulation scandal involving the Murdoch empire’s most prestigious asset could be the one transgression too far. The board could be tempted to demote the aging boss. The rationale behind their putative decision would point to the rigid, top-down News Corp chain of command. In such an environment, practices such as this amazing circulation scheme must have been directed or, at the very least, tolerated by top management.

More broadly, this scandal raises another question: What is the real value of an audience, print or digital, when it is artificially bought — instead of naturally sold?

In the newspaper business, inflating circulation is hardly new. In fact, it is standard practice. The way copies are counted is a soft encouragement to blur the line between loyal and occasional readers. Officially, audit organizations across the world make subtle distinctions between distribution channels. They break down paid/unpaid circulation, mass subscriptions, types of deliveries, etc. On most Western markets, roughly 20% to 35% of the circulation for supposed paid-for newspaper is actually free.
Beyond that, we have what I’d call “near-free” circulation, i.e, copies that are paid a fraction of the cover price, usually just above the minimum rate imposed by audit organizations to be counted as paid distribution. This includes copies made available in airline lounges and hotels. In the end, this circulation is free. First of all, end users won’t disburse a dime for their newspaper (it is part of the service). Second, the price paid by the corporate distributor will likely be offset by side arrangements such as logistics fees charged by airlines or hotel chains (let alone advertising deals that could also be part of the package). Taking in account such arrangements, the share of free distribution can rise well above 50%. More