Wednesday, 18 January 2006

Removing the Middleman, part 1

"The first thing we do, let's kill all the carriers."
--Henry VI Part 2, as performed by the Silicon Valley Royal Shakespeare Company

I want to let you in on a little secret: the company most disliked by people in Silicon Valley is not Microsoft. It's not Google either. And no, it's not Intel, Apple, eBay, or even SCO.

Don't get me wrong, there are plenty of people who want those companies dead, but even the hostility toward Microsoft at the peak of its power pales in comparison to the contempt that people in Silicon Valley reserve for the companies that own the pipes: the carriers, networks, publishers, and content distributors who deliver entertainment and communication to consumers.

Most of the nastiness is expressed in private conversations in hallways and restaurants, but occasionally a bit of it boils over into public view...

"Carriers haven't been hot-houses of innovation, they've been charnel houses."
--Nathan Torkington of O'Reilly Radar

"The post-millenium world’s biggest adversity is the monopolistic control over the broadband pipes in many countries including United States."
--Om Malik of Business 2.0
(Silly me, I thought it was terrorism or maybe global warming.)

"It's amazing how the labels always seem to come up with new ways of screwing artists: if they're not cheating them out of royalties, they're systematically alienating their fan-base."
--Author and commentator Cory Doctorow

"Apple's never been very good at going through corporate orifices in order to get at the end users. And if we can't do it with 500 companies, you can imagine it's even harder when there are only four."
--Steve Jobs, on selling products through the US operators.
(Everyone in Silicon Valley knew which orifice he meant.)

Why's there so much "negative energy?" There are cultural disconnects and lingering bitterness over business deals that went bad during the bubble years, but the main issue is that the pipe companies are just plain in the way of what Silicon Valley wants to do.

For example:

No recording of digital radio. The music industry is lobbying for legislation that, if I understand it correctly, would:
--Prohibit recording digital radio broadcasts (satellite or terrestrial) in less than half-hour chunks.
--Prohibit recording digital radio based on any user preferences, including artists, genres, and song titles.
--Prohibit disaggregation of the recordings (ie, cutting out the commercials).
--Prohibit any recording at all onto any removable media or digital outputs.

Basically, it not only prohibits any TiVo style services for digital radio, it also bans almost any practical recording of digital radio.

High pricing and limited availability of eBooks. Ebooks are much cheaper to produce than printed books. An ebook doesn't have to be printed, distributed, stored on a shelf, or returned if it doesn't sell. Despite these savings, and their potential to make books available to more people, the publishing industry doesn't make many best-sellers available as e-books until they have been on the market for a while. For example, I just checked the NY Times hardcover bestseller list, and I couldn't find any of them on, which claims to be the world's biggest ebook store.

Even when books are made available, most of the publishing industry insists that ebooks have to be sold for virtually the same price as printed books, even though they are massively cheaper to produce. Check out these books that were featured on the home page of eReader:

SuperFoods HealthStyle
Print price: $16.47 on Amazon
ebook price: $17.96 on eReader

Star Wars: Dark Nest, Book 2
Print price: $6.99 on Amazon
ebook price: $6.64 on eReader

The Five Lessons a Millionaire Taught Me
Print price: $10.17 on Amazon
eBook price: $8.54 on eReader

As far as I can determine, the publishers' main motivation for doing all of this is to protect the current book sales channels. The publishers are also afraid of ebook piracy. I think most of them would be happier if the whole ebook concept just went away.

That's good news for the Barnes & Nobles of the world, but it cripples the adoption of ebooks. Consumers want to read what's popular now, and they rightly ask why they should pay the same price for a digital copy as they pay for a tangible object. In 1999 I worked for SoftBook Press, an e-book company. This issue helped to drive them out of business.

Mobile phone companies: paternalism and slow innovation. The mobile phone industry is notorious for trying to create "walled gardens," tightly controlled collections of content and services for which they charge substantial fees. They tend to put obstacles in the way of open, unlimited access to the Internet, and are much slower to enable new services than Web companies are. I've had some mobile software developers tell me they were forced out of business because their funding ran out before the operators gave them permission to operate.

There are sometimes good reasons for the operators' caution – they've been burned by a lot of failed data services (can you say WAP?), and they're afraid rogue software might somehow attack and destroy their networks. But the feeling among many tech companies is that the operators are using this as an excuse rather than actually trying to solve the problems. They believe the security fears are just a smokescreen for trying to extract more money from users and software companies. After all, the world's ISPs have managed to live with open access over phone lines and cable networks for years, and nobody's network has been destroyed.

The operators are also seen as paternalistic toward users. I have vivid memories of a meeting with a major US operator in which we discussed the fact that a very popular phone in Europe had low sales in the US. I cited that as an example of how different the markets are around the world. "Oh, no, I can explain that," the operator replied. "We don't like that company and we won't let them sell their phones here."

That attitude, in which the operator does the thinking for the customer, is incredibly uncomfortable to most Silicon Valley companies. They are used to selling directly to end users, and don't want to work through anyone else (thus Steve Jobs' comment about "orifices"). They want the operators to be neutral providers of all products and services, enabling customers to make their own product decisions. That's the way the wired Internet works, and Silicon Valley wants the same thing in wireless.

Differential pricing on broadband. BellSouth and a number of other ISPs are starting to talk about charging websites for priority delivery of high-speed data. Aside from all the hostility this is generating among users who already paid for high-speed service, such a fee on high-speed delivery is seen as a barrier to small companies creating new data-heavy services. Such companies are often the most innovative, so this could have a chilling effect on Web innovation. As US chief justice John Marshall put it, "the power to tax involves the ability to destroy."

Those are just a few of many, many, many examples. Taken together, they are creating an almost endless appetite in Silicon Valley for business plans that feature the destruction of carriers and content publishers, even if the plans are longshots. For example, I think a lot of the enthusiasm around here for WiFi and VOIP is driven by a visceral hope that someone will find a way to use them to bring down the phone and cable companies.

From what I hear, most of the pipe companies hate and fear Silicon Valley right back. Here's a nice article from the LA Times on Hollywood's paranoia about Google.

I'm not trying to say either side is inherently evil. The industries just have different histories, perspectives, and interests. They don't see the world the same way, and they want different things. It's fair to ask if they might be able to learn to cooperate over time. Can't we reason together? Can't we find a common ground? Can't we all just get along?


This isn't just a misunderstanding, it's a collision of market forces. It's going to be a fight to the death, or at least a fight to the severe disabling head wound. No amount of diplomacy can change that. Besides, I think it would be wrong to try. If we simplify the pipes in the right way, I think it would be a big benefit for consumers, for content creators, and for the economy as a whole.

The problem (and the opportunity)

Over the years, a series of elaborate, multi-step business mechanisms have evolved in order to move entertainment and communication from creators to consumers. (Books, for example, go from authors to agents to publishing houses to printers to bookstores to readers.) Those systems all have three things in common. First, in most cases, the vast majority of the money paid by the consumer is absorbed by middlemen rather than the content creators. Second, the middlemen view their points of control as entitlements, and will fight like rabid wolverines to keep them.

And third, the Internet and new technologies create potential mechanisms to break their control, radically simplify the distribution chain, and enable a much higher percentage of the total revenue to flow back to content creators.

Today there's intense interest in some of the benefits we could get from new distribution channels. For example, the Long Tail weblog is focused on how new forms of distribution can make it economically viable to create content for narrow vertical markets (the "long tail" at the end of the demand curve).

But many of the ideas aren't new. The late Peter Drucker once predicted that electronic publishing was on the verge of making magazines obsolete.* Today, 28 years after he made that prediction, electronic publishing is still on the verge of making magazines obsolete. This is typical of much of the analysis of new content channels – it tends to focus on the benefits and gloss over the process of getting from here to there. We assume the benefits are so compelling that it'll just happen. But in my experience the real world doesn't usually work that way. If you dig into the details, there's usually a tipping point that combines economic models, new technology, and new business infrastructure that must be created before a new channel takes off. If any element is missing, the transition never happens at all.

The barriers are very different in each industry, which means the pipes won't all change at once, and some of them may not change at all. To figure out what needs to be done, you have to look at each case individually.

That's what I plan to do over the next few weeks. The first one I'm going to cover is music.

(Sorry to leave you hanging, but if I try to write this thing all at once I won't post anything until March.)

*Adventures of a Bystander, Peter Drucker, 1978. If you don't already have this book, you should get it. Then check out the chapter on Henry Luce.

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