Monday, April 12, 2010

Why you might want to wait to buy an iPad

As the first wave of iPad hype begins to recede, let's consider the possibility that Apple will repeat the pricing tactics used to launch the iPhone.

Apple lowered the price of the iPhone by $200 just two months after its launch on an earlier wave of carefully-crafted publicity. Widespread outrage prompted Apple CEO Steve Jobs to offer early buyers a $100 store credit.

This still looks like a textbook example of price discrimination.  Price discrimination occurs when the same product is sold to different consumers for different prices.  This requires first that consumers will pay different amounts for the product, and second that consumers can be divided into groups based on their willingness to pay.

A classic way to divide consumers into groups uses time.  Release a product, let's call it an iPhone, for $599.  Wait until all of the people who want to be among the first to own the product have bought one. Then lower the price to, oh, $399.

Offer complaining customers a consolation prize.  The store credits probably cost Apple much less than $100 a person.  Store credits are often used to buy products that cost more than the credit.  Or else the customer never uses the entire credit.

Now Apple has another "magical and revolutionary product." The starting price is $499 for the most basic iPad.  That's $100 less than the iPhone's original cost, but the iPad doesn't make phone calls.

Is Apple's pricing history about to repeat itself?  It can't hurt to wait and see.

Thursday, March 11, 2010

Google gives newspapers some friendly advice - Why they should listen

A lot of newspaper publishers and editors are understandably angry that Google is siphoning their revenue and readers.  But they should set that emotion aside for now, and listen to what the company's chief economist is saying about their industry.

Hal Varian was already a distinguished research economist when he turned his attention to information economics.  His knowledge and authority were well-established when he joined Google, so his words reflect more than the company's self interest.

Varian's description of the problems facing newspapers in this post on Google's policy blog won't surprise  anyone who follows the business side of the industry.  What deserves consideration are his suggestions about which parts of the problem matter most.

Why newspapers are losing the race for online advertising

Varin points out that print editions of newspapers are still attractive to advertisers because people actually read them.  Online readers average less than two minutes on a day looking at newspaper web sites, which sounds to me as if they mostly skim headlines.

As a result, newspapers aren't attracting much of the rapidly expanding pool of online advertising revenue.  Varian says search engines are not the real culprit.  Search engines actually account for almost half of the revenue newspapers have managed to attract.

The real problem is readers don't find newspaper web sites engaging.  Meanwhile, lucrative advertising in categories like automobiles and real estate has migrated to independent web sites that provide information about, well, automobiles and real estate.

Varian doesn't say this, but he is clearly responding to proposals some publishers have made to block search engines like Google from indexing their stories.

Those publishers should listen.

Cutting costs vs. charging for access

Varian also reminds us of a basic economic fact, one that I've also tried to stress.  Most news is a commodity.  Readers can find the same basic headline and story on lots of different websites.  When competition is intense, prices are always low.

If newspapers want to differentiate themselves enough to persuade readers to pay for access, they must find and pay for better ways to provide unique news that readers will pay for.

Varian points out that newspapers could instead cut the costs of producing the news.  He estimates printing and distribution accounts for half the cost of producing a physical newspaper.  Covering the news accounts for just 15 percent of the cost.

Varian suggests newspapers try to cut costs by producing news only on the internet.

I think this makes sense, but only as a long-term response. Companies that produce physical newspapers cannot just abandon their financial obligations, such as loans to finance a building or a printing press.

Varian's real message is that it's late in the game for print newspapers that want to compete on the internet. Perhaps they should consider focusing on the issues he highlights if they want to start catching up.

Sunday, March 7, 2010

ABC and Viacom Provide Illustrations of the Shape of Things to Come

The proliferation of channels for delivering entertainment, news, and dog pictures is now a defining characteristic of the markets where media firms compete.  Competition is increasingly about who controls popular channels where content must appear to reach large audiences.

This creates a potential for conflict when one company owns a channel and another company produces content for the channel.  Each company needs the other's product to succeed.  But the balance of power in these relationships will often be uneven.

Two news stories this week illustrate how this new reality works.  ABC just carried out its threat to pull the station with the Oscars from Cablevision, a major cable television company in Connecticut, New York and New Jersey.  Viacom, meanwhile, is removing its popular Comedy Central programs from Hulu, a web site offering free full-length television programs and movies.

Both disputes are about how much the distribution channels will pay the content providers.  But there appear to be significant differences in the balance of economic power.

ABC vs. Cablevision

ABC is negotiating to increase the amount that Cablevision pays to distribute ABC's programs.  The network receives payments from Cablevision subscribers for all of its programming, including ESPN and ABC Family. So the threat to black out ABC's New York television station before the Oscars begin was intended to put public pressure on Cablevision.

Right now, ABC's New York station is reminding viewers its programs are "Always Free Over the Air!"

But more than 3 million subscribers receive ABC's programs via Cablevision.  The network cannot afford to lose that many potential viewers for any length of time.  ABC's advertising revenues are based on the number of people watching its programs.  Large numbers of Cablevision subscribers are not likely to return to watching broadcast television.

Meanwhile, Verizon is advertising a deal aimed at Cablevision subscribers, hoping they will switch to Verizon's fiber optic service that bundles internet access with cable television.  But ABC's problem won't be solved if a significant number of people switch to Verizon. The network will just have to negotiate with a different company for access to a distribution channel.

Viacom vs. Hulu

Viacom is removing some of the most popular programs on Hulu, such as "The Daily Show with Jon Stewart" and "The Colbert Report."  This dispute is over advertising revenue that Hulu divides with content providers like Viacom.  Viacom wants a larger share of that revenue.

Hulu is growing rapidly, but that growth depends on popular programs like the ones Viacom is about to remove. And Hulu cannot control access to viewers the way that Cablevision does.

Fans of the Viacom shows can easily switch to Viacom's own web sites to watch their favorite programs.  The report that Hulu "will direct users to those (Viacom) sites" points to the balance of economic power in this dispute.

Hulu has not yet earned a profit. If Hulu loses a significant share of its audience after the split, Hulu will be forced to reconsider its deal with Viacom.

Still, both companies describe the split as amicable because both companies know they might not be breaking up for good.

Hulu was developed to find a profitable model for the internet distribution of television programs.  Hulu's owners include NBC, Fox and, it's worth noting, ABC.  Viacom owns multiple cable television networks.  So all of the companies have a shared interest in finding ways to make Hulu work.

Inspecting her new kingdom

Wednesday, February 24, 2010

What were the Miami Herald's editors thinking?

A badly-conceived "experiment" recently ended when the Miami Herald stopped asking its online readers for voluntary donations to help pay for news coverage.

This had the feel of a gimmick when it began two months ago. As I recently noted, the print editions of most newspapers don't generate enough reader revenue to survive.  They rely on advertising.

So it's hard to take seriously any talk about generating reader revenue to support general news coverage on the web.  Alternate sources of free news are plentiful and likely to remain so.

However, Herald executives may not be entirely daft.  They are continuing efforts to expand online coverage of local communities with news reported by "partners" who live or operate in those communities.

The partners apparently include a paella of local web sites, weeklies, and small dailies. The Herald is trying to attract readers without having to pay journalists and others to produce the local coverage.  This might help the Herald sell more local advertising.

What do the partners get? Access to a larger audience and a share of any advertising revenue generated by the experiment.  Now that is an idea that makes sense.

Monday, February 15, 2010

Google Buzz Privacy Complaints and the Economics of Social Networks

The economics of social networking favor whoever attracts the most users first, so it's no surprise Google used its vast trove of user data to create millions of instant members when it launched a social networking site.

Social networks become more valuable as more people join them, and Google's new site still has fewer users than Facebook. But coverage of Google's new social network -- Buzz -- focused instead on vehement user complaints that forced Google to make multiple changes in the privacy settings.

An estimated 176 million people have Gmail accounts, and Google made all of them automatic members of Buzz. The problem is that Google used information from each user's account to automatically make public a list of their frequent correspondents, along with information from photo albums and other tools that come free with a Gmail account.

It's the "free" part that really caused all the problems.

Google --like its rivals Facebook, Yahoo, and Microsoft -- routinely trolls through e-mail and other user data so it can make money that pays for "free" email and other services. Sophisticated data about who users communicate with and what they communicate about is used to target advertisements that provide the bulk of Google's revenue.

So Google's engineers might not have thought much about revealing to users some of what the company knows about each person's network of personal connections. Google probably was just trying to convince users that Buzz might be an attractive alternative to other social networking sites.

Facebook, for example, claims it has more than 400 million users. Facebook uses a business model that is similar to Google because Facebook collects information on users to sell targeted advertising. So Google cannot be happy about having just 176 million Gmail users.

Social networks become more attractive as they add members because that increases opportunities for each person to, well, network with other members. Nonmembers know that larger networks offer more chances to find interesting people. This cycle can rapidly become self-reinforcing -- increasing size makes the network more attractive, so more people join and make the network even larger.

Google appears to lag far behind Facebook in this competition. Revealing each Gmail user's network of correspondents was just an ill-advised attempt to begin catching up.

Sunday, February 7, 2010

NBC and the myth of rational decision making

Dick Cavett's meditation on the Tonight Show train wreck is a reminder that sometimes bad decisons cannot be stopped at even the most experienced companies. And it has always been thus.