Richard Brandt, technology journalist and author, discusses his new book, One Click: Jeff Bezos and the Rise of Amazon.Com. Brandt discusses Bezos’ entrepreneurial drive, his business philosophy, and how he’s grown Amazon to become the biggest retailer in the world. This episode also covers the biggest mistake Bezos ever made, how Amazon uses patent laws to its advantage, whether Amazon will soon become a publishing house, Bezos’ idea for privately-funded space exploration and his plan to revolutionize technology with quantum computing.

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Related Links

• One Click: Jeff Bezos and the Rise of Amazon.com, Brandt
• History of Google/About Google, Brandt
• Five minutes with Richard Brandt, Author of One Click, Ennyman

[Cross-posted at Truth on the Market]

[UPDATE:  Josh links to a WSJ article telling us that EU antitrust enforcers raided several (unnamed) e-book publishers as part of an apparent antitrust investigation into the agency model and whether it is “improperly restrictive.”  Whatever that means.  Key grafs:

At issue for antitrust regulators is whether agency models are improperly restrictive. Europe, in particular, has strong anticollusion laws that limit the extent to which companies can agree on the prices consumers will eventually be charged. Amazon, in particular, has vociferously opposed the agency practice, saying it would like to set prices as it sees fit. Publishers, by contrast, resist the notion of online retailers’ deep discounting.

It is unclear whether the animating question is whether the publishers might have agreed to a particular pricing  model, or to particular prices within that model.  As a legal matter that distinction probably doesn’t matter at all; as an economic matter it would seem to be more complicated–to be explored further another day . . . .]

A year ago I wrote about the economics of the e-book publishing market in the context of the dispute between Amazon and some publishers (notably Macmillan) over pricing.  At the time I suggested a few things about how the future might pan out (never a good idea . . . ):

And that’s really the twist.  Amazon is not ready to be a platform in this business.  The economic conditions are not yet right and it is clearly making a lot of money selling physical books directly to its users.  The Kindle is not ubiquitous and demand for electronic versions of books is not very significant–and thus Amazon does not want to take on the full platform development and distribution risk.  Where seller control over price usually entails a distribution of inventory risk away from suppliers and toward sellers, supplier control over price correspondingly distributes platform development risk toward sellers.  Under the old system Amazon was able to encourage the distribution of the platform (the Kindle) through loss-leader pricing on e-books, ensuring that publishers shared somewhat in the costs of platform distribution (from selling correspondingly fewer physical books) and allowing Amazon to subsidize Kindle sales in a way that helped to encourage consumer familiarity with e-books.  Under the new system it does not have that ability and can only subsidize Kindle use by reducing the price of Kindles–which impedes Amazon from engaging in effective price discrimination for the Kindle, does not tie the subsidy to increased use, and will make widespread distribution of the device more expensive and more risky for Amazon.

This “agency model,” if you recall, is one where, essentially, publishers, rather than Amazon, determine the price for electronic versions of their books sold via Amazon and pay Amazon a percentage.  The problem from Amazon’s point of view, as I mention in the quote above, is that without the ability to control the price of the books it sells, Amazon is limited essentially to fiddling with the price of the reader–the platform–itself in order to encourage more participation on the reader side of the market.  But I surmised (again in the quote above), that fiddling with the price of the platform would be far more blunt and potentially costly than controlling the price of the books themselves, mainly because the latter correlates almost perfectly with usage, and the former does not–and in the end Amazon may end up subsidizing lots of Kindle purchases from which it is then never able to recoup its losses because it accidentally subsidized lots of Kindle purchases by people who had no interest in actually using the devices very much (either because they’re sticking with paper or because Apple has leapfrogged the competition).

It appears, nevertheless, that Amazon has indeed been pursuing this pricing strategy.  According to this post from Kevin Kelly,

John Walkenbach noticed that the price of the Kindle was falling at a consistent rate, lowering almost on a schedule. By June 2010, the rate was so unwavering that he could easily forecast the date at which the Kindle would be free: November 2011.

There’s even a nice graph to go along with it:

So what about the recoupment risk?  Here’s my new theory:  Amazon, having already begun offering free streaming videos for Prime customers, will also begin offering heavily-discounted Kindles and even e-book subsidies–but will also begin rescinding its shipping subsidy and otherwise make the purchase of dead tree books relatively more costly (including by maintaining less inventory–another way to recoup).  It will still face a substantial threat from competing platforms like the iPad but Amazon is at least in a position to affect a good deal of consumer demand for Kindle’s dead tree competitors.

For a take on what’s at stake (here relating to newspapers rather than books, but I’m sure the dynamic is similar), this tidbit linked from one of the comments to Kevin Kelly’s post is eye-opening:

If newspapers switched over to being all online, the cost base would be instantly and permanently transformed. The OECD report puts the cost of printing a typical paper at 28 per cent and the cost of sales and distribution at 24 per cent: so the physical being of the paper absorbs 52 per cent of all costs. (Administration costs another 8 per cent and advertising another 16.) That figure may well be conservative. A persuasive looking analysis in the Business Insider put the cost of printing and distributing the New York Times at $644 million, and then added this: ‘a source with knowledge of the real numbers tells us we’re so low in our estimate of the Times’s printing costs that we’re not even in the ballpark.’ Taking the lower figure, that means that New York Times, if it stopped printing a physical edition of the paper, could afford to give every subscriber a free Kindle. Not the bog-standard Kindle, but the one with free global data access. And not just one Kindle, but four Kindles. And not just once, but every year. And that’s using the low estimate for the costs of printing.

Business Insider reports that, sometime next year, Scribd will launch a “seamless” interface that allows users to access Scribd docs on their Kindles.  That’s a major step forward for the startup, which aims to be the “YouTube for print”—and which Adam and I use to make all our PFF papers available online in an embeddable Flash viewer that’s much quicker to load than the full PDFs.  But it also represents a serious potential long-term challenge to Amazon, since Scribd is “quietly developing a strong e-book storefront to match its hoard of user generated content,” as Business Insider notes, and because:

If Scribd can put its books on the Kindle, this number should only grow, especially since it offers publishers a better business deal than Amazon.  Amazon reportedly offers a 50/50 sales split. Scribd only keeps 20% and allows publishers to set their own price.

So much for “The coming Kindle monopoly” the cranks over at Oligopoly Watch warn us about!

It would be more accurate to say that Scribd will be “Kindling” e-book competition within the base of Kindle users, and of course, competing devices like  Barnes & Noble’s Nook offer cross-platform competition, just as satellite television competes with cable.   In both cases, the platform operator has a strong incentive to compete for users by offering as much content (books/video programming) as possible at attractive prices.

On the one hand, one might say that inter-platform competition is stronger in the case of video delivery platforms, because users generally lease equipment on a month-to-month basis, while e-book users must buy their $250+ device up-front (making it therefore harder to switch from Amazon to Barnes & Noble, if one decides one doesn’t like the offerings or prices for e-books on the Kindle).  But on the other hand, if Scribd can compete head-to-head with Amazon in offering e-books on Amazon’s Kindle (and perhaps on the Note, too, someday soon), users don’t need to switch devices at all: They can just switch e-book providers. Furthermore since e-books are bought on an à la carte basis, users don’t have to switch completely, they can just switch for any particular book—meaning that Amazon needs to compete for every additional purchase they can get, which means lower prices and more choices for consumers.

In short, there’s no reason to think that competition won’t work in this market.  But, then again, it works pretty darn well in the video programming delivery market, too, and yet we still see the Federal Communications Commission trying to uphold outdated regulations based on supposedly ” gatekeeper power” that cable providers lost roughly 15 years ago, when satellite television became an alternative to cable for essentially all Americans. If the general activist direction of antitrust enforcement under this administration is any indication, I fear we may soon see this kind of stasist thinking applied to the very competitive new market of e-books. And if recent tech history is any guide, innovative, scrappy startups like Scribd will simply be dismissed out of hand by regulators incapable of imagining what’s just around the corner.

The disabled have much to give thanks for this year—but contrary to common assumptions, it’s not for paternalistic government accessibility mandates, regulations or subsidies (see, for example, the FCC’s November 6 Broadband Accessibility workshop), but for the good ol’ fashioned private sector ingenuity that has made America great. Five broad categories of examples suggest how constantly-improving computing power and innovation can make life easier for many, if not all, disabled users—and how market forces empower the disabled along with everyone else.

Video transcription. Last week, Google announced “the preliminary roll-out of automatic captioning in YouTube, an innovation that takes advantage of our speech recognition technology to turn the spoken word into text captions.” Google uses the same speech recognition technology it refined with its free Goog-411 and Google Voice services to automatically transcribe video dialog (which can also be automatically translated using Google’s translation engine). Why? Not because of any government mandate, but because of some combination of three factors: (i) it’s an easy way for Google to invest in its “reputational capital,” (ii) the underlying technologies of transcribing videos make videos easier to use for all users, not just the hearing-impaired, and (iii) those technologies also make it possible to contextually target advertising to the verbal content of videos.

It’s worth noting that Hulu currently offers closed captioning for some of its television programming but notes that “closed-captioning data that’s used for broadcast TV isn’t easily translated for online use.” The online television clearinghouse promises to offer more closed-captioning soon. Perhaps they ought to license Google’s algorithmic transcription?

Voice recognition for direct consumer use—most notably, Dragon NaturallySpeaking 10, the latest version of the leading voice recognition software, which was released in summer 2008 but only recently seems to have really hit critical mass. By many accounts, and my own personal experience over the last few months (having lost the use of my left hand due to cartilege damage), Dragon 10 is the first speech recognition program that is really “ready for prime time”—good enough that I will very likely continue using it, at least sometimes, even after my wrist heals in the coming months. (I used it to write this post.) It offers non-disabled consumers functionality like dictation-on-the go and points to a day when everyone gets their own personal transcription secretary—think: 1950s office culture meets artificial intelligence.

While Dragon standard currently retails for $50.99 on Amazon (list Price: $99.99), Microsoft’s new Windows 7 includes voice-recognition functionality that is not terribly far behind Dragon in quality among its built-in accessibility features (although, when it comes to voice-recognition, small differences in quality are well worth the cost).

Jon Morrow (Associate Editor of Copyblogger), whose muscular dystrophy rendered him quadriplegic, provides a definitive guide to speech recognition for bloggers, focusing on Dragon:

Voice recognition for search. Google Voice Search, initially launched on the iPhone a year ago, and more recently made available on other mobile devices. By allowing users to search from their phones without typing, the program makes search just that much more accessible for users who have difficulty typing—something I was very grateful for as I recovered from my wrist surgery, with only my Droid to keep me (and my one good hand) company—and allow me to blog! While this is a small step, it foreshadows a day in which all mobile devices will have the kind of speech recognition capability Dragon makes possible on the desktop today.  Given the rapid and constant increase in computing power made possible by Moore’s Law, it’s just a matter of time before this dream comes true.

What these first three product categories have in common, besides speech-to-text functionality, is that they are not exclusively geared to the disabled. Instead, each also offers functionality to a broader market.

Text-to-speech functionality. This is one of the accessibility highlights of Windows 7. Adobe has also improved the screen reader functionality in its Acrobat Reader 9 software. While these features are primarily geared towards the disabled, the quality of text-to-speech automation has improved to the point that it is actually being used for a mass-market.

• Exhibit A: AudioDizer, a service that aims to “enable newspapers, magazines, and blogs to distribute their content in MP3 format for every single article published.” While AudioDizer won’t replace good human readers anytime soon, such software will increasingly remove the absolute necessity—and cost—of having someone read text material you want to podcast. This, in turn, will revolutionize podcasting by making it nearly costless and effortless to put text into audio form.  The quality is probably not acceptable for most people yet, but for many other hard-core “listenists” (people who consume audio content as voraciously as the most dedicated readers), it’s simply revolutionary to have access to a library of audio content potentially as large as the text-Internet itself.  For me, this means I can make better use of the time I spend puttering around the house—or, in my two-arm days, folding laundry, going to the gym  or riding my bike. (I am a particularly big fan of the MIT Technology Review podcast, which will give you an idea of the quality of AudioDizer.) But for the visually impaired, AudioDizer could be far more profoundly important.  In either case, the “killer app” for text-to-speech will be the level of quality finally achieved in speech-to-text by Dragon NaturallySpeaking 10.
• Exhibit B: the text-to-speech capability in Amazon’s Kindle 2 reader device. While the Kindle itself is difficult for the visually impaired or blind to use, the mainstreaming of such functionality will ultimately benefit such disabled users by increasing the incentive to improve text-to-speech functionality. Sadly, after receiving (debatable) copyright complaints from the Author’s Guild, Amazon decided to turn this functionality off  for all books, unless activated by the publisher (an opt-in). If the technology were actually good enough to be a substitute for an audiobook, the Authors Guild’s complaint would be more understandable. Unfortunately, such an opt-in will probably delay the popular acceptance of text-to-speech functionality by average users.

Open source & open platforms.  Their growing success in the marketplace (not because of government, mind you!) likely means that disabled consumers will have more choices.

• Software: There are a slew of accessibility-oriented add-ons for the Firefox browser, and Mozilla makes it easy to find such tools by allowing users to group related add-ons into “Collections” such as this one. In particular, the Firefox Accessibility Extension has been downloaded nearly 150,000 times.
• Hardware: The success of open operating systems such as Google’s Android should make it easier for device manufacturers to build devices with specialty features, say, for the visually-impaired. Certainly, it would be easier to do so than to build such functionality into all iPhones. At the very least, a diversity of form factors will create more real options for the sometimes very specific needs of the disabled.  For example, I simply could not have typed effectively with one hand on my old HTC XV6800, but my new Motorola Droid, with its superior on-screen keyboard and different form factor allows me to type fairly effectively with just one hand (as does my partners iPhone).

Tying It All Together

That’s really the key lesson here: While many advocates for the disabled may complain that the iPhone isn’t as accessible as they might like, mandating accessibility features for all devices comes at a real costs for users: There’s only so much you can fit into a single device. If government mandates additional features, something has to give, because we live in a world of trade-offs: price, bulk, weight, etc. But a world with many devices and competing operating systems is a world in which niche markets are increasingly being served—primarily because Moore’s Law increasingly makes it cost-effective to do so.

The “disabled” are not a monolith but represent a wide spectrum of interface needs along the long tail of human ability-diversity. Rather than trying to stunt the functionality of all devices in the name of “fairness,” we ought to be focusing on the ways in which falling prices, increasing processing power and the increasing efficiency of small-scale consumer electronic device manufacturing make possible an increased degree, and diversity, of functionality previously inconceivable. We also ought to look for ways to make sure that government doesn’t inadvertently get away this ongoing process, such as through cumbersome device testing requirements or by restricting the exclusive handset arrangements that make it possible for wireless carriers to subsidize the cost of expensive devices. The latter is especially important for achieving the kind of scale in adoption of a device that could help make it worthwhile to develop and bring to market specialty devices—say, for the visually-impaired.

The offerings for the disabled will probably always lag behind those for average consumers, but complaining about that is a lot like complaining about the fact that the rich tend to be the only ones who can initially afford new inventions—from air travel to air conditioning to refrigerators to personal computing.  Just as the wealthy tends to fund the investments in these technologies, to the benefit of “average” consumers, so, too, will the mass market for functionalities like speech-to-text and text-to-speech drive the perfection of these technologies, which are particularly important for disabled users.

Of course, there are are indeed some accessibility functionalities necessitated by certain disabilities that may not have such ready dual-use among a mass audience. But I suspect that accessibility functionalities will become increasingly indistinguishable from tools developed for average users.  The main distinction will lie in the fact that for the disabled, these tools may be a life-changing “necessity,” while for most users, they may merely be “cool” or simply “useful.”  Case in point: the volume level on my new Droid’s speakerphone is so loud that it will likely make the phone “accessible” for many heart-of-hearing users who simply couldn’t hear previous smartphones. For me, it’s a nifty feature (and sometimes even annoyance), while for them it may be a fantastic relief.

More generally, it’s important to recognize the diversity of incentives that makes possible this diversity of functionalities for a diversely-capable citizenry: For some companies, like Nuance (maker of Dragon NaturallySpeaking) the disabled are a key market. And anticapitalist critic might claim that “they’re just in it for the money.”  But as Adam Smith said, “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” In other words, it’s a good thing that there are companies out there who try to meet the needs of the disabled. (The Internet has made it easier than ever before for disabled consumers to find products that meet their needs.  Just Google the keywords “disabled products” and you’ll get over 57 million hits.) For some companies, the motive to  invest in accessibility innovation may be “philanthropic”—i.e., a down payment on consumer goodwill. And for other companies, the motive may be more mixed: Google clearly gains additional advertising audience by reaching the disabled, and also uses its accessibility technologies to serve ads better and making it easier for all users to conduct searches.

As for the broader subject of “neuro-diversity” (the broad spectrum of human cognitive abilities and not necessarily a “disability”), I highly recommend Tyler Cohen’s new book Create Your Own Economy (reviewed by Adam here), which celebrates the Internet as a great emancipating force for the neuro-diverse.