Give Customers What They Want
Two forces tug legacy industries from opposite directions. On the one side, you have customer demand. On the other side you have a mix of fear and laziness. In-between is where corporations and industries find themselves, and they face a choice. Sadly, in most cases, the fear and laziness win out. It’s left to radical new upstarts to provide customers with what they actually want.
The examples are numerous. Look at Tesla, a company that builds all-electric cars and wants to sell them direct to the consumer in order to keep the price down. These cars are sexy, great for the environment, and becoming more and more affordable. What’s the response from the competition? An appeal to the courts to block the skirting of dealership laws. An appeal to an old and wasteful system that means higher prices to the consumer and lined pockets for the middlemen. Check out what the New York Times had to say about these attempts:
Car dealers in New York, New Jersey and several other states are waging legal, legislative and regulatory campaigns to stop Tesla, the fast-growing electric-car company, from selling its vehicles directly to consumers. These moves are little more than attempts to protect an old retail model by limiting consumer choices.
How about Uber and Lyft? Having used these services, and having gotten around dozens of cities by cab, the most amazing shock to me is that taxis weren’t the ones who innovated here. With every potential customer holding a networked computer in the palm of their hand, the increased efficiency made possible by an app that handled dispatching, routing, and payment is a no-brainer. But fear and laziness win out, and now taxis are appealing to the courts to keep a system that is less efficient (which means worse for traffic and worse for the environment) and provides less customer satisfaction.
What does the New York Times have to say about this innovation and Uber’s pricing strategy with UberX?
The key to understanding Uber’s strategy is the concept of “elasticity of demand,” which is how people will react to a lower price. If consumers’ demand is highly elastic, it means that a slightly lower price will lead to people taking a lot more UberX rides.
Price elasticity. Lower prices will result in widespread adoption and greater profits. Interesting.
How about that great disrupter, Netflix? Having put video rental chains out of business and then proving that dropping an entire season of TV all at once can be a good thing, Netflix is now arguing that the classic program of “windowing” is not good for the film industry. Netflix wants to release the sequel to 2000’s smash hit Crouching Tiger, Hidden Dragon on Netflix as well as in theaters, all on the same day. The theaters (which are predominantly three companies) refused. Netflix appealed to the Imax chain, but Imax waived control of their screens to the same three aforementioned companies, who host their installations. Again, the companies refused. And again, the New York Times had fair coverage of the event, saying:
Theater chains in the United States have rallied against attempts to change the traditional model for releasing films, worried that movie fans might stay at home rather than pay for movie tickets. The theaters now typically play movies for three months without competition.
Netflix, Imax and the Weinstein Company, which is producing “Crouching Tiger,” said that movie fans were asking for new ways to watch films. “Going out to the movies is a very different experience than staying in,” said Ted Sarandos, chief content officer at Netflix. “Withholding access only invites piracy.”
In cable television, customers want a la carte (the ability to choose individual channels rather than packages bloated with programming they’ll never watch), but cable providers resist. More balanced coverage from the New York Times ensued, showing both sides of the argument, with their reporter writing: “I don’t watch Animal Planet or TruTV, but I pay for them as part of a package that includes the channels I do want. The cable industry books that inefficiency as profit. It is the lucrative lifeblood of the current entertainment business.”
When Aereo provided a workaround to direct access to over-the-air networks at an affordable price, instead of providing this service to its customers, the networks appealed to the courts. Screw the customers has become the mantra of those whose industries are being disrupted. The networks won, but at least the story was covered fairly in the print media, with Aereo shown as an innovator appealing to customer demand and networks described as “titans,” “powerful companies,” and “fixtures in American living rooms for decades.”
The stodgy and entrenched vs. the awesome new innovator. That’s how these showdowns are rightly portrayed.
Ah, unless it’s books. Unless it’s the publishing industry.
As these same trends hit my favorite pastime, it amazes me how bizarre and lopsided the coverage has been. When the six major publishers banded together to raise prices on consumers, charging upward of $14.99 for ebooks and getting hammered by the DOJ for collusion, the coverage was often sympathy for the publishers and lack of concern for the consumer. This article starts out not by detailing what publishers did, but by making the story about the DOJ’s aggressive response.
The Justice Department jumped directly into the fight over the future of digital books on Wednesday — and Amazon came out the winner.
In an action that could lower the price of e-books and shift the expanding market in Amazon’s favor, the Justice Department slapped Apple and five of the largest book publishers with an antitrust lawsuit, charging that the companies colluded to raise the price of e-books.
Note the “jumped,” “fight,” and “slapped.” How rude of the Department of Justice! And note that the winner in lowering prices, according to the New York Times, is Amazon, not the consumer. Reading the paper every single day, these differences in coverage jump out at you and clobber you over the head with a baseball bat.
The difference in coverage must stem partly from direct conflicts of interest (more on that in a moment) but also from what Clay Shirky brilliantly points to as a brand of elitism. Clay says:
The traditional industry belief — if you don’t live in a big city and have a lot of money, you deserve second-class access to books — is being challenged by a company trying to say “If you have ten bucks, there’s not a book in the world you can’t read.” If the current industry can’t keep their prices high while competing with instant distribution of a vastly expanded literature — and that seems to be their only assertion worth taking at face value — then it’s time for them to figure out how to make a business out of improved access. They can drop DRM, sell ebooks directly to readers, add or improve their subscription services, offer print-on-demand—any strategy, really, except continuing to insist that readers must accept high prices and restricted access.
The tension between their ordinary sympathies for the general public and their withholding of that support in this particular case stems from the duality of authorship as an open marketplace and a closed cultural arena. To criticize Amazon, the publishers and their defenders must simultaneously insist that literature is essential for society, and that a sudden increase in its availability would be a catastrophe.
Finally, quoting at length (you should read the entire piece. Here’s another link to it:
When Packer registers his concern for “books,” he masks the aristocratic core of his argument: fear of popular participation. Like Coll, he imagines a world where the current elites aren’t in charge, and he does not like it, ending his discussion of Amazon with a the question, “When the last gatekeeper but one is gone, will Amazon care whether a book is any good?”
To which the answer is obvious: Of course Amazon won’t care. That’s none of their business. And note well Packer’s concern: It is not that people will stop writing or selling books that rich, well-educated people want to buy (an unlikely outcome, in this or any market.) Instead, he is concerned that publishing will become too easy, that there will be no one who can stop the publication of dreck, and by dreck he means books he and I and our fellow members of the highly educated class won’t approve of.
So that’s the cultural elitism aspect of the one-sided coverage. The other is the direct conflict of interest. The same company that owns HarperCollins, one of the five remaining “major” publishers, also owns the Wall Street Journal. Hachette was part of Time Warner and is now owned by a French media conglomerate that runs newspapers and magazines around the world. Penguin and Random House have merged and are both owned by the Bertelsmann Group, Europe’s largest radio and TV broadcaster and one of the largest magazine printers. Simon & Schuster is owned by CBS, one of the handful of broadcast TV companies. MacMillan is owned by Holtzbrinck, another multinational media firm.
The “Big Five” are all wings of larger media conglomerates; they are not mom-and-pop book-creators. In fact, each major publisher is made up of dozens of imprints each, many of which used to be smaller publishers, some of them daring to publish affordable paperbacks until they were gobbled up and merged into the hardback-windowing high-margin machines we see today. These publishers, keep in mind, occupy some of the most expensive real estate in the world. In London, publishers are erecting towers along the Thames, despite real estate there being crushingly unaffordable for the general public.
So two things are at play here: The first is that innovation is happening everywhere, and the response everywhere has been for legacy industries to have as their “Kodak Moment” entrenchment, fighting against customer desires, banding together where possible, and appealing to the courts for protection.
We receive fair coverage of many of these trends, but completely busted coverage of what’s happening in the publishing industry. Instead, the New York Times sells $104,000 ads to wealthy authors and gives them in exchange article after article presenting only one side of the issue. It is rare when a member of the media presses with facts, and a disaster for the pro-legacy pundits when they do.
So what needs to happen? Someone in the media business needs to cover the publishing industry fairly. I’ve pleaded with David Carr to be that person, as he’s sharp enough and independently minded enough to pull it off. And I want to see my beloved New York Times at least dip a toe into the right side of history. The coverage can be fixed, I’m sure of it.
But what about the disruption taking place at the heart of the industry? What should we hope to see from publishers?
I’ve blogged before about what I would do, and it comes down to slashing the waste in the industry and passing those savings along to customers and artists. Basically Amazon’s strategy. Amazon gets hammered for making its employees (gasp) pay for candy bars in vending machines and for not taking large profits—choosing instead to focus on customer service, low prices, and better margins for authors. Publishers, meanwhile, set up in Midtown Manhattan and along the Thames, collude to raise prices on consumers, offer lockstep and horrid digital royalty rates, and they are the paragons of virtue. It doesn’t have to be this way. Any one of them could make an about-face immediately and change their corporate culture, and we should want them to.
Just as it should have been the taxis who embraced technology and linked up with customers through their cell phones, it should have been publishers who invented ereaders and celebrated a less wasteful and more affordable story delivery mechanism. And it’s not too late for them to innovate and lead rather than go to the courts and sue against progress.
Let’s talk about solutions. When I worked in a bookstore, I lamented the choice publishers made to window book formats. Hardbacks came out first and paperbacks were delayed. Rather than give the customer what they wanted, the publisher made only the most expensive version available. $30 for a hardback that cost less than $3 to print. No affordable option during the window in which the bulk of the advertising dollars would be spent. It made no sense to me as a bookseller (or as a reader).
Giving customers what they want makes good business sense. It also makes sense to give customers a variety of experiences, not just because the audience is made up of a mix of people with different wants and financial means, but because of the effect of an upsell. If there are two versions of the same product, and one is in some way superior but costs more, the upsell means the price of the more expensive product is — in the mind of the consumer — equal to the difference between the two prices.
If I know I want a certain book, and the paperback is $15 while the hardback is $25, I tell myself that the hardback is “only $10 more.” The money I’m spending is now a smaller amount than even the cheaper of the two options. The choice between two editions removes the choice of whether or not to buy the book. Now I’m deciding which format I want.
In the NYT article about Netflix’s Crouching Tiger release plans, a great analogy is made with professional sports. Being able to watch the game at home doesn’t stop the stadiums from being well-attended. It’s a different experience. In the publishing world, the reading experience across formats is becoming more and more similar, with even ebooks providing something closer and closer to print, but the ownership experience is still different. Hardback buyers are often collectors. Paperback buyers might read once and then pass the work along or sell it at a used bookstore. E-book buyers are free to hoard without worrying about clutter or the psychological weight of unread books staring them down from the bedside table.
Publishers obsess about hardback margins at the expense of customer choice. They do this despite the fact that the #1 breakout publishing hit of the decade was 50 Shades of Grey, a paperback original. The hardback editions came later and still sold, because not all readers are the same. When Simon & Schuster released WOOL in the US, they published the hardback and paperback on the same day, and both editions hit their respective New York Times bestseller lists and went into third and fourth printings.
It’s simple: Ask yourself what the customer wants, and give it to them. Stop running your business by the whims and needs of the middlemen. Treat writers and readers as well as possible, and refuse to do business with anyone who tries to squeeze you for making that decision. That means no windowing. It means free copies of the audiobook and ebook with the sale of every hardback. It means getting rid of DRM. It means ebook prices in the $5.99 – $6.99 range, even for new releases from top-selling authors.
What do we have instead? Publishers fighting against every one of these trends. We have appeals to the public and to the courts that get it all completely backwards. We have a part of a much larger trend of legacy industries fighting progress, working against the public’s best interest, all because fear and laziness win out over customer demand.
Start watching for these trends, and you’ll see them everywhere. And you’ll notice that there are companies (usually on the west coast), like Uber, Tesla, Netflix, Google, and Amazon that are trying their damnedest to provide a better experience at a better price with more choices. While other companies, in expensive towers built of stone, are conspiring with one another and appealing to the courts to do whatever they can to fool and rob their paying customers. Who do you think is going to win with those two strategies? Who should win? And what affect can a biased media play in the outcome?