Saavn is a new and upcoming internet music streaming service for Indian music. You can stream any song in their very comprehensive library on demand. The quality of streaming is pretty good, at least out here in the US. The website is simple to use, though some minor UX issues could do with some attention. (btw, why don’t songs have composers as a field?)

You can make your own playlists, or just play playlists that other people have saved. I used their Weekly Top Songs as a jumping off point for my compilation.

Raaga is a competing website that has been around longer. Both these websites have the same ad supported business model. Currently, it is mostly display ads. Eventually, I expect audio ads. Both websites have Android and iPhone apps.

Overall, this ad-supported on-demand streaming model seems the most interesting thing happening in Indian digital music. They have completely handed over control of the download business to Apple, which is a shame. But that’s a different subject.

Funny thing is, this model doesn’t exist for digital music in the US. Here, on demand streaming is like owning the song. With wireless broadband now, for all practical purposes, one is never cut off from the cloud. If I can stream any song at-will, with high quality streaming it’s not very different from owning it.

In the US therefore, there is no ad-supported on-demand streaming model. You can subscribe to a whole library for a period of time which means more $$ (Rhapsody). Or you can buy and download all the songs you want for much more $$ (iTunes). [In Europe, Spotify is a little like Saavn, which is why they are having trouble entering the US].

Then there is the ad-supported model called internet radio. The differentiating characteristic of internet radio is that the user has no control over what song is played next. Pandora, the leader in this model, is expected to have an IPO soon. In India Bombay Production follows this model.

How is it that Indian digital music seems to be evolving very differently from western digital music? The answer is what I will call the Galapagos effect. The way unique species developed on the Galapagos island (or Madagascar) because it was cut off from the mainland, the same way, Indian digital music is insulated enough from the western industry that it can and will mould itself differently.

Copyright law is very tricky. It differs from country to country. Which is why you can’t get Pandora outside the US. Or Netflix. Or many books on the Kindle. It also works the other way, as in the case of Spotify.

Indian copyright law is different enough that Pandora or Rhapsody is going to avoid the hassle and instead focus on its US business.

But that’s not all. Broadband infrastructure is a key enabler for digital music. In India, that infrastructure so far has been well behind developed countries’. In fact, it might be argued that so far, the target listener for Saavn like companies has been mainly the NRI. This might change soon as broadband and 3G penetration increase.

So, while Pandora, Spotify and Rhapsody pass on the Indian market, it leaves white spaces for startups to exploit. That is, until Apple decides to go after the Indian market. They already have almost the entire market for Indian digital music. And they are rumored to be planning a cloud service for streaming your music. Which will be easy to extend since Indian copyright laws allow it.

In the meanwhile, I’m not complaining. I get to listen to any song I want on Saavn for free. If I’m feeling lazy I go to Bombay Production. It’s free and uninterrupted. Pretty good deal.

But I worry about the future. I want Saavn to survive. This morning I spent 2 hours on pulling together my compilation. Most of that was on Saavn which was incredibly useful. But then I went and spent $20 on iTunes. Doesn’t seem fair.

While the music industry in the West and in Bollywood is doing its best ostrich imitation, in another product category we are seeing some amazing new developments – books.

From Novelr

Amanda Hocking is 26* years old. She has 9 self-published books to her name, and sells 100,000+ copies of those ebooks per month. She has never been traditionally published. This is her blog. And it’s no stretch to say – at $3 per book1/70% per sale for the Kindle store – that she makes a lot of money from her monthly book sales. (Perhaps more importantly: a publisher on the private Reading2.0 mailing list has said, to effect: there is no traditional publisher in the world right now that can offer Amanda Hocking terms that are better than what she’s currently getting, right now on the Kindle store, all on her own.)

If Hocking had gone to a publisher to do a paperback that retailed for $10, she would have made $1 per book. For the Kindle version, she would have made $3. But by self-publishing on the Kindle she gets to keep 70% or $2.10 per book and keep the low, low price of $3.

Yes, she has to figure out how to market the book. But as any good VC will tell you, when you are starting out, focus on the product. If it’s good, they’ll keep coming back and bring their friends with them.

I don’t know how good Amanda Hocking is. I actually don’t think she needs to be a Michael Crichton. This is the magic of low prices at work.

Now, can we get songs for a quarter any time soon?

I write about the economics of Information Products often and have used the term marginal costs several times over the years in connection with digital music, e-books and of course the technology industry. So perhaps it is important for readers to understand what I mean when I say marginal costs are zero. In the process, I’ll also examine Bob’s claims to the contrary about the software on an App Store.

Wikipedia’s definition of marginal costs is

…marginal cost is the change in total cost that arises when the quantity produced changes by one unit.

Effectively, when I say that apps on the Mac App Store have a marginal cost of zero, what I am saying is that the next user of Angry Birds or Evernote or Omnigraffle, incrementally costs these companies nothing.

Compare this with Gap jeans. The next pair of Gap jeans sold will cost Gap a pretty sizable portion (maybe 50%?) of the sale price of the jeans.These costs are the material, manufacturing and shipping costs. And maybe a few others as well.

Bob’s rebuttal rests on three types of costs that he says prove that the marginal costs are not zero.

Engineering costs related to updates

Engineering costs are fixed costs. They have no relationship to the units of software sold. Sure, if you sell more units you have more money to spend on engineering, but that is conflating cause with effect. Think of the Gap jeans analogy. Is the next unit of Angry Birds sold going to need any extra cost in engineering? Nope.

Support

Support is a little trickier. If the app you are buying includes support over email or the phone, yes, there is a marginal cost here. But apps, and indeed, most consumer SaaS applications now direct users to their forums. On the forums, they either find the solution to their problem themselves or they post a question and a super user answers it for them. Often, someone from the company’s support team will have to answer the question. And so you might say that as the number of users goes up, the queries on the forum go up and the size of the support team must also go up. 

But, there is another dynamic at play here. As users grow in number, the knowledge base on the forum also gets richer. The number of super users also increases. Problems with the software that lead to support queries are ironed out. Does all this compensate for the upward pressure on support costs? I don’t know. Probably not. But for these kinds of apps, after a certain user base has been achieved, incremental costs are not material, in my opinion.

Server side costs of processing, storage and bandwidth

Even if the software downloaded is simple desktop software with no SaaS component, there is the matter of the first download and subsequent updates. And presumably, the traffic created by polling to see if an update is required.

I understand that these costs, for an additional user, are not zero. But there is something called materiality. Is this particular cost material compared to the revenue from the next user? I doubt that Angry Bird or Omnigraffle worry about it. Evernote perhaps does, but how many apps do you know that users regularly use to scan and upload documents to? 

Two endnotes

In software, there is always more that can be done. More products, more features, better performance, better customer service. The only thing holding it back is the money available to do all this. As a company grows in customers and revenue, it expands its engineering and customer service teams. Because it can. But this is not because of marginal costs. The causation is the other way.

Marginal costs is a construct used in Economics. In real life, you can never really parse out marginal costs from fixed costs with any certitude. Nor should you waste your time doing it. Managerial decision making, most of the time, doesn’t need numbers to be precise. So when I say, marginal costs are zero, but they turn out to be 2% of the unit price, it is not going to result in a different decision on whether one should be on the App Store or not.

Apple’s (AAPL, Fortune 500) iTunes is credited with finally getting people to pay for digital music, but it wasn’t unveiled until 2003.

In the time between Napster’s shuttering and iTunes’ debut, many of Napster’s 60 million users found other online file sharing techniques to get music for free. Even after iTunes got people buying music tracks for just 99 cents, it wasn’t as attractive as free.

and

Now just 44% of U.S. Internet users and 64% of Americans who buy digital music think that that music is worth paying for, according to Forrester. The volume of unauthorized downloads continues to represent about 90% of the market, according to online download tracker BigChampagne Media Measurement.

Matt Yglesias responds

Music industry executives can tell themselves that as long as they want. But under conditions of perfect competition, the price of a song ought to be equal to the marginal cost of distributing a new copy of a song. Which is to say that the marginal cost ought to be $0. That’s not a question of habit, you can look it up in all the leading textbooks. Of course real businesses rarely operate in circumstances of perfect competition, and record companies have a variety of political and legal tools they can deploy to try to protect monopoly rents. But this is hard to do. I think the real story with the iTunes store is that over time competitive pressure has impelled it to largely drop DRM and over time I expect we’ll see that the CPI-adjusted price of songs declines.

If you are a music industry executive, you can wait for CD sales to bottom out at somewhere close to nothing. Or you can take the initiative

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

To my mind, piracy of music:

1. Is inversely related to the chances of getting caught, which is very low.
2. Is inversely related to the punishment if caught, which is mild.
3. Is inversely related to the disapproval from friends and family who might know that you are using illegal music. This is almost non-existent.

All of these factors might indicate that piracy can’t be vanquished. But there is something that the music labels could do to start beating it back – reduce the cost of digital music dramatically.

Today the price of a song averages around $1. The marginal cost of delivering the next song is close to zero. So if you were to somehow know what the price to downloads curve might look like, all you would do is to set a price where the product of price and downloads was maximum. But of course, you don’t. Which is why the price of a song is stuck at $1.

I don’t know if any research has been done on this or not. But it seems to me that $1 is just too high a price for a song. At that price, a high school or college student faces the choice of transferring music from his friend for free or paying $40 to get a few albums of a new band that he got interested in. There’s no contest.

You might say that by this logic you can never win against free. You can, if you make it really easy to access and download cheap music from legal sites. If iTunes had song downloads for 10 cents you would convert a large majority of “pirates” to legal downloads.

Obviously, executives in the music industry have a pretty tough choice. First, they may not be able to convince all parties – Apple, artistes – to agree to a dramatically lower price. Doing it for one song doesn’t really work – it won’t change habits. They need to go the Full Monty. That’s a tough sell. Even if they managed to get that far, it is likely that revenue would plummet in the short term before it started rising again. On the other hand, it takes one bad quarter to get you fired.

The leap of faith is that reducing the price per song to a tenth of what it is today can take the share of legal downloads from 5% to 50%. Isn’t it time someone took that chance? After all, things can’t get much worse can they?

There are a few disadvantages of course. The biggest one is the price. At $360 or so you don’t want to leave it on the airplane! You can’t loan a book to someone else. Books with illustrations won’t offer the same experience for a while (no DC comics on the Kindle so far). You are forever tied to amazon.com as your supplier of books. Much like the lock-in that music downloads from iTunes created for the iPod until Apple also moved to mp3 downloads. Funnily, the DRM that the publishers insist on creates a lock-in that benefits the device manufacturer the most.

Kindle, and hopefully other e-books, will change the economics of the book publishing industry. I can’t say if it will be for better or for worse for the publishers (probably worse) or authors (probably better). But the readers will certainly have more choice. And this can be very, very good for Amazon’s shareholders.

The marginal cost of a book is quite a bit more than a for a music album or a DVD. I would put at about 20 to 30 %. It would be somewhat less for hard covers and technical books with specialized readership as compared to paperback and popular fiction.

With e-books that marginal cost goes down to zero. This allows the price of the book to be lower, even while (I suppose) Amazon makes a higher % margin though perhaps a similar dollar amount per book. A lower price can seriously expand the market.

Then there is the convenience. To be able to instantly gratify the need for a new book can only mean more sales of new books.

The marginal cost being zero means a few other things as well. Classics whose copyright has expired are available for next to nothing. The entire collection of Dickens is available for $1, for instance. A Raja Sharma has a whole collection of summaries of classics for around a buck each. I’m sure there are thousands of high school and college English lit students who will plump for the summary.

The reason why the summaries are interesting is much more than the genre of summaries itself, which existed before the e-book. It is interesting because it totally bypasses the publisher. The author gets a 33% cut of revenues from Amazon, regardless of the price. Amazon keeps the rest. Might this become more of a trend in the future? It just might. New authors can avoid the publisher entirely with a combination of Kindle and Print on Demand. You’d have to do your own marketing, but then if you are a new author, it’s not as if the publisher is spending millions on marketing your book anyway.

Question – are summaries of books that are still copyright protected, an infringement of the copyright? Business book summaries are regularly advertised in the Economist and given that the summary almost always will eliminate the need to read the book it seems reasonable to assume that there is some contractual arrangement between the summarizer and the publisher of the actual book. On the other hand can ‘remixing’ a book be deemed an infringement?

In an earlier post Paperbacks in India I wrote about how publishers were releasing cheaper paperback versions of books in India simultaneously with hard cover releases in the US. With an e-book release that won’t be possible, which means that publishers will lose the ability to geographically price segment the market. Which hopefully means that the book will cost less everywhere. Although it’ll be a long time before e-books become a factor in India. The readers just cost too much today. But get some real competition going and the prices should come down quickly. Maybe from Sony, or maybe these guys.

I saw the article coincidentally when I was looking at a Zoho product after a long time. A friend in New Bombay who co-owns a fledgling, but growing business was looking for a CRM solution. I was spending the weekend with him so he and I got on the internet and started checking things out. He was already being pitched by salesforce.com. Apparently, salesforce.com has a center in India that calls out to trial users in India. He was getting ready to get salesforce.com for the low, low price of $9 per user (limited time offer) before I suggested that he have a look at 37signals and Zoho. I had never tried them but knew that they both had something on CRM.

The 37signals product, Highrise, is somewhat different from your classical CRM so that didn’t work for my friend. But he loved Zoho – especially, the price – free for up to 3 users, $12 per user after for a full-featured CRM product. I tried out the product myself and I was very impressed by it. CRM software functionality is not rocket science. It’s been done many times before. But Zoho had managed to improve on it considerably. For example the one feature that totally wowed me was how you could convert a list of contacts or leads into a Zoho spreadsheet (nice cross-integration, guys), edit it and then save it back to the CRM database. Very cool.

Back to the topic at hand. The Face Value story was about how Sridhar and Zoho were creating a new disruptive model in software based upon a dramatically lower cost of operations. Not just lower cost Indian engineers, though that probably doesn’t hurt.

If Mr Vembu still expects to make money, it is because of his firm’s frugal ways. This has little to do with low Indian wages: these are rising quickly, and most Western software firms also do much development in India. More importantly, he says, Zoho’s software and data centres are built for efficiency. The firm spends a pittance on marketing. And it uses free technology developed by others wherever possible. Its subscribers can, for instance, use Google’s authentication service to sign on to Zoho.

And further,

But Mr Vembu is unfazed: “We’ve heard this before from the likes of Digital Equipment and Sun Microsystems. But look what Dell did to them.”

So while the SaaS model upends the high cost licensed software model, Zoho aims to become the cost leader amongst the SaaS business software vendors. And do what Dell did to the PC industry a decade ago.

But there are some crucial differences. The PC and hardware business is a variable cost business. Lower costs translate into a pricing advantage that leads to more sales and better margins. On the other hand, software, especially in the SaaS model, is largely a fixed cost business. Lower fixed costs don’t automatically turn into a pricing advantage and more sales.

According to the Face Value article, Zoho has wired its business so that a variety of costs are lower:

1. Fixed costs – use of open source, engineering and most of the company is in India. Almost no Marketing costs. Just word-of-mouth.
2. Variable costs – data center efficiencies. Minimal Sales costs. Service costs are presumably India based.

This is a comprehensive, across-the-board cost advantage. But what we must note is that while some things have a lower cost at presumably no trade-off, having lower Marketing, Sales and Service costs than say salesforce.com is a strategic bet. The bet is that sales can scale without them.

Does this comprehensive cost advantage automatically translate into success in the market? Not necessarily. If the lower costs enable Zoho to offer a somewhat lower price, say 15% lower, it may not matter to the customer. The design and quality of the software may matter more. Part of what makes one software product better than another is simply feature coverage, which is more a function of cumulative investment in engineering rather than this year’s fixed cost, giving incumbents the advantage. The other part of it is just how it is designed. “Code is poetry”, as wordpress.org says. Lower costs make no difference whatsoever in this regard.

In my opinion, lower costs are only part of the story here. The big bet that Zoho is making here is that there is a lot of room at the “bottom of the pyramid”. My quick assessment is that a Zoho CRM subscription is between 4 to 5 times cheaper than salesforce.com (ignoring their limited time offer). That is not a measly 15% less. That is 75 to 80% less!

At these prices, they don’t have to fight salesforce.com for customers. They are going after an entirely different market. A market that includes my friend in New Bombay and his Indian startup. Or a Chinese toy manufacturer. Or a small business in the US. You get the picture.

I’ll leave you with an excerpt from my post Go South, Young Man from two years ago.

I think the bottom of the global pyramid in SaaS (borrowing heavily from Prof. C. K. Prahlad) is a great opportunity for Indian tech startups. India abounds in technical talent but is stymied because it can’t develop cutting edge software for developed markets. Indian technologists aren’t deeply knowledgeable about business practices there and thus lose out. My contention is – forget developed markets. Go for the bottom of the pyramid. There are thousands of businesses – small and large – in China and India that need the same software that is being served up by today’s SaaS providers in the US. While these companies are trapped in their first world pricing traps, Indian companies can create similar SaaS products and target the South. These products, at first will be similar, but will eventually diverge as the needs and price points take them in a different direction from their US competitors. And that is good. It creates entry barriers for when the SaaS companies from the North wake up and realize the potential in the South.

[Update: General Electric is going with Zoho on thousands of its desktops. Clearly targeting the bottom of the pyramid does not preclude a smart player at the top of the pyramid (and they don't go any higher in the pyramid than GE). Well done Zoho!]

At the most basic level the framework says that to maximize the chances of switching you should maximize Switching Benefits, minimize Switching Costs and make Research and Trial really easy.

Maximize Switching Benefits

If there isn’t a compelling feature or two in your product that will get a large percentage of your target user base to check out your product, it won’t work. When you introduce a product, it is more important to focus on the Switching Benefits than on lowering the Sacrifice. If the Switching Benefits aren’t there, you won’t get enough people into Research & Trial. If the Switching Benefits are there but the Sacrifice is somewhat high, at least you’ll get the trials and perhaps some early adopters to switch. You might also get some parallel runs, where users use both products for a while. But most importantly, you will get feedback.

Getting the Switching Benefits right is half the battle – that is the innovation, the idea. But sometimes it is not big enough. For instance, the challenge that online office competitors like Google apps and Zoho face is that their Switching Benefits over Microsoft Office are so slim that most of their users continue to use Office for the most part and use online spreadsheets for shared lists or some such occasional use case. Meanwhile Microsoft keeps making progress with Office Live.

Minimize Relearning

In recent years this has received a lot of attention. Design of software particularly has now entered an era where the bar on usability and aesthetics is getting higher and higher. This is partly because of enabling technologies like Javascript, AJAX and of course ubiquitous broadband. And partly because it needs to. It has become so easy to offer new software based services over the internet that, well, people are. In droves. When many services that do very similar things compete to keep users, user experience becomes very important.

Minimizing Relearning is not just about designing for better usability and aesthetics. There are other important considerations that are perhaps more strategic. Like not making it so different from what the user is using today, that they are totally lost. Or, holding off on introducing power user functionality to when a section of users are familiar enough with the simpler workflows and are ready for the power user functionality. And when you need to make the software more complex, layer the complexity so that a new user can still achieve simple tasks quickly. Many Web 2.0 companies do this really well. The poster child (if you don’t count Google) is perhaps 37signals.

The greatest design technology, will still leave some users looking for help for something or the other. When they do, they should be able to find answers to their questions quickly and in many different ways. A service that I use (and like immensely) called Wufoo has so many different ways of getting an answer to a question that is unlikely that anyone at the end of it will actually use the email support that is also available.

Performance

In Enterprise IT products were, and in some cases are still, bought based upon a comparison of features in presentations and marketing material. Here, having a feature is more important than how well it performs. But in software targeted at the individual, for personal use or for work, try before you buy has become so common that a technology marketer cannot hide a low performance feature.

Outlook 2003 could claim that it had a search feature, but one used it only under duress. Google Desktop changed that and Search became the natural way to find old emails. Now Outlook 2007 has better search, but Google Desktop and Spotlight on the Mac, are what users use even for searching email.

Integrating with peripherals

This one is important, but brings up the rear after Sacrifice and Performance. Sometimes, you won’t be able to integrate with peripherals even if you’d like to. Apple, for years, courted application software vendors to port software to the Macintosh platform. Some didn’t. Some did, but all new releases would be on Windows only and the Mac versions would follow after months.

Now Apple makes it easier to bypass this problem by allowing users to run Windows on the Mac. As momentum shifts to the Mac, application software vendors will automatically shift (or balance) allegiances.

Research and Trial

As I said in the last post, Research and Trial is a separate kind of Switching Cost. It is a component of the total Switching Cost, but in addition, it is something like an “investment”. Regardless of whether the switch happens or not, the individual has “sunk” in this cost. Also, a successful Research and Trial cuts through all the marketing hype and the fogs of the unknown usage patterns of each individual to uncover all the Switching Costs. What is still left uncovered becomes the Switching Risk. The higher it is the less likely is the individual to switch.

Thus it is important not only for the cost of Research and Trial to be low, it must appear to be low. Very often a potential user will not even go through the Research and Trial because it appears too costly in terms of time invested.

For tangible technology products, being able to touch and feel the product is very important. I remember how intrigued I was about the Segway a few years back. I read all the press about it, but nothing could beat the 30 second trial ride at the San Jose Tech Museum. Riding it was easy as pie. It’s another matter that I and a million other enthusiasts could never figure out when or where to use it.

In the world of software, free trials are the rule. But by itself that is not enough. One shouldn’t expect users to figure out how to use your product or even the purpose of it just by downloading your software and playing around with it. Most people don’t go through all the menus and screens just to figure out how it works. They want to know what it does and how it can help them in their jobs or their lives. And they are short on time.

Again 37signals and Wufoo do a great job here. They have Free Trials of course. But also product tours, video tutorials, FAQs, testimonials, forums…you can research their product any way you like.

These two posts turned out to be much longer than I thought they would. I hope I have done justice to the topic, at least what you might expect from a blog. But the downside of long posts is that you keep putting it off for when you have a stretch of free time from work and family commitments. In the future I’ll have to think about how to tackle deeper subjects – maybe break them into more posts.

When writing with a fountain pen, the kind of paper you write on is very important. It has to be of a certain quality, otherwise the nib snags or the ink blots. I don’t believe you are supposed to write on both sides of the paper, but I do. So for me, the thickness and quality of the paper is even more important.

I do most of my writing when I am traveling – in meetings, on planes, on phone calls – whenever it is inconvenient to fire up the old laptop. So I need a light notebook.

Unfortunately, you don’t get light notebooks with high quality paper. I have tried Moleskine. Very high quality paper. Looks good. But with 192 pages and a hard bound cover, it adds many ounces to my already heavy laptop bag.

Last week I was in Mumbai. Before lunch with a friend we had some time and stepped into Rhythm House, a favourite haunt of ours when my wife and I lived in the city. I saw some notebooks on display. Most of them were thick with colored paper which weren’t interesting to me.

Then I saw this slim notebook, just 80 pages, with a cover that was made of craft paper. Good quality Very simply designed but with just a few stylistic touches to make it stand out. The price at Rs. 80 is a steal compared to the Moleskine prices.

I bought a notebook. The product is from Rubberband Products. There is a design studio, Ajay Shah Design Studio, behind it. Goes to show that good design can breath life into every day products that are almost commodities.

Now I’m in Chennai. I wish they had an outlet here. I would have stocked up before I left for the US.

One of the (many) problems with modern day drug discovery system is that it is driven completely by a template that provides no incentives to discover naturally found active ingredients with therapeutic properties. Discovering new drugs is an expensive process requiring tens of millions as investment before the drug can be commercially exploited. Most drug candidates don’t make it. If you amortize the cost of these failed drugs over the few successful ones, the costs multiply rapidly. The entire edifice of the pharma industry rests upon the ability of companies to successfully exploit a successful drug through patent protected pharmaceuticals. The problem with naturally found active ingredients is that a patient can get the cure without buying the pill.

I believe that there are many, many cures to diseases as well as ways to stay healthy (nutraceuticals) that can be found in natural substances. Ayurveda is entirely based upon finding remedies in natural substances rather than man made molecules. Unfortunately, to take Ayurveda from what some might call ritualistic mumbo jumbo to authentic medicine requires investment – to isolate active ingredients, do pharmacological testing and clinical trials. How does one justify this investment if at the end of it, the remedies will still be available freely?

Tough problem to crack. Somebody needs to come up with a business model that allows them to justify the required investment. I don’t think this business model can emerge in the developed countries where the powerful pharma industry will snuff it out. But in a country like India, there is still hope.