6 AM Pacific

The Dharma Indexes

Stock indexes are an important part of the stock markets. A Wikipedia entry here will give you a good overview. Last month Dow Jones launched a family of indexes called the Dow Jones Dharma Indexes, in association with Dharma Investments. More »

Open Letter to the Bollywood Music Industry

Dear Mr./Ms. Music Executive,

First of all, let me compliment you on your pricing strategy so far. You have aced the test on how to price information products. Information products like music are tricky - the content is all in digital form, the fixed costs are high and marginal costs approach zero. How do you price such a thing?

Your current strategy seems to be working well. You have segmented the market according to the listeners’ ability to pay. To each segment you offer a different product (or sometimes the same product) at vastly different prices. I checked prices at different places for the same album – Don. Here’s what I found: More »

Apple and the Music Industry

Last week’s post on YouTube and Viacom got some great comments. If you get a moment go read them. Ram Medury brings up the case of VAS content providers in India, who get a small fraction of the revenues. The rest is kept by the Indian mobile service provider. Senthil says that it’s about the quality of the content. If the content is compelling it will pull in the dollars. Also, Robert Young at Gigaom has a very thought provoking post on the subject of Google and old media companies.

Onward ho! As promised, this week I take up another interesting space where the “Content vs. Distribution” battle is being played out – digital music. More »

YouTube vs Viacom: The Return of the King

The old adage “Content is king” doesn’t seem to be borne out by the post-bubble resurgence of new media. The three companies that have benefited by this resurgence the most are Google, Apple and YouTube, which is now part of Google. None of them create content. More »

Go South, Young Man

A few months back in a post on ‘Paperbacks in India’ I had talked about how information products have some interesting challenges when it comes to pricing in the developing world. I believe that in what is called Software as a Service (or SaaS) - basically web-based hosted software like your internet banking software or even Yahoo Mail - there are significant opportunities for Indian technologists. More »

Too much of a good thing

The patent law in the US is one that the country is justifiably proud of. Over decades it has nurtured and rewarded inventors for inventing things that improve the lives of their fellow beings by granting the inventors a limited time monopoly over the uses of their inventions.

But it seems like the pendulum has swung too far to the other side. The range of innovation that is now addressed by patent law is vast and extends to things like business methods. The duration for which the inventor has monopoly rights to exploit his invention keeps going up (now 17 years).

Michael Crichton  (of Jurassic Park fame) recently wrote a piece where he talks about the need to reign in the patent law. In a recent ruling a federal court ruled that an existing patent that simply links elevated homocysteine to vitamin B-12 will stand. Just to be clear, this patent is not about a novel test to check for elevated homocysteine. It is simply the causal link between it and B-12, which is a natural phenomenon in the human body. And the court is allowing the patent on it.

Earlier this week, Netflix sued Blockbuster for patent infringement. The patents are on its business methods of unlimited rentals with no late fees and a ‘range of automated interaction with its customers’. Now I am no friend of Blockbuster and actually think Netflix has reached its dominant position in online DVD rentals through grit and gumption. They deserve every bit of what they have achieved so far. But do they deserve 17 years of untramelled access to the online rental market for some hohum ways of interacting electronically with customers? I don’t think so. An earlier and bigger brouhaha on a similar award of a business method and software patent was Amazon’s 1-click ordering.

These may be one-off exceptions and don’t necessarily prove anything. But if you look at the facts, US patent law (and other IP laws like copyright laws) have become looser, more wide-ranging and give the owner of the patent longer exclusive protection. This, it is claimed, encourages innovation.

But it doesn’t. All innovation is accretive. All creativity is remix. Great inventors stand on the shoulders of inventors before whose inventions allow them to see further. Restricting the use of an ever-widening range of patents for longer reduces innovation because new inventors will not have free access to the inventions. Businesses will spend too much time trying to figure out what to patent or how to side-step others’ patents.

In some industries like healthcare, the upfront time and costs of FDA approval make it hard for the inventor to commercialize a patent quickly. But in most of the world of commerce, 17 years is many lifetimes. The speed of business is faster than at any other time. A shorter period of patent protection should be very doable. Jeff Bezos had some very good suggestions back in 2000 when the 1-click ordering patent controversy broke.

The patent law needs some serious attention from Congress. Otherwise, be prepared to see poorer inventors and richer lawyers.

Paperbacks in India

Every trip to India, I bring back half a suitcase full of books. My wife is a voracious reader of fiction and she reads a lot of Indian fiction too. Also, we want our children to read Indian mythology and other Indian stories and it’s impossible to get Indian childrens’ books in the US (there’s eBay retail opportunity for someone out there).

Of all the reasons why I buy books in India, cost is not one of them (unlike for Hindi film music and DVDs where there is a cost arb opportunity). But I think I may have to reconsider. I had just bought The Argumentative Indian’ by Amartya Sen in the US before going to India. It was the hardcover edition and cost about $25. In India the same book was available in paperback for less than half that price.

I know what’s going on of course. A book is an information product (like music, magazines, software and cinema). All of them are digitizable and the medium that carries them is immaterial (more or less) to the enjoyment of the product. All information products have a similar business problem. The marginal cost of producing the next copy is minimal and so variable cost has no bearing on the pricing of the product. For instance, the cost of a blank CD disc is insignificant compared to the price of the CD. So how does one price such a product?

In the case of books, the cost is not insignificant but it is much less than the price of the book (20% of the cost of a hardcover). So how does one price a book? The main technique is what I will loosely call ‘windowing’, though this is a term more widely used in the movie business. Publishers first come out with hardcover editions for (in the US) a $20+ price. With this they cover the well informed, price insensitive crowd. After a year or so comes the paperback with a price of around $10 that caters to the more price sensitive crowd.

However, there is another problem that publishers must deal with. Readers in different countries have vastly different purchasing power. How do they preserve their pricing model in the developed world without losing readers in developing countries like India? In the past they would just delay the launch of the book in India. However, in today’s global village, the media buzz around the launch of a new book creates demand everywhere at the same time. Postponing the book launch in India could mean lost sales.

So the solution is to launch relevant books in India simultaneously (or closely after) with the US market, but go straight to paperback. The different covers in a way justifies the different prices. For me, this is great news. I hate buying hardcovers because I do most of my reading on long flights and that is just extra weight to lug around. But many times, I just can’t wait. Paperbacks in India are like having your cake and eating it too.

Pricing of information products is one of the most fascinating subjects in business. My own company sells an information product. Many an hour has already been spent on how to price it. I’m sure this is not the last time I’ll be talking about this subject on this blog.