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Pearlstein: How the iPad impacts new media business models

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Steven Pearlstein
Washington Post Columnist
Wednesday, February 3, 2010; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, February 3 at 11:00 a.m. ET to discuss how the arrival of the iPad has been a case study of the radical transformation taking place all across the economy as a result of the digital revolution.

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Pearlstein won a Pulitzer Prize in 2008 and is co-moderator of the On Leadership discussion site.

Read today's column: The Amazon-Macmillan book saga heralds publishing's progress.

A transcript follows.

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Washington, D.C.:: Thank you for your column on ebooks today. I'd love to hear your thoughts on the effects of digital rights management on the transformation to electronic book selling. I, and many people I know, refuse to invest in an eReader until DRM is a thing of the past. We're too leery of being locked out of what we buy, as has happened numerous times with both emusic and ebooks. Many people do not want content tied to a particular appliance or family of appliances. Ironically, Amazon was a key player in ending DRM on music downloads when they began selling unencumbered MP3s at high bit rates (quality). Now Amazon has the most encumbered ebooks, tied directly to its software and Kindles. Do you foresee a similar shift happening with ebooks? If so, who do you see driving it?

Steven Pearlstein: I'm a bit out of my depth here, but what I'd say is that we'll go through a period in which various publishers and device makers and distributors will try to gain advantage with closed, proprietary systems, which they will argue are necessary so they can recoup their large up-front fixed costs of development. Those arrangements will last for a while, but before too long we'll have an open system with open software so you can get any book or song or video to work on any device with sufficient capacity. Full interoperability, in other words. The public will demand it and it is necessary to realize a competitive marketplace. But it will take time in getting there, so in the meantime, it is going to annoy some people and result in monopoly pricing and inconvenience and less than full competition. There was a time when you couldn't call people who were on a different phone network, back in the early days of telephones. But we got over that.

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McLean, Va.: So the introduction of competition into the electronic book reader marketplace has the effect of ... higher prices to the consumer? I demand that the FTC get involved and reinstate the monopoly!

Steven Pearlstein: Selling something below cost isn't a sustainable model. Now, in fact, you could argue it wasn't below cost at $9.99 because Amazon also attributed some of the revenue from the sale of each Kindle to the sale of the subsequent books -- deferred revenue. So the real cost was more than $9.99, it is just that some of it was hidden in the Kindle. In which case, of course, the actual price didn't rise and you have no complaint and no reason to call the FTC.

In fact, what the FTC should be looking into is the potential collusion among all the publishers to "set" the price of e-books at $15. They didn't get in a room and collude, but they colluded through their new "agent", Apple, with one following the lead of the other. It's an old story that we've seen many times over the years in many industries. But at the least the FTC should put these folks on notice that any attempt to fix the retail price (as opposed to setting a standard agency percentage fee) would be suspect if it appeared they were acting in concert.

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Denver, Colo.: Thank you, thank you Mr. Pearlstein. As a new author, I constantly try to proselytize my colleagues that traditional publishing is a dinosaur and that it is much more fulfilling to put your energy towards gathering readership, rather than the painful process of obtaining an agent/publisher. Your last few paragraphs regarding the future of publishing is right in line with my thinking, and I thank you for your vision.

JJ Frederick- Making Stuff Up Since 1970

Steven Pearlstein: Thanks JJ. Like your tag line.

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Great Falls, Va.: I hope that the introduction of the iPad stirs up some discussion about intellectual property and the balance of trade. I was amused and angry when I read about how a Chinese firm is suing Apple because they say the iPad is a knock-off of their product.

How is the foreign country that owns most of our debt able to steal our intellectual property like this? At some point can we just walk over to the Chinese and say "start enforcing these patents or we will cancel/retire/default on $500 billion of the treasury bonds that we owe you"?

If I spend two months out of every year earning the money necessary to pay my taxes, and a portion of that is interest on the debt, and a portion of that is owned by China, I'm probably spending at least a week or two working just to earn money to give to these intellectual property crooks.

http://www.fastcompany.com/blog/kit-eaton/technomix/reverse-psychology-chinese-knock-firm-sue-apple-over-ipad

Steven Pearlstein: This Chinese relationship is getting complicated, but I think we have to stop thinking of China as some sort of monolith. It's a complicated country and not everything is connected and controlled by some all-powerful, all-knowing cabal in some secretive palace in Beijing. They operate in many respects through global markets just like we do, and there are a lot of individuals (billions, actually), millions of companies and lots of different government agencies.

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Reston, Va.: The business model that popped into my head when I first looked into the iPad: A fool and his money are soon parted.

A person could spend half as much money on a far, far more powerful Netbook. I don't see what innovation the iPad is bringing to the table. Clearly, Jobs - or someone at Apple - was taking offense at the Nook and the Kindle. While this probably won't be a Newton-esque failure, I can't see why anyone other than the most rabid Apple fan would see any value in it.

Steven Pearlstein: As you may know, I'm not a techie, but I find that the discussions among techies about new products always gets so nasty and vitriolic and very personalized in a way that is totally overboard. Everyone is so focused on the here and now -- the current price, whether this or that functionality works better than the competition -- ignoring the larger picture of what is going on. First people overhype what's going on at Apple (not Apple so much as people on the outside), then people criticize Apple for overhyping things and under-delivering, blah blah blah. This is a segment, if you don't mind my saying it, that needs to grow up a bit and get a life. We see the same thing, of course, in the political blogosphere, where every molehill becomes a mountain. But you'd think in business, people would have more perspective.

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Silver Spring, Md.: I think the iPad is going to be HUGE in education.

Right price point. Killer graphics. The e-reader applications. It will tie in nicely with the smart/whiteboards that are becoming the norm in the classroom.

Steven Pearlstein: More precisely, thin, light portable tablets are going to be HUGE in everything. Reading books and newspapers. Playing games. Keeping up with e-mail and stuff when you are on the move. And when you get to the office or home, you'll put the tablet into some holder, hook it up to a keyboard or mouse, and it becomes the screen for your "computer."

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Laurel, Md.: As an individual consumer, your column today illustrates why I don't spend a lot of money up front in a way that will tie me to a particular company's products. (I'm still using pre-paid cellular.)

Technology and its pricing changes too frequently to spend $250 on Kindle to save $5 per book. That's 50 books you have to buy just to break even, and doesn't even reflect the fact that paper is easier to handle than a Kindle is.

Steven Pearlstein: Look, different people have different incomes and make different uses of these devices and place themselves at different points along the technology adopter curve. That kind of diversity is a good thing. But it also should cause us all to be cautious about making sweeping judgments like that anyone who buys an iPad now is a fool -- or that anyone who waits three years to buy one is a troglidite. We'd all be happier if we were a bit less judgmental and a bit more tolerant with each other and patient with the process of getting things right.

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Mattapoisett, Mass.: How many iPad units do insiders at Apple anticipate selling in 2010? Do you believe their estimates to be realistic?

Steven Pearlstein: No idea what their estimates are or what the right number should be. But, again, unless you are a stock analyst or stock trader, what do you care? It's gonna be a big category and they have a good running start. Everything else is sort of secdonary.

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Southeast D.C.: I think an interesting possibility that comes with the iPad is that of multimedia books. (Something the Kindle just can't do.)

I have mixed feelings about it all, but imagine what Vonnegut could have done with sounds and moving pictures.

Steven Pearlstein: Don't you think the next generation of Kindle will have a multimedia function (or the next one after that)? Of course it will. Don't talk about these things as if they are static.

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Washington, D.C.: Do authors need to sell books through Amazon or i-book in order for their books to be read with these devices? Could, say, an author make the book available on his Web site, where the e-reader user could download it?

Steven Pearlstein: What Amazon offers is essentially the digital interface that allows independent authors to do that. Such an interface would be too expensive for an author to create or buy on her own, but Amazon essentially rents theirs out for a fee. And that will probably be the case for a long time, until the application is so ubiquitous and cheap that any author can have it on her own web site. At that point, however, it will still be cheaper for her to use Amazon, because of service and billing and the like. At that point, however, the amount that Amazon can charge will be much lower. That's how dynamic markets work.

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Games on the Kindle?: Does Amazon really think anyone would play a game on the e-ink display? While it's fine for text I can't imagine what a video game would be like.

Steven Pearlstein: Again, well beyond my knowledge or understanding. There are differences between the display technologies of the Kindle and the iPad, and the Kindle is better on the eyes for reading and maybe a lot worse for games, I don't know. But in the next generations, the developers of both instruments will improve on those deficiencies, or in the end, one technology will win out and the other will disappear. Beta and VHS and so forth.

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Washington, D.C.: I'm a happy Apple products user (iPods, Macbook, and others), and I was initially excited about the iPad. But the more I thought about how I would use it, the more I realized that were I to buy one, it's limitations would mean I would probably use it rarely. I like to blog, but since you can't multitask on an iPad or type easily, it would be hard to do so, since you can't look anything up while you're writing. I like to read, but I don't think an iPad would be practical for outdoor reading due to sunlight or reading by the pool or on long trips if the battery dies. And I like to listen to music, but its limited storage, relative to my iPod, means it doesn't do that as well either. In short, it seems the only thing it would be good for is travel, which I do only a few times a year, and then only on the plane or train, as I'd rather have my laptop, iPod and books/magazines the rest of the time.

Steven Pearlstein: At this point, you may be right. But it's early yet. What you have to think of, in terms of the tablet, is all the things that are now done on paper that will be done digitally. That's the reason for it -- not that it can do the same things as smaller devices can already do. And, yes, you'll have multiple devices. The iPad isn't the replacement for the iPhone. It is the replacement for a whole library full of books and that big stack of newspapers and magazines piling up on your kitchen table.

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No Pulitzer for Timeliness?: During 4th-Qtr 2009, wasn't most if not all reporting on the US Economy by MSM reporters, political pundits and economists negative? While it would've been bold to report positive things about the economy last year, shouldn't journalists be criticized highly for missing an important fact the last 4 months -- i.e., the US Economy was growing robustly at 5.7% ("fastest rate in 6 years")? I'm not suggesting we're out of the woods or that double-dips aren't possible, but certainly 4th-Qtr growth indicators didn't just appear last week and perhaps things weren't as bad as implied by prior reporting. Given the protections and resources this country affords the Press, what more do you guys need to improve the timeliness of your reporting? While "herd mentality" is a fact of life, shouldn't good reporting have uncovered this growth sooner? Or are Pulitzers awarded for successful muckraking but not timeliness?

Steven Pearlstein: Well, some Pulitzers are given for timeliness, I suppose. I know of one, in any case. There are many of us who have been bearish on the economy and warned about inventory swings and snap backs from a steep decline in corporate investment and spending, which are different than a sustainable recovery. We'll see whether we were right or not, although the strength of the output numbers these last few months has been beyond anything any of us anticipated. In which case, we were wrong and we'll say it. But you'll have to wait a few more quarters to be able to crow about that. And if we're back at annualized growth rates of 2 percent by the end of the year, and of that 2 percentage points comes directly or indirectly from government stimulus, then maybe you'll admit you were wrong. Or not.

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Mountain View, Calif.: An important note from the geek crowd here. The iPad should not be viewed as a Kindle competitor, or as an e-book device. E-books use a special kind of text display (commonly referred to as e-ink), that makes reading large quantities of text much easier on the eyes. The iPad appears to have a more traditional laptop-type display, which does not suit itself to reading books. Unless the iPad has some sort of "dual-mode" display function, it shouldn't be lumped in with the Kindle. Ask Rob Pegoraro, I'm sure he could explain this more fully.

Steven Pearlstein: I'm sure you are right, and I'm sure Rob could explain it more fully. But not being a geek, I think I can say that the functionality will improve over time, perhaps with a dual mode, as you suggest, or some third approach that makes an acceptable tradeoff between the two current approaches. Looking at it from the 100,000-foot level, the iPad and the Kindle are competitors -- they are both digital tablets what will be the instruments of moving away from paper products.

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Princeton, N.J.: Steve, there are people who I would guess you see as left-wing nuts whose slogan is "information wants to be free." They want to do away with all copyrights. While I don't agree with them, I think their strongest argument is that it will simply be impossible in the future to keep people from "stealing" information, books, music, software, etc.

Right now, I can show you how to do it with little fear of getting caught. I think this is a problem that most business people don't want to consider, a problem which will turn around and bite them in the very near future.

Steven Pearlstein: I am definitely, and for obvious selfish reasons, not with the "information wants to be free" crowd. And this is another of those instances where you can really get your attention diverted by short-term controversies. Reporting and sophisticated, original commentary and data collection are very useful to people, but also take a lot of work by smart people who could do other things in life, and they won't work without getting paid. So our market economy will come up with some way of allowing commerce between the people who demand those products and the people who produce them, at a price the buyers are willing to buy at and the sellers are willing to sell at. We might not know the price at the moment, or have the right insitutional structure for this market place to work, and we might not have the technological tools to prevent free riding and piracy and the like. But, trust me, these will come.

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Arlington, Va.: "Steven Pearlstein: We'd all be happier if we were a bit less judgmental and a bit more tolerant with each other and patient with the process of getting things right."

What are you? Some sort of communist or something?! It's the American-way to be judgmental of others.

Steven Pearlstein: No, actually, I think its the old Mainstream Media way of an earlier era.

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Washington, D.C.: Rubbish. The feel of a book when relaxing in your favorite chair has infinitely more value than scrolling thru text on a backlit screen.

The only value I see in a reading device is if the device allows document searches, offers notepad extras so you can jot reminders as you read, and has a dictionary with translation options.

Still, I like to hold a book, turn the pages at will, stop and ponder once in a while, and drop it to the floor if I should fall asleep.

Steven Pearlstein: Fine, and if you want that, you'll be able to print yourself any book you want by walking into a Barnes and Noble and getting it. You might have to pay more than you do now for that privilege, although not an exhorbitant amount more. But if there are sizeable number of other people like you, the market will rise up to take you rmoney and satisfy your needs. But, again, let's not impose our own preferences on everyone else.

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Vienna, Va.: Call me old fashion or just plain old grumpy, but all these new devices and the related service plans are very telling about what is wrong with the USA. Here were are in the midst of the worst recession since the 1930s and people are going out and blowing $300-500 plus subscription fees for an iPhone, iPad, Droid, Playstation, etc. What's wrong with a library card? Seriously, I don't understand why parents won't teach their children the basics of saving for the future. We've bred an entire generation that has to have the gadget of the moment and it's sucking us dry. Your thoughts?

Steven Pearlstein: Hello? Although we have 10 percent unemployment, and another 7 percent underemployment, there are still lots of people who have jobs, and those jobs are still paying an average of $35,000 apiece, with roughly half the working population earning more than that. Some of those people are stretched very thin, but lots of others aren't. This isn't the Great Depression. And its perfectly reasonable that during this recession, people still take vacations, go out for a celebratory dinner or, yes, buy an iPad. The impact of this recession is very, very uneven, as most recessions, which is why we need to spend more time figuring out how to help the losers, even if it means taking a bit away from the winners.

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Houston, Tex.: I have been using Apple computers since 1989, so there's no doubt I'm a loyal customer. However, I'm not sure I see myself getting an iPad. In the last few years, the Apple laptop computers have become good enough that I got rid of my desk top, which greatly simplified my life, i.e., everything is on one computer. My iPhone provides the rest of my needs. While the iPad looks like it might be a bit more portable and convenient, especially for travel, I would still need to carry around my laptop anyway--and now I'm back to two devices. Thus, I'm not sure this device will change the landscape all that much (or are my personal views in the minority?)

Steven Pearlstein: I think I gave the answer to your question in the earlier post -- the tablet as the removable screen for your laptop.

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Silver Spring, Md.: Sure, a netbook can do more for less money. but:

1) it weighs more

2) it has lower battery life

3) it is a complex mess and runs Linux or Windows

For the iPad target market, those three factors are important.

If you want a netbook, enjoy. But know you're not the "rest of us".

Steven Pearlstein: Okay. And you're point?

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Leesburg, Va.: My problem with the iPad is that I already have one. It's smaller, an "iPad Nano," if you will, but it has more functionality - I can make phone calls and take pictures with it...it's called my iPhone.

If this thing is a success it will truly be a P.T. Barnum-esque duping of the public. Steve Jobs will have successfully convinces people to by a slightly bigger version of something they already has, that does less.

This way to the Egress!

Steven Pearlstein: Again, why is that people have to see these product introductions as either "the greatest thing since sliced bread" or "duping the public?" Okay, so it's not for you at this moment. But geez, give the guy a break. He seems to have a knack for developing products that have real purpose and add real value to people's lives. Why do we have to lionize or demonize him all the time? He's a good businessman and clever technologist and a flawed human being, and the first generation of every product he comes up with is never the best. Welcome to the real world.

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Takoma Park, Md.: I own an HP1100 tablet PC. The screen totally detaches from its dock. Although it works with a pen only and not touch, I find it terribly handy when doing stuff around the house.

Recipe online. Just prop it up in the corner. Just yesterday I need to look up a engine part online. I just walked down to the garage with the tablet in hand and "wrote" down the model number.

I think people really need to use a tablet PC to understand exactly HOW handy it is.

Steven Pearlstein: THANK YOU!

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Silver Spring, Md.: The point is that people who say that the iPad will fail because a netbook is cheaper and more capable are not thinking about the target audience for the iPad.

Steven Pearlstein: Right.

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RE: Your Response to No Pulitzer for Timeliness?: The main point is that the economy wasn't as bad as most reporting by you guys implied, and better reporting by the press should have revealed this before an after-the-fact government report. Certainly the press doesn't wait for government reports when it comes to scandal reporting -- do they?

Steven Pearlstein: I think there was actually plenty of reporting about how much better things were getting -- more by the business press than the economics press here in Washington. But it was all there to see in the company quarterly reports and comments from top executives that got plenty of play. I don't know why everyone has such a great focus on the press, as if we are so all powerful. We're really not -- and we get caught up in conventional wisdom and group think as much as any group. Comments about "the press" or "the media" or "the mainstream media" aren't really very useful most of the time.

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Princeton, N.J.: Well, you may be correct, but if I thought I would be around long enough, I would take the other side of that bet. I think we may be in for a paradigm shift even bigger than when Guttenburg put a lot of monks out of business.

Steven Pearlstein: I don't disagree with that.

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Ashburn, Va.: "He seems to have a knack for developing products that have real purpose and add real value to people's lives."

You sound like someone who never owned an Apple Newton or Apple TV :)

Steven Pearlstein: If he didn't have any failures, then I would say he was a technologist who wasn't taking enough chances.

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Washington, D.C.: The way you described the business model of the Kindle and iPad books confused me somewhat... First, why would Amazon have approached the pricing the way they did? How does it make sense to sell the razor-blades below cost but the razors above it? Is their expectation that the number of Kindles sold will increase that much faster than the number of books bought by existing Kindle users? That seems unsustainable, at a glance.

Second, why would Macmillan want to restructure pricing so that they make less money on each book? If they were getting paid more per Kindle ebook than they will net from the Apple "thirty percent of fifteen dollars" model, why change? Just because they were worried about Amazon becoming too powerful as a near-monopoly in the market?

Thanks for any additional clarification you can provide.

Steven Pearlstein: The reason Gillette underprices the razors and overprices the blades is that people aren't completely rational and foresightful and they wind up spending more over the long run with that model. If not, Gillette wouldn't do it that way. The idea of underpricing the razor is to get you to give up your old razor, with its cheap blades, and switch to the new improved razor with blades that are more expensive and have higher margins. In the case of books, Amazon found that the best way to get people to switch to the "new model" was to offer $9.99 books, which makes people feel like they are saving money. In order to do that, they have to sell a pretty expensive piece of equipment, but for enough people, it was sufficiently cool or convenient and affordable that it worked.

Now as for MacMillan, as I said, their whole interest at this point is to slow that transition from hard-copy to digital by raising the retail price of the digital book, so it is closer to the discounted price at Barnes and Noble for a best seller. That is where their bigger profits are and they want to protect that more profitable product as long as they can and not cannibalize their own business. And to do that, they are willing to take less profit on the small part of the business that is digital.

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I just think he missed the boat.: By not actually improving on the iPhone, I think he let down the consumer. That's all. For someone with his aforementioned "reputation," he didn't really do anything other than give us a bigger iPhone that doesn't make calls.

Steven Pearlstein: That's true for iPad 1.0, perhaps.

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McLean, Va.: I don't really have a dog in this fight. I have an iPhone, and I have all PC Computers. As a consumer, I think that Apple dropped the ball by not having multitasking on this thing. It is the single most frustrating aspect of my iPhone, next to not having Flash. I really just can't see dropping that kind of scratch on something that won't let me do two things at once.

Steven Pearlstein: Same answer. It will. I'm sure it's not that they didn't think of that. It is that it would have required other tradeoffs that they were unwilling to make. I'm sure they've got people working on that 24/7 for the next version.

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Steven Pearlstein: That's all the time we have today. I'm sorry if I sounded like an Apple salesman today, but it's not because I have any particular desire to boost one company. I hope and expect others will join in the tablet competition and do them one better. That's how markets work their magic. "See" you all next week.

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Editor's Note: washingtonpost.com moderators retain editorial control over Discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions. washingtonpost.com is not responsible for any content posted by third parties.


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