Go bonkers

It was a Friday morning, January 22, 2010. Apple was preparing to release its newest product, a long-rumored tablet computer, the following week. Part of the iPad’s appeal was supposed to be the vast array of media that could be consumed on it, but one of the largest American publishers, HarperCollins, was holding out from signing a deal to sell its ebooks in Apple’s iTunes store.

Those were the stakes as Eddy Cue, Apple’s head of iTunes and the App Store, visited executives of HarperCollins and its parent company, News Corp. The substance of that meeting was conveyed in an email sent to Cue later that day by Brian Murray, the CEO of HarperCollins. It detailed the publisher’s opening bid in the negotiation, with five days remaining until the iPad’s unveiling.

Eddy,

Thanks for coming in again this morning. We’ve talked over the proposal and I want to make sure that you have a summary of the deal that HarperCollins would be willing to do in your timeframe.

1. Pricing: We need flexibility to price on a title by title basis outside the prescribed tiers in the contract. We will use our best efforts to meet the tiers we discussed.

2. MFN [“most favored nation” status]: In the event that HarperCollins and Apple disagree on a consumer price for a title, HarperCollins needs the ability to make that title available through other agents who support the higher price.

3. Commissions: We need a lower commission on new releases for the economics to work for us and our authors. We believe a 30% commission will lead to more authors asking for ebooks to be delayed a result that will not work for Apple or HarperCollins.

4. The new release window: We need to have flexibility on the agency window. We believe this window should be 6 months rather than 12 months in the event that one or more large retailers do not move to an agency model.

Leslie will be sending Kevin a contract that reflects these points in the event you wish to move forward on these terms.

Thanks
Brian

Those terms were never going to fly with Apple, which had successfully signed deals with HarperCollins’s rivals, like Penguin (a division of Pearson) and Simon & Schuster (part of CBS). Those deals would allow Apple and the publishers to set prices for new ebooks at $12.99—three dollars higher than the typical rate at that time on Amazon—and take a 30% cut of each sale.

But HarperCollins wanted the freedom to set its own prices and worried that $12.99 per ebook would hurt its sales on the new iPad as well as the Kindle. It also didn’t want to give up 30%. To back up its position, James Murdoch, a high-ranking News Corp. executive, forwarded Murray’s email to Apple’s then-CEO Steve Jobs, and included the following note. It was still Friday.

Steve,

Thanks for your call earlier today, and for the time last week.

I spoke to Brian Murray and Jon Miller [then the head of digital media at News Corp.]—and Brian is sending a note to Eddy today. I thin I have a handle on this now. In short—we we would like to be able to get something done with Apple—but there are legitimate concerns.

The economics are simple enough. [Amazon] Kindle pays us a wholesale price of $13 and sells it for 9.99. An author gets $4.20 on the sale of a hardcover and $3.30 on the sale of the e-book on the Kindle.

[A portion of this email was redacted by the court.]

Basically—the entire hypothetical benefit of a book without raw materials and distribution cost accrues to Apple, not to the publisher or to the creator of the work.

The other big issue is one of holdbacks. If we can’t agree on the fair price for a book, your team’s proposal restricts us from making that book available elsewhere, even at a higher price. This is just a bridge too far for us.

Also, we are worried about setting prices to high—lots of ebooks are $9.99. A new release window with a lower commission (say 10[%]) for the first six months would enable us to proce much more kenly for Apple customers. We’d like to da that.

More on this below in Brian’s note to Eddy. We outline a deal we can do.

Feel free to call or write anytime over the weekend to discuss if you like.

I am in the UK (so eight hours ahead of CA). My home number is [redacted]. I check the email regularly.

Steve, make no mistake that across the board (TV, Studios, Books, and Newspapers) we would much rather be working with apple than not. But we, and our partners who produce, write, edit, and otherwise make all this with us, have views on fair pricing, and care a lot about our future flexibility. I hope we can figure out a way, if not now and in time for this launch of yours, then maybe in the future.

Best,
JRM

Jobs digs in

Jobs wasn’t willing to compromise. He sent this reply to Murdoch the same day, arguing that Amazon’s pricing wasn’t sustainable and would train people to think that ebooks were cheap. Jobs also reminded Murdoch of Apple’s vast reach—”over 120 million customers with credit cards on file.” You need us more than we need you, he seemed to be saying.

James,

A few thoughts to consider (I’d appreciate it if we can keep this between you and me):

1. The current business model of companies like Amazon distributing ebooks below cost or without making a reasonable profit isn’t sustainable for long. As ebooks become a larger business, distributors will need to make at least a small profit, and you will want this too so that they invest in the future of the business with infrastructure, marketing, etc.

2. All the major publishers tell us that Amazon’s $9.99 price for new releases is eroding the value perception of their products in customer’s minds, and they do not want this practice to continue for new releases.

3. Apple is proposing to give the cost benefits of a book without raw materials, distribution, remaindering, cost of capital, bad debt, etc., to the customer, not Apple. This is why a new release would be priced at $12.99, say, instead of $16.99 or even higher. Apple doesn’t want to make more than the slim profit margin it makes distributing music, movies, etc.

4. $9 per new release should represent a gross margin neutral business model for the publishers. We are not asking them to make any less money. As for the artists, giving them the same amount of royalty as they make today, leaving the publisher with the same profits, is as easy as sending them all a letter telling them that you are paying them a higher percentage for ebooks. They won’t be sad.

5. Analysts estimate that Amazon has sold more than one million Kindles in 18+ months (Amazon has never said). We will sell more of our new devices than all of the Kindles ever sold during the first few weeks they are on sale. If you stick with just Amazon, Sony, etc., you will likely be sitting on the sidelines of the mainstream ebook revolution.

6. Customers will demand an end-to-end solution, meaning an online bookstore that carries the books, handles the transactions with their credit cards, and delivers the books seamlessly to their device. So far, there are only two companies who have demonstrated online stores with significant transaction volume—Apple and Amazon. Apple’s iTunes Store and App Store have over 120 million customers with credit cards on file and have downloaded over 12 billion products. This is the type of online assets that will be required to scale the ebook business into something that matters to the publishers.

So, yes, getting around $9 per new release is less than the $12.50 or so that Amazon is currently paying. But the current situation is not sustainable and not a strong foundation upon which to build an ebook business.

[A portion of this email was redacted by the court.]

Apple is the only other company currently capable of making a serious impact, and we have 4 of the 6 big publishers signed up already. Once we open things up for the second tier of publishers, we will have plenty of books to offer. We’d love to have HC among them.

Thanks for listening.

Steve

Murdoch starts to bend

Murdoch’s reply came the following afternoon, Saturday, January 23. Jobs had made clear that Apple wouldn’t budge. Murdoch was about to indicate that HarperCollins would. He proposed two possible compromises, then noted that News Corp. and Apple were negotiating on a number of fronts. “Is it worth considering in the round, over the next few months or weeks, whether or not some of these loose ends can be tidied up?” Murdoch wrote. The iPad announcement was four days away.

Steve,

I think the crux of this is our flexibility to offer product elsewhere at price-points you don’t like.

If we could offer to you that a certain percentage of releases (>50%) would be available within your pricing structure (< or = 14.99), does that give you enough comfort?

I think we are worried more about the absolute holdback of product elsewhere, and our ceding of pricing to Apple, than we are about the actual haggle over what the price will be.

I haven’t shared this with HC directly—so this is only hypothetical. But if you were willing to accept that a supplier can exploit other avenues (at prices not disadvantageous to you), with a guarantee of substantial volume through Apple—maybe I could work with HC to get to some common ground.

Please let me know.

A different question: we have four areas of discussion (related to our product) between our teams right now: Books, US Video, Int’l Video, and newspapers. All at different stages of maturity, these discussions are all centered, for us, around the desire to make our product widely available, and to make yours and our products more attractive for our customers. It seems though that we in each one we largely encounter a “take it or leave it” set of terms, and predictably we’ve so far failed to really strike the kind of partnerships that could move things forward.

Is it worth considering in the round, over the next few months or weeks, whether or not some of these loose ends can be tidied up? It’s clear that Apple is already becoming an attractive platform for so many of our customers—all over the world. As a creative company at our core, NWS [News Corp.] should be more engaged with Apple, and I think Apple could be more engaged with NWS, globally, than either of us are today.

Best,
JRM

Jobs goes in for the kill

With Murdoch indicating that HarperCollins was willing to compromise, Jobs pressed harder. “As I see it, HC has the following choices,” he wrote in a reply to Murdoch the following morning, Sunday, January 24. Jobs outlined three stark choices. Accept our terms, he was saying, or good luck with Amazon. “Maybe I’m missing something, but I don’t see any other alternatives,” Jobs wrote, almost daring Murdoch to spurn Apple. “Do you?”

James,

Our proposal does set the upper limit for ebook retail pricing based on the hardcover price of each book. The reason we are doing this is that, with our experience selling a lot of content online, we simply don’t think the ebook market can be successful with pricing higher than $12.99 or $14.99. Heck, Amazon is selling these books at $9.99, and who knows, maybe they are right and we will fail even at $12.99. But we’re willing to try at the prices we’ve proposed. We are not willing to try at higher prices because we are pretty sure we’ll all fail.

As I see it, HC has the following choices:

1. Throw in with Apple and see if we can all make a go of this to create a real mainstream ebooks market at $12.99 and $14.99.

2. Keep going with Amazon at $9.99. You will make a bit more money in the short term, but in the medium term Amazon will tell you they will be paying you 70% of $9.99. They have shareholders too.

3. Hold back your books from Amazon. Without a way for customers to buy your ebooks, they will steal them. This will be the start of piracy and once started there will be no stopping it. Trust me, I’ve seen this happen with my own eyes.

Maybe I’m missing something, but I don’t see any other alternatives. Do you?

Regards,
Steve

On Tuesday, a day before the iPad announcement, HarperCollins agreed to Apple’s terms. The publisher’s ebooks were included in the iBookstore unveiled on January 27 along with new tablet, more than 100 million of which have now been sold.

Q: I have $5. What is the best way to invest and grow my money?

Vivek Virasamy’s response on Quora:

I remember reading Tina Sellig’s (executive director of the Stanford Technology Ventures Program) book- What I wish I knew when I was 20. (I don’t know Tina, though I wish I did, and I love her book.)

She gave her students the exact same problem. Here are her words, with my emphasis. If you don’t have time to read the whole thing, just skim and read the words in bold.

“What would you do to earn money if all you had was five dollars and two hours? This is the assignment I gave students in one of my classes at Stanford University, as part of the Stanford Technology Ventures Program…

 Each of fourteen teams received an envelope with five dollars of “seed funding” and was told they could spend as much time as they wanted planning. However, once they cracked open the envelope, they had two hours to generate as much money as possible. I gave them from Wednesday afternoon until Sunday evening to complete the assignment.

Then, on Sunday evening, each team had to send me one slide describing what they had done, and on Monday afternoon each team had three minutes to present their project to the class. They were encouraged to be entrepreneurial by identifying opportunities, challenging assumptions, leveraging the limited resources they had, and by being creative.

What would you do if you were given this challenge? When I ask this question to most groups, someone usually shouts out, “Go to Las Vegas,” or “Buy a lottery ticket.” This gets a big laugh.. These folks would take a significant risk in return for a small chance at earning a big reward.

The next most common suggestion is to set up a car wash or lemonade stand, using the five dollars to purchase the starting materials. This is a fine option for those interested in earning a few extra dollars of spending money in two hours.

 But most of my students eventually found a way to move far beyond the standard responses. They took seriously the challenge to question traditional assumptions—exposing a wealth of possibilities—in order to create as much value as possible.

How did they do this? Here’s a clue: the teams that made the most money didn’t use the five dollars at all. They realized that focusing on the money actually framed the problem way too tightly. They understood that five dollars is essentially nothing and decided to reinterpret the problem more broadly: What can we do to make money if we start with absolutely nothing?

They ramped up their observation skills, tapped into their talents, and unlocked their creativity to identify problems in their midst—problems they experienced or noticed others experiencing—problems they might have seen before but had never thought to solve. These problems were nagging but not necessarily at the forefront of anyone’s mind. By unearthing these problems and then working to solve them, the winning teams brought in over $600, and the average return on the five dollar investment was 4,000 percent! If you take into account that many of the teams didn’t use the funds at all, then their financial returns were infinite.

So what did they do? All of the teams were remarkably inventive. One group identified a problem common in a lot of college towns—the frustratingly long lines at popular restaurants on Saturday night. The team decided to help those people who didn’t want to wait in line. They paired off and booked reservations at several restaurants. As the times for their reservations approached, they sold each reservation for up to twenty dollars to customers who were happy to avoid a long wait.

As the evening wore on, they made several interesting observations. First, they realized that the female students were better at selling the reservations than the male students, probably because customers were more comfortable being approached by the young women. They adjusted their plan so that the male students ran around town making reservations at different restaurants while the female students sold those places in line. They also learned that the entire operation worked best at restaurants that use vibrating pagers to alert customers when their table is ready. Physically swapping pagers made customers feel as though they were receiving something tangible for their money. They were more comfortable handing over their money and pager in exchange for the new pager. This had an additional bonus—teams could then sell the newly acquired pager as the later reservation time grew nearer.

Another team took an even simpler approach. They set up a stand in front of the student union where they offered to measure bicycle tire pressure for free. If the tires needed filling, they added air for one dollar. At first they thought they were taking advantage of their fellow students, who could easily go to a nearby gas station to have their tires filled. But after their first few customers, the students realized that the bicyclists were incredibly grateful. Even though the cyclists could get their tires filled for free nearby, and the task was easy for the students to perform, they soon realized that they were providing a convenient and valuable service. In fact, halfway through the two hour period, the team stopped asking for a specific payment and requested donations instead. Their income soared. They made much more when their customers were reciprocating for a free service than when asked to pay a fixed price.

For this team, as well as for the team making restaurant reservations, experimenting along the way paid off. The iterative process, where small changes are made in response to customer feedback, allowed them to optimize their strategy on the fly.

Each of these projects brought in a few hundred dollars, and their fellow classmates were duly impressed. However, the team that generated the greatest profit looked at the resources at their disposal through completely different lenses, and made $650. These students determined that the most valuable asset they had was neither the five dollars nor the two hours. Instead, their insight was that their most precious resource was their three-minute presentation time on Monday. They decided to sell it to a company that wanted to recruit the students in the class. The team created a three-minute “commercial” for that company and showed it to the students during the time they would have presented what they had done the prior week. This was brilliant. They recognized that they had a fabulously valuable asset—that others didn’t even notice—just waiting to be mined.”

- Page on Psychologytoday

TL;DR:

You’re framing the problem too tightly. 5 dollars is as good as nothing. Buy yourself a coffee and figure out how you can solve existing problems for free, and then charge for that.

(Better yet, buy that coffee for someone you respect or admire.)

EDIT:

I notice a few comments talking about how this was a cheap trick, misleading, incorrect, etc. You’re all absolutely right. But consider the context. Tina was trying to teach her students something. And she gave them a powerful gift- she helped them see for themselves that they were boxing themselves in with limitations.

Yes, a lawyer could make money just working a couple of hours. Yes, it takes time and physical effort to make money. But what are the assumptions you’re making in your daily life? What are you not looking at? What have you taken for granted?

Anybody can ask you those questions, but not everybody can set you up and put you in a place that makes you most receptive to appreciating the full power of those questions.

If you can tell me that you go about your life questioning every assumption and leveraging every hidden advantage, sure. But are you? What would it take to get you to start doing that?

The key to creating a business is to possess the ability to execute. It may seem easy, but take the effort and you will realize this is the most difficult thing to accomplish.

The key to creating a good business, is to be a good thinker in addition to being able to quickly execute.

Simply thinking gets you no where. You need not be the brightest and the most analytical mind to own and develop a business. Examples are plenty around you; right from the smallest shop owner to the largest industrialist.

The ones that really make the mark - those who create value not just for themself, but for those around too - are those who possess the ability to think, as a top-up to the ability to execute. Right from Steve Jobs to Dhirubhai Ambani, to even today’s Zuckerberg, these are the people whose focus is all on the growth of business, and it never gets frazzled by over thinking - Check out the chart of Facebook’s iterations to where it is today, and you will realize the pace of Zuck’s executional ability.

So get up and get it moving. You may succeed or you may fail. But simply by thinking and analyzing, you will get nowhere.