Don’t ‘iTune’ Us

Attention, would-be professional bloggers: the nice folks at Amazon have good news and bad news for you. The good news is that Amazon now lets anyone create a blog and sell subscriptions to owners of its Kindle e-reader device. The bad news? Amazon sets the prices, and Amazon keeps 70 percent of the money.

Such a deal, right? You do all the work, and Amazon pockets more than two thirds of the loot. If you don't like that arrangement, well, you can go build your own e-reader and online store. But if you want to participate in Amazon's e-reader marketplace—which happens to be the only such marketplace that matters right now—well, you'll have to play by Amazon's rules. For what it's worth, that 70–30 split is the same one that Amazon offers to big newspaper companies. So at least bloggers can take comfort that they aren't getting shafted any worse than the big guys.

Remember when everyone was saying how digital media was going to be the greatest thing ever for writers and other creative types—or "content creators," as we're now known? The theory was that everyone could sell direct over the Internet. We'd have total freedom, digital nirvana, a frictionless system. Things haven't worked out that way. Instead, what's happening is that tech companies keep herding consumers into digital corrals, then anointing themselves gatekeepers. Not surprisingly, the techies scoop up most of the spoils.

A good example is Apple's iTunes music store. The music companies couldn't (or wouldn't) create a way for people to buy music legally over the Internet. So Apple created the store for them; it's now the biggest U.S. music retailer. In effect, Apple runs a tollbooth, taking 30 cents from every dollar of sales. On top of that, Apple makes money selling iPods. But music companies don't get a share of that revenue. Sorry.

Now Amazon is doing the same with books, newspapers and magazines (including NEWSWEEK). Last year Amazon sold more than half a million Kindles. By next year, one Wall Street analyst estimates, Kindle will represent a billion-dollar business. Now Amazon is establishing itself as the tollbooth operator, controlling both the device itself and the store that sells "content."

Problem is, the media guys know what Apple did to the music companies, and they're determined not to get "iTuned" by Amazon. News Corp. and Hearst are talking about making their own e-readers. I doubt these companies can actually build a decent device and a decent online store. Even if they succeed, we're in for chaos if every publisher makes its own e-reader.

A better idea might be for publishers to band together and negotiate as a group. That's what media veteran Steven Brill (Brill's Content, Court TV) is trying to do with a venture called Journalism Online. The idea is to create a system where a customer can use a single account to subscribe to different publications on any platform—Kindle, iPhone, whatever. Brill has hired antitrust lawyer David Boies to help publishers negotiate better terms with Amazon. "The idea that Amazon is getting 70 percent of subscription fees is crazy," Brill says. A better percentage, he argues, would be zero. As Brill sees it, Amazon should make its money by selling Kindle devices, and the content guys should keep all the subscription fees. "This is like Sony going to HBO and saying they want 70 percent of what people pay for HBO because people watch it on a Sony television," says Brill. An Amazon spokeswoman points out that Amazon provides free wireless service to Kindle customers and doesn't require them to sign a service contract, "which is why we have a different arrangement with content owners."

The great myth of the digital age was that once we got rid of those expensive printing presses there would be no barriers to entry and costs would come down. But guess what? It costs a lot of money to build a system like Amazon's. An even bigger barrier to entry is brainpower. You need armies of smart engineers to build and run these online stores. There simply aren't enough of these brainiacs to go around. The result is that few companies on the planet can build what Google, Amazon and Apple have built. This is probably what Charlie Munger, vice chairman of Berkshire Hathaway, meant when he recently praised Google as being surrounded by a moat, and that "their moat is filled with sharks." So the game is the same today as it was in the old days. The only question is where the money will end up. In the analog world the lion's share of the money ended up in the hands of big, bad media barons. This time around, the geeks in Silicon Valley are pocketing all the dough. Ironically enough, they present themselves as a bunch of pious, sweet-natured nerds who aren't doing this for the money—they're all about making the world a better place. The truth is that when it comes to exploitation, the new guys make those old media barons look like a bunch of amateurs.

Lyons is Newsweek’s Tech Editor, and has his own blog, Twitter and Bloofy. Don’t know what a Bloofy is? Get with the times, grandpa! S.C.

© 2009