Sounds like a novel itself, right? As Owen explains, the battle has to do with the pricing and payment model applied by the publishers to the sale of their e-books through retail outlets.

The “wholesale model” – in which publishers charge the retailer a wholesale price for each
book downloaded by a consumer – is the one that has traditionally applied to eBook sales through Amazon.com. (And before the iBookstore, this was 90% of all eBook sales). Under this model, so long as the retailer pays a set wholesale price to the publisher, the retailer is at liberty to sell the book to the end consumer at any price it deems fit. This model facilitated deep discounting by Amazon (some would call it “predatory pricing”) as it strove to establish itself as the best and cheapest place to buy eBooks – eBooks, incidentally, that could only be read on its Kindle platform.

The “agency model” – in which the publisher sets an identical price-to-consumer across all
retail outlets – was first applied in deals between each of the big six publishers (eventually; Random House delayed acceptance of it) and Apple in 2010 in anticipation of the advent of the iBookstore. The publishers then began prevailing upon Amazon to apply the same model to sales through their site. Not surprisingly – because the publishers set them – retail prices under the agency model are so far higher than under the wholesale model.

Then all legal hell broke loose.

On April 11, the US Department of Justice (DOJ) sued Apple and the first five book publishers (i.e. excluding Random House) to embrace the agency model. Then 16 US states sued Apple and the “Big Five”. These lawsuits come on top of over a dozen class-action lawsuits, the first of which was filed last August, and a formal antitrust investigation by the European Commission.

Generally, the lawsuits accuse Apple and the “Big Five” publishers of colluding to raise
e-book prices. There is no suggestion that the agency pricing itself is illegal; it’s about the process through which it was adopted. The claims allege that the “Big Five” and Apple illegally conspired to adopt the model all at once in order to retaliate against Amazon’s discounting strategy. There are also allegations of two separate conspiracies — one regarding a possible joint venture to sell eBooks together, and one to replace the wholesale model with the agency model.

Three of the publishers named – Simon & Schuster, Hachette and HarperCollins — are
settling, while Macmillan and Penguin are fighting. What does it all mean?

The publishers claim that the agency model is pro-competitive because it nullifies the power of one retailer (guess which one) to gain a monopolistic advantage through predatory discounting. This strategic view is supported by observers such as Mike Shatzkin, who cites the need for a vibrant retail environment (where prices are equal on the gorilla websites and on the minnow websites) as a reason to embrace the agency model, and the implicit damage to intellectual property integrity through excessive discounting.

Gleefully responding to the lawsuit and the apparent capitulation of Simon &
Schuster, Hachette and HarperCollins (and shamelessly playing for the audience)
Amazon said: “This is a big win for Kindle owners, and we look forward to being
allowed to lower prices on more Kindle books” as it watched its stock price
bounce. Amazon wants to go back to the wholesale model so it can price eBooks
to consumers as it wishes and continue to drive Kindle market share growth.

As if this wasn’t enough, this debate has also reignited the DRM discussion. This is the same issue that other intellectual property industries have had to face as they tried to address the new media business environment. Should eBooks be DRM-protected, so that you can only enjoy them on specific devices tethered to the retailer from which you
bought them? Does the consumer “own” the content in an eBook, or do they just
have a license to use it, subject to many restrictions? And isn’t it interesting that Apple – famous for fencing off its own ecosystem so thoroughly – is now fighting hard to break down the power of the Kindle ecosystem?

Groupon’s issues are starting to look chronic, more than acute. It’s beginning to feel like a web 1.0 company that went public in a blaze of excitement with a spectacular new idea, only to later disappoint. No-one likes a spoiler.

Last year, the company got into trouble for including in its revenue numbers the merchant
share of its deals – an amateurish mistake. After federal regulators questioned this, the  company almost halved its revenue. Since then, Groupon has become a public company, and the fact that it now has had to revise its numbers again raises questions about the company’s ability to manage its financial reporting and give investors an accurate picture of how it is faring. All of this raises the fundamental issue of internal management. “We believe Groupon is now a ‘show-me’ story, where a company’s ambitions are higher than the level of its internal planning and controls,” Jordan Rohan, an analyst with Stifel Nicolaus, said in a note to investors after the latest restatement. Internal auditors are now questioning the strength of the company’s financial controls and lawyers are trawling for class-action lawsuits.

Moreover, there are real doubts about Groupon’s business model. Both merchants and investors are having second thoughts about the nascent daily-deal industry. Merchants are concerned about the capricious nature of consumer behavior in utilizing deals (e.g. an entire restaurant full of diners using a Groupon deal) and the low rate of repeat business from new customers gained through such offers. Investors fret over the rising cost of merchant acquisition and shrinking margins. The amount of billings Groupon booked as
revenue narrowed to 37 percent in the third quarter from 42 percent in the prior period and 44 percent in the first quarter. Groupon is responding by going beyond daily deals business (e.g. Botox interventions), but that is pressurizing its margins further and increasing the likelihood of refund requests.

Did Groupon take off too soon, with too little in the tank? Will the mistakes continue, or are they over? And is the idea which got Groupon up in the air unique and inimitable enough to keep it there? It all depends on who you ask.

Who would have thought, a decade ago, that this would happen? That physical media behemoths like Tower Records and Blockbuster would be road kill on the information superhighway? We once proudly displayed our books, CDs and DVDs on shelves. We once browsed the aisle of the rental store and carried the disc home with us. Now consumers are happily yielding up these tactile privileges in favor of the more ephemeral rights to a stream or a digital file on a computer. And it’s streaming – the most ephemeral of the
consumption methods – that’s really driving the growth, IHS says.

But the news is not so good from a revenue or profit point of view. Just as in the case of digital music and ebook consumption, these new levels of digital revenue for movies and TV shows are not offsetting the decline in physical media sales. IHS predicts digital transactions will only yield around $1.7 billion in 2012, compared to $11.1 billion for physical formats. And even by 2016, digital viewing will only account for 17 percent of
home entertainment revenue. There’s still a long way to go before the white
water of the digital revolution becomes a lazy deep river.

But it is part of a trend with wider, less predictable, implications. According to IDC, by 2016 India and Brazil will move into the top five markets for smart phone shipments. When this happens, three of the top five smart phone markets in the world will be so-called “emerging” markets, a startling change in the order of things from as little as five years ago. And this shift will continue. Although these emerging markets may still have comparatively low per capita incomes, middle class wealth and demand for luxury items continues to rise. And, even more powerfully, the newer network infrastructure in the emerging markets makes them highly suitable for data-hungry smart phones. For the foreseeable future, at least, these markets will not be limited by the capacity constraints afflicting, for example, the North American market.

All of this contributes to a movement in the tectonic plates of smart phone (hardware and software) design and innovation. Hitherto, it’s always been more important for a company aiming at the mobile phone market to focus primarily on the needs of the highly developed western markets – the US in particular, but Europe as well – when designing hardware or software. (The main exception to this, Japan, has to some extent been treated separately, through purely native product development.) But companies in the smart phone value chain – whether on the hardware or software side – now have to start paying more attention to their future markets and to the tastes of the consumers in these places. And there’s a lot at stake here, because what happens with smart phones will have a direct impact on the future of the PC and tablet devices.

What will this mean? As the emerging markets emerge, they will cause even more things to change, will punch above their weight more as time passes. More R&D focus will shift to the faster growing BRICS (Brazil, Russia, India, China and South Africa) markets. There will be a more globalized approach to device marketing. And – at a guess – the movement towards smaller devices, away from the PC, will accelerate. And these changes, if not permanent, will, at the very least, be long term. As IDC analyst Wong Teck Zhung puts it: “There will be no turning back this leadership changeover.”

A lot has changed since Microsoft’s attempt, in 2008, to buy Yahoo! The target company is now worth less than half of the $45 billion that Redmond offered for it back then. Management ructions at Yahoo! seem to have worsened in the intervening years, particularly following the termination of CEO Carol Bartz earlier this year. But other things have stayed the same: Yahoo’s continued strategic uncertainty and the weak online advertising market, to name just two. To name a third, there remains a general sense that there really isn’t room anymore for MSN and Yahoo! and AOL in this new world we live
in. The music in this dance eventually has to stop, and surely there will only be two chairs to sit in, not three, when it does.

Microsoft must certainly have this in mind as it signs a  new non-disclosure agreement and looks again at Yahoo! – and if nothing else it will want to lock its competitors out of the negotiation room. But it’s more complicated now. As The Times points out, Microsoft’s strongest imperative now is to shore up the search and ad sales arrangement with Yahoo! to maintain this toehold in its search battle with Google. Therefore, the company is unlikely to make a play for full acquisition of Yahoo! again, perhaps preferring instead to
participate in a consortium bid to buy Yahoo’s business assets. Microsoft
has wider issues, issues which are beyond the help of a Yahoo! alliance, that warrant its resources nowadays.

And what does Yahoo! want? Strategic clarity; a firm idea of what the company will look like in a year’s time. Right now, that’s so unclear that they are operating with an interim CEO and talking to all different kinds of possible investors, each with different agendas. That’s not good for any of the company’s stakeholders – not for partners, not for
employees and particularly not for shareholders. And spare a thought for those
shareholders, as they yearn for 2008 and what might have been.

Godin’s new partnership with Amazon, The Domino Project, is fascinating from several angles. It’s also scary, if you are inclined to hang on to the old ways of doing things. Content owners should be paying close attention to the things that are going on here:

Blending of content. You used to buy a book, get a book and own a book. Now the words that constitute a book come with all kinds of other content cross-promoted with it and wrapped around it. This is how media is going to be consumed in the future.

The growth of content snacking. The Domino Project is very much about short pieces of content. Whether we like it or not, in a 140-character world, this is the way things are going, and it’s smart of him to recognize that.

Short term ownership and sharing. The digital delivery of content, cloud warehousing and micropayments are combining to facilitate and encourage ephemeral ownership, rental and subscription models. It won’t be long before we don’t “own” anything.

Innovative pricing. Hand in glove with all of this, and liberated by promotion bundling, look how price structures are changing.

This is all very interesting to watch. As Godin himself says: “Each time, we’re going to try to push one boundary or another.”

If you already own a piece of music – whether originally in the form of a compact disc or a downloaded file – do you have the right to store a copy of it on a server somewhere and access it when and how you like? It depends on who you ask. The labels will say no; Amazon and Google, yes. This issue is the subject of a long court case between EMI and MP3tunes and it’s hard to see any of the labels duplicating that law suit in this case. So how this plays out will be fascinating.

And this is important for the future of music. Digital music distribution is still poorly established. It is a jungle dominated by one plant – iTunes – that eclipses all the other tiny plants trying to grow. The scary thing is that everyone (except Apple) wants new services to succeed because a viable competitor to iTunes must be found. But they’re making heavy going of it.

On the one hand, online services need to be respectful of copyright owners – both the labels and the publishers of the musical works. Apple, Google and Amazon all make lots more money from other product and service offerings, but that does not entitle them to use music as a loss leader just to promote those other products and services.

On the other hand, the record labels have to get out of their own way. Harmed by their own laissez faire attitude to licensing video rights to MTV in the early 1980s, the major record labels have been tyrannical in the way they approach licensing of content to internet services, ever since the first flickering of Web 1.0. Whether they like it or not, attitudes to intellectual property are shifting quite quickly. They can either move with it and try to shape it, or push against it and come off second best.

Amazon is a dangerous competitor. A pioneer Web 1.0 company that has survived and thrived better than anyone else – with the possible exception of eBay – it has massive brand penetration, a huge range of integrated services and an enormous established user base to sell to. And Netflix is much more vulnerable than it appears to be.

Netflix has lots of problems. Testy relationships with content suppliers who feel threatened by new rental distribution models are presenting in high content costs. Established competitors such as Hulu (Plus) and iTunes are burrowing into its market share. And it’s entangled in a complex bandwidth problem because of the huge amount of internet traffic it generates (especially for a paid service) and because of its involvement in the dispute between Level 3 Communication and Comcast.

It gets worse. Now, it transpires from a Netflix 10-K form recently filed, that the company depends on Amazon for a significant strategic activity – Netflix has outsourced “the majority of our computing” work to Amazon Web Services. In other words, Netflix is dependent on one of its new competitors for a core part of its operations. And that’s not something that can easily be switched for a company that operates a major commercial activity inside the “cloud.” Lots to think about for Netflix.

Who is right?

Sometimes a dumb question yields a smart answer and a mistake yields triumph. Whether or not The Daily is able to immediately thrive and to create a model for others to follow, it’s at least an attempt to create a new foundation. Critics of Big Media so often tell it what NOT to do, but few are able to tell it what it SHOULD do, to reshape their business models and compete in the new media world. Rupert Murdoch’s organization has repeatedly shown that it’s willing to take on big challenges and stick with them to the end. Others have repeatedly shown a willingness to criticize, and then to follow, his lead when he’s proved himself correct.

Both companies are struggling to maintain the buoyancy of their business in the face of several challenges, particularly the threat presented by content-streaming services. But is this really a good reason to get married?

Is a merger of this size in this sector persuasively in the public interest? There are significant questions to do with media ownership diversity and vertical integration that the conditions have addressed, but perhaps not fully resolved.

And is the vision of the merger a chimera? In 2000, two companies – both of whom were “media companies,” but very different kinds of media companies – set sail on a perilous and ultimately disastrous journey. Those companies were named AOL and Time Warner. There are a number of similarites in the Comcast/NBCU union. Has the last decade taught anyone anything?

Lots more to come on these issues!