I had an enjoyable lunch the other week with a former client in the book publishing industry. It got me thinking how publishing is tremendously lucky to have a lesson plan of what not to do laid out by the music industry.  The question is whether they learn the lessons, or will they fall into the trap of DRM and obsession over price protection.

The music industry might argue that their aggressive tactics slowed the decline in record sales, but I think it served as a bad distraction that alienated large portions of their customer base.  Instead, music companies should have: 1. focused on how free music strategies could spur music sales; 2. gotten more aggressive on diversifying revenue streams.  IP businesses won’t make all their money from controlling the sales and distribution of IP anymore, but rather from many smaller sources.

The new e-books are a hit.  Digital books are going to grow, and if hardware remains a competitive market, openness and portability will win.  Both electronics manufacturers and book publishers need to focus less on control over IP and maintaining price levels, and more on growing the overall market through social media word of mouth, book sharing, discovery, etc.  However, this is a tall ask for a slow moving industry that has not had to change for a very long time.  I suspect it will take a generational change amongst leadership.

Authors, Diversify Your Revenue Sources
Authors, like musicians, are going to need to think much more aggressively about alternative revenue sources.  Rather than relying on the sale of content itself, artists have to create lots of smaller income streams.  Musicians now make money from live performances, exclusive fan interactions, merchandise, premium packaging, brand sponsorship, etc.

Authors need to start thinking the same way wherever possible. Some of this already takes place with movie rights, merchandising around children’s books, and consulting or speaking gigs, but all this will need to expand, get more creative, and spread across the different sectors of publishing.  Authors should be looking closely at music startups like Topspin, and their focus on leveraging technology, analytics, and premium product offerings.  They should also look closely at musician innovators like Amanda Palmer in terms of how to embrace fans.

Of course, musicians tend to be more extroverted in nature (save, perhaps for classical and maybe jazz), so perhaps the new heros for authors are going to be their agents and the entrepreneurial efforts of folks like CAA, William Morris Endeavor, and aggressive new entities.

All this reminds me to go pick up Jeff Jarvis’ new book.

Virtual goods have been used extensively in Asia for years, but are now coming into their own as a business model in the U.S.  With that growth comes media attention — including articles like today’s piece in the New York Times, “Virtual Goods Start Bringing Real Paydays“.  The entire thing isn’t awful, but I have to take the journalists to task for a few pieces of idiocy:

1. The lead sentence: “Silicon Valley may have discovered the perfect business: charging real money for products that do not exist.“

Excuse me, Claire Miller and Brad Stone, but what exactly do you think all software is?  Or any business based on intellectual property rather than physical manufacturing?  I know that sensationalism brings readers (witness the phenomenon of Glenn Beck), but really now…

Of course, while I might protest, I also know this is how the media works: fan up hype on a new tech, and then wait to tear it down.

2. “Analysts estimate that virtual goods could bring in a billion dollars in the United States and around $5 billion worldwide this year — all for things that, aside from perhaps a few hours of work by an artist and a programmer, cost nothing to produce.“

Wow, once again in one sentence they manage to insult every non-manufacturing-based profession.  Replace that with: “The legal services market is estimated at $250 billion worldwide – all for things that, aside for a few hours of work by a lawyer or paralegal, cost nothing to produce.”  Okay, maybe that’s a bad example since people love to resent lawyers!  Insert entertainment and media, advertising, banking, and huge swathes of technology, tourism, healthcare, hospitality, etc etc

Never mind that you not only need to pay those “artists and programmers”, but you have to design, create, market and support a game or online community that has millions of users and effective virtual good compulsion loops.  I’m not saying that the margins cannot be very good for the winners, but that in itself is not unique (cough: Google, Microsoft, etc).

3. “For outsiders, the selling of virtual goods — items with no actual value in the real world — might seem the very definition of a swindle.“

OK, this one I don’t blame the journalists for because it is true; there are people that simply have a hard time understanding what it means to pay for something intangible because they’ve never really examined what it means to pay for things like software, movies, music or anything experiential. Maybe if they received a cardboard box in the mail every time they bought a virtual good, these people would feel better. Then they can be idiots AND bad for the environment.

The journalists do have a good quote on exactly that from a Pet Society player who says, ““It’s an experience, like going to the movies.”  They do also quote Moshe Koyfman over at Spark, saying “It’s not about the good itself, it’s about the underlying human emotion or desire.”

But I’ll blog my dissatisfaction anyway.

<3% Conversion

For those actually in the social games space, the data point to note is the stat from Zynga that less than 3% of users buy virtual currency/goods. That is lower than many virtual worlds and MMOs, but not surprising given the scale and nature of social games (which should also have lower infrastructure and support costs than virtual worlds/MMOs).        (here’s some information on historical ARPU levels)