13 Thoughts on Apple for 2015

Much like the mechanical watches with which its newest product will compete, Apple is an organization in perpetual motion.  The Apple Watch launches in April 2015 as the company’s first foray into the wearables market.  The just-announced new MacBook, with a retina display and only two ports, joins it as a spring release.  An enterprise iPad Pro is expected to debut in the fall, and a rebranded Beats music streaming service and updated Apple TV are also forecasted to drop this year.  And let’s not even get into the Apple Car that’s purportedly in the works.

Here are thirteen thoughts, broken into four broad topics, about Apple’s product pipeline after its “Spring Forward” event last Monday.

Wearables
1) The Apple Watch is already a success.
2) The Apple Watch Edition may have a minor Glasshole problem.
3) New Beats headphones will be important, and Jony Ive shouldn’t design them.

Devices
4) The Macbook is stunningly gorgeous and two years ahead of schedule.
5) Boost Mac sales by emphasizing Continuity with mobile platforms.
6) The entire iPad line should be consolidated and renamed.
7) What’s the future of the iPod?
8) HomeKit is the next big frontier, and Apple TV is the conduit.

Speculation and Hypotheticals
9) An Apple-Nintendo partnership won’t happen, but they would be a natural fit.
10) Could iTunes or Apple TV become a carte blanche media streaming service?
11) Tesla would be a synergistic feverdream, but CarPlay makes more sense.

The Big Picture
12) Diversity beyond the iPhone is critical.
13) Tim Cook is a better CEO than Steve Jobs.

***

Wearables

1) The Apple Watch is already a success.

Full stop.  Without sales data, professional reviews, or market feedback, the Apple Watch is already a success.

Its criticisms are real and important to take into consideration: a slightly bulky frame, comparatively poor battery life, and high starting price relative to other Apple devices.  But these criticisms don’t matter in the context of this product launch.

The goal of the first generation Apple Watch is innovation informed by heritage.  Whereas other smartwatches are focused on technology, the Apple Watch is as much about fashion as it is computing – perhaps even more so.  It’s an exercise in expanding the concept of what should be expected from a digital watch.

This essay by Ben Clymer is my favorite evaluation of what Apple got right and wrong with the Watch.  It is remarkably balanced in its evaluation, and Clymer pinpoints why the Watch is so important:

Apple products have a way of making someone not want to live without them, and while I wasn’t able to fully immerse myself in the OS yesterday, what I saw was impressive. So while certainly not direct competition for haute horology watchmaking right now, the Apple Watch is absolutely competition for the real estate of the wrist, and years down the road, it could spell trouble for traditional watches even at a high level.

The Apple Watch is about setting the stage.  It’s about building that connection with customers and improving upon the current offerings in the smartwatch and entry-level luxury watch market.  “The overall level of design in the Apple Watch simply blows away anything – digital or analog – in the watch space at $350,” Clymer says.  He’s right, thanks to the relationship between form and function that Apple’s competitors have yet to attain.

Analysts are predicting that Apple will sell 12-15 million units in 2015 and nab half of the smartwatch market share.  That might be a high forecast, but Apple’s profits from the device, especially the Edition, should be significant even if fewer than 10 million units are sold.  And it will sell.  Customers will look past things like battery life because of the novelty factor.  Come for the hype, stay for the quality of apps and services that the platform affords – a far more robust infrastructure than any other smartwatch company by far.

The Watch will be a flop only if Apple fails to convince customers outside of Apple aficionados and the smartwatch market that the Watch is a valuable device by its next iteration.   This first generation Watch, flaws and all, just needs to generate enough electricity to get that conversation off the ground.  And by that metric, it’s already succeeded.

2) The Apple Watch Edition may have a minor Glasshole problem.

“Glasshole Syndrome” might be defined as when a product’s design language becomes synonymous with people who want a visible token of their superiority.  “Glasshole,” of course, refers to the early adopters of Google Glass, which became infamous for its stealth video recording capabilities, $1000+ price point, and embarrassing design.

The Apple Watch will not suffer criticisms for privacy invasion or poor design.  It is a beautiful machine whose utility and app ecosystem makes it a more worthwhile product right out of the gate.  But the Watch Edition, which starts at $10,000 and reaches $17,000 in its most expensive iteration, is ripe to become an iconic emblem of conspicuous consumption.  I fear this may unfairly tarnish the rest of the Apple Watch line.

In September 2014, John Gruber wrote about the Watch Edition’s price and its likely reception among the tech community:

Apple Watch is not a product from a tech company, and it will not be understood, at all, by the tech world. Apple creates and uses technology in incredible ways. The Apple Watch may prove to be the most technologically advanced product they’ve ever built. But again: Apple is not a tech company, and Apple Watch is not a tech product.

When the prices of the steel and (especially) gold Apple Watches are announced, I expect the tech press to have the biggest collective shit-fit in the history of Apple-versus-the-standard-tech-industry shit-fits. The utilitarian mindset that asks “Why would anyone waste money on a gold watch?” isn’t going to be able to come to grips with what Apple is doing here. They’re going to say that Jony Ive and Tim Cook have lost their minds. They’re going to wear out their keyboards typing “This never would have happened if Steve Jobs were alive.” They’re going to predict utter and humiliating failure. In short, they’re going to mistake Apple for Vertu.

Utter and humiliating failure are simply not in the cards.  Sales of the Watch Edition are going to match maximum production capacity.  The profit margin on each device is likely astronomical, and Apple is going to make a significant profit while establishing itself as a serious player in the luxury fashion market.

The Watch Edition will sell.  The question is: who will buy one?

prording to Ben Clymer, no one should buy one.  Clymer argues that for $10,000, the Watch Edition is simply a poor choice given the field of alternative options:

In addition to perceived value, mechanical watches are also priced by human value: how much of the work is done by hand (in many cases using 200-year-old methods). For example, a watchmaker named Philippe Dufour makes just 12 watches per year, alone in his one-room atelier in the mountains of Switzerland. A simple, time-only piece can cost $100,000. Whether the case is gold or platinum, the price of a Philippe Dufour watch remains (roughly) static — you are not paying for materials, you are paying for Mr. Dufour’s time and touch. The Apple Watch has minimal human value, and that is the biggest difference between it and its mechanical counterparts.

From $10,000 to $20,000, you are into the realm of watchmaking where everything you see is original and interesting — or at least should be. Consider fully ceramic chronographs,stunning hand-wound dress watches, or modern legends all fall within this range — all featuring truly in-house movements with a moderate amount of hand-finishing to internal components. These watches will be assembled by hand, completely in Switzerland and offer the incredibly low tolerances and extreme quality for which this industry is known.

Leave aside the (very good) utilitarian question of how someone could ever justify spending $10,000 for a watch when there are people dying of hunger around the world.  Assuming you have $10K to blow on a timepiece, why would you ever choose the Apple Watch Edition?  You’re not purchasing a stunningly unique style that will last your entire lifetime.  You’re not funding a the exquisite craftsmanship of a master engineer to produce a mechanical wonder.  You’re buying a product with the exact same functionality and design as its $349 sibling.

And that’s the point.  The people who buy the Watch Edition are buying it because it’s $10,000 worth of gold.  They want their wealth to be evident.   It’s tough for a non-watch expert to identify a Rolex from afar, let alone guess its exact cost.  The Apple Watch is designed to be iconic, and the Watch Edition’s price is its crown achievement.  You buy the Watch Edition so everyone knows that you spent exactly $10,000 on a watch.

Tim Lee believes that Apple is following Tesla’s lead in this regard.  He argues the Watch Edition’s high price is a means of generating a halo product for the smartwatch market, making it an enviable good:

It’s hard to remember today, but a decade ago electric cars didn’t have a great reputation. Carmakers had experimented with a few electric vehicles, but these had not been a commercial success… Tesla’s solution to this problem was to focus on the very high end of the market. The first Tesla car, the Roadster, cost $109,000.

This strategy of defying stereotypes about electric cars helped Tesla become one of the most prestigious brands in the auto industry. And as it has moved downmarket (the company introduced a $57,400 Model S in 2012 and is working on a vehicle that will cost $30,000), it has been buoyed by the luxury reputation the Roadster helped to establish.

Apple faces a similar challenge with its Watch. Smartwatches have a reputation as impractical devices for nerds. Apple’s strategy is to defy this stereotype by creating luxury smartwatches that (Apple hopes) people will pay $10,000 for.

I actually fear that the opposite of this scenario will emerge.  Instead of boosting the reputation of smartwatches, it’s easy to imagine how the clientele of the Apple Watch Edition might come to be the entire line’s defining characteristic: a product for rich Silicon Valley bros who want to flaunt their wealth in the easiest way possible.  As Racked and The Verge noted, “it was Apple fanboys who lined up to view the watch at Colette (a recent fashion show), not the fashion cognoscenti.”  That is a deathly blow for a device with aspirations of the highest fashion circles.

The Edition is, by definition, for the 1%, but it matters which people in the 1% it attracts.  It would be a shame to see this “halo” infect the rest of the Apple Watch line and make it an object of derision.  Though its capabilities are still comparatively limited, I trust Apple more than any other technology company to fully leverage the Watch’s potential as a useful, integral part of our daily lives.  Apple has largely sidestepped criticisms of conspicuous consumption by selling products at higher prices whose design and utility largely, if not wholly, justify the extra cost.  Owning an iPad or an iPhone 6 is a status symbol of relative material comfort, but that ownership extends beyond demonstration of financial wealth because of the function afforded by the device.  The burgeoning app store and the truly beautiful design of the Watch and Watch Sport suggest a promising value proposition in the same vein.   The same cannot be said of the Watch Edition, and it’s queasily easy to see it as a sort of Google Glass in vogue.

I hope I’m wrong about the arguments listed above.  In a certain sense, I’m glad Apple is going so aggressively after a slice of the luxury timepiece market, because it can put the profits earned from the Watch Edition to use in service of other world-changing technology.  And, realistically, the Watch Sport is going to be the most popular model that Apple sells; it will earn the lion’s share of market attention, making it unlikely the Edition’s aura will extend beyond the diamond wrists of the elite.

I just hope the Edition price point, and its clientele, don’t come to define the full product line and overshadow the legitimately groundbreaking work that was accomplished in creating this device.

3) New Beats headphones will be important, and Jony Ive shouldn’t design them.

If you haven’t already done so, go read the New Yorker’s profile of Jony Ive.  It’s an incredible, exhaustive look at the man behind Apple’s iconic products and the work his team does to make them a reality.

The emphasis here is on “exhaustive” in more ways than one.  From the opening paragraphs, it’s clear that Jony Ive is dead tired.  He owned the entire Apple Watch product build and he’s also responsible for design across the iPhone, iPad, and iOS.  That is a massive amount of oversight and work.

Jony Ive is synonymous with Apple.  If he retires in the near future, there might be even greater panic and uncertainty surrounding the company than in the wake of Steve Jobs’ death.

It’s a little surprising, then, that Apple hasn’t elected to give other members of his design team more high-profile platforms to discuss their work and create their own personal mythologies.  Deference to Ive is obviously warranted and justified, especially since he has given no indication of retiring anytime soon, but contingency plans are wise.

I’d like to see a couple of key figures from Ive’s team take charge of the Beats hardware division and update the product line in accord with Apple’s design philosophy.  In that New Yorker profile, Tim Cook makes it clear that Beats are currently an outlier amongst Apple’s computers and phones:

Would Jony have designed some of the products?” he said. “Obviously, you can look at them and say no… I want Beats to be true to who they are. I don’t want to wave the wand over them in a day and say, ‘You are now Apple.’ Down the road, we’ll see what happens.

Modifying a well-established brand is risky, and given Beats’ 60+% share of the premium headphone market, immediate changes run the potential of alienating Beats customers.  Much of Beats’ market penetration has been thanks to overwhelming advertising and genius marketing deals with famous athletes and stars.  Apple’s cash hoard guarantees Beats will never lose the ability to make those cultural cache deals, suggesting future changes to the product line could be conducted with minimum risk.

Why not let some of Ive’s team members take the lead on rethinking what Beats can be?  Perhaps retain current model stalwarts like Beats Studio and PowerBeats, but completely redesign Beats Pro and Mixr in accord with Apple’s design philosophy.  Introduce a new line that doesn’t fall victim to the classic Beats criticisms of ear-bloodying bass and muddy, subpar audio quality.  On the hardware development side, hire engineers from companies like Sennheiser and Audeze.  Oppo just introduced a $400 pair of planar magnetic headphones; Apple could easily introduce this kind of highest-end quality to the Beats line, and its marketing leverage (prime placement in Apple stores!) is a guarantee of huge volume and high margins.

Apple reportedly purchased Beats primarily for the streaming infrastructure and contracts of its music service.  If Apple is serious about expanding into wearables, it should look to leverage Beats hardware as another fashion item with untapped market potential.

Devices

4) The new Macbook is stunningly gorgeous and two years ahead of schedule.

Forget the Apple Watch pricing.  The most incredible parts of the March 9 keynote were ResearchKit and the new Macbook, and the latter is breathtakingly beautiful.  I thought the Dell XPS 13 gave Apple a run for its money a couple of months ago, but Apple once again blew its PC competitors out of the water with this new machine.

In terms of style, that is.  Functionality- and price-wise, the Macbook is a solid entry into the laptop market, but it’s not transcendent.  Though the retina display and weigh of the machine are attractive, the $1300 base price and the single port (!) mean that it’s primarily a device for early adopters at this point instead of the broad laptop market.

Which is as it should be.  The original Macbook Air was similarly criticized for shearing off too much too soon, but it looks prophetic in hindsight, having eliminated the CD drive before most other PCs made the leap.  The same is true for this Macbook.  With cloud storage becoming the go-to means of sharing files and Wifi available in more places than ever, Apple is ahead of the game once again.  Cutting out those extraneous ports is going to look like a smart move two years from now.  (Though an additional USB 3.0 port might be welcome.)

I can’t wait for the second-gen Macbook to lower the price on this first model.  In the meantime, I’d love to see some limited-edition color variations to the three currently offered – anodized white, rose gold, sandstone, or evening sky blue, perhaps?

5) Boost Mac sales by emphasizing Continuity with mobile platforms.

Apple sold 160 million iPhones and around 55 million iPads in Q4 2014.  In contrast, its Mac division generated around 20 million unit sales.

In 2014, Apple introduced Continuity for Mac, which allows users to swipe and send documents and files from an iPhone or iPad to a Mac in real time.  Similar capabilities also exist for Windows computers, but Apple has the benefit of a unified software ecosystem to make these transfers completely hassle-free.

Microsoft’s unpopular Windows 8 and forthcoming launch of Windows 10 gives Apple an enormous window to converting former Microsoft customers into new users.  The close integration of iOS with OS X is no doubt going to be a lynchpin of that pitch.

6) Consolidate and rename the entire iPad line.

Apple’s current iPad offerings include five different base models, each with multiple colors, storage options, connection capabilities, and price points.  At a glance, it’s difficult to tell how exactly they differ from each other, or whether they’re actually different at all.

The rumored 12.9” iPad Pro offers Apple the opportunity to slim down their iPad line and refresh the distinctions between each device.  If the Pro is launched alongside the 2015 refreshes for the line, it would be great to see a new nomenclature adopted for each category.

7) What’s the future of the iPod?

Apple’s iPod revenues have plummeted due to the popularity of the iPhone and iPad.  The company expected this self-cannibalization and appears inclined to let the iPod slowly fade away.

That’s probably the wisest course of action since it doesn’t make sense to invest in a product line that has seen its profits fall off a cliff in the last five years.  But the iPod does still have a dedicated customer base that could be well served with some incremental updates, especially since its current iPod offerings are overdue for a refresh.

Among the potential iPod revamps the company could pursue:

  • A bigger iPod Touch that aligns with the iPhone 6’s internal specs and size.
  • An iPod Pro with significant storage (possibly a hard drive?), sold at a premium to customers with enormous music collections. Essentially a replacement for the workhorse iPod Classic which was retired a while back.
  • A revamped iPod Nano that emphasizes fitness and exercise capabilities. The Apple Watch will likely fulfill this niche in a future iteration, but the Nano could be a lower-cost option that essentially replaces the iPod Shuffle as the entry Apple device.  (Either way, the Nano desperately needs to be redesigned; it’s easily the most visually unappealing product in Apple’s repertoire, an ugly mash of metal, glass, and an inferior iOS clone that looks like it’s from 2008.)

8) HomeKit is the next big frontier, and Apple TV is the conduit.

Smart household devices will become ubiquitous in the next few years – connected refrigerators, lighting systems, garage doors, etc.  Current iterations of those products usually include device-specific standalone apps for remote user access and control.

Standalone apps will increasingly become unviable as the volume of connected household items increases, and Apple’s HomeKit is positioned to become the conduit for collecting device controls.  It’s easy to imagine a scenario where an Apple HomeKit app aggregates each smarthome input and allows the user to manipulate each device from a central dashboard.

One sticking point is ensuring all devices are regulated by the same network to ensure they’re all properly synced for local and remote control via Apple devices.   Christopher Breen notes the importance of having a dedicated, centralized network for this purpose:

Wouldn’t it be better if each home had a small, power-efficient, always-on, platform-agnostic, Wi-Fi-enabled computer that could talk to your devices both remotely and over a local network?

If you haven’t yet glanced over at your Apple TV, now’s the time.

Apple TV is rumored to be receiving a substantial update later this year, which may include a hardware redesign and new content such as HBO’s streaming service.  The product has only received incremental updates since its launch eight years ago and has been largely eclipsed by Chromecast, Roku, and other streaming devices.

An Apple TV relaunch featuring full HomeKit integration would easily make Apple’s TV offering the most logical option on the market.   Robust streaming options plus full iTunes integration are an attractive proposition for Apple’s 100 million+ iTunes users, and having a centralized home base for device control and additional security only sweetens the deal.

Speculation and Hypotheticals

9) An Apple-Nintendo partnership won’t happen, but they would be a natural fit.

If Apple really wanted to own the living room beyond a relaunched Apple TV + HomeKit, it might also consider trying to acquire Nintendo.  This theory has been floated before and a deal is not going to happen, even though Apple easily has the cash to cover Nintendo’s $18 billion market cap and a purchase premium.

But what a win it would be for both parties!  Apple acquires Nintendo’s treasure trove of licensed characters and games.  On the mobile front, it essentially starts printing money by offering Nintendo classics on the App Store and perhaps reinventing the iPod as a game console a la the 3DS.  On the console front, it could offer a more powerful Apple TV Pro that competes with Sony and Microsoft as a complete living room entertainment hub.

Nintendo wins by earning a fat return for its investors and by attaining greater creative freedom than it has now.  Though its first-party games are constantly lauded for their quality, Nintendo has fallen victim to a conservative and confusing development cycle, where sequels and character appropriation replace new franchises and experiences.  The shortfall of cash generated by App Store sales and the reduced hardware development costs associated with an Apple purchase would ensure Nintendo has the financial footing to redouble its efforts to make world-class games.

10) Could iTunes or Apple TV become a carte blanche media streaming service?

Apple will reportedly price the revamped Beats streaming service at $7.99 per month and apparently has the enthusiastic support of major music labels.  The service is said to be outside the purview of iTunes, which will continue to sell music on a track-by-track basis.

Given Apple’s massive customer base and the fact that it succeeded in getting music executives on board with this price point, is it possible Apple might try to introduce the first cross-media streaming service under the iTunes brand?  Would you pay $40 a month for unlimited music streaming, unlimited television streaming, two free movie rentals of your choice, and a limited library of free eBooks?  I would in a heartbeat.

Apple has long talked about rethinking how television works as part of an Apple TV upgrade, and this would certainly qualify, especially if this “base” subscription package could also include additional bundles like HBO streaming or extra movie rentals for an additional fee.  Being able to consolidate media subscription services into one payment (combining Netflix, Oyster, Spotify, and HBO, for example) would be worth it for the convenience alone.

Again, this is not on the horizon, but it would be an absolute coup for Apple if it comes to pass.

11) Tesla would be a synergistic feverdream, but CarPlay makes more sense.

If Apple gets into the automobile manufacturing game, as recent rumors have suggested, all the more power to them.  It would be thrilling to see how Apple’s designers and engineers could rethink how we travel and engage with our vehicles.

Tesla has been cited as a potential acquisition for a couple of years now as part of that entry into the car market.  Of late, that talk has been supplanted by suggestions that the two companies are competitors, poaching each other’s employees with fat bonuses.

It’s tempting to envision a scenario where the two companies come together: Elon Musk on Apple’s board, an iPad replacing Tesla’s center console, Jony Ive designing the Model 3, Apple leveraging Tesla’s battery production process for its other devices.  But all signs point to Tesla’s continued independence.  Apple probably won’t acquire Tesla given this status quo.

That’s fine.  In the short to medium term, Apple’s CarPlay dashboard technology is a more promising avenue for immediate profits and widespread adoption.  If Apple acquired Tesla in the next year or two it would almost certainly not license CarPlay to other car manufacturers.  That would be forsaking a gold mine, given the 16.5 million cars sold in fiscal year 2014.

Apple is smart to seed CarPlay now.  If Tesla continues to expand in market share, Apple will no doubt have the cash to purchase it in the future.  And if Tesla stumbles along the way, Apple can swoop in and acquire it at a discount.

The Big Picture

12) All of this is to say that diversity beyond the iPhone is critical.

Apple’s sales figures suggest it will live and die by the iPhone.  The enormous success of the iPhone 6 has guaranteed the company stability for the next few quarters, and the likely improvements to the iPhone 6S (Force Touch, better battery, etc.) suggest the iPhone line will be a rock-solid profit generator at least through 2016.

That said, the pressure to continually produce an expectations-exceeding iPhone is immense.  I don’t doubt Apple’s ability in the slightest to amaze customers with whatever it introduces in the iPhone 7.  But if even one new iPhone model is a flop, Apple would lose a significant revenue source that would probably wreak havoc with its stock price.  (Not that stock fluctuations should matter too much, since it has hundreds of billions of dollars in cash on hand.)

2015 will be remembered as the year when Apple consolidated its mobile phone dominance with the iPhone 6 and also took the first steps to significantly expand beyond the iPhone.  It wouldn’t surprise me in the slightest if the Apple Watch is only the tip of the iceberg for new products released under Tim Cook’s leadership.

13) Tim Cook is a better CEO than Steve Jobs.

This is an admittedly tough claim to defend; Steve Jobs’ legacy speaks for itself.  But Tim Cook has already presided over some of the most important moments in Apple history, including its most profitable quarter ever and the launch of an entirely new product category.  And he has done so with poise, remarkable foresight, and efficiency.

Profiles of Jobs all lead to the same conclusion: he was a genius, a leader with unparalleled foresight, and, quite often, a horrible person to work for and with.  Cook retains Jobs’ passion without the tempermentality.  He is an exceptionally hard worker with one of the best leadership teams in the industry.  He is a man who deserves respect.

The good news is that Cook’s tenure has not shown any signs of heightened internal discord leading to a stagnant product pipeline.  On the contrary; if anything, there has never been a more exciting time to wonder what Apple has in store as its purview expands to home automation, automobiles, fashion, and untold product areas.

More than hardware and software development, however, has been the moral facet of Cook’s guidance.  Environmental responsibility has been a hallmark of his tenure; “If you want me to do things only for ROI reasons, you should get out of this stock,” he famously told a group of shareholders last year.  Product (RED) offerings have continued uninterrupted.  And, most significantly, Cook has emphasized the importance of overseeing an ethical supply chain through the publication of Apple’s progress report earlier this year.

At best, Apple is an amoral amalgamation of inputs and outputs.  It creates exceptional products while undoubtedly engaging in questionable business practices that affect workers and the environment, primarily in developing countries.  Cook will probably not change this by mandating, for example, that all Apple suppliers offer their employees a living wage.  But he seems more cognizant than both Jobs and most other tech CEOs of Apple’s ability to shape just labor policies and supply chains.  That his tenure has already seen pledges for improvement in these areas suggests he is serious about Apple’s commitment to ethical production and product creation.

I’d love to see Apple make a push at developing markets with a low-cost iPhone, essentially selling it at cost to seed those customer bases for future iDevices.  Much of Apple’s revenue comes from selling expensive products to comparatively wealthy clientele, with the Apple Watch Edition representing the peak of Apple’s pursuit of the luxury market.  It would be good for Tim Cook’s Apple to counterbalance this trend by advocating for productivity and growth in markets that can’t afford a $700 unlocked phone.

Apple’s market share and singular vision suggests it can have the most substantial impact for the good in most of the areas it chooses to enter.  Let’s hope this will be put to good use going forward.  The future certainly looks bright.

 

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The Destruction of Innovation? On Pfizer’s Proposed AstraZeneca Acquisition

I worked at Pfizer for two summers during college, and although I no longer have any connections with the company, I’ve followed its corporate development with a distant fondness over the last couple of years.  My last summer corresponded with a changing of the guard and a shift in direction for the world’s self-proclaimed largest research-based pharmaceutical company.  Jeff Kindler, erstwhile CEO, was dismissed by the Pfizer board and replaced by current CEO Ian Read after a series of disappointing quarters and a bizarre case of senior-staff palace intrigue.  Check out this outstanding Forbes piece for a full rundown of the mutiny that occurred.  (Seriously, it’s worth the read.  You’d never imagine so much drama could be manufactured by a drugmaker.  Bickering over helicopters is involved.)

Read’s appointment as CEO heralded a new focus on investing in smaller, case-specific drugs instead of “blockbuster” drugs like Lipitor.  Pfizer’s revenue throughout the 1990s and 2000s was buffeted by a small cluster of huge sellers, but many of these products began to lose patent protection as the decade came to a close, leading to generic competition and significantly lower profits.  Attempts to invest in new blockbuster drugs were largely unsuccessful; multiple late-stage drugs, each bolstered with hundreds of millions of dollars of research funding, were cancelled due to poor late-stage trial results.

Beginning in the late 1990s, a series of company acquisitions (and their product portfolios) was used to shore up revenue streams in the absence of innovative drug creation.  Pharmacia, Wyeth, and Warner-Lambert were all purchased and integrated into Pfizer within the span of a decade.  The company’s revenue streams and size grew but its share price did not.  Read’s focus as CEO was to pare Pfizer’s organizational bloat and alter its boom-or-bust funding framework.  The new goal was investing in a broader cohort of smaller, targeted drugs that had better chances of success.

At least it seemed like Pfizer planned to chart this path over the next decade.  Instead, Pfizer’s recent attempts to acquire British drugmaker AstraZeneca suggest a new course has been abruptly plotted.  Pfizer is interested in purchasing AstraZeneca for the same reason it acquired Pharmacia, Wyeth, and Warner-Lambert: to obtain a new slate of prospective drugs in order to shore up its own pipeline.  The additional driving force that makes this deal unique is the tax incentives Pfizer could unlock by “reincorporating” and shifting its corporate headquarters to the U.K.  In doing so, it could take advantage of British rates and cut its corporate tax from the U.S. rate of 35% to 20%.

Talks between the two companies recently came to a standstill, but a number of major AstraZeneca shareholders are pushing the company to re-enter negotiations with Pfizer.  The last offer Pfizer made was £55 per share and AstraZeneca’s board was looking for £59 per share, which analysts think may be a palatable amount for Pfizer in the end.  This translates to a total purchase price for Pfizer that’s well north of $100 billion.

AstraZeneca, for its part, has been strongly resistant to Pfizer’s takeover attempts.  Since CEO Pascal Soriot took over about two years ago, AstraZeneca has posted strong fiscal results and has developed a promising pipeline that could drive significant growth in the near future.  Soriot’s position throughout negotiations with Pfizer is that his company’s potential for high-quality products will be subsumed by the hassles of integrating into Pfizer’s corporate structure.

He’s not alone.  Bill George had the following to say in an op-ed for Dealbook:

Does anyone believe pharmaceutical companies can create long-term shareholder value by chasing lower tax venues and cutting research and development spending?

AstraZeneca’s board would do well to evaluate whether the company’s progress will continue under Pfizer’s management. If history is any guide, the Pfizer acquisition would lead to a mass exodus of Astra executives and scientists, the closing of more research labs and lost momentum on vital research projects. Mr. Soriot’s scientific leadership could become a casualty, with Pfizer’s financially minded executives dominating the decision-making.

Who benefits from this merger? In the long term, it is doubtful that there will be any winners. AstraZeneca and Pfizer employees will lose jobs, patients may lose innovative new therapies and American taxpayers will lose as Pfizer legally avoids higher taxes in the United States. If history is any guide, Pfizer shareholders will be losers as well, along with AstraZeneca shareholders who retain converted shares.

There has been much grumbling of late regarding corporate acquisitions that seem to prioritize short-term profits or narrow brand assimilation over long-term innovation.  Facebook’s recent purchase of Oculus, arguably the most promising manufacturer of virtual reality headsets, was heavily criticized on the belief that Oculus’ amazing technology will be absorbed for limited, gimmicky commercial ends.  (Anyone want to dig up some 3D carrots in a virtual-reality Farmville?)  It’s similarly ominous when telecom monoliths like AT&T start gobbling up huge television organizations like DirecTV.  In both cases, customers are suddenly saddled with increasing corporate bureaucracy and a lack of independent market choices.

But these kinds of acquisitions have potential upside.  Facebook could use Oculus to build amazing virtual worlds and AT&T could leverage DirecTV’s content to provide a more robust programming experience for its phones.  With pharmaceutical companies, however, it seems like there are very low chances that any kind of synergy will develop.  Pharmaceutical acquisitions involve real disruption to research and laboratory testing and even moderate delays could result in lost trials or benchmarks.  Restructuring inevitably leads to a shakeup of teams and groups as assets are reorganized and paired down.  Jobs will be lost and employees will probably look to leave if they can.

It seems the primary (and perhaps only) beneficiaries of Pfizer’s acquisition of AstraZeneca would be (corporate) shareholders.  Shareholders like BlackRock are the reason AstraZeneca is even considering returning to the negotiating table, since a sale would yield enormous premiums for all parties with a stake in the company.  Bill George is right: this is a short-term boost for investors, and it hurts employees, scientists, doctors, and customers across the board.

Regulators have a responsibility to balance the right of businesses to conduct private deals and the benefits of the public who live with the consequences of those deals.  Most large-scale acquisitions have significant ramifications for communal well-being, but those in the health sector are arguably the most important since their impact is directly tied to life and death.  Pfizer’s purchase of AstraZeneca would signify corporate and legal prioritization of short-term moneymaking for a select number of shareholders over the potential health benefits of continued research.  If Pfizer could guarantee that this deal would result in additional funding for drug development, it’s doubtful there would be so much concern.  But this promise can’t be made, and Pfizer’s history with acquisitions (as George describes in his piece) is not promising.

I hope U.S. and U.K. antitrust commissions address these public benefit questions if an agreement comes to pass between Pfizer and AstraZeneca.  Megamergers and acquisitions are not inherently bad, but deals like this reek of corporatism instead of healthy capitalist expansion that will benefit the majority of parties involved.   This is even more emphatically true in this case given Pfizer’s lackluster history of sparking new innovation with its purchases.  Acquisitions should build on existing structural gaps to yield new value and innovation instead of just padding investor coffers.   At what point will regulators declare that enough is enough?

The Church as an Institutional Ethical Consultant

I enjoyed reading Matt’s recap of Daniel K. Finn’s “Building Better Economies: Why Popes and Economists Need to Talk” lecture at Fordham. One paragraph of Matt’s write-up, in particular, stood out to me:

As Finn concluded his remarks, I was left wondering about what might actually be done to further the sort of dialogue he believes is necessary. Sure, popes have consulted with economists when they want to write about economics; have economists consulted with popes when they want to write about ethics? Do economists ever want to write about ethics? I approached Finn after the talk and asked him what he made of this asymmetry and how he thought it should be addressed. He acknowledged that this was a problem, and offered a few examples of forums and conferences that have modeled the kind of interaction wants to see become more widespread. Yet his examples were events that were sponsored by the Church! My point still stood.

As important as Finn’s thesis is, Matt’s observation speaks to the underlying issue with any sort of ecumenical-economic dialogue: it’s always a one-way discussion. No matter the extent to which the Church incorporates economic theory into papal encyclicals and other official documents, there’s no guarantee major economic institutions will integrate Christian ethical principles into their organizational frameworks.

Matt’s main point still stands, indeed. Not only are most forums for conversation usually initiated by the Church, but most ethical discussions in the business and finance community are reactive in nature. Prosperous environs are not conducive to calls for temperance. It’s clearly not a coincidence that major banks instituted more responsible protocols after the damage of the risk-fueled 2008/2009 crisis had already been done.

So what, if anything, could encourage secular organizations to engage the Church in constructing moral guidelines? Is it ludicrous to even consider this happening on anything more than a miniscule scale?

Perhaps. But the papacy of Francis has presented a unique opportunity for the Church to capitalize on its current favorability and crossover appeal with nonbelievers and non-Christians. And if we think of Francis’ first year as a period in which the papacy regained respect from secular society, it’s possible that the next few years could see the Church itself become a body worth consulting for guidance.

What I’m proposing, in effect, is a scenario wherein the Church heavily promotes itself as a sort of Christian Ethical Consulting Firm, a body that provides advice for organizations looking to reshape their culture. In effect, members of the Church could work with businesses and major economic groups to provide advice for growth and success within a Christian ethical framework.

Why would this scenario appeal to big businesses? The public’s post-crisis perception of most major institutions is still deeply negative; banks, in particular, continue to look for ways to make it seem like they’re working to atone for their sins. The Church could take advantage of this opportunity (be it sincere or simply superficial) and gradually work to advise the company on more responsible practices going forward.

To suggest that big banks would go to a religious institution for advice seems slightly crazy, especially given that the profit-maximization objectives of most financial institutions are in opposition to the Church’s economic philosophy. Without question, there would be limits to the Church’s ability to achieve the kind of economic justice described in Rerum Novarum or John Paul II’s encyclicals. Goldman Sachs would not begin donating its quarterly profits to charity after a brief morality sesh with Timothy Dolan. But the underlying goal would be a gradual integration of Christian ethics into different facets of a bank’s macro workflow, with the intent of achieving responsible outcomes over the long term. Not only is this kind of guidance going to look good from a PR standpoint, but it could engender business practices that might actually lead to more temperate growth and development. I’d bet that, in retrospect, the Bear Stearns board would have jumped at the opportunity to take on the Church as a consultant in exchange for moderately lower short-term profits.

The key to this scenario, of course, is the Church’s ability to employ people for this kind of consulting work who know what they’re talking about. If there is one concrete outcome from this year’s upcoming Synod of Bishops, I hope it’s the elevation of lay Catholic leaders in business, medicine, science, and other professions to more influential roles in the Church. Espousing a theology with effective, measurable outcomes requires the input of those who know their disciplines best and who also have a deep sense of faith and service. Their views should be viewed with equal weight to those of cardinals and bishops, at least in matters of their expertise.

The good news is that this is already happening! Late last year, the Financial Times ran a detailed story of how lay bankers were helping clean up the Vatican Bank’s messy finances. Just a few days ago, the panel of the Vatican’s new Council of the Economy (a sort of “ministry of finance”) was announced, and it includes seven laypeople with backgrounds in financial governance and executive leadership. I’d imagine lay professionals have long been asked to assist in high-level Church initiatives, but Francis has indicated a more extensive and foundational role for these kind of experts going forward. Let’s hope this is the case.

As noted above, there’s no need for this kind of consultation to be limited to business and economic matters. There are plenty of areas where the Church could apply its ethical principles in service of secularists who would otherwise have no interest in learning about Church teaching. Marriage comes to mind as an intriguing case study. The oft-cited statistic is that 50% of marriages in the U.S. end in divorce. Much has been said of how the Synod will likely tackle the issue of divorced and remarried Catholics later this year, but what if the Church worked to tackle the breakdown of civil marriage as well? Perhaps a consultant board could provide services to couples who are considering getting married, with a message of, “Let us help you make the most of your commitment to each other so that it’s as rewarding as possible.” It could employ lay relationship counselors to provide advice along the journey, advice rooted in secular language with distinctly Christian underlying principles.

The important phrase in the previous paragraph is “in service of.” Right now, one fears that non-Christians might view the Church with an attitude of skepticism for what Pope Francis would call its “legalistic” trends: pronunciations of what not to do combined with a focus on the consequences of these transgressions. The Church as a “consultant” would instead emphasize gradual reformation with a combination of firmness, compassion, and logic. You won’t engage nonbelievers by telling them what they’re doing wrong, but you might get their attention by proving to them the advantages of the Church’s way.

Most studies of Church attendance in the last few months have not found any measurable impact of the so-called “Francis Effect.” That is, there has been no jump in people attending mass despite the Pope’s high favorability. And that makes sense. One man might make people more understanding of the Church as an institution, but it’s difficult to single-handedly convince non-believers that Catholicism’s beliefs and practices are a worthwhile paradigm. Even if the Church doesn’t adopt the measures outlined above, the general conceit should be its priority going forward: engaging more effectively with non-believers on their grounds. This requires the presentation of ideas and beliefs in a way that makes sense on a secular level.

To be frank: my comparison of the Church to an “ethical consultant” is somewhat watered-down and clinical. It strips the mythology of a communion of people into a panel which provides advice sapped of explicit Christian associations. No doubt this would strike many as foolishly ineffective or a betrayal of the Church’s tradition, but I’m finding myself increasingly drawn in the other direction. The Church’s size and ability to unite believers across countries, languages, and governments is an advantage it should leverage. Using that weight to make a concerted push for dialogue with nonbelievers, on their terms, is something the Church can – and should – do.

Returning to Matt’s original question about economists and Christian ethicists: imagining the Church operating in the aforementioned manner wouldn’t turn the one-way street of economic-ecclesiastical dialogue into a two-lane highway. But it would provide a broader and more effective set of tools to make sure that conversation keeps growing and the effects of such dialogue have progressively greater impact. Francis has laid the groundwork for this type of cooperation to begin in earnest; let’s see if we can’t take those next steps to make it happen.

The Benefits and Dangers of Personal Brand Journalism

Earlier this month, John Allen, Jr. announced that he would be leaving the National Catholic Reporter to take a new position at The Boston Globe. In its press release about the hiring, the Globe included this interesting nugget: “(Allen) will also help us explore the very real possibility of launching a free-standing publication devoted to Catholicism, drawing in other correspondents and leading voices from near and far.”

Allen’s move comes days after Wonkblog founder Ezra Klein’s pitch to the Washington Post for “an ‘eight-figure’ investment to launch a new site focused on explanatory journalism.” It also comes as Nate Silver, erstwhile New York Times employee and current Editor-in-Chief of FiveThirtyEight, prepares to re-launch his site as a Disney venture.

These and other recent high-profile journalist departures from newspapers (Walt Mossberg from The Wall Street Journal, Glenn Greenwald from The Guardian) are the latest indicators of what Michael Wolff calls the rise of “personal brand journalism.” Wolff argues:

There is a new vision of journalism – call it the auteur school – in which the business shifts from being organized by institutions to being organized around individual journalists with discrete followings… That’s a new notion, this solipsistic brandedness. The old organizational notion in journalism was exactly the opposite. There were never enough readers interested in one subject or one writer so you created a package of many subjects and writers, sharing the attention and the rewards.

Wolff focuses on the profitability of personal brand journalism in his column, but another question arises from his astute observation. Is personal brand journalism beneficial or harmful to the integrity of news reporting?

Newspapers, of course, are not doing well. They are losing both money and readers and have been for almost a decade. It would seem that high-profile reporters like Klein, Silver, and Greenwald would thus benefit the entire industry by leveraging their reputations to deliver high-quality reporting and content. Klein’s demand for $10+ million to start his new site seems outrageous at face value, but it suggests he is serious about providing an excellent and informative product with broad public appeal. This is certainly a good thing.

The problem with “personal brand journalism” is that while its lead figures may intend to provide substantive and objective reporting, their central roles might preclude the balanced, wide-ranging coverage that traditional news organizations provide. This doesn’t refer so much to an implicit ideological slant as to the fact that coverage will be largely aligned with each founder’s primary interests, or a more narrow news spectrum than “old media” organizations. Wonkblog tackles a pretty wide range of policy issues but does so from a specific “wonkish,” graph-based perspective. FiveThirtyEight will utilize data analysis to report on politics, business, sports, and more. Mossberg’s site focuses primarily on technology and culture.

The risk is that each of these individual ventures will lead an increasing number of viewers into more limited sub-strata of news coverage that (perhaps unintentionally) masquerades as a holistic overview of the news. Some people might argue that Wonkblog can be categorized as an objective news source that replaces the need for the Washington Post, but it’s a tough argument to win. That Klein’s name is so integrated with the site’s genesis and production reinforces the idea that it is not a true equivalent to the Post and cannot serve as a 1:1 supplement in its reporting and scope.

This issue isn’t particularly urgent at the moment. Major news sources, which provide broader coverage and demarcate news and opinion, are sufficiently vital to act as complements to personal brand journalism. But the trends are increasingly ominous going forward. The rise of “sponsored content” at sites like Time and The New York Times suggests readers will have to be more vigilant about what information is news and what constitutes well-integrated advertising. If this trend continues, more people will flow to personal brand journalism portals for their news than today, and fewer stories will be sourced from independent news organizations.

This is, in other words, a double edged sword that threatens to strike at the profitability and sustainability of objective news. The incorporation of too much sponsored content risks diluting the reputations major news organizations have developed as impartial and comprehensive, while personal brand journalism features an inherent risk of bias based on limited coverage and the influence of each key figurehead. Personal brand journalism might result in devoted readership bases that help prop up the news industry, but it does not necessarily follow that personal brand journalism is helping save the industry. The actual result might be precisely the opposite.

Of course, it’s not fair to group all of the aforementioned personal brand journalism purveyors in one uniform pool. Different blogs or sites have different aims and some might be more inclined to produce objective reporting than others. We might distinguish the problematic potential of personal brand journalism by breaking its purveyors down into different categories. Wolff distinguishes ventures like The Huffington Post, Buzzfeed, and Business Insider from Klein and Greenwald’s sites by noting that the former are “working at a self-sustaining level.” I’d say it’s more a question of scale. The Huffington Post and Buzzfeed have expanded to a point where the editorial spectrum is no longer dictated by a single person. In contrast, people like Klein and Greenwald will have more significant influence on what their sites publish.

In addition to these two groups, I would add a third category to personal brand journalism in order to recognize a separate type of new media entity: the professional blogger-curator whose only original content is his/her personal analysis of the news. The commonality between the Huffpost / Greenwald groups is that they provide readers with either original reporting or sophisticated data analysis. Larger media organizations like Huffpost might feature editorials as a driving source of traffic, but they do publish independent reporting as a key part of their content stream.

In contrast, the blogger-curator publishes no independent reporting and primarily serves as an aggregator of both original journalism and other blog content. My main point of reference here is Andrew Sullivan and his site, the Dish. Sullivan left The Daily Beast just over a year ago to launch his popular blog as a “freemium,” paywalled independent venture. The Dish is a curated collection of articles supplemented with Sullivan’s commentary; as of now, aside from interviews with Mikey Piro and Dan Savage, the Dish has published no independent journalism or sophisticated data analysis. All of the Dish’s exclusive content has been based off of Sullivan’s own reflections or ruminations.

Sullivan’s work is perhaps the most dangerous case study of how of personal brand journalism could siphon resources and traffic away from news organizations providing original content and reporting. One of Sullivan’s goals since going independent was to provide groundbreaking long-form journalism, but it remains uncertain whether Dish revenue will be able to support this initiative. In the interim, Sullivan is essentially charging readers for personal commentary and article aggregation. That readers are being asked to pay for full access to the Dish means money is flowing away from alternate news organizations that do produce independent reporting.

I do not mean to unfairly malign or downplay the quality of the work that Sullivan produces, nor do I mean to suggest that the Dish’s published material is of negligible value. The Dish is a wonderful site with an unparalleled range of content and commentary and Sullivan has every right to ask people to pay for his analysis of contemporary culture. But it seems hypocritical to hear Sullivan argue how the Dish is “building a future for a whole range of new media on the ashes of the old.” In no way has the Dish, as constructed, been able to replace traditional old media without losing the core principles of journalistic integrity that Sullivan lionizes.

Again, this is not a pressing issue now, and the popularity of personal brand journalism does not mean traditional reporting is soon to be extinct. But the question still remains: is there a way to combine the best of personal brand journalism with the broader objectivity of old media?

Perhaps this is where John Allen’s new deal with the Globe could prove instructive. Allen’s case is unlike any of the other personal brand journalists listed here. He is a reporter first instead of a commentator, and he’s partnering with a major old media institution to create something new. He’s clearly going to be the most important figure in this “free standing” Catholic publication but it’s not implied that he will be a dominant figurehead a la Klein or Silver. In many ways, it seems like Allen is splitting the difference: leveraging his credentials to do something new and specialized within the context of a broader reporting service.

This seems like a good path for old media organizations to follow: hire high-profile, respected reporters (and commentators) to run specialized affiliates that combine intensive reporting and high-quality analysis. A well-run niche site will always have viewers, and tying that site to a major news brand allows readers to access both a broad spectrum of news and a specific range of coverage with personal flair. Wonkblog is probably the most successful example of this now, though Ezra Klein’s initial influence on the site (and his affiliation with things like JournoList) skews it slightly more towards the “personal brand” side of the spectrum. That said, if I were Jeff Bezos, I would pay Klein to start that new site and try something even grander. In this climate, there will be no great rewards without risks.

It is good to see so many “new media” organizations arising amidst the ascendance of personal brand journalism. Readers are better off when there is more choice and better argued interpretations of current events. To this end, there is certainly a place at the journalism table for Sullivan’s passionate opinions, Silver’s statistical analysis, Klein’s wonkish lens, and Greenwald’s political focus. Let’s just hope “old media” organizations will be able to capture the vitality of these branded publications and employ it in the service of continued objective journalism.

Amazon Should Acquire Barnes & Noble

You’ve got to hand it to Jeff Bezos. Amidst ongoing news coverage of Amazon’s popular Kindle Fire HDX, its online foray into Netflix-esque digital programming, and its familiar role as nexus of the online holiday shopping season, Bezos managed to pull yet another PR ace from his company’s burgeoning sleeve this past weekend with the announcement of Amazon Prime Air. The new service is expected to launch in 2015 and will supposedly deliver small packages via drone shipments within 30 minutes of placing an order.

It’s an amazing, terrifying idea, and one that will probably have to clear miles and miles of regulatory tape before any drone levitates a single inch off the ground of one of Amazon’s storage facilities. So what other aces can Bezos play in the meantime to keep up his company’s ever-increasing public profile?

Here’s one suggestion: acquire Barnes & Noble. My friend Jamie and I began talking about this idea about a month ago, and it’s increasingly clear that such a move would be a highly sensible avenue to buttress Amazon’s identity as a known and trusted brand.

The immediate impetus for this move would be to consolidate Amazon’s power as the largest market force in bookselling. Barnes & Noble is the last major challenger to Amazon’s cost-effective behemoth and absorbing it into the Amazon portfolio would give Amazon a great deal of additional power in controlling book marketplace standards. It would also remove the competition of B&N’s Nook which, although an increasingly marginal player in the e-reader and tablet market, still has a relatively robust digital infrastructure. Acquiring this infrastructure could have important implications down the road. Example: Microsoft owns a 10% stake in Nook and an Amazon purchase of the entire B&N brand would eliminate the potential of Microsoft adding a Nook-based reading application to Windows if and when Nook is spun off.

There would also be direct financial benefits from such a deal. Amazon can easily afford the $985 million market cap of Barnes & Noble as well as a hefty stock purchase premium. And given that B&N still earns $374 million in annual profits from its physical bookstores, it’s a deal that would eventually pay for itself.

More important than market share consolidation, however, is the new public narrative that Amazon can create from such an acquisition, as well as the previously untapped footholds it can gain in local communities. The conventional bookseller lament is that Amazon is destroying the joys of the physical book store with its soulless, algorithmic cost-slashing. In one acquisition Amazon becomes the cultural proprietor of the local bookstore, a global force that still cares about the benefits it can provide to local communities.

People like bookstores for a variety of reasons. They imbue a sense of spontaneity and discovery that online shopping will always have a hard time replicating. They’re a great place to wander through on rainy days while grabbing a coffee or pastry and enjoying extended previews of potential purchases. They’re a prime destination for picking up quick but thoughtful gifts. Most importantly, in many cases, they’re a sort of cultural hub for the community, hosting authors and other guest speakers that are open to the public, almost always free of charge.

Imagine how the noxious narrative surrounding Amazon would change if they purchased the largest bookseller and made a campaign of further promoting these public goods that bookstores provide. Not only would Amazon become a cultural touchstone in many communities, it would be seen as the savior of bookstores and a force that understands the communal value of reading.

How Amazon would operate a brick-and-mortar bookstore chain is open to interpretation, but I see the potential to combine the best of a library rental system with the benefits of immediate purchasing. Amazon would still offer books for sale, perhaps at a slight markup from their online counterparts, but customers would likely pay the premium for the immediacy of purchase. More importantly, Amazon could leverage its Prime program to create further purchasing incentives, in which anyone with online membership would receive perks or in-store benefits. Jamie suggested a bevy of avenues this kind of program could take: free coffee, sales discounts, or even participation in a library-esque book loan system.

Unlike Apple and Microsoft, Amazon does not have a dedicated physical space to demonstrate its wares. Its Kindle line is available in a number of retailers but is often displayed amidst a sea of other tablet options. Purchasing Barnes & Noble would give Amazon space for a devoted Kindle display in the most innocuous of atmospheres- surrounded by physical books! This space would also allow Amazon to publicize and promote any major, non-book online deals, letting customers test out key products that they might be reticent to purchase without trying beforehand. This kind of store setup would also facilitate the purchase of online products in-store. Most people go home from Barnes & Noble to buy a discounted or e-reader edition of what they saw in the store. Why not cut out the middleman and let people make those purchases directly from a store terminal?

A purchase of Barnes & Noble would have limited returns, to a degree. The single-floor B&N stores in malls throughout the country would not be conducive to this kind of plan; the main core of the deal would be access to the multi-tiered B&N megastores that dot select communities in major population zones. And, again, on the whole, this would be revenue-neutral for Amazon at best. Its margins are already slim or nonexistent in the online book business and any revenue gained from the stores would not generate net profit (due to the deal’s upfront expenses) in the immediate future.

But, as Jamie noted in our conversation: “Normally, this might be a pie in the sky scenario for a profit-maximizing corporation in Amazon’s shoes, but Amazon hasn’t ever cared about profits, and shareholders apparently don’t care that Amazon doesn’t turn a profit.”

The purpose of this deal is one of crafting a strategic PR narrative rather than strict accounting. Bookstores are not moratoriums for the dying print medium; they’re living, breathing communities where people go for diversion, enlightenment, and solace. Subsidizing this kind of experience is something Amazon can easily afford, while simultaneously eliminating its largest bookseller rival and creating a dedicated space to promote Amazon products. It’s a win-win-win for Amazon’s reputation, readers, and communities across the board. (Indie booksellers, not so much… but that’s why they should band together and create an online distribution network, as described here.)

Thanks to Jamie for the conversation and ideas that informed this post.

The Political Economy of New Jersey’s Minimum Wage

Barring any last-minute surprises, New Jerseyans are poised to head to the polls on Tuesday ready to take the paradoxical step of reelecting Republican Governor Chris Christie by an overwhelming margin at the same time that they amend the state constitution to raise the minimum wage to $8.25 and to provide for automatic cost-of-living adjustments (COLAs) in the future. Paradoxical because of the fact that Christie publicly opposes the ballot measure, and vetoed a bill passed by the Legislature earlier this year that would have enacted a policy almost identical to the one now being put to the voters.

In a statement following his conditional veto of a measure that would have raised the state minimum to $8.50 from the current federally-mandated floor of $7.25 while also instituting annual COLAs, Christie argued that the “sudden, significant minimum-wage increase in this bill, coupled with automatic raises each year tied to the United States Consumer Price Index, will jeopardize the economic recovery we all seek.”

Democrats in the Legislature argued at the time that Christie’s action was one he would come to regret, and that the opportunity to put the issue before voters in November would ultimately redound to their own political benefit. The electorate might not have been enthusiastic about the party’s little-known gubernatorial nominee, State Sen. Barbara Buono, but the minimum wage question would, according to this line of thinking, prod Democratic leaners to show up at the polls and allow the party to tap an otherwise unmotivated reservoir of anti-Christie votes. The excitement generated by a referendum campaign would help to make up for the enthusiasm gap left behind when better-known Democrats like Cory Booker – who, as the Star Ledger put it last December, “picked a cozy run for Frank Lautenberg’s Senate seat over a bare-knuckle brawl with the big man” – took a pass on the race.

But with polls now projecting that both Christie and Question Two will easily prevail, it is clear that this strategy failed to deliver. That said, the Democrats were not necessarily crazy for believing it would improve their chances; Christie just happens to be an exception to this particular rule of political thumb. The minimum wage has always been an effective cudgel with which Democrats can beat up Republicans. The policy is easy to understand and speaks to the personal experience of a sizeable fraction of the American population (even though only a small share of the workforce is earning the minimum wage at any given moment in time, the proportion of workers who have ever earned the minimum at some point in their lives is much higher).

The most common argument against raising the minimum wage, like many arguments proffered by Republicans in defense of less government regulation, relies on an apparent counterintuition. Claims that low-income people are hurt the most by policies that require employers to pay their low-income workers more, whatever their validity, resonate less with voters than the simple populist refrain that wealthy business owners can afford to (and therefore ought to) share more of their surplus with the little guys. For that reason, Republicans will almost always be at a rhetorical disadvantage whenever the issue comes up. Those who are worried about the party’s long-term viability and competitiveness in national elections should be eager to find some way to take it permanently off of the table.

Ten states have minimum wages that are indexed to inflation. Both Barack Obama and his former challenger Mitt Romney are supportive of inflation indexing at the federal level, yet congressional Republicans continue to block the proposal. By doing so, they only guaranteed that the issue will be resurrected by their opponents again and again. Perhaps Christie had all of this in mind, and vetoed the original bill in an attempt to let the Democrats resolve the issue for good without having to alienate his allies in the business community. Not that he didn’t alienate them anyway, though; some business groups are just as opposed to automatic minimum wage hikes as they are to ad hoc ones. The National Federation of Independent Business, a conservative advocacy group best known as the lead plaintiff in the Supreme Court case that upheld the Affordable Care Act, recently tweeted that it is inappropriate to use constitutional amendments as a vehicle for making economic policy (given their support for state amendments prohibiting individual health insurance mandates, one suspects that this position is one of expedience rather than principle).

NFIB believes that allowing a provision like this to make it into a state constitution will make it harder to remove or amend when the injurious side effects of an ever-higher minimum wage begin to materialize. Even if their warnings about these effects are overblown, they may have a point: on my reading, the ballot measure only provides for increases in the minimum during years in which the Consumer Price Index rises, meaning that it would remain flat in the event that the CPI stagnates (similar to the way that COLAs work for Social Security). This means that a relatively severe bout of deflation could lead to a sharp increase in the minimum wage in real terms, potentially increasing the severity of an economic downturn.

How exactly this scenario would play out is an open question that will have to be left to empirical economic research, but all else equal, policymakers would indeed find it more difficult to tinker with the law if it were embedded in the constitution rather than dictated by statute. Early in his first term, Governor Christie advocated amending the state constitution to cap local property tax increases, though he ultimately struck a deal with the Legislature to enact a statutory cap instead. This was seen at the time as a victory for the Democrats, since a statutory cap would be easier to undo if, as many of them predicted, towns and municipalities found it too onerous to abide by the caps without sacrificing vital priorities.

All of that said, conservatives should still on balance find the idea of minimum wage COLAs appealing. They reduce uncertainty for businesses and make it easier for them to plan for the future. Instead of large, discrete hikes in the minimum that can come at unexpected times and be driven by the vicissitudes of public opinion and the vagaries of the political cycle, all future increases under such a policy regime would be modest and would occur at regular intervals. In response to Christie’s conditional veto of the original minimum wage legislation, Senate President Steve Sweeney declared that “[Christie’s] action shows that he believes politics and politicians need to remain part of the process on minimum wage… I think they need to be removed from it entirely.” Shouldn’t conservatives worried about the threat posed to the private sector by uncertainty be supportive of making labor market regulations more predictable?

Both Christie and the business community will likely come to be thankful for the fact that the minimum wage will never again be a subject of debate in New Jersey (if they don’t quietly believe this already). Democrats, in achieving a spectacular policy victory, will have relinquished a reliable political weapon. Imagine the benefit to the national Republican Party if it too came to grasp the deep logic of this issue and disposed of it once at for all at the federal level. Can anybody think of some candidate who, come 2016, might be able to help it connect those dots?

Should Authors Link to Amazon?

Dustin Kurtz argues that “there are exactly zero defensible reasons for authors to link to Amazon” when advertising their books on their personal websites:

All of the discussion of the ills of Amazon aside… authors have nothing appreciable to gain by linking to Amazon. Linking to an indie [bookstore] can have real, pecuniary benefits. If linking to the former alienates the latter—and it damned well should—then an already obvious choice becomes something closer to an imperative. Link to your local bookstore.

While I agree with Kurtz that promoting local booksellers is more beneficial than sending customers to Amazon, his defense of indie store linking is incomplete and warrants further argumentation.   Kurtz only conceives of two scenarios for authors to promote their books online:

  • Scenario A- link customers to a single local store, which yields you “new friends” in your town and helps your community through economic support.
  • Scenario B- send customers to Amazon, which doesn’t care about your well-being and effectively harms your community by nabbing a potential local cash infusion.

Kurtz says that “in most cases people looking to buy your book will navigate [to Amazon] first, not your site.”  If this is the case, it’s rational to conclude that most traffic to an author’s website would be for informational purposes rather than actually purchasing their work.  I’d be interested to know what percentage of author sales are a result of clicks from their personal sites, but I’d be surprised if it’s above the low single digits.  So it’s unlikely that linking to a local bookstore will substantially benefit the community on a per-author basis since there would be relatively few clicks with the intent to purchase.

Even if we assume indies do benefit from author links, however, there are still disincentives for authors to send readers to a single local store.  Let’s say I’m based in Northern California and I link to a local Palo Alto bookstore.  My online customers could be ordering from anywhere in the country or the world.  Can I be sure that this bookstore has the infrastructure to efficiently handle and ship these orders?  And why is my local bookstore superior to the customer’s local bookstore?  It would probably be faster, easier, cheaper, and fairer to link customers to their own stores and encourage broader indie growth rather than focusing on a single store in my neighborhood.

This isn’t an argument in support of Amazon, of course, but it speaks to author and consumer concerns that Kurtz does not mention.  Despite of Kurtz’s criticisms of Amazon, it still has one of the fastest and most efficient delivery systems in the world.  It’s also got the benefit of selling other products, meaning customers are more likely to have an account and will actually purchase things there.  While pay sites like PayPal are making online shopping easier than ever, the scope of Amazon’s offerings incentivizes customers to combine their purchases for a more consolidated experience.   There is less variance in ordering from one giant seller instead of multiple small unknowns.

This is not an insurmountable hurdle for indies, though.  It’s surprising that Kurtz paints such a black or white picture of how authors can sell books: either link to only one local store or link to Amazon.  A powerful middle ground would see scores of indie bookstores band together and create a database or algorithm that authors can link to on their sites.  Customers would enter their zip code and the database would link to their closest participating bookstore, but any other store in the network could also be selected.  This kind of network would ensure a baseline quality standard for local ordering and would allow readers to pick which stores they want to support.  Kurtz mentions an indie bookstore network in his article that seems to help authors set up their local links, and it very well might have a service like this set up.  If not, it’s a good synthesis that helps authors support a greater number of indie bookstores and allows customers to purchase books with greater efficiency.

I share Kurtz’s fervent support of local bookstores, which are important hubs of information and social energy for their respective communities.  A stronger network of indie stores would remove the current incentives authors and customers do have from linking to Amazon, creating a better buying alternative where any given indie could be a benefactor.