One of my favorite sayings is “Those who can’t innovate, litigate.” Many patent defends claim the patent system protects small inventors, but it more often seems as a way for large businesses to stifle competition. Look at recent lawsuit announcements and it’s a who’s who of no longer relevant companies who ceded their market leads by failing to continue innovating with market.

Apple has seemed like a company more focused on innovation. Even as Jobs proudly announced more than 200 patents related to the iPhone, Apple appeared to want to seriously compete in the mobile space by offering a more compelling product.  Those 200 patents did little to stop the many patent lawsuits lodged by marketplace losers against Apple including most recently Nokia (think, what was the last good Nokia phone).

Now Apple, rather than continuing to fund and innovate on the iPhone, has sued HTC, the maker of many Google Android phones, over several patents.  HTC and Google Android have been stealing much of Apple’s thunder in the mobile space and are both growing very rapidly (thanks, in part, to Google’s free and open-sourced operating system allowing HTC and other phone manufacturers to innovate and create compelling phones). Apple apparently thinks its worth spending millions of dollars on lawyers to sue HTC rather than spend that time and money making an even better iPhone.

Apple suing HTC, and by association Google, is a thinly veiled way of saying they’re scared of competition. Yes, Apple has a legal right to sue over patent infringement (even though most patent lawsuits are not over willful infringement but because two companies came up with the same idea but one patented it first), but what is gained from these lawsuits, aside from making lawyers richer. Rather than out-innovate and compete in the marketplace, as is object of capitalism, Apple would rather sue to keep quality products out of consumers hands. Enjoy that AT&T 3G. We might get stuck with it.

Game developers have frequently lamented the drive for lower cost games on the iPhone.  “The push to 99 cents is the single most frustrating and terrible thing about App Store pricing,” says Nathan Vella, co-founder of Capybara, makers of Critter Crunch. “Since it became ‘expected’ by consumers, it forces a lot of developers, specifically indies, to devalue their game and significantly increase the number of sales needed for developers to get back their investment.”

But what Vella thinks as devaluing is really basic economics. Competition, the healthy and rewarding heart of capitalism, encourages makers of goods to try to one-up each other, whether by lowering prices or offering a more compelling product.

The App Store, with more than 100,000 applications, 13,000 of which are games, competition is pretty fierce. It is to be expected that price will be pushed down. Most game makers have stayed around 99 cents, so if someone really wanted to stand out, maybe they should sell at 98 cents. Or there’s lots of free games and that soon might become “expected”. Not even including truly free apps, estimates (which I strongly question) claim 75 percent of apps are pirated meaning Vella and game developers have more to fear from free than 99 cents. If Vella thinks 99 cents devalues his games, how will he feel when he’s forced to sell it for free?

iPhone developers, like many in the media industry, forget that price and value are two different things. Value is subjective. I, as a consumer, value a game a $10. As long as the price is less than $10, I will buy the game, even if it is $2. The developer chooses the price that will make them the most money, specifically by setting the price low enough as to attract the largest number of buyers. The $2 price in no way devalues the game. While I might have paid more, 10 other people might not have. Meaning the developer attracted more purchases and made more money over all. This is known as price elasticity.

We see evidence of this in many digital services. The PC game Left4Dead took 50 percent off its price and jumped 3,000 percent in sales. Variable pricing on iTunes led to lots of $1.29 songs and very few 69 cent songs. Those higher priced songs have seen enough of a drop in unit sales that overall revenue is lower. Maybe at 69 cents, they’d actually make more money.

For game developers, it seems the App Store just has too much competition to make it easy for anyone. There are so many games vying for attention, thanks to the low cost of entry (until traditional gaming consoles), that its a major challenge to get the attention of enough consumers willing to pay the 99 cents (or even pirate it). The benefits of the Long Tail in the App Store necessitates better search and organization to help people find the apps they want (the App Store does lack this robust a function). But game developers can look for their own solutions to stand out by using social media, pricing, and excellent games to build the buzz. It’s not Apple’s fault, it’s not consumers fault, piracy’s fault, or other developers faults. It is up to each developer to give consumers a reason to buy their game.  If consumers don’t pay, then change what you’re doing. That’s innovation and competition makes sure it happens.

The New York Times took an intelligent look at how content is selling on Apple’s App Store.  The best-selling version of David Pogue’s “iPhone: The Missing Manual” book is its $4.99 iPhone app version, not the paper book or PDF.  Saul Hansell understands the application’s success on the iPhone is because of the valuable convenience and service Apple provides rather than customers simply paying for content.

Apple has created an environment that makes buying digital goods easy and common. With an infrastructure that supports one-click purchases of songs and videos, it was easy to add applications in the same paradigm. Paying for software, especially games, is not new to Apple customers. So when you see the iPhone manual or the Frommer’s Paris guidebook, it feels natural to click. (And of course, your credit card is already on file with Apple.)

He adds that Pogue’s app “hard to use” with poorly formatted text and a lack of interactive features, but for $4.99, the book sells quite well to a captive audience.  The publisher raised the price to $9.99 and saw sales plummet 75 percent.

This is not an example of micropayments, like some would like us to believe.  As newspaper’s desperately try to convince the public content should be paid for, they forget to tell us why to pay for it, let alone give us a reason to.  Apple built a easy-to-use system that is so convenient, it’s worth a few dollars and cents.  But Apple doesn’t look to make money on it’s App store. Apple already makes a healthy profit on the iPhone itself, just like on the iPod. Any profit from songs or applications is icing on an already sweet cake. These so called micropayments supplement Apple’s massive profits – they aren’t the source.  Newspapers hoping to replicate this model will be sorely disappointed.

Another difference, Apple has no real competition.  No one else can sell or offer iPhone applications except Apple (unless you jailbreak your phone). And no other mobile phone system offers as complete a catalogue or convenient system to truly challenge the iPhone (Google’s Android is trying very, very slowly).  If and when Android or Symbian or Windows Mobile (ha) can and do challenge the iPhone, convenient service will not be worth paying so much for. It’ll be expected and the next innovation will be required.  That’s, of course, smart business – staying ahead of the competition.

Something of concern for Apple and micropayment fans is research shows iPhone users rarely use applications after 20 days.  Techdirt points out iPhone users not finding much value in the apps they download will be less likely to spend money on more, hurting the long-term viability of the store.

The Guardian posts an interesting theory that for Amazon’s Kindle to be more successful, it needs more widespread piracy.  Unlike Apple’s iPod, Kindle users can’t transfer their book collections onto the hardware like CD-to-MP3s.  Every book must be purchased or downloaded. And while book piracy does exist, it relies on devoted fans copying every page – not as easy as an automated CD ripper.

The Kindle is selling quite well for Amazon, but hardly on the road to travel dominance like the iPod. This might show the market is not as ready for the iPod of books as it is for the iPod of music.  As I’ve (and others) have written, piracy shows what the market wants and at this point, digital books are not in high demand.

Book and content producers need to understand why this is the case. Right now, books are more valuable to consumers for any variety of reasons, like convenience, habit, and collecting.  We know reading online/on the computer is a preference for many for short features, like news articles, but books are still preferred in tangible form.  The Kindle isn’t going to change the habits of consumers, but it’s a forward looking option that knows paper’s days are numbered.

Unfortunately, the book industry is leaving clues they are more likely to follow the close-minded music industry approach.  Paul Aiken, the executive director of the Author’s Guild claimed the Kindle’s new text-to-speech feature was an act of copyright infringement by allowing any book to be read aloud saying literally: “They don’t have the right to read a book out loud…That’s an audio right, which is derivative under copyright law”. According to his logic, reading any book out loud, even a bedtime story for your kids, is a derivative work and thus copyright infringement.  Or, maybe, this feature is just a way to make the Kindle, and thus digital downloads, more valuable to consumers. It’s unlikely a computerized voice is going to replace emotional actors on audio tapes.

For book publishers, they need to plan for a future where books are digital and readily pirated. It’s already happening on a very small scale.  Instead of fighting the inevitable future, book publishers can embrace the change and profit from it. First, embrace the cheap distribution of digital goods and include digital downloads of books with the purchase of a hard copy. Even spread full, free downloads online – several examples of free eBooks show huge increases in tangible book sales.  These sales come because the hard copy is more valuable than the digital copy.  Book publishers need to increase the quality of the published books, recognizing why people buy them.  Small, soft cover travel copies are perfect for convenience customers (and should be cheap, impulse buys). For collectors, like everyone I know with huge bookshelves to fill, increase the value of hard covers with gorgeous art, author’s notes (the paper form of commentary tracks), and high-end binding.

These features give customers a reason to buy the hard copy.  This way, when book piracy explodes, book publishers are already offering compelling alternatives that give customers a reason to spend their money.

I will be speaking at the Flow Conference in Austin, Texas on October 9th at a round table about music and copy protection.  I’m posting here my position paper, though regular readers should be familiar with my opinion on the subject.  If anyone’s heading to the conference, please contact me in the comments, email or Twitter.

The other panelists will be (links go to panelist’s position papers).

Patrick Burkart, Texas A&M University (convener)

Danny Kimball, University of Wisconsin-Madison

Ali McMillan, University of Western Ontario

Moderators: Marnie Binfield and David Uskovich

This is the question the roundtable will be discussing:

More and more music fans, artists, and labels are rejecting DRMed file formats in favor of more lenient digital music sharing policies than what are available through most commercial music service providers. Under what conditions do music fans resist copy protections? When have music labels dropped copy protections? What is the disposition of digital music distributors towards DRMed formats?

My response

Thanks to technology, more people are creating and listening to music than ever before. With computers and the internet, it is cheaper and easier to produce and distribute music. Instead of embracing technology, music companies are using technology like DRM to stifle innovation and user value, trying to control their evolving industry.

DRM gives record companies the feeling of control over their music – control they no longer have. But the economics of music are changing. The cost of distributing music has dropped to almost nothing, making music infinitely reproducible by anyone. Music companies used to decades of controlling distribution need to adjust to a new marketplace where plastic discs don’t matter. This means radically changing music’s business models.

Musicians and publishers feared the first digital music device, the player piano, more than a century ago. In 1906, John Phillips Sousa and music publishers asked Congress to ban the player. Instead, Congress instituted the compulsory license system still used today. This took away control from publishers, but helped everyone make more money by embracing the benefits of the technology, selling piano rolls to make songs more popular and performers more valuable.

Computers and the internet can be just as profitable when embraced. Musicians like Trent Reznor, Radiohead, Jill Sobule, Kristin Hersh, and Maria Schneider are experimenting with new business models using infinite goods to sell scarce goods. Reznor posted his own music on file-sharing networks while selling premium editions of his album with a Blu-Ray slideshow, vinyl version, and signature. Reznor grossed $1.6 million in the first week even though his music was freely available online. Sobule and Hersh let fans support the creation of their albums by selling private performances, chances to sing on the album, or executive producer credits. Music companies study file-sharing networks to target advertising and decide tour locations based on the popularity of artists.

Most music companies treat new technology like the enemy, using DRM to limit what technology can do. DRM aims to prevent file-sharing, helping music companies control distribution of an infinite good, while taking away value from paying customers. Music companies expect customers to pay more dollars for less value.

But DRM does not stop file-sharing. Only one MP3 file is needed to spread to thousands of freeloading fans. Almost every form of DRM gets circumvented within days meaning one file always makes it onto file-sharing networks. EMI began selling DRM-free files on iTunes partly because DRM has no effect on piracy.

While DRM fails at its only purpose, it succeeds in making music less valuable, treating paying customers like criminals, and causing technical and public relations nightmares from installing malware (Sony rootkit) to failing devices (Blu-Ray players that don’t play all Blu-Ray discs). DRM-free stores like Amazon and Wal-Mart evolved out of necessity. Music companies forced Apple to lock iTunes with DRM limiting files to only play on iPods. As Apple sold more music, it sold more iPods. When Amazon and Wal-Mart launched their music stores, they had to offer them DRM-free so songs could play on iPods. The music industry handed Apple control over its digital future, from pricing to marketing, because of DRM.

Some DRM validation services get canceled, leaving companies with expensive public embarrassments and unhappy customers with useless music. Yahoo, Google, and Microsoft all canceled support for their DRM. Yahoo and Google offered refunds or DRM-free alternatives to all customers while Microsoft, due to public outcry, reinstated its DRM.

It’s up to the music industry to develop business models that embrace the promotional value of its music to sell more valuable scarce goods. Entertainment has used this model for decades: Television provides free shows supported by advertising and music uses the promotion of radio to increase album sales. There is more money to be made embracing technology rather than fighting it. People can listen to and share music, becoming bigger music fans, and increasing demand for scarce goods like concert tickets and collectibles. Thanks to computers and the internet, every MP3 is a promotional tool.

The music industry needs to adapt to the changing marketplace. Use technology to give customers more value: give people a reason to spend their money. DRM takes away value from customers, causes public relations nightmares, and provides no benefit except a false sense of control. Instead of fighting file-sharing, embrace it as a competitor and offer a more valuable customer experience, not try to control the experience. More value means more money. And that’s good business.

Work Cited

Doctorow, Cory. “Microsoft Research DRM talk.” Microsoft offices, Redmond. 17 June 2004. 1 Sept. 2008 <http://www.craphound.com/msftdrm.txt>.

Masnick, Mike. Techdirt. 1 Sept. 2008 <http://www.techdirt.com>.

Just as I praise 3rd-party innovation on other mobile systems, Apple shows itself less willing to host an open environment.  A developer released a $999.99 iPhone application called “I Am Rich” that did nothing but show a red screen. Some bloggers called for Apple to takedown the program for no reason other than it was significantly over-priced.

Why remove the app? Yes it’s stupid and the eight people who bought it are weird to say the least, but if people want to spend $1,000 on a red screen, who is Apple to say they can’t? MG Siegler of Venture Beat says since the App Store isn’t completely open, Apple shouldn’t have approved it in the first place.  But why? “I Am Rich” doesn’t violate any of the rules Apple laid out: no pornography, bandwidth abuse, or threat to privacy.  The program specifically states there are no hidden features. Anyone who buys the program knows exactly what they’re getting.

By de-listing the program, Apple is expanding its control over what is allowed on the iPhone, proving if it doesn’t like your program, it can and will remove it. Apple also removed BoxOffice, a movie showtime search engine, without notice or justification. Without standard rules on what is allowed on the iPhone, developers may be scared away from getting on Apple’s bad side. Further, it scares away innovation that expands usage and value for the iPhone - no one wants to risk time and money to get banned.

Apple keeps fighting open standards for the iPhone which works now amid the hype. But competition from open systems like Google Android (if it’s ever released) and Symbian will challenge Apple’s concept of top-down control.  The reason Windows Mobile has full flash support in the Skyfire browser is thanks to 3rd-party developers given free-reign to do as they wish on a platform.  If Apple wants the iPhone to really change the mobile space, it needs to let developers do what they do best - develop.

Any web 2.0 business model must, by law, include five or more buzz words from user-generated content to API to social networking to get venture funding.  Companies are desperately trying to use social media like Facebook, Second Life, and even the iPhone to manufacture marketing and attention. The result is start-ups and established companies focusing resources because that’s where the hype is rather than where the smart business is.

Hype is the keyword here.  An already popular company like Facebook or Apple launch something new and obviously there’s hype.  But this hype is not contagious.  A former boss of mine said the reason we were developing an iPhone app before we had a mobile site was to “Get some attention when the app store launches.”

For start-ups limited in resources, jumping on the internet bandwagon is more often a waste and at best a distraction.  It’s best to focus on building your own features and worth to make sure once people find you, they want to stay.  Building applications for other platforms fragments your audience and time - what you build on Facebook needs to be rebuilt for the iPhone and rebuilt for Netvibes.

Second Life has become a prime example of hype overblowing marketing potential.  Last year, just as another company I worked for wanted to build a Second Life presence, Wired wrote about the marketing waste the virtual world had become. Coca-Cola, Reebok, IBM, Sears, and dozens more build huge islands with style and zazz, paying high-profile Second Life consultants and expecting the viral marketing to take off.  But no one visited.  The hype came from companies trying out Second Life, but no one ever posting resulting.  Since Second Life accounts are free, the 4 million users it boasts is misleading.  Only 1 million had logged on in the past 30 days and only a third of that in the past week.  Only 100,000 of those live in the U.S.  Those who do sign on spend most of their time in sex shops or gambling, not looking at marketing campaigns.

Facebook is likely to follow. Facebook itself is having trouble monetizing its massive user base, how do third parties expect to do better?  iPhone applications can be sold for money, which makes them less viral.  And working with any closed platform like Facebook or Apple puts the platform in control of your future.  Facebook suddenly blocked some of its most popular applications, Top Friends, Super Wall, and Social Me, with little notice and challenges to get back in the platforms good graces.

The opposite strategy of releasing your own API is more worth the time (if it makes sense for your product and not just a buzz word for investors) but has its own risks.  Twitter’s success and constant downtime are both due to their API.  Without the API, much of the sites usefulness wouldn’t have happened leading so many to join.  But because of the API’s popularity, the site can barely keep basic features operational.

So this is a lot of don’t.  The dos, unfortunately, are the hardest because it needs to be case-by-case.  Because there are so many platforms and APIs and doodads to try and sync up with, it’s impossible to say everyone should do this.  The key is when deciding how you want your product to integrate with the greater web world, think about your own strength and goals rather than bullet list features.  Everyone is pushing the same bullet lists.  You’ll stand out more by not.

Forbes provided some hyped linkbaiting today with an article on why Apple’s iPhone could kill, not compete with, but kill the Nintendo DS. I’m taking the bait to quash Apple’s gaming might once and for now.

Tech pundits love finding that new “killer” app to quash the incumbent which, in recent memory, always seems to be something Apple related: iPod “killer”, iPhone “killer”, and even Apple TV “killer” (do you need to kill something that isn’t even selling?).

Nintendo’s DS is the powerhouse of handheld gaming, the benefit of almost 20 years and more than half-a-dozen hardware generations. Sony launched its first handheld competitor, the PSP, barely clutching to 30 percent of the market, a credit to the system’s power and Sony’s well-established Playstation brand. Apple comes to the gaming world with no experience (except the tragic Pippin), no game studio, no retail presence or expandable memory, and most importantly, no interest in killing Nintendo.

Forbes writes its article ahead of Apple’s release of 3rd-party software include, presumably, an assortment of games. When Apple announced its developer’s kit for 3rd-parties, major game publishers Sega and EA were there to show off the first games for the platform. These high-profile releases led blogs to speculate on the iPhone’s potential as an actual handheld gaming platform.

This assumes Apple wants to be a handheld platform. The recently announced $25 for games sales Apple has other priorities. Gaming platforms have relied on low priced hardware subsidized by royalties from game sales. Sony’s PSP struggled initially at its $200 price point - how can Apple’s $400 iPhone think to fare better.

The other point against Apple’s gaming interests are its lack of actual gaming. EA’s cute flOw clone, if holding to Apple’s aforementioned price, costs $8 on the PS3. A rare $20 game on the PSP, Patapon, featured dozens of hours of gameplay. The DS offers assorted casual games like those likely to dominate on the iPhone, but also offers a varied library of epic stories and varied genres. Casual gaming is big business, yes, but hard core gaming is still bigger. The Wii sells amazingly, but software beyond Nintendo (first-party) fails to sell like games on the Xbox 360 and PS3.

Games will never sell the iPhone. The iPhone sells itself because of its variety of features and solid casual gaming will appeal to that user base in ways even the Nintendo DS can’t. The result will be different markets, not competitors.

Sure the iPod is great for listening to music and watching movies on a really tiny screen, but why limit yourself.  The iPod is a powerful tiny computer and you might try using it as such.  Most of these tricks take some advanced computer skills, so if your iPod explodes, blame Microsoft like everybody else.

Install Linux

What free games and programs for your iPod?  The open-source miracle worker Linux has been developed specifically for the iPod and its handy click-wheel.  iPodLinux allows you to play more media files and you can still load the regular Apple firmware.  Unfortunately the newest iPods and some older ones are not supported.

Wikipedia on your iPod

If you get into a lot of discussions about the House of Burgundy but can’t remember the order of the monarchs, try carrying Wikipedia with you.  With no need for the internet, you can install almost 2 gigs of Wikipedia goodness onto your iPod for anytime viewing.  Now you always have something interesting to read on the train.

Change the iPod theme

For very advanced users (Windows only), use the iPodWizard to change the visuals of your iPod OS.  Tweak the colors, fonts, and maybe make your music sound better as a result.

Read a book

With a slight of hand, you can upload ebooks to your iPod.  Simply paste any text into a simple text file (.txt) and load it into Notes or Contacts on your iPod.  Files must be less than 4kb so novels need to be broken up between several files  Programs Text2iPod X and iPoDoc can help simplify the process.

You can even buy software

I know, who buys software these days.  Depending on if you want to learn a language, create flash cards, or listen to some female robot read your notes, you can find software for your iPod.  We are not here to judge.

As Gizmodo reveals, there’s this unique new band (can we really call them that?) called iBand with a creative new YouTube video featuring the original sounds of two iPhones and a Nintendo DS with Electroplankton.  I only fear when Philip Glass creates a 150-person iPhone orchestra.  The future is now people.