The $300 million investment in the  Nook subsidiary of Barnes & Noble gives Microsoft about 17.6 percent ownership of this business unit. That values this part of the business at about $1.7 billion. Before the markets opened this morning, the Nook business was valued about $900 million more than Barnes & Noble itself.

Update: Barnes & Noble stock zoomed at the opening bell – and is now trading at about $9 a share, giving Barnes and Noble a total market cap of $1.3 billion, which is still less than the Nook subsidiary itself.

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As traditional media revenues continue to fall off a cliff thanks to the precipitous decline in print advertising, there seems to be a desire on the part of media companies to somehow find a single solution that will magically cure this problem — hence the increasing popularity of paywalls. But as media industry analyst Ken Doctor points out in a recent post at the Nieman Journalism Lab, it is far more likely that success for media entities of all kinds will come by making smaller bets on a number of different things. The big problem for the industry’s traditional players is that they have spent decades getting good at doing one thing. But now not as many people want that thing, and experimentation and rapid innovation is not in the media companies’ DNA.

Doctor says that after years of hoping the rise of the Web and digital media would not decimate the industry, followed closely by the hope that digital ad revenue would somehow arrive and close the gap, print executives are finally starting to understand that both of these hopes are futile:

Until recently, the holy grail was summed up in two words: replacement revenue. Now the jig’s up. No matter how fast you shovel digital dirt into the chasm of print loss, you can’t recreate the past; you can’t fill the hole.

Stack those digital dimes as fast as you can

John Paton, the CEO of Media News Group and a leading advocate of the “digital first” approach for newspapers, has said that the only possible response to the problem of digital dimes’ not making up for the loss of print dollars is to “stack those digital dimes” as fast as possible. In other words, accumulate as much as possible from as many sources as possible (while also reducing costs to try to stem the bleeding). In his Nieman post, Doctor notes that Meinolf Ellers, the managing director of German multimedia agency dpa-infocom, made a similar point at a recent conference of news executives:

What we all see — newspaper publisher or news agency — is that the bundle is eroding, losing its power. The more we see the bundle losing market share and reaching the end of its lifecycle, the more we have to work on smaller, fragmented products that, not each by each, but overall, can compensate. That’s the strategy.

This reminds me of a phrase that David Weinberger, a fellow at Harvard’s Berkman Center for the Internet and Society and co-author of the book The Cluetrain Manifesto, came up with to describe how the Web works: He called it “small pieces, loosely joined.” One of the things I took from this is the idea that the Web allows for individuals and small groups or entities to have almost as much power as — and in some cases more power than — established players. The barriers to entry, and the barriers to discovery, are so much lower now, thanks to the Web’s “democratization of distribution.”

We have seen the impact of exactly that phenomenon in the media industry in spades over the past few years, with the rise of digital-first entities such as the Huffington Post, TMZ, Politico and others, as well as the rise of individual media sources’ using social tools to become the equivalent of media entities in their own right or hybrids such as Andy Carvin of NPR and his one-man Twitter newswire model.

What will readers pay for other than just a paywall?

In his discussion of what media outlets can do to make a number of smaller bets instead of one or two big ones, Doctor refers to a number of things, including “in-sourcing” — using printing presses and distribution chains to provide services to others who need those skills — as well as providing marketing services outside the traditional newsprint platform. These are also things that Paton has focused on while trying to remake the Journal-Register Co., a chain of papers he took over after it emerged from bankruptcy.

But the things that really interest me are the ones that fit the kind of “velvet rope” model I have argued for as an alternative to a hard paywall around content: the ones that encourage a kind of membership approach, where new features or ways of packaging content or experiences related to that content are offered to readers. So live events, for example, which both the Texas Tribune and the Atlantic have been using to their advantage, or e-books, which are a different way of packaging content, can be remarkably profitable, even if that content has already appeared on the Web for free.

Unfortunately, many traditional media companies simply don’t have the kind of culture that allows for random experimentation or rapid iteration and prototyping: in other words, a startup culture. Some papers such as the New York Times have a skunkworks or research lab, and others such as the Washington Post have experimented with new features such as the Trove recommendation engine or the Facebook social reader. But many of these still feel like afterthoughts or side projects rather than a coordinated plan of attack on multiple fronts. The ones that are trying the hardest always seem to be the digital natives, or the ones with the gun to their head.

Post and thumbnail images courtesy of Flickr user See-ming Lee

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Thanks to the rise self-publishing tools, from Amazon’s Kindle platform to Apple’s iAuthor software, anyone who wants to write a book can do so and theoretically reach an audience of millions — as self-publishing superstars such as Amanda Hocking and John Locke have shown. But this explosion of amateur authors and publishers also means a lot more competition for an audience. So how do writers make money? First of all, according to author and marketer Seth Godin, they have to give up the idea that they somehow deserve to be paid for their writing.

In a recent interview with Digital Book World, the writer and creator of the Domino Project — a joint publishing venture with Amazon that he recently wound up — was asked about his advice that authors should give their books away for free and that they should worry more about spreading their message and building a fan base instead of focusing on how to monetize it right away. And how would he respond to writers concerned about their ability to make a living from their writing? Godin’s response:

Who said you have a right to cash money from writing? Poets don’t get paid (often), but there’s no poetry shortage. The future is going to be filled with amateurs, and the truly talented and persistent will make a great living. But the days of journeyman writers who make a good living by the word — over.

The rise of the amateur has disrupted all forms of content

This probably isn’t the kind of message that most authors (or creative professionals of any kind) want to hear, but that doesn’t make it any less true. The rise of the amateur, powered by the democratization of distribution provided by the Web and social media, is something that is disrupting virtually every form of content that can be converted into bits. To take just two examples, the news industry is struggling to adapt to an era where anyone can commit “random acts of journalism” with a blog or smartphone — and where sources of news have the ability to publish their own content instead of having to go through a middleman — and photography has been battling the rise of the amateur for years now.

The crucial principle at work in all of these areas is the idea that your real competition isn’t the book or news outlet that is better than you; it’s the one that is good enough for a majority of your audience. So maybe the Huffington Post version of that news story isn’t as good as the one in the New York Times, but it is good enough for many readers. And maybe those vampire books by Amanda Hocking or the detective novels from million-selling author John Locke aren’t as good as yours, but for hundreds of thousands of weekend readers they are probably good enough. Godin’s point isn’t that you can’t make money; it’s that you have to think differently about how to accomplish that task.

If you’re a mystery writer, can you find 1000 true fans to pay a hundred dollars a year each to get an ongoing serial from you? It’s not the market’s job to tell authors how to monetize their work. The market doesn’t care. If there’s no scarcity of what they want, it’s hard to get them to pay for it.

Who says that artists have a right to make money?

Film director Francis Ford Coppola said something similar in a recent interview, in which he discussed some of the lessons he had learned over decades of practicing his craft. He also talked about how the Internet — and specifically the widespread downloading of music and movies — has changed the nature of the business. Somewhat surprisingly for someone who has been involved in creating some of Hollywood’s biggest commercial successes, Coppola said that he sympathized more with those doing the downloading than he did with the content creators whose work was being affected:

As we enter into a new age, maybe art will be free. Maybe the students are right. They should be able to download music and movies. I’m going to be shot for saying this. But who said art has to cost money? And therefore, who says artists have to make money?

As media theorist Clay Shirky has pointed out before, abundance breaks a lot of content-related business models that were built on scarcity, and that includes the ones that have supported the book-publishing industry for so long. That’s why publishers have been scrambling to try to lock down their content — including jacking up the prices that libraries pay for e-books — and it’s why authors who have a built-in audience are using the Web to connect directly with that audience. Godin’s message may not be a popular one, but it is the way that content works now.

Post and thumbnail images courtesy of Flickr users Joel Bombardier and Mike Licht

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The news comes after a strong holiday season in which the bookseller said sales of digital content during the nine-week holiday season increased 113 percent over the same period last year. Sales of the Nook Simple Touch, Nook Color and Nook Tablet were up 70 percent over the last year, though sales of the Simple Touch were below expectations.

Barnes & Noble now expects fiscal 2012 digital content sales to come in around $450 million with a run rate for digital content sales to hit $700-$750 by the end of fiscal 2012. And the Nook operation is now expected to generate $1.5 billion in sales this fiscal year. Here’s what William Lynch, CEO of Barnes & Noble had to say about the Nook business:

We see substantial value in what we’ve built with our Nook business in only two years, and we believe it’s the right time to investigate our options to unlock that value. In Nook, we’ve established one of the world’s best retail platforms for the sale of digital copyright content. We have a large and growing installed base of millions of satisfied customers buying digital content from us, and we have a Nook business that’s growing rapidly year-over-year and should be approximately $1.5 billion in comparable sales this fiscal year. Between continued projected growth in the U.S., and the opportunity for Nook internationally in the next 12 months, we expect the business to continue to scale rapidly for the foreseeable future.

As Lynch mentioned, Barnes and & Noble is looking to expand internationally and is in talks with different potential partners including publishers, retailers, and technology companies. It’s understandable considering that the digital side of the business is outpacing the company’s traditional business. Barnes & Noble said retail store sales increased by 2.5 percent to $1.2 billion for the holiday season compared to the prior year. Comparable store sales increased by 3.4 percent this holiday season, but that was less than the 9.7 percent increase last year.

Meanwhile, BN.com holiday sales were up 43 percent to $327 million compared to the prior year, with comparable sales increasing 52 percent. The company said Nook business drove the increase of online sales and offset declines of physical product sales. Overall, the Nook business, including sales of digital content, device hardware and related accessories, increased 43 percent during the holiday period to $448 million. The company has lowered its full fiscal year 2012 forecast, saying consolidated sales will now be $7.0 billion to $7.2 billion with earnings before interest, taxes, depreciation and amortization to come in at $150 to $180 million because of the performance of the Simple Touch.

The stock is getting hammered prior to the open of the market, perhaps due to concerns that spinning off the Nook business could strip away the growing part of the company. But giving Nook its independence could allow that business to grow faster and make more aggressive moves if it’s not weighed down by the parent company.

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Chafie Creative Group, based in Dallas, is introducing a new iPad app called Immersedition, the first in what it believes is a new form of interactive book-reading apps. The app will feature as its first book a story called The Survivors, a young adult piece of fiction from new author Amanda Havard, who designed the story to ultimately be an enhanced media experience. The 283-page book, which went on sale earlier this year in print and tells the stories of descendants from participants in the Salem Witch Trial, includes 300 touch points that reveal 500 interactive frames of content embedded in the pages of the book through watermarks. 

The watermarks reveal things like historical facts, maps, photos, videos and character profiles that change depending on where in the story a user is. There’s also embedded music including three original tracks that can be turned on at key points. And there’s even live Twitter profiles from five of the main characters, who continue to tweet and add background to the story. All of the content works offline except the maps and Twitter feed.

The book works to preserve the reading experience for people, enabling them to still engage their imagination. So it doesn’t include images of the actual characters and instead shows runway shots of what they might wear. But it does include more than 50 location shots to give a broad sense of what a place looks like without getting into the details. The idea is to augment the reading experience and keep people involved while still respecting the traditional reading process.

A lot of the existing enhanced ebooks are children’s books that bring almost game-like elements into a story. Others like Our Choice employ infographics, videos, images and other elements that allow people to get deeper into the book as if it were a museum display that can be pinched, zoomed and manipulated. But it’s trickier to apply some of these elements to a novel, which can suffer if certain elements are too literally enhanced. Go too far and people feel like you’re robbing them of the experience of creating images in their head. Don’t go far enough and people will wonder what the point is of making the book interactive.

But I think just like we’re seeing with other books, we’ll see more publishers look to make fiction novels more interactive. I think it does have to be applied intelligently. And some books with some historical connections or a lot of locations might lend themselves better to this approach. But the right facts, background and extra details here and there can make the experience work well and deepen the engagement of readers. I don’t expect we’ll see all the classics get the ebook treatment overnight, but Immerseditions shows that it can work for new novels.

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In a statement, the European Commission said that it was looking into Apple’s deals with Simon & Schuster, HarperCollins, Hachette Livre, Penguin and Holtzbrinck over the question of whether they have colluded to keep other players out of the e-book market, fix prices or unfairly restrict competition.

The Commission will in particular investigate whether these publishing groups and Apple have engaged in illegal agreements or practices that would have the object or the effect of restricting competition in the EU or in the EEA.

The Commission is also examining the character and terms of the agency agreements entered into by the above named five publishers and retailers for the sale of e-books. The Commission has concerns, that these practices may breach EU antitrust rules that prohibit cartels and restrictive business practices.

News of the formal investigation might be new, but the claims are not. Earlier this year antitrust officials conducted raids on the offices of the companies involved, and there have been several lawsuits and legal challenges to Apple’s relationship with publishers in the U.S., as Mathew wrote over the summer.

The heart of the allegations against the various companies is that they may have conspired to fix prices through agreements around the so-called “agency model.” The EU is investigating whether this meant that the group was acting as a cartel or unfairly shaping the market for e-books. There is no doubt that publishers were desperate to try to keep prices for digital books up while under constant pressure from Amazon to drop them: The question is whether breaking that relationship involved breaking the law. They deny that anything untoward happened.

But notable by their absence are some of the other major players in this space: technology companies like Amazon and Google, as well as publishing houses like Macmillan and Random House.

That alone makes this picture much more complicated, which is one reason it has escalated to pan-European level (until now, Britain’s Office of Fair Trading had been conducting its own separate investigation into these claims, but it has closed down its operation, as the European inquiry takes jurisdiction).

There is no formal deadline for completion of the investigation.

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And while some channels of communication — such as cable TV, print news and talk radio — are fairly mature, history tells us early mastery of any new medium can give a candidate a discernible advantage in a given election cycle.

For example, it’s commonly accepted that Kennedy’s performance in his televised debate with Nixon helped him win in the 1960 presidential election, while Obama’s more evolved social media strategy gave the Democrat a competitive advantage that, in the end, helped deliver him the presidency.

But what about the book?  Judging by Obama’s success with The Audacity of Hope in 2008 and the rush by the current crop of 2012 candidates to push tomes out this primary election season, the book, while perhaps the oldest of all the mediums outside of speaking in the public square, is still one of the most effective ways for candidates to inject their messages into the stream of conversation.

As publisher Peter Cosnos puts it in this NPR piece, “If you can get somebody to buy it, a book has a great virtue. It’s just you and the reader. There is no interviewer; there is nobody to get in the way.”

However, while books can certainly be effective, the paper book is the product of an inarguably antiquated distribution model. To push a book out through traditional publishing means putting your message on the slow train to the voter; a book usually gets to the reader months after the final draft was written.

But just as the Internet (and in particular YouTube) has reshaped the way campaigns use video to get messages quickly out to the voter, is it possible e-books could create a similar disruption in how candidates reach voters through the written — and electronic — word?

If early e-book pioneers who were able to bypass the byzantine and slow-moving world of traditional book publishing are any indication, than yes.  John Locke, Bob Mayer and other authors have been able to go direct to consumer — with the help of Amazon — and reach a much wider audience.  So why couldn’t presidential candidates, or politicians in general, do the same?

In order to do so, candidates would need to change the way they think about the book today. Instead of viewing a book as a brute-force, one-size-fits-all message delivery vehicle it drops in one big package every election cycle, candidates need to instead think about how they could instead deliver a stream of targeted messaging throughout the long election cycle with electronic publishing.

Imagine for a moment if Obama or the prospective GOP candidate were able to publish e-books in advance of major debates, or to convey certain messages to address voter concerns.  One month a candidate could focus on national security, the next he or she could convey his or her personal story through a media-rich e-book with photos and video interviews.

Or, looking back, ponder how things might have been different last election cycle if, for example, McCain released an e-book with his plan for economic stability in the face of the financial crisis that assuaged concerns of those who thought he may not have had a plan, while also giving the faithful talking points to distribute by word of mouth.

Candidates also need to maximize what’s possible in this new medium.  By releasing enhanced e-books, they can create highly personalized messages rich with video and audio; they can become more humanized to the voter.

Lastly, with the traditional book model, candidates are often their own biggest enemy as they seek high book advances and try to climb the bestseller lists to put more money into their pockets.  This traditional approach to the traditional model only serves to create expensive books the vast majority of voters never buy.

But what if a candidate looked at the e-book as an interactive application complete with fundraising capabilities built in?  Would they possibly consider distributing all their e-books for free if they could, somehow, garner campaign contributions through an in-book (or in-app) payment model? E-books and enhanced e-book apps could become the main way in which candidates could come into many voters homes and, in a sense, fill their campaign coffers.

Book and e-book purists may be moaning at the thought of a flood of campaign e-books filled with talking points and calls for contributions. But that is, for better or for worse, what campaigns are about, and if these same messages are flooding every other medium during campaign seasons, it was only inevitable that the campaign would eventually come to the e-book.

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Amazon has released a browser-based version of its Kindle e-book app, called the Kindle Cloud Reader, in what appears to be an attempt to detour around Apple’s in-app purchasing requirements. But what the e-book retailer has also done is provide a great example of how media companies should be looking beyond the world of apps to the future of the web: one in which websites behave like apps, thanks to the magic of HTML5, and publishers can get the benefits of both without having to sell their souls to one app-store provider after another.

As Darrell notes in his review, the Kindle app mimics the native Kindle app for the iPad in almost every way (although it lacks some features such as the ability to create new notes or highlight passages). In my own use of the Cloud Reader, the one thing I noticed most of all was how fast it was at rendering pages. One of the complaints some have about browser-based apps is that they can be slow, but the Kindle app doesn’t suffer from this problem. The app also allows you to download books so they are available when you don’t have an Internet connection.

An app-based store without Apple

But the most important part of the app, at least from Amazon’s perspective, is the built-in access to the Kindle store: Clicking on a button takes you to a special version of the store optimized for the iPad’s touch interface. As Darrell explains, this allows Amazon to make it easy for users to buy books without having to go through Apple, which recently changed the terms of its license to require that retailers funnel purchases through their apps, and thus give Apple a 30-percent cut of any sale.

Amazon isn’t the first to do an end-run around Apple with an HTML5-based browser app: the Financial Times recently came out with a similar web-based, app-style version of the paper, which mimics the native iPad application, and Fortune  magazine has also experimented with an HTML5 version of one of its targeted publications. A German design firm has even come out with a browser-based prototype of an entire magazine called Aside, in part to show the ability of HTML5 to recreate the look and feel of a native app.

Another startup we have written about before, OnSwipe, is making a bid to capitalize on a web-based future for media companies: Jason Baptiste, co-founder and CEO of the company — which recently closed a $5-million Series A round of financing from a venture-capital group including Lightbank, Betaworks and Lerer Ventures — says his pitch to content publishers is that “apps are bull****,” in part because they prevent media companies from taking full advantage of the web.

Most media apps are still walled gardens

The OnSwipe founder has a point. Most apps from traditional media companies — including those from the New York Times, Wired and other publications — try hard to mimic the website version of the newspaper or magazine they are based on, but do little to take advantage of actually being part of the internet. Although some such apps offer live updates, and allow articles to be shared on Twitter or Facebook, other things are missing — including any links to web-based content outside the walled garden of that particular app, as well as reader comments, and so on.

There are other benefits to having an HTML5 browser-based app as well, as the creator of the Financial Times‘ new web version noted in an interview: A main one is that publishers don’t have to create multiple apps for different platforms such as the iPhone/iPad, Android devices, the RIM Playbook, etc. One browser-based app, done properly, is available to anyone regardless of which device they use — and it doesn’t have to go through an often torturous and opaque review process before it becomes available.

One of the most appealing things about browser-based apps, however, isn’t just that they allow publishers to get out of the clutches of Apple; it’s that they fulfill the original promise of the web, which was the ability for anyone with a browser to get access to any content regardless of what operating system or platform they were using. The web’s creator, Sir Tim Berners-Lee, wrote a long essay earlier this year about his fear that walled gardens created by Apple and Facebook were taking over from the web, saying that if the process went unchecked:

[W]e could lose the freedom to connect with whichever Web sites we want [and] the ill effects could extend to smartphones and pads, which are also portals to the extensive information that the Web provides.

Browser-based apps are not the solution for every company, of course. While games like Angry Birds can be recreated fairly well with HTML5, there are some things that only native apps can do: such as including support for using the iPad’s camera, or the accelerometer that allows an app to behave differently if the device is tilted. But for content publishers such as newspapers and magazines, the ability to produce an app-like experience while maintaining control over the purchasing process should be a powerful incentive to take a cue from Amazon and start thinking about HTML5.

Post and thumbnail photos courtesy of Flickr user Rego Korosi

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Mahaney said based on recent disclosures by Amazon and Citi’s own analysis, he believes that Amazon will sell 17.5 million Kindle units this year, worth more than $2 billion in revenue, and 310 million Kindle books, which will generate more than $1.7 billion this year. He said that would mean a combined revenue of almost $3.8 billion or about 8 percent of revenue through Kindle activites.

Next year, Mahaney said he expects Amazon to sell 26.2 million Kindles and 751.5 million Kindle books, worth a combined $6.1 billion in revenue or 9.9 percent of Amazon’s total. Mahaney said when a business segment reaches 10 percent, it has the potential to impact the growth rate of the total business.

The analysis comes on the heels of news last month that Amazon is now selling more ebooks than physical titles. As of April 1, Amazon is selling 105 ebooks to every 100 physical books, not including free Kindle titles. The company should see even more mainstream adoption of its Kindle readers as the hardware price comes down below $100, which Mahaney believes will happen by the end of this year. Amazon’s cheapest unit is now the $114 ad-supported Kindle, which Mahaney said is the best selling unit in the Kindle family.

This is pretty impressive growth no matter how you slice it. And it shows how quickly consumers have shifted their reading habits to digital content on a plethora of devices. Amazon is on a roll and seems to have even bigger ambitions for its book business. As my colleague Michael Wolf reported, Amazon has been adding new imprints to become a “book industry in a box.”

Mahaney said there are still challenges posed by the iPad and offline retailers getting their act together in the ebook industry. But Amazon seems to be in the driver seat with ebook sales and it’s now realizing how big a businesses it has on its hands.

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Updated: Lendle, an ebook-sharing service that allows users to find and trade Kindle books, sounds like a great idea — except that it doesn’t work anymore, because Amazon pulled the plug on the site by blocking access to the Amazon API. According to Lendle co-founder Jeff Croft, there was no warning from the online retailer, only a cryptically worded email. So Lendle becomes the latest poster child for a simple maxim: Building your service on top of someone else’s API, no matter how “open” the API is supposed to be, is a very dangerous road.

Update: Lendle has posted an update on its blog to say that it has modified its service as requested by Amazon (removing a feature that allowed Lendle users to synchronize their books with their Kindle account) and API access has been restored. However, the company also said that as a result of the incident it had “come to realize we need to work towards a Lendle product that does not rely on APIs provided by Amazon or any other third party.”

No one knows the downside of this approach better than Bill Gross, the founder of UberMedia, which the veteran Silicon Valley entrepreneur has built into a kind of Twitter client rollup by acquiring services and apps such as UberTwitter and Echofon. Gross originally had a great idea for selling advertising around tweets as well, but then Twitter launched its own identical advertising platform. Earlier this year, after what Twitter said was bad behavior by some of UberMedia’s apps, the social-media platform shut down the company’s access to the Twitter API.

In UberMedia’s case, the company made some changes to its apps, and Twitter turned the API tap back on. It’s not clear whether Lendle will be able to modify the way its service works to make Amazon happy, however. The online retailer hasn’t made any statement about the action it has taken against the ebook-lending service other than to say Lendle doesn’t “serve the principal purpose of driving sales of products and services on the Amazon site.” We’ve emailed Amazon and will update this post if there is any response.

Is Amazon planning its own lending service, or is it simply afraid that more borrowing of books equals less buying? The answers to those questions remain unclear until the company clarifies its reasoning (Lendle says users buy more books after borrowing them).

Twitter used to be the most obvious example of a company that was willing to let developers do pretty much whatever they wanted with the service’s data, and that open approach arguably helped to create much of the network’s value, including popular conventions such as the retweet, the @ mention and so on. But Twitter has been tightening the reins on what it allows for some time now, and its latest pronouncement made it clear certain aspects of its business are simply off-limits for third-party developers.

In some ways, that’s a natural evolution for a company: to be open with its data when it is trying to grow, then to shut down or restrict that as it tries to become a functioning business and make money. Amazon has long since passed that point, of course, and Lendle is only the latest to find out that what it thinks is a good service and what a company like Amazon thinks can be two very different things — and whoever controls the API wins.

Post and thumbnail photos courtesy of Flickr user Will Clayton

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