In B&N Report, Print Books Declining Gradually

I predicted a 30 percent decline in sales of print books this year, but sales are not declining nearly that fast. I looked at the latest report from Barnes & Noble to try to pick out the trends. The report showed a same-store sales decline of 6 percent year over year. That isn’t exactly the rate of decline in printed books, but it must be close. There was a 12 percent increase in toy sales, a decline in Nook hardware sales in-store, and 3 percent of stores closed. Sales declined faster at the web site, but slower at the college bookstores. Putting it all together, my guess is this translates to a one-year 8 percent decline in sales of printed books and magazines. The financial results are worse than the sales numbers suggest, though. Every Barnes & Noble division lost money, suggesting that the current level of operations couldn’t be sustained even if demand were to stabilize.

But of course, demand for print will continue to decline, and if you extrapolate a trend of -8%, that is an industry declining by half in nine years. It is easy to see that readers intend to buy fewer printed books, and they certainly can do so, if you look at the perennial studies that show that readers read only a small fraction of the books they buy. The best answer I can suggest is that publishers must find ways to make printed books more physically appealing, especially for the Christmas shopping season, so that shoppers who pick up a book will not think of it as just an ordinary book.

After Aereo, a Time to Give Up TV

Aereo has shut down its television antenna streaming service. The key points in a letter posted on its web site overnight:

A little over three years ago, our team embarked on a journey to improve the consumer television experience, using technology to create a smart, cloud-based television antenna consumers could use to access live over the air broadcast television.

On Wednesday, June 25, the United States Supreme Court reversed a lower court decision in favor of Aereo, dealing a massive setback to consumers.

As a result of that decision, our case has been returned to the lower Court. We have decided to pause our operations temporarily as we consult with the court and map out our next steps.

The Supreme Court apparently decided that Aereo’s complicated network of television antennas and Internet links meant that the CATV exemption did not apply in its case. It was not a highly confident ruling by the court, drafted in such a way that it would never hold much weight in a case involving any other defendant, so I wouldn’t take it as an indication of the future direction of telecommunications.

Today, with Aereo gone dark, is an especially opportune moment to give up the TV habit. TV viewers are not particularly happy with what TV programming has become or with the time they spend watching, but they need a push to change their habits and routine. Most often, the disruption comes in the form of a move from one home to another. That was my own experience 8 years ago, and it is easy to see how it works. When you move, it is easy to postpone a television subscription for a month, then another month, then another, until television is forgotten. A shock price increase, a job loss, and the cancellation of a favorite show are other disruptions that can lead people to stop watching television at home. A court decision that says your low-cost television service is illegal will tend to bring out people’s defiant streak. “They can’t force me to pay an extra one hundred dollars a month,” people will say, and taking that stance may be easier than actually finding $100 (or $200) in the monthly household budget. I will be surprised if more than a small fraction of Aereo viewers turn up as subscribers to the TV offerings that remain. As for Aereo, it will likely stay dark for two years or longer while its legal case and new business plan are sorted out. By the time it returns, many of its recent customers will be former television viewers. It will essentially have to start all over.

This Week in Bank Failures

The Bank of England did not take long to use its new power to limit mortgage lending. The new rules on October 1 allow a lender no more than 15 percent of its mortgage portfolio in loans with a loan-to-income ratio (LTI) of more than 4.5 years. It is a flexible rule, applying to the portfolio rather than any one loan, and it should not have much immediate impact in a market where the average LTI on a new mortgage is around 3.5 and where barely 10 percent exceed 4.5. Nevertheless, the rule will prevent any sudden decline in underwriting standards at banks. It is hoped that this will limit the scale of a predicted housing bubble, particularly in London.

U.S. law prevents Argentina from making payments to U.S. creditors on its restructured debt, a court decided, making a sovereign default all but assured. The country has notified the United Nations that a default is likely in the coming days.

Accused: Barclays, of intentionally misrouting trades in its dark pool to maximize its transaction fees. There are reports of major banks and investment funds withdrawing from the dark pool after yesterday’s fraud lawsuit filed by New York State.

Update: The FDIC reports one very small bank failure tonight: The Freedom State Bank, with its office in Freedom, Oklahoma. The bank had $21 million in deposits. Alva State Bank & Trust Company is assuming the deposits and purchasing most of the assets.

Was YouTube Pushed?

I don’t believe it’s a coincidence that word of a retreat at YouTube — a new strategy that has been characterized as a partial shutdown — comes just weeks after the end of net neutrality. Most people surely don’t realize how vulnerable YouTube is on the Internet and how easily your Internet provider can interfere with the streaming video just enough to make it an unbearable experience. That becomes all the more of a concern now that it is perfectly legal for ISPs to throttle YouTube videos as much as they like. For YouTube in the post-neutrality era, it makes especially good sense to pursue a strategy of few viewers, less bandwidth, more downloads, and more money to grease the palms of the Internet’s gatekeepers so that the video playback can get in the building when you request a video.

With the protections of net neutrality gone, video streaming of all kinds might run into problems. It is live streaming of political events that faces the greatest peril. The corporate owners of Internet pathways don’t have to let those video streams go through intact if they don’t want to, and it’s pretty clear that most political events are talking about policies that wouldn’t be supported by the average big communications conglomerate.

But most streaming isn’t done to broadcast a live event, but to theoretically protect the ownership of music videos and similar content. If you can download a video, you’ve made a copy of it, and with a copy in your hands, you can watch it over and over if you want to, which is not necessarily what the publisher of the video had in mind. Also, with a copy being made, someone might have to pay rights holders a royalty for that copy. Streaming somewhat sidesteps these issues, but it is important to note that these are very artificial distinctions.

The new YouTube will charge for access and pay much of the money from subscription fees out to record companies. The royalty amount is shockingly low, though — a floating amount, but apparently about 1/4 cent per music video play or download, hardly anything when you think about what people pay to buy a song or an album. Of course, the estimated 1/4 cent is the payment to the record company, not what the recording artist gets. Under the terms of the typical record deal, the money won’t reach the recording artist at all. The record company will keep half and use the other half to cover the cost of producing the video. Or try to — it takes a mountain of farthings to pay for even a low-budget video. Even on Old YouTube, no recording artist can plan on getting that many views, and with the lower view counts of New YouTube, it may never happen again.

If we hadn’t repealed net neutrality, I don’t know if we would be debating the future of YouTube right now. With net neutrality YouTube would have more alternatives and would be able to present a more attractive proposition to its viewers. But with net neutrality in the past, you can’t really fault YouTube for trying something that most of its viewers aren’t going to like. The Internet isn’t exactly a civilized place, and it’s not a huge surprise if advertising revenue is not enough to chase away the wolves at the gate.

Weather and Health Care Efficiencies

The key factors in the first quarter GDP revision appear to be the severe winter weather of the period and larger than expected cost savings in health care. Neither factor represents a trend. Winter is over, and the severe winter weather ended before the first quarter did. The January 1 and March 31 dates for health care policy won’t recur. There are more dates to come as more provisions go into effect, but those are smaller and their effects probably won’t be seen in economic aggregate measures. Not that I expected to see such a large downward move in health care. It is worth noting that the amount of health care actually delivered jumped up in January with millions more people covered, but the efficiencies outweighed the added work.