Since the beginning of the month, I’ve been reading up entranced by the bitter fight between NBC and iTunes, which had been well covered by Phill Ryu. This is an interesting case where someone at NBC sadly thought that this was a good idea but have clearly miscalculated.

Basics of What Happened

This case can be summed in 5 basic steps:

1. NBC’s sells shows on Apple’s iTunes Store at $1.99 per episode; contract comes up for renewal
2. NBC tries to re-negotiate with Apple asking $4.99 per episode; Apple refuses to budge on price
3. Negotiation goes public; NBC hoped “the people” would side with them, forcing Apple to concede
4. Negotiations goes nowhere; NBC switches to Amazon’s Unbox service for Tivo
5. Wheels fall off the bus!

So who’s the Biggest Loser?

I think that NBC will lose because:

Reason #1: People will buy the DVD

NBC is operating under the assumption that people are willing to pay $5 per episode. Considering that a typical television season has 21 - 23 episodes (according to Ryan Tuttle, who is an avid TV watcher), I’m calculating that viewers of shows like 30 Rock, which had 21 episodes, will shell out almost $105 based on the new price:

21 episodes/season * $4.99 per episode = $104.79

That’s a fair sum, considering that you can buy the 30 Rock Season 1 DVD for less than $50. If viewers paid $1.99 per episode, they would be shell out a more reasonable $41.79:

21 episodes/season * $1.99 per episode = $41.79

Reason #2: People will steal download shared episodes for free

In comparison to movie downloads, shared TV episodes are more popular. It seems that while only a small fraction of shared files, or torrents, are TV series, 50% of all download activity is focused on grabbing these shared files. And at $4.99 an episode, downloading these for free would be a steal.

Reason #3: iTunes is FREE while Tivo’s are not!

You can download iTunes for FREE but the barrier to entry for Amazon Unbox Service is a Tivo box. While there are potentially 1.5 million broadband-ready TiVo boxes that can take advantage of this service, it seems that Amazon is tight lipped about how many subscribers are currently purchasing movies through this service. Even if you estimate that 2% of subscribers, that’s only 30,000 potential customers, which will fetch about $150k per episode which seems a bit on the lighter side.

Reason #4: People will opt for cable/satellite TV

Many of the folks that I’ve known who buy episodes do not have cable. They buy episodes from iTunes because it is more cost effective. If you assume that a viewer watches three TV shows and there are 4 episodes a month (one per week), a typical viewer would pay much less than a regular cable bill:

3 shows * 4 episodes * $1.99 per episode = $23.88 per month

When you compare that to a normal cable/satellite bill (approximately $30 to $60 per month), viewers can save a ton of dough. But when you price an episode at $4.99, a viewer will now pay $59.88 per month and at that cost viewers will likely opt in to cable TV.

Reason #5: People will Tivo the episode

One of the reasons that people have Tivo’s is that they can digitally record shows. The benefit of having the Unbox service is that you can access movies, and that is worthwhile if you are a bare-bones cable subscriber. A typical Tivo subscriber would “Season Pass” the show and enjoy the show at their leisure.

Final Marketing Pressure

To makes matters worse, Apple is considering a more aggressive marketing strategy for the TV episodes, with rumors swirling of a price cut to $0.99 per episode. When you consider that NBC had a 30% market share of downloads on iTunes, I see NBC really taking it on the chin.

Oh well, hope that you don’t own any GE stock shares (GE is the parent company of NBC).

Okay, maybe communication never truly left … but our awareness of it has grown keen as we shape effective customer experiences in interactive media. Recently, Donovan (Director of User Experience) gave a presentation about web 2.0’s impact on the landscape of user (customer) experience.  He convincingly described how web 2.0 capabilities evolved as a response to user needs and allow the web to become, among other things, the communication medium people envisioned 10 years ago.

In this changed landscape of customer experience, what is communication exactly?  How do we ensure customers not only get our messages but also find them relevant and convincing?  How do we coordinate messages across multiple channels to deepen our relationships with customers?

As a start toward answering such questions, I just published “Rediscovering Communication“ for the online magazine UXmatters.  Please add your insights as we journey through this exciting landscape together.

Virtual worlds, like Second Life and Entropia, are well… virtual. Avatars created in these worlds often have little or no relevance to their real life users. However, with the fairly recent creation of Kaneva, the line between the virtual world and the real world may begin to look rather blurry.

Kaneva, which is still in its beta version, was developed by Chris Klaus, who created Internet Security Systems (ISS) and later sold it for $1.3 billion. Since selling ISS, Klaus has directed his attention full-time to designing Kaneva and giving a very different feel than virtually any other world out there right now.

What sets Kaneva apart is that it combines the elements of a 3-D virtual world, a la Second Life, with a 2-D personal profile website, a la MySpace. When users first sign up, they can create their own 2-D profile page on Kaneva and add friends, send messages, and share photos and videos in much the same way that users on MySpace can. After signing up and creating their own profile, users can enter Kaneva’s 3-D virtual world and create their own avatar, just like users can in Second Life.

While many aspects of Second Life are obviously tailored only to the virtual world (many Second Life avatars have wings and sometimes look more like animals than humans), Klaus’s goal is for Kaneva to be a virtual world that mirrors the real world. Through its 2-D profile website, many users create avatars that are similar to the real-world personalities.

Another unique aspect of Kaneva is that it provides its users with a free virtual apartment once they create an account and enter Kaneva’s 3-D world. Users can then upload pictures and graphics from their Kaneva profile and place them as framed pictures in their new apartment. Users can change the style of the flooring and walls in the apartment. In addition, they can shop in-world and place their own furniture in their newly decorated apartment. Finally, if users choose to buy a TV in-world, they can then upload videos that they have put up in their real 2-D profile site, and then watch the video on their virtual TV in Kaneva’s 3-D world. Through all of these features, Kaneva has seamlessly bridged the distinction between aspects of the real-world and aspects of the virtual world.

Klaus also said that Kaneva’s goal is to reach a different user demographic than many other virtual worlds. “Unlike most companies in the gaming space, we are not pushing the latest and greatest graphics. Our world is about connecting with people in a very casual way,” said Klaus in an interview that he gave in February to Digital Arts Online.

Because Kaneva is still in its beta testing version, no companies have signed on and agreed to promote their brands in-world. However, Klaus believes that because so much of the Kaneva experience is rooted in the real-world, it’s an ideal opportunity for companies like Coca Cola and IBM to advertise. One of Klaus’s main business objectives is to design Kaneva such that it has many different purposes and is able to be redesigned so that other virtual worlds can be built on it. Klaus’s long-term vision is to have companies like Coca Cola use Kaneva’s world, and later on possibly create their own worlds for purposes of e-commerce. Klaus feels like this type of e-commerce could lend itself to companies using the virtual world for all different types of experiences, from virtual town hall meetings to virtual conference rooms.

Kaneva has published on their website that the has a world population of over 290,000 (remember, they are still in early stages of development). Comparatively, that’s about 4 percent of Second Life’s population of over 7.1 million. All of Klaus’s current ideas and plans are projections. No companies have officially signed on to advertise in Kaneva.

Regardless, Kaneva has perhaps changed the virtual world landscape. The line between the real world and the virtual world is a little less clear-cut. It is possible that in the future users may see other virtual worlds that combine aspects of the real world and virtual world in much the same way that Kaneva has. It may still be to early to tell, but one thing is certain, in terms of marketing it has a great deal of potential and upside.

Last night, Peter Merholz of Adaptive Path spoke inspiringly to a group of user experience professionals, CHI-Atlanta, about “Experience Strategies.”  Not any ordinary presentation. It reminded me why I care so deeply about user experience and rekindled my vision for it to be not just good but innovative—for it to not just compete but leapfrog competition.  I’m sharing a few high points here and will share more in another post.

Take an Experience-Based Approach
Peter talked extensively about what this means, especially for products–applications, websites, devices, etc.  It’s easy to get mired in technology and features without truly understanding the problem we’re trying to solve and envisioning the experience we’re trying to design.  In the words of Steve Jobs:

When you start looking at a problem and see a simple solution you don’t understand the problem. You keep looking and see how complicated it really is and you are halfway there. The really great person will keep going to find the key underlying principle and create a beautiful, elegant solution that works.

The stage of looking at the problem is one of the most critical and often the most overlooked.  Looking at the problem takes research with real customers/users, understanding the competitive landscape, understanding the brand’s system of customer touchpoints (channels, etc.), and more.  Reflecting thoughtfully on all these considerations helps us find that key underlying principle.  And all this takes time.  (I’m reminded of the CHI 2006 keynote address given by Scott Cook, co-founder of Intuit, where he discussed the culture of innovation.  He views every touchpoint with customers as an opportunity for innovation.)  One of the most compelling examples Peter mentioned was the Nintendo Wii.  Rather than staying in the same features and graphics game as PS3 and XBox, Wii changed the game by introducing physicality—and has outsold the competition in huge numbers ever since.

Employ Experience Strategy
So how do we apply an experience-based approach?  Largely by articulating an experiential goal and sticking to it. Peter also noted it tends to be where business value and experience opportunities align.  This doesn’t have to be expressed in reams of documentation.  It can be a few paragraphs or a few words.  Its purpose is to remind everyone what the end experience should be.  Peter artfully described many examples, but I am simply noting a few here:

• Kodak camera (in 1884): You press the button, we do the rest.
• Flickr: Articulated on their About page. 
• Google Calendar: Shown on the AdaptivePath blog.

Think Systems—And Leverage Them
Perhaps my favorite part of the presentation, Peter described how a customer experiences not just a product but a system.  The system is comprised of the brand/company’s processes, or channels (web, paper, IVR / call center, store, etc.), or more.  The product is just an interface to access the system.  For example, the iPod itself doesn’t have much functionality.  It’s the iPod device (to access the media) and iTunes software (to manage and buy the media) together that make the system, albeit a system Apple tightly controls.  A more complicated but still tightly controlled system is Target’s prescription bottle and communication system.

More complicated still are the multiple channels of a financial services company he encountered when designing its website.  The danger there, Peter warned, is treating the channels as silos, not as a system.  This partitioned view results in a fractured experience for the customer. It burdens the customer to figure out the system, rather than burdening the system to help the customer.  I cannot stress how important this point is for large companies and big brands, especially those offering services.  Designing the experience for a single website or application is good.  Designing the experience across channels is what leapfrogs competition.  

My wife was perusing Art.com the other day looking to fill the walls of my 9-month old baby’s room.  As I was looking over her shoulder, I couldn’t help but notice how well certain aspects of their interface were designed from a usability perspective.  But then I thought…is it that the page is “usable” or is it “persuasive”?

It’s both really.  But the thing that caught my eye the most was how simple the visual layer was and how it created a perception of usability.  Are there only a few items on the page that make it simple?  NO.  And that is the beauty of it.  In a recent blog post, I talked about the Misconception of Clutter and this site does a great job of illustrating my point.  There are actually a lot of items on each page.  But Art.com has done a great job of stripping away fancy creative elements that don’t serve a purpose and uses the power of visual design to create not just a simple, usable page; but one that subtly persuades users to follow a path towards making a purchase.

They use lots of white and very light grey tones as the base color for the site.  What this does is allow the color they use for their primary calls to action to really pop.  It really makes the eye focus on the primary action, which is Add To Cart.  There is something about that shiny orange button that creates a gravitational pull towards clicking it.  Something about it brings me back to the old dot-com days where anything that looked interesting, made me want to click it just to see what would happen. But the reason why the button brings attention to itself is not just the shiny gradient color, but the absence of color around it.

My point with all of this is that I think the role of the creative designer is often underutilized when it comes to website design.  Everyone wants the site to look good and be consistent with the brand, but the creative designer plays a much more important role in User Experience design.  How information and interaction elements are presented visually are critical in helping the user clearly understand them, as well as persuade them into taking the action we want them to take.  Designers aren’t there just to make things look pretty…although if it’s pretty enough, it might make me want to click it.

Marketers and sales people will do crazy things to get your information.  Technology has made it easier to find new and creative ways to do so… visit a web site? Your email may be grabbed without you even knowing it.  In meatspace, your credit card can be used to link together your personal data into a mailing address (and other things). 

Before you all call the tinfoil hat police, let me explain.  Like a crack addict jonesing for a fix, sometimes marketers lose perspective on what lead capturing is all about.  In your rush to meet some sort of misguided sales goal, marketers take heed:  just because you can track a customer, or potential customer, it doesn’t mean you should. 

It’s become commonplace nowadays for all of us to have a few plastic dongles on our keychains for supermarkets, record stores, and wherever you crazy kids shop nowadays.  We accept this. For a few cents off canned peas, we’ll let them track everything about all our purchases to be scrutinized and analyzed for greater sales yields.  (It annoys you that you’ve done this, don’t deny it.)  What about permission-based lead capture on ‘the interwebs’?  To me, there is nothing worse than traveling through a series of tubes, only to be blocked by a page requiring me to enter my name, my email, my income, and my bank account number -  for the Prince of Nigeria for all I know. 

What good marketers should be asking is: What do we lose when we ask for this information?  How many customers are turned off from a brand because the lead you are squeezing out of them for that drop of content is just too much?  Forcing users to sign up before reading an online newspaper article, forcing users to give information before you can access any sort of web content: it’s bad for usability and it hurts the overall brand experience.  Wouldn’t you rather have people visit your content, be completely excited about it and forward the bejeezus out of the link?  This would be bringing you more ad revenue, but not more precious leads.  Well, let me remind you:  quantity does not mean quality.  Wouldn’t you rather people like your content so much they voluntarily subscribed to an email newsletter about related content?  It may be fewer leads, but they would be more relevant.

Let me put it this way:  For a user of your site, it’s like showing up for the free day at the state fair and then finding that there’s a $10 cover charge.  You end up going, “Aww, man…” and then you and your friends go wander around the Wal-Mart for a couple of hours instead.  There will be sites out there that get it, employ laissez faire lead capture and ultimately have a better user experience and more return users.  Isn’t that what it’s all about? 

You can direct a user experience with your vanilla left nav menu and breadcrumb trail, but are you ballsy enough to manipulate the user experience web 2.0 style?  Enter Etsy.com, an unlikely frontrunner in the cojones contest of innovative ecommerce and navigation.  The site is “your place to buy and sell things handmade”, a marketplace for the “You” generation of the web.  Fueled by the DIY craft movement, Etsy has become a quick success story as an ecommerce portal because of two things:  (1) focus on relationships and social networking, and (2) the user experience. 

Unlike many other “social” sites, the experience for the user is painless – sublime even.  Apps with names like the “time machine” and “geolocator”, well, you know you’re in for something different.  Based on seller profiles and time stamp information in Etsy’s database, they have made creative visual navigation based on the ways that people sort data. 

What does this mean for your site?  Depending on your average user persona, it may not mean much.  (I don’t expect to see walmart.com implementing this style of navigation anytime soon.)  But for larger sites, like the Amazons or eBays of the world, it could mean rethinking how people interact with the site altogether.  When you get right down to it, it’s just all about what makes sense for your user.  If that’s breadcrumbs, good for you.

Last week the top internet retailers in the country convened at eTail 2007 to learn what their peers are doing, listen to vendor’s pitches of new products and services, and to commiserate about the state of their industry. In my post from the conference last week I had commented on the recent lack of innovation in online shopping. Over the last three years merchants have moved progressively towards what has become a fairly homogenous online user experience that caters to the same mode of browsing and transacting as each other’s websites. Imitation may be a form of flattery, but if form follows function, then in the case of online shopping, banality follows form.

Online shopping has in reality been reduced to online transacting. Seek this one thing, find that one thing, maybe compare prices, then check out. 1 + 1 = 1.1 = something less than the whole. The building of desire? The premise that shopping should be engaging? Maybe at next year’s eTail. Or the year after that. Or never. Maybe it’s time to accept the fact that this is the business of ONLINE shopping, and not online SHOPPING. Maybe it’s about the medium and not the act?

That’s what it seems like today. The onerous burdens of the internet retailer to streamline technology and operations, to market the site in search engines, to keep their heads above the latest calendar-driven buying surge have driven innovation to the back of the “to-do queue”. Innovation - isn’t that the job of the next technology vendor? A slightly faster search tool, a multivariate test platform, a 0.05% improvement guaranteed or your money back technology elixir. All fine and well. But what if the industry could look out further than this month’s results? What if they could rise above the day to day grind? What is missing? I say at a high level it’s a sense of fun.

Fun? Yes, Fun! Not laugh out loud entertainment, at least not for most types of products. But how about at least a sense of discovery, of desire, of something a level above the pablum of the competition? If there are three basic pillars of online retailing, they would be operational efficiency, marketing efficiency, and conversions. A few retailers have achieved an operational advantage over their competitors via technology, fulfillment processes, and scale. Some have achieved an advantage of driving qualified traffic to their websites through search engines and affiliates. But who has led in conversions? Ask most industry experts and they will point to conversion ratios in order to rate the winners. Click to Product to Cart to Checkout. Mission accomplished in their book. They will pepper that user with some email campaigns, a discount here and there and wait for them to come back. Maybe they will type in the URL this time and save the retailer $1.50 charge from Google.

But what if shoppers came to your site because they really wanted to? What if they experienced something unique, engaging, even dare we say it: fun? There are several ways to express this concept in different terms. What if shopping online was more social, more collaborative, more educational, more engaging? What if ONLINE shopping became online SHOPPING. Or what if someone threw caution, and e.e. cummings, to the wind and capitalized both words, “ONLINE SHOPPING”, and created something worth seeing, doing, and doing again?

I think something is coming to help make online shopping fun. It just isn’t coming from retailers. It’s coming from outsiders like social networks where products can be promoted by buyers’ peers. Its coming from magazine publishers who are going to attack with a vengence. They will not bog themselves down with operational concerns, they will not seek to compete in the traditional online marketing channels as internet retailers, they already have traffic, and they will build more through word of mouth and the nework affect. The good ones will get stronger and more powerful at a very quick pace. These sites will not hold inventory, they will not plow money into google keywords, they will send their qualified, engaged traffic to the online shopping sites, for a fee. Their margins will be in the mid double digits rather than the high single digits of transactional websites.

So when People Magazine realizes that their InStyle website should not look like this but should look like this then users will flock to the site. The magazine will be useful online. It’s already engaging to users offline. Conde Nast is beginning to get it and they have a bevy of content to expand this vision. Scripps gets it and has a powerful stable of multimedia content plays to bring to bear.

These are the companies that help build desire, that help create buzz, that engage their customers through their multiple channels of content. While online retailers are homogenizing their shopping experiences the here-to-fore dormant giants that help build desire, and the new age social networks that have created communities that spread desire are preparing to close in and take the high ground. The high ground of traffic and lead generation. And retail shops will pay, a lot, for that traffic and for those leads, and thereby label themselves as low margin impediments to purchases rather than the high ground of creating desire and providing true value.

It might take a couple of years for this to play out. But I see this as something that will play out. And major retailers with a sense of initiative (and budgets) have a tight window to decide on whether they will invest in content, features and partnerships to bring the “fun” back to shopping. Or resign themselves to being transaction vehicles with an ongoing operational focus.

I am attending the eTail 2007 conference this week. The first session of the day just wrapped and as I take a chance to go to the Starbucks in the lobby and hop online I have a chance to see the battle weary but happy faces of the ecommerce merchants around me. It’s Valentine’s day and for several of these merchants its the first chance to rest after the back to back to back holiday build up from Thanksgiving, to Christmas through today. Talking this morning with Mrs. Fields Cookies I see first hand the work that ecommerce merchants put in to fulfill their customers requests. Their busiest days were over this past weekend, both Friday and Monday in particular. Last minute shopping has always been popular, toss in shipping constraints and the fact most people shop on workdays from the office computer and an internet retailer can generally map out their busy days in advance. The cookie impresarios at Mrs. Fields mentioned that they see their peak volume generally between 11am and 2pm. The times around lunch makes the cookie hearts grow fonder it seems. Valentines day represents their second busiest time of year and today they can finally sit back and see how their cookies translated into dough.

As per the conference itself: The kickoff speech to this year’s conference was particularly relevent. I say that partly because it was a great presentation and partly because it echoed a recent post in our blog. Chris Anderson, the Editor in Chief of Wired Magazine explained that niches are the new mainstream and that retailers needed to adjust. I couldn’t agree more. Richer and more engaging content presented in new and compelling formats is vital for ecommerce merchants who want to seperate from the pack and get results. Stephanie Acker-Moy from Hewlett Packard followed that speech up with one about using content development to enhance the brand experience. By blending rich content and feeds together to present customers with fresh and compelling content a retailer, or any website for that matter, can stay relevent while also being able manage the new level of content effectively.

One overriding subtheme to this event, echoed in several conversations I had with other merchants is that the operational requirements of ecommerce are still overwhelming. There is the feeling that the day to day issues of updating content, dealing with logistical issues, taxes, returns, inventory, merchandising etc has sapped a lot of the creativity and joy from the long time ecommerce vendors. This has perhaps been the reason that ecommerce sites have mostly evolved to look the same, with little innovation the past few years. Its lulls like these - where innovation gets curtailed to deal with operational issues - that present opportunities and rewards to those who do something different. I think the ecommerce space has been in their current innovation lull for too long. I have some sense of where things are going next. For that you will have to wait for my eTail wrapup post but I would like to hear your thoughts on whether there has been a lull in innovation in ecommerce and what will shake things up in the coming year.

That’s it. All done. We’ve wrapped the 2006 holiday season. How did US retail sales fare? Well, it depends who you ask. Ecommerce sites such as Amazon.com, CircuitCity.com and BestBuy.com have seen pretty impressive growth this holiday season. According to Hitwise, ecommerce sales are up no less than 5.9%. Several reports have stated that ecommerce sales hit a 23% increase on the weekend before Christmas. Wowza.

So that leaves us with overall retail sales (meaning a combined total of in-store and online purchasing). According to national retail sales estimates, holiday sales saw only a 3% increase over 2005. That’s less than last years increase - not good.

Of course we could blame the overall slow down on interest rate hikes, gasoline prices or even the unseasonably warm weather. Maybe it’s my interactive radar, but, something stands out to me. There was a significant increase in holiday ecommerce this season. People love the convenience of shopping online, and are flocking to the Web to find a vast selection and variety of consumer products. Here’s the question: Could an increase in online shopping hurt overall retail sales? Stay with me…

What if consumers are purchasing less when they buy online? Perhaps we are less motivated to purchase as much, deterred by shipping rates or less exposed to impulse buys? We may even be finding better deals online and spending less. A recent report from Consumer Reports showed a discount of 36% at Amazon.com for the same purchase as at the retail locations for Borders and Barnes and Noble; where the discounts were a meager 4% and 5% respectively. Even the website for Barnes and Noble had a very respectable discount of 19%

This got me thinking about my own purchases this season. Each year I do at least some of my holiday spending online. This year, for the first time, all but two of my gifts were purchased online, including a GRILL from Amazon.com. The result? I actually spent less on my holiday gift-buying than I did last year - by nearly 100 dollars.

Right, so what does this all mean? Online retailers should consider that buyers behave differently online than they do in-store. The sales and marketing psychology used online needs to factor in these behaviors. Online retailers need to analyze their customer’s online behaviors to determine ways of increasing the average spend per user. Many sites have started suggesting items based on what is in a shopping cart or by buying history. I’ve always considered this a great sales technique. But, maybe it’s not enough anymore.

Don’t get me wrong. I firmly believe ecommerce is a fundamental part of today’s economy. But the marketer in me believes that retailers must continually evaluate their customer experience – both on and offline- in order stimulate and grow consumer spending year after year. That’s right … no rest for the weary.