iTunes now better than break-even

There may be a theoretical limit to the upside from Apple’s inverted razor-and-blades business model, which may be why it’s allowing operating margins on iTunes to creep up.

NBC and the Olympics: Old ways still earn gold

Although the networks have complained in recent years about the high costs of rights for major sporting events, to say nothing of the impact those high costs have on the carriage fees the networks demand from pay-TV distributors, nothing in NBC’s experience with the London Games suggests its time to change that formula.

Today in Connected Consumer

With Facebook’s advertising business model still very much a work in progress the newly public social networking company is moving to bolster its e-commerce business. Facebook said in a blog post yesterday that it will begin phasing out its Facebook Credits virtual currency for in-app purchases in favor letting users pay with their own local currency. As AllThingsD’s Mike Issac explained, the whole Facebook Credits thing never really worked out as planned. Instead of simplifying the payment process across the social network, Credits ended up adding layers, as developers generally required app users to exchange their Facebook Credits for their own virtual currency unique to each app, like FarmVille cash. By switching to local currencies, Facebook is clearly hoping to increase e-commerce on the site by eliminating the extra layers. Facebook is also adding a subscription payment model, increasing the monetization options for developers, which could also increase the amount of e-commerce on the site.

Today in Connected Consumer

The New York Times ran a gloomy editorial this morning about investors’ loss of faith in equity markets and the huge outflow of capital from stock funds over the past three years. But don’t tell that to retail brokers, who are reporting 1999-like demand from individual investors for a piece of Facebook’s IPO. The Wall Street Journal even found an 11-year old who wants to bet her college fund on Facebook shares. The fact that Facebook’s bankers have raised the price range for the offering can only fuel the frenzy. Odd then that nearly half of Americans in a survey, including Facebook users, think the social network is a fad that will have a relatively short life cycle. Nearly 60 percent of Facebook users also express little faith that the company will keep the data it collects on them private, and more than half say they never click on the ads or sponsored content that are currently Facebook’s only source of revenue.

Today in Connected Consumer

With paywalls coming back into fashion among online news sites, publishers are trying to figure out how high to build them. The Wall Street Journal is hosting a 24-hour “digital open house” today, courtesy of Jaguar, temporarily taking down one of the steepest paywalls in the business. The model is similar to one adopted by the New York Times, which partnered with Ford to offer free digital subscriptions when it erected its new paywall. Chris Hughes, the new, 28-year old owner of The New Republic, just partially dismantled the magazine’s paywall, making more content free but limiting comments and access to the archive to subscribers. The biggest news, though, comes from Google, which is partnering with AdWeek and about two dozen publishers on a new paywall alternative. Under the new Google Consumer Surveys model, some articles on web sites will be partially blocked. To continue reading, users will be asked to answer a multiple-choice, one-question survey. Advertisers will pay Google to place the surveys, and Google will pay publishers 5 cents per answer. Now if Google could just figure out how to keep the surveys embedded in articles as they get aggregated by third parties they might really have something.

How to make freemium work for you

The freemium business model propelled the phenomenal growth of Dropbox and Evernote, but it doesn’t work for everyone. Future Simple’s Uzi Shmilovici helps you decide if freemium is a good fit for your company and, if it is, how to make it work for you.

Can the daily deals business be saved?

If you lived in New York during the first dot-com bubble, you remember dodging the army of orange-clad delivery people dispatched by Kozmo.com as they careered around the streets on their scooters and bicycles.

Kozmo was launched in 1998 and promised to deliver pretty much anything at any time to any address in the city, within one hour. It ended up delivering a lot of Häagen-Dazs ice cream at 2 a.m. to people with the munchies. The service died three years later after expanding to eight other cities, leaving behind an abandoned IPO and 1,100 former employees. Along the way it burned through about $250 million.

Today backers of daily deals sites may be experiencing a similar sense of vertigo. Market leader Groupon has pushed back its once keenly anticipated IPO after the company was forced to restate its financials. Its prospective valuation has fallen from as much as $30 billion to $3–$4 billion.

LivingSocial was also heading toward an IPO, but that, too, now looks doubtful. The company reportedly is looking for additional private funding instead. Meanwhile, major players like Yelp and Facebook are getting out of the business altogether while scores of local deals sites are closing up shop.

The similarities between the deals sites and Kozmo’s delivery service go beyond mere irrational exuberance, however. Like Kozmo, Groupon’s business model creates a clash of incentives between the company itself and the customers it’s trying to serve, one that pits volume against value.

Kozmo’s anytime, any item delivery model might have worked if the average basket of goods delivered were big enough. By setting no minimum order size and no delivery charge, however, Kozmo created an incentive for customers to use the service frequently for small orders, which is just what they did.

Online coupon sites typically offer goods and services at 50 percent off retail. The sites then take about half of what the customer pays. That creates an incentive for the deals sites to maximize the number of coupons they send out, without regard to category exclusivity for the merchants, the frequency of promotions or any of the ordinary constraints that marketers and merchants would typically apply to price promotions.

For the merchants, the offers only make sense if coupon-using consumers become repeat customers who go on to pay the full price. According to an increasing number of merchants who have experimented with online coupons, however, that doesn’t happen nearly enough. Instead, coupon buyers simply take their business to the next merchant to offer a similar product or service through the deals sites, a game made easier by the ever-growing number of coupons being offered.

For the business to grow and be sustainable, the interests of the coupon sites and those of merchants will need to be better aligned.

One way that might happen would be to tie use of the coupons to an online payment processing system so that both payment processor and merchant stand to benefit from repeat business. That would create an incentive for the deals sites to target coupons at consumers most likely to become repeat customers.

The data collected by the payment processor could also be used to reward frequent purchasers with future discounts or other incentives.

The pricing of coupons between the merchant and the deals sites is also going to have to change, such that the sites get a bigger cut of the deal in exchange for exclusivity within the merchant’s category of service or goods.

Simply hawking discounted goods and services inevitably creates a race to the bottom, exactly what many merchants are experiencing today with daily deals sites. If the deals sites are to have a role in the future, they need to become market makers, matching willing buyers with willing sellers. Otherwise, there’s nowhere to go but down.

Question of the week

What’s the best way to align the interests of daily deals sites and merchants?

BitTorrent tests paid µTorrent Plus client

µTorrent users will soon be able to transcode their downloads and sync them with mobile and connected devices, thanks to a new µTorrent Plus client now going into limited alpha testing. Want to check it out yourself? We have some invite codes inside.