I predicted years ago (as a book editor at the time) that a powerful author would be the first to drive real disintermediation of publishers. At the time, I also believed it would be Stephen King! (He’s played with this before, but not with such good execution as I know the Kindle will deliver.)

More importantly, I’ve been delighted by my Kindle 1 and am thrilled to see it continuing to get better and reach more mainstream readers, while also helping break the back of the retail distribution chain for books. This is good for writers too: more reasonable distribution costs = more reasonable pricing for consumers = more room for author royalties.

With any luck, other variations of this technology will continue to arrive and Amazon won’t get to the point of punitive pricing. . . .

Anyway, if you’re thinking of getting one, consider this a +1.

It never ceases to amaze me how much vapidity is for sale in airport newsstands, but (insider tip) SJC has something that passes for a bookstore way down at the end near A10, and, choosing among slim pickings, I came up with a copy of The World is Flat, which I’ve heard much of, had never read, and seems to be in release 3.0.

So far, the thesis is interestingly woven if unsurprising. But it’s the little details that scare me — Indian citizens referring to getting good jobs “at a multinational”, and then attending “accent neutralization class” to learn how to articulate their t’s poorly in order to sound less alien to americans.

Here’s another choice passage:

When you look around at 24/7’s call center, you see that all the computers are running Microsoft Windows. The chips are designed by Intel. The phones are from Lucent. The air-conditioning is by Carrier, and even the bottled water is by Coke.

My version of the analysis is very simple: The value derived from a barter transaction (net of what you’re trading away), must exceed the cost of buying the item in a simple cash transaction (net of the cash value of the item you’re potentially trading), and – importantly – must do so by a margin sufficient to substantially exceed the costs in inconvenience, uncertainty, and social awkwardness of trading orthogonally with strangers.

These costs are substantial, and in my opinion take away most of the marketplace in small-ticket items. Signing up for a new service, learning its rules, having to go through a process of selecting what I want and setting up umpteen DVD transactions, trusting strangers to mail me stuff, having to ask questions about the condition of stuff, etc., are a pain in the ass. It’s just easier to either sell stuff for cash in a known system or to dump a box of CD’s on the record store counter and take what they’ll give me.

In large-ticket marketplaces, where products are not commodity products, trust becomes a bigger driver of the uncertainty factor. You probably wouldn’t trade your car to a guy you’ve never heard of for equity in his illiquid startup. Where products are commodity, why not sell for cash?

For an online system to work, there also has to be a meaningful efficiency benefit from bringing together and normalizing a market of many fragmented participants. This takes away other sections of the market – repeating trades between known participants, local service provider economies, and farmers’ markets, to name a few examples.

There are opportunities, however, where bigger-ticket items create enough incentive, and where known-commodity items (or traders) can create enough trust. RCI and Interval International, for example, are two multi-hundred-million-dollar barter banks for timeshare inventory, and have millions of participants paying real cash in management and transaction fees in a trusted marketplace. They work because they are high-ticket enough to come out positive in the equation above, because they are known-value and trusted commodities, and because the cash market for condo rentals is inefficient (for part-time landlords at least).

Where else do conditions like this exist? Why couldn’t one create a market for swapping used cars, capitalizing on the consumer-unfavorable conditions on the dealer side and the fact that most new-car buyers pay a huge sales tax penalty when they buy new and sell at 50% of value? (For example.)

Frankly, I’m surprised it’s not illegal (since it effectively is similar to gambling or an unregulated derivative security).

Setting aside the fact that I probably shouldn’t say such things so flippantly about other people’s businesses – I assume they did their legal homework – something about it has been bothering me.

It got me thinking about all the different kinds “bets” you can take against the future in one form or other — and wondering why some of them are legal and others aren’t. Personally, I think it’s stupid that a country’s worth of adults with access to compulsory free education can’t gamble on anything they damn well please, but the state of the social contract is such that there’s a political consensus otherwise, and I’m interested in some of the contradictions.  My full ramble (and quiz) is after the jump.

You can look at these bets categorically.

First, there are bets that convey actual value. When you buy stock in a company like Yahoo!, you are betting that the net present value of the income of the company will go up at a faster rate than other stocks. But, you are also buying a piece of equity that conveys all kinds of ownership rights, like voting, dividends, and the right to participate in splits and liquidation events. The SEC regulates the issuers and markets of publicly traded equity closely, and you sign a lot of disclosures on the risks of investing when you open a brokerage account. So reasonable people generally agree it’s acceptable to make this market open to little old ladies in the Midwest.

When you get to riskier securities, like derivatives and commodities, you’re talking about bets that are one level of remove from ownership, but they remain tied to hard assets (someone writes every call you buy and is on the hook if you exercise), and you get even scarier disclosures. Angel investments (still tied to hard assets but less publicly scrutinized and regulated ones) are limited only to accredited investors (with yet more disclosures). This all works for me.

Then there’s a whole category of things like extended warrantees on products. This strikes me as an absolute, absurd gamble of a betting proposition: is my tv going to crash in more than one year (the free warrantee period) but less than 3, with the price of repair being more than the total cost of the warrantee + shipping?

One reply is to say, hey, it’s not gambling, you’re simply paying the manufacturer for a little extra service on top of what they’re giving you, which you hopefully won’t need. Sort of like having an unlimited rate plan on your cell phone when you may or may not use the minutes. Buy this tv with a one-year warrantee for $300, or buy that one with a 3-year warrantee for $375, right?

But this doesn’t stand up to scrutiny. Many of the issuers of these plans are retailers, not the actual manufacturers, and some are pure aftermarket 3rd-party. Plenty of the insurers don’t even do the repairs themselves, simply reimbursing for covered repairs. So let’s get this straight: a retailer can sell you on a tv, then with a straight face can sell you a ticket you can cash in only if your tv blows up, knowing full well that this is a money-loser for 9 out of 10 people. They get to use inside information about the failure rate and are not obligated to disclose it, and they get set the price and put enough of a house “vig” on it to make it a profit center. (Meaning, all 10 buyers are paying more than the true “expected” value of the ticket – and if you think about it, retailers are already protected on the downside anyway, since they would presumably go after the manufacturer in the event of any unreasonably high repair rate.) Finally, on top of that, they get to put hard-sell tactics around it that would make a timeshare salesman blush.

What? Will someone please tell me exactly how this is different from a bet on a single number on the roulette wheel. In fact, it’s worse; in casinos, odds and payouts are disclosed, and they don’t let teenagers in.

For anyone who thinks this is small potatoes, by the way, simple math says that if every household in America on average buys one of these policies a year at $50, that’s a five-billion-dollar bet that the house will always win. But I’m guessing Circuit City stores aren’t all located on indian reservations, subject to gambling board oversight, or paying vice taxes.

And yet if I were an educated investor and wanted to bet against iPhone hardware quality, I couldn’t put $100,000 to work against future repair reimbursements (not without buying a couple thousand iPhones anyway), nor could I legally write those tickets if I thought they would have unexpectedly high performance. (Or could I?)

Life insurance is no different that I can see. You’re taking a bet, essentially that you will live short enough that the NPV of the payout minus the premiums is positive. Okay, well, insurance is a regulated industry, so let’s assume the gouge is capped, and given that life insurance is often used to provide for someone who might not otherwise be able to provide for himself, there’s a reasonable social safety net concept that makes sense here. Similarly, you can make an argument that car insurance is a hybrid of health insurance and distributed taxation, but enough.

Now wait. It turns out that, if you are an employer, you can take “key man” or even so-called “janitor’s insurance” to bet against the future protect shareholder value. This strikes me as a concept you’re glad to have as an investor in, say, Oracle. Plus, hey, life insurance on third parties!

So can I walk into a bookie’s State Farm and put $1000 on Lindsay Lohan to die before the age of 50? (Only if I’m her employer, and it would take a lot more than insurance to get me to do that.) Can I “write” insurance on myself – I’d happily sell you a fat payout policy on me dying before I’m 50, for the right premium.

I could go on: travel insurance, postal insurance, or even lifetime Tivo memberships for that matter.

But for now back to Farecast. You know I love the product, and I’m just having some fun here, so you tell me. Is Fare Guard:

• a): simply a guarantee on merchandise – i.e., a premium information service guaranteeing the validity of its information up the to limit of damages due to its information being wrong (in which case please tell me why I can’t start a similar information service on baseball outcomes);
• b): an insurance policy;
• c): a casino-worthy prop bet?

I can’t wait to see what they do with it.

So let’s say you search for a trip between LAX and JFK, and Farecast predicts prices will stay about the same for the next 7 days. For $9.95, you can buy a guarantee that will refund you the difference if the price in fact rises contrary to their predictions (with proof of purchase – yes, you actually have to buy the ticket).

It makes mathematical sense on the face of it: if they’re wrong by an average margin of, say, $50 when they’re wrong, as long as they’re wrong less than 20% of the time, they come out ahead on this bet. Over time, they can adjust pricing, there’s some breakage (customers who never buy tickets, don’t bother to check, or fail to submit a claim), and presumably they could bias the system to model conservatively if they really wanted to, since the model doesn’t work in reverse. (It doesn’t protect you if Farecast predicted prices would go up, you buy a ticket, and in fact they go down.) Here’s a pretty interesting blog post detailing their predictive algorithms.

Why am I so excited about this? What this amounts to is in effect a 7-day call option on airfares. I’ve been privately predicting for some time that the travel industry would eventually turn out products like this, given how much consumer pain there is in airfare pricing uncertainty, but I’d always assumed an airline would pioneer it, finding a way to make the revenue earned from price protection (net of revenue lost from “exercies”) exceed the revenue earned from the yield management practices that lead to all that consumer pain.

Frankly, I think overall travel demand would go up under this model, because it could drive more favorable look-to-book ratios across the industry, and pull revenue from non-bookers (all those expired, out-of-the-money options are just free money). Over the long run, Farecast may either want to securitize their aggregate one-way bet anyway, tie it to actual inventory lock-in, or launch a product that lets them take bets the other way – and airlines would make natural partners in these efforts.

But what really excites me about this is the fact that this secondary market is extractedby 3rd parties from published data and can be augmented by social data. Frankly, I’m surprised it’s not illegal (since it effectively is similar to gambling or an unregulated derivative security). It’s not even technically a derivative, since it can’t truly trade independently (e.g., you can’t sell it) and it doesn’t convey control of an underlying asset.

But If Farecast can do this, couldn’t they offer a whole spread of similar products (put options, collars, etc.)? What if Zillow, for $1,000 a month, offered you downside protection on the value of your local housing index falling? What if you could convert any car you owned outright into a lease-like structure, by locking in a residual price option (with adjustments for condition and mileage) with Kelly Blue Book, 2 years before you’re ready to sell it to Carmax?

Car leasing, ARM’s, and cell phone plans prove that consumers can handle complicated pricing & financing models. I’m very excited by the promise of the Web2.0-enabled next generation of that.

Josh Kopelman has a post questioning whether Zillow, having raised $50+ million for a consumer play without a visible revenue stream other than advertising, is going to go “that big”, or is simply a rehash of an operatic tragedy we’ve seen before.

As I’ve written elsewhere (see comments), I can’t wait for the real estate market to tip, as though there is significant inertia in the current market structure, there is also significant inefficiency and frustration on the part of consumers. If marketplaces are simply places where buyers and sellers meet by arbitrary convention, I would argue that we are but one such convention away from eliminating realtors completely (much as craigslist has nearly wiped out local classifieds) — or at least from taking away a significant amount of their commission pricing power.

As Josh knows, arbitrary conventions can be created with new levels of efficiency by the internet — and the founder of Zillow has done this before. While I don’t see these new tools as a direct play to dis-intermediate realtors — yet — I do see it as a reasonable attempt to become the defacto spot for consumer-oriented real estate content and to build a lot of proprietary data and user lock-in. Kind of like a craiglist with better authentication tools and structured, incentivized UGC — and completely unlike previous attempts to create a virtual real estate market.

And if this is successful in garnering a critical mass of consumer participation, then it’s an easy step to turn it into the virtual trading post of choice, and even the “real real estate OS”, if you will, potentially enabling all kinds of things ranging from obvious mashups to a real-world Second Life universe.

This is a very big bet — with a very big prize if it pays off. Good luck guys – I look forward to a day when I can I don’t need to pay over $30,000 for someone to type my address into an MLS system, give me self-interested negotiating advice, and fill in the blanks of preformatted contracts for me.

Answer: because they work better! Among the 3 niche sites mentioned above, I can find, without hitting a single “next page” button or filter, listings for Director of Philanthropic Relations at Squidoo (wow!), a Product Manager at Google, design guru at Internet Brands (CarsDirect, etc.), and various other VP- and Director-level positions at startups and large internet players all over.

On the other hand, the most interesting job on Fred Wilson’s badge – which is basically a persistent search of jobs with the word “start-up” in them and do not have the word “engineering” in them, a reasonable-looking proxy for non-technical start-up jobs – promises a position as a product manager at a Sequoia funded company, but links to a dead craigslist homepage. Clicking through the badge to see the full list of jobs, one finds 24,250 results for mortgage loan originators and “start-up opportunities” requiring skills like:

candidates will have 3 years or more of progressive experience in operations and customer service, a working knowledge of DOT safety requirements and superior communication and organization skills. Candidates must also meet the following requirements: Have a CDL Class B w/Tanker and Haz-mat endorsements; ability to install propane tanks; excellent customer service, interpersonal and communication skills; and must be qualified for Propane Tank Installations and Bulk Deliveries.

Sorry guys, the only propane installation I’ll be doing any time soon will be for the BBQ I’m having this weekend! And filtering 24,250 jobs has all the hallmarks of a low effort-to-reward exercise when the sliders are inefficient, non-normalized job titles.

On the employer side of the equation, Joel has a good analysis of why it’s hard to find the best people on job sites (nutshell: because they’re rarely seeking jobs). So you need to find them in the places they congregate for other reasons. . . such as reading useful blogs like Joel’s.

This is interesting because it has everything to do with the social dynamics that are behind social media – there’s a delicate balance they must maintain between selectivity (filtering noise) and value (receiving signal), and that balance differs across social groups and functions. LinkedIn is of value to me in business if most of the people in my network are similarly thoughtful to me about who they accept as contacts (it creates a reputational system), but it is not useful to me in finding stuff to buy from trusted parties like ebay is (because there is no marketplace associated with it). Myspace is of low value in maintaining business relationships, but great for bands with a following. paidContent shows that job boards can scale effectively to large audiences, but only because there’s a pricing engine (and possibly an editorial one) maintaining a filter on the thousands of junk listings that would turn up there if they were free. On the other hand, craigslist is a much better place to find apartments for rent, because you need all the signal you can get there and can efficiently filter lots of noise via parameters like price, bedrooms, and location.

Blogs continue to turn out to be great proxies for niche social networks – if a place that I find valuable for information becomes a meat market for jobs, that’s great for me as both a potential employer and employee. On the other hand, the more spaces like this that emerge, the more I have to spread my job listings and consumption across multiple sites. So how do we aggregate this more efficiently?

Hello friends: how about a feed network for job blog sites? How about a Hype Machine for job listings? How about a utility from technorati or Newsgator or MyBlogLog that can identify sites I’m reading or getting readership from or have audiences like me and then surface me feeds of certain kinds of links (podcasts, job listings, product links, Flickr pointers) from my OPML file or community?

What else?

I’ve always been under the impression that eBay sets a high bar for best practices in engaging seller community influencers and “grass tops”. This guy is clearly a top eBay seller and appears to have been identified by eBay as a community leader (even if his merch is fringe). Now he’s unhappy with some of eBay’s business changes, so he’s auctioning – on eBay no less! – the chance to sponsor him as he goes public with his discontent. Topping that, he’s giving half the proceeds to charity. . . wait for it: the eBay Foundation.

So he’s clearly a true believer, not just a hater. He’s got comments of support from other eBay sellers who clearly agree with him, and has apparently even made the Pulse (eBays’s most-watched auctions) with his listing (which is going for over $1300 as of this writing). I love the image of him mourning over his broken eBay mug (more photos here).

Kudos to eBay for not cutting him off at the knees by taking this listing down, and for allowing this to highlight the fact that, in order to really empower users, you have to empower them to do things that sour your palate.

At the risk of stretching the comparison (because I don’t think community businesses are truly democratic), it’s a bit like a government that empowers a free press, in that you attract more involvement in your system when your system can take self-criticism – and similarly that you risk breaking it if you try to control it.  On that note, I look forward to seeing how the MySpace community reacts to recent changes that do exactly that.

In the case of Saturn, exploiting transparency: have enough guts and faith in your product to show up, toss the keys to some high share-of-voice folks, and take your lumps good or bad.

In the case of Cambrian House, exploiting the flash-mob’s appetite for documenting and reposting geeky tomfoolery qua news by delivering 1,000 pizzas to Google. For those of you like me and thousands of others who didn’t know but now do, Cambrian House is a cleverly conceived crowdsourced idea incubator that has interesting potential (even if I’m a bit skeptical it can execute its full vision).

Nicely done.