Guest Column: The Kindle—Igniting the Book Business

Book businesspeople are about to make the same mistake that has devastated the music and newspaper industries: worrying about whether a new digital format will cannibalize their traditional business rather than focusing on how to make the new format more competitive with other digital media.

Recently, there has been a flurry of alarmist articles about Amazon’s Kindle 2, mainly addressing the following questions:

1. How does the current digital reading experience compare with the printed book?

2. How should e-books be priced in relation to p-books?

3. Will the print book industry disappear?

The real issues are:

1. How can we enhance the reader’s overall experience—not just reading, but browsing, purchasing and library-building, and not just through print or digital media, but through a combination of both?

2. How can we create pricing options that will increase demand for books and offset the decline in book readership?

3. How can we build a new business model that is attractive to authors and sufficiently profitable for publishers and online retailers?

Asking baby boomers whether they will forego their affinity for printed books is irrelevant. The key to the future is whether e-books will be interesting enough to Generations X, Y and the millennials to capture a significant portion of their entertainment spending.

Other companies will enter into competition with Amazon. Sony and Apple almost certainly will introduce enhanced e-readers, and in all likelihood, new entrants will be tempted to invest in the format of the future. The ensuing competition will result in improved e-book readability and drive down prices for the devices. What will this mean for the book business?

First, online retailing is poised for a second wave of innovation. The innovation of the Kindle was not to improve e-reading—many earlier e-readers offered a very similar reading experience—but to dramatically alter the purchasing experience through its wireless capability. Similar innovations are destined to occur in browsing and marketing. Until now, book covers designed with “dust” jackets to sit on shelves for prolonged periods of time have been the basis for the online positioning of books; obviously publishers could do better by designing online-oriented cover versions that would not only be more eye-catching and dynamic, but potentially even interactive.

Similarly, the digital version of a book could be a portal to additional information about the author or content—imagine learning, right after reading “Lolita,” about how Vladimir Nabokov came to write the novel, or getting a visual demonstration of Robert Millikan’s oil-drop experiment right after reading the chapter on electron charges.

The personalization of recommendations through enhanced regression analysis is another inevitability: Every reader relies heavily on recommendations from a few trusted sources in addition to pure impulse purchases. Together, these innovations in the digital experience will drive online’s share of retailing to much higher levels than the 10 percent to 15 percent of book sales today.

Setting E-book Prices
Pricing innovations are inevitable in the digital world as well. Prices of e-books should be shaped by cost structures and customer demand rather than by comparison to traditional p-book pricing. A stand-alone electronic book business has radically different economics than the print business: If we assume that the average retail price of a print book is $10, then the average wholesale price is $5 (the $5 difference represents the retailers’ costs for store rent and personnel, including a profit of, at most, only 50 cents for the retailer); the costs of paper, printing and binding are roughly $1, the author’s royalties (15 percent of retail price) $1.50, internal publishers’ costs (including marketing, sales, warehousing, inventory management and distribution) of approximately $2, on average, leaving a publisher’s margin of 50 cents.

About half of these costs vanish in the e-book world since the store rent and personnel that make up much of the $4.50 are unnecessary; $1 of paper, printing and binding are not be incurred; and an estimated 50 cents of publisher costs related to functions such as warehousing, inventory management, production management and distribution disappear.

This analysis suggests that e-books could, as a stand-alone business, be priced far below Amazon’s current $9.99 pricing and dramatically lower than p-books. Beyond this, pricing is likely to take many new forms, if recent developments in music are any indicator. Portions of nonfiction works could be sold by bits—for example, to a reader who wants only vegetarian recipes from a book on Mughlai cuisine or a student who only needs the chapter on differential equations from a book on calculus. Backlist titles could be offered in a bundle at a steep discount to bolster demand and enhance library-building and format conversion. Additional offerings (an author biography, for example) could be added for incremental revenue.

There is no reason, moreover, why e-books could not be priced dynamically, as are most products in an online world—the initial release price for Dan Brown’s new novel, for example, could start at $39.99, rather than the announced $28.99, for the first 24 hours to reflect the pent-up demand and the relative price insensitivity of his most devoted fans, dropping swiftly as demand declines toward the $4 price level shown above.

Finally, the e-book version of public domain books should be made available at very low prices or even for free to encourage reading in schools and at home. In the case of public domain books, the deep backlist of publishers, the digital format renders the role of publishers virtually irrelevant; online retailers become publishers of classics by default.

The Industry’s Shifting Roles
This development leads to the reconfiguration of roles in the book business. Authors remain essential: E-book royalties per book should not be reduced in absolute dollar terms below p-book levels in order to provide the necessary incentive for creative energies that could otherwise be directed elsewhere (the current royalty schemes proposed by publishers would unfairly give authors only a percentage of net revenues).

Amazon will receive competition from new entrants to online retailing (probably Internet companies or startups that are dedicated to the digital world rather than brick-and-mortar retailers who remain focused on their moribund business model, much like newspaper publishers).

Publishers will not disappear, though their role will inevitably alter. Certain ancillary activities like warehousing, shipping and distribution, production, and inventory management will need to be stripped away. Other activities like editorial and consumer marketing will become, if anything, more important in the digital world. Lost in the doomsdayer debate about publishers’ future is that their unique role as intermediaries has always been about discovering and promoting talent and content—rather than printing and distributing. There is life after print death for publishers, but only in a streamlined and refocused configuration, working constructively with online retailers and authors to ensure that book reading is not the ultimate loser in the digital revolution.

Bharat N. Anand, Henry R. Byers professor of business administration at Harvard Business School, is an expert in corporate strategy. His current research examines corporate change in media organizations. He is faculty co-chair of Harvard’s executive education program, “Effective Strategies for Media Companies.”
Peter Olson is senior lecturer of business administration in the Strategy Unit at Harvard Business School. He worked as an attorney for three years, in commercial and investment banking for nine years, and for the international media group Bertelsmann for 20 years. He was a member of Bertelsmann’s executive board and chairman and CEO of Random House, the world’s largest trade book publisher, for 10 years. From 2000 to 2001, he was a visiting lecturer at the University of Vienna.