Cover Story: Are We on the Verge of an E-book Explosion?

"The market for digital books … has been roughly doubling every 18 months,” says Andrew Savikas, O’Reilly Media’s vice president of digital initiatives. “Follow that line out, and in less than a decade it’s 64 times the size it is now.”

Savikas has reason to be optimistic. Consumers are adopting reading on screen like never before:

• 15 percent of U.S. adults have read at least one e-book, according to Simba Information’s recent “Trade E-Book Publishing: 2009 Market Report.”

• Trade wholesale electronic-book revenue was more than $37 million in the second quarter of 2009, compared to just $11.6 million in Q2 2008, according to the International Digital Publishing Forum (IDPF).

• More than 12 million e-books have been downloaded by the Stanza e-reader iPhone app, which turned one-year old in July.

• The number of e-readers on the market has surged. (See Book Business’ list of 30 current e-readers.)

Digital Surpassing Print Sales?
O’Reilly Media released the e-book of “iPhone: The Missing Manual” as a standalone iPhone app in December 2008. The app outsold its best-selling print counterpart.

The company followed that success with a multiplatform digital publishing strategy. Consumers who buy an O’Reilly e-book get three digital rights management (DRM)-free formats of it: ePub, PDF and the Kindle-compatible Mobipocket. Or, customers can purchase the books as standalone mobile apps for the iPhone and Android smartphone.

O’Reilly’s digital strategy has been successful enough to convince Savikas that more people will read O’Reilly books in digital form than print within the next 12 months. What’s more, O’Reilly’s share of the printed computer book market has risen since it implemented its e-book strategy, suggesting that e-book success has not cut into print sales despite lower price points, he says.

HarperCollins also is capitalizing on e-book momentum. Ninety-five percent of the publisher’s titles are released in digital format, and same-month e-book sales have increased as much as 400 percent (June 2009 vs. June 2008).

“We see [e-books] as a very effective vehicle to attract additional readers to our authors, and that’s our primary goal,” says HarperMedia Vice President and Publisher Ana Maria Allessi. “It’s huge growth, but of course the growth is accompanied by a period of great change. ... Every day it seems something new is announced or something new will impact these formats.”

Still, e-books comprise just a few percentage points of total sales (1 percent to 2 percent seems to be the norm) for many publishers. But with the rapid growth many are seeing in e-book sales, Michael Norris, Simba Information’s senior trade book analyst, is “sure the e-book unit percentage has crept up a tiny bit overall.”

Bigger questions, though, he says, deal with pricing e-books—and the number of people reading e-books (15 percent) vs. those paying for them (8 percent) [according to Simba’s “Trade E-Book Publishing” report]—as well as declining print sales and the fact that e-book sales are not offsetting these declines.

Norris also adds that e-book sales figures don’t necessarily include revenue from other ways publishers are making money from digital content, such as “licensing agreements, ad-support sites …, for example, which,” he says, “make e-books look quaint.”

An E-ducation
The expansion of digital learning tools in higher education is opening another significant market. Princeton, Pace, Arizona State and other institutions recently joined an Amazon pilot program to give students Kindle DX e-readers for select courses. As part of the program, Amazon added more than 100 McGraw-Hill Education textbooks to the Kindle store. However, McGraw-Hill’s digital learning materials go far beyond e-readers.

“What’s really terrific about e-books,” says Rik Kranenburg, president of McGraw-Hill’s Higher Education, Professional and International Group, “is that the technology lends itself to all kinds of new applications and learning formats—new ways that students learn, and instructors can use and integrate the technology to instruct.”

McGraw-Hill offers many of its e-textbooks in the context of a wider, digital learning suite called Connect that includes multimedia and interactive learning experiences, such as searchable lecture capture and personal learning diagnostics.

“E-books are embedded in that platform … but … are just a subset of what’s in the product offering,” explains Kranenburg.

E-books could drastically change the business model for college textbooks, which have long been a rising cost of higher education. According to Kranenburg, most McGraw-Hill e-textbooks sell for about 60 percent of the cost of their print versions, but usually aren’t resold on the used-book market, which helps balance sales over the edition’s life.

McGraw-Hill is also experimenting with distribution models that would allow students to rent the e-book for the duration of a class, and perhaps lend it to a friend using technology that limits access to one user at a time—a technology already used by some libraries.

The E-reader Upsurge
The growth of e-books is mirrored by the proliferation of e-reading devices. The two most well-known are Sony’s Reader and Amazon’s Kindle (which was the first to find truly mainstream legitimacy when Oprah Winfrey embraced it as a “life-changing” gadget). The two devices have battled for market share since. Late this summer, Sony released three e-readers that challenge Kindle’s utility and price point—touchscreen devices starting at $199, with an Internet-connected Daily Edition at $399.

While the Kindle is tied to Amazon’s store, new devices from Sony and other manufacturers can access everything from Barnes & Nobles’s catalog to hundreds of thousands of free e-books through Google, Project Gutenberg and other digital archives. Plus, smartphone apps, such as iPhone’s Stanza, allow millions of smartphone users to access e-books. Plus, an e-book can be released as a stand-alone app, as O’Reilly Media has done.

Smartphones: Smarter E-readers?
This raises an obvious question: How important are e-readers to the overall success of e-books?

With over 2 million people using Lexcycle’s Stanza app, many consumers don’t seem to care about the differences between e-ink and LCD screens.

“Smartphones and 3G data networks are the main driver [behind digital sales] …,” says O’Reilly’s Savikas.

Neelan Choksi, CEO of Lexcycle, agrees. “My impression is that the ease of use being introduced with wireless and over-the-air access has had a huge effect on adoption. It’s probably the primary reason for the growth in content sales.”

The Chicken or the Egg?
It’s also clear that e-reader adoption is lagging far behind overall e-book adoption. According to Norris, most e-books are read on personal computers. He points out that, although Amazon will likely sell 500,000 Kindles by the end of the year, an estimated 110 million U.S. adults buy at least one book a year.

“… It’s important … to keep a degree of perspective when looking at the entire market,” explains Norris. “Because 500,000 … is still not a huge penetration.”

Still, many publishers are encouraged by the buzz about e-readers, and DisplaySearch, a research company specializing in display market research, forecasts e-paper sales (mostly used in e-books) of $9.6 billion by 2018, from $129 million in 2008. E Ink Corp. (which produces e-ink screens for Sony, Amazon and iRex, as well as most other e-readers) expects color displays to reach the market by 2010. E Ink’s vice president of marketing, Sriram K. Peruvemba, also says flexible displays will make e-readers more durable and practical.

What’s Important?
Ultimately, many publishers agree that it’s about giving readers the chance to buy what they want where and when they want it.

McGraw-Hill is already designing text for digital distribution first, and other publishers have begun doing the same. It’s less important to publish on one specific device than it is to produce books that can be accessed through whatever channel readers use to buy books.