The E-book Opportunity
Two-thousand ten may be remembered as the year of the iPad, but if the recent buzz around e-readers is any indication, a rising content-delivery-device tide truly does lift all boats. The release of a clutch of new devices, including Barnes & Noble's Nook (released in late 2009), Spring Design's Alex and Borders' Kobo, helped spawn summer price wars, pushing the price of the market-leading Kindle and Nook below $200 for the first time. With predictions that this lower price point may be the spark needed to make e-readers this year's hot holiday gift item, the little devices seem poised to go from niche curio to major player in the electronics market.
Less certain is the course book publishers should take on this new ocean of e-ink. Opinions range from wait-and-see (as counseled by guest columnist Rudy Shur, founder and publisher of Square One Publishers, to independent publishers in the May/June issue of Book Business), to cautious acceptance (the majority position, as publishers slowly move away from "windowing," or delaying the release of e-books, to a simultaneous release of new best-sellers in both print and electronic formats), to enthusiastic embrace ("enriched" or "amplified" e-books developed for the iPad). All point to the same numbers to justify their position: e-book revenue in the hundreds of millions and growing steadily, yet still only comprising a small percentage of the $80 billion book market.
E-readers Come Into Their Own
Helping to power the growth of the market is the effort by several major retailers to position e-book sales and marketing around an e-reader device. Following Amazon's lead, both Barnes & Noble and Borders have sought to breathe new life into their business models through branded devices and associated apps, positioning themselves as a convenient, cross-platform e-books provider.
With the Kobo, Borders sees itself as extending its multiformat bookselling strategy into a rapidly growing market. "The Kobo eReader is one of many e-reading devices we are carrying as part of our device-neutral strategy," says Borders' CEO Mike Edwards. "The Sony Readers and Aluratek's Libre eBook Reader Pro round out our current assortment, and we'll add additional devices to our assortment soon. Overall, we will emerge with a 'good, better, best' selection of e-readers at affordable price points, making it easy for our customers to enjoy books digitally."
Barnes & Noble, by contrast, recently adopted a "Nook-centric" branding strategy. Apps for the iPhone, iPad and Android devices now all carry the Nook name, as will NookStudy, Barnes & Noble's new online study platform for the education market.
"We felt the Nook brand had resonated so beautifully with customers coming into the store, and we feel people understand that Nook is Barnes & Noble," says Douglas Gottlieb, vice president of digital products for Barnes & Noble.com. "We want to be completely interoperable .... [and] having one e-book brand under the Barnes & Noble umbrella kind of simplified that message for us. Nook has done so well and people are so conscious of the book device, we really wanted to leverage that halo of the Nook device and simplify it for customers."
In addition to building out a strong online presence, Borders hopes to position itself as the expert on all things digital with "Area-e" sections, in-store boutiques (set to launch this fall) staffed by associates trained to help consumers with e-book devices and accessories. The company's e-book store, launched in July in conjunction with Kobo, is proving a "strong traffic driver to Borders.com," Edwards says.
Ned May, vice president and lead analyst at media research and advisory firm Outsell, says centering e-book brands around a device is really about selling books, not hardware.
"It provides a locked and secure channel," he says. "Once you get someone to use your device … then hopefully they will keep coming back to you for the sales. Most are deploying iPhone apps and PC apps and tablet apps around that same device, so you can ... migrate content seamlessly across [platforms]."
Even Sony, May says, realized it needed to build a robust, dedicated e-book store, coming to an agreement last year to offer half a million public domain books through Google. Not surprisingly, it is hardware-focused Sony that has proven most willing to embrace a platform-independent, free content model to boost the number of titles available through its e-book store.
"Sony is not looking to sell books," May notes. "They are looking to offer that unified experience."
The importance of cross-platform digital book sales has become clearer since the release of the iPad and success of branded e-book apps from Kindle, Nook and others. Amazon's recent upgrades to its Kindle app included new audio and video functionality, which several media outlets noted makes it more competitive with its own hardware device (Dow Jones' Simon Constable wondered if Kindle's app would prove a "Kindle killer").
The success of such apps fogs the crystal ball for those looking to interpret the significance of Amazon's recent announcement that e-books are outselling hardcovers. "It was a very well-crafted press release," May says. "I did not [read it as] ... e-books downloaded on the Kindle. I saw [total] e-books sold. ... It was not clear what device those books were being purchased on."
Amazon's improvements to its Kindle app have been matched by Barnes & Noble, which is clearly interested in creating an optimal reading experience on the iPad. With eight fonts to choose from and customizable layouts, colors and page backgrounds (including settings designed to mimic classic book design principles and make LED screen reading easier on the eyes), the Nook-branded app is designed to make Nook the first choice for those who wish to read books on a tablet device.
"It's about customer choice," Gottlieb says, "and we recognize that for some customers, an iPad is a terrific experience. We recognize it's not so much a case of, 'Is it iPad or Nook or Android?' For us, it's about the reading experience."
As the e-book market matures, the focus has begun to shift to consumer niches or levels of functionality perceived as underdeveloped, such as the education market. Barnes & Noble is renewing its push into digital education with NookStudy, an integrated software product allowing students to consolidate e-textbooks, class materials and notes into one interactive platform on their computers. A portable e-reader also designed to meet the specific needs of college students, the dual-screen Kno, will debut this fall.
The Kno is an example of analog behavior fused with digital content and technology, says Osman Rashid, co-founder and CEO of Kno. "We started by saying e-textbooks have been around for 10 years; why have they failed?" says Rashid. The problem, he says, has to do with having to pan up and down or side to side on a small, far-away screen. "You can only see a portion of the content. It's just not conducive to a learning experience," he says.
The Kno device offers split-screen functionality (users can read questions on one screen while checking answers within the text on another) and allows students to write notes and collaborate. Despite a device-focused approach, Rashid says the company's long-term vision is to differentiate itself on the software side, offering "an education ecosystem that could run on any device out there."
The iPad is good for all digital book purveyors, Rashid believes, because it accelerates the market's development. "It makes publishers get their content available much faster, it helps the supply chain deliver products faster, it helps the consumer say, 'Yeah, I've heard about that. I'm comfortable using that.' It helps us in every way," he says.
Rashid's potential publisher clients seem to agree.
"The e-book market is the hottest area in publishing, and the introduction of the iPad has accelerated its course," notes Ray Colon, director of eProduct management at Springer Science+Business Media. "Newspaper publications, trade publishers and several STM publishers are now prioritizing the development of reader apps and formatting their content and portals for mobile."
Springer is preparing for a multiplatform future in an area of e-book publishing long dominated by the desktop browser. "Springer content is working content," says Robert Boissy, director of network sales at Springer, "and so will benefit from ongoing developments with devices that foster good image rendering, annotations and other interactive features."
As it looks more to e-book releases tailored to a growing range of e-reader devices, Springer is moving to augment its current PDF e-books with releases in the ePub format, Boissy says. "We expect the ePub format to enhance the experience for users and attractiveness of our content in the trade market on a wide variety of devices," he says. "SpringerLink.com abstracts and book previews are also available to anyone with a device running a Web browser. We are currently experimenting with mobile apps for some of our publications, and we do have some medical content already available through intermediaries who have made apps for us. The market appears to be wide open to us for this."
The Pricing Question
How to price e-books in relation to physical books has been a persistent question for several years, with the recent effort by publishers to regain some control over pricing through the agency model as the latest attempt to discover a scheme publishers and retailers are both happy with. Under the agency model, publishers set the price at which books will be sold, with Internet retailers taking a predetermined cut. The arrangement allows publishers to preserve the "tiered" system of selling new books at a higher price point. In return, publishers like Macmillan have agreed to stop delaying the release of e-book versions of new trade hardcovers.
Edwards says it's "too early to tell" if the agency model will bring stability to e-book pricing. Charles Stack, founder of Books.com and now CEO of book and magazine app developer Sideways, believes that, with the "inventory concept" removed from distribution models, "a wholesale model becomes an historical vestige. So, absolutely, an agency model makes more sense."
Publishers need to ask themselves what their core business is, he says, especially with the increasing number of direct-to-author publishing services. "Digital books are ultimately democratizing for publishers," he says. "As costs of production and distribution slide to zero over the next few years, the advantage of size will be eliminated, although right now the effect is contrary due to the temporary high cost of adapting new digital publishing techniques."
May says the key near-term question publishers need to consider is what they hope to accomplish with the agency model: "Is it about control or is it about maximizing the price they get for a book?" If the latter, he says, publishers are already able to set wholesale prices, and no research has been done to prove that $9.99 is the upper limit of what consumers will pay for an e-book.
"The question of cannibalization is a tough one," May notes. "Yes, they can delay, and windowing is probably their best opportunity while they still have people looking for print, but if you put out a bestseller in the summer and [a] digital [version] in the fall ... you may have missed that opportunity."
According to Springer's Colon, "Setting book prices is one of the most difficult aspects to selling a book, online or print. The way STM books—and most products, for that matter—are priced is by using comparable products, as well as other factors such as print run, market size and brand perception. An important role, especially in science, is also the high-quality content."
Springer prices e-books based on the physical version, if one exists. Colon notes that with the growth of print-on-demand and print-to-order distribution, the publisher has been able to greatly reduce the price of its physical books, pointing to a possible future where highly efficient digital printing and distribution models will make current pricing concerns (based on consumer expectations of lower book prices in a market dominated by high-overhead physical distribution) irrelevant.
Richard Stephenson, chairman and CEO of tablet software provider Yudu, sees a coming together of e-book and tablet functionality, and therefore markets, as the limitations of e-ink displays, such as refresh time and color, are overcome. A single, common standard for content is important, he says, though he believes there is much work to be done in improving the current ePub standards if reader devices are going to meet the sophisticated graphics needs of both book and magazine publishers. "On a scale of one to 10, ePub is currently at sophistication level three, and what is needed is a level-eight standard," he says.
Stack believes e-book publishing will bifurcate into two distinct categories: a text-based ePub market based within the e-ink devices, with an "occasional embedded image or video," and an "mBook" market, featuring true multimedia titles as emerging via iPad and Android apps.
The discussion is especially important when considering the children's book market, says Stack. "Children's books ... need a tight integration of images, animation, video, audio, text and interaction," he says. "To paraphrase ["If You Give a Mouse a Cookie" author] Laura Numeroff ... if you give a child an iPad, you will be left with no doubt where the children's book market is headed. Their fingers fly across the screen, and their joy and engagement with the story is remarkable."
"Cross-device software that merely gives a reading capability, albeit a poor one, is not sustainable," Stephenson warns. "If a standard screen size is adopted with adequate performance and common open software, a true cross-platform solution is possible. But until this happens, we have to adapt to devices."
While there are still kinks to be worked out—among them format standardization, reform of a licensing system, Stephenson says, which is regionally-based and "not designed for the Internet," and tax and legal issues accompanying new distribution models (such as whether the agency model is anti-competitive, as Connecticut Attorney General Richard Blumenthal recently contended)—sales numbers seem to indicate the e-book market has fully come of age.
"We fully and forever 'tipped' in April 2010 when the Apple iPad crossed swords with Amazon's Kindle," Stack says. "Publishers should be genuinely exhilarated over the next decade with the pace and scope of the impending transformation. But, we are truly optimistic because the core of publishing is truly timeless. Storytelling is the art form at which publishers excel, and that will be more important than ever. The need for selection, editing, author development … marketing, social networking (digital hand selling) becomes even more important in our new 'disrupted' industry." BB