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CEO's mussings hint at new business model: the e-book library

While trawling the blogosphere for e-book insights, I came across an interesting post by Eric Hellman questioning the future market for e-book rentals. I’ll admit it’s something I haven’t given much thought, and it could hold substantial implications for e-books.

According to Hellman, John Sargent, CEO of Macmillan publishing, spoke briefly at a Publishing Point meeting in New York City. During audience questions, Hellman asked Sargent about the future relationship between libraries and e-book distribution.  Sargent’s comments suggest he’s given some though to the publisher-library relationship in an e-book-dominated future. The following is Sargent’s response, excerpted from Hellman’s blog.

“In the past, getting a book from libraries has had a tremendous amount of friction. You have to go to the library, maybe the book has been checked out and you have to come back another time. If it’s a popular book, maybe it gets lent ten times, there’s a lot of wear and tear, and the library will then put in a reorder. With e-books, you sit on your couch in your living room and go to the library website, see if the library has it, maybe you check libraries in three other states. You get the book, read it, return it and get another, all without paying a thing. ‘It’s like Netflix, but you don’t pay for it. How is that a good model for us?’

‘If there’s a model where the publisher gets a piece of the action every time the book is borrowed, that’s an interesting model.'”

I agree.

These could simply be off-hand remarks from Sargent, but in light of Macmillan’s recent agency-model victory over Amazon, we can be sure the company isn’t afraid of trying new things.

Is a rental model possible for e-books? It seems likely. Apple has already had success with movie rentals via its iTunes store, not to mention the video-rental behemoth that is Netflix.

Could a rental market pay off for publishers? That’s harder to get a beat on. It seems unlikely that e-book publishers and distributors will allow free borrowing on the same level as contemporary libraries. After all, the physical restrictions and limitations mentioned above have always provided a significant incentive for consumers to buy their own copy of a book. However, none of these restrictions apply to an e-book, which can be copied and distributed almost effortlessly — at least in comparison to physical print. Thus, no inherent incentive exists to pay for a copy — ignoring the opportunity for added content, ease of access, etc.  It seems reasonable to assume publishers will at least try to get a commission on e-book rentals. I would not be surprised if the big publishers start making quick inroads with distributors like Amazon or Apple on a rental model.

Kindle on your iPad?

Last week, Amazon rolled out two more Kindle applications to bring their e-book distribution to more platforms — an app for MacOS and a plan to bring it to the iPad.

Kindle on the iPad

A Kindle application for the iPad.

At first glance, it seems counter intuitive for Apple to allow its biggest competitor in the e-reader market to develop distribution applications on its own platform. The company has been in negotiations with media conglomerates to supply content for the iPad, but Amazon’s application would steal users away from the company’s new iBooks store.  Apple’s locked-in philosophy has become infamous, best exemplified by its iTunes-iPod strategy. By controlling both the content distribution and platform, Apple dominated the competition. Why let Amazon break the chain?

It’s time for some speculation. Even though it goes against traditional Apple ethos, allowing Amazon’s app on the iPad could still hold benefits. For years, Apple users have railed against the company for locking them into proprietary platforms and services. Relaxing that legacy of control could hold more appeal in the e-reader market, where market segments are still developing.

The move may also appeal to users already using Kindle software. Amazon already has a substantial user base. Wired reported that Kindle books outsold real books on Amazon last Christmas. Offering the service on the iPad platform could give Apple an opportunity to reach users that have already bought into Kindle, enticing them back to the fold with glossy screens and color display — perhaps before ultimately cutting the umbilical.

Of course, all this is just speculation. Amazon’s new Apple applications remain a mystery. And the development could highlight a greater controversy in the making: Who distributes e-books and who makes e-readers? Currently, it looks like that battle will converge on the iPad, with retailers all fighting for the vaunted platform.

Amazon's new model: speak loudly and carry a big stick

In the past few years, Amazon has become one of, if not the, premier book retailer. Now, as the online retailer attempts to cultivate its e-book market, that strength is paying off.

One account, published in the publishing-industry news letter Publishers Lunch, says the retailer is pressuring all but the biggest publishers (i.e. Random House, HarperCollins, Hachette Book Group, Simon & Schuster, Penguin, and Macmillan) not to pursue the new agency model introduced by Apple earlier this year. Independent publishers looking into the agency model risk being dropped from Amazon all together. In the newsletter, Publishers Marketplace‘s Michael Cader says:

“At least one independent publisher of scale was told categorically by Amazon in a recent phone call initiated by the retailer that Amazon would not negotiate agency selling terms with any other publishers outside of the five initial Apple partners. This publisher was told that if they switched to an agency model for e-books, Amazon would stop selling their entire list, in print and digital form. In conversation, Amazon is said to have reiterated that as matter of policy they are declining to negotiate an agency model with any publisher outside of the five who have already announced agreements with Apple’s iBookstore. Another sizable independent publisher we spoke to has not discussed an agency model with Amazon yet, but is resolved to work with Apple regardless. ‘We’re committed to going forward with Apple,’ a senior executive told us, underscoring, ‘we don’t see how we could allow one retailer, no matter what threats they make, to block our authors’ works from being available at another retailer.'”

It’s hard to say what Amazon’s stance on the agency model will mean in the long run. The agency model appeals to publishers by giving them the power to price books. The retailer then receives a portion of that price. Apple revealed its plan to implement the agency model in conjunction with iPad content earlier this year.

This difference in the two companies approach could make all the difference. After all, what good is an e-reader without content? Some (see Mashable’s Chistina Warren) have even described the divide as an “e-book war.” And it probably is; to the victor go the market.

The crucial question becomes how Amazon will be affected. Will loosing (if they loose) indie titles make a difference? It’s just another dimension to the industry’s zeitgeist question: what will people pay for content?

Penguin's plan to 'reinvent' books on the iPad

During a presentation today in London, Penguin CEO John Makinson showed a video of how the publisher plans to utilize the iPad in the coming age of e-books. The presentation looks great, but it left many asking the same question: Can we even still call it a book?

Are the interactive reading experiences Penguin has in mind even books?  Makinson says the publisher will develop games, online communities, and multimedia content that corresponds to these new ebooks. According to The Huffington Post, Makinson said, “The definition of the book itself is up for grabs.” That’s a hard one to swallow, considering books have arguably been published for more than 600 years.

The shift in conceptualizing books — from text on paper to fully integrated applications — is a startling one.

Makison’s remarks made obvious his vision for increased e-book sales in the future. According to paidContent: UK (the origin of the videos as well), Makison said he expects e-book sales to hit 10 percent next year, rising from just four percent in the U.S. this year. He also hinted that his focus on the iPad could be just as much a function of Apple’s new “agency model” and the chance for a paid distribution model as the increased functionality of the device over other e-readers.

What does this mean for Penguin? The announcement has already received criticism from some (see: Slate’s Big Money) as a “we’re still relevant” cry from struggling publishers.

What does the mean for the future of books as we know them? That could much more complicated. Still, the move to revolutionize one of our oldest traditions — as old as the written word itself — will surely attract debate.

Doing the Math: NYTimes details price of publishing e-books

New York Times writer Motoko Rich did something my j-school professors nostalgically refer to as “doing the math.” Rich’s article, “Math of Publishing Meets the E-book,” lays bare the costs publishers face in the evolving world of e-book sales. The main question Rich tackles is this: do publishers save enough through eliminating printing costs to justify reducing the price of e-books? While on its face, the answer appears to be yes, Rich still reports that publishers are weary of shifting costs during the print-to-e-book transition.

Here’s the much-simplified price layout:

For an average, $26 hardcover, a retailer typically pays the publisher $13. Of this, the publisher pays:

  • $3.25 to print, store and ship the book
  • $0.80 for cover design, copy-editing and typesetting.
  • $1 for marketing (may be higher or lower depending on title)
  • $3.9o in royalties to the author (about 15%)

Out of the remaining $4.05, the publisher must pay overhead for editors, designers, office space and utilities before taking a profit. Any profit may then be used to recoup unrealized author advances.

For the e-book, Apple has agreed under the proposed “agency model” to act as a agent/retailer, taking 30% commission of the price determined by the publisher. So, for a $12.99 e-book, the publisher starts with $9.09. From this they pay:

  • $0.50 to convert text into a digital file, typeset and copy edit
  • $0.78 in marketing
  • $2.27 to $3.25 in royalties to the author (debate rages on over whether the 25% royalty should be calculated using the gross revenue or the consumer price)

This leaves $4.56 to $5.54 for the publisher before any overhead.

Doesn’t that make e-books more profitable? Maybe. This simplified snapshot leaves out revenue recouped in sales of paperbacks and shifting sales margins. Remember, e-books only make up a small percentage of publisher revenue — 3 to 5 percent — and if that begins to increase, publishers could be trapped with the printing costs of their old model and the revenue of the new, e-book model.

Where have I heard that one before? Oh yes, in newspaper industry printing costs. In the near future, publishers may face the same dilemma many newspapers are grappling with now: at what point do you stop the presses and go entirely digital?

Dedicated e-readers vs. omni-functional smart phones

February 25, 2010 Leave a comment

E-reader makers and publishers (with the exception of Apple) have focused primarily on larger, dedicated devices for displaying e-books. The result has created products like the Kindle, a larger, yet still portable device tailored specifically for the reading of e-books.However, in an age crammed full of mobile devices, can e-readers afford their myopic approach to functionality?

Last week, the Mobile World Congress conference in Barcelona sparked nervous chatter from in the publo-blogosphere about e-reader competition from mobile phones. Does the future distribution of e-books rest in smaller, more functional mobile phones? At least some people think so. Hannah Johnson of Publishing Perspectives says the infrastructure for a mobile reading market already exists, built on the back of 50 billion connected devices.

“In the last couple years, the growing infrastructure for delivering mobile content (app stores, secure financial services, and mobile Web sites) combined with better device technology (clear displays, touch screens, and Internet connectivity) has created a robust mobile marketplace where content creators have an ever-expanding platform for reaching consumers.”

If so many people already have access to a network capable of distributing content, publishers and application developers would be fools not to jump on board.

The mobile market also points to the importance of leveraging existing infrastructure as e-readers innovate. One of the largest hurdles e-reader viability faces is getting people to purchase a dedicated reading device — a tall order when so many people already carry around multiple electronic devices. If increasing use of smart phones can be seen as a trend — and I think few people would argue that it can’t — it makes much more sense for publishers and retailers to fold their services into those devices.

We all hate carrying multiple, bulky devices. The argument for the pocket-sized omni-tool requires little defense, except for current e-reader retailers, who seem to think consumers will prefer a dedicated device. They could still be right, but if they don’t move on the mobile market soon, someone else will (see: Apple).

Macmillan's 'agency model' victory over Amazon = publisher pricing power?

February 21, 2010 1 comment

The past couple weeks have been ripe with speculation over the new pricing model for e-books originally proposed by Apple: the “agency model.” The model would essentially give publishers power over the pricing of e-books instead of retailers like Amazon — a dream for publishers.

Well, the agency model could be more than a dream soon. Last month, publisher Macmillan demanded power over pricing in their dealings with Amazon, leading the key-market retailer to pull nearly all Macmillan titles from their store. But a few days later, Amazon reneged on their position, announcing that they would yield pricing power to the publisher — setting a ground-breaking precedent in the e-book retailer-publisher relationship. A week later, Hachette USA followed suit.

Summed up by IdeaLogical’s  Mike Shatzkin, the agency model lets publishers sell directly to consumers with retailers acting as more of a cut-taking conduit.

“The ‘agency’ model is based on the idea that the publisher is selling to the consumer and, therefore, setting the price, and any ‘agent,’ which would usually be a retailer but wouldn’t have to be, that creates that sale would get a ‘commission’ from the publisher for doing so.”

This model would set a new standard for book pricing, giving more power to e-book publishers than in the current physical-book supply chain. Success would also provide a powerful incentive for publishers to promote the e-book market, particularly larger publishers that own the most titles (i.e. Random House, HarperCollins, Hachette Book Group, Simon & Schuster, Penguin, and Macmillan).

It remains unclear, however, how all this would work in reality. Would publishers keep and serve e-book files? What will the not-Amazon retailers do? How will smaller publishers with less leverage fit into the market? And most importantly for consumers, what will determine the price of an e-book?

For now, speculation reigns. Pricing power is a powerful weapon, but the model’s success ultimately rests with consumers, who must decide what an e-book is worth and whether publishers’ expectation of value matches it.