It was a mere dream ten years ago, an emerging market only three years ago. Today, the e-book is on the verge of transforming drastically the publishing industry. The arrival of e-readers has sent the demand through the roof and by 2015, within developed nations, digital media could represent 20% of the book market in value. The radical transformation of the value chain puts publishers under heavy stress with the arrival of new players.
Compared to movies and music, it took some time for books to move into the digital world, though the question was raised as early as in the 1990s with the emergence of online libraries.
The pioneer website of the Library of Congress had set the pace by proceeding to digitizing many ancient works. In 1998, 50 000 books were available online. Others, as British publisher Chaldwyck-Healey and its French counterpart Bibliopolis bet on the DVD, selling expansive products to libraries, not individuals. Though the public existed nobody was by then able to make a real market out of it. And they quickly realized that though digital technology was perfect for search features, on screen reading was far from comfortable.
Still, it was possible to take benefit from the growing interest for digital reading. GoogleBooks was launched in 2004 and by early 2011, had proceeded to digitizing 15 million books. At first, it was founded on a completely free base, in order to generate and broaden the panel of services offered to the search engine users. The e-book was a simple tool for another source of income: online publicity. After the American giant’s troubles with the law, the all-free model was abandoned and the firm reoriented its project: in late 2010, Google eBooks was launched, an online library. Others had not waited that long.
The Kindle revolution
The most dramatic changes occurred in 2006-2007. They were made possible by significant progress in the storage capacity, increased speed of information transmission and by online payment systems which enabled the growth of commercial offers. Ultimately, it was the introduction of e-readers that marked the beginning of a new era by offering a reading comfort almost similar to that of paper.
The first models appeared in the late 1990s but in November 2007, everything changed with the launch of Amazon’s Kindle on the American market. This reader was initially sold for 399 USD and granted access to 88 000 titles. The product was an instant hit and the company quickly supplied aggressive offers. In July 2010, the Kindle 3 was sold 189 USD with a catalogue of 750 000 titles. Amazon is notoriously reluctant to publish sales figures for its e-readers but experts estimated that some 4 to 5 million units would be sold for the year 2010 alone, and 8 million for 2011. The actual numbers seem to be closer to 7 or 8 million in 2010, and well above 10 million in 2011.
According to a report from the International Data Corporation, published in March 2011, the e-reader world market has more than doubled from the third quarter to the fourth quarter of 2010, reaching 6 million units. That’s 12.8 million units for the whole year (compared to 3 million in 2009). In Q4 Amazon remains the market leader with 48% of sales, followed by Barnes & Nobles’ Nook, aimed at children books and illustrated books in color. Almost at the same rank (2nd or 3rd according to quarters), is the Pandigital reader. Then comes the Chinese Hanvon, concentrated on its national market (half of the sales) and the large-format Sony readers. To this list, we must add tablets such as the iPad and other smartphones – we’ll get back to them.
The dynamism of the e-book market is closely linked to the market of e-readers and more specifically today, it relies on to the presence of Kindle. According to an Idate study from December 2010 the worldwide market of book sales represented 594 million euro, mostly in the developed countries (83%). The United States and Japan come out on the top, whereas a country such as France, where Kindle will arrive only at the end of 2011, is still lagging behind.
The experience of older markets, such as the US and Japan, already offers some teachings. In particular, despite the fact that in the mid-2000, there still was an all-free basis, the growth of paying offers never encountered any resistance. Quite the opposite: it met great popularity.
Experts agree on the forecasts that by 2015, 15% to 20% of the industrialized countries population could use a tablet (2/3 of the market) or a reader (1/3). Digital products could represent 10 to 25% of the book market value, and much more in volume, since e-books are cheaper.
All different players in the publishing industry, from authors to booksellers, including editors and distributors, have followed this story with increasing concern. Over the last 30 years, they have had to adapt, sometimes painfully, to the arrival of new technologies. This time, the transformation is not only about their processes but indeed, about the chain of value. With an additional twist: the uncertainty about the emerging economic models.
Pure players and hybrid models
In the field of publishing stricto sensu, the arrival of e-books raises three major questions. The first is the emergence of pure players who compete with traditional publishers. One of the most dynamic players today is the American ByLiner. These publishing houses 2.0 would find it hard to enter a market reluctant to open its doors to new players. By choosing to publish only online, they bypass the big distributors and free themselves at the same time of the constraints of paper production.
The absence of stock, the elimination of printing costs, the redefining of the distribution circuit and specifically, the elimination (or substantial recovery) of the share due to the bookseller or to the distributer/broadcaster (52% to 60% of the price of a book sold in a bookshop) enable pure players to develop innovating business models. They rely much less on the time the book is kept by the retailer – a time that has dropped to some 2 ½ months in the last years: this reduction doesn’t leave many chances to books that don’t benefit from massive promotional resources.
More specifically, the digital transition could enable the long-tail model pointed out at the beginning of the millennium by Chris Anderson. But we could just as well imagine short and reactive cycles, during election campaigns for instance – when a hundred-page essay could be written, published and brought to the market in less than two weeks.
The second issue, for a traditional publisher who chooses to shift to the digital, is the choice between paper and electronic. For niche markets, the digital can prevail. Arbitration should lead to move away from paper supports (or at least keep very limited number of copies), or to propose printing on request.
The third matter concerns the link between the paper market and the digital market. In this emergent phase, which will most certainly last several years, this link poses an almost unsolvable problem of profitability calculations. Not that the additional costs generated by the production of an e-book should be considerable – once the publisher masters the news processes (ePUB format, setup of an online payment system). Rather, the absence of any reliable foresight concerning incomes makes it difficult to build a provisional budget account.
As consequence, the question of price arises, further compounded by a clear difference of perception between publishers and readers. The quarterly digital barometer ECR (E-Content Reference) of GFK Institute regularly shows that Europeans, as Americans, would be willing to pay up to 6 and 7 euro (9 to 10 USD) for the digital version of a standard novel sold 20 euro in bookstores. However, most publishers speak of 20% to 30% price reductions. In the French case, it is true that the VAT difference between digital (19.6%) and paper (5.5%) limits flexibility. However, publishers justify their caution by their keenness not to destabilize the bookselling sector, upon which they depend and which remains fragile.
Indeed, small independent libraries in France with net margins of 2% to 3% during the normal year, are potentially threatened by the restructuring of the book market. As for the retailers, the American example illustrates the ongoing revolution: the giant Barnes & Nobles, no doubt diminished these last years, seems to have succeeded its digital transformation: with the success of Nook, they can face the future with more optimism than their competitor Borders, who is on the brink of bankruptcy.
The publisher/distributor contest
In France and in lesser developed digital markets, publishers have chosen to maintain a unique price which enables them to keep pricing on a close grip. Eventually, they have been followed by the legislators. However, economists Mathieu Perona and Jérôme Pouyet have recently proposed more convincing evolutions of the juridical model.
The possibility of selling books directly online, with no intermediary, could have seduced the publishers. But this option may not prevail in the future, since great distributors have been successfully struggling against it. On the best-seller market, the American publishing houses are confronted to very aggressive commercial offers from Amazon who offers best-sellers at a loss on Kindle store for 9.99 USD, when they were bought 12-13 USD from publishers. This policy of selling at a loss aims to win market shares and thus increase Amazon’s bargaining power respect to its partners. Besides, it also contributes to promoting an inferior price than wished by the publishers. This practice grants Amazons and other companies leadership in setting prices.
Consequently, some publishing houses have decided to delay six months their digital format copies, but the power and weight of Amazon is such, that the competition is not turning to their advantage.
As featured in a most interesting article from the New-Yorker published in April 2010, the launch of Apple’s iPad had at first been hailed by publishers as a mean to escape from Amazon’s hegemony. Indeed, Amazon had recently successfully resisted to MacMillan revolt and imposed peace to the rebels under its own conditions. Would Apple be the white knight?
One year later, most of the publishers were disenchanted, as they discovered that Apple is just as harsh as Amazon when it comes to dealing with publishers. The Cupertino giant gave them until the 20th of June 2011 to submit to the new Appstore rules concerning sales within applications; after that, it became impossible to sell through an application available in AppStore without buying through the Apple in-app… which takes 30% of each transaction.
Finally, what was true in the world of paper is even truer in the digital world: the distributors have seized power. Furthermore, they have imposed new models, far remote from the traditional per unit selling model. It is speculated that Amazon is working on a new offer, based on monthly subscription.
What’s next? We are now witnessing the emergence of different ecosystems, the biggest of which are dominated by content distributors, organized around their particular tablet or e-reader. Others, much more modest ecosystems rely on groups of pure players, who once dreamed of short-circuiting traditional distributors and are now fighting for their independence.
In this universe in constant reconfiguration, it is stunning to see that instead of a unified, more liquid and more transparent market, one witnessed both market fragmentation and an increasing asymmetry of information. Pierre-Jean Benghozi, chief researcher in the economy and management department of Ecole Polytechnique notes the following paradox: “In the beginning of the Internet, economists imagined we would advance towards an ideal unique market, with perfect information. However, what we see is the exact opposite: a fragmented, blurred market, where most part of the innovation energies have been spent looking for new business models rather than improving the offer. And last but not least, there is plenty of smoke screens: between distributors and publishers, publishers and authors, between the competitors themselves… Authors, for instance, are definitely not on the good side the value chain: most of them are completely unaware of what they are granting and don’t have much information, or control, on the income they are contributing to generate.”
The rise of the digital book is a genuine revolution for the sector. Not only is it driven by new, tense power struggles that redefine completely the value chain. The old models such as copyright and droits d’auteurs are shattered to pieces.
The books themselves no longer belong to that coherent universe they were part of, since Gutenberg. Catherine Lucet, general director of the Education & Reference department of Editis, speaks of a movement of “increasing differentiation” of the different worlds of books. Since the emergence of the digital era, this movement sped up, until now: “Dictionaries change into digital language processors, the youth publishing comes closer to the world of gaming and multimedia… The e-book, as simple digital copy of the paper book, is in fact only one of the possible products which we call books. Others belong to different competitive spheres, such as entertainment, video, online games”.
Going further, we could say that books, as they dematerialize, tend to become services rather than goods. Once an object, a book is about to become a flow of information, which increasingly escapes from the grasp of the producers, to the hands and profit of those who control its circulation. As for the readers, they on the good side of the value chain, that is, downstream. E-books open the doors to new possibilities of interactivity, personalization, annotation and even editing… which grants them part of the former powers of authors and editors. Not only is market evolving. The intrinsic idea of a book is being revolutionized.