An entrepreneur's view of ebooks and the publishing market

The economics and business model of ebooks has caught the attention of entrepreneur Luke Johnson who runs the private equity firm Risk Capital Partners. He’s also a NED at publisher Phaidon so is well placed to reflect on this fast moving market – though he acknowledges that Phaidon – art, cookery, illustrated books may be less affected by this technological and market change for the time being. He has also recently written several books and where content is time sensitive, as for example with business books, waiting a year from manuscript to bookshop is ‘ludicrous’. Here are some of his reflections, predictions which can be found in full on FT.com Wednesday May 11, 2011.

- In the US, digital sales are at least 20% of large publishers’ revenues and growing fast.

- Authors generally receive 25% royalties on ebooks (15% for print) – given the much larger gross margins of ebooks, publishers need to start sharing more of this revenue with authors – in the meantime publishers such as Penguin are recording huge profits by maintaining ebook price points close to or at the level of print.

- Publishers could be missing a trick – the huge number of English speakers and readers who do not currently buy books but who might if prices were right – in other words a volume opportunity around much lower price points.

- There are of course challenges – piracy is a fear , as is the disappearance of high street bookstores; the increased dominance of Amazon; growing use of devices such as Kindle and iPad and other ebook readers; and decreasing importance of libraries will all contribute to an urgent need to re-think publishing business models and skills (e.g. SEO - Search Engine Optimisation).

- Good publishing brands (perhaps series too) can find success – Johnson cites the Dummies series where a reader is unlikely to know an author’s name but will likely own several copies of the series.

- Overall, he sees huge opportunities and threats as well as consolidation and upstarts coming from nowhere.

- Comment – an interesting perspective and good to see a concise update on some of the key issues from someone with broad business experience, not just of the publishing world. I think I would question the longer term viability – as he sees it – of illustrated books over other genres - it will be very interesting to see if the high quality format of illustrated books will be replaced by digital.. seeing how comfortable particularly younger readers are to read magazine content and view images online, am not sure the illustrated book is as safe as Johnson suggests. The opportunity is to consider how digital can enhance further the beauty, look and feel of illustrated print titles.. take a look at Touch Press titles to see what can be achieved...

E-Book Price Differentials Confusing for Consumers

Here is a link to a Telegraph blog lamenting the pricing structure of ebooks and that there does not appear to be obvious price competition between the formats  and e-readers offered by Kindle and iPad. 

This is something I have blogged on earlier this year and the potential for a captive audience tied to one device being stuck with higher prices than those offered to owners of similar but different devices.  The blog claims that Apple’s iBooks are more expensive – it takes the example of Sebastian Junger’s War. ‘On amazon.co.uk, the hardback is available for £8.49. On iBooks, the ebook costs £9.99...on amazon.com’s Kindle store, it’s available for $11.74, which I make to be about £7.80’.  At least the author takes some solace in the availability of a Kindle app for the iPad allowing access to what he says would be lower priced books but read on the iPad.

Other laments which must be puzzling many potential and actual users of e-readers and ebooks:

·         How could an ebook cost more than the real physical print version of a book?

·         Why should there be such price differentials between Kindle and iBooks?

·         Why can’t it be made easier to share ebooks?

The iPad, the Kindle and the Future of Digital Publishing

Reading books on the iPad

Apple’s iPad is giving ebook downloads a huge boost – 300,000 iPads were sold on the first day of its launch and more than 250,000 books were downloaded.  Apple’s Steve Jobs said "iPad users, on average, downloaded more than three apps and close to one book within hours of unpacking their new iPad."  The iPad will be available in UK at the end of April and there is huge speculation as to its impact on the ebook and e-reader markets.

Pricing models and agreements with publishers are known unknowns right now and not all publishers will have digital content available via Amazon unless they can reach agreement with the online retailer. On the positive side for ebook buyers, some commentators say the expected intense competition between Apple’s iBookstore and Amazon might help keep prices down, though this may not logically follow as not many people are expected to own both an iPad and the Kindle – the strong competition may help improve the performance of e-readers but  may in the short term help the alter the price points of ebooks  - it may be of more commercial benefit to publishers.   

Apple’s store currently offers  c. 90,000 titles (30,000 of which are available free of charge) whereas the Kindle has about 450,000 – this imbalance will change over the coming year.  The key point among all these figures is that the volume of e-reader sales (including the iPad) and ebooks for sale would strongly suggest a good future for digital publishing.

Warnings against Kindlemania...

Christmas Day ‘09 saw ebooks outstripping sales of print books on Amazon.com as eager recipients of the Kindle went shopping online for content (books..) - John Naughton’s Networker column in The Observer warns that the current exuberance about the Kindle (and eReaders generally) may be irrational - he refers to a study of people's use of paper to understand which uses might conceivably be eliminated by electronics, and which might not - he says the Myth of the Paperless Office should be 'required reading for anyone showing the early symptoms of Kindlemania' ! By the way, it's available in print and, according to Amazon.com, Kindle format.

While Amazon has a head start with its ebook reader and ebooks aplently on offer, Apple is expected to be hot on the Kindle’s heels this year with the Tablet eReader device – aka iPad, iSlate, iTab... Naughton expects Amazon and its Kindle to be the next target for what he calls Apple’s ‘distinctive brand of creative destruction’ and predicts Apple’s superior product development and design to come out on top in the long run.

eBook Survey Findings - The Bookseller's Digital Conference

Some interesting responses below to a survey conducted for the The Bookseller’s Digital Conference Futurebook in December ’09.

These provide some more pointers on where the industry thinks pricing is going - it concluded that cheaper ebooks and an Apple ebook reader / ereader will be the key factors driving digital publishing forward – these two points appear to be mainstream now, never mind that the latter point relies on the supposition that Apple will bring out an e-reader.. even if it does.. improvements to iPhones and iPods might mean that we’re using these devices for reading as much as for music, browsing and communications. An Apple eReader would help capture a market of readers with a dedicated content channel while expecting those readers/consumers eventually to end up using one device for multiple purposes.

Another finding worth commenting on is the expectation that high street bookshops in their current guise have the most to lose, but that they have the opportunity to exploit the shift in the market by changing their role to that of a service provider to owners of eReaders and continuing to promote reading, authors, events..and yes, even selling a few printed books too.

Key findings of the survey:

· More than 88% of respondents thought bookshops would lose out from the growth in digital sales, while 55% said they did not support the revised Google Settlement.
· 44% had read a digital book but only 19% had purchased one. 30%said that e-books should be same price as a paperback book, or cheaper (53.6%).
· Parity pricing of print / ebooks was seen as a hindrance to ebooks sales growth.
· Low priced e-books could devalue other editions (and the work that goes into writing, editing and producing a book).
· The dilemma: consumer expects to pay less for a digital product – like a downloaded album.
· The publishing industry would undergo huge changes with the emergence of new digital products. More than 67% said that book trade professionals should re-skill to take advantage of digital media.
· High street bookshops have most to lose from the increased use of digital content but there are potential gains for all by making reading more accessible and through appeal to younger audiences - ie mobile.
· High street bookshops should provide range of services for readers - technology, some printed books (e.g. children's books, maps, art books), advice, author readings, seminars, learning centres, event hosts, etc
· Quality of content will suffer – more does not mean better.
· Importance of interoperable e-book formats and devices.
· Mobile phones: despite the emergence of mobile phone apps, 42% said that most people would read e-books on a dedicated e-reader in the future.
· Apple would emerge as leader in the e-reader market, with Amazon second, with Sony third.
· Google Settlement still a problem - 55% did not support the revised Settlement, and 58% thought this version would be approved anyway by the US court.
· By 2025 16% said that more than half of sales would be from digital content, and just 5% said the electronic market would be less than 10% of total sales.

More than 50% of the respondents were publishers, the rest booksellers, librarians, agents and authors.

Ebook Pricing an Unknown Quantity

A survey of 840 international industry representatives conducted at this year’s Frankfurt Book Fair, in cooperation with buchreport and Publishers Weekly, confirms the lack of consensus in the publishing industry as far as ebook pricing is concerned. While most publishers suggested that ebooks should be cheaper than the same (or equivalent) print version, the range of the discount suggested by publishers varies enormously.

The responses reflect, I believe, the wide range of publishing experience, types of book and level of sophistication in pricing calculations (including gut feel favoured by many publishers). The responses raise a number of questions about ebook pricing:

Do publishers start from a position where they strip out print and distribution costs and thereafter price to achieve the same margins as print – or do they see this as an opportunity to squeeze higher margins?

Do they give a little more discount to reflect the absence of returns – ie to take account of books which otherwise would be returned to the publisher from booksellers in exchange for a refund ?

Do they – following any discount to relect zero print and distribution costs – add back in a percentage to reflect the cost associated with piracy risk?

Are the growing number of conusmers who are used to purchasing music, say, off iTunes, more inclined to favour a flat-rate price – like on Amazon front list titles?

Another consideration – linked to the piracy consideration, but from the consumer /reader side – is whether a discount should be factored in to allow for limited usage of an ebook. If a ebook is made difficult to share then can it be considered by the consumer as a less useful product? ....on the other hand if you believe that the sharing of print books leads to increased sales of books, then the restricted sharing opportunities of ebooks should lead to a more shallow discount to maintain margin.

The point I’m illustrating here is that ebook pricing is not so scientific (yet)! Other known unknowns – I believe – could be in the variable cost of sale of using different channels and formats ; how far publishers will consider use of advertising revenue – e.g. like Spotify for music – in exchange for ‘free’ to end-user content; subscription rates buying consumers access to whole /sections of publishers’ catalogues ; whether mobile access to ebook content should in fact be at a premium, rather than discount, to the print.

Here are the results of the survey:

The price for an e-book should be:

More than the printed book: 4% of respondents
Same as the printed book 15% of respondents
10 per cent cheaper than the printed book 11% of respondents
20 per cent cheaper 17% of respondents
30 per cent cheaper 14% of respondents
More than 30 per cent cheaper 16% of respondents
A standard price as with Amazon ($9.99) 15% of respondents
Other price model 6% of respondents

Rumours of Apple entering the eBook Reader market

There appears to be some excitement at the prospect of Apple entering the ebook reader market proper… 'proper' because although they’re already in the market – a lot of people are using their iphones for this purpose - the iphone could be improved on as an ebook reader. And do we expect Apple to bypass the opportunity to take some of market share from Sony, Kindle and Plastic Logic?

The rumours are discussed in an article on www.thestandard.com

Some say if you've got an iphone you don't need a Sony or a Kindle reader. Actually, this discussion is not so new:
Is the iphone the ultimate ebook reader.. from way back in 2008..

but it's fair to say a bigger screen, easier on the eye and comfortable size for holding like a book would be better than the iphone.

A user's decision to buy a reader in addition to their iphone may also depend on the type of content they're reading.. if it's work, professional, travel and reference related stuff with a lot of links then iphone is more convenient.. if it's novels and e.g. biography then a 'proper' reader would be good and Apple can probably be relied on to create something good..web browsing capability should be part of the offer.