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...

Google is open for bookselling

After various announcements and delays, Google's bookstore is now open for business in the US.  Rory Cellan-Jones, BBC technology correspondent, is impressed.  Read his blog post on this here

Key comments:

• 'Booksellers and publishers are pretty desperate to see the arrival of a service which could provide real competition for the Kindle store, and prevent Amazon from building a virtual monopoly in the electronic bookselling market here.'
• 'You can read Google's books online,  in the cloud, or you can download them to read across a number of devices - on a computer, on an Apple iPhone or iPad, on any number of phones or tablet computers running Google's Android operating system. One place you can't read them, of course, is a Kindle. '
• 'Publishers on both sides of the Atlantic have had plenty of run-ins with Amazon over pricing, so they are enthusiastic about another route to the electronic market.'
• Booksellers are enthusiastic because Google is offering independent booksellers a chance to sell e-books through its new service.  Currently, if you're an independent bookseller, it's hard to compete with Waterstones or Amazon on e-books.

Digital sales outstrip hardbacks for first time in US

Amazon US says it has sold 143 digital books for every 100 hardbacks in the last three months.  

Read this article from the Guardian about the growth in ebook sales via the bookselling giant Amazon

This announcement might come as just the sort of bad news that lovers of books (physical objects made of paper with print and a cover) were dreading. Amazon said sales of digital books have outstripped US sales of hardbacks on its website for the first time.

The rate of change is also getting faster: Amazon said that in the most recent four weeks, the rate reached 180 ebooks for every 100 hardbacks sold. Jeff Bezos, founder of Amazon, said sales of the Kindle and ebooks had reached a "tipping point", with five authors including Larsson, author of Girl with a Dragon Tattoo, and Stephenie Meyer, who penned the Twilight series, each selling more than 500,000 digital books. 

Key points and notes of caution:

·         While the volume of sales is impressive and the rate of adoption of ebooks perhaps faster than expected, the value of the books sold in digital format is not equivalent yet to that of their physical format version. Some titles in the Kindle top 10 were selling for as little as 75p.

·         Are ebook sales damaging those of physical sales? Not yet it seems – heardback sales are up 22% this year in the US.  Ebooks now account for 6% of sales in the US consumer book market. 

·         In the UK, the percentage is smaller and the consumer sales (£5m) are still dwarfed by sales of digital content in the academic-professional sector. Total digital sales were c.£150m. There are fewer titles available in the UK.

·         Many people are still waiting for the price of e-readers to come down before making the investment and waiting to see what the impact of the iPad will be on Kindle and book pricing.

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.

Authors asserting digital rights cause publishers to panic

The growth in sales of ebooks and the devices you need to read them, ebook readers, has taken many people by surprise and it’s affecting all areas of the market: publishers grappling with new technology, business models, marketing strategies, versions and supply chains; tech companies looking for a lead in the eReader space; booksellers looking ways of staying in business, dreaming up new services and products to compete with Amazon and other large etailers; and last but not least, authors. This last group now find themselves negotiating with their publishers over how much they should be paid for ebook sales, and indeed if the publishers of authors' print editions even have any rights to the sales of ebook versions.

At the end of last year Arthur Klebanoff, CEO and founder of ebook business RosettaBooks secured a deal with Amazon whereby the online bookseller acquired the exclusive digital rights to Stephen Covey’s bestselling titles The 7 Habits of Highly Effective People, and Principle-Centered Leadership. This agreement means that Simon & Schuster, the original print publisher of the books, has been left out of the equation, leading to speculation that other publishers may also lose revenue from critical backlist titles in digital formats. The move has lead some publishers to contact literary agents to assert their rights over digital versions of backlist titles. Agents and authors have fired back, referencing a court ruling 2001 finding in favour of the author as owner of the rights (at least of those books published pre-digital).

The Amazon deal gives Covey 50% royalties from ebook download sales – til now a publisher’s standard digital rights deal gave authors 25% or less, so this is a big departure from the norm and is causing some publishers to panic. This development raises questions about authors’ loyalty to publishers, and whether authors and agents believe they’ll be better served by dedicated and expert ebooks channels. This issue seems to be causing more trouble in the US than the UK market where it's said publishers are happy to renegotiate digital rights and authors are prepared to stick with their existing publishers.

The question of branding is also relevant to this argument – how much does a well established author rely on the publisher’s brand to market and sell a book? Answer: probably not very much. But if the publisher has nurtured and developed that author over a period of time, contributing to his or her success in many ways, then should the publisher not share in the continued success of that author’s work – even if in different format? And will lesser known authors stand a better chance of being marketed and achieving sales via a traditional well established publishing brand, whether in print or ebook formats? Quite possibly..

These are some of the thorny questions being asked in an industry going through change...

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