Blackberry

Big publishers have to be very happy about how things have been developing in the ebook world over the last six months or so. In that time, we have gone from a situation in which Kindle appeared to so totally dominate digital reading that Kindle-only publishing seemed an imminent threat to disintermediate publishers to one where it is not only Amazon’s hegemony that is threatened. Even their position as the ebook market leader isn’t safe.

Although one of the big factors in this change, the iPad, was unforseen at the time, we wrote around 16 months ago about the possibility that Amazon’s position leading the pack on ebooks would be hard to defend in one of the first posts on this blog.

As the ebook world has evolved (so far), we have the following “facts on the ground.” You will see from this recitation why so many people outside commercial publishing see eliminating DRM as a key to ebook marketplace efficiency. Our guess is that, regardless of the merits of the idea, going DRM-free is a non-starter for the big houses because it will be a non-starter with most big authors and most big agents.

1. If you buy an ebook from the Kindle store, you can read it on many devices within the Kindle reader software. That software is currently available for the iPhone, iPad, iPod Touch, PC, Mac, and Blackberry with Android reportedly on the verge. If the Kindle book has no DRM, though, you can read it on any reader that supports the Mobi format or you can use a program like Calibre to convert your Kindle book to epub, which can be read on just about all other devices.

2. But if you buy an ebook from Kobo or BN (through their “reader” software, not for the Nook), you can do the very same thing (and Kobo’s Android app is at least a bit ahead of Kindle’s; it was announced over the last weekend).

3. If you buy a book from iBooks, the iPad bookstore, you can only read it on an iPad and, soon, on an iPhone. That is, unless it were DRM-free which is, some are told, an option for publishers.

4. If you want to read on a Kindle device, you can only read books you buy from the Kindle store (unless you select from DRM-free mobi files, which leaves out the biggest books).

5. If you buy a Nook, you can theoretically read epub content obtained elsewhere by putting it through its DRM paces at Adobe Digital Editions, but it ain’t easy. My expert on these subjects, Kirk Biglione, points out that this is one of the big advantages of loading devices through wireless means (which sidestep having to deal with ADE) rather than computer synching. Because ADE is a challenge for most people, the interoperability across devices promised for epub files is, for protected files, more theoretical than real.

6. The Sony Reader is like the Nook: theoretically able to handle anything epub but made much more difficult by Adobe DRM. Sony is also suffering at the moment from having no apparent mobile strategy.

7. Bottom line: DRM creates hassles if you try to read on anything except the platform on which you bought. But Kindle, Kobo, and BN Reader (not Nook), provide a pretty seamless experience across devices.

8. The promise of the presumably-imminent Google Editions is that you will be able to read them on all systems that browse the web (except that Kindle’s browsing is not going to provide a terribly satisfying experience and Sony, which doesn’t provide a web browser, is probably left out of the Google Editions party).

So the e-ink devices generate the real lock-in, or, more often, lock-out, problem. It is your Kindle device that locks you into the Kindle store; your Kindle file can be ported to a non-Kindle device using the Kindle reader software.

This is a mixed, but probably mostly negative, blessing for future sales of Kindle devices. On the one hand, consumers who figure this out will be increasingly unwilling to chain themselves to a reader that makes them buy files they can’t use elsewhere. On the other hand, the spouse of a friend cracked her Kindle a few days ago and because of the hundreds of books she’d bought over the years from the Kindle store, couldn’t really consider purchasing any other reader as a replacement. So she bought a new Kindle.

So while the Kindle store almost certainly still has the most titles of any ebook retailer, Amazon is definitely facing some uphill battles selling devices to new customers. Even before the iPad hit in April, DigiTimes reported that Nook devices outsold Kindles in March. (Could this be the power of 700 retail locations talking after the cream of the online customer base had already been harvested by Amazon over the past 2+ years?) Then they reported yesterday that total e-ink monochrome ebook reader sales were 700,000+ for April and May, of which 37% were Nook and 16% were Kindle. In the same two months, of course, Apple reports selling 2 million iPads. So, in two months, iPads outsold Kindle devices about 20 to 1.

That means that even if 2 million new iPad owners, on average, buy 1/3 as many ebooks as 700,000 new single-purpose ebook device purchasers, the larger, full-color, web-ready screens sold in the last two months would be responsible for as much ebook consumption as the book-dedicated devices.

Meanwhile, the device prices are coming down sharply. Kobo announced a $159 device on sale at Borders a month ago. Since then Borders announced their own branded device for $119. Then Barnes & Noble cut the price of the Nook to $149 for the wifi model and $199 equipped with 3G. Many had been anticipating a price cut before year-end by Amazon from the $259 level they have maintained; but the B&N move forced their hand and Kindle just announced they were coming down to $189. Because aside from all the competition that Kindle faces on the device side, the Agency model has made it harder for them to keep customers loyal with a pricing advantage on the biggest books.

What this adds up to is that a much more diversified marketplace is developing for ebooks than publishers would have dared hope for a year ago. This, in turn, makes the customized ebook offering that Ingram is enabling (as they announced last week in a deal with F+W) even more powerful, because more and more devices — and therefore consumers — will be able to readily take advantage of ebook offers that aren’t served up from the Kindle store. Since one of the great unmet challenges of book sales on the web is merchandising — making it quick and easy for consumers to find what they want — curated offerings on specialized sites might really work better for a lot of people. And then Amazon will feel some of the pain that big publishers do, being horizontal in an increasingly vertical world.

On the other hand, big publishers have apparently lived past the danger of a massive problem: the possibility that authors could find most of their audience by setting up with Kindle alone. There is still more complexity to be added. Google will arrive shortly with a big splash. Newcomers Copia (a client of Idea Logical) and Blio are still planning market entries in 2010, and they each have some unique propositions the current players do not. The more different places an ebook might successfully be sold; the more variety in the way ebooks get merchandised; and the more benefit that can accrue from effective distribution of files and metadata; the more a publisher with some savvy will look like a sensible option to an author who might be thinking of a do-it-yourself effort.

There was a conference called Untethered last week. I didn’t go because it was an “all publishing” conference about technology, and I am skeptical about any horizontal approach. But there was a panel of publishing CEOs asked to estimate how much of book sales would be ebooks five years from now. The high guesses were 40-50%. I think they’re low. And if the question is what percentage of the books that are narrative writing are ebooks by five years from now, I think they are way low. (Apologies to the first batch of people to see this post and those who got it by subscription because I hadn’t quite finished this thought when I put it up. I saw it later and fixed it.)

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I love and value The New York Times. But I have to admit that every time they write about something I know a lot about, it makes me wonder whether they’re complete and accurate when they write about the things I don’t know a lot about.

There’s nothing wildly inaccurate in Motoko Rich’s “Week in Review” article of May 17 headlined “Steal This Book (for $9.99)”, but there sure is a lot left out. And more that is misinterpreted.

We start out with an eye-catching but pretty phony premise: that author David Baldacci took it on the chin from his reading public because Amazon briefly priced his new $27.99 list hardcover for $15 instead of $9.99. In sadly typical fashion, a few posts from protesting readers become an undocumented “hundreds more” who have joined an “informal boycott” of “digital books priced at more than $9.99.”

Most customers for most products understand that the retailer sets the price they pay. For those who think they know more about the publishing business and think beyond the retailer, they would know the publisher sets the suggested retail price (which is one reason it is to the bookseller’s advantage that publishers have traditionally printed that price on the book itself so the publisher can take some of the blame.) I won’t say there is nobody in the world that wouldn’t blame Baldacci (or any author) for his book’s price, but that would be an ignorant and relatively rare reaction that shouldn’t be suggested as a widespread fact in any story’s lead, particularly not in The Times.

Rich does a superficial analysis of the economics. She is accurate in saying that Amazon is taking a per-unit loss on many titles in the Kindle store because doing so a)  helps them sell more devices and b) helps them “lock in” their Kindle audience. And she accurately reports the publisher’s fear — and the common-sense likelihood — that Amazon will, at some point, insist that publishers bring the prices they charge Amazon into line with what Amazon is charging the consumer. The choice for publishers then would be painful: either give up a growing army of Kindle owners as customers for a book or lower prices to a point that would make ebook margins a fraction of the print book margins they are replacing.

From that point on, we need to add facts and nuance that the article didn’t cover, and we have to discourage one pretty peculiar suggestion that is floated as though serious from a professor of economics.

What the article misses is that, because of the iPhone and App Store — and similar environments that will soon surround the Google Android phones and Blackberries, as well as just about all smart phones from just about all carriers — Amazon has already had to adjust its strategy in ways that will wean people off of their devices! A month or two ago, Amazon distributed a Kindle reader for the iPhone. That meant that Kindle owners could immediately access their entire Kindle library through their iPhone as well as their Kindle. There are two serious consequences of that action:

1. It exposes people who had formed the Kindle habit to reading on a different device, the iPhone. And, if they get an iPhone reading habit, then Kindle is no longer the only game in town. There are at least three other formats (Stanza, Scrollmotion, and eReader) that work just fine on the iPhone and we can be sure there will be more, just as we can be sure that what works on the iPhone will soon have to work on most, if not all, other smart phones.

2. It “unlocks” the content from being chained to a single device. That means that one “copy” of an electronic book can now be read by two people simultaneously: one on a Kindle and one on an iPhone. 

How does this work in practice? Here’s one man’s true story. I bought a Kindle in December 2007. I read on it almost exclusively until Kindle released their iPhone app. Then I started reading on the iPhone because I was reading the same book on two devices. That was in February. Last week I gave my Kindle to my wife and I am reading on the iPhone exclusively. But I’m not reading Kindle exclusively anymore. I have four books open in the four different readers I referred to above. And my wife is working her way through many of the 40 or 50 books I had purchased on the Kindle for myself over the past year. And when she buys a book (I just introduced her, ironically, to David Baldacci), I can read it too.

So this article misses the importance of the iPhone, and its strategic importance particularly in relation to Amazon and Kindle.

The second big thing the article misses is the sheer complexity of the ebook supply chain. There is this proliferation of formats and points of distribution. There is the fact, that Rich mentioned, that Barnes & Noble has bought Fictionwise (a big ebook retailer) and therefore now owns eReader, Fictionwise’s ebook platform. B&N has been the Sleeping Giant of the ebook space: the biggest brick-and-mortar book retailer, probably still the biggest player in the consumer book business, but not a participant in ebooks. The purchases they made were mentioned, but the strategic implications were not. B&N is rumored to be launching their own reader this Fall. Whether or not they do that, they are certainly going to be doing something to compete in the ebook space. That’s potentially a signficant counterweight to Amazon, but it isn’t mentioned in this article.

And if the looming problem for publishers with ebooks is their margins (and I think we can agree on that), then why not mention the ultimate solutions: publishers selling digital downloads directly to consumers and, at the same time, reducing the discounts off retail (the margins) offered to intermediaries? Rich does a nice job of enumerating how the publishers’ cost structure changes with ebooks; she neglects to mention that the costs for retailers evaporate as well when they don’t have to invest in inventory or handle physical goods (and handle many physical goods twice — purchase and return — without any revenue to show for it!)

The proliferation of ereading delivery options is not only not spelled out in this piece, its absence is magnified in importance by the article’s close. Some anecdotal evidence is introduced to suggest that lower prices might increase book purchases. Brian Murray, CEO of HarperCollins, is quoted as saying “if the overall market is bigger, then we should be O.K.”

Then Rich concludes with the punch line that sales might rise not just because of lower prices but also because of the ease of purchase. So we conclude with a former book editor who, after buying the first of Stephenie Meyer’s “Twilight” series and finishing it at 1 am, bought “the next installment on her Kindle from her bedroom”. Well, here’s my conclusion. She could have done the same thing from many different online locations and in many different formats using her phone. I think the Times should tell you that.

Oh, yes, the professor. Professor Fiona Scott Morton of Yale did entertain a market coming from Apple, based on the new Kindle-sized tablet they are reputed to be about to introduce. Morton says: “then the book publisher of Obama’s next book can say, ‘O.K., which of you is going to offer us the best deal?’”

Uh, probably not. That’s not how publishing works. Publishers don’t put their books up for bid between Barnes & Noble and Borders, and they won’t between Amazon and Apple, either. But what is true is that B&N and Borders are aware of their “market share” on major books, and neither wants to be without a book the other is successfully selling. That, ultimately, is the publishers’ protection against pressure from Amazon. Kindle got where it is largely by offering the best selection of any ereading platform. It is in the retailer’s DNA to try to get some exclusive product, but it is in the publisher’s DNA to put everything they have in front of the consumer in every way they can.

May 28 at 11 am: “Stay Ahead of the Shift”, at the Javits Center. A 20-years out view provides a context for viewing the changes we are likely to see along the way, and what publishers should do about it. 

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I got a call today from Laura Sydell of NPR in San Francisco to have a conversation about DRM. I found myself telling the story this way.

From the beginning, there were multiple ebook formats, the leading ones being Adobe, Palm, and Microsoft Dot Lit for a time, with Mobi originally intended to be the format that bridged the gap (at that time) between devices. Then Amazon smartly took Mobi out of play, blocking anybody else from peddling a device-agnostic solution. And now we have e-readers…

From the beginning, there has been a reluctance of people to read BOOKS (goodness knows they read many other things) on screens, or at least on the screens that were presented to them for the purpose. This distinctly separates the book business from the music business, which I know I wrote about last week, but which also applies here. Your ears don’t care whether the speakers or headphones got the sound from a download or a record. It all works the same to you. But, as we all know, reading a screen for most people is a sufficiently different experience than reading on paper that they’re likely to have an opinion about it (often whether they’ve actually tried it or not).

From the beginning, some people in the book business (mostly, I suspect, agents for very big authors and their publishers, who have the most at stake) have been concerned that there would be a spread of unauthorized digital copies if they didn’t “protect” them. They were apparentely learning a lesson from the music business. But the music business was “stuck.” The format they sold music in was a “gold master.” They distributed digital copies.

From the beginning, there has been a romantic notion called “interoperability”, which says it is a wonderful thing if the same file can work on lots of different devices. So you should be able to  read the book on your PC, or on your Sony- or Kindle-like device, and on your iPhone and/or Blackberry and your Sony Play Station, for that matter. Believe it or not, there are not only quite a few of the publishing digerati who think this is very important, there are many who actually blame the slow growth of the ebook market on the fact that the industry hasn’t accomplished the ability to deliver it. (Seems preposterous to me.)

The multitude of formats presented costs and hassles to the publishers. They had to do more work to put each book in shape for each format, and they had to do pretty meticulous quality control because a lot could go wrong. With ebooks not selling much at all, the difference between spending $250 to convert to one format, say (starting with a PDF print file), and then adding $50 or $100 more for additional formats created a whole decision-making cascade. This all choked off books from the ebook stream, on one format or another or at all, as publishers needed to “decide” to publish each book in one or more formats.

The multiple systems also prevented interoperability and restrained piracy. The DRM was actually a bit of window dressing; even unprotected files wouldn’t have traveled very far.

But then the industry, through the IDPF (International Digital Publishing Forum) developed the epub standard, which was code that could be read by many different systems and/or converted inexpensively to other systems. So the publishers could provide just one file, the epub file, and the distribution channels could do the conversion to different formats. A giant step toward interoperability (and efficiency.)

So now DRM is the one barrier to interoperability and so the drumbeat to get rid of it gets louder and louder.

Also from the beginning, people have noticed that, in most cases, the more of a book you give away digitally, the more you sell. This would almost certainly not be the right strategy with high-value scientific reference, or a directory, but it is the experience of many people over a long period of time. Tim O’Reilly has famously pointed out that obscurity is a much more prevelant problem for books and authors than theft through piracy. Cory Doctorow is certainly the most vociferous and among the most eloquent expressing contempt for the whole idea of DRM, the insult it constitutes to the audience of book readers, and its self-defeating nature. He has given away huge amounts of digital content and he credits doing so with growing his sales as a novelist.

My officemate and colleague Brian O’Leary of Magellan Media has been doing an ongoing study of the effects of free distribution with O’Reilly Media and Random House. They are documenting both the fact that there is no significant piracy of ebooks and that free distribution, even the limited piracy, seems to have a stimulative effect on sales.

We are at a moment where publishers are noticing this and taking it on board. O’Reilly and Thomas Nelson are the first I’ve noticed to start offering ebooks in multiple formats, with Nelson doing so to any buyer of a print book who registers on their site for it. (A nice way to capture names, too.) Others, noteably Hachette’s unit Orbit, and Random House, have started giving away ebooks (for free or, in Orbit’s case, a buck or near-free)  to promote books and authors. The ROI on these is close to infinity if it sells one more book!

I hope that this is an accurate summary of events so far, except that I left out the Kindle (on purpose). Now I’d like to offer some forward-thinking and observe an enormous irony.

1. Forward-thinking. This notion of giving away ebooks has a tragedy of the commons built into it. It’s free and it works. So everybody’s going to do it. The choice of ebooks you can legitimately download for free or under a buck will grow by leaps and bounds (it already has.) At just the moment that the ebook market is growing, and lots of new people are coming into it, many people will be able to form the habit of choosing from what is free or near-free. Ultimately, this will have two negative effects. One is that it will depress the pricing across all titles. And the other is that the giveaways will lose their stimulative effect.

I would not suggest that anybody voluntarily try to save the commons. It would not be in their own best interests to do that and they would not succeed. 

2. Because there is going to be a culture of free or almost-free, piracy might well become an issue for the most popular ebooks as takeup of ebooks grows. It clearly has never been a problem, but that doesn’t mean it never will. Things change. (See number 1.)

3. The Kindle. Amazon not only steered clear of the epub collaboration, they are aggressively blocking people from selling content that would be compatible with the Kindle. Everything about what they do is closed. The problem is that they’re defying history so far: growing faster with a closed system than all their competitors for ebook eyeballs combined.

That’s ironic.

But it’s not what’s most ironic.

I personally never got the thing about interoperability until now, when I am reading the great new biography of Abraham Lincoln by by Ronald White on both my Kindle and my iPhone. Whenever I switch over from one to the other, it knows my place and asks me if I want to advance to it. This is great! I love interoperability. I have no use for it between any other two devices, but between my Kindle and my iPhone? Terrific!

Of course, Amazon is probably able to deliver this functionality so seamlessly partially thanks to the fact that they have a closed system and more control.

That’s really ironic.

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