The Digital State of Play in the US
Good morning. I have accepted the challenge of trying to update you in 15 minutes on how digital technology is affecting book sales and marketing in the US. That means I’ll be talking fast, leaving a lot out, and asking your indulgence in advance if I steal a few minutes from the question time.
Although most publishers and observers of the scene measure digital change against where we’ve been — like: how are we doing selling digital books and will people pass them around if we don’t encrypt them and thereby reduce the number of units we can sell? — I think it is more useful to measure change against where we’re going. To do that, we have to an idea of where we’re going. Those of you who have heard me before have possibly heard this before, but we need to take a few minutes to talk about the overall arc of change.
In the 20th century, successful consumer media enterprises almost always shared two characteristics: they were horizontal in their content coverage and format-specific. In the US, that means companies like Random House, CBS, and The New York Times. They all embraced a very wide span of subject interest, but very seldom strayed from books, broadcast, or newspapers, respectively.
But in the 21st century, the net is flipping this on us. The net tends to self-organize us by subject niche, so the eyeballs and human bandwidth are linked to the niches, which are vertical, not horizontal. And because web interaction is about file exchanges, format specificity is meaningless. The file can hold text, art or photographs or other graphics, animation, moving images, sound, games, or code that helps us combine, sort, or tag things.
So we’d expect the successful 21st century consumer media entity will be vertical in subject interest and format-agnostic. When the 21st century world gets more fully articulated, it will be obvious that the customers for a book about knitting, political conventions, or deforestation are reached through specific vertical channels, notthrough CBS or The New York Times. That alone will force today’s publishers to focus on niches if they want to be tomorrow’s publishers. But they will also be driven to find the niches because the horizontal outlets for promotion and sale are getting weaker and less numerous.
Once you accept this paradigm, you see it playing out in many places. Last month, Nike announced that it would no longer organize around the product (shoes, sporting equipment, clothing) but around the sport. This is not only an example of going from horizontal to vertical, it also obviously makes Nike a much more coherent customer for content. And last week the publisher of the Las Vegas Sun, Hank Greenspan, announced that an intensely local-focus web initiative he is piloting in Las Vegas will move to New York and other cities. He’s creating a template for intensely local verticals that he intends to roll out across the country. (Of course, the newly format-agnostic New York Times might have something to say about this when they get to New York.)
In the context of the change we’re going to see, everything that has happened so far — and what will happen over the next several years – is a mere prelude. The horizontal format-specific media have hardly disappeared; they are still the dominant media. But what has happened is putting in place building blocks for much more substantial change to come.
First of all, we’re getting files we can use. Just about all books today are printed from digital files which are fairly readily converted to a version of XML. Most of the major publishers in the US are far along in programs to create useful digital files of their backlists.
The DADs — digital asset distributors — are quickly signing up all publishers of a certain size to facilitate all kinds of digital distribution, from search inside at retailers to content on cell phones to widgets that can bring content to any web site. Last year we did a project of presenting the DADs and what they do; in the year since then, it looks like Ingram Digital and LibreDigital are the market leaders on our side of the Atlantic.
There is ebook growth that even the most hardened skeptics and defenders of the primacy of paper books must admit is real. The Kindle was introduced by Amazon and is apparently a great success; the Sony reader is rapidly becoming a ubiquitous professional working tool. The new epub standard is going to make it easier and easier for books to find their way into any conforming ebook format.
The rating and tagging for books, which is particularly important for fiction and memoirs and belle-lettres in the digital world, is being facilitated by both book-specific sites like LibraryThing, Shelfari, and Bookreads and by general sites like Deli.cio.us.
And in a development that’s outside the book business but will be critical to the future, the silos of the 2.0 social networking sites — most prominently MySpace and Facebook — are being broken down by initiatives like the OpenSocial Foundation. We have always seen the first generation of social networking sites as horizontals, and therefore not likely to survive long as the vertical communities form. Expect to see the vertical areas of interest be organized across the social networks. And, in the future, expect social networking to be a component — like reference material and a job board — of every major vertical.
I’ve always believed that there would be a tipping point for ebooks. We may still be a long way from it, but at least now the progress is visible.
When research I did earlier this year demonstrated pretty convincingly that most ebooks sold in the US are not read on devices, but are Adobe files that are most likely read on PCs, I was surprised. Only about a third of sales are of Palm, Mobi, or Microsoft dot lit formats that we’d expect to be read on a handheld. The emergence of the Kindle and the vitality of Sony Reader may change that balance soon, but that’s what it has been.
Ebook retailers we checked with say that only Harlequin puts all their new releases into all ebook formats as a routine matter. Now that other publishers seem about to join instant adaptor Hachette Book Group USA in embracing the new epub format for ebooks, which should make conversion to different formats just about free, we’d expect to see more titles in more formats in the future. A survey by Market Partners in March 2008 suggests that far less than half of the total title offerings from the majors are available as ebooks. What will also drive more widespread ebook availability is the excitement around the Kindle and Amazon’s efforts to get more digital files from publishers.
Two signficant web retailers I asked said that sales doubled from January 2007 to January 2008. The International Digital Publishing Forum, the industry association for ebooks, says sales in 2007 had increased by about three times since 2005 and six times 2002. The growth rate is very impressive; the overall sales levels still are not. No publisher I am aware of reports digital sales of as much as 1% of their total business. Yet.
The Kindle has only been available since December 2007, and Amazon is tightlipped about how many readers they’ve sold, let alone how many books for it, but anecdotal reports say that ebook sales have surged across all formats since the Kindle came out.
In the past couple of weeks, Random House joined Hachette and Simon & Schuster in announcing that it is distributing Sony Readers to its sales reps and editors to make it easier for them to carry around and read advance galleys and manuscripts. This is a significant step, turning the ebook reader into a professional tool for our industry. Getting people within the publishing business familiar with the capabilities of ebooks is a critical step toward a more widespread consumer takeup. And it will help our industry create better ebook products.
In that vein, Penguin has just announced that it will be creating very much enhanced ebooks of classics, including contemporary reviews and commentary. We’d hope this would be the first step toward more robust ebook product. It shouldn’t take a lot of imagination to come up with content that could “ride free” in an ebook that would add value for readers and for the author’s attempts to establish relationships with readers.
Aside from ebooks, the biggest investments the biggest publishers seem to be making don’t suggest that the transition to “format-agnostic vertical” is taking hold. Nor is there much evidence that publishers recognize their existing brands as B2B, not B2C.
There have been obvious investments in corporate branded websites by all the majors with a great expansion of bells and whistles: author features, browse- or see-inside functionality, and, increasingly, offers to sell physical or digital product.
There is also a growing use of podcasts and vodcasts and video trailers, but universally these are marketing devices, not product plays.
The big publisher sites are almost bereft of vertical consciousness or community activity. They sign people up for “alerts” about books and authors, but, since these sites are mostly about promoting general trade lists for sale, there is no logical opportunity to promote discussion, user generated content, or the kind of features that would encourage repeated visits. And, similarly, these branded sites offer little opportunity for partnership with non-publishing brands that are in the same space, but are not part of some publishing deal.
Since Amazon controls the vast majority of book sales on the net, it is not surprising that Amazon’s initiatives are the most closely watched and highest impact in the online retail world. All three of the moves enumerated here are signs of a monopoly player strengthening its already dominant market position.
About three weeks ago, Amazon declared a new policy that they would no longer ship as Amazon-sold product books printed on demand by another supplier. If you want your POD book listed for sale by Amazon, as opposed to one of the “marketplace” vendors who use the site’s capabilities, you would have to set it up to print at Amazon’s POD operation, BookSurge. The legality of this approach is not yet clear, but many of the marketplace implications certainly are. Amazon has a commanding position among online book purchasers and they can use that as leverage to compel publishers to conform to their desires. Until now, that has meant getting vendors to give discounts Amazon requests and participate in coop programs. This latest policy is a shot across Ingram’s bow — at the very least; maybe it is a missile into the wheelhouse — but it is also a sober reminder to publishers that their now second-largest vendor has a whip hand and will use it.
Audible has been a boon to the publishers’ audio download business. Through Audible directly and through Audible’s relationship with iTunes, they control a greater percentage of it than Amazon does of online book sales. One publisher characterized this to us as “99.9” percent.
The purchase means that Amazon can now port the biggest collection of digital audio titles available over to their massive customer base and, perhaps, stop Audible from working through iTunes when the current deal expires. Of course, publishers would probably rush to fill the iTunes vaccuum themselves, and thereby create some competition for the Audible-Amazon combination.
Amazon’s Kindle has apparently sparked a surge in the ebook business. It has also broken new ground in the business. It is tethered to the retailer, which makes purchasing simple and quick, but also makes the purchaser a captive of Amazon. It started out with more than 90,000 titles available, a number comparable to Adobe and several times larger than what is available for any other handheld reading device. It offers non-book material: blogs and newspapers and magazines. And it also allows you to go to the web and, with a crude and clunky keyboard, even do email.
Barnes & Noble dot com is the second place book web site, but they are way behind. Estimates of Barnes & Noble’s share of the web book market are around ten percent. But they are investing heavily in beefing up the site. They are creating content “channels”; rich data organized by vertical subjects to make the site more attractive and sticky. And Barnes & Noble has a new business called Quamut, which like their established SparkNotes line, sells PDFs of content for the same price as a printed form, which for Quamut is laminated cards.
B&N is also building a “look inside” capability some yeas after Amazon lead, but still at a time when publishers have not yet fully cooperated with Amazon’s program and when many are putting this capability on their own sites.
The growing ebook and downloadable audio phenomena could result in a great dispersal of retailing on the web. Lightning Source and Content Reserve already white label this function for anybody who needs it. As web communities by subject grow in importance, it will make sense for them to sell this kind of content directly, rather than refer sales off their site as affiliates, the way they do for physical product. This is good news for publishers looking for additional outlets to sell their product in the short run; it could also weaken Amazon’s grip on the marketplace. In the long run, according to our overarching vision, these vertical sites become publishers, not just retailers.
I’d add a word here about libraries. They “lend” ebooks and digital audio already. Since ebooks and audiobooks tend to be read once, as opposed to music that might be listened to many times over many years, “borrowing” an ebook or audiobook is about as good as buying one. This has already led some publishers to think about some sort of per-use charging in this marketplace, which would certainly be a challenge to implement. On the other hand, as the download customers become savvier, one would expect more and more of this business to shift from “buy” to “borrow” with a dampening effect on sales.
Now, just a few predictions of what we might see in the next year or two.
The view from there is that the Kindle challenge has to be taken up by Barnes & Noble somehow. Borders has teamed with Sony on the Reader, but Sony’s proposition is lacking enough titles and the direct connection to the net they need to compete. And Borders is loaded with troubles of their own. I keep thinking that B&N will find a partnership possible with Apple, but that’s an outsider talking and I have no idea if they talk to each other. But I’d expect something!
We will start to see a decline in the horizontal social media like MySpace and Facebook; I saw one stray stat somewhere that suggested that Facebook has already suffered some losses in the UK. These horizontal sites are like AOL was; their raison d’etre is to make tech easier for people. As people learn the tech, the vertical sites offer social tools, and the various initiatives like Open Social start cutting across the horizontal silos, the utility to the stadium-sized social sites will diminish as compared to homier collections of more like-minded people.
Also in the next year or so, I’d expect to see a vertical content-and-community site driving new print publishing economics. When you have the attention of the people you need to sell to already in hand, marketing costs drop dramatically. This is at the core of our argument about the overall change in publishing; we ought to have a “case study” or two developing soon.
There is a new company called SharedBook which provides software to allow book assembly from various components, including some supplied by the customer. SharedBook is powering book creation on a few dozen vertical websites, including cookbooks being created at AllRecipes.com. This idea is not new: the academic community has been assembling digital coursepacks for years. But we’re about to see an explosion in “create your own book” opportunities for consumers and, by a couple of years from now, it will be pinching some established businesses. Travel publishing and cookbooks would seem to be early targets.
One other outcome of all this digital change, we believe, will be mushrooming availability of large print books. If a book is tagged properly in XML, setting up large print in POD is almost cost-free and, once set up, certainly cash flow positive. With the baby boom generation many years past their first pair of bi-focals or reading glasses, a large market for large print is about to be one of our next significant revenue opportunities.