From Paper to Pixels: the eBook Story

Reading habits are not the only thing the eBook is changing. It's changing the entire publishing industry as well--authors, publishers, and retailers included. The last two months have found me learning about the eBook, collecting bits of information here and there. So when Amazon launched the Kindle Fire yesterday, I decided to organize and put down what I had learned.  Though much of the effect is mainly in the States, many of my reader friends here have been purchasing eBooks, and I think it's just a matter of time before the local bookstores will distribute their books electronically.

I started by drawing myself a map of a simple supply chain of the printed book (let's call them pBooks) the way the age old model has been. An author's work is submitted to a publishing company where it is printed, given a cover price (similar to the SRP here) and sold at a discount or 'wholesale' price to booksellers and retailers. These retailers can be brick and mortar stores like Barnes & Noble, or online stores like Amazon, who sell the books to consumers at any price between the wholesale price and the cover price, depending on their pricing strategy.   This strategy is an important tool for booksellers to create differentiation and sustainability in their respective markets.

The first Kindle, 2007
Photo: Wikipedia

All this changed when Amazon launched the Kindle - the first 'electronic reader' and started selling the concept of eBooks at what we call the 'loss-leader' price of $9.99  (Php 450 approx) for a title. In the States where a hardcover book or a novel will sell at around $12 to $20, $9.99 is a really good deal. Plus you get your book instantly without having to go all the way to the bookstore.

All of a sudden readers started buying eBooks and many other gadget makers started manufacturing eBook Readers as well, such as Sony.  Supposedly eBooks didn't cost as much as pBooks because there was no physical material nor logistics involved.

Amazon's 'loss leader' pricing of eBooks is a brilliant move to broaden readership by making reading affordable to a wider base of readers.  But is it really a good thing?  Let's see, according to this article I found:

• For Authors:  Authors supposedly get royalties, which is a share of retail sales. So obviously lower retail value means less royalties for authors.  Will this be enough for them to continue writing?

• For Publishers:  Publishers were asked to sell at even deeper discounts to support retailers with 'loss-leader' pricing.  However, the publishers whose business models were primarily built around printing and logistic structures, were still churning out pBooks and needed to recover the cost of their infrastructure.  If they are not able to sustain their operations there will be no pBooks, or maybe even eBooks, at all.

• For Book Sellers (except Amazon):  Booksellers are now forced to bring down their prices to stay competitive, especially in bestsellers which drive much-needed foot-traffic to their stores. Thus they lose the flexibility they used to enjoy in pricing.  For some booksellers, this might be alright, but not all of them are prepared to bring down their pricing and take a hit.  It is simply not sustainable.  An example would be Borders which filed for bankruptcy last February and officially liquidated last July.

• For Readers: Having worked in marketing at a multinational FMCG company, I have learned that what is good is what will benefit consumers for the LONG-TERM.  Low prices may be good for readers on the short term, but if authors and publishers will get less than enough to recover costs, they may not be able to maintain the same quality and selection that readers are currently enjoying, not to mention the many errors that eBooks are becoming infamous for.  Apparently eBook editing and marketing cost real money, too. 

Then, as if it wasn't already complicated enough, came Apple.  When Apple launched the iPad last year it included the 'iBooks' app that allowed for purchase of eBooks online. The iBooks app had already been on the iPhone but the iPad's larger screen just made reading so much easier.  Suddenly authors and publishers had a new set of e-Book readers other than Kindle owners.

And this is how the Big 6 Publishers used the launch of the iPad to counter Amazon in its pricing game.  They agreed on an "Agency" pricing model where the publisher, instead of the retailer, is now selling books to the reader at a set price. The retailer, or the 'agent', then takes a 'commission' from that price.  It's "agency" because it is very much like selling something through an agent at a given price and setting a %age commission for him. 

This Agency pricing model effectively does 3 things for the publishers

• A greater degree of control over eBooks pricing, even more than pBooks.
• A chance to set the publisher's and the retailer's share out of retail sales.
• An edge over smaller publishers on eBook margins.

At this point I got so engrossed I couldn't resist making a diagram just to illustrate the three models, taking for example an SRP of $14.99.  Here it is! :-D   Exact amounts may vary. 

With two very different pricing models for eBooks, which one will eventually prevail?  I think that as long as there is a demand for eBooks, the pricing will eventually settle where it will provide a balance for all, maybe somewhere in between loss-leader and agency model pricing.  Publishers will eventually find ways to reduce infrastructure costs and offer greater value to sustain both their pBooks and eBooks business. Readers will pay more for greater value, and independent bookstores will find other value-adding offers to generate revenue, as this particular example shows us. 

Publishers are not the only ones to react to this eBook phenomenon -- retailers are as well.  First,  Barnes and Noble launched its own electronic reader, the NOOK.  With it they sell and distribute their books electronically. To showcase it they are taking advantage of the one thing they have that Amazon doesn't - a physical showcase in their stores where readers can appreciate and hold it in their hands.  They say that with the NOOK B&N's entry into the eBook arena helped it survive, an entry that Borders completely missed.

Nook displays at Barnes & Noble
www.mobilemag.com

But what about independent bookstores? Those brick and mortar stores in town that the locals love to browse? Surely not every one of them can come out with their own electronic reader - that would be a nightmare.  Fortunately there's Google eBooks, which allows bookstores to sell eBooks on their website, immediately getting them into the eBook arena and letting them share in the revenues without having to launch their own eReader. Perhaps this is something that local bookstores in the Philippines should eventually get into.  Unlike the Kindle or Nook which are device centric,  Google eBooks can be downloaded and read on various devices such as Android, iOS (iPhone, iPad, iPod Touch), computers and laptops, and iriver Story HD, Google's eReader.

Now what about the authors?  Are they just sitting quietly and watching all this?  Hardly.  With so many writers wanting to be published, there's nothing to stop them from approaching retailers directly and skipping the publisher altogether.  In fact a few self-published authors have become quite successful out of Amazon's Kindle but perhaps the most well-known is John Locke, the best selling self-published author of the Donovan Creed novels. He was just offerred and signed a deal with Simon & Schuster, one of the Big 6 who refused to be left out in a dynamically changing publishing game.

Just when Amazon seems to be surrounded from all sides, they launch the Kindle Fire to compete with the iPad.  At a killer price of $199 vs the iPad's $499, the Kinde Fire is Amazon's way of saying that they will keep fighting to stay on top of the game they started. With all these changes happening, the publishing industry has gone through more in the last 5 years than in the previous 50.  And the change isn't over yet...