“If you don’t eat your own children, someone else will”: That’s how Michael Mace, Principal of the Silicon Valley–based Rubicon Consulting, began his presentation, “Check Out My Scars: Seven Lessons from the Failure of E-Books in 2000, and What They Mean to the Future of Electronic Publishing,” at the 2010 O’Reilly Tools of Change for Publishing conference, which took place February 22–24 in New York City.
Mace, former VP Product Planning at Palm and VP Marketing for Softbook Press, warned against falling in love with the way you’re doing business today—inevitably, it will change. Sure, important barriers to e-book adoption—availability, pricing, usage patterns, and marketing—mean they’re not going to take off as fast as some people think. Printed books may be the last thing to go. And since the economic structure of traditional publishing is unstable, it’s tough to figure out when the real change will take place—but when it does happen, it will go very quickly. So how to predict what’s coming? We can look at the year 2000.
In 2000, hopes were high for the many e-readers on the market (including Softbook, Rocket eBook, Go Reader, Hiebook, Franklin eBookMan, and others, “more than there are now”). That year, the Industry Standard optimistically forecast e-book device sales between 3 and 7 million for 2001. (Point of reference: Kindle has sold an estimated 2 million units.) And Dick Brass, then Head of E-books at Microsoft, predicted that by 2020 90% of publishing would be electronic. “He’s got ten years to go, but I don’t think we’re likely to hit 90% in the next ten years,” Mace said. So what went wrong at the turn of the century?
First, too few books were available. In 2000, as now, the core customers for e-books were reading enthusiasts, and they couldn’t find everything they wanted to read in digital form. Nervous publishers and agents didn’t want to make the commitment of converting too many titles.
Second, prices were too high. Consumer perception that an e-book is disposable (like a paperback) and shouldn’t be priced like a hardcover was at odds with publishers, who kept e-book prices high in an attempt to protect bookstore channels and hardcover pricing. “Publishers were viewing this as something just short of Napster,” Mace said. High e-book prices and limited availability of titles led to consumers’ strong reluctance to invest in e-readers.
Since people didn’t want to buy e-readers, publishers decided to put e-books on the things they did own—PCs and mobile devices. But PCs aren’t comfortable for long-content reading and mobile devices are too small and have a “unique usage pattern,” said Mace, “where you look up something or take a call and then put it away. It’s not like eating a meal. It’s more like snacking.”
Fourth, few digital periodicals were available in 2000. Magazines and newspapers are actually a better fit for e-readers than books are, says Mace, because they’re already viewed as disposable (so people don’t mind paying the same price for the e-version as the paper version), they’re consumed in small chunks, and the fact that there’s immediate delivery is a big benefit. However, the electronic version’s quality must be comparable to the print version’s, and so far this hasn’t been the case. And digital periodicals are competing with free websites. (Mace thinks the most successful free publisher online is Yahoo!, which takes ads from big national advertisers, mixes them with digital content, and makes a lot of advertising revenue, whereas Google’s ads are like classifieds.)
Fifth problem, now and then: Marketing. Mace says the right way to market a tech product is to determine very clearly who the consumer is and ask what “compelling problem” you can solve for them. But consumers don’t think books are broken. Mace recently examined the pitches of e-readers on the market now. He found that Kindle advertises by listing product features rather than advantages to consumers, and while Sony announces that the Sony Reader lets the consumer carry hundreds of books in his pocket, “how many people actually want to do that?” Companies make the mistake, Mace says, of “trying to convince themselves that the features they have are benefits to customers whether the features they have actually matter to customers or not.” (Whose marketing is best? Barnes & Noble, by a little bit, because of the limited sharing the Nook allows.)
Publishers have to ask themselves some hard questions… and they won’t like ’em. First up: How much reader-visible value does our editing add? “Is [editing] like CD-quality audio? Do readers notice?” Mace wondered. He’s not sure yet: It might depend on the author, or the marketplace might end up deciding what’s well-edited.
Next, How much demand generation do we really do?
Third, Could an author get the same value through contract services (freelance editing or marketing, for instance?)
And the fourth question: Do readers value our brand (versus the author’s)? This varies from publisher to publisher, “but the more that value is coming from the author’s name rather than the publisher’s, the more vulnerable you are to book buyer behavior when they are out in the marketplace.”
When does it pay an author to self-publish electronically instead of working through a publisher? Mace estimates that when between 20% and 30% of the public owns an e-reader, “financial incentives flip around” and authors make more money selling their titles digitally and directly to readers than they do with traditional publishers and a 15% royalty.
We’re not close to this tipping point yet, Mace says, because today only 2–3% of book buyers own e-readers. But he believes the iPad, as well as competition between Amazon and Apple, will accelerate change. And Mace thinks that when publishers raise e-book prices, they bring the tipping point closer by creating higher incentives for authors to switch away from traditional publication. If e-books are cheap, authors might as well stick with their traditional publishers because they aren’t losing out on much money, but when e-books are expensive, it’s in authors’ advantage to switch over early and get a bigger cut.
“Some authors will publish stuff completely on their own, and some will need a ton of help and turn to a publisher,” says Mace. “However, it’s much more fluid than it was in the past, and people providing services have to be clear about the value they are creating for people buying them.”
Create More Apps
In “Running Two Companies,” Sourcebooks CEO and Publisher Dominique Raccah spoke about the challenges for publishers managing both traditional and digital businesses, and what she said agreed with Mace’s idea about the continuum of transformation. Though change appear rapid and pervasive to those of us “on the front lines,” Raccah says the mass market takes longer to respond. CDs still comprised 65% of all music sold in the first half of 2009, despite the fact that the iPod launched in 2001 and iTunes in 2003. It takes a long time for old media forms to disappear and for a company to transfer from B2B to B2C.
“Think through the content you already own,” suggested Raccah. “Is there an opportunity to do something different with it?” She recommends trying lots of low-cost experiments, such as iPhone apps, which are easy to fix on the fly. (Sourcebooks designed all its iPhone apps in-house, with the exception of the coding.)
File Sharing, DRM, and Music Industry Lessons
In “The Impact of P2P File Distribution on Paid Content Sales,” Brian O’Leary of Magellan Media discussed the company’s research on another new challenge for publishers: Piracy. Magellan is currently tracking sales and piracy at O’Reilly and Thomas Nelson to try to determine the niches and titles for which “piracy is a direct loss and enforcement makes sense” and those for which “piracy may help build awareness…to spur sales.” When Magellan monitored peer-to-peer file-sharing sites for O’Reilly’s fall 2009 front list titles, The Pirate Bay was the only site with more than a handful. (Magellan has not yet found any of Thomas Nelson’s fall 2009 front list titles on P2P sites.) There was also an unexplained bump in paid sales of O’Reilly content after seeding (uploading) was first noted. And an average of 19 weeks from a title’s pub date passed before it began to appear on pirate sites.
O’Leary said it’s important to understand the reader’s point of view. First of all, publishers should release digital versions of their titles (might as well not frustrate demand before you even start out) and make them available in a high-quality consumer experience. Digital editions should be high-quality, not sub-standard, and publishers should manage piracy rather than trying to solve it. O’Leary also pointed out that getting pirated books isn’t that easy. The relative difficulty of obtaining pirated content is evidence that restrictions like DRM or business decisions to withhold content can frustrate readers enough that they pursue pirated content instead. O’Leary recommends that publishers visit pirate sites to see what the experience is like and to find out which of their titles are actually being shared illegally. (If they don’t know where to look, they might want to ask their interns.)
Finally, O’Leary warned publishers not to draw broad conclusions from the limited data available. Attributor grabbed lots of headlines with its recent study claiming that piracy is a “$3 billion problem,” leading publishers like Macmillan to announce detailed “piracy plans.” But more data is needed to find out what’s really happening, and a rush to DRM isn’t necessarily the answer. DRM-restricted content just isn’t wortRh as much as unrestricted content, and true pirates don’t worry about DRM since they can easily disable and strip it (or just scan the book). “We’re restricting the rights of readers just in case they turn into pirates,” said O’Leary. Publishing can learn lessons from other industries—but it’s not as simple as saying that “piracy killed the music business.”
So what can we learn from the music business? In his panel “DRM, Digital Content and the Consumer Experience,” Kirk Biglione, Principal of Oxford Media Works and contributor to Medialoper, set out to answer that question. And like Mace, he gave publishers another chance to learn from history. The future of all media, he said, is digital. And all media companies, not just publishing, are challenged by the transition. Consumers burned by DRM during the music-buying experience carry that baggage with them as they move to digital books. “Even though you haven’t done anything to consumers yet, they’re prepared for the worst already,” Biglione said.
But though everyone agrees that the music industry made mistakes, there’s been no consensus on what those mistakes were. The music industry was hugely successful in the 1990s. Consumers loved the improved sound quality and durability of CDs, and they had to buy their record collections all over again, which led to huge profits that the music industry expected to keep going up. Digital content distribution wasn’t on the agenda, and music companies weren’t worried about MP3s because they assumed consumers cared deeply about CDs’ superior sound quality. At the turn of the century, the recording industry didn’t realize that the internet had allowed consumers (who’d historically bought whichever format they were told to buy) to gain control.
One of the industry’s mistakes, Biglione said, was to mistake consumer demand for piracy. Industry execs reacted to digital media piracy in the same way they’d reacted to bootlegs and counterfeit products—they tried to stamp it out. But this was a new breed of piracy with “no profit motive involved.” The new pirates didn’t make money from sharing MP3 files, and they didn’t have legal digital options to turn to—MP3s weren’t for sale (notwithstanding some short-lived trial runs like Sony’s Connect Sony format). So there were no credible alternatives to piracy: “Consumers were showing a preference for digital music and labels did not have anything in place.”
Biglione drew a parallel to consumer demand for e-books. “Ever try to buy a Thomas Pynchon e-book?” he asked. The author is not available in a legitimate digital format. But Google “Thomas Pynchon e-book” and the second result on the list is “The Burgomeister’s Books,” whose owner describes it as “My personal backups. But since you’ve dropped by, I’m happy to lend them to you. Naturally you’ll delete these books when you’ve finished—your way of returning them. Download and enjoy five truly free e-books on loan from my library!” The Burgomeister has scanned hundreds of titles—by authors like Saul Bellow, Agatha Christie, and, indeed, Pynchon—and promises, “More late-20th century classics are being added every week.” The site also runs a “Wanted” list of titles and authors (Evelyn Waugh, Patricia Highsmith, Graham Greene) and promises, “I offer unlimited download access to anyone who can supply me with a decent digital copy of one or more of these titles. I even pay money. I am certainly willing to buy you the book if you are willing to scan it.” The new pirate: Someone who really loves the backlist and can’t get it legally. (Flashback to Michael Mace’s panel: Mace says digitizing the backlist is a major untapped opportunity for publishers to make money.)
Other music industry mistakes included declaring war on digital and using litigation as a business model, but the biggest lesson publishers should learn, Biglione says, is not necessarily to assume that DRM is the answer. Echoing O’Leary, he listed a few myths about DRM: DRM prevents piracy (the reality is that all you need is one physical copy of a book to scan and upload it); customers won’t pay for DRM-free content (they buy Amazon’s DRM-free MP3s and O’Reilly and Microsoft’s DRM-free books); DRM enables a marketplace for digital content. In fact, DRM shapes the marketplace for digital content in ways that have unintended consequences. When Microsoft launched its PlaysForSure DRM standard in 2004, they hoped to license it to every manufacturer who made devices and anyone who wanted to market digital music. In fact, many companies and content providers did license PlaysForSure—but not Apple, and Apple’s iPod and iTunes were what people wanted. Microsoft sealed the nail in the PlaysForSure coffin when it launched its own MP3 player, the Zune, in 2006 and made both the device and the content on Zune Marketplace incompatible with PlaysForSure. As publishers struggle with DRM and various e-publishing formats, Adobe’s Content Server DRM seems to have emerged as the standard. It’s been widely licensed—last fall, Sony’s e-reader store pulled its proprietary format and switched to Adobe’s. But Amazon uses its own proprietary DRM, as will Apple in its iBookstore. Biglione predicts the Adobe Content Server standard will “end like the music industry’s PlaysForSure standard ended.”
In the meantime, the top search phrases on Medialoper relate to cracking DRM, and these searches spike on Christmas Day, when people want to break the DRM on their new presents. “So sell consumers what they want, since they are going to get it anyway,” Biglione said. “You might as well get paid for it. In the 21st century, you are not going to beat the consumers.”