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Device update: Analyzing the publishing value chain

Ereaders get the attention for now; new tablets from Sharp and RIM.

In a recent article in the Financial Times, HarperCollins Publishers announced that it had sold more ebook copies than hardcover copies of Laura Lippman’s latest thriller “I’d Know You Anywhere.”

According to vice president and publisher Ana Maria Allessi, this was encouraging news. While I’d agree it is great news for the adoption of ereaders, her exuberance made me wonder. Was this really cause for excitement? At the time of the article, HarperCollins had sold 11,250 electronic and approximately 9,300 hardcovers copies. From a pure numbers game, there was no doubt, as was previously reported by Amazon, electronic books are outselling their hardcover counterparts.

When we check the retail price of these different versions, another perspective comes into focus. Right now, the Amazon Kindle edition of the book costs $9.99 and the hardcover $14.99. So total sales for the Kindle edition are $112,388 and total hardcover sales are $139,407. At this early stage of the transition from hardcover to ebooks, it’s not simple to compare these numbers or draw any conclusions.

However, if we add in recent projections for the growth of ereaders, I think it is safe to assume that the disparity between ebook and hardcover sales will only increase. Which means that, over time, best-seller income for publishers will drop. This, of course, assumes an apples-to-apples comparison of relatively the same number of total units sold. Many publishers are hoping that this assumption is wrong and lower ebook sales will be made up with increased total units sold. If we try to compare a scenario where just the hardcover of the Lippman novel is available to one that includes an electronic version, to break-even, the Lippman ebook thriller would have to outsell the hardcover-only scenario by more than 50 percent.

It will take time to achieve this transition. As I was reading Chris Anderson’s “Free,” I was reminded of “The Law of Conservation of Attractive Profits.” It immediately struck me that publishing was suffering the commoditization of their main product: books. Essentially, as the value of books drops, the law suggests that the value has to emerge in an adjacent stage in the publishing process.

Right now, the stage that is absorbing the lost revenue from falling ebook prices is in the development of ereaders. As this new market expands, the value being lost in books is being captured in sale of ebook readers. But this will only be a temporary stop as the value continues to migrate away from books. After ereaders become a commodity, their collective prices will start dropping. The next logical adjacent layer to capture the migrating value is in proprietary, independent, and open ebook marketplaces. So once the market is flooded with ereading devices, then the value will move into the distribution channel of ebooks.

This framework explains the breakneck speed of device announcements, and the bigger players like Kobo and Kindle with their multi-platform clients looking down the road. In this scenario, Apple’s closed platform may not work to their advantage. While Apple got such a big jump on other MP3-player manufacturers, it seems unlikely that the iPad will enjoy the same level of market domination as the iPod. While they’ve not hinted at expanding the reach of the iBookstore to other platforms, it will be fascinating to see if Apple will port the iBook ereader to other platforms.

I’ve got a feeling that the e-stores will not be the last stop in the book value migration. Once ebooks themselves become a commodity, then we’ll need effective systems to help us manage our libraries and keep a personalized pipeline of books in our ereading queues. In this area, it’s much too early to make any solid predictions, except that there is one large search company that’s well positioned to help Internet users find the books they’re looking for … but that’s a whole other story.

More diversification in ereader market

It’s clear that portable electronics competitors are not going to concede the ereader platform to Apple as they did for the portable MP3 market. So in just this last week, we saw announcements by Sharp and Research In Motion’s Blackberry division. Each of these announcements continues the trend toward multiple-use devices. In addition, it underlines my analysis that the next sector of competition in publishing will be at the cloud level.

Sharp Galapagos Devices and Service

206236-sharp_galapagos_2_original.jpgSharp announced plans to capture migrating revenues in both the ereader and ebookstore markets. Its Galapagos devices — named after the islands that partially inspired Charles Darwin’s evolution model — will come in two versions: A 5.5-inch LCD model aimed at the mobile market, and a 10.8-inch LCD version aimed at the home market. Initially posed for the Japanese market, the Android-based devices are expected to become available in December 2010. Featuring color displays, the devices will include a trackball to facilitate ebook navigation. Both devices will come with 802.11 b/g connectivity.

The devices were only half of the announcement. Sharp will also launch a cloud-based media service business, also nicknamed Galapagos. Starting with a 30,000-item store of newspapers, magazines, and books, the cloud service will provide periodic software updates. All of the content will use the XMDF ebook format to support Japanese expressions, such as vertical writing.

Research In Motion Blackberry Playbook

playbook_web.jpgDuring their annual BlackBerry DEVCON conference, Research in Motion (RIM) unveiled the BlackBerry PlayBook. Featuring the Blackberry Tablet OS, the new Playbook will have a 7-inch capacitive touchscreen capable of displaying WSVGA. The Playbook will have high-definition audio and video playback, including an HDMI video output. With dual HD cameras, the Playbook also supports 1080p HD video recording as well as video teleconferencing.

As we identified in last week’s update, the Playbook is a multi-purpose and multi-tasking device aimed at the enterprise market. It’s powered by a 1Ghz dual-core processor, and it integrates with existing BlackBerry smartphones via a secure Bluetooth connection. It’s also compatible with the BlackBerry Enterprise Server. Initial versions will feature 802.11 a/b/g/n connectivity. 3G and 4G models are planned as well.

The BlackBerry Tablet OS is based on the QNX Nuetrino architecture, which means that it is fully POSIX complaint for porting existing C-based applications, including support for Open GL for 2D and 3D graphics.

RIM also announced a new applications development platform called WebWorks that will provide deployment possibilities for both the Playbook and BlackBerry smartphones.

The Playbook will come pre-loaded with the Kobo reader and access to the Kobo global ereading service. Unlike other Kobo readers, the Playbook version of the Kobo reader will use the Blackberry Messenger (BBM) service to access the new BBM social platform. Amazon has developed a version of its Kindle app for the the new Blackberry Tablet OS.

Kobo gets Wi-Fi

This week Kobo announced the newest addition to their ereader line-up, the Kobo Wireless eReader. Thanks to the addition of 802.11 b/g connectivity, the $139 device can directly access the 2.2 million books available in the Kobo store. Kobo’s new device also features a faster processor and a sharper E Ink screen. The ereader is available for pre-order through Kobo’s website


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Comments: 13

  1. Amazon has really won this game. First to market with a usable product that can be done indoors and outdoors. Most consumers are already comfortable with their online store. Having a lion share of the buyers also means better reviews on their website. Consumers most definitely read these reviews as part of their shopping experience.

    The burden is on the emerging eReaders to lure folks away from Amazon. Tough position to be in IMHO.

    As for the communization of books, digital media is cheap to produce. Amazon becoming a publisher is putting more money in the author’s hands rather then the publishers.

  2. Wait, hold on, full stop.
    Revenue from the sales is not at all the issue. What is the profit from the sales?

    “to break-even, the Lippman ebook thriller would have to outsell the hardcover-only scenario by more than 50 percent.”

    No, for the e-book edition there was no paper, no printing, no shipping, and no shelf space. A digital copy was sent.

    If the fixed cost of producing a novel (not a book, a book is a physical object!) is slashed, as a publisher fewer sales can equal MORE profit.

  3. Am I missing something here: “best-seller income for publishers will drop”? The income may drop, but unless the cost of producing an ebook is the same as a hardback, the costs will drop as well.

    Is all that paper, ink and distribution really negligible? In this example, only if it actually costs $4 or less to make a book and put it in a reader’s hand will the publisher see any difference.

  4. Geoff, I’d have to agree with you on Amazon being very well positioned. It’ll be interesting to see how well the Kobo system (ereaders + cloud store) can compete with them.

    Doug & Derek,

    I think you’ve hit upon one of the missing pieces of this puzzle. As of yet, I haven’t seen anything from any of the publishers that breaks down the costs to produce the two different editions.

    In talking with some O’Reilly editors, I understood, that yes there was some costs that were saved from pushing atoms around. However, they didn’t share any specifics.

    So yeah, I agree I was merely looking at revenues and not the bottom line. Does anyone know of any cost-base analysis of print version ebook? That would help clear up my analysis.

  5. Anybody can buy a hardcover book. Only those who have a kindle or any other ereader can buy an ebook. Imagine what it will be when everybody will have an ereader!

  6. I was thinking, isn’t the cost saving of an e-book already factored into the price? the hardcover in this case costs $14.99 and the e-book costs $9.99. So doesn’t the $5.00 reduction eliminate the cost saving from pushing bits instead of atoms?

    Or are you suggesting that the saving is greater than that? I guess it depends on the title. The more it sells, the greater the cost savings becomes, due to the fact that there are negligible costs in producing another e-book.


    Yes, once the ereaders become more ubiquitous, the number of e-books sold will become staggering.

  7. > So total sales for the Kindle edition are $112,388
    > and total hardcover sales are $139,407.

    ok. those are the gross numbers. what about net?

    > At this early stage of the
    > transition from hardcover to ebooks,
    > it’s not simple to compare these numbers
    > or draw any conclusions.

    i think it’s _extremely_ simple, to do _both_…

    the variable cost of the e-book approaches zero so
    you make $9.90 profit per e-book after the fixed cost.
    or, if you figure the retailer (e.g., amazon) takes 30%
    of that, then you’ve made roughly $6.90 per e-book.

    the variable cost of the p-book is more like $10,
    after the fixed cost, counting the retailer, who is
    absolutely necessary when you sell a product that
    is physical, so you make just $5.00 per p-book…

    so you make more — possibly _much_ more —
    from each e-book, and you can _sell_ more too,
    since the price is lower. ergo, easy comparison.

    corporate types will respond with mumbo jumbo.
    that is why they are dinosaurs, who will be driven
    extinct by the more efficient mammals we now see.


  8. It’s interesting that your article suggests that Google will be the one to benefit from the growth of ebooks, as I just did an experiment and found that Google is barely indexing the 700,000+ Amazon Kindle Store pages.

  9. The pricing for ebooks is murky at best. If we assume that the same document that is sent to the printers for hardback books, is the same document that is used for ebooks, then ebooks have very little costs. The costs of pre-production (editing etc) will be covered by the hardback, I also suspect that the marketing budget will be for all books rather than ebooks. Finally, for ebooks, you have no distribution costs and no problems with returns. I suspect that in the cold light of day ebooks are far more profitable for publisher than they would like to admit.

  10. Author Charlie Stross has a better take on the industry on his blog. This is one exampl:


  11. Most of the costs of publishing are fixed, not variable. Overhead, editors, the whole process of paying people to read submissions and make decisions. Anyone who thinks it costs anything near $5 to slap the atoms together for the hardcover version is out of step with reality. The revolution is about control, not about margins. By the way, you can’t just assign the editing costs of a book to hardcover sales and arbitrarily decide that electronic books have a Cost of Goods Sold of near-zero.

    Additionally, publishers care about the perceived value of their content. In the recent blowup between publishers and amazon, it came to light that some publishers balked at amazon’s practice of selling eBooks for $9.99 EVEN IF THEY PAID THE PUBLISHER $13 FOR THAT SALE. In other words, the transition to eBooks and new pricing models is about far more than short term profit.

  12. gary, it’s not fair to assign all the fixed costs to the
    hardcover, and then let the e-book slip in for free…

    one could argue that both formats should _share_
    the fixed costs (held in common to each) and then
    bear all the costs which are idiosyncratic to each…

    i’d go a step further, and make the e-books bear
    the entire fixed costs, and let the p-books off with
    the variable costs which are idiosyncratic to them.

    that’s the model you’d have to follow if you pursued
    an e-book-first strategy, followed by p-books _if_
    the e-book sales warrant. that model minimizes risk.


    alex, charlie stross does _not_ have too firm a grip on
    the costs — fixed and variable — of creating a book…

    specifically, he overestimates the fixed costs, and he
    severely underestimates the variable costs of p-books.

    (in fairness to charlie, _his_ books might be costly to
    edit, since he implies that he turns in something of a
    _mess_, and that his editors then spin that into gold.
    but i don’t think he can generalize that experience to
    the future of publishing, which can’t afford that luxury.)


    alan, you will have to give more than bald assertions
    — totally unsupported at that — to be convincing…

    like any exploitive overlord, the corporations _love_
    to cite “overhead”, but _refuse_ to open their books.

    i believe their costs are through-the-roof, because
    i live in l.a., and i know how much a yacht can cost.
    the moorage fees alone will eat you up…

    but, you know, the mammals won’t need any yachts
    to publish their books, no sir. sayonara dinosaurs…
    i wish you smooth seas to retirement in the bahamas.


  13. Revenue is gross revenues. Income is revenues net expenses. You’ve mixed up the terms and arrived at the wrong conclusion. Publisher revenues may fall with e-books initially, but income could increase significantly because e-book expenses are lower. The ~$28K difference you show between hardcover and e-book sales on a volume of 9,300 hardcover books means the variable costs per hardcover book (paper, bindery, shipping) would have to be