Great digital expectations, from The Economist

Digitisation may have came late to book publishing, but it is transforming the business in short order

Sep 10th 2011 | from the print edition

TO SEE how profoundly the book business is changing, watch the shelves. Next month IKEA will introduce a new, deeper version of its ubiquitous “BILLY” bookcase. The flat-pack furniture giant is already promoting glass doors for its bookshelves. The firm reckons customers will increasingly use them for ornaments, tchotchkes and the odd coffee-table tome—anything, that is, except books that are actually read.

In the first five months of this year sales of consumer e-books in America overtook those from adult hardback books. Just a year earlier hardbacks had been worth more than three times as much as e-books, according to the Association of American Publishers. Amazon now sells more copies of e-books than paper books. The drift to digits will speed up as bookshops close. Borders, once a retail behemoth, is liquidating all of its American stores.

Electronic books

Having started rather late, books are swiftly following music and newspapers into the digital world. Publishers believe their journey will be different, and that they will not suffer the fate of those industries by going into slow decline. Publishers’ experience will, indeed, be different—but not necessarily better.

In some ways the transition from paper to digital distribution is a boon. E-books currently have high profit margins, and are free from many of the drawbacks of print. Peter Osnos, the founder of PublicAffairs Books, says the biggest challenge small publishers face is managing their inventories. Print too many books, and lots of them will be returned by stores. Print too few and publishers will forgo sales while they order reprints (at higher prices). None of these problems exists when distributing books digitally.

Bodice ripping

Romance novels and crime blockbusters have proved particularly popular on e-readers, perhaps because it is difficult to tell from across the aisle of a bus whether someone is reading a bodice-ripper or Dostoevsky on their Kindle. Donna Hayes, chief executive of Harlequin (which owns Mills & Boon), says digitisation has given new life to old books. Serialised romance novels generally have a shelf life of just four weeks. Now many are easily available: Harlequin has digitised more than 13,000 of its books. The firm has begun to publish some romances as e-books only, gauging customers’ appetite for them before taking some into print.

Yet these advantages are outweighed by several looming hazards. The first is piracy. Digital-book files are tiny—much smaller than a film, and not even as big as a music album. Book readers may be an unusually honest lot, but they are not above getting stuff for nothing. E-books routinely pop up on file-sharing websites like the Pirate Bay, both in their own right and as part of vast anthologies with names like “2,500 Retail Quality E-books”. The example of countries such as Spain suggests that media piracy can become entrenched even among the middle-aged. In Russia, e-book piracy is already rampant.

Piracy is a particular threat because of a second, bigger problem: the apparently arbitrary nature of e-book pricing. When Amazon began selling e-books, it charged $9.99 for many of them, often selling at a loss to fire Kindle sales. Gradually it became clear that Amazon was undermining the perceived value of all books, digital and paper alike. So, last year, the biggest publishers used the release of Apple’s iPad to push Amazon into “agency” pricing. Publishers now set their own prices and give about 30% of the sale to Amazon.

That has meant higher prices for many new e-books. As some prices rise, though, a tide of free and cheap product is flooding the market. Self-published novelists, keen for attention and without agents or publishers to share the proceeds with, often sell their works extremely cheaply. Meanwhile publishers have moved to offer introductory discounts on some books. As a result, Amazon’s list of 100 best-selling books has become a pricing free-for-all. This week 21 books were selling for just 99 cents. Others were priced at $4.98, $7.59 and $8.82. The most expensive single book, at $16.99, was Dick Cheney’s memoir. There is none of the clarity of iTunes in its early years, when the price of music tracks was fixed at 99 cents.

Publishers point out that books have always sold for a wide variety of different prices. Hardback books cost more than high-quality paperbacks, which cost more than small, mass-market paperbacks—and everything is more expensive than a dog-eared library book. But those books are physically different from each other. E-books all look the same. And the popularity of those 99-cent thrillers suggests readers are more price-sensitive, and less quality-sensitive, than publishers care to admit.

Another problem is Amazon’s market dominance. The firm accounts for less than a quarter of physical book sales (see box). But Amazon sells 60-70% of e-books in America and perhaps 90% in Britain, according to estimates by Enders Analysis, a British outfit. In America, Barnes & Noble’s Nook is the main competitor. Surprisingly, given the success of the iPad, Apple’s iBookstore has lagged. James McQuivey of Forrester Research found in a survey that only half of iPad owners read e-books—and two-thirds of them own or plan to buy an e-reader especially for the purpose. Amazon appears set to launch a tablet computer to take on the iPad. And Amazon is becoming a publisher in its own right. It has a romance imprint, and has signed big writers like Timothy Ferriss, author of “The 4-Hour Workweek”. This tightens its grip over the e-book market.

A book in the window

Perhaps the biggest problem, though, is the gradual disappearance of the shop window. Brian Murray, chief executive of HarperCollins, points out that a film may be released with more than $100m of marketing behind it. Music singles often receive radio promotion. Publishers, on the other hand, rely heavily on bookstores to bring new releases to customers’ attention and to steer them to books that they might not have considered buying. As stores close, the industry loses much more than a retail outlet. Publishers are increasingly trying to push books through online social networks. But Mr Murray says he hasn’t seen anything that replicates the experience of browsing a bookstore.

Efforts are under way. This week a British outfit called aNobii released a trial version of a website that it hopes will become a Wikipedia-style community of book lovers, with an option to buy. The idea has potential. Amazon’s recommendation engine, although helpful, is rather impersonal—perhaps the retailer’s second-biggest weakness, after the resentment publishers feel for it.

The book business has long been suffused with gloom; Mr Osnos says that booksellers have faced five or six supposedly fatal challenges during his career. But this time the challenges are really daunting. Publishers have to confront many of the problems that have afflicted other media industries that have gone digital, as well as a few entirely new ones. The next few years will be a thriller.