The E-book Dilemma

It seems like everyone is worrying about the e-book these days.

In meetings, in the press, at professional gatherings and in the hallways, there’s a lot of chatter going on. “What will it mean for sales? For wholesalers? For reps? For the printed book? What about children’s books? Will we ever see a digital picture book? Will this change my job? Will I have a job?”

Very few people are asking what this means for readers (except Amazon), but readers will make their feelings known as time goes on.

My advice to the industry: don’t panic, but don’t be stupid either.

Let me also say that I have absolutely no problem with e-books. It’s a great format for certain kinds of books, and for certain kinds of readers. I’m no Henny Penny.

What I am concerned about is whether we are approaching the innovation in a smart way with a view to the long term future. In our anxiety, I’m not sure we’re asking the right questions.

It’s one thing if the book evolves away from the hard copy as an outcome of market forces. That’s natural selection, and when we get there, that will be what it is.

It will be quite another if the industry kills the hard copy inadvertently through a shortage of vision. That would be a Darwin Award, which is something else all together.

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I was inspired to write this essay after reading a comment by an industry professional in Shelf Awareness that “E-books are an avoidable and discretionary layer of production cost and administrative complexity laid on top of a relatively efficient form of publishing that has existed for centuries.”

At best this position is wishful thinking, and at worse it’s fatally flawed for anyone involved in the book industry.

The book has been a constantly evolving technology, and it’s a mistake to think otherwise. (Clay tablets, anyone? Papyrus scrolls? How about an illuminated manuscript? Lead typesetting? Offset printing? Digital production?)

E-books are here to stay. Consumers are driving the trend, and it won’t work to simply dismiss them. They are not a huge chunk of the market–about 1%–but they are a growing one–up 68% over last year–and soon there will be a loyal customer who prefers them to hard copy.

How fast this segment will grow is open for debate, but as an industry we better get ahead of it, figure out a sustainable cost structure, and serve those customers broadly or Amazon really will dictate the market terms for everyone.

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Talking ’bout my generation

In addition to a technological debate, this is a generational debate both for consumers and for us in the industry. For the next twenty to thirty years, we are going to have to serve three really different demographics, each with a unique consumer pattern, and each with influence over the outcome.

On one end you have the Baby Boomers.

All 70 million of them.

By and large, this generation loves its books, and will be much more reluctant adopters of the e-book. Some members of this group will never embrace electronic technology at all. By and large this group is economically better off than the generation before them, and they have a higher degree of education than previous generations.

These guys are a major economic powerhouse that will be driving hard books sales for some time to come, and they will exert a measure of industry balance against the Gen-Z group when it comes to how far and how fast e-books will bloom.

We already know how to serve this customer very well, but sooner or later they’re going to leave us.

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In the middle you have Gen-X, and Gen-Y. This group, which includes folks that came of age as computers came of age (born between 1965-1999), are a transitional crowd. (I recently heard someone call this generation Digital Immigrants, which I love.)

They read books. They own books. They also own computers, blackberries, and can get around the wired world.

They adopt new technologies without throwing out the old. The Kindle and Sony E-reader are their thing. If a better, more integrated solution comes along for e-books, they’ll pick it up instead.

They will gravitate to e-books for formats and reasons that make sense to their lifestyle, like taking it on the road, organizing many references into a handy package, and for cost reasons. They also will continue to buy paper books for pleasure, but will understand they don’t HAVE to buy something in a hard copy if they don’t want to. They are discriminating.

We’re serving this group pretty well, but they’re not buying everything we’re selling.

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On the other end you have the Gen-Z readers, the post-electronic generation born after 2000 who will be completely wired, and who will no longer think of a book solely as something made of paper you hold in your hands. This generation, which is gaining strength with every baby born today, will be the real force behind e-books. (These guys? They’re Digital Natives.)

This reader isn’t going to buy a Kindle, because they’d rather download an e-book to their 9-inch iPod, or whatever other fancy integrated machine is available when they hit the consumer market. Why buy a separate machine when they’re already using their handheld for everything else?

This generation will be super literate, and they will be absorbing media in all forms interchangeably. This includes some hard copy books, e-books, and web content, but they will be predisposed to the speed and seamlessness of the electronic world. Web 3.0 will be their playground.

This group will drive the market, not the other way around, and it’s this customer we need to get in front of (if we can.)

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We’re asking the wrong questions

It’s a big challenge to figure out how to meet these divergent readers, especially with all of the channels competing for consumer attention.

However, I believe the biggest issue we face as an industry is not how fast e-books will gain market share, but how we will price them properly so that they accurately reflect the costs involved in making them.

Up until now, we have had a tendency to think e-books are somehow cheaper to produce than regular books. More to the point, that is the consumer perception, which makes sense unless you understand exactly what goes into a book’s real cost.

There is definitely efficiency to be gained by not printing, storing, and shipping a hard copy of a book, but a book costs exactly the same to bring to the point of market readiness no matter what format it ultimately takes. (Assuming that it is a professionally written and produced book, that is.)

There are rights, advances, editorial, copy-editing, and proofing expenses, as well as set-up and general overhead. Furthermore, for e-books there is a whole set of digital readiness costs like IT overhead, web design, data management, data servers, networking costs, and other very real expenses.

How much of a book’s cost is made up of these various elements? More than consumers think.

As was rightly pointed out by Carolyn K. Reidy, of Simon & Schuster, it’s not a foregone conclusion that an e-book should be cheaper. It really depends on the upfront costs. The last thing we need is to habituate the consumer to an unsustainable and artificially cheap price point. There will be no going back once their expectations have been set.

If a book was only going to be put out electronically, what would the cost be then? Electronic books are only much cheaper if we’ve invested in the upfront costs already for its hardcover sister. We need to think very carefully about this as an industry, and we better do it quick.

Do publishers really want to be in a situation down the road where they have two products selling side by side in equal numbers, with the same content, and where one is less than half the price of the other? That’s a great way to kill the hard copy book for sure. Can our industry support its costs solely on sales of e-books at $9.99? In a hypothetical world where only e-books are bought, can a publisher afford half the revenues on the same number of units? Are we really going to make it up by doubling the e-units sold?

I’m not convinced, especially as sheer consumer demographics are on the Baby Boomer end of things these days. We already know that the pool of active readers isn’t expanding, and now some of our most committed readers are going to be dying off.

If I was a publisher, I’d be thinking not just about the next three years when I price this content, but about the next 30, when all those Baby Boomer book sales go away.

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We’d best make a choice and make it quick

On the retail side, the big question is how to sell e-books—a format that is tailor-made for downloading—in a bricks-and-mortar store. And this is not just a question for indie bookstores, but for all retailers who currently sell books. So far, the best (and perhaps the only viable) suggestion I’ve heard has come from Bob Miller, head of HarperStudio.

At ABA’s recent Winter Institute, as part of the opening keynote on the state of the industry, he suggested a model where we sell an enhanced hard copy of a book that includes codes for the consumer to also acquire the e-book and/or the audio book via download with one purchase. So, for an extra amount—$2.00, let’s say—the customer will get the “whole” book in multiple formats.

Some folks have questioned whether the consumer wants the extra formats. That’s missing the point. One of the principals of retail is to sell them the things they don’t know they want, but are happy to have. If the price point is right, it will make sense to most consumers especially as e-books gain traction, and is an excellent opportunity to up-sell.

This is an elegant solution that avoids difficult-to-maintain systems like cards, kiosks, and other messy gap solutions. Frankly, it’s the only solution I’ve heard that makes sense.

Publishers will be selling hard copies of books plus the bonus of added e-book revenue through all channels, stores will get a piece of the business regardless of whether they are tech-savvy or not, and consumers will get their content across multiple platforms in a single purchase. And they’ll have more than one choice when it comes to where they get their content.

Again, time is of the essence. As an industry, we have to figure this out, or we will be completely run over and at the mercy of consumer patterns out of our control.

We can either innovate like we’ve never innovated before, or sit and see what the tide of shifting consumer patterns brings our way.

Which would you rather do?

To my mind, it seems like a pretty cold time for a swim.

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Part of this essay first appeared in Shelf Awareness on 2/12/09.