Update 2012: Well, content was written in 2010, and saw a lot of white papers since them drawing on these blocks.
Reference to another presentation I compiled, down here:
Reference to another presentation I compiled, down here:
Henri Moufettal - Augmented Books and how I would choose an ebooks reader
And yes I am an ebook reader fan, update of the presentation on:
-ebooks for the world of education
-a reader or a tablet
so here we start reviewing how traditionnal publishers can make most of the current evolution:
It was not since Gutenberg’s invention of the printed press, that the publishing industry started to face an unprecedented change. It has been built since then. Are EBooks a real challenge or can they thrive on this structural change?
If we look closely to the business model of the traditional publishing company, we can see how they will be able or not to circumvent the challenges ahead. Let’s take a deeper look.
In the traditional business, publishing companies do certain activities to reduce the risk of failing with each book published; screening candidates works, editorial help, gap identification, story line coherence and feedback with the author. Let’s not forget about representation to gain visibility by marketing efforts and distribution leverage.
Having agreed on the release of a work, covers and forewords are selected and contracts signed. A new review is done to add anything that can increase the book’s appeal and position within a specific market by choosing “personalities” to add comments and attract possible readers. At the same time, final details will be solved at this stage such as price setting (Appendix C), and the selection of points of sale will be done.
Then when all details have been addressed and the final text has been received, the book is finally sent to be printed and sent to the distributors’ channels. At the same time, the final copy of the book needs to be registered for intellectual property rights to the corresponding intellectual property administration of each nation.
After the book goes to sale, the publicist and publishing house will work relentlessly to have the author interviewed as many times as possible, send copies to magazines and newspapers for reviews and hopefully be part of their editorial releases. At this point, the publishing efforts end as for the first edition of a book. In rare occasions, editions will be released again in another format, to attract new customers via price discrimination. For example, a paperback edition or translations will be pursued to try and gain momentum on other market segments. This will depend mainly on the success of the book. [i]
Challenges started to appear in the mid 2000’s where different companies started to develop hardware and software that would render this model obsolete – or at least that was the general thought. Panic has been the news ever since Amazon launched Kindle and peaked ever since Steve Jobs, Apple’s super-star CEO announced the launch of the iPad.
Now, let’s take a closer look at the EBook business model. It’s unclear to pinpoint exactly where the EBooks started or who was the first company dedicated to the conversion of books to an electronic format, so all assumptions given ahead are mere educated perceptions of how the entire industry works. Business models have evolved much in the past years and we suspect this will continue to happen in the years to come. It is a new industry in diapers that is challenging a consolidated industry. Similarities to the music industry can be borrowed, not all but, but this can give us a valuable insight[ii]. We may not expect similar outcomes, but it would be daft not to take these experiences into account. Since the introduction of global digital music downloads, “legal digital downloads account for only 2% of music sales”[iii]. EBooks are the door that has the ability to gain access to free media and endless possible customers by the internet as the starting point. Along comes the possibility to lower the cost to the bare minimum, but let’s keep it clear: It does produce overheads, so this is not a free highway.
EBooks lift the traditional screening process and therefore are less concerned about reaching a threshold in sales to break even. This relaxes many constraints traditional publishing houses have in launching less well known, more alternative styles and unique concepts. For the sake of putting aside discussion, we will not go further into quality judgements of any material produced.
To tackle the overheads, that as a myth in EBooks, they do exist. In order to have material to publish, there must be expenditures.
Expenditures include editors, copy editors, artists, marketing, review coordinator, submissions coordinator, formatters and various office staff, all of whom have a hand in publishing the book. Also, let’s recognize that these sections also incur in expenses as office space, electricity, web access and hosting, advertising, marketing lawyers and accountants. Costs do exist.
Also, author royalties are generally higher (25% - 35%) (Appendix C). In this stance, the author is involved more in the publishing of the book. So the company and the author share the risk of having a successful publication that meets or exceeds initial expectations.
Also, EBooks have a time frame much faster than traditional publishing. In most occasions, traditional books take as long as three years to reach bookshelves.
A big setback for this new business model is the perception it has from early adopters; First adopters where repelled in a large extent because of quality contents and the developing wars of the manufacturers which, to build wall around their products, developed incompatible systems, causing much frustration and not meeting expectations.
So, the EBook industry is still very immature, so early adopters are still considered to be moving within the industry lengths, meaning that volume sales are still significantly low compared to industry’s potential.
This growing industry will continue down this path of growth only if two things matchup: retail price and expected price. What is the expected value of an EBook? Being priced lower than in the traditional model can be an advantage but margins can shrink if piracy problems are not address or copyrights issues resolved[iv]. Let’s keep in mind what is happening to the record labels, who are switching from producing and selling albums into revamping the touring of the bands because piracy has left a big hole into their wallets.
Taking on the copyright issue, as for the French industry as an example, publishers are allowed to publish any text seventy years after the death of its author[v]. All works that pass this age, become free of copyright. This can be a major concern for many publishing houses and an opportunity for EBook publishers how can add fairly easily proven successful texts and delivering them to customers cheaper and faster.[vi]
The main breakaway from traditional models as for the point of sale is in the direct versus third party. Today EBook publishers can skip traditional distribution channels thus bringing costs down, hurting the traditional business model. They can hurt so much their relationship with distribution channels that can retaliate to them badly before their EBook business model pays back for the trouble (if it pays backs at all). If traditional models adopt direct sales, the harm done to their own distribution channels can be devastating. But on the other hand, new EBook publishers cannot expect to be instantly recognized or have the critical mass of traffic to make all their efforts worth. We can relate this to the Sword of Damocles’ tale on traditional means of production and distribution. By going into EBooks, traditional publishers can affect deeply their established network in this industry.
As observed, a great risk is looming on traditional players of this industry. Appendix B displays the concern particularly for Penguin group’s business and a weakened financial outlook of the company in 2009. On its parent website, Pearson Publishing states that the strategy for years to come is displayed on four core points[vii]. (Appendix E).
As mentioned above, the introduction of digital tools is transforming and creating new distribution channels within the industry. On the supplier side, authors can now publish at a reasonable cost their works through EBooks websites and independent channels[viii].
How can Penguin Group build up success from its past dependencies? Is branding their only competitive advantage in the new context?[ix] Penguin Group has to sustain its attraction of customers through quality and consistency. Complacency with new entrants in this industry is not an alternative. Status Quo has changed.
With 14,000 EBooks offered[x], Penguin Group plays currently a minor part in the global publishing industry of EBooks. Major players as Google, Amazon and ebooks.com have more than 400,000 EBooks available. Other players will enter the arena, so it is time for action. In conclusion, Penguin Group can take advantage of its past dependencies with traditional publishing and evolve independently from EBook devices, only seeking basic partnership for synergies with EBooks manufacturers. EBooks will increase their sales by partnering with publishers, and look for the possibility to set up trends, like we can see in the music industry with the IPhone.
EBooks will alter the traditional perception of books, but this might not affect publishing industry as a whole. Both, manufacturers and publishers will now continue to evolve as two independents entities and not overlapping industries. Traditional publishing might not disappear, but the expansion of electronic format is surely to have a big participation on the market share. Penguin Group must go in this direction.
Penguin group is also strongly looking to develop its strength in digital library while nurturing its relationships with authors, preferring a smoother transition. Penguin would need to reach a critical mass and be seen as a global player within the EBook industry.
It is not just a change in presentation; it is an opportunity to know more about their clientele through IT. Added to the blogosphere, information will prove useful for managing the business and reacting proactively to the on-going trends. It would ensure managing the traditional risks of publishing by minimizing uncertainties and cost of development via CRM. This is a powerful tool to be resilient to fast market changes.
Penguin Group needs to use proactively knowledge of the industry by recognising the strengths within the traditional business and develop itself with this proof of quality supporting this new media. Penguin group would ensure to have a firm foot within different business models. By partnering EBooks manufacturers with the traditional publishing, Penguin Group will minimise much of the risk of failure of any new book. Marketing risks and other uncertainties will be reduced by this direct online contact with the customers. Even if investing more money initially, Penguin Group will be able to tap a much broader customer base in the developed countries while offering both standards: traditional and digital media.
Going forward with EBooks, will mean that fixed costs will either impact the retail price or the loss making of the traditional industry, the volume will decrease on traditional books sales and dividing these fixed costs to a much smaller amounts, raising the cost per unit.
Synergies, not mergers, with printing companies will prove to be a suitable solution to outsource and mitigate the increase of cost while not investing more in the traditional channels. Partnering to EBooks, Penguin Group will expand its customer offerings while not increasing its risk. Indeed, an EBook reader device will almost certainly be a “one-shot” opportunity. Penguin Group can release several books that will be able to be read in the any EBook reader and look into a longer term customer relationship. Penguin could develop a new network and ensure an adequate vertical integration: outsourcing printing traditional offering, while ensuring its marks within market of EBooks.
Copyright and the piracy are the biggest challenges. Competitive edge like emphasis on quality of the output would be required but not sufficient. A fundamental way forward might be to offer more services to the customers in their conversion from traditional reading to digital reading. A Freemium[xi] internet will help offer a solution. In addition to contents, Penguin Group, therefore, can look to build up and link customers via recommendations and added contents. At the time these lines were written, Penguin Group released one possible output publishing one interactive book for the education sector. It is surely looking to take advantage of the dynamic interaction readers can have with the book in the new format being consistent with their new campaign: “New Life for a Classic Character”[xii].
Part of the metamorphosis of the industry will certainly see an increase of candidate works to the industry. EBooks emphasises greatly the interaction offered to the reader. New series of books where readers are the heroes as in role-play[xiii] books could be continuously updated[xiv]. Interaction offered by EBooks will indicate a new way to raise interest to younger generations by adding this entertainment side they are so eager of.
So, is not only the customer perception that has and will continue to change, Penguin Group and its parent company (Pearson owning Penguin Group, FT, and other education) should eliminate past dependencies and leverage on their knowledge about the nature of the industry and avoid industry myopia. Publishing will not end, it is merely transforming. Penguin is a publishing company, not a book maker. Getting too tied up to the idea that their business is coming to an end, will prove fatal. They have to look for new horizons of the industry and develop their business model in accordance.
So
So
[i] Gavin D. J. Harper: The Publishing Industry
[ii] Similar revolution happened when digital music was made available through the internet.
[iv] On the first day of January 2010, CNN highlighted that piracy is entering broadly to the area of EBooks. They reported that with the last release of Dan Brown’s Bestseller “The Lost Symbol” . It took less than twenty four hours for the new opus to be displayed on EBooks free of charge. [iv] http://edition.cnn.com/2010/TECH/01/01/ebook.piracy/index.html
[v] Arts and literacy intellectual property code France: Article L. 123-1 intellectual property period for French publishing http://www.celog.fr/cpi/lv1_tt2.htm
[vii] Pearson group, consumer publishing brand, http://www.pearson.com/about-us/consumer-publishing/performance-2009/
[xiii] A novel where the reader makes decisions and chooses on several ending for a story
Appendix A: Penguin Group in the organization
belongs to Pearson PLC who owns Pearson Education, the Financial Times group, and their arm to consumer publishing, Penguin Group
Appendix B: Insight of financial performance of Penguin group 2009*:
£ Millions
|
2009
|
2008
|
Headline growth
|
CER growth
|
Underlying growth
|
Sales
|
1,002
|
903
|
11%
|
(1)%
|
(2)%
|
Adjusted operating profit
|
84
|
93
|
(10)%
|
(17)%
|
(19)%
|
Appendix C: Breakdown of cost in the publishing industry
Traditional
|
EBooks
| |||||
Retail Price
|
26.00
|
Retail Price
|
12.99
| |||
Bookseller revenue (Retailer)
|
13.00
|
Retailer (30%)
|
3.90
| |||
Gross Margin
|
13.00
|
50%
|
Gross Margin
|
9.09
|
70%
| |
Print - Store – book
|
3.25
|
13%
|
Conversion to digital (typeset and copy-edit)
|
0.50
|
4%
| |
Design - type setting - copy-editing
|
0.80
|
3%
|
Marketing
|
0.78
|
6%
| |
Marketing
|
1.00
|
4%
|
Royalties
|
3.25
|
25%
| |
Author royalty (15% cover price)
|
3.90
|
15%
| ||||
Total
|
4.05
|
16%
|
Total
|
4.57
|
35%
| |
*http://www.nytimes.com/2010/03/01/business/media/01ebooks.html?pagewanted=1&hpw
| ||||||
Appendix D: Penguin description industry description through the 5 Porter forces:
1. “Investing consistently and in a disciplined way in author and product development;
2. Developing a globally coordinated publishing organization, benefiting from worldwide scale and rapid rates of growth in literacy, education and demand for books in emerging markets;
3. Innovating with digital technologies to provide new reading experiences, new ways to market, new sales channels, and more efficient means of production, storage and distribution of content;
4. Becoming a more efficient organization, focusing on margin progression, working capital discipline and cash generation. In 2009, Penguin successfully implemented a series of organizational changes in the UK designed to strengthen its publishing, reduce costs and accelerate the transition to digital production, sales channels and formats and to lower cost markets for design and production. Penguin’s 2009 results include approximately £9m of charges relating to these organizational changes.”
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