NQ Logic

Technology | Strategy | Consulting

Paper Chase

"Black Friday", the Friday following Thanksgiving Day, is considered by US retailers and consumers as the official kick-off of the Christmas shopping season, with dramatic sales and bargains. Despite the Great Recession, this year saw a not-so-Black Friday swallowing U$595m of online spending, an 11% increase from last year, with Amazon.com in the lead (capturing 15 % of all visits among the top 500 retail sites).

For weeks, Amazon’s own Kindle has been rated #1 Bestselling Product on its site, even though this latest generation e-book reader costs hundreds of dollars, even with a discount. Although no number has been officially published by Amazon.com to “protect competitive interests”, the one estimate says the nascent e-reader market will sell a stellar 3 million units in 2009 with 900,000 units selling just during the November and December holiday season.

What is a Kindle?

The Kindle is a combined hardware and software platform that can read electronic book content. Named after the vision to "kindle" the love of reading, the device lets customers download the e-book content from Amazon’s e-book catalogue without cables or other computers, using mobile phone technology and telecommunication carrier networks.

Developed by Amazon’s subsidiary Lab126, the first device was released in the US in November 2007, and has since evolved into three different models (Kindle 2, Kindle 2 International and Kindle DX), with Kindle 2 International just deployed in over 100 countries this October. Despite drastic conditions dictated by publishers over price and distribution rights, Amazon has managed to offer a vast portfolio of over 360,000 books, as well as the latest magazines and newspapers for download, which is more than enough to fill the maximum capacity of 1,500 titles (for the latest Kindle) for many customers. This licensed (not purchased) content can be electronically bookmarked, highlighted, annotated and searched on the Kindle. While a book is open on the display, a contextual menu allows readers to look for synonyms and definitions from a built-in dictionary. The latest Kindle even has a Text-to-Speech feature so that an electronic voice can read the content to you aloud.

The device is far from being the ideal electronic book reader platform but will certainly evolve in the future to address the poor screen contrast definition, the low battery life expectancy, and the proprietary file format support limitations. Nevertheless, the bold vision from Amazon is that Kindle will, in a not-so-distant-future, replace the paper book.

Battle of the Middle

With PCs becoming smaller and phones becoming smarter, the Kindle appears to be squeezed between two large trends in the consumer tech market, while addressing a very narrow need. The e-reader market has been nurtured for years by large consumer electronics companies and content providers, without being able to trigger a large consumer migration over to the digital world.

More shocking is the abundance of devices (and therefore proprietary formats) on the market today. The Sony Reader series, the Samsung Papyrus, the iLiad from iRex Technologies, the Hanlin from Jinke, the Foxit's eSlick, the Elonex eBook, the Interead COOL-ER, the Hanvon N series, the BeBook from Endless ideas, the "flexible" e-newspaper reader by Plastic Logic, the CyBook Opus by Bookeen, and the recently released and already out-of-stock Nook from Barnes & Noble are all fighting in the same niche but haven’t managed to become as successful as the Kindle, in both technology and market share. And the recently introduced Smartbook by Western Digital can only add to the profusion confusion.

All could change shortly with Apple rumored to re-launch next year (12 years after terminating the Apple MessagePad), an Apple Tablet PC (a.k.a. iPad), a hybrid device that could be best defined as a combination e-reader and e-writer. With its cult-like consumer mindshare, distribution channels experience, and carrier relationships, Apple may quickly take the lead and light of the promising digital market.

With so many big name players and with such fragmented device offerings, the promising electronic publishing business has yet to find a solid leader taking it all.

Is the Book Dead?

September 30, 2009 marked the 557th anniversary of Gutenberg's printing of the Bible and since that very day, books have been published regardless of wars, famines and plagues.

"At no time since 1450 …has the book business been at such a confusing and potentially treacherous juncture.” -- Sarah Lyall, formerly a reporter for The New York Times covering the book industry
Ironically enough, few books have been published about the global publishing business itself. But UNESCO estimated that over 1 million book titles have been estimated in 2005, with three countries (US, UK, China) being responsible of almost 50% of the global book market.

Narrowing down to the US and using their numbers as a proxy (depth and accuracy), could help to understand better the publishing ecosystem business while eliminating cultural biases that usually arouse when it comes to words and language.

In 2008, US book publishers had U$40.3bn in net dollar sales (+1% from 2007) and a total unit sales of 3.08bn (-1.5% from 2007) [Book Industry Study Group (BISG)]. This is an increase from a decade prior when1998 revenue was U$6.15bn in net dollar sales with total unit sales of 860.3m. The increase of the average revenue per unit sold within the 10-year period (from U$7 to U$13) may be partly explained by the previously untapped consumer market, despite technological improvements, managerial rationalization, cost reduction, new book format introduction, and intense competition in the industry.

Despite all rumors, consumers still like books, so books will survive.

Is the Book Publishing Business Dead?

In order to manage economic risks, large publishers are more likely to sign books that appeal to the widest possible audience, and are reluctant to take chances on experimental books or unknown authors. A 1998 KPMG report suggested that only 3% of book titles accounted for 50% of the volume of UK retail sales. This means readers are mass purchasing the same few titles, with the consequence that large publishing companies are almost universally looking for the next Dan Brown DaVinci Code, 80-million-unit sale blockbusters.

The key difficulty in this traditional, produce-before-you-sell publishing business model is to estimate the market and print the right number of books, and subsequently manage the inventory and the different supply chain components. The eventual bi-polarization of the supply side (large publishing houses looking for a blockbuster, and small publishing houses looking for a compelling niche) is slowly matching the bi-polarization of the demand side (readers buying top of the list and specialty books). And this is the same path trodden by the other content industries like TV, movie and music.

The digitalization of the TV, movie and music (and now book) content
  1. addressed consumer thirst for easy-access content, and ultimately extended the long tail market (Chris Anderson),
  2. removed the barrier between unique content experiences (e.g., watching/listening a music video on mobile phone)
  3. created a unique market in which all content types compete with each other for the same discretionary money from consumers for leisure, and so
  4. reinforced the economic necessity for providers to seek the big, blockbuster success (Large Head).

This “Elephant Effect” (animal with a very Large Head and a Long Tail) is now shaping all content provider ecosystems, including the very diverse and fragmented book publishing industry.

Despite all rumors, publishing business is alive but even more fragmented.

New Business Model

Since the beginning of the printing industry, technology has been driving the economics of book publishing. Recent developments in print production are changing once again the publishing business dramatically, fueling the burgeoning micro-publishing and self-publishing models.

New digital printing machines can now print a book in sequence, like any regular desktop printer would do, from cover to cover, without any human, manual intervention. This new print-on-demand technology offers the possibility to develop a sell-before-you-produce business model, the same that actually predated the printing industry. Large, third-party organizations are making massive capital investment, focusing essentially in selling excess capacity to any publishers of any size, for the same price irrelevant of the number of books needing to be printed.

This combined with the internet that gives direct access to consumers, numerous micro-publishers have successfully come to market. Lulu, iUniverse, Trafford and Blurb are expanding their self-publishing model around the globe giving masses of unknown writers the possibility to "vanity publish" their books.

Still, all tasks previously done by the publishing house have to be executed to offer a final product regardless of its format, but ownerships and decisions have now shifted from central to local. In the new model, original tasks are distributed between the self-publisher, the print-on-demand manufacturer, and the writer, the last having the final say in the entire creative process. The new model has removed the different intermediaries and is proposing a collaborative platform for writers to finally monetize on their creation, regardless of its market size.

Can Amazon Survive This Publishing "Jungle"?

Jeff Bezos started Amazon.com in a Bellevue,WA garage in 1994 with only a U$40,000 loan. In its first full fiscal year in business, in 1996, the company generated U$15.7m in sales. Soon after, Bezos decided to let customers add their comments about books, making Amazon.com one of the first online communities.

A year after going public in 1997, Amazon.com added music CDs and movie videos to their online store catalogue. Ignoring profitability directive and using abundant cash from the dot-com venture capitalists, the company focused uniquely on growth, expanding their product categories at lightning speed. This “get big fast” strategy culminated in 1999, which saw sales at U$1.6bn mark and Bezos named “Person of the Year” by Time magazine.

A month later, the company reported a loss of U$323m for the holiday fourth quarter and entered in what was the dot-com burst death spiral. Many rounds of layoffs later and a massive loss of $1.4bn in 2001, Amazon.com was forced to change its strategy. Focusing uniquely on profitable products, cost-cutting, supply chain optimization on one hand and diversifying by selling others’ company products on the other, Amazon.com managed to turn a profit one year later, and has delivered since then.

Today, Amazon.com is the world’s leading online retailer with 280m visits per month [Oct 2009], four times more than its closest competitor Walmart [Oct 2009]. The Fortune 500 company, now based in Seattle, has the “earth's biggest online selection” where customers can find and discover, with the community’s help, anything they might want to buy at the lowest possible price. Amazon.com and its 1.3m affiliate merchant partners around the globe offer new, refurbished and used items in many product categories. Most recently in 2008, Amazon.com launched the Digital Text Platform, a system for authors to self-publish directly to the Kindle. The service is based on a revenue-sharing model and enable writers to distribute, market and sale their own work.

In business, solving a known problem has always been easier than creating a brand new need. Amazon.com, with its large data storage capacity (AWS), consumer-friendly portal, and established brand identity, has ventured away from providing the best online experience to building a new market.

From the consumer perspective, the Kindle and all other e-book readers are new devices that compete will the ones they already have. By pricing the Kindle at a premium, selling e-books at price on par with paper books, and competing directly for writers with its publishing partners, Amazon.com has too many dependencies and constraints in this new business. It is painfully learning that large capital investment combined with well-established brand strength is not sufficient enough to create a new market, where there is no real consumer "need". Amazon.com, once again, has to change its strategy if it wants to win the electronic book business, no matter what the un-official Kindle sale numbers are saying.

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