The Rough and Tumble World of E-Books
E-book sales surpassed hardcover sales, but obstacles are hindering the digital format's road to supremacy. According to the Association of American Publishers, stores sold $280 million of adult e-books in the first quarter, an increase of about 30 percent from a year ago. Young adult and children's e-book sales, meanwhile, doubled to $64 million, while adult hardcover books grew modestly at 3 percent to $230 million.
Robust sales of e-books over hardcovers signal the rapid transformation of publishing. Early on, the industry embraced the digital format, but as it grew dominant, publishers, authors and consumers started jockeying for control over the distribution and pricing, especially as the number of e-readers proliferated. E-books are at a critical point in the industry, and two major events and forces are shaping the growth for years to come.
The Justice Department Shakeup
HarperCollins, Simon & Schuster and Hachette agreed to tear up contracts and renegotiate pricing with outlets like Amazon and Barnes & Noble, according to a Justice Department settlement with publishers, but the long-term outlook of digital publishing remains uncertain.
Regulators say Apple and five major publishers conspired used an agency model, which allows publishers to set prices of e-books, to fight Amazon, which used a wholesale method to let it guarantee the lowest e-book prices and undercut competition.
U.S. District Judge Denise Cote sided with consumers against Apple and the publishers. She believed Apple blocked e-books from competing in the open market by "helping the suppliers to collude, rather than compete independently." The ban will help Amazon secure a stranglehold the market by crippling its two biggest competitors, Apple and Barnes & Noble.
An Amazon Monopoly
But several publishers counter that Amazon's wholesale model, while cheap, devalues their digital books. They fear consumers will get used to the $10 e-book, and they'll be unable to sell them at higher prices later on, draining their future profit and revenue. Currently, Amazon sells books at those low prices based on sheer quantity.
For now, it pays publishers the full royalty fee, and takes the loss itself for market share. But publishers fear Amazon's size lets it undercut the competition, which drives rivals out of business, Once it's the only seller left, it won't have to slash prices, and it will have the power to pay whatever royalties it deems proper. That scenario would ultimately hurt consumers, publishers and the market itself.
Regardless, as part of the settlement, retailers are free to discount. In addition, the terms are good for two years, and afterwards, publishers can negotiate agreements to switch to another model and restrict discounting. Amazon, meanwhile, plans to drop its prices on many popular titles to less than $10 from around $15.
For its part, Apple is staying the course. "The Justice Department's accusation of collusion against Apple is simply not true," said Tom Neumayr, an Apple spokesperson. "The launch of the iBookstore in 2010 fostered innovation and competition, breaking Amazon's monopolistic grip on the publishing industry."
A Raw Deal for Authors
The rise of Amazon is bad for authors, too. Scott Turow, president of the Authors' Guild, lambasted Amazon's uncontested dominance, saying Amazon gives authors less for their work than Apple or Barnes & Noble, and far less than authors make if they distribute the e-books themselves.
Since Amazon is the dominant e-book seller, the pricing may get worse, depending on what the Justice Department does. Amazon marks up the digital delivery fees that small authors must pay, for example. Some, like J.K. Rowling, who released the digital version of the Harry Potter series through her own website, Pottermore, sidestepped the exorbitant fees. But lesser-known authors will have to pony up, or turn to publishing tools like Habitat and try to distribute books through other venues -- but that avenue alienates a bit chunk of digital buyers.
Writer and president of the Authors Guild, Scott Turow, expressed concern about what a shift may mean for Amazon, which he coined, "the Darth Vader of the literary world," in an op-ed piece from Bloomberg last month. Turow joins others who contend Amazon's wholesale pricing creates a monopoly, resulting in less diverse titles coming to market, which hurts bookstores, publishers and readers.
Still, e-books aren't going anywhere, but if Amazon manages to box out its competitors, it'll drastically change the face of the digital publishing industry -- and not in a good way. Authors and publishers are caught in a difficult position, faced with the choice of reaching Amazon's larger market or go it alone in the quest for a higher cut of revenues, and fragmenting the market.
An Opportunity for Challengers
As Amazon and Apple fight it out, underdogs Microsoft and Barnes & Noble are teaming up to gain a foothold in the shifting digital publishing market.
Microsoft will invest $300 million for around an 18 percent investment stake in the "Newco," the temporary name for the joint venture. Barnes & Noble, meanwhile, will own the remaining 82 percent share as it spins off its Nook Digital and College businesses.
Microsoft's involvement comes at a surprise, since they fought over the Nook's alleged patent infringement. But rather than battling each other in courtrooms, the two companies teamed up -- with Barnes & Noble agreeing to royalty-bearing licenses on Microsoft's patents. In return, Microsoft will help push the Nook by installing its app on Windows 8 systems.
Barnes & Noble's broke through and captured a niche in the e-reader market. But it's been unable to parlay that into a successful brand, a feat Amazon achieved with the Kindle. Amazon developed its Kindle Fire, and then aggressively discounted it while offering a subscription service -- giving customers a direct link to content -- which increased its popularity and sales.
Microsoft's investment, as well as the push from Windows, will help fuel growth as well as innovation. Barnes & Noble's GlowLight e-reader, for example has yet to be matched by Amazon, and give the bookseller a little boost as it tries to gain ground.
The deal also opens the door for Microsoft to have a greater presence in the tablet market, at a time when the industry is ripe for educational expansion. Windows barely make a mark. IPads, meanwhile, dominate.
But the timing is significant as well. The Justice Department lawsuit against Apple and publishers has destabilized the e-book market, giving an opportunity for another competitor to enter.
E-book prices will drop in the short-term, but the bigger picture is harder to discern. Publishers and writers will continue to fight to protect their interests, Amazon and Apple eye an emerging market and their own bottom line, the Justice Department is expected to press on with its antitrust suit and consumers want choice, flexibility and affordable prices.
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