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Note: This is NOT an attack on EverNote – it’s a great product with a very well designed iPhone App.

This post simply shows how difficult it might turn out to be for Authors and Publishers to make money from books on the Internet. 

In fact the only option might be to shun the Internet and focus on channels of good intent like the Kindle Store and Apple iBooks Store.

Todd Sattersten has a post explaining the math for Evernote (a great product) and the numbers are terrifying - books may one day be in a similar situation.

What situation?

1. The Free spirit of the Internet and the brutal competition turning everyone to desperation.
2. The destruction of profits and of rational business models.

It sounds melodramatic until you look at what’s actually happening.

The Math on Evernote

Evernote’s numbers for January 2010 -

1. Active Users – 2,335,676 total users. 
2. 30-40% of users use the service (are active) any given month.
3. Premium Users – 41,958. That means 1.78% of people using the service are actual customers.
4. Actual customers (the premium users) pay $5 a month.
5. You can sugarcoat it any way you like – the rest are non-customers.

It gets even scarier when you look at revenue and profits -

1. Revenue from premium users - $145,000 (January 2010). 
2. Total Expenses – $68,641. This includes hardware, software, hosting, network, operations staff, and support staff.
3. Gross Margin of 53%.
4. There are other sources of revenue and fixed costs (fundraising, team building, product development, marketing, execution, lunch). However, Evernote say Gross Margin is the important number.

Revenue of $145,000 in January with expenses of $68,641 and a gross margin of $76,359 seems quite good.

Until you look at the context.

Putting Evernote’s numbers in Context

EverNote puts in a lot of effort and resources into getting their $76,359 a month profits.

1. EverNote has 30 employees. That’s $2,545 of gross margin per employee.   
2. Evernote has received $25.5 million in funding – starting in 2006 (March 1st).  
3. 1.78% of people who use the service are paying customers.

Is this what a successful Internet company looks like?

Evernote say this about their gross margin -

The gross margin increases every month because revenue per user grows (conversion rates go up because long-time users are more likely to convert) while variable expenses per user decline (Moore’s law + efficiencies of scale).

That’s all well and good – However, it isn’t like Evernote are very focused on profits.

What’s truly scary is that EverNote is happy to keep going with this model

Here’s the founder’s philosophy -

Here are three things I think about:

1. Make a product that a billion people will fall in love with and use for the rest of their lives.
2. Make it easy for a single-digit percentage of them to pay you a few bucks a month once in a while.
3. Make sure your variable costs are low enough that you can make a mountain of profit if you get #1 and #2 right.

If you can’t see how you’ll do all three things, go with another business model.

Who knows what’s right or wrong – it’s just interesting to realize how he views his company’s path to huge profits.

It’s worth pointing out exactly what EverNote’s founder views as success -

Make it easy for a single-digit percentage of them to pay you a few bucks a month once in a while.

On the Internet this is the sort of mindset Authors and Publishers will face.

What if the Internet and Competition reduce Books to a similar fate?

It’s important to keep in mind that this is a company with 30 employees and $25.5 million in funding – advantages that no author will have (and only a few publishers will). 

It’s even more important to keep in mind that his company has lots of competitors who are happy to do the exact same thing.

That makes it very difficult to increase the percentage of Premium customers to double digits (from the current 1.78%)

With the Kindle and the Nook and the Sony Reader publishers and authors have a very good thing going. Readers are willingly paying $10 – an amount that can sustain both authors and publishers.

Yet, Publishers don’t see that the comparison of $10 is with the Internet.

The current push to $15 is toppling the delicate balance of readers gladly paying $10

Publishers’ ‘it’s the principle of the thing’ stance is the most poorly thought out bit of strategy ever.

1. They actually make less. 
2. Readers pay $5 more – that’s a 50% price hike. 
3. They encourage piracy.
4. Their attempt to kill eReaders might kill their current channels of good intent.

Publishers are missing two key facts -

• There is no guarantee that a channel of good intent will spring up on Apple’s iBooks Store – $15 is too high of a price.  
• They may kill the channels of good intent that are already set up.

They may be left with nothing except the Internet – and the Internet destroys profits mercilessly.

On the Internet you have companies like EverNote

Ambition and competition run wild.

1. The Internet has people willing to sell billions of books for $2 just so they can make 5 pennies per book.
2. The Internet has people willing to give away billions of books for free so they can make money off of ads.
3. There are authors who will give away their work – just for the principle of it.

There are a lot of people who’d starve for years in the hope that they will one day be billionaires.

What happens when everyone start selling free books and $1 and $2 books?

Authors will be happy to have 2.3 million people read their book while just 47,000 pay for it – Because they think that will guarantee they become the next J. K. Rowling.

The strategy of using free for marketing sounds great – It doesn’t work when everyone is doing it.

We need to keep all our channels of good intent

It isn’t a bad thing if Publishers want to create multiple channels of good intent and sustain them.

However, their current $15 push is killing all the channels.

They aren’t saying that they’ll come in with competitive prices and competitive range on the iPad - they’re saying they’ll destroy the Kindle channel and also not let the iPad channel become sustainable.

Publishers need to take a long, hard look at EverNote -

1. It’s what’s considered a successful Internet Company. 
2. A victim of free and infinite competition and the Internet’s anti-profit essence.

They have channels to avoid the Internet and they are choosing to sabotage them.  

Greed and Fear make people do irrational things – However, killing a $10 channel of good intent is a madness in a class of its own.

Filed under: books Tagged: | future of books, race to zero