If you were setting up a Publishing company today …

Thanks to Frank for linking to a very interesting article, i.e.

Dumping Print, NY Publisher bets ranch on Apps

The article discusses publisher Nicholas Callaway who is dropping print and switching to apps –

For Callaway, it’s all about apps — small applications sold in Apple’s App Store where books are enhanced beyond the mere text of e-books.

“I have bet the whole ranch on this,” Callaway told Reuters. “This kind of juncture happens maybe once in a century.”

Mr. Callaway is certainly right about us being at a juncture/crossroads that comes about once a century or less. However, is he right about choosing apps?

Various Paths You can Choose

If you were to set-up a Publishing company today, you could choose between a number of options (perhaps even a combination) –

  1. Traditional Print. It is, after all, 85% to 90% of the market.
  2. Kindle and Nook Stores. Release books as digital books.
  3. Apple’s App Store. Release books as apps and ‘enhanced’ books. 
  4. The Internet. Release books as digital books over the open Internet.
  5. A Co-operative of Agents and Authors.
  6. Publishing on Demand – either at bookstores or when orders come in via your website.
  7. New Strategies – Kindle Singles, subscriptions, Shorts, and so forth

Which of these make sense?

Which of these are troublesome?

Traditional Print

There are the obvious advantages – Control, 85% of the book market, an existing infrastructure in form of booksellers and distributors, an existing market in the form of people who buy paper books, there’s a lot known about selling books.

There are the obvious disadvantages – existing Publishers have domain expertise and are scary competition, print books are costly to replicate and distribute, the winners have to cover up for the losers, ebooks are eating up market share, competing forms of entertainment are becoming more compelling.

Perhaps the two biggest concerns are –

  1. How do you compete against the entrenched Goliaths?
  2. How do you compete against the promise of ebooks?

It’s death on two separate fronts – You would need time and money and effort to match or beat the Big 6. By the time you manage to become big and established, your print business might have been eaten up by digital books.

In my opinion, if you were setting up a Publishing company today, it would be madness to focus on being a traditional-style paper book Publisher.

The Internet

Please note that we’re splitting eBooks into two very distinct strategies – ebooks that are sold through ‘evil and closed’ ecosystems like Apple and Kindle Store, ebooks that are sold through ‘open and benevolent’ ecosystems like the Internet and Android.

Does it make sense to set up an Internet-based digital book store? Is it a good idea to choose an ‘open’ platform like Android?

Here are my 3 main concerns –

  1. There’s no way to ensure people pay. So, you are dependent on people’s honesty and generosity and on people feeling your books are worth what you think they are worth. It’s a really bad way to run a business.
  2. The system is set up to exploit content makers. Whether you look at newspapers or music producers or any other content provider – The Internet tends to destroy the amount of money they make. If you’re not a content creator, it’s easy to argue that the Internet is great for content creators by using outliers. The Internet is great for users because they can choose to pay whatever they like – including zero. It isn’t very good for creators.
  3. The people who understand the system, and/or control it, get rich. If you produce books and sell them via the Internet, the people getting rich will be Internet Service providers, search engines, and companies providing technical services – you will not be the one getting rich.

What we have with the Internet is an amazingly lopsided system – Users pay whatever they like; Internet companies get a big share of revenue; Content creators may or may not get a share.

If you have to pick between a closed ecosystem and a completely open ecosystem – only desperation or madness or an allergy to profit would make you pick the open ecosystem.

People who get upset with this approach don’t understand that there is a LOT of money being made – the Internet is not some ‘non-profit entity’ where no one makes money. It would be madness for authors to say – Let Comcast and Verizon and Yahoo and Google make a ton of money while we enjoy the pleasure of selling in an open ecosystem and make nothing.

It’s the same old situation of middle-men eating up all the profit. It’s just couched so well in terms like ‘open’ and ‘good’ that readers fail to see that ‘open’ ecosystems are far worse for content creators than ‘evil and closed’ ecosystems.

Kindle and Nook Stores – Evil & Closed Ecosystems selling eBooks

These have grown from less than 2.85% of the market 2 years ago to 10% to 15% of the market today. It’s quite remarkable.

On top of that, these ecosystems offer a better deal to readers (lower prices, convenience, etc.), a better deal to authors (35% to 70% cut), and reward the platforms richly.

If Amazon and B&N sold ebooks over the Internet – Instead of a 30% cut they would be expected to be happy with 0%. The books would be expected to be free and supported by advertising. By setting up an ‘evil & closed’ ecosystem, B&N and Amazon have managed to reset expectations to something far more realistic.

The only parties hurt here are – the traditional Publishers, the bookstores, the distributors.

Any new Publishing company using ebooks and a closed ecosystem gains several advantages –

  1. The Closed ecosystem ensures only readers who pay, and who pay a price the Publisher sets, are able to access the book.
  2. It’s still books. Digital is just a mode of transport.
  3. eBooks have a huge advantage over physical books when it comes to price and convenience.
  4. The Publishers gets a much larger share while also lowering costs.
  5. It’s new enough that there are no dominant ePublishers. The market is there for the taking.

There’s a lot of upside. The only question is –

Will eBooks stall when they hit 15% of the market? Will they become 50% of the market? Will they take over and be 80% of the market?

If ebooks continue to do well, Publishing will be taken over by Publishers who are fully committed to digital. Publishers that only do print books, and Publishers that optimize for a mix of print and digital, will not survive. It’s hard to survive when 50% or more of your effort is geared towards a very inefficient form of product distribution.

A Publisher selling eBooks through Apple’s iBooks falls into the same category as one optimizing for Kindle Store and Nook Store.

However, there’s a completely separate category that Apple and companies like Vook are promoting.

Apps as the new Books

There’s a mix of two interesting elements that is causing some companies to go with ‘enhanced’ books and apps and video books –

  1. The belief that books need to somehow be improved. That they should be supplemented with video and social aspects.
  2. The belief that the only way to keep books alive is to morph them into something other than books.

These are both very interesting beliefs.

There are, however, a few things to keep in mind –

  1. Apps are a completely new and foreign domain. To make books successful as apps you need mastery of not only book publishing, but also software and technology.
  2. Apps are very, very new. Electronic Arts and GameLoft and a few other companies are the only ones seeing consistent success. We don’t know how sustainable apps are for app-making companies.
  3. The App Store controls everything. Publishers are used to having tons of options for where they can sell their books. Even with ebooks there are options. With the App Store there is nowhere except the Apple App Store for paid apps.

It’s very rare to find companies that can master more than one domain. To make consistently successful ‘book apps’ companies would have to master so many domains that it makes you wonder if it’s just a dream.

Finally, it’s always in the App Store’s interest to equalize things and there are very few barriers to entry – you are guaranteed to get infinite competition.

A Co-operative of Authors & Agents

New Publishing companies should consider creating a co-operative with Authors & Agents. A Publishing House similar to the Big 6 but focused on the most efficient means of getting books to readers.

Here are a few reasons why a co-operative might work –

  1. The only people interested in keeping the value of books intact are Authors, Publishers, and Platforms.
  2. By banding together Authors and Publishers become very powerful. They cannot be exploited by geeks bearing gifts or anyone else.
  3. Everyone’s skill sets mesh together to create amazing domain expertise which is unmatched. Authors and Publishers know more about writing and publishing books than anyone else – Might as well make the most of it.

Everyone other than the author, the publisher, the platform, and the reader is a middle-man preying on inefficiency. A parasite who will try to gradually become more and more powerful and squeeze out all the profit for itself – even if it means no profit for anyone else.

The only actual defence is for authors to band together with people who are interesting in selling books for profit.

This also makes sense if you consider that the real challenge to books is from other forms of entertainment. If the market for books doubles everyone in books will do well – provided they keep the value of books intact.

In a Huge Market Transition no one is to be trusted

Most dangerous by far are companies which have suddenly taken an interest in books. Companies who want to steal the rights of creators and reroute all the profit to themselves.

Another threat are the new middle-men. Companies that see an opportunity to replace Publishers and Booksellers and become the new gatekeepers. Any company asking for more than a 25% to 30% cut falls into this category.

However, the other participants are not to be trusted either.

If readers are given free rein to rationalize they will stop paying for books. If Publishers are given the option, they’ll drag us back to the days of gatekeeping. If platforms are left unchecked, they will start claiming a 50% share. New Publishing upstarts will soon be trying to carve out 50% of the pie for themselves. Authors too will try to take advantage of the circumstances.

It’s an interesting time to be in the book industry. Everyone wants to exploit this Huge Transition in Publishing for personal gain. It’s fortunate that readers and Publishers are some of the smartest people around. It doesn’t take a genius to look at what happened to newspapers. It’s easy to see the devaluation of content being promoted by companies that use content as their fundamental raw material.

Authors have to figure out a way to prevent Internet companies and service providers from stealing authors’ content. Closed ecosystems might be the only solution.

New companies have to figure out a way to preserve the value of books while providing a better value proposition to authors and readers than what platforms and publishers are providing.

Are there going to be a group of new Publishers that manage to connect Authors with Readers in an optimal manner? Will they be able to preserve the value of books? Or will the existing Big 6 and the existing Platforms end up being the eventual winners?

thoughts on defensibility

The Kindle, the iPhone, and all the other devices and closed eco-systems that are springing up are a heaven-sent for anyone creating anything – whether its content or software.

The reason is defensibility.

The Internet is this beautiful thing – unless you are creating and selling a product. Then it’s a nightmare.

It’s really hard to build a business on the Internet, and even tougher to defend it

Lots of things get in the way of building a business –

  1. Some customers are super entitled. They expect everything for free.
  2. There are lots of people who are happy to give customers things for free – to steal their information, or in anticipation of some magical revenue stream they hope to stumble on to down the line.
  3. It’s really tough to get noticed.
  4. There are middle-men everywhere.
  5. There is brutal competition.

Lots of things get in the way of your business’ defensibility –

  1. Your competitors are free to steal anything. They’ll literally steal your software and designs and site and posts and use it to compete against you. 
  2. Absolutely anyone in the world can compete against you. And lots of people do.
  3. There are lots and lots of people with very low expectations – People who are happy to earn $1 per hour.
  4. There are people who will give away a competing product for free. Often they will steal your product and then give it away for free.
  5. People are willing to try lots of illegal things, and there aren’t really any rules. 

It’s like trying to keep a house secure and safe in the middle of an earthquake, a tornado, floods, and a tsunami. What do you prioritize for when things are breaking apart everywhere?

Luckily, closed ecosystems provide a great alternative.

In a closed ecosystem, creators finally get defensibility

Contrast how blatant stealing would be treated in a closed ecosystem versus on the Internet –

  1. On the Internet someone steals your software and runs ads against it – There’s little you can do. Get one site blocked, and another springs up. Torrents spring up. Entire companies like YouTube and Scribd spring up that survive on stealing (at least YouTube did in its initial years). Software like Kazaa springs up that makes stealing super-easy. Huge companies with hordes of lawyers couldn’t fight stealing – How could you?
  2. In a closed ecosystem – Provide the proof and the culprit gets kicked out. Not only does that infringing software get removed, the culprit gets removed – which means the 50 other things he was stealing are safe again.

That’s defensibility. It’s one of the most essential and basic types of defensibility – A rival can’t just take your product and steal it outright.

It gets better.

You get paid for your work

If the ecosystem is being run well, and iTunes and Kindle Store certainly are, then only customers who pay for your product get it. Yes, there’s still piracy and hacking. However, you’re guaranteed that a significant portion of your users will be people who paid for your product.

For a creator, the importance of this can’t be overstressed – There are few things as disheartening as knowing that 80% of the people using your product got it for free, and are using it in a way that doesn’t benefit you at all.

Imagine being a store owner and knowing that every day you will get 20 paying customers and then 80 non-customers will just walk in, will take whatever they want, won’t pay anything, and will curse you on the way out. That’s what it’s like for people making software and games.

In a closed ecosystem the ratio is flipped – even in the worse case you will have 50% or 60% of people paying for what they got from you.

The money you get adds to the defensibility – It lets you improve your product, and thus lets you compete more effectively.

The ecosystem itself is defensibility

It’s absolutely beautiful that the ecosystem membership is self-selecting.

If someone believes very strongly in openness – he stays away. If a company makes its money by stealing ideas – it stays away. If a person makes a profit from other people’s content – he stays away. If customers expect free everything – they stay away.

All the elements of bad intent either stay out, or very quickly leave, or are kicked out when they start breaking the rules.

It’s just not an ecosystem that entities of bad intent like.

Middle-men don’t like defensibility, except when it applies to them

A company like a social network or a content aggregator isn’t creating anything.

For it, the best thing in the world would be to weaken all the actual content creators and make them dependent on itself. Which means that when you deal with a social network or a company that survives on arbitrage – they want your position to be indefensible. So that you are dependent on the middle-man, and the middle-man can take 90% of the profits.

The whole ‘openness’ of the Internet is a sham. There are people making lots of money – it’s just people who are good at using the ethos of the Internet to weaken actual creators and empower themselves.

Creators are getting little from what they create. Users are getting their information stolen. Middle-men are profiting – though not very much. It’s a mess.

You can’t have a business without defensibility

There have to be things you can use to defend your business. Things like product protection, rules and regulations, prevention of stealing, ways to avoid knock-offs, patents, first mover advantage, branding, etc.

Some of those things are missing on the Internet – which makes it very difficult to build anything sustainable.

Closed ecosystems are providing a solution. Instead of getting upset about a system being ‘closed’, users should consider the implications – It allows companies to provide higher quality products. It allows creators to get paid for their creation. It kills the stealers. It weakens the middle-men.

People complain about review processes and lack of openness – Without realizing that these are the very things that ensure quality, and provide an incentive for people to put in a ton of effort into making great products.

It’s difficult – Perhaps the Internet is the environment all companies in the future will have to adjust to. Though you have to hope we’ll continue to see alternative eco-systems where creators and companies can get justly rewarded for their creations and products.

eReader makers seem to be allergic to eReader profits

The Kindle and the Nook have fallen in price considerably over the last 3 years. From an initial starting point of $399 we now have a world where Kindles and Nooks are around $190 and where WiFi-only variants retail for $139 and $149.

If you think about it, cutting prices relentlessly is a rather strange strategy. In most electronics market segments we see constant innovations that keep prices high – things like Plasma TVs and 3D TVs and faster processors and new hard drive technologies.

With eReaders it’s the exact opposite – newer models come in at lower prices than the older models were selling for. We’re now close to the point where eReaders can’t sustain themselves. This slide to zero profitability has been triggered by eReader makers themselves.

eReaders are being sold mostly to sell eBooks

At the moment eReaders are being viewed by eReader companies as a means to sell eBooks – As a device that will make money from ebook sales and doesn’t necessarily have to make any money up-front.

This might turn out to be a huge mistake.

Consider what’s happening with smartphones – Except for Apple, everyone is in a race to zero profitability. The same is happening with eReaders with the exception of one painful fact – There is no Apple of the eReader world. There simply isn’t any eReader that’s very profitable in itself.

Every eReader maker is waiting for the magic stream of eBook revenue even though it’s the hardest thing to guarantee – All users have to do is go online and get a pirated ebook and there goes your ebook profit.

eReader makers are only thinking about market share

There’s a strange lack of respect for profitability amongst current eReader makers. They have this belief that all they have to do is sell a lot of eReaders at cut-throat prices and then at the end of the rainbow there’ll be a pot of ebook revenue gold waiting for them.

You know what – It’s much easier to sell a tangible, physical, value-add eReader than it is to sell an in-the-ether ebook. All the arguments readers use about why eBooks should be cheaper than books apply to why eReader companies should be making profits from eReaders and not waiting for the Godot that is eBook profits. 

Think about the value eReaders provide –

  1. Instant store from anywhere.
  2. All public domain books for free.
  3. Changeable font sizes and in-built dictionary.
  4. Text to speech.
  5. Load up anything that’s DRM free.
  6. Lots of interesting features like syncing your place in a book and your notes and highlights.
  7. Reading across multiple devices at the same time.

The eReader is providing a ton of value. Yes, content has a lot of value too – However, there’s no way to guarantee profit.

eReader makers are throwing away the part that has the guaranteed profits – Readers can’t pirate an eReader. They can’t make a LCD great for reading. They can’t duplicate eInk with a single copy function. Yet, it’s that priceless eReader device that’s being given away without any consideration of profit.

eReader makers are depending on eBooks despite what’s happened with music.

eBook Profits are guaranteed to disappear

There’s no way to lock-in ebook revenue

All this DRM song-and-dance is based on users not fully understanding how easy it is to work around it.

You could buy a Kindle or Nook and never have to buy another book ever again – They are all available for free online.

Why will readers buy eBooks when they are all free?

Perhaps they’ll buy because it’s the right thing to do, because eBooks provide more value for money, perhaps for the convenience, or perhaps out of a sense of loyalty. Mostly, they’ll buy ebooks so that authors can keep writing and can get rewarded for their hard work.

However, authors don’t need very much – The army of authors selling their books for $1 and $3 shows that authors don’t really care about eBook profits.

Authors are just as allergic to making money from eBooks as eReader companies are allergic to making money from eReaders.

In a contest between authors trying to give away their books for free and eReader companies trying to price those books at $10 the authors will always win.

Even without the generousness of authors we have trouble.

We start off with $10 ebooks. Soon we’ll have someone offering ebooks a bit cheaper. Then someone else will go even lower. Before you know it we’ll have $3 ebooks as the standard. Then eReader companies that are making zero profit on $100 eReader sales will be trying to generate profits from $3 ebook sales.

There’s infinite competition in eBooks

You sell your $100 eReader. Then you’re happy because you can keep selling $10 eBooks to people who own your eReader.

Right? Wrong.

A company comes in and starts selling $9 ebooks and starts trying to work around your lock-in. Then another company comes in and tries to make money in another way and offers free books. Then some crazy author comes in and starts demanding books be free.

That ‘$10 per ebook for the lifetime of the reader’ image in eReader companies’ minds is pure illusion. There is NEVER going to be a stable state where ebooks sell for $10.

There’s always an anti-profit company dying to make 10 cents of profit where $5 of profit exists.

With eBooks it’s extremely easy for all the anti-profit companies to compete. They might not be able to invest $100 million and bring an eInk based eReader to market – However, they can invest $100, get a year’s worth of web hosting, and give away $0 ebooks.

The sustainable profits are in eReaders – not in eBooks.

The profit potential of eReaders is being wasted

eReaders could end up being a 50 million eReaders a year market.

10 million out of those could be $300, high-end eReaders – Built to provide the very best reading experience.

At the moment, no company is thinking about that market. That’s $3 billion a year in solid revenue and potentially $1.25 billion in profit. Yet, eReader makers want to throw that away. They would rather try and generate money from ebooks.

We have a $23.8 billion Books market in the US which is well on its way to morphing into a $10 billion to $15 billion Books+eBooks market. That’s the best case scenario. The advent of eBooks could mean that this $23.8 billion a year market shrinks to a $5 billion a year market. One that is full of tough competitors and where no single company makes more than $500 million a year in profits.

In fact, the way things are going with eBooks it seems very likely that some company will end up destroying all the profits and the market leader in eBooks will have annual profits of much less than $500 million a year.

The eReader Market holds a lot of potential profit

We’ve already mentioned the ’10 million high-end eReaders a year’ market that could generate $3 billion a year in revenue and $1.25 billion a year in profits.

We also have the ‘tens of millions of low-end eReaders a year’ market. That might generate anywhere from $1 billion to $5 billion a year in revenue, and perhaps as much as $1 billion a year in profits. However, eReader makers insist on throwing away that possibility.

eReader Makers don’t want to profit from eReaders

It’s almost as if they consciously ruled out any dependable source of profit –

$1.25 billion a year in profits from high-end eReaders?

Nah, that’s too easy.

$1 billion a year in profits from low-end eReaders?

Nah, that’s easy too.

These are markets that require hundreds of millions of dollars of investment – It’s unfair of us to profit from these.

You know what.

We could make $300 million a year in profits from eBooks. It wouldn’t last very long and almost anyone could compete. We also wouldn’t have a defensible position.

Yes – that sounds perfect.

It really is amusing that eReader makers would invest hundreds of millions of dollars into making eReaders and then decide they should try and profit from something else.

Wouldn’t it make more sense to profit from a product that very few companies in the world can make?

Why aren’t eReader makers trying to profit from both eReaders and eBooks?

The standard arguments are all hollow – eReaders have to be cheap because they do one thing. eReaders have to compete against multi-purpose devices.

Actually, it’s a choice. You have some phone makers sell a $600 phone and some phone makers sell a phone with similar functionality for $100.

We aren’t saying that there shouldn’t be cheap eReaders – Just that there’s a lot of profit in eReaders and at least one company should be trying to wrap up that profit instead of throwing it away for the siren song of ebook revenue.

There are people buying $250 Nook Colors and $379 Kindle DX 2s. There were people buying $399 Kindles and $259 Kindle 2s.

Why are eReader makers moving everything to $100? Why isn’t there a Kindle for around $299 with technology that merits the price?

That market for high-end eReaders is there for the taking. Yet, Amazon and B&N are consciously ignoring it.

It’s understandable that there’s a Kindle WiFi at $139 for people who don’t think an eReader or reading can be worth $300. It’s also understandable that the Kindle 3 is $189 and is trying to reach the mass market. However, there’s a solid market for $300 eReaders which is being ignored. Additionally, eReader makers are destroying the profits in the lower-end market segments. They are making the poisonous assumption that eBook profits will sustain them.

The Kindle could be very profitable for Amazon. Nook Color could be very profitable for B&N. By exchanging current eReader profit for the promise of future eBook revenue both companies are digging a hole for themselves.