In another installment in its series about the future of reading, the New York Times ran a piece this week about the tie ins between video games and books that some publishers and authors are beginning to explore. One author of a science fiction book for teens remarks:

“You can’t just make a book anymore,” said Mr. Haarsma, a former advertising consultant. Pairing a video game with a novel for young readers, he added, “brings the book into their world, as opposed to going the other way around.”

And another writer/teacher has the following prediction:

“I wouldn’t be surprised if, in 10 or 20 years, video games are creating fictional universes which are every bit as complex as the world of fiction of Dickens or Dostoevsky,” said Jay Parini, a writer who teaches English at Middlebury College.

Elsewhere in the article, a librarian ponders the following question:

“I think we have to ask ourselves, ‘What exactly is reading?’ ” said Jack Martin, assistant director for young adult programs at the New York Public Library. “Reading is no longer just in the traditional sense of reading words in English or another language on a paper.”

If you ask me, playing a video game is no more likely to make my kid a better reader than becoming proficient at Guitar Hero is going to make him a better guitar player.

One of the most cogent arguments that was posted about the article puts it this way:

Without supporting research, all we have is a group of people trying to sell video games and claiming that those games will make kids want to read books, thus, presumably, making the parents who buy the games for their kids feel less guilty and enriching the people who develop the games. It’s a win-win proposition. But perhaps the “victories” have nothing to do with reading books.

But before we dismiss any digital gadget as anathema to the pursuit of all things literary, keep in mind that the road to media convergence goes two ways. A good example is the popularity of an application from a company called Lexcycle, Stanza, which can be downloaded for free to an iPhone (as well as to any PC or Mac). A recent article in Forbes describes it this way:

Stanza, like Kindle, lets users download new content directly to their device. It has a snappy interface that allows readers to flip through a book simply by tapping the edges of the page and responds far faster than Kindle’s poky E-ink screen, which takes about a second to turn pages. On the downside, the iPhone’s LCD screen can strain eyes after hours of reading and chews through battery power far faster than Kindle or the Sony Reader, both of which can go without recharging for days. Lexcycle currently offers only public domain books–most of which were published more than 50 years ago–and creative commons titles offered up without copyright by the books’ authors. The Kindle, by comparison, costs $360 and offers more than 180,000 titles, including new releases and best sellers at around $10 each.

I recently witnessed this somewhat ironic collision of classic lit and new technology when my own kids discovered they could download the Stanza app to their iTouches. So they took a break from playing Jewel Quest II and started reading “Animal Farm” and “Sherlock Holmes”. Apparently they’re not the only ones doing this. The Forbes article continues:

In the meantime, Stanza’s scarce supply of new content hasn’t stopped users from finding plenty to download. According to Paris-based Feedbooks, Stanza’s largest distributor of content, the application’s users have downloaded more than 2 million books. By comparison, Kindle users who access Feedbooks’ book catalog–directly via multiple methods, including through its preinstalled Web browser–have downloaded less than 40,000 of Feedbooks’ titles, although they also have wireless access to the company’s contents.

Think of what those numbers mean for those doomsayers predicting the demise of the written word. I’ll bet my Kindle that sales of books by Tolstoy, Orwell, and Austen haven’t approached 2 million total in the last fifty years. These statistics merely prove the theory that if you offer hassle-free access to compelling content, it will be consumed. OK, so maybe it’s too much to expect my thirteen year old to read War and Peace on a 3.5 inch screen, but I didn’t have to drag him to the library to get it in his hands either.

In a book published this summer, the business guru, Harvard professor and author of the best selling book, “The Innovator’s Dilemma” Clay Christensen, turns his analytical lens to the education sector and offers some compelling arguments about how best to reform it. His new book is called Disrupting Class: How Disruptive Innovation Will Change the Way the World Learns (co-authored with Curtis Johnson and Michael Horn), and I strongly recommend it to anyone involved in educational technology. If you can’t get to it right away, an excellent summary of it, written by the authors,  appears in this Forbes article. More can be found on their website, www.disruptingclass.com. Publisher’s Weekly offers this commentary:

It’s no secret that people learn in different ways, so why, the authors of this book ask, “can’t schools customize their teaching?” The current system, “designed for standardization,” must by its nature ignore the individual needs of each student. The answer to this problem, the authors argue, is “disruptive innovation,” a principle introduced (and initially applied to business) by Harvard Business School professor Christensen in The Innovator’s Dilemma. The idea is that an audience in need will benefit from even a faulty opportunity to fulfill that need; in education, the demand for individual instruction could be met through infinitely customizable online computer-based instruction.

A reviewer on Amazon offers this summary of the book’s arguments:

Dr. Christensen argues that the traditional government-run education system will in the near future be “disrupted” by the innovation of computer-based learning. At first, online learning will compete against nonconsumption by offering classes in subjects where there isn’t enough demand in any given school to justify offering a traditional course (such as a very advanced math one or an unusual foreign language). But eventually, He believes that the technology will improve such that computer-based learning will render the traditional model of education obsolete. In “Disrupting Class”, he postulates that demand for computer-based high school classes will follow an S-curve that will start to “flip” (significantly accelerate) in the year 2012. In the years between 2012 and 2018, Dr. Christensen projects that the share of online courses will grow from 5% to 50% of all high school courses.

Professor Christensen’s influence on industries and large organizations should not be underestimated. Intel sent its top 2000 managers to his workshops in the early 1990s, when it was being attacked on the low end by innovators such as Cyrix and AMD. The Celeron chip emerged from this exercise, which helped Intel fend off the disruptive technology of the newcomers. However, he recognizes that the public school system is a very distinct animal from a profit-driven corporation, and the tools needed to effect change are quite different indeed.

One aspect of his analysis, I believe, is spot on regarding how one of the major players in the educational field will be affected by the predicted disruption, and that is the publishing industry. He characterizes the textbook industry as:

a scale-intensive value chain business, marked by high fixed costs, much like the pharmaceutical and commercial aircraft manufacturing industries. The costs of writing, editing and setting up to print and bind a book are roughly the same, whether 1000 or 1 million copies are sold. …These are blockbuster seeking businesses. A large monolithic market for a single best selling title is just as attractive to a textbook publisher as the blockbusters Zantac and Lipitor are to a drug company.

There is little dispute among textbook publishers that because individual students learn differently, they need differentiated learning options. But the textbook companies can’t get there from here. Were they to focus on developing different books for each type of intelligence, their volume per title  – and their profitability – would decline markedly. Because this is so disruptive to their business models, most of the intellectual and financial energy of this formidable industry focuses on creating and commercializing still more blockbuster books for large, undifferentiated masses of students.

But Christensen and his co-authors point to the enabling technology of such Web 2.0 innovations as User Generated Content as the solution to this dilemma. In other words, the disruptive innovation will come from the consumer side, as opposed to the producer side, since the producers have too much to lose to be the innovators. Like most disruptive technologies, these tools will initially be adopted on the margin, say for tutorial purposes, rather than be integrated into the mainstream system right off the bat. His prediction:

For several years, most teachers and students will still have conventional textbooks. But little by little, textbooks will give way to computer-based online courses – increasingly augmented by user-generated student centric learning tools. At some point, administrators, school committees, and teachers unions will recognize that even without explicit administrative decisions ever having been made, student-centric learning will have become mainstream.

A bit of historical perspective may be appropriate here. Anyone who studied engineering or science up to the early 1970s would recognize the name K + E (Keuffel & Esser), the premier manufacturer of slide rules for over a century. Their story may ring a bell:

K+E held patents for a wide range of slide rule features, including improved cursor indicators, functions and scales, and the adjustable body mechanism. Caught by the huge market shift created by electronic calculators, CAD systems and laser surveying systems, which displaced all of their strong markets, K+E shrank dramatically after 1972. K+E even sold some TI manufactured calculators for a brief period trying to capitalize on their existing customer base and industry knowledge. The final assets of K+E, mainly involving paper products, were sold to AZON in 1987, after several painful internal re-organizations.

There are some striking parallels between companies like K+E in the 1970s and the textbook publishers of today. A prime indicator of an industry in decline is rapid consolidation. Another is the introduction of “new” products whose main objective is to protect the existng franchise that the “old” products have built up over the years. One wonders if any publishing executives have ever heard of K+E. The authors may want to leave a couple of copies on the desks of their publisher, McGraw-Hill.

At the Demofall08 conference that was held this week in San Diego, (“72 companies. Each with six minutes to show their product to the world. It doesn’t get any more straightforward and fast paced than that.”) a company named Plastic Logic introduced a new type of e-reader that looked like it featured nearly everything the Kindle doesn’t, at least in its current incarnation. Take a look at this video:

Demo08 Plastic Logic

Some of the oustanding features of this yet to be named product are:

• Touch screen
• 81/2 by 11 inch display
• as thin as a pad of paper
• durable, unbreakable plastic (not glass) display screen
• virtual keyboard
• Bluetooth and Wi-fi capable
• allows notes and annotation on a document
• handles PDFs and other open format content

Some reviewers have commented that it lacks content, when compared to the Kindle’s library of 170,000 or so titles. But the device was presented to the crowd as a “Business reader”, in contrast to the Kindle, which they referred to as a device for “recreational reading”. Elsewhere they  mentioned that their device allows them to work with publishers to create “new business models”. Perhaps they could find an intrepid textbook publisher that would be willing to offer textbooks on the device. Its form factor and durability would appear to make it far more suitable for the high school and college market than the Kindle. Whoever gains the first mover advantage in this market will be able to write their own ticket when Jeff Bezos comes calling.

The country that gave the world U2, Guiness beer, and the shamrock also seems to be on the cutting edge of educational technology, according to a story in Thursday’s Irish Times:

A GROUP of 18 secondary school pupils yesterday became the first students worldwide to replace their academic books with electronic devices. The first year students of Caritas College girls’ school in Ballyfermot, Dublin, each received an electronic book, pre-loaded with the required textbooks, as well as 50 classic novels including Moby Dick, Pride and Prejudice and Oliver Twist . The use of the electronic devices will mean a dramatic reduction in the weight of the pupils schoolbags, replacing more than 6kg (13.2lbs) of textbooks, workbooks, an English dictionary and a novel with a 400g (0.9lbs) e-book.  In addition, the students will no longer need copybooks to take notes, as they can write and doodle on the electronic pages, similar to a regular copybook.

The pilot program has apparently been launched by Dublin based educational publishers Gill & Macmillan. Their director of sales is quoted as saying: “Although we believe that the widespread adoption of e-readers is some time off, this project allows us to determine how well they work in the classroom, how the pupils interact with them and to examine their potential.”

The device being used for the pilot program is the Iliad, by iRex Technologies. It list for $599 U.S. and is generally regarded as the Mercedes of e-book readers. In addition to handling e-books (including PDFs), this device incorporates Wacom’s pen writing technology, allowing the user to write directly on the screen with a stylus. The mind boggles when imagining the scenario in which a student can carry all her books and notes in a 15 oz package that fits in her purse.

No doubt some critics will say that at this price, why not buy them all laptops, but you’d be hard pressed to find a laptop with handwriting recognition and touch screen technology incoroporated for $600. Besides, the electronic paper display is unbeatable for reading long passages of text. The iliad comes with built in wi-fi for downloading content wirelessly, as well as an optional ethernet hook-up, in contrast to the built in “Whispernet” feature of Amazon’s Kindle, which is based on Sprint’s high-speed mobile phone network.

This is a bold step for a publisher to take, assuming they are underwriting the full cost of the program. If this assumption is correct, this begs the question, (or several questions): Does Gill & Macmillan plan to migrate all its textbooks to an electronic medium? How is their economic model different from that of North American textbook publishers, who so far have shown little interest in adapting their content to an electronic format? And finally, could they please open a U.S. branch?

We will be following the progress of this experiment in digital publishing closely over the coming months. Stay tuned.

In a stinging critique of its recent foray into the field of digital textbooks, the publishing industry was taken to task in a report released this week  by the Student Public Interest Research Group. The study, entitled, “Course Correction: How Digital Textbooks Are Off Track, and How to Set Them Straight”, outlines the findings of a survey conducted on two different college campuses last spring, and presents the following findings:

1. Digital textbooks must meet three criteria – affordable, printable and accessible:

In order to be a solution to high costs, digital textbooks must cost less than traditional books. That means digital textbooks must be priced lower than the net cost of buying a textbook – the purchase price minus the amount the student can expect to receive for selling it back to the bookstore.

2. Digital textbooks done wrong: e-textbooks fail to meet the criteria:

The first type of digital text we reviewed was e-textbooks, the digital book format offered by the major publishers through CourseSmart.  We found that they fall short on each of the three criteria we found digital textbooks must meet.

E-textbooks are too expensive
* The e-textbooks we surveyed cost on average exactly the same as a new hard copy of the same title bought and sold back to the bookstore.
* The e-textbooks we surveyed cost on average 39% more than a used hard copy of the same title bought and sold back online.

Printing is costly and difficult
* Printing was limited to 10 pages per session for each of the e-textbooks we surveyed.
* Buying and printing half of an e-textbook was three times the cost of buying a used hard copy and selling it back to the bookstore, for the books we surveyed.

E-textbooks are difficult to access
* Students have to choose between using the book online or using it offline – they cannot do both.
* Most (75%) of the e-textbooks we surveyed expired after 180 days, so students do not have the option to access their books in the future.

3. Digital textbooks done right: open textbooks meet all of the criteria

Open textbooks are textbooks distributed free digitally under an open license.  The key feature of an open license is that it permits users to make copies of the textbook and translate it into different formats.  So, open textbooks start as digital textbooks but can be printed in a variety of formats. We found that open textbooks accomplish what e-textbooks do not: low prices, printing options and accessibility.

Open textbooks are affordable. Open textbooks are free digitally, and students can purchase other formats at a low cost.

Open textbooks are easy and inexpensive to print. Students can print digital textbooks anytime, anywhere and in a variety of formats.  They can print individual pages at home, order a print-on-demand bound copy, or anything in between.

Open textbooks are accessible. Students can access open textbooks anytime, from any computer, without the book expiring.

The authors of the study urge faculty and institutions to do everything they can to encourage adoption of open textbooks:

For faculty, this means giving preference to open textbooks whenever pedagogically appropriate.  For institutions, this means providing incentives to faculty authors and pooling resources to develop a viable infrastructure to support open textbooks.

This report seems to be getting noticed, as it’s been quoted by most of the major tech and publishing blogs. If nothing else, it will most likely lead to a spike in hits on a couple of sites: Coursesmart (which PIRG ranks slightly below the IRS in its contribution to society), and on Flatworld Knowledge, which receives high praise for its approach to open textbooks. (Another site Connexions, offers open source educational content as well.) There will also quite possibly be a lot more traffic to file sharing sites like Textbook Torrents, which didn’t let pesky conventions such as copyright laws interfere with its users’ access to every textbook that has been scanned and uploaded by disgruntled students. (Although the site is currently not accepting any more registrations, which suggests that their legal bills may be exceeding their server costs.)

As the report indicates, the textbook publishing industry is overdue for change. But for some insight into some factors that might keep the business from changing as quickly as the technology is, it’s worth reading a column posted by a writer with impressive credentials, as an author, college professor, and a publishing executive. His post is called Why the Kindle Won’t Have a Dramatic Impact on College Course Materials for at least Five Years and although it focuses largely on the barriers to the adoption of the Kindle in the college market, it provides a cogent and laconic account of the economics of the textbook publishing industry. Among his observations:

• Within this context, e-books are budgeted as a small percentage of the overall budget. From the textbook publisher’s perspective the development costs are identical whether the content is being flowed into a print textbook or an e-book. This is because textbook publishers make most of their revenue of print textbooks and, consequently, most of the content development strategy is formulated around those print textbooks. E-books are simply “add-ons” or extra products that can be viewed as a by product of the core print development process.

• Within the current content development workflow for textbook publishers, the plant investment remains the same regardless of whether the product is a print textbook or an e-book. And, since publishers sell far more print textbooks than e-books, there is no incentive to change production workflows to favor the creation of minimized or lower-cost e-books from which print textbooks could be created. This means that publishing e-books, without significant changes to current design and production workflow, does not reduce the publishers’ costs significantly. This is important because it means all current e-book solutions for textbook publishers take into consideration the print book production process and derives cost efficiencies from that process. There are neither sales incentive or cost efficiencies in the current workflow that would cause publishers to get excited about the Kindle.

One could surmise that the same might be said for ebooks in general, not only Kindle versions. Until the design and workflow process undergoes a radical transformation, thus reducing the cost curve by an order of magnitude, traditional publishers will not be in a position to offer their content in an open (free or nearly so) model. This is a clear symptom of an industry about to undergo a stage of disintermediation, which is usually accompanied by major sell-offs of assets, restructuring and layoffs of thousands of managers and editors. It may take a decade or so, but eventually the textbook industry may consist of hundreds of small, specialized content producers, and a handful of POD providers. Instead of going to Barnes & Noble to buy their textbooks, the freshmen of 2015 may be stopping by Kinko’s.

The Association of Educational Publishers sponsors a blog called: Publishing for the Digital Future, which is a collection of essays, articles and opinion pieces that analyze the impact of the digital age on the field of educational publishing. In a recent post, the CEO of Evan Moor Educational Publishers offers up a number of questions that are often asked by publishers thinking about moving into the digital realm. His answers to these questions provide some valuable insight into the thought process of publishing executives. The writer, Bill Evans, takes a decidedly optimistic view of the future of digital publishing, and its effect on the industry. Here are some excerpts  of the questions and answers he addresses:

1. How secure is the e-book format? How can I be sure that my intellectual property isn’t going to be e-mailed to 150 of my customer’s closest friends?

Before answering this question, we first have to ask: How safe is a paper and ink book? The truth is that with better and better scanning techniques and better and better character recognition, any paper and ink book can be made into a digital book in a matter of minutes. Whether it’s a paper and ink book or a digital book, publishers will have to be vigilant about protecting their copyrights.

2. Will digital books cut into my other sales?

That has certainly not been our experience at Evan-Moor. It has been our experience that it actually grows the sales of a book. We believe this is because we are serving a different customer–a customer who has not previously been served. However, if the format did replace the sales of a paper and ink book, it would still mean greater profits for your company. Without any costs of goods sold or the costs of incoming and outgoing shipping, more money drops to the bottom line.

3. How should I price an e-book?

I’ve always taken the position that I’m not selling paper and ink. Rather, I’m selling content. The publisher may be saving on the cost of goods sold, but the customer is also saving the cost of shipping. In addition, the customer gets immediate delivery of the product. At Evan-Moor an e-book and a paper and ink book cost the same.

6. What’s the future of the digital book?

Right now, most publishers (including Evan-Moor) are simply taking the production files we have for our books and transforming them into PDFs for distribution. To a certain extent this is a lot like putting radio shows on television. It really doesn’t take advantage of all the possibilities of this new electronic medium. There are lots of ways we could think about enhancing our e-books, including:

• Providing a clickable table of contents to immediately get to the part of the book that you want to go to;
• Giving the ability to annotate the pages with the teacher’s notes;
• Allowing the teacher to customize the content for his/her class;
• Adding elements to an activity or deleting them or perhaps even changing the spelling for territories outside the United States;
• Selling chapters or even a few pages of a book rather than the entire book;
• Selling compilations and collections of e-books in a bundle; and
• Making the book whiteboard friendly so that the book is truly interactive. This might also include providing worksheets that now become self-correcting in the digital context.

8. What are the benefits to the ultimate consumer?

There are many reasons that teachers are going to want to buy supplemental materials in this manner:

• Get the book immediately;
• Do electronic word searching within the document;
• Store the book so it doesn’t get lost, and even back it up;
• Print exactly what you need when you need it;
• Avoid shipping costs;
• The teacher may have the ability to customize content for his or her individual classroom; and
• Use the book on a whiteboard, as well as printing it out.

Now you might be a bit confused if you read the answer to Q 3 (“At Evan-Moor an e-book and a paper and ink book cost the same”) and attempted to reconcile it with the rest of the piece. This statement might be paraphrased as “Let’s not change our pricing one iota, despite taking 30-40% out of our cost base and not adding any value to the content”. It is symptomatic of the antediluvian philosophy of the publishing industry. This assertion is all the more ironic in view of the other promises of e-books that the writer refers to. If they took the extra step and converted to a reflowable text standard such as e-pub, then one might see the justification for charging the same price, because of the value added to the digital content. Clickable ToC, highlighting and annotating text, electronic word searching – now those are features that changing the nature of the book (and education) as we know it.  Simply converting files to PDF misses out on the ability to deliver on the prediction he makes in his conclusion:

E-books and digital content are not just a new way of distribution–this is a whole new way to think about educational publishing.

It may be a new way to think about it but they’re stuck doing things the old way.

The buzz in the e-book world is all about Sony’s announcement this week of its forthcoming support for a more open standard of e-books, called “e-pub”:

From Gizmodo:

A firmware update scheduled to drop later this week will allow Sony Readers to use the .epub format, an open standard (with DRM support) that has the backing of several major book publishers. This means you’ll be able to get books from sources other than Sony’s own Connect store, which currently only has one third the titles of Amazon’s Kindle store. The Kindle, however, currently uses the Mobipocket format for its Kindle Store books, and does not yet support .epub.

More from PCWorld:

…EPUB. It is known more technically as “the International Digital Publishing Forum’s XML-based standard format for reflowable digital books and publications.” Many book publishers apparently are already publishing upcoming ebooks in this format and this is something Sony wants to capitalize on by making the Reader the first device of its type to support this. The Reader model PRS-505, starting next month, will be able to let users access ebooks in the EPUB format. It will also support, said Sony, Adobe ebooks with DRM protection as well as “the capability to reflow standard text-based Portable Document Format (PDF) eBooks for improved flexibility and readability.” These Adobe updates will be possible with the use of Adobe Digital Editions 1.5 software.

[For an earlier discussion of this standard, see my May 19 Post]

To paraphrase another, admittedly more significant milestone, that took place nearly forty years ago this week, “That’s one small step for a reader, one giant leap for e-books.”

Adopting an open format can only help accelerate the range of choices for readers, which in turn will help drive demand for more titles, and other documents that could be stored on an e-reader. Note that the E-pub standard allows for DRM to be applied after the conversion process, which makes it up to the publisher whether the content is protected or not.

It remains to be seen whether Amazon’s rumored Kindle 2.0 will support this standard. One piece of information was notably absent from all the hoopla around the Sony announcement this week. Sony recently made a major announcement about their corporate strategy and it contained the following quote:

Ensure that 90% of our electronics product categories are network-enabled and wireless-capable by the fiscal year ending March 31, 2011 (“FY2010”)

No mention this week about when the Sony Reader will have this capability. To my mind, this is the feature that most differentiates Sony’s reader from the Kindle. Despite Kindle’s less than elegant form factor and interface, the ability to download content wirelessly, at no extra cost, puts it miles ahead of anything else in the category. When does Sony plan to incorporate the wireless feature into their reader? (The PSP already has it, and so do a couple of their TVs.) Until they do, they will remain a distant second in the e-reader world, despite their adoption of a more open format of e-books.

It’s a sure sign that a new piece of technology is moving from the fringes to the mainstream when it’s possible to find more than a hundred sites that link to it or refer to it in some way. This one – Hack Your Kindle 100+ Tips, Resources and Tutorials to Get More Out of the Amazon Kindle – has more useful information than most, from the familiar (how to view PDF files on the Kindle) to the arcane (how to use your Kindle as a GPS device), to the worldly – a couple of these links require an understanding of Russian and German.  Its posting on a college oriented website (CollegeDegrees.com) would seem to indicate that college students are beginning to look at the Kindle as an item to stick in their backpacks, along with the laptop and ipod, but one that actually may lighten their load. See this discussion for a well organized summary of the issues surrounding the potential of textbooks on the Kindle. Also, my June 25 post on the news that a few university presses are starting to publishe Kindle editions.

It was bound to happen sooner or later, but barely six months after it was introduced, the Kindle is starting to become the “textbook of the future”. As reported this week in The Christian Science Monitor and Inside HigherEd, a handful of university presses are starting to put some titles on the Kindle:

This fall, Princeton University Press will begin publishing Kindle-edition textbooks. It’s on a short list of printing houses that are testing the e-textbook waters. (Kindle has also snagged Yale, Oxford, and the University of California.) But Princeton is the only to attempt a Kindle-first launch, offering Robert Shiller’s new economics book “The Subprime Solution” on the Amazon electronic reader two weeks before students can buy a hard copy.

This development has met with enthusiasm from back-breaking-bag toting college students, if the following post is any indication:

Oh thank HEAVENS some of the University Presses are getting into the Kindle game! This device will radically transform the chiropractic needs of college students as soon as they can get textbooks on there … it’s coming!

A quick search of college textbook titles available in the Kindle store today turns up a mere three results, with prices ranging from $25 to $40 per title. The Inside HigherEd piece reports about a 10% savings for the Kindle versions of the books, not a substantial discount given the cost of the device. Again though, prices should come down as volume scales up, and if publishers ever venture out of their protection-of-margin comfort zone, and face the fact that the consumer will eventually run of of patience with an industry that continues to charge as much for digital bits as it does for the physical product (can you say “record labels?”) Of course, if they continue to manage their business with this 19th century foresight, there are a plethora of Web 2.0 upstarts ready to step in and serve the market. (See my post about Flatworld Knowledge on April 18)

Last month at Book Expo America, I heard Jeff Bezos say that Amazon had been selling e-books for nearly ten years and that they needed an electron microscope to find the sales figures. Well they may not need one much longer, if Pacific Crest analyst Steve Weinstein’s projections are valid. He estimates that global sales of e-book sales at Amazon could reach $2.5 billion by 2012, based on the following analysis:

To figure this, Weinstein starts with the handiest analogue: iPod and MP3 player sales. He notes that between 2003 and 2008, digital music sales grew from 2 percent of the US market to 33 percent, largely on the back of Apple’s (NSDQ: AAPL) twin offerings. He doesn’t expect the Kindle/e-books to track as fast, but he does think the market is off to a strong start already, and that the cycle will pick up steam as the Kindle comes down in price (that’s already started) and the ecosystem matures. He also suspects the consumers will be drawn to the instant gratification aspect of Kindle titles, as well as the lower price per book. Based on an operating margin of 4% to 5% for physical books (comparable to operating margins for brick-and-mortar stores) and 15% to 20% for e-books (comparable to other forms of digital media), we estimate that e-books could add as much as $330 million to operating income.

The key figure in this analysis is not the total sales projection, but the margin ratios. If the e-book business generates an operating margin that’s 4X that of the dead tree type, you need no further evidence that Amazon will over time make this the foundation of their business model. Any innovation that offers you the opportunity to carve out two of your largest cost components – warehousing and shipping – (not to mention improving on the customer’s instant gratification experience), is clearly going to be a key component of the company’s strategy. In fact, one wonders why they aren’t giving Kindles away, in order to “iPod-ize” the market, and begin to reap the benefits of the overall growth of the ecosystem. The most logical explanation is that the capital markets still regard Amazon’s investments in digital media with a high degree of skepticism, which tends to temper the rate of spending on this type of technology. This somewhat cautious approach could end up backfiring however. If Steve Jobs chooses to enter the e-book market (despite his dismissal of the book business last year), Apple could quickly come to dominate the market for e-books, since consumers are becoming more accustomed to using their iPhones for reading along with browsing the web. The infrastructure is already in place (iTunes store), and the platform has the dominant market share, and the lure of 20% margins on $10 price points (compared with the few pennies they currently earn per song download) may just be enough to entice Apple to change course and start selling e-books.

All these developments are good news, of course, for the reading public. The outcome of this creative destruction process will be lower costs for content, as well as for the devices to read it on. I might however, have some concern for my career path if I was an assistant editor in a large publishing company.