You can always count on The Economist for a cogent and succinct analysis of an important trend or development that promises to change the way either producers or consumers act. In last week’s issue, they turned their attention to the U.S. book publishing industry, with a piece covering Jeff Bezo’s announcement at BEA that Kindle sales now account for 6% of sales of the 125,000 titles available in both print and electronic versions.
None of the handful of e-book manufacturers will divulge sales figures. First-quarter sales of mass-market e-books in America have tripled since the same period in 2005, but they were worth just $10m. But Kindle and its kind are merely the first generation of a product that is sure to evolve quickly in the coming years. Eventually, e-books point the way towards a cleavage of content from platform, threatening publishing with the wholesale change that has hit the music industry. It is a familiar story: fearing piracy, publishers are already adopting various mutually incompatible security technologies that are sure to annoy readers—although ePub, a new standard backed by many big publishers, may clarify things.
This paragraph zeroes in directly on the essence of the threats and opportunities facing the publishing business. First, until recently, miniscule sales, a fact which is largely explainable by the myriad of confusing and conflicting formats to present the content, and by the fact that:
Unlike digital music or video, digital books require consumers to change their consumption habits.
This is a pivotal distinction: except for consumption of live music or performance, consumers have used some sort of electronic device (albeit not necessarily a digital one) to enjoy their music and video for decades. But the book, as we all know, has survived in a very analog format for more than 500 years. As Bezos himself remarked: “It’s hard to out-book the book”. So there is naturally a fair amount of resistance to changing one’s ingrained habits to adapt to a piece of new technology. The benefits must far outweigh the costs of switching and breaking old habits. Convenience is one compelling feature: downloading almost any book you can think of in under a minute is one that comes to mind – but only if you’re a voracious reader. (just as having 500 channels to watch is not a strong attraction to someone who never watches TV.)
Just as with all new technology, the early adopters pay the premium for what’s essentially a beta release. Prices must drop significantly for the device to reach mass acceptance. And mass acceptance is what it will take in order for Amazon to be successful with the Kindle. That’s what will drive demand for e-books, which is really what they’re after. Let’s face it: Amazon is not a hardware company; they sell content, and high volumes of consumption of content drive their margins higher. How sane would it be for a company like CBS to start manufacturing TV sets to facilitate distribution of their programming content? Shareholders would shout “Stick to your knitting-let someone else provide the hardware.” But Bezos recognized that no one had come up with the ideal device to consume digital books on, so he created one.
By offering the Kindle, Amazon has jumpstarted the whole e-book market, and shaken up the moribund publishing industry yet again. But in order for this effort to be successful, they will need to get the price point down to a level where it’s a no-risk proposition for the late-adopter. That means around $99 or so. Bezos might think about the approach another tech visionary is taking with his game-changing gadget. Just this week Steve Jobs announced the new and improved version of the iPhone will drop in price from $399 to $199. This strategy is no doubt a recognition of the benefits of subsidizing the development of the overall ecosystem, which drives greater overall demand for content offered on the device, (see iTunes) or for other, much higher margin products, like Macbooks.
If some Taiwanese manufacturer came up with a sub-$100 e-book reader with color touch screens and a Gig of storage, I predict Amazon would cede the device business to them. Then they could concentrate on selling more e-books, and continuing their gradual domination of the book selling business.