Thursday, March 18, 2010

After EBSCO Hooks NetLibrary Will Others Take the eBook Bait?

Don Linn's post on the business of book publishing "Risk and Return in the Time of Cholera", did a good job of explaining the John Sargent "disastrous but stable" comment that I reported last week. The observation that I found most interesting in Linn's article was that technological change surrounding the transition to ebooks will necessitate significant expenditures of capital. "Given weak balance sheets and low ROI's, where will the capital come from to finance the rapid innovation and change required?"

Yesterday a major transaction was announced involving one of the leading ebook distributors in libraries. OCLC sold most of its NetLibrary Division  to EBSCO Publishing. The transaction is surely a manifestation of the need for innovation capital identified by Don Linn.

First, I need to make disclaimers. For the most part, I've avoided writing here about OCLC, the world's largest library cooperative.  I worked there for three years, and I have continuing obligations regarding proprietary information, so writing about OCLC means I have to do extra work to make sure that things I know and write are public information. Although I didn't work with the NetLibrary division at all, you can't work somewhere for three years without developing bias, so consider yourself disclaimered.

NetLibrary was a bubble-era dot-com that was the first company to try to make a business of creating, aggregating and selling ebooks. eBook adoption was too slow for NetLibrary to generate the returns that investors had hoped for, and it burned through over $100 million of venture capital and crashed. OCLC was the white knight that rode in to rescue the company, picking it out of the bankruptcy dumpster for only $10 million. OCLC said that it did so to protect the investments its members had made in NetLibrary ebooks, but another way to understand its motivation is to note that libraries and the institutions that serve them have much longer horizons than venture capitalists, and OCLC could afford to wait for for the day that ebooks would transition from curiosity to widely used medium.

As part of OCLC, NetLibrary's market presence grew steadily along with the library ebook market. Its content expanded to audiobooks and the FirstSearch article databases,  but its technology was designed long before Kindle and iPad came along. While you can listen to a NetLibrary audiobook on your iPod, you can't read a NetLibrary ebook on your iPhone. NetLibrary now uses the Adobe Content Server to allow its PDFs to be read on the nook from Barnes & Noble and on Sony Digital Readers. Clearly NetLibrary will need some significant investment to keep up with the rapidly changing ebook environment.

The sale of NetLibrary should be viewed primarily as a capital allocation decision by OCLC. eBooks and eReaders are not the only change happening in the library world, and NetLibrary is not the only major product at OCLC that would suck up significant capital. OCLC is making significant investments in cloud-based library management service based on WorldCat and WorldCat Local, and sensibly managed businesses, even non-profit ones, allocate capital according to the potential value created.

With capable ebook competitors such as Overdrive, ebrary, Myilibrary (part of Ingram Digital Group) and others, it's difficult to make the case that NetLibrary was providing unique value or substantial cost savings for OCLC member libraries. In contrast, WorldCat is a unique resource and the library management services being built on it promise a revolution in the way libraries work. According to OCLC VP Chip Nilges, quoted in an article worth reading in Library Journal, selling NetLibrary is "a strategic repositioning from hosting and reselling content to building WorldCat out as a platform that libraries can use to manage and provide access to their entire collection."

Netlibrary's presence in the ebook market may also have conflicted with OCLC's desire to catalogue, expose and link to every ebook held by libraries. To best do this, OCLC needs cooperation from ebook vendors other than NetLibrary. These competitors probably weren't happy that OCLC's library holdings database constituted valuable market intelligence- what they were selling and who they was selling it to.

If OCLC wasn't willing to finance rapid ebook innovation, why does EBSCO Publishing appear to be willing to do so?

EBSCO is one of the more unusual players in the library space. EBSCO started out selling magazine subscriptions. Elton B. Stephens, the company's founder and the EBS of EBSCO, noticed that his customers, which included the military, needed binders to put the magazines in and shelves to put them on, so he started selling binders and shelving. EBSCO grew into the largest subscription agency in the world, and provides libraries and corporations tools to create and manage their virtual magazine shelves. Somewhere along the way it also became the largest fishing lure manufacturer in the world.

The reason that a move into ebooks makes sense for EBSCO is that ebook purchases are really subscriptions. The print book production and distribution chain was built under the assumption that once the book was delivered to the customer, the transaction was done and could be forgotten. Magazine subscriptions, by contrast, are continuing relationships. Electronic magazines and journals require even more continuing support, and this is true for ebooks as well. A corporate infrastructure built to sell and support magazine subscriptions works well for supporting ebooks.

I think the answer to Don Linn's question is that the capital to support rapid innovation in ebooks will come (and has come from) from incumbents in adjacent industries with expertise in products that are not print books. Amazon first developed eCommerce capability; Apple developed consumer devices and a content marketplace; Google sells ads and delivers search. Starbucks does storefronts.

I wouldn't be surprised if one or more of the NetLibrary competitors I named above are soon acquired by "adjacent industry incumbents".  The comment thread is open for your speculatory pleasure.
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  1. <record class="stuck">
    Eric, you wrote: "The reason that a move into ebooks makes sense for EBSCO is that ebook purchases are really subscriptions."

    Do you honestly believe that consumers are going to tolerate "purcheses" of ebooks that can be unilaterally revoked at any time?

    Realistically, some will and some won't -- I can tell you now that I am in the second camp -- and the question is where the split will fall. But even if that split is currently far enough to the left that subscription-model ebooks are a tenable business model this year, surely the split can only drift rightwards. Enough people have been burned by vanishing content already -- or heard from those who have -- that I just don't see it being a trick that publishers are going to be able to keep pulling off.

  2. Mike- Some ebook business models are more subscription-like than others. If you can unstick your record for a moment you'll remember that most e-journal subscriptions come without DRM- they use access restrictions instead.

  3. I rather enjoy the irony that the very things that make ebooks lousy as a product to be sold (drm, impermanence, lack of "owner" control) make them perfect for library lending -- they can't be stolen, the transaction is by its nature one with a relatively short end-date, and users are not supposed to keep library books forever. I've spoken to librarians who especially appreciate being able to serve certain kinds of materials (which one public librarian called "books with legs") in electronic format. The "For Dummies Books," Cliff Notes, and repair manuals have a very short shelf life in libraries because they are so often either stolen or not returned. I am especially interested in the move to lending films and music in electronic format. Those formats are the ones that are the hardest to deal with in terms of library security systems since their physical composition is incompatible with the two major security methods: RFID and EM tattle tape. Going digital could actually solve some knotty problems for libraries.

  4. Eric, I don't see that a distinction between DRM and other forms of access-control is important here. The issue is: if you buy a thing, do you then own the thing? Or can it be taken away from you? If my record is stuck, it's because I am convinced that that distinction is fundamental -- not only theoretically, but in the hearts and minds of consumers.

  5. Mike- even if you buy a physical-book-thing, you don't own the words, in the sense that you can't do everything you might want to do with them. I think consumers understand that. I think there will be demand for virtual-book-things that are as non-revocable as possible in the sense that physical-book-things are, but I think that there will also be demand for virtual-book-things that don't have that attribute and are priced accordingly.

  6. NetLibrary as part of OCLC,could be widely used in today's world!