Tuesday, December 7, 2010

Lots of Markets, Lots of Business Models

from Wikipedia
The book industry is a lot like the Soviet Union. The Soviet Union consisted of fifteen ethnically divergent states (soviets) stitched together by a highly centralized government model. When that government model weakened, it turned out that there was little holding the soviets together. The Soviet Union no longer exists.

Discussions of the ongoing transition from print to digital books frequently make reference to corresponding transitions that have occurred in the music industry and in the film industry. As I've learned more and more about how the book industry has worked in the age of print, it's been made clear to me that unlike music and film, the book industry has consisted of a large number of disparate industries thinly stitched together by a common delivery mechanism and shared supply chain.

Predicting what will happen to the book industry in its shift to digital by looking at music is like making predictions about the Soviet Union by looking at Germany.

Consider the different ways that books can be of value. The utility of a cookbook has very little in common with the utility of a romance novel. A dictionary and a travel guide are very different, even though you might take both on a trip. A manual on object oriented programming and a superman comic book might both be useful for squashing bugs, but the former should be open and the latter should be rolled up when doing so. I won't even mention coffee table books.

Compare the music industry. No matter the genre, most everyone uses music in the same way. Whether rap or raga, Beethoven or Roll Over Beethoven, the variations in consumption patterns are relatively small.

When utility variations of goods are small, the business models behind their distribution tend to converge. The film and television industries had very different pre-digital distribution models, but their business models are converging today because they are valuable in much the same way. Scholarly journals are another good example. 10 years ago, when journals began the transition from print to digital, publishers started out with a variety of business models for different fields. Today, however, the vast majority of journal publishers use roughly the same business model.

That's why I think the book industry of the past is fragmenting into many smaller industries based on business models that deliver the most value. We've already seing this begin to happen. The old business model of the encyclopedia industry has already died;  Wikipedia has almost wiped out the incumbent encyclopedia publishers with a public charity business model.

Whenever O'Reilly Media and their willingness to do free-on-the-web versions of their books come up in a conversation among publishers, one of them will say something like "well that's a very different market segment from ours". And it's true. The utility of a book such as Programming in Perl is of a sort that free-on-the-web + ebook + print works well.

While I was in London I had a chance to chat with Frances Pinter, who I've mentioned on the blog. Her imprint, Bloomsbury Academic, is experimenting with another business model, one that resembles the "freemium" models common on the web. Basic ebooks will be available under a creative commons license, but print and enhanced digital versions will be available for purchase. Other publishers, such as Springer, are going with subscription based models for institutions. The subscription model, without DRM, works just fine for ejournals, and Springer is confident that it will work just fine for eBooks in libraries. I've previously written about other business models for ebooks, such as PDA (Patron Driven Acquisition) and of course, "collective acquisition" and "bounty markets". Other models that are likely to work in at least some of the book industry fragments include advertising and what I will henceforth call the PIP (Pretend It's Print) business model.
London Online Information

As I learned at October's ICv2 Digital Comics Conference, digital publishers of graphic novels are finding that a serial mini-book business model works well for their industry. By pricing smallish chunks of content at under a dollar, a series can build readership momentum and do well financially without DRM.

Geography and language are also likely to define book industry fragments. At the London Online Information show, I met a group of entrepreneurs from Estonia. Their company, LibroCS OÜ , has developed an ebook delivery platform that includes a storefront and nifty color-video capable ebook reader devices manufactured in Shenzhen. They hope to provide infrastructure for retailers and publishers, especially those in smaller countries like Estonia.

I was interested to hear how the market dynamics in Estonia might be very different from those in a larger country. There are only about 1.1 million speakers of Estonian in the world, but it's a very well connected group. (The one Estonian I went to school with is brother to the President, so it must be true!) As a result, any Estonian is only one Facebook friend away from any other Estonian, or so it's claimed. If you ask an Estonian publisher to allow lending of an ebook, they immediately think they'll only sell 2 copies, 3 if the author's mother is living. To address these concerns, LibroCS emphasizes their use of Adobe Content Server DRM to enable PIP business models. Just because the print model is old doesn't mean it's dead.

Physics tells us that interacting systems eventually reach their lowest energy state, although there may be some heat required for them to reach it. The corresponding rule in economics is that a superior business model will sooner or later drive out its inferiors. In the context of the Former Book Industry, "superior" means that it offers the best value relative to its cost. Business model experimentation is what provides the heat. An English chemist friend of mine pointed out to me this week that when the experiment releases energy, you can get an explosion.

For the record, many Estonians refuse to acknowledge that Estonia was part of the Soviet Union. I don't know what that means for book publishing.
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