Monday, January 11, 2010

Business Idea #2: eBooks are not Books

After finishing my article on the economic reasons that libraries exist, I briefly considered titling this followup "2030: No More Libraries". But as I've said before, I'm an optimist about the future of libraries, and my message is that a new sort of public library will thrive in 2030, even if the current sort don't survive.

To quickly sum up my previous article, in the 90's, Prof. Hal Varian derived an equation (pdf) that describes when library-like sharing can benefit both producers and consumers. Varian's equation boils down to comparing the transaction cost of sharing to the producer's marginal production cost. When the cost of producing and selling an additional book is higher than a library's cost to loan a book, society will benefit from the existence of libraries. This is the environment that has allowed libraries to thrive for hundreds of years.

eBooks are not like printed books. The cost to produce an additional book is essentially zero. The cost to deliver an additional book is essentially zero. The only marginal costs a publisher is likely to have are author royalties and the financial overhead of the sales channel. Thus the likelihood that public libraries can generate economic value by mere sharing of ebooks is minuscule.

I want to emphasize that I'm not saying that public libraries don't generate economic value, just that libraries generate a lot of value in the print economy that won't be generated in the digital economy. There's been a lot of reaction to a short post by Seth Godin in which he asks "What should libraries do to become relevant in the digital age?" Some of the umbrage is directed as his seeming unawareness of what libraries are already doing in the digital age, but to say, as another blog does, that that the answer is "nothing" is just head-sand-sticking.

Another economic benefit of circulating libraries described by Varian's equations kicks in when consumer access preferences are heterogeneous. This benefit remains in the digital book economy, but oddly, it is tied to the inconvenience of using libraries. To put it another way, libraries help to segment the ebook market only if ebook access through the library is sufficiently inconvenient to shield publishers' higher priced access options. If you don't believe me, go and look at how ebooks are offered at the New York Public Library; you'll have to pretend that ebooks have all the inconvenient characteristics of real books.

Demand aggregation is a function that libraries have fulfilled in the print economy. If 10,000 people are willing to pay $10 for shared access to a book collection, they can buy 1,000 books that cost $100 each. But local libraries lose their advantage in collective acquisition when books become digital because there is no longer a necessity for users to be geographically close to books. Smart publishers will want in on this action, as will other entrepreneurs. As Evan Schnittman, a senior executive at Oxford University Press told me, "Lending models of scale are coming... but I doubt consumers will turn to libraries en masse to get their ebooks, as capitalism has a funny way of turning demand (at any price) into financial opportunity."

There's no doubt there will be collective acquisition of ebooks, the question is the shape it will take. Today I read about the problems of tropical fish farmers in Florida. This group no doubt has an distinctive set of information needs. They need access to information about tropical fish, weather forecasting, pond digging, Florida real estate, agricultural regulations and international trade. Few of them have enough money to access all the types of information they need, and they're too small a group to attract the attention of a publisher-sponsored "ebook-club". As a collective, however, it should be theoretically possible to aggregate their demand, improve information access for members, and increase publisher revenue.

Alas, the Florida Tropical Fish Farms Association would have a number of difficulties in building the ebook library it needs. Making deals with all the different publishers would be prohibitively difficult; technical infrastructure to support the use and administration of such a library may not exist. Perhaps Gluejar can make it possible for communities of interest to nucleate and create libraries of ebooks.

Locally funded public libraries will continue to be efficient demand aggregators to the extent that they focus on the particular interests and needs of their communities. In this respect they will repeat the experiences of academic and corporate libraries that have seen their importance increase with the transition to electronic information. But on the whole, public libraries will need to reprioritize and reduce their budgets, reconfigure their physical assets, scrap expensive infrastructure exclusively focused on inventory management and adopt infrastructure that supports community involvement and community development.

They'll need our support.
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  1. Perhaps a public Library will become a system of servers, with access at many terminal points to digital books and media. The system of servers could also be networked between many Libraries around the country, perhaps the world. All the books in that system would be available to anyone free of charge, but access is limited to a terminal in the Library itself.
    Lending of digital books outside of the building would become more problematic, and publishers will likely fight it. Perhaps online access to the system could be granted to the patrons. That idea is a little more difficult to implement as a sustainable model, and will also likely be fought by publishers. Furthermore, it will not serve the public that has no online access at home.
    I for one can't read on a computer screen, it hurts my eyes after an hour or so. I hope books never go away.

  2. I'm always amused when people say they can't read on a computer screen after they've just finished reading and perusing a blog on a computer screen. It also assumes a model that never really existed, i.e. ebooks to be read on a large computer screen. I read constantly on my Kindle, nook, iTouch, and Droid. They work remarkably well.

    What publishers have failed to understand is that they are fighting a rearguard action to protect distribution, not content. Editors and authors, content providers are now in a position to completely ignore them. They seem to think if they lose the hardcover-makes-us-all-our-money model the world will come to an end. Nonsense. The people who really should worry are used bookstores. Publishers, if they had any sense, could wipe them out. Make ebooks ubiquitously available and price them inexpensively and they earn vastly more revenue. A personal example: I read a nice review of a book on Goodreads by one of my friends; I click on the Amazon link; if an ebook is available I buy it immediately and have it forthwith, loaded either on my Kindle or iTouch or both. If the ebook is NOT available or priced too high (more than the paperback), I'll buy a used copy for ridiculously small prices (I've gotten lots for one cent), and if no used is available, I'll order a copy from my library. Note that under the last two scenarios, the publisher and author earn exactly zero. 50% of $9.99 is a whole lot better than 50% of nothing. A second copy of that ebook would have cost them absolutely nothing to produce or ship.

    To paraphrase Stephen Roxburgh, when the titans begin to do battle Amazon, Google, and Apple, the industry will be remade.

    Libraries will survive just fine, because we've always been in the service industry, not the book business. As far as digital distribution from libraries, why not sell digital copies to libraries and then charge a nickel/dime per circulation. No late fees nonsense, always a copy available, and the publisher gets revenue commensurate with use. The Netlibrary model is stupid and obsolete, serving no one.