The Year Amazon Failed Calculus

In August, Amazon sent me a remarkable email containing a treatise on ebook pricing. I quote from it:

... e-books are highly price elastic. This means that when the price goes down, customers buy much more. We've quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000. The important thing to note here is that the lower price is good for all parties involved: the customer is paying 33% less and the author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. The pie is simply bigger.

As you probably know, I'm an engineer, so when I read that paragraph, my reaction was not to write an angry letter to Hachette or to Amazon - my reaction was to start a graph. And I have a third data point to add to the graph. At Unglue.it, I've been working on a rather different price point, $0.  Our "sales" rate is currently about 100,000 copies per year. Our total "sales" revenue for all these books adds up to zero dollars and zero cents. It's even less if you convert to bitcoin.

($0 is terrible for sales revenue, but it's a great price for ebooks that want to accomplish something other than generate sales revenue. Some books want more than anything to make the world a better place, and $0 can help them do that, which is why Unglue.it is trying so hard to support free ebooks.)

So here's my graph of the revenue curve combining "repeated and careful measurements" from Amazon and Unglue.it:

I've added a fit to the simplest sensible algebraic equation possible that fits the data, Ax/(1+Bx²), which suggests that the optimum price point is $8.25. Below $8.25,  the increase in unit sales won't make up for the drop in price, and even if the price drops to zero, only twice as many books are sold as at $8.25 - the market for the book saturates.

But Amazon seems to have quit calculus after the first semester, because the real problem has a lot more variables that the one Amazon has solved for. This is because they've ignored the effect of changing a book's price on sales of ALL THE OTHER BOOKS. For you math nerds out there, Amazon has measured a partial derivative when the quantity of interest is the total derivative of revenue. Sales are higher at $10 than at $15 mostly because consumers perceive $15 as expensive for an ebook when most other ebooks are $10. So maybe your pie is bigger, but everyone else is stuck with pop-tarts.

While any individual publisher will find it advantageous to price their books slightly below the prevailing price, the advantage will go away when every publisher lowers its price.

Some price-sensitive readers will read more ebooks if the price is lowered. These are the readers who spend the most on ebooks and are the same readers who patronize libraries. Amazon wants the loyalty of customers so much that they introduced the Kindle Unlimited service. Yes, Amazon is trying to help its customers spend less on their reading obsessions. And yes, Amazon is doing their best to win these customers away from those awful libraries.

But I'm pretty sure that Jeff Bezos passed calculus. He was an EECS major at Princeton (I was, too). So maybe the calculation he's doing is a different one. Maybe his price optimization for ebooks is not maximizing publisher revenue, but rather Amazon's TOTAL revenue. Supposing someone spends less to feed their book habit, doesn't that mean they'll just spend it on something else? And where are they going to spend it? Maybe the best price for Amazon is the price that keeps the customer glued to their Kindle tablet, away from the library and away from the bookstore. The best price for Amazon might be a terrible price for a publisher that wants to sell books.

Read Shatzkin on Publishers vs. Amazon. Then read Hoffelder on the impact of Kindle Unlimited. The last Amazon article you should read this year is Benedict Evans on profits.

It's too late to buy Champagne on Amazon - this New Year's at least.

Is the Kindle Direct Program MFN Legal?

If you sell an ebook through Amazon's Kindle Direct program, Amazon doesn't want you to offer it for less somewhere else. It's easy to understand why; if you're a consumer, you hate to pay $10 for an ebook on Amazon and then find that you can get it direct from the author for $5. But is it legal for Amazon to enjoin a publisher from offering better prices in other channels? In other words, is Amazon allowed to insist on a "Most Favored Nation" (MFN) provision?

Here's the provision in Amazon's Kindle Direct Program that constitutes an MFN:

4. Setting Your List Price
You must set your Digital Book's List Price (and change it from time-to-time if necessary) so that it is no higher than the list price in any sales channel for any digital or physical edition of the Digital Book.
But if you choose the 70% Royalty Option, you must further set and adjust your List Price so that it is at least 20% below the list price in any sales channel for any physical edition of the Digital Book. 

I really don't know the answer, but I do know that Apple's MFN provision was a focus of the Department of Justice's successful prosecution of Apple and 5 colluding publishers for violations of the Sherman Antitrust Act. If Apple couldn't have a MFN, then how can Amazon insist on it, given their dominant market position in ebooks?

The Winston & Strawn law firm has a nice discussion of MFN clauses in the light of Judge Cote's decision in the US vs. Apple case. Here's the highlight:

Although the judge found that the MFN clause in this instance was critical to Apple’s ability to orchestrate the unlawful conspiracy, Judge Cote explicitly held that MFN clauses are not, in and of themselves, “inherently illegal.” Judge Cote explained that “entirely lawful contracts may contain an MFN …. The issue is not whether an entity … used an MFN, but whether it conspired to raise prices.” This determination, she stated, must be based on consideration of the “totality of the evidence,” rather than on the language of the agency agreement or MFN alone. Examining the facts in this particular case, Judge Cote found that Apple’s use of the MFN clause to facilitate the e-book conspiracy with the publishers constituted a “per se” violation of the antitrust laws.

Martin Coleman writes in mondaq:

depending on the economic and commercial circumstances, MFN clauses have on occasion caused concern to competition authorities. In particular:

• They can act as a disincentive to price cutting. If a supplier knows that, by offering a discount to any third-party customer, the supplier must also offer the customer benefiting from the MFN clause a discount to ensure that the latter enjoys the most favourable price, that is a "double cost" to price cutting, and therefore could have the effect of deterring price cuts and keeping prices higher than they might otherwise be.

In the European Union, Amazon has run into problems with a similar "Price Parity" provision for the Amazon Marketplace.  After inquiries by European Union regulatory agencies Amazon agreed NOT to enforce Price Parity, a policy that has been in effect since August 31, 2013. The Bookseller reported on the effect of this agreement in the (print) book market.

In the U.S., there's further confusion about distribution channel pricing because of the Robinson-Patman Act, which prevents them from pricing print books to favor one distributor over another. But according to the Federal Trade Commission, "The Act applies to commodities, but not to services, and to purchases, but not to leases." Since ebooks are licensed, not sold, it seems to this non-lawyer that Robinson-Patman shouldn't apply to ebooks.

The particular situation that has drawn my attention is the case of authors and publishers that make their ebooks available under Creative Commons licenses. Many of these authors also make their ebooks available via the Kindle Direct Publishing Program. There's nothing at all wrong with that - many readers prefer to get these ebooks onto their Kindles via Amazon, and are happy to know that some money ends up with the creators of the ebook. Amazon offers convenience, reliable customer service and wireless delivery.  

At Unglue.it, we're starting to offer Creative Commons creators the ability to ask people who download their ebooks for support (the program officially launches on April 30). The top concern these authors have expressed to us about this program is the "setting your list price" clause for their Kindle Direct channel. If they participate in our "Thanks for Ungluing" program they worry that Amazon will kick them out of the KDP program and the corresponding revenue stream.

We've done a few things to address this concern. Creators can set a "list price" in unglue.it- it's the suggested contribution for the pay-what-you-want download. And that's the price we report in our schema.org metadata.

But what if Amazon sees Unglue.it offering free downloads of books they're offering for $3.99 on the Kindle? Would they delist the book from the Kindle platform and kill that revenue stream? Or maybe delist the publisher entirely?

It seems to me that if Amazon did this, it could be running afoul of Judge Cote's guidelines for MFN provisions. Enforcing the MFN would amount to a retaliation against creators who offer lower prices (including zero) in other channels. Amazon doesn't even let you set your price to zero. 

What do you think?

Related articles

• Where do MFN clauses stand after Apple Price-Fixing Decision?
• The Procompetitive story that could undermine the DOJ's e-books antitrust case against Apple
• More Proof The Big Six Of Publishing Are Run By Morons
• Apple Inc. (AAPL) E-book Case Kills "Most-Favored Nation"

Open Access Honesty

I've spent a large part of February becoming acquainted with Open Access ebook publishers. And the one thing that troubles me is that too many of them are not putting honesty first. Because existing distribution channels do not reward forthrightness in Open Access publishers; in fact the channels actively discourage it.

Let's take Amazon, for example. They don't like free ebooks, because there's no money in it for them. If you're a publisher and you want your ebook to be free for people to load onto their kindles, Amazon will charge you for the privilege. They rationalize that they're paying for a separate wireless network, "Whispernet", so it's only fair to assess "delivery charges" to free  ebook publishers. If you use their 70% royalty option, the delivery charge is 15 cents per MB of data, and the minimum price you can set is 99 cents. The only way to get Amazon to deliver your ebook for free is to select their 35% royalty option, and then invoke this "matching Competitor Pricing" clause:

From time to time your book may be made available through other sales channels as part of a free promotion. It is important that Digital Books made available through the Program have promotions that are on par with free promotions of the same book in another sales channel. Therefore, if your Digital Book is available through another sales channel for free, we may also make it available for free. If we match a free promotion of your Digital Book somewhere else, your Royalty during that promotion will be zero. (Unlike under the 70% Royalty Option, if we match a price for your Digital Book that is above zero, it won't change the calculation of your Royalties indicated in C. above.)

Apple, Kobo, and Google are much happier to set prices to zero, because they make some money on hardware sales or advertising, so you can get Amazon to give your ebook away for free by getting people to report your zero price on Apple, Kobo, and Google.

So just to get your ebook to be free on Kindle, you're forced to be incompletely honest with your customers and distributers.

But Amazon creates a great temptation. Why not use the suckers paying on Kindle to subsidize the free availability for those smart users who come to  your website? Isn't it convenience that these people are happily paying for?

And libraries are another temptation. They'll pay for the convenience of getting your ebook though their preferred platform, Overdrive or whatever, even as you offer the book for free to users at all the libraries that don't pay for your ebook. But would they still buy if they knew they could get the ebook for free? Maybe you shouldn't ask questions when you don't want to know the answer.

So here's my simple, unproven postulate: in the long run, full disclosure about pricing and an honest relationship with readers will be in the best, mutual interests of authors, publishers, readers, and libraries. And customers will prefer a distribution channel that enables that honesty.

Stop laughing.

In 2013, eBook Sales Collapsed... in My Household.

2013 was not the year the ebook industry was expecting. We hoped that ebooks would continue their explosive year-on-year revenue growth, and that the replacement of print by digital would proceed apace. We suspected that the growth of ebook sales might moderate, because, as HarperCollins CEO Brian Murray told Publisher's Weekly, "Nothing grows by triple digits for too long." But just as CDs replaced vinyl and digital downloads replaced CDs, it seemed obvious that the the age of the printed book was nearing its end; the century of the ebook was dawning.

We got a few things right. Internationally, ebook sales growth was strong. Print continued its slow decline. Bookstores continued to close. But for some reason, ebook sales in the US stopped increasing. And even started declining!

There are many possible explanations for this turn of events. There are technicalities with the data collection, particularly with publishers such as Amazon's imprints that don't report their sales numbers. Young Adult sales dropped steeply, as there was no smash hit to follow on the huge success of Hunger Games. 50 Shades of Gray didn't turn out to be a lasting relationship. And there's been a downward trend on prices, particularly as publishers start to use dynamic pricing to stimulate sales. But it seems to me that something in the environment is changing, more than just a market maturation.

Amazon probably has enough data to understand what's happening, but they're notoriously opaque about reporting numbers. On the other hand, they're quite good about reporting to customers what they've bought. So I decided to analyze my own household's Amazon data. I had the impression that my family was spending less on ebooks, but I wasn't sure, because they still seem to spend all hours of the day reading. The results were kind of shocking.

The graph shows my household Kindle ebook purchases from 2009-2013. As you can see, 2013 marked a steep drop from the 2009-2011 peak years of about $1000 per year.

I don't buy Kindle ebooks myself (I buy ePub only, so I can hack on them) but other members of my household have bought quite a lot. The average price paid is about $7, and this has held quite steady. But in 2013, Kindle purchases stopped almost completely, and they were not replaced by purchases on other platforms.

Based on detailed "interviews" with the subject ebook purchasers, here are some non-factors in this collapse:

1. "Netflix-for-Books" services. Nobody but me has heard of them.
2. Kindle Owner's Lending Library. Despite an well-used Amazon Prime subscription, they haven't figured out how to use it for ebooks.
3. Our public library. Nobody but me has used it for ebooks.
4. Piracy. As if!

The two main reasons for this spending collapse turn out to be:

1. The Kindle acquired in early 2009 reached end-of-life due to a cheaply made power cord, and was replaced by an iPad. The lack of in-app purchase for the Kindle App has resulted in a significant impediment to Kindle purchases. The iBookStore has not attracted a single ebook purchase.
2. The iPad owner now spends the vast majority of her reading time in fan-fiction websites, mostly fanfiction.net and ArchiveOfOurOwn.org. Same for the iPad borrower, but a different mix of websites.

I find it worrying that the Justice Department pursued an big antitrust suit against Apple and 5 of the big 6 publishers, won, and despite making an issue of Apple's in-app purchase ban in iOS, it seems to have lost the argument with Judge Cote. We'll see how that turns out.

It's worth paying close attention to the fan fiction sites. After all, 2012's biggest revenue engine for the book industry, 50 Shades, was a repackaged fanfic. On an iPad with a decent internet connection, the fanfic sites work better than ePubs. They link and they script. Just try making a link from one ePub to another and you'll get my point.  They deliver content in smaller, more addictive chunks, and they integrate popular culture MUCH more effectively than books do, for reasons relating primarily to copyright. The authors are responsive and deeply connected to readers; they often ARE the readers!

There's a fanfic site to appeal to every reader; I highlighted Wattpad earlier this year. ArchiveOfOurOwn.org ("AO3"), a project of the Organization for Transformative Works, a non-profit, experienced the growth in 2013 that was missing from the ebook sector. The number of works hosted by AO3 doubled to just under a million works, covering almost 14,000 "fandoms". (A good example of a fandom is the "Dragonriders of Pern" fandom, which currently hosts 534 works). Fanfiction.net, an advertising supported site, hosts almost 2000 fandoms and over 1.3 million works, more than half of which are in the Harry Potter or Twilight fandoms. Game oriented discussion forums also engage in fanfiction. (Popular in my house is spacebattles.com)

My anecdata might be completely anomalous, although Amazon, a very data-driven company, seems to be aware of the same phenomena. They've been making the Kindle into a full featured tablet to go head-to-head with the iPad. They've also launched a fanfic site called Kindle Worlds, which has 15 worlds and 341 works.

Early stage venture capitalist Josh Kopelman says that many of the best opportunities for startups are not those in expanding markets. "We love investing in technologies and business models that are able to shrink existing markets. If your company can take $5 of revenue from a competitor for every $1 you earn – let's talk!",  he has written on his firm's website. Kopelman founded Half.com in the early days of the internet, a company which shrank the book market by getting people to resell the books they had just bought for a fraction of the price of a new book. Microsoft's Encarta shrank the Encyclopedia business from $1.2B to $600M before Wikipedia shrank the business by another 90%.

In 2014, I'm guessing it's the book publishing industry's time to shrink. A convergence of tech startups, tech monsters, and tech non profits seems to be ready for the assault. The fanfic sites, the Wattpads, the Project Gutenbergs and the Manybooks, the Readmills, the Leanpubs and the Smashwords (and I hope the Unglue.its); these are people building the foundations of a creative industry that will flourish even if the ebook sales collapse that I see around me spreads to your house as well.

Happy New Year!

How Apple May Inadvertently Boost eBook Linking

"The net interprets censorship as damage and routes around it." John Gilmore, 1993

The official word from Apple finally came out today, in their press release announcing in-app subscriptions.

In addition, publishers may no longer provide links in their apps (to a web site, for example) which allow the customer to purchase content or subscriptions outside of the app.

Assuming that this limitation will be applied to the Kindle App, it means that the "Shop in Kindle Store" button will disappear, and similar features in other ebook reader software, such as Nook, Sony, and Kobo will disappear as well.

You can go elsewhere if you want to read apocalyptic whining about Apple's imperious ways. What I want to focus on is how the net will route around this damage. The net will route around this damage by making more links.

At O'Reilly's Tools of Change for Publishing Conference, I was able to spend some time with Keith Fahlgren, a partner at ThreePress Consulting. He's part of a group that has worked on the improvement of linking capability in EPUB 3. A Public Draft of the specification was released today by IDPF.

Since EPUB3 is based on HTML5, all the outbound linking that you would expect from a web page is already built into EPUB3 (as well as earlier versions of EPUB). Ebook reader apps available on iOS and Android use the "Webkit" webpage renderer for ebooks in EPUB. (Kindle devices use Webkit to render web pages and WebKit is used by Amazon to render Kindle ebooks (in mobi format) on  hardware other than their own.) So it's clear to me, at least, that even if ebook reader apps can't have "Kindle Store" buttons, the apps will be able to present "Kindle Store" links inside the ebook content. I'll bet you anything that Amazon is loading up ebook content with Kindle Store links: "If you like this book, perhaps you'd like this one". They'll even have specialized shop-books containing Kindle store links available for free. Ditto the others.

Publishers aren't going to like Apple's power-play. But neither will they like having their content getting hijacked to promote individual ebook stores. There will therefore be a great deal of pressure for the creation of vendor-neutral, customer friendly ways to link to ebooks from within ebooks, one that Apple can't ban because doing so would break Safari.

Here's where it gets tricky. If a customer has already purchased the linked-to book, it's pointless to send them out to a ebook store, they should connect their copy of the ebook. But figuring out whether a consumer already has the book is messy, given the state of ebook identification. There are many other use cases for linking to a specific chapter or paragraph inside an ebook.

Unfortunately, doing this sort of linking is not a solved problem. EPUB3 adds one tool that will help. A new required metadata property, dcterms:modified,  will help identify the epub in the case where it has been modified- in the past it was poorly specified what should happen to the epub identifier if the file was modified. With EPUB3, it's now clear that EPUB documents are identified internally at a level above the ISBN (different DRM wrappings of the same EPUB file often require different ISBNs) but below the "work".

There's still a lot of apparatus that will need to be built, both inside and outside of EPUB, for linking to work the way it should. Being able to decide which ebook to target will require external mechanisms. Perhaps some linking organization along the lines of Crossref be formed; perhaps a more wikipedia-ish database collaboration will suffice. In any case something like xISBN supercharged for ebooks will be needed. Fahlgren told me that without a strong use case to drive the solution, the EPUB group has had a hard time going very far in their linking development.

A true ebook linking solution would need to include Amazon, of course, and since they've not been using EPUB, it seems to me that ebook linking won't get done by the EPUB group itself. Amazon hasn't had much use for EPUB in the past, but now Apple may have handed the ebook technology community a giant use case for interoperable ebook linking.

Happy Day-After-Valentines-Day, EPUB!

Inside an Indian Bookstore

I'm in Bangalore, the tech capital of India, where even the Cook pines look like cell phone towers.

My favorite "tourist" activity in a country new to me is to go inside ordinary stores. A walk through grocery store will give you a much better understanding of a nation's cuisine than their best restaurants. You'll see strange foods and smell strange smells, and you'll see familiar foods presented in unexpected ways.

So I just had to visit a bookstore here. I chose a medium sized one, situated on the second and third floors of a building in a busy shopping district. Like bookstores anywhere else, Indian bookstores find it profitable to stack lots of non-book items- in this store, the entire second floor is taken up with DVDs, toys, games, teddy bears and Ganesha figures.

In this bookstore, six of seven aisles are devoted to English-language books. The seventh aisle is devoted to books in the local language, Kannada. Kannada is spoken by a total of 60 million people in southern India, which is a lot more than than speak many European languages, but in India it's a minority.

As you might expect from Bangalore's status as a tech capital, an entire aisle of the bookstore is given over to computer-related books. The prices of these books were higher than I thought they would be. For example, the latest edition of Programming Perl was 750 Rupees, or about 17 US dollars. In the US, it's 33 dollars at Amazon. (Wow, that's pretty expensive!) Books aimed at the Indian market are priced lower- 150-300 Rupees.

You might wonder how programming books can command such prices given that many good ones are available in free html versions in a region with a per capita income only 1/40th of the US; even a software developer's salary is a fifth that of his US counterpart. Part of the reason may be that it's still unusual for people to have access to the internet at home. Print works better here.

By all reports, the ebook reader market in India is be poised for an explosion. If you think about it, a cheap ebook reader would be a really good way for Indians to take that free-on-the-web ebook home from the office. The bookstore I visited had a single ebook reader for sale- it's displayed in the book section on top of other luxury items such as the plastic-sealed copy of Dan Brown's Lost Symbol.

Infibeam's "Pi" ebook reader sells for 10,000 Rupees, or about $225. It's made in Taiwan and looks like a stripped-down Kindle, with e-ink display, but no keypad and no wireless connectivity. It supports all sorts of ebook formats, and most of the 22 official languages in India. The marketing slogan for the Pi is "Read eBooks Anywhere!" and the availability of free ebooks, including the "top 100 from Project Gutenberg", is prominently noted. The Infibeam website (which exhibits sincere flattery of Amazon) offers a wide selection of eBooks. Stieg Larsson has a good share of the Pi at 433 Rupees (close to the $9.99 Kindle pricing); he was nowhere to be found in the Bangalore bookstore.

While the Pi is first ebook reader targeted at the Indian market (Kindle is also available) there are a number of competitors waiting in the wings- I'll cover them in another article.

For eBook Reading Devices, More is Less

If you've been following the evolution of ebook reading devices, you will have noticed a recent wave of new products and price reductions; for a review see this article. I've been interested in two intertwined questions: "How low will prices go?" and "How will reading devices evolve?

In my previous look at reader prices I showed a graph of historical pricing versus time and predicted that we'd see $25 e-readers in 2014; here's an updated graph. In this version, I've connected the pricing for particular devices to help unravel the tangle of lower prices vs. more features. What you can see is that the cheapest devices continue to get cheaper; we're on track to see $50 devices in 2012. At the same time, we see a a full range of devices emerging, with full color, video and gaming capable devices like the iPad occupying a price point of about $500 and adding functions instead of cutting price.

The latest Kindle exemplifies the evolution of the dedicated reading device. David Pogue's review in the New York Times suggests that its biggest improvements are things that have gone away- weight, area, and cost. It's quite possible that this trend will continue, but it's also possible that reader prices will stabilize and instead add features like touch screen, color, and video support.

Since the reader device evolution is determined in many respects by the display, I reached out to some contacts is the display industry to better understand what to expect over the next few years. What I learned was that, at least for the next year or two, the very best reading experience will be delivered by single-function, reading-focused devices.

The display technology behind the Kindle and its competitors from Sony, Barnes and Noble, Kobo, and the real-soon-now Copia is called e-ink. E-ink displays use electric fields to push black stuff to the surface of the display. These displays consume power only when the page is refreshed. They're too slow to do video, but the very low power consumption allows the reader to use a small, light-weight, long-lasting battery. They rely on reflected light, just like real ink on paper, and display manufacturers struggle to make the reflectivity of the white part as high as possible. White paper reflects about 85% of the light that hits it; black ink reflects only 20%. For comparison, the "white" part of an e-ink display reflects 40% of the incident light.

Since I've gotten used to the iPhone, the Kindle's lack of a touch screen bothers me. But the addition of a touch screen reduces the readability of text in two ways. Touch screens are extra layers that sit on top of a display. This extra layer includes a conductive layer made of a material called indium tin oxide (ITO). Although ITO is mostly transparent, it still absorbs about 10% of the light that goes through it. That means that the white part of an e-ink display with a touch layer is down to about 34% reflectance, which is closer to black ink than white paper. The touch layer also separates the pixel from the surface of the display; imagine the effect of reading a book under a thin layer of yellowish glass.

Nontheless, e-ink readers with the touch feature don't look so bad; the Sony PRS-600 Reader Touch Edition is one such device (currently retailing for about $150). Touch layers also a impose a power penalty; a device has to be constantly checking to see if there's a finger poking at it. The cost of adding a touch layer is significant; the yield of the attachment process is not 100%, the display is the most expensive part of a reader. However you slice it, a non-touch device will be easier to read than one with touch.

It's a similar story with color. Color displays require either multiple layers or extra pixels. There will be a severe tradeoff between the readability of a display and its color capability.

Reader manufacturers are addressing these tradeoffs in various way. Apple uses a hefty battery powering a bright backlight to achieve acceptable performance in the iPad; they've been able to save lots of power with a custom processor, and the iPad's operating system and App Store impose severe constraints on what the iPad will run. The Nook has separate displays for reading and for color/touch; I find the result to be a bit clunky. The new Pixel Qi displays offer multiple display modes- the reflective black and white mode offers low power and good readability, while, a backlit mode offers color and video speed.

Right now there's no reason for Amazon to push its price point; the $139 Kindle is back ordered, and it appears that they're selling as fast as they can make them. E-ink displays are manufactured by a single company that has the ability to manage supply to avoid a margin-killing glut of displays. You can expect Amazon to drop the price even further as soon as its supply allows; its long term strategy is clearly to make money selling ebooks rather than reader devices.

After the iPad came out there have been all sorts of predictions of the imminent demise of the dedicated e-reader. My look at current technology suggests that, at least for the next few years, the best reading experience will be delivered by simple, cheap, dedicated reading devices, and the business models for ebook sellers will likely center around content and forms of interaction that work well on slow, black and white displays.

I'm still going to buy an iPad, though!

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Introducing the Totebag for eBooks

As we hurtle towards a future where books come on Kindles and iPads and Nooks, we tend to overlook the loss of many products and services attached to the print book ecosystem. Tens of thousands of people whose livelihoods depend on books will suffer tragic dislocations in their lives. While many bemoan the plight of bookstore workers, librarians, editors, and authors, there are other small industry segments no one ever thinks of.

Totebag manufacturing is just one of these overlooked industries. Half of the world's  novelty totebags for books are manufactured in a single town in China called Shu Bao (书包). Shu Bao is located in an inland area of China that has concentrated on book related products; neighboring towns specialize in bookmarks, dust covers and those little alphabet labels used in dictionary manufacture. At this weekend's American Library Association (ALA) meeting in Washington DC, I had a chance to speak with Shu Bau's mayor, Yi Rui-Da, who doubles as a sort of totebag ambassador and salesman to the world. Yi was in town to start getting the word out about digital book totebags.

Yi told me that the central committee of his town has been closely watching the shift to eReading for at least 10 years. They've seen one of the neighboring towns become quite wealthy by shifting their manufacturing to iPad covers, and hope to make a similar transition themselves. The lesson of what happened to buggy-whip manufacturers after the introduction of the Model T is known to the committee. Some committee members thought the town was in the luggage business, and preferred to stay in the luggage business. Other committee members, aware of the specialized fibers that must be added to their totebag fabrics, argued that the town was really in the information portability business; these voices prevailed.

To make the transition to transporting eBooks, the town had to nurture its programming talent, of which it has an abundance. Totebags are made in factories that employ hundreds of teenage girls. But it's not like the old days, when the girl were virtual slaves, sewing everything by hand. In a modern totebag factory, the girls program automated sewing robots using specialized smartphone apps. Over the past 5 years, the top sewing machine programmers have gone on to advanced operating system hacking; before, they would get bored with programming and get married.

The culmination of this program of training and development is the digital book totebag. I got a demo of this widget in a private suite at one of the conference hotels, but was not permitted to photograph it. The prototype looks nothing like a canvas totebag of course- it's more a mess of wires and connectors. The functionality is quite impressive, however. I was easily able to download an eBook from a Kindle to the "totebag" using a red suction-cup connector that came with some sort of special grease. I then attached an iPad using a USB connector and viewed the book in iBooks. I was also able to connect the totebag to my Google Books account and use the Kindle book there. Yi had a number of other devices to try; each of them had its own quirks, but more or less worked.

I asked Yi how this seeming magic had been accomplished; the most I could get out of him was that any book is "just another sewing pattern". I also asked him if standards for content and DRM would make ebooks portability possible without his digital totebag widget. We had a good long laugh at that one.

BookExpo, Digital Book 2010, and eBook Messes

When I was 5 years old, I wanted to be either a doctor or a garbage man. When I got my Ph. D., I thought that I had checked off the first option; that was stretching a 5-year-old's conception of a doctor pretty far. Looking back on my career so far, however, I see that using machines to get rid of dirt is a much more consistent theme. In graduate school, I used high vacuum systems to remove impurities from semiconductors; at Openly Informatics, we built software systems to clean up electronic resource metadata.

This week at IDPF's DigitalBook2010 Conference and BookExpo America, I was reminded over and over again how messy the so-called "supply chain" for books had become, and how the transition to ebooks from print is just making everything that much messier. I had known about the ebook ISBN mess, the book metadata mess, the territorial rights mess and of course the orphan works mess, but the presentations at IDPF on the "agency model" staggered me with the realization that big publishers were dumping a huge load of local sales-tax excrement on their channel partners. The last straw for me was a BISG presentation on rights standards. The speaker was trying to convince the audience that huge piles of money were to be made if only content rights could be efficiently chopped into smaller, more insidious pieces.

I hit the floor of the expo hoping to find solace in some shiny clean gizmos. I found all sorts of reader devices that I hadn't seen before, along with the alluring iPads and the competant Sony readers that I'd seen before. I didn't see a single Kindle on the entire show floor.

Well maybe I wasn't looking too hard. But it was hard not to get the impression that IDPF and BookExpo was a gathering of the anti-Amazon forces of Openness.

It's easy to swallow the story line that Amazon is building a closed, sterile system with its Kindle and that B&N, Sony, and all the others are unleashing a torrent of innovation with their open ePUB standards and promises of interoperability. This story line usually makes an analogy with the early days of the PC, in which Apple's proprietary Mac system was swamped a wave of innovation fostered by the PC's open design and Microsoft software that worked with all the hardware. The irony of Apple using ePUB for their iBookstore on the iPad is dutifully noted and left unexamined.

Somehow, BEA failed to sell me on the open vs. closed story line for ebooks. I don't see how open standards are going to clean up the scrapheaps on which the current book industry is built and in which the ebook industry is stuck.

I've mentioned that I've been reading about the early days of Intel. The Windows-Intel platform was never an open one; it was designed to sell Intel chips and Microsoft software. Apple's strategy, in contrast, was designed to sell computers, and avoid all the mess of keeping the hardware compatible.

After a day to reflect on Book Expo (and some time to sleep off a very nice party!) I came to a different story line that I find more useful in giving insight into the future course of the ebook industry. I think the key to understanding the different entrants in the ebook race is to understand which messes they're trying to tidy.

Amazon, with its Kindle, has focused on maintaining a clean shopping experience and a clean reading environment. By eliminating the computer tether with wireless Whispernet, they avoid a hardware compatibility mess. By choosing a proprietary file format, they avoid a document compatibility mess. By launching only in the US and extending to other territories slowly, they avoid all the territorial mess. Since their online bookstore had already addressed all the messy details of e-commerce for a huge catalog, the execution of Kindle was in large part an exercise in avoiding having to deal with any new messes.

Overdrive had a surprisingly large presence at BEA- they had two separate booths. Working with hardware makers such as Sony, Overdrive has attacked the problems of messy distribution channels- libraries and bricks and mortar retailers, in particular. The work of Overdrive has allowed publishers to pretty much forget that libraries use ebooks- the only place that libraries were mentioned on the show flow in connection with ebooks was in the Sony booth- they work directly with Overdrive to surface the library channel to consumers through their Library Finder feature.

The company that made the biggest impression on me this week was Kobo, the ebook seller that spun out of Canada's Indigo Books. More than any of the current ebook players, Kobo is emphasizing an any-screen strategy. Unlike Amazon, Kobo is not afraid to takle the mess of making a consumer's ebook work on all the devices they own. Kobo's $150 ebook reader device, which launches in the US on June 17, looks and feels like the device that Apple would have designed if Steve Jobs  bothered to reads books anymore. Perhaps most significantly, Kobo is tackling the ebook territorial rights mess. At IDPF, Michael Tamblyn, Kobo's Executive Vice President for Content, Sales and Merchandising, described Kobo's global reach. On one day last month, Kobo sold books to customers in 174 countries. Kobo does business in 6 different currencies and has agreements to sell books from 1600 publishers.

Apple's Disneyfied approach, as expressed in the iPad, is to sweep all sorts of application messes into app sandboxes. Apple has done very little, though, to clean up ebook messes, and their complicity in letting the big 6 agencies dump on the supply chain suggests that they want to be like Target and Walmart and just skim the blockbuster cream off the incumbent publishing ecosystem. I agree with Mike Cane that Apple will open the digital book floodgates by targeting the ebook creation tools mess.

There are still a lot of ebook messes looking for entrepreneurial sorts to show up with a broom, or perhaps a tsunami to just wash away the whole rickety shantytown. It should be an interesting couple of years.

I hope this piece has cleaned up the picture for you a bit!

iPad People, Here's What You Missed

I didn't get an iPad this weekend. I'll probably get one sooner or latter (I have a birthday coming up, hint, hint), but for those of you who spent your Easter weekend playing with your iPad, the first picture should give you a taste of what you missed.

I entered some data into a spreadsheet to see if ebook reader pricing shows any trend. The data comes mostly from the MobileRead wiki. I've added two arrows to indicate two possible evolutionary paths for ebook readers.

One path, the tablet, is exemplified by the iPad. The tablet roadmap is characterized by a relatively constant price and ever increasing computer power and display functionality (color, speed, resolution).

The other path, exemplified by the Kindle, is the dedicated ebook reader. The reader roadmap is exemplified by relentless price reduction and gradually increasing accommodation for reading ebooks.

If you believe my extrapolations, the dedicated ebook reader will cost as little as $25 in 2014, and the iPad will still cost $400. You heard it here first.

$25 eBook Reader Application Scenarios

My sixth grader goes to school with a 14 pound backpack. A few years ago, Consumer Reports weighed  backpacks at three New York schools and found that sixth graders had the heaviest backpacks, averaging over 18 pounds. A lot of that weight is textbooks, and there's a lot of concern that kids are hurting themselves by carrying around so much stuff.

The Kindle 2 weighs only 9 ounces; shoppers will take home 22 oz. iPads starting this Saturday. How long will it be before schools start issuing ebook readers instead of textbooks?

The big issue, of course, is cost. In my last post, I compared ebook readers to digital watches and other consumer electronics products that saw dramatic price reductions in the years following their introduction. It is inevitable that ebook reader prices will also come down to a point where they can find new applications such as textbooks for school children.

Another possible application is libraries. I've written several times about the difficulties ebooks pose for libraries, but I've not discussed a scenario that's becoming increasingly popular: libraries loaning ebook readers to patrons.

Most libraries that have tried ebook reader lending have found the programs to be popular with patrons. Typically a number of Kindles are loaded with a set of ebooks; sometimes all the Kindles have the same collection; sometimes different books are loaded onto different Kindles and somehow the library has to track which Kindles have which books. Patrons have to be instructed not to use the library Kindle to buy extra books. Unfortunately libraries don't have the budgets they would need to scale these programs.

So far, though, there's not been an ebook reader or reader loading system designed with library lending in mind. Imagine that the readers have dropped to $25 a piece. At that price, it would make sense to issue library reader devices (with a deposit) instead of library cards. If the library circulation system was designed specifically for use with dedicated reader devices, a patron could have access to a universe of books while in the library building; there would likely be a limit on the number that could be taken home. The reader device and circulation system would be designed so as to allay the legitimate concerns that publishers have with ebook distribution by libraries.

Another possibility is that content could be locked onto cheap reader devices. Imagine going to Target ten years from now, and instead of seeing stacks of the latest After Twilight Saga hardcover at the checkout, imagine seeing stacks of ebook readers preloaded with all ten novels in the Twilight and After Twilight series. Locking the content onto the reader device would enable all the reuse and resale that's possible with print books today- the buyer could lend the reader to friends, sell to a used book shop, or just keep it on a "book"-shelf in its attractive cover.

Each of these scenarios supposes that ebook readers will evolve to become increasingly inexpensive single function devices like the Kindle, and that they will diverge from general purpose media consumption devices like the iPad. A device designed specifically for reading will deliver a better reading experience at a lower price than one designed to support 3D video and gaming.

If you disagree, consider this question: How much reading would my sixth grader be doing if all his textbooks were issued on a gaming machine?

Content is Bling

In about 1973, my father helped start a company that spun off from the CMOS chip manufacturer, Solid State Scientific, that he had previously helped to start. He was unhappy being a marketing executive and wanted to get back into engineering. The new company, Integrated Display Systems, Inc. (IDS), was formed to combine integrated circuit technology with the newly commercialized liquid crystal displays (LCD) to design and manufacture modules for LCD digital watches.

In the box of tech relics from my dad that I brought down from the attic last week was one of the watches that he worked on. It's a "Chronosplit" built for Swiss watchmaking giant Heuer. Introduced in 1975, the Chronosplit was the first digital wristwatch to combine a digital stopwatch function with a quartz digital timepiece. It was a tour de force of the day's technology, and I remember my dad being very proud of it. The Chronosplit used two separate displays for the two functions. The LCDs of the day were too slow to support the stopwatch function, while the LEDs sucked too much power to constantly display the time.

Much has been written about the Swiss watch industry and how it was disrupted and almost destroyed by the invention of the quartz digital watch. Although we're now used to the way consumer electronics drops in price with market penetration and manufacturing scale, the rapid reduction in digital watch prices that occurred in the early 70's is still astounding. From 1972, when the first LED watch, the Pulsar, was introduced at a price of $2000, to 1976, when Texas Instruments launched a digital watch that retailed at $20, the watch industry experienced a bewildering technology and business transition.

The 100-fold reduction in price could have been predicted. From the user interface point of view, the Pulsar was rather clunky. Even though the watch had no hands, you needed two hands to read the time, because the display was normally off. A subsequent version added an accelerometer that turned on the display when you flicked your wrist. In order to sell the Pulsar, its manufacturer had to capitalize on the novelty value. The Pulsar came in a gaudy gold case- which looked great when it was featured in a James Bond movie, Live and Let Die. The resulting manufacturing bill of materials was thus dominated by the case. Japanese manufacturers realized that by putting quartz modules in cheap cases, they could deliver accuracy as good as the most expensive Swiss watch for a fraction of the cost; Swiss manufacturers took decades to recover.

The first few years of the digital quartz watch were marked by incredible creativity and diversity. Eventually,  economies of massive scale resulted in a shake-out among digital watch producers. (IDS went bust and my dad moved to Hong Kong to run a watch factory.) If you go to the store today to buy a watch, you find an amazing diversity of digital watch cases and a depressing lack of diversity of the electronics inside them. The watches are sold purely as jewelry- even watches that cost hundreds of dollars use electronics modules that wholesale for a few pennies.

At the center of the US watch industry of the 70's was an electronics importer called North American Foreign Trading (NAFT). NAFT was a company owned by New York's Lowinger family. Maurice Lowinger was a survivor of the Holocaust who emigrated from Hungary to New York and built a business importing consumer electronics and other items from Japan and Hong Kong. Among the items they dealt with were inexpensive watches. When Hughes Electronics went looking for a partner to sell digital watches, they were rejected by numerous Swiss and American watch makers. Lowinger jumped at the opportunity, however, and became one of the top watch producers in the US. The consumer electronics company that resulted, Unisonic,  was successful in a number of similar businesses, including electronic calculators and digital phones.

Today, Maurice's son Andrew leads the family business, which has become the DMC Worldwide group of companies. DMC includes companies specializing in private equity, logistics and supply chain management, GPS tracking devices, luggage, and even life insurance settlements. Their latest venture aims to create a new distribution channel for ebooks, called the Copia. It's a major investment.

On Wednesday evening, I had a chance to chat with Andrew Lowinger at an event where the Copia platform was being introduced to the New York publishing community. He emphasized DMC's long history of working with many partners, integrating technology, marketing, distribution and sales so that each partner could focus on their core competencies and overlay their business models onto new technologies. The message to publishers was that working with DMC would allow them to stick to publishing great content and avoid all the messy techy and selling stuff they hate.

The Copia platform will include e-Commerce, social networking, reading applications and a line of ebook reader devices; platform components will be launching gradually throughout 2010. The Copia hopes to provide infrastructure and technology to a variety of "powered by Copia" partners. Although there's nothing innovative about any single aspect of what the Copia is doing, the combination of all these pieces represents a level of ambition and effort that's right up there with Apple, Amazon, and Google.

What DMC and the Lowinger family really bring to the table is experience in successfully exploiting rapid technological change in consumer markets. My guess is that DMC will repeat its strategy of providing value to the consumer by pushing prices lower, just as in the watch, calculator, and phone handset markets of the past.

A look at the evolution of these industries suggests a possible future for ebook readers. In each case, an existing industry is invaded by new technology. At first, the new technology is pricey and a bit clunky, but as technology advances and manufacturing moves to scale, prices drop. In each case, successive generations of devices add functions at the top of the line while continually lowering the price of the base model. Prices drop until a floor is reached. The base model then adds functions in new iterations until the high end of the market is marginalized.
 
For digital watches, the price floor today is set by the case and the batteries; for ebook readers, the display and batteries are likely to set the price floor, at least in this decade. DisplaySearch, an analyst firm covering the display industry, estimates global production of 22 million e-paper displays and $431 million in display industry revenues in 2009. (That's an average price of about $20 per display.) For 2018, they forecast a market of 1.8 billion units and $9.6 billion total revenue. That's $5 per unit. eBook readers are forecast to consume 77 million of those units, suggesting that display prices will be driven down by applications (such as shelf tags) having nothing to do with ebook readers.

If the price of an ebook reader drops by a factor of 10 from today's Kindle, it will be $26, less than the list price of a new hardcover. If it drops by a factor of 100, the way digital watches did in five short years, it will be $2.60, similar to what it costs to print a book; the print book would join the mechanical watch as a low volume niche product.

The recovery of the Swiss watch industry in the 90's came about as Swiss watch manufacturers began  once again to market their products as jewelry. The value of a watch today is not in the mechanism, it's in the bling. When the cost of an ebook reader drops by more than a factor of ten, the value of the reader will once again be in the content it holds. Once again, content will be bling.

I'll write more about the implications of cheap ebook readers in my next post.