eBook Heaven

Do you believe in heaven?

Well, why not? There are many ways to think about heaven. Most people will admit that there's something of us that lives on after we die, even if it's just the memories that we leave in others or the impact of our lives on the material world. And whatever that something is, it doesn't need food to eat or even air to breathe. It certainly doesn't require a paycheck. Truth and beauty and wisdom, those qualities don't really die with our bodies, do they? If the bit that we leave behind has of its essence some truth or beauty or wisdom, doesn't that sound like heaven?

If you have a favorite library, you know what book heaven is like. Words can live on long after their creators have turned to dust. Libraries work each and every day to bring all the truth, beauty and wisdom in their collections to their communities, both present and future. They cooperate with each other, so that even if your library is missing the book you need, another will fill the void. The rules governing our society have recognized how important all this is, and allow us all to benefit from the labors of those whose existence has faded to memories.

I believe in ebook heaven. In ebook heaven, there are no royalties to pay to Herman Melville or William Shakespeare or Dante Alighieri.  There's even a slushpile in ebook heaven, where the weight of the world presses a diamond or two from unpublished graphene sheets.

The ebook heaven I believe in – some call it Open Access.

There's ebook hell, too, and that's what libraries live today. In ebook hell, books don't live forever, they disappear after a year. Or they're snatched into the kindles of eternal damnation by digital rights demons, lawyers and engineers. Every read must be monetized to feed some hungry monstrosity, and truth and beauty and wisdom are memories like the smells of leather bindings and musty paper.

Or maybe it's ebook purgatory. Dante imagined purgatory as a mountain that souls must climb before being admitted into paradise. In each circle around the mountain, the deadly sins that have stained the souls – envy, greed, lust, etc. – are purged by suffering, sanctified by fire and purified by agony. At last, the remains enter into the Garden of Eden, where everything has returned to its original perfection.

As we look to the future of ebooks, all we can see today is a long circle of purgatory. Our copyright theology posits that we must track millions, perhaps hundreds of millions of creators and their deaths into the far future so that we may say if a work has passed into ebook heaven. In more circles around Purgatorio mountain, we must track national boundaries, regional rights, governing laws, inheritance claims, contract disputes, international conventions, and perhaps even patent rights.

But still, I believe in ebook heaven.

Libraries are still endeavor to create little circles of ebook paradise. Within the bubble of a library, ebooks can be free to read. Digital archivists see that some books really do outlast us. New generations of minds encounter all sorts of new knowledge and enlightenment.

Libraries still work with each other to connect their bubbles and make their ebook paradises bigger. We need to enlarge those heavens, book by book, year by year, library by library. And we can't restrict ebook paradise to academia, any more than a belief system can restrict spiritual paradise to its priesthood. We need to find ways to expand the boundaries of availability for every book, to build bridges between today's best sellers and the far future of the public domain.

eBook heaven is worth working towards, together.

Do you believe in it?

$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?

Back to the Future at the Storefront Library

I wish library I can buy book.

I wish we had a permanent library.

I wish to be happy and proud of my accomplishments.

In the window of the Chinatown Storefront Library in Boston stood a Wish Tree. Modeled after Yoko Ono's Wish Tree Project, the tree was meant to allow patrons to pass on a spirit of energy and hope. The instructions were:

Make a wish. Write it down on a piece of paper. Fold it and tie it around a branch of a wish tree. Ask your friend to do the same. Keep wishing until the branches are covered.

The Chinatown Storefront Library closed its doors on January 17, 2010, the Sunday that ALA Midwinter was in town. Always meant to be a temporary library, the Storefront Library was an expression by Boston's Chinatown community of its need and support for a library of its own. The Chinatown neighborhood of Boston has been without a branch of the Boston Public Library since 1956, when the branch was closed and demolished to make way for a highway.

Without a local branch, Chinatown residents needing library services have to go to the main library in Copley Square, which, though a beautiful building, may seem rather imposing and hard to navigate for someone looking for Chinese language materials.

The founders of Chinatown Storefront Library, Sam and Leslie Davol, had been involved in community meetings surrounding the proposed design and construction of a new branch of Boston Public Library, and in that process had gotten to know faculty at Harvard's Graduate School of Design. With a new branch on hold due to budgetary reasons, the Davols decided to take action. A local developer offered to let them use a vacant storefront for free. Design students made some gorgeous, modernistic shelving pieces for the library, enabling it to create an inviting environment in an bare commercial space. Library students from Simmons paired with Cantonese- and Mandarin-speaking community volunteers to staff the facility. Donations of over 5,000 books were solicited, and for twelve weeks, a community library came into existence. The operating budget for the entire project was about $10,000.

The day before the closing, I had a chance to tour the Storefront Library and sit down with Sam Davol. Formerly a legal-aid lawyer in New York, he and his wife moved back to Boston with their two children, partly so that Sam could devote more time to music. The Library project was an outgrowth of their involvement in the community and other cultural programming they've produced.

In just a few short months, the Storefront Library has had a clear impact on its neighborhood. People who used to avoid the block because of its vacant, spooky feel began to feel welcomed by the activity surrounding the library. Cultural activities, language classes and storytimes attracted people from the community and passersby.

Initially, the Storefront library did not plan to circulate books, but in the first week of operation patrons told them that they really wanted to take books home with them. A makeshift paper-based circulation system was implemented, and over 1,374 books were circulated in 11 weeks of operation, over half of them in Chinese. Over 4,000 books were catalogued using LibraryThing.

In talking to librarians in general about the storefront library concept, I've gotten a consistent reaction that small storefront spaces could not provide sufficient room to provide internet access; terminals take up more room than books. At the Storefront Library, the computers tended to be lightly used. When I was there, some older gentemen were reading newspapers, some children were reading books, but no one was using the computers or internet access. This could be because the Library did not subscribe to electronic resources.

I think the most important lesson that can be learned from the Storefront Library experiment is that even small temporary libraries can be powerful agents of community development. In Boston, this role was accentuated by a location in close proximity to people's everyday lives. While I've written that the future of public libraries may be in smaller locations, the Chinatown Storefront Library reminded me that many public libraries began as grassroots efforts to promote knowledge and culture.

Now that the Storefront Library has closed, its books will be going to a new reading room, to local schools, and a few to the Chinese Historical Society of New England. The furniture will be going to local schools and daycare facilities. Information about the project will be published on the storefrontlibrary.org website so that similar projects in other communities can learn from their experiences.

As for Sam Davol, he goes on tour. He plays cello with the indie-pop band "The Magnetic Fields", which has a new CD out, Realism. I just got my tickets for one of the shows at New York's Town Hall in March.

I wish there were more people experimenting with libraries.

PTFS to Acquire LibLime and Move to Library Systems Premier League

Update Feb.12 - the acquisition is not happening. 
Update Mar. 16- the acquisition closed after all.

In 2009, the New York Yankees had a payroll almost ten times that of the Florida Marlins. The reason that baseball lives with that disparity is that the financial interests of many owners do not align with their fans- they take in roughly the same amount of money no matter what the team's performance.

It's different in the English Football Leagues. Teams which fall to the bottom of the standings in the Premier League are relegated to the second division, the equivalent of baseball's minor leagues. At the same time, the best teams in the second division are promoted to the Premier League, giving them a chance to make much more money. There is a clear alignment between the interests of the fans and the owners.

The library industry has likewise been troubled by misalignment of interests between the owners of the companies and their customers. That's why it's important for libraries to pay close attention to the frequent mergers and acquisitions of the companies that serve them. These transactions are often announced just before an ALA meeting, and this past weekend's ALA Midwinter Meeting was no exception.

The big story of the weekend was the pending acquisition of Koha support vendor LibLime by PTFS (Progressive Technology Federal Systems, Inc.). (The acquisition is still in the due diligence phase and is expected to close in early February; terms were not disclosed.) The surprising part of the announcement was the sudden emergence of PTFS, which has had a very low profile in the library industry, into the top tier of integrated library system vendors.

Here I must digress to discuss a bit about business models in the library industry. Libraries have traditionally viewed their catalog system vendors as long term partners; the migration of data from one system to another is a major project, not lightly taken, and preferably not attempted more than once a decade. The choice of a new system touches almost all the library's processes, and thus involves many consultations and lengthy RFPs.

From the vendor's point of view, the sales process is very expensive. Promises to customize the system to address customer peculiarities are common, and these add to the cost of system maintenance. Once the system has been sold, a proprietary system vendor has a guarantee of continuing profits from support contracts. Only the vendor has the system knowledge (and sometimes even the system access) to make even the most trivial changes. It's in the support phase that the vendor and customer interests can become misaligned. The vendor has every incentive to do the least work at the highest price possible. The customer is locked into whatever system they have chosen.

Companies with strong cash flow have been attractive acquisition targets for private equity firms. Once acquired the company's new management focuses on eliminating expenses by cutting support staff and cleaning up the balance sheet by offloading liabilities such as unfinished development, thus making the company very profitable. The company can them be resold at a good mark-up. Customers often become very unhappy during the process. The company they "hired" during their system selection process transforms into something different.

The recent popularity of open source library management systems is in large part a search for business models that better align the interests of vendor and customer during the support phase. If the support vendor doesn't perform to the library's expectations, the library can hire a new support vendor without ditching their automation system. If a library wants to add a new feature to their system, or integrate it with a system from another vendor, they can hire a developer based on qualifications rather than access to source. The important thing to the library is not so much the access to source or the cost of the license, it's the absence of vendor lock-in.

The reason that PTFS is not widely known is that it specializes in an obscure segment of the market- it supports libraries predominantly in the government and the military. Founded in 1995, PTFS has been installing ILS systems, doing conversions and supporting systems in the unique security environment of government systems. John Yokley, a co-founder and the CEO of PTFS, spent 13 years as a Sirsi system administrator and programmer at the U.S. Courts, NASA, and University of Virginia Health Sciences Library has spent 20 years, 5 more than the age of PTFS, working in the library industry. Yokley himself worked in a government library for a short period in the early 90’s designing and building virtual library technology.. The company has experienced steady 20% per year growth and today has 120 employees. PTFS is particularly proud of their development of the US Government Printing Office's Federal Digital System (FDsys) which supports over a thousand libraries, but the company also has a library staffing component and a digitization facility.

Although PTFS has had a strategic partnership with SirsiDynix to market ArchivalWare, a digital content management system that grew out of technology developed for FDsys the Naval Research Laboratories (NRL) TORPEDO project, it found itself hamstrung in supporting its customers because of the lack of access to source code of the proprietary systems it was supporting. About 18 Months ago, PTFS decided that Koha was the Integrated Library System that it could most easily integrate with ArchivalWare, and it began to offer support for Koha. Koha is generally considered to be the first open source integrated library system; it was initially developed in New Zealand by Katipo Communications Ltd. and first deployed in January of 2000 for Horowhenua Library Trust.

LibLime (which is actually a trade name of Columbus, Ohio based Metavore, Inc.) was started in 2005 by Joshua Ferraro, Tina Berger and two others. LibLime has been the hardest-charging and fastest-growing proponent of the Koha Library System in the world. Over the intervening years, LibLime has acquired key Koha-related assets, including the US trademark, copyrights to Koha source code, and the Koha website. The combination of PTFS and LibLime will be supporting 640 installations of Koha under 123 contracts. The combined business will have Koha-related development contracts totaling $1.7 million. Despite the state of the economy, LibLime has actually had an increase in business over the past few months.

Recently, Ferraro and his co-principals at Metavore became very interested and excited by an opportunity outside of the library space. As the LibLime business grew, they recognized that they couldn't pursue both the new opportunity and LibLime, and they began to look for an acquisition partner. PTFS was the first company they went to. Given the reasons for the sale, only Ferraro among the Metavore principals will remain with LibLime; and he will stay only for 18 months to oversee the completion of planned development.

PTFS will keep the LibLime name and fold its own Koha support business into LibLime, which will be run by Patrick Jones. At the press conference held at ALA Midwinter in Boston, PTFS CEO John Yokley indicated that PTFS was committed to the concept of user-driven development and the open source concept, but also emphasized that he was still learning about open source and he was reviewing the LibLime business model; there is much left to be decided about how the LibLime business will move forward.

I spoke with Yokley afterwards. In his conversations with LibLime customers, he has found that their top priority for adopting Koha was to avoid vendor lock-in: their systems should be expandable by LibLime, the library or by another vendor. He sees Koha as a component of a fully capable integrated library system, and vowed that in two years, Koha will be fully capable of running a major academic library. The integration of Koha and ArchivalWare will be only the first phase. Although his team has discussed making ArchivalWare into an open source project, there are issues with third party components used which may prevent that from happening.

Yokley's clarity on avoiding vendor lock-in will be reassuring to customers, particularly with respect to LibLime Enterprise Koha (LLEK), a service announced by LibLime in September of 2009. LLEK is perhaps the most exciting asset being acquired by PTFS, and also the most controversial. The controversy deserves another article entirely, as it represents a break between LibLime and other developers supporting Koha. I plan to write that article in the coming week; please e-mail me if you wish to comment.

LLEK represents the evolution of LibLime's entry into cloud computing (also known as "software-as-a-service". Unlike vendors whose idea of cloud computing is simply to offer fully hosted services, LibLime's implementation of the cloud is more in line with that of modern "lean startups" who don't even own their own servers. By using Amazon EC2, LibLime has access to instantly expandable, low cost computing resources. LibLime is able to provision, configure, and implement a new Koha server in less than an hour. To accomplish this, LibLime has developed sophisticated deployment software (which it does not intend to release).

PTFS is already doing a sort of software-as-a-service, building private clouds for its military customers who don't have the option of going out on the open internet. As Yokley explained to me, "Economies of scale are an interesting thing. We've had a few large customers, but now with LibLime, we can provide services to large numbers of small libraries."

Welcome to the big leagues, PTFS!

This article is the first part of a series. Part 2 is here. Part 3 is here.

Offline Book "Lending" Costs U.S. Publishers Nearly $1 Trillion

Hot on the heels of the story in Publisher's Weekly that "publishers could be losing out on as much $3 billion to online book piracy" comes a sudden realization of a much larger threat to the viability of the book industry. Apparently, over 2 billion books were "loaned" last year by a cabal of organizations found in nearly every American city and town. Using the same advanced projective mathematics used in the study cited by Publishers Weekly, Go To Hellman has computed that publishers could be losing sales opportunities totaling over $100 Billion per year, losses which extend back to at least the year 2000. These lost sales dwarf the online piracy reported yesterday, and indeed, even the global book publishing business itself.

From what we've been able to piece together, the book "lending" takes place in "libraries". On entering one of these dens, patrons may view a dazzling array of books, periodicals, even CDs and DVDs, all available to anyone willing to disclose valuable personal information in exchange for a "card". But there is an ominous silence pervading these ersatz sanctuaries, enforced by the stern demeanor of staff and the glares of other patrons. Although there's no admission charge and it doesn't cost anything to borrow a book, there's always the threat of an onerous overdue bill for the hapless borrower who forgets to continue the cycle of not paying for copyrighted material.

To get to the bottom of this story, Go To Hellman has dispatched its Senior Piracy Analyst (me) to Boston, where a mass meeting of alleged book traffickers is to take place. Over 10,000 are expected at the "ALA Midwinter" event. Even at the Amtrak station in New York City this morning, at the very the heart of the US publishing industry, book trafficking culture was evident, with many travelers brazenly displaying the totebags used to transport printed contraband.

As soon as I got off the train, I was surrounded by even more of this crowd. Calling themselves "Librarians", they talk about promoting literacy, education, culture and economic development, which are, of course, code words for the use and dispersal of intellectual property. They readily admit to their activities, and rationalize them because they're perfectly legal in the US, at least for now.

Typical was Susanne from DC, who told me that she's been involved in lending operations for over 15 years. This confirms our estimate that "lending" has been going on for over ten years, beyond even Google's memory. Our trillion dollar estimate may thus be on the conservative side. Of course, it's impossible to tell how many of these lent books would have been purchased legally if "libraries" were not an option, but we're not even considering the huge potential losses to publishers when "used" books are resold for pennies on the black markets.

The communications backbone for this vast enterprise appears to be Twitter. Already, there is constant chatter on the #alamw10 hashtag. Most messages are clearly coded references to illicit transactions. For example a trafficker with the alias "@libacat" tweets "Have to be on the bus to the airport at 6:41 tomorrow morning to make it to the airport to get on my plane to #alamw10". At first glance, it seems like a mundane tweet about travel plans, but the breathtaking ordinariness and triple redundancy is more likely a secret code. How else to understand @scolford's (correction: retweet of @SonjaandLibrary replying to @BPLBoston) tweet; "curling my toes in joy at the thought of visiting your library"?

I've attended this meeting before. When I register for the book lending confab, I'll be presented with an encrypted document labeled the "program", which once decoded, will tell me where I can meet other book traffickers, discuss arcane trafficker lore, and drink trafficker beer. It's thick with secret code words like YALSA, LITA and NMRT, and no apparent rhyme or reason in its layout, evidently to frustrate outside investigators. I'll be lucky if I can find a bathroom.

Two places I'll be sure to find this weekend will be the OCLC Blog Salon on Sunday evening and the Chinatown Storefront Library on Saturday afternoon. Say hello if you see me.

A more serious post on Attributor is forthcoming.

Update: here's my post on "Deconstructing the Attributor Study".

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.

Why Libraries Exist

Imagine a world in which you share every book you buy with nine strangers, and you don't buy nine of every ten books you read. What would that world be like?

If you're a librarian, you're probably thinking it would be a reader's paradise. If you're a publisher, you're probably thinking it would be an author's nightmare. If you're an economist, you're probably computing demand curves, and concluding that both librarian and publisher have got it completely wrong.

Demand curves are used by economists to characterize the market for products. They plot the the amount the market would buy for a given price. For example, the market for a book would show that many people will buy books at a low price, and few will buy the book if it has a high price. If you are an exclusive seller in a market, as most publishers are, you can choose any price you like, but your revenue will be maximized if you choose a price somewhere in the middle of the curve. For the demand curve shown, the best price for the book is $10, which results in 1000 sales, for a revenue of $10,000.

What happens to the demand curve in our hypothetical everybody-shares world? The sales go way down of course, but the people willing to get the book for $1 will get to read books priced at $10. The people willing to spend $10 will be able to read the book even if it's priced at $100.

If the publisher took economics in college, he would look at the demand curve and price the book at $100 instead of $10, and guess what? The publisher revenue would be $10,000, or exactly the same as before! Since the publisher doesn't have to incur the printing costs of the larger print run, he makes more profit.

Is this realistic? Librarians can't have missed the fact that books meant for the library market are invariably priced at five times what the book would command in the trade market. On the other hand, if publishers were better at math, well... they'd have become bankers, and we'd probably all be better off in 2010 than we are!

The real world makes things complicated, and economists like UC Berkeley's Hal Varian studied these situations in the 90's. They wrote lots of interesting articles, including ones filled with math (pdf) and others fit to be read by librarians and publishers. Varian included the effects of transaction costs, production costs and the different values of owning and sharing, and found that library-like sharing benefits both publishers and consumers when the transaction cost of sharing is less then the marginal production cost:

1) more books will be read; 2) consumers will pay a lower price per reading; 3) the sellers will make a higher profit; and, 4) consumers will be better off.

To put it another way, libraries can be economically justified if the cost to lend a book is less than the cost to produce and sell a book. As I discussed in my previous article, the Institute of Museum and Library Services publishes a survey (available here) that tells us that US public libraries performed 2.17 billion circulation transactions in 2007 at an operating cost of $8.86 billion dollars. If we ignore all the other services that libraries provide, that gives us a cost per transaction of $4.09. So public libraries are inherently beneficial if it costs more than $4.09 for publishers to make, sell, and deliver an extra book.

Varian also notes that consumer sharing also yields benefits when consumer preferences are heterogeneous. Some people want to read the book the day it comes out; other people are perfectly happy to wait until the paperback comes out, and others will prefer to get it from the library. This heterogeneity allows market segmentation, which improves the efficiency of the market. The book publisher can charge $30 for the hardcover edition, but can still make money off of people who are only willing to pay $10 by issuing a paperback a year later. The publisher even makes money from library sales that allow use by people not willing to pay anything for book!

Libraries benefit society in many ways, but it's important for both publishers and librarians to understand the economic role that libraries have played in the book industry- they benefit everybody, publishers, authors and readers, by aggregating demand and helping to segment the market.

Next... ebooks.