Lentis/Amazon, E-readers and the Future of the Publishing Industry

E-readers are quickly becoming the primary mechanism for consuming literature, news and magazines. E-reader sales grew exponentially between 2007-2011 and since are on a downward trend. Amazon, the online shopping giant, is driving the e-reader and e-book industry with unparalleled creativity. With over two million book titles available on the Kindle Store, Amazon recognizes its customers' wants and boldly shows society new technology it did not know it needed. The economic success of Amazon's e-readers is an excellent example of the interface of society and technology to create unique products. As the digital revolution changes how society consumes media, important issues must be addressed. The publishing industry and the laws the surround it are in flux. The industry needs to adapt to an online publishing environment or risk losing business to new ventures like Amazon's Kindle Direct Publishing. If Amazon continues producing technology that fits consumer needs and if the publishing industry successfully embraces the digital revolution, then e-readers and e-books can completely revolutionize how society interacts with the written word.

Amazon

Amazon's Kindle

Digital Revolution and Books

In the 1400's, the invention of the printing press sparked the printing revolution and made printed books mass producible. The printing revolution changed books from the illuminated manuscript into the printed word on paper. Today, the digital revolution is responsible for converting paper books into digital books, or e-books.

Bookstores

Chain bookstores, such as Borders and Barnes & Noble, emerged dominant in the 1970's, competing with local independently owned bookstores. When Borders went bankrupt in 2011, it revealed yet another shift in the book industry. Borders failed to understand the digital revolution and recognize the market had shifted.

Critics agree that three main factors led to Borders' bankruptcy: (1) overexpansion, (2) too late in establishing an online presence, and (3) neglected e-readers. It opened stores overseas, a move that stretched themselves too thin. From 2001 until 2008, Borders outsourced its online sales to Amazon. Meanwhile, Barnes & Noble invested in strengthening its online sales. These seven years were formative years of e-commerce and Amazon emerged as a huge competitor when Borders launched its own online store in 2008. Because of path dependence, Borders overlooked the possibilities of selling books online. The Amazon Kindle was released in 2007. Two years later, Barnes & Noble announced its Nook. Apple's iPad debuted early 2010. A year before bankruptcy, Borders started selling its own e-reader, the Kobo.

Both Borders’ and Barnes and Noble’s business model was to create a warm, inviting atmosphere where customers would not feel rushed when browsing books. Due to this mental model, Borders constricted itself to sell books only in stores. By the time Borders realized the digital revolution changed how customers viewed books and wanted access to them, it was too late. Meanwhile, Barnes and Noble recognized the trends in bookselling and aggressively established their stake in the e-book industry, acknowledging the niche market they fulfilled was changing.

The disappearance and reduction of big-box bookstores have allowed small independents to take advantage of the bookstore void. Advances in technology shrunk the bookstore niche, enabling small stores to operate more efficiently.

Project Gutenberg

In 1971, Project Gutenberg launched, marking the first serious ebook endeavour. Its mission "to encourage the creation and distribution of eBooks." Today Project Gutenberg freely offers over 45,000 titles, books whose copyrights have expired or are self-published through Project Gutenberg's Self-Publishing Press.

Why Amazon? Why the Kindle?

Sony Librie, the first mainstream e-reader

In 2004, Sony debuted the Sony Librie with new E-Ink Technology. This technology, created in 1996 by Joseph Jacobson and Barrett Comiskey, places a charge on black and white microcapsules, creating pre-defined patterns . This low-power "ink" allows for a bi-stable device that has extremely long battery life. Sony had high hopes for the Librie, recognizing the similarities between E-Ink and physical books. However, in 2007 Amazon released their first Kindle, also utilizing E-Ink technology, taking the market by storm. Selling out in 5.5 hours, the Kindle quickly became the most popular e-reader choice. By 2008, Amazon was boasting 10% of it's book sales as digital while Sony claimed only 300,000 titles sold. In 2011, Amazon sold 143 e-books for every 100 hardcover books sold.

As Sony focused on the technical details of their e-reader, Amazon strategized to fill both technical and societal needs. For example, Amazon correctly predicted the need for wide variety of titles to be successful. Before launching the Kindle, Amazon worked with publishers to offer a wide variety of titles. When the Kindle released, 800,000 titles were available for download. Amazon designed two other features Sony overlooked: wireless purchasing and a user friendly experience. Gizmodo reviewer Wilson Rothman wrote: "My verdict is that a connected e-book reader was what the world needed..the Kindle is a quality invention, and I can see why the first batch sold out so fast." By anticipating user's desires for these features, Amazon positioned themselves for a successful launch; now, Amazon dominates the e-reader market. In the next five years, Amazon must continue to evolve to compete with their emerging rivals.

Amazon's Competition

Amazon faces three main competitors for control of the e-reader market: Apple's iPad, Barnes & Noble's Nook, and tablet computers. While the Nook is a threat, Amazon identifies Apple as their direct competitor by comparing the Kindle Fire and the iPad side-by-side on their website. The cheaper price of the Kindle Fire is Amazon's main advantage: about $170 cheaper than the iPad mini. .\ However, in October 2012, Amazon posted a $274,000,000 third quarter loss, which experts attributed to the release of the iPad mini.

For Amazon, competition from Apple is only part of the battle. Standard E-reader sales have been steadily declining, falling from 23.2 million to 14.1 million between 2011 and 2012. As society's needs change, Amazon must adapt to remain relevant. Amazon offers the Kindle Cloud reader to compete. It allows consumers to read their purchased e-books on any device with the app. These apps can be downloaded on most devices and allow users to purchase books from the Kindle store. Amazon even offers a web portal to read Kindle books, allowing consumers to access Kindle books from their desktop and laptop computers. Through the Kindle Cloud Reader apps, consumers can purchase e-books through the Kindle store without owning a Kindle e-reader. This enables Amazon to tap into another revenue stream.

Amazon's recent business strategy

Amazon has stressed throughout its history that it is not seeking immediate profits, but instead investing for the future. In the past few years, Amazon has sacrificed profit for resources, or warehouses. In 2011, Amazon added 17 warehouses to the 52 already in its possession. Today, it is rapidly expanding its data centers, to support development of its Web storage business. In 2011, revenue rised about 40 percent each quarter, demonstrating the need for more capacity. In the highly competitive and fragile retail environment, this is an inevitable problem. Now, Amazon has about 100 fulfillment centers, also known as warehouses. It streamlined the process of opening these centers, but each opening is still a huge expense.

Amazon is the subject of an ongoing debate: whether or not its fulfillment center investments and other new ventures will lead to steady profits. The bulls (investors expecting upward trend in the stock market) argue the company is building a foundation to become the most important retailer in the country. The bears (investors expecting downward market trends) point out October's increase in the free shipping minimum from $25 to $35 as a sign that one day Amazon will have to focus on the bottom line. Amazon's revenue continues to increase, but if it will yield profits remains to be seen.

The rise and fall of e-books

E-books and e-readers had an exponential rise, yet their respective growths have slowed down just as quickly in the last couple of years. E-book sales growth has dipped from a peak of 252% in 2010 (Q1) down to 5% in 2013 (Q1). Similarly, e-reader sales have dropped over the past 2 years and are predicted to continue to drop. Market research firm IHS iSuppli estimates that shipments of dedicated e-readers peaked in 2011 and predicts that 2012 shipments slid to 14.9 million units, down 36% from a year earlier. By 2015, it expects unit sales of dedicated e-readers to be just 7.8 million.

One theory for these trends is that e-books are well suited to some types of books, like genre fiction, but not well suited to other types, like nonfiction and literary fiction. Also some argue that e-books are well suited for certain reading situations, like plane trips, but less suited for others, like lying on the couch at home. This theory hypothesizes that the e-book is not more than a complement to the printed book, as audiobooks have long been, rather than an outright substitute. Another theory is that some users who bought e-readers have no urgency to buy another. People haven't stopped reading; as a matter of fact, more people are reading e-books. The likelihood to read e-books on tablets rather than e-readers is increasing, according to a recent Pew Research Center report. Despite the plateau in e-book sales, the polling firm found that 23% of Americans said they read e-books in 2012, compared with 16% in 2011. Amazon must continue to adapt to the dwindling support of e-readers yet must still take advantage of the increase in people reading e-books.

Confronting the "tablet takeover"

Amazon's Kindle Paperwhite

There is a broader trend of single-purpose devices, like e-readers and cameras, losing business to general-purpose devices, like tablets and smartphones. This phenomenon is because users want to use their devices to do more than just read e-books, e.g. surf the web, play video, and use social media. Tablets such as the iPad allow consumers to do so.

Amazon unveiled the Kindle Fire tablet in 2011 to enter the tablet market and compete against Apple's popular iPad series. Amazon continues to make improvements to their tablet while keeping their prices lower than Apple's iPads. However, Amazon's tablets rely on a content-centric business model, based on the assumption that consumers will buy more content long after initial purchase of the tablet. One disadvantage of this ecosystem is that it is more closed-off than other devices running on Android. Currently, the Kindle Fire HDX model is $20 cheaper than the iPad Mini with retina display.

Amazon has boosted its e-reader series with the release of the Kindle Paperwhite. It boasts a smoother interface, improved readability in direct sunlight, and improved touch response. This new iteration represents Amazon's desire to emulate a physical book as closely as possible (hence, the name of the tablet).

Amazon is continually trying stay relevant as society shifts toward tablets. In addition to confronting the tablet industry, Amazon must face opposition from the Publishing Industry.

Publishing Industry Unrest

Dissatisfaction of Legacy Publishing

HarperCollins, one of the Big Six publishers

When Amazon launched the Kindle in 2007, it sold bestsellers e-books at $9.99, about 45% off the wholesale price.. Amazon used the undercutting pricing strategy to eliminate competitors. The publishers disliked this pricing because it "devalues books and hurts all the retailers of hardcover books." Publishers were afraid of Amazon's emerging monopoly and the power of negotiation that can result. Penguin USA CEO said, "I am now more convinced that we need a viable alternative to Amazon or this nonsense will continue and get much worse." With the launch of the iPad, five of the Big Six publishers negotiated agency pricing with Apple, allowing the publishers to set their own prices. Apple was the perfect candidate, it long believed it could "trounce Amazon by opening up [its] own ebook store." Until this point, Amazon operated under the wholesale model, where publishers sold to retailers at a "wholesale" price (usually half the recommended retail price), but retailers were free to set their own prices. Under the agency model, publishers set the prices, and retailers earn money by commission (i.e., Apple gets 30% and the publisher gets 70%) .

Legacy Publishing Vs. Amazon

Publishers began seeking similar agency agreements with Amazon to raise prices. Amazon fought Penguin and MacMillan for a few days and a few weeks, respectively, by removing the publishers' books from the website. Because of Amazon's aggressive rebuttal, causing heavy losses for publishers, the publishers aligned to take on Amazon together. MacMillan CEO was quoted, "I can ensure you that you are not going to find your company alone in the battle." Amazon eventually released a press statement saying: "we will have to capitulate and accept Macmillan's terms." Though details of each agreement were not released, the raising of ebook prices from $9.99 to agency prices reveal Amazon's defeat. Meanwhile, Amazon agreed to agency pricing with HarperCollins, Simon & Schuster, and Hachette, three of the Big Six publishers. With five of the Big Six demanding their terms, Amazon cannot afford to boycott supply without losing significant business.

Amazon: From retailer to publisher

Timothy Ferriss, one of the bestseller authors who signed with Amazon publishing

In 2009, Amazon launched the first subsidiary of Amazon publishing. Amazon thinks "the only really necessary people in the publishing process now are the writer and reader." With this realization, Amazon began disintermediation of the publishers. When Amazon signed Timothy Ferriss, a New York Times bestseller author, he described Amazon's "one-to-one relationship with every one of their customers.” Author Bob Mayer wrote about Amazon's "honesty", "access to the top people", and help with sales. New York Times best-selling author Barry Eisler talks about the "control of business decisions" Amazon offered and the promptness with which it acted. Research shows a link between customer service and profitability. If legacy publishers remain stiff and customary, their market share may be eroded by Amazon and its customer-focused and innovative mentality.

The Future of the Publishing Industry

The struggle between Amazon and legacy publishing raises some interesting questions about the future. Amazon’s publishing business has seen some initial success and may continue to grow. E-books' market share is growing, possibly at the expense of print books. Other entities, such as Google, have successfully entered the market . Legacy publishing will try to recapture book sales. In the face of new opposition, will Amazon be able to continue its growth?

Publishing is not just a business — it is culturally integrated to society. Publishing both reflects the interests of society and contributes to its development. The success of Amazon is closely related to their sensitivity of the societal role of publishing.

Piracy and DRM

Piracy is an ongoing issue for digital media, arguably inhibiting the development of new content. Although it's difficult to accurately determine how e-book piracy is affecting sales, a 2010 report by Attributor, a copyright protection company, estimates that American publishers have lost $2.8 billion. Following the example of the music and movie industries, many publishers license e-books with digital rights management (DRM) to prevent piracy. However, many major e-book retailers, such as Apple and Amazon, use DRM schemes that are dependent on the company's e-reader platform, which limits the use of purchased e-books on other devices.

Amazon has used platform-specific DRM to it's advantage at the expense of smaller book retailers. For example, three independent book sellers are suing Amazon, claiming that their use of platform-specific DRM is unfairly restricting the e-book market. These small sellers want to be able to sell e-books to customers with popular e-readers, like the Kindle, but agreements between publishers and Amazon on platform-specific DRM prevent this. Thus, in agreeing to platform-specific DRM, Amazon is able to constrain the market for Kindle users to its own e-book store. The case discussed previously where publishers banded together to force Amazon into agency agreements also illustrates this point. In allowing Amazon to hold on to its already established customer base via agreeing to platform-specific DRM, the Big Six publishers arguably helped Amazon in being able to devalue their products with extremely low prices.

In addition to constraining the e-book market, DRM has not prevented privacy, because it is increasingly easy for customers to free their e-books from DRM. DRM is also not appealing to customers since it limits how they can use products that they've purchased, rather than granting full ownership. For example, Amazon can remotely delete e-books from customers' libraries without consent, made possible by DRM. Organized opposition to DRM seems to be growing, with more communities and platforms centered on open source e-books. Thus, while it seems likely that DRM will eventually die out, its persistence in the e-book industry demonstrates a lack of understanding by publishers that traditional views of rights management do not translate to the digital medium.

Hybrid Content

In the traditional publishing industry, the paperback has been king. Now, e-readers are changing the industry. Digital availability will enhance the visual nature of information and allow new and enriched content. Comic book publishing has already been revitalized in digital format. Further changes to the publishing industry will be driven not only by increased availability, but new content. For example, the traditional printed cookbook may be replaced by apps which feature a mixture of professional and user-generated content, interactivity, pictures, and videos. These apps already exist for both Apple and Google platforms.

Due to piracy concerns, textbook publishers are reluctant to create e-books of many popular textbooks. To fill this gap, Apple and others are creating new textbooks known as iBooks which takes advantage of e-readers' interactive capabilities. In contrast, Amazon is lacking innovation in hybrid content, where Apple and others are a step ahead.

Censorship

Amazon has, unilaterally and without oversight, censored content on its e-readers. This is in violation of the freedom of the press promised by physical books; once in existence, print media cannot be easily censored. Centrally-controlled digital media is easily subject to censorship and erasure. There is little public knowledge of these censoring capabilities. If Amazon exercised this power visibly, it might lose public confidence in their company and e-books in general.

Generalizable Lesson

Amazon initially succeeded in dominating the e-book industry because of both the opportunity afforded and their awareness of society. Social and technological marketing of the Kindle enabled Amazon to out-compete Sony's highly technical product. Even though Project Gutenberg had been in existence for thirty years prior, Amazon's innovations defined the beginning of the e-book age.

Through several generations of e-reader hardware, Amazon has continued to develop new features, generate further interest, and accumulate consumer goodwill. Even as society shifts towards tablets, Amazon has adapted and released its own tablet. The future success of Amazon in the publishing industry is not as clear. Legacy publishers and other players, such as Apple and Google, have had time to realize innovative strategies of their own. As with the outset, Amazon needs to anticipate the desires of their customers, whether consumers, authors, or publishers. Although Amazon currently dominates the e-reader and e-book industry, the industry is rapidly changing due to technological innovations and social demand.

In times of social and technological revolution, businesses must adapt quickly and continuously to remain relevant. Technological revolutions, like the digital revolution, change society's desires. This change shifts the market and is responsible for the expansion or reduction of niche markets. "When there's a massive transition in an industry, the strong players make it through to the other side," explains David A. Schick, a retail analyst, "What gets caught up in the change are the weaker players." Businesses fulfilling the needs of such niche markets must recognize such changes before it is too late.

Expanding the Chapter

Recommendations for Future Groups

• Discuss how literature genres (textbooks, magazines, newspapers, etc.) are changing as e-readers become more prevalent. As books become digital, many genres are adapting to incorporate sound, media and multiple endings. How does this change the way books are defined? What are the social implications of literature merging with multimedia applications?

• Investigate more into the social groups involved: authors, publishers, libraries, students, teachers, parents, etc. There is much to be uncovered that could not be adequately accomplished here.

• Analyze the conclusion of the Publishers vs. Amazon lawsuits. What does the outcome mean for society? Does the price of a digital book really "devalue" the importance of the written word? How will the government try to get involved with anti-trust issues and price setting?

• How do authors perceive the online publishing environment? How does Amazon's Direct Publishing change the way literature is published? Which social groups are opposed to more open publishing environments and which groups support it?