The Possible Future of eBooks and Print Publishers

The world of ePublishing, from the perspective of one of the "dot.coms"

May 03 2001

SPEECH BY DAVID SPISELMAN, CEO, CYCLOPSMEDIA.COM, DELIVERED TO San Francisco Chapter of the Women's National Book Association (WMBA) FEBRUARY 2001. Reprinted with permission. Edited by BinaryThing.com.

Good evening, folks. Thanks, Andrea, for the introduction. And, before I begin, I’d like to thank the WMBA for this opportunity to enlighten you folks about the world of ePublishing, from the perspective of one of the "dot.coms" involved in the evolution or revolution of publishing.

I’d like to start with a thumbnail vision of the publishing industry’s evolution. Imagine what things were like back a million years ago. When a caveman killed a wooly mammoth and was joyous that he’d survived, he had a story to tell, and a lesson he could pass on to his progeny so they’d be less likely to die when they hunted. He’d use the material he could find to tell the story to future generations by painting the story on the cave wall. These were the first instruction manuals or textbooks. The cavebook basically says, "Son of Moog, read this: to survive against the wooly mammoth, you must do what the illustration shows Moog did." And later, about 6,000 years ago in Mesopotamia, Babylonians were using Papyrus to write their contracts with their trading partners, possibly the first form of non-fiction. Egyptians put their hieroglyphics on temples and tomb walls to tell the exaggerated stories of their rulers, possibly the first form of fiction. From there, we go to the dark ages, where we find monks, patiently copying and annotating bibles. All these were precursors to the biggest single invention in publishing, around 1450 AD: Gutenberg’s printing press. That is, until, of course the computer.

Every profession has been altered by automation technology. Sooner or later, the process of cost-cutting to keep an industry competitive forces that industry to accept and then embrace increasingly automated processes. The business owner’s intention, in a kinder and gentler world, is to free workers from repetitive tasks and instead enable them to perform more creative tasks where real thinking is involved.

So, now that I’ve given you a vision of the road back, let me show you, with this step in evolution, the challenges that the publishing industry faces, and what the potential outcomes might be.

The first law of technology is Moore’s Law, named after Gordon Moore, one of the co-founders of Intel Corporation. Twenty years ago, he noticed that advances in technology made it possible to double the number of transistors on a microchip every 12 to 18 months. The implication is that EVERYTHING in technology doubles in quality and functionality while the costs reduce by half every two or three years at worst.

Over twenty years, the price of a computer has been reduced by over 90% while the power of those computers has increased about 200 times. And, Moore’s Law says that this process remains a continuous function. There is no end and there is no turning back once the genie is gone from the bottle.

About ten years ago, William Gibson released his best-selling novel Mona Lisa Overdrive on floppy disk. About five years ago, Adobe created Adobe Acrobat, a software tool for electronic distribution of text material for reading on-screen and printing. About three years ago, Palm began selling Palm Pilots for people to keep their appointments and contact information.

It was inevitable that there would be a bit of convergence. Last April, when Microsoft released the Pocket PC, a handheld computer that contained the Microsoft Reader, a software program that made it easy and more pleasing to read off a screen, the publishing industry’s genie was finally freed from it’s bottle, and now there are only a few easy questions:

  • Customers – Who buys eBooks? Why do they buy eBooks instead of pBooks? Will this change? How long will widespread acceptance of eBooks take?
  • Markets - Are the eBook and pBook markets separate markets or segments of the same market? Are eBook sales incremental or cannibalistic? How big are the eBook and pBook markets now, and how fast are they growing? What are the revenues for each market?
  • Digital Rights Management - Over the long-term, will things like Napster alter the ways publishers do business?
  • Technology - How long will it take for screen quality to become more pleasing to read from than paper?
  • The long view of the future - How long will it take for revenues and unit sales of eBooks to surpass pBooks? When will pBooks become collector’s items?

Before we seek the answers, let me tell you a bit about Cyclopsmedia.com. We were founded with the intention of being a totally electronic business; a true eBusiness. We create and operate eBookStores for portal websites. A portal site is a site that draws information together for delivery to its community. For example, Yahoo or Women.com. We create an eBookStore catalog page for the portal site, and when one of their members or visitors wants to buy an eBook, they see our catalog. To the visitor, they are still within the portal’s site. We process the back office accounting and the credit card approvals for all our portal site client’s eBook sales. The first chapter of any eBook is free. All complete eBooks sell for $5.95. The portal gets $1.00, the writer and Literary Agent split their share of $2.95, and CyclopsMedia.com gets $2.00. We don’t acquire rights, only "non-exclusive, revocable permission to sell" on behalf of the writer and their Literary Agent. Our hope is that every eBook that we place into our catalog will be there for a short time; just long enough to generate a critical mass of readership and attract a pBook publisher with a large advance for its writer. That way, we can say to our customers, "Over 60% of what you see here will be available to you in printed form within two years. But you can read it here first!"

By only accepting eBooks represented by literary agents, cyclopsmedia.com assures quality content:

  • Literary Agents are "The Arbiters of Content Quality"
  • 5 out of 1,000 unpublished authors become "represented" by Literary Agents
  • 60% of represented manuscripts are published

Cyclopsmedia.com gets customers from:

  • Portal Partnerships – We create and operate eBookStores for portals and the Portal sites promote "their" eBookStores.
  • Viral Marketing - When readers acquire free first eBook chapters and email them to friends, we get new customers.
  • pBook Publisher Partnerships -
    • We promote printed books online for pBook publishers.
    • When readers buy the printed book with our (printable) Discount eCoupon, we receive commission revenue.

Cyclopsmedia.com's progress to date:

  • Relationships
    • We have signed Sales Agreements with over 3% of Literary Agencies in USA
    • We had exploratory meetings and discussions with over 70 Literary Agencies including William Morris
    • Without yet garnering a substantial amount of investment, we have an average of 2 writers per Literary Agent and most writers have given us more than one eBook.
  • Publicity
    • We sponsored the Maui Writers Conference (attended by 1,200 writers and 50 Literary Agents)
    • We were promoted through articles in ThemeStream.com and Publisher’s Lunch
    • We launched www.cyclopsmedia.com on October 31, 2000

Now, I’d like to propose answers to those pesky little questions:

Who are eBook customers?

  • The eBook customers are actually several different groups.
  • Research shows that the three most popular eBook genres are non-reference textbook, science fiction and romance novels.
  • The reading devices of choice are the PC notebook and the Pocket PC.
  • The implications are that the two market segments for eBooks are college students and rich people. The students can load all their textbooks for a semester into the reading device and not need to worry about having to carry over twenty pounds of dead tree with them. As they graduate and begin earning income, they’ll be used to reading on-screen. Many or most of them will prefer eBooks. The rich people can load up to a few hundred full-length eBooks into a Pocket PC and travel locally or by air, and that same device holds all their appointments and contact information, music files in MP3 format, and, serves as a notebook for their meetings. The people buying eBooks now are the "early adopters" of technology. From here, for the market to grow, the reading devices need to become ubiquitous.
  • Going from our current stage of market development to the next stage is called "crossing the chasm." This process takes time and if you were to chart the growth of the customer base, this is where the steepest part of the growth curve is. Therefore, I expect that this market will begin to grow explosively.

How big are the eBook and pBook markets?

  • eBook Market for downloadable books will grow:
    • from 10 million in 1999;
    • to $100 million in 2000;
    • by 400% in each of the next 2 years;
    • to $3.1 billion by end of 2004;
    • to over $25 billion by 2008.
  • In comparison, pBook Market is $25 billion in 2000, growing at 7% to 9% per year. In 2008 it will be just over $50 billion.
  • Before the end of this decade, both markets will be of equal size. Within a few years after the end of this decade, eBooks will be the preponderant delivery format for "book" content. But, pBooks will not go away. For example, there is still a very small market for music on LP records. But, how many people do you know who BUY these? We may own leftovers from the past, but there are very few stores we can go to, to buy them. At least no one will be looking to buy phonograph needles, except on eBay.
  • About pBook Publishers:
    • 40,000 pBook Publishers created $25 billion in revenue last year
    • About 30 Paper-based Publishers had Revenues of $17 Billion last year
    • Only one (Random House / Bertelsmann) has successfully sold eBooks
    • Through our Literary Agents, we offer print Publishers easy access to Literary Agents that represent the best original content for pBook contracts
  • About eBook Publishers:
    • There are now over 70 eBook Publishers
    • Biggest and best known are:
      • iUniverse.com
      • Barnes & Noble.com
      • Amazon.com
      • Contentville
      • CyberRead
      • netLibrary
      • On-line Books
      • Peanut Press

Digtal Rights Management

Napster has already altered the way publishers do business, by scaring the bejesus out of them. In fact, those of us with extensive experience in computers already know that most hackers are looking for a challenge, and that the more difficult a digital rights management encryption mechanism becomes, the more likely it is that hackers will flock to the challenge like seagulls after the last fish. Honest people tend to behave honestly, and rational honest people need a good excuse to behave dishonestly. If eBooks are priced low enough, there is no incentive for fraud. For example a CD costs about $0.30 to produce, and the musician gets less than a dollar, yet they have a retail price that is ten dollars higher. If they were priced at $3.00 Napster would have been a failure. This is why pricing an eBook at a price below that of a paperback makes better sense than pricing it at the level of a hardcover. Since over 60% of a pBook’s costs are printing and distribution, and since these are totally unnecessary for an eBook where distribution is electronic, the rational price for an eBook is about $6.00, and at that price there is little reason to worry about publishing’s Napsterization.

Technology

It’s estimated that by 2004, screen quality will be superior to paper, and more durable as well. A screen will be foldable, as paper is, so it can fit in a pocket. It will be reusable, so it can hold the morning’s newspaper, an eBook, or whatever else is sent from the tiny computer that drives it.

The long view of the future

Currently, the number of on-line businesses is shrinking as eCommerce consolidates. But, the most interesting fact is that the swift incubation of these businesses left them without solid infrastructure and without proven business models needed to achieve profitability. Survivors will need to adjust their business models to demonstrate greater customer-driven focus. Market consolidations follow naturally with market maturity. For example, there were over 10,000 automobile manufacturers 100 years ago and now there are less than fifty. The survivors will be those that can demonstrate continuous modest profitability and growth. Then, as they get stronger, they’ll acquire their competitors for their customer base. Meanwhile, standardization will occur regarding the pricing, format of eBooks, and the treatment of content creators and providers. This means that there is now the opportunity for authors to improve their economic standing with publishers. Stephen King’s experiment and those of other authors are demonstrations of what new types of business models can be tried by a creative author.

Here again, among eBook distributors, CyclopsMedia.com has a different enough business model to offer us the possibility to not only survive but to thrive. With each round of funding, we will look to achieve profitability before all the cash is spent. That way, even if we can’t raise another funding round, we’ll continue to grow, but more slowly. And, if we can raise more investment, we’ll grow faster during the time we’re spending the first half of that investment round. Remember, though, our job is to serve all our customers: the people that buy eBooks from us and from our portal partners, the Literary Agents and their writers, and the portal sites. We’ll do anything we can to get our customers to continue to love us. Repeat business is the most important metric for the eBook business. This model has us growing more slowly, but with less risk. Thank you.