Article: Bubble Bursts for E-Books

[sUnShInE]

According to the article, Helen Fraser, managing director at Penguin said if Penguin sold 40,000 copies of a printed book, it would typically shift 4,000 audio books of the same title and 400 e-books. Last month, top U.S. bookseller Barnes & Noble Inc announced it was halting e-book sales. "We did not see sales take off as we and many others had anticipated," a spokesman said.

What's the future hold for one of our favorite pasttimes? Read all about it here.

[Colin Dunstan]

Originally Posted by sUnShInE

What's the future hold for one of our favorite pasttimes? Read all about it here.

Hi sUnShInE!

Today I read a very interesting article in the WSJ which I thought best to be quoted here. Basically, we are facing a tiny e-book market right now (a little over $10 million in sales for 2003), but there is potential as we all know....

The Plot Thickens
Remember e-books? Well, the final chapter hasn't been written on them yet.

If electronic-book publishers like Rosetta Books LLC had their way, you'd be reading the book in your bag or briefcase on a tablet PC or a PDA -- but not on paper.

Rosetta, the only established independent e-book publisher focusing solely on copyrighted literary fiction and nonfiction, got a big boost in the number of titles it offers in December 2002, when the New York-based company ended a bitter legal dispute over the digital rights of titles from Bertelsmann AG's Random House. The resulting licensing deal appeared to give Rosetta a powerful start over its rivals. With the privately held company's catalog secure, Rosetta's staff had hoped they could finally apply all of their energies to selling e-books.

More than a year later, though, the business is still struggling. Rosetta, as well as its rivals, found that there was more to the digital-book business than accumulating authors and titles. They have to persuade more readers to put down their paper-bound books in favor of digital ones with backlit text.

But Rosetta's chief executive, Arthur Klebanoff, sees hope for his company in an unexpected quarter: the library.

This past summer, Rosetta signed deals with two major book distributors, Baker & Taylor Inc. and Follett Corp., to distribute its books to public and school library systems. (Publishing companies mostly don't sell directly to schools and libraries, but count on third parties to distribute their books to them.)

"Right now a successful e-book sells 1,000 copies, but if we get into the classroom, 20,000 may be possible," says Mr. Klebanoff, who is a major shareholder in Rosetta. "We just don't know yet what types of content will be the most appealing, and which business models will work best."

Expectations Revised

Indeed, the electronic-book market is a small one right now. The Open eBook Forum, the electronic publishing industry's trade and standards organization, estimates that for the nine months ended Sept. 30, 2003, e-book sales revenues rose 32% to $7.6 million, reflecting unit sales of about one million. Sales for the full year were expected to top $10 million. "These numbers mean that this industry is becoming a legitimate part of the publishing business," says Nick Bogaty, the group's executive director. "It's easier to be fast-growing when you have a small base -- but remember, every industry starts from zero."

Part of Mr. Bogaty's optimism reflects growing interest in e-books from public and academic libraries. His trade group will host a daylong event titled "eBooks in the Public Library Conference" in New York on March 16.

E-books came out of the heyday of the Internet boom, when controlling digital content appeared to be the next sure thing, and books in digital form promised to be as popular as paperbacks. The fledgling format attracted software makers and hardware concerns, and the country's biggest publishers quickly jumped in. Their exuberance may have been their biggest mistake.

Although there was plenty of enthusiasm for the e-book format in the early years, digital books didn't live up to their promise. Consumers found the appliances involved to be more cumbersome than the paper materials they were supposed to have replaced. Some say consumers found it too confusing to download necessary software onto the various e-book readers; others cite the mixed quality of display technology. Price was also a factor: Some early e-book devices cost $400 or so, which damped sales. Many of the e-publishing pioneers have failed or are struggling to survive now.

"I've been involved since the beginning," says Susan Peterson, vice president of digital business development at book distributor Baker & Taylor, a unit of Willis Stein & Partners, a Chicago private-equity firm. "If I could take back one word, it would be 'revolution.' Expectations were too high."

Among those rushing to stake an early claim was Gemstar-TV Guide International Inc., a technology and media concern based in Los Angeles. In early 2000, the company acquired two businesses: NuvoMedia Inc., the maker of the Rocket eBook reader, and SoftBook Press Inc., which produced the SoftBook Reader. The stock transactions were valued at a total of about $400 million. But last June, Gemstar-TV Guide International acknowledged that its investments had soured and weren't generating enough revenue. The company has ended sales of its reader and its e-books.

The e-book universe suffered an even larger jolt last September, when Barnes&Noble.com stopped selling titles. Many publishing onlookers were surprised because the online bookseller, majority owned by Barnes & Noble Inc., had been one of the format's earliest supporters. Marie J. Toulantis, chief executive of Barnes&Noble.com, said the retailer concluded that e-books weren't "user friendly, or price friendly."

Better Reading Experience

But those in the e-book industry say things are turning around. "There was a pricing impediment and a quality impediment," says Rosetta's Mr. Klebanoff. "Today the [digital] reading experience is much better and prices have fallen."

"Consumers will move towards electronic formats for reading, much as they have turned to electronic formats for music and even movies," says Keith Titan, senior director of e-publishing and e-commerce at Viacom Inc.'s Simon & Schuster Inc. "Books are going to come to this party, even if it's later than other forms of media."

A generation of devices offering better display technology and greater ease of use are being shipped with e-book software. These include the Zire 21 from palmOne Inc., Milpitas, Calif., which costs $99 and weighs only 3.2 ounces. This personal digital assistant comes with Palm Reader software and allows users to change type sizes, do a text search and bookmark passages, among other features. And there's Sony Corp.'s hand-held Clie TJ25, introduced Oct. 1, which is preloaded with Palm Reader and costs $200. It offers a high-resolution color screen and has a fast processor, which means readers can quickly access pages.

Hewlett-Packard Co. says its iPAQ Pocket PC H4150, which costs $449, is preloaded with Microsoft Reader. The device, released in October, also comes with a feature that allows users to download e-books from the Internet wirelessly. Elsewhere, Toshiba Corp. in mid-November unveiled its next-generation tablet PC, dubbed the Portege M200. The notebook device comes preloaded with Adobe Reader and has a cool new feature that enables e-book readers to "turn" pages by tilting the notebook upwards. The downside is the price: $2,499.

Part of the appeal of e-books is that they offer good value. A new hardcover might sell for $25, but Simon & Schuster, on an experimental basis, is now offering the e-book version for $14.99. The publisher even operates its own bookstore at SimonSays.com. "We're capturing impulse buys from visitors to our regular Web site," says Mr. Titan. He adds that bookstore operators haven't complained, although there has been some grumbling from businesses that only sell e-books.

Surprising Demand

One promising -- and surprising -- development, however, is the demand coming from several library consortiums, which have added e-books to their collections.

The 42 libraries that comprise the King County system in the Seattle area now provide downloadable e-books at KCLS.org. Members can choose from about 2,000 titles, including Michael Moore's "Dude, Where's My Country?" and then download the books onto their personal computers or PDAs.

"The response has been pretty good," says Bruce Schauer, an associate director for the King County Library System, which began providing e-book access on Sept. 15. "In general, e-books will likely be used primarily for quick reference [on subjects] such as medical, travel and law. People are also using the search and highlight functions for homework."

In fact, library patrons of all ages have indicated they like the portability factor. They checked out about 3,200 e-books between Sept. 15 and the end of November.

The Cleveland Public Library is also wooing digital readers, at DLC.Clevnet.org, says Patricia Lowrey, head of technical services. An estimated 5,700 e-books were checked out from April through the end of November.

"The public has embraced the system," says Ms. Lowrey, who estimated the start-up costs, including titles, at about $65,000. She noted that the system, which serves 31 libraries in northern Ohio, currently owns about 2,600 titles. "I got three e-mails this morning from other parts of the country inquiring about what we're doing," she added. She has also received inquiries from Italy, Spain and Australia.

While the libraries' affinity for e-books is still in its infancy, there are powerful economic forces that may make librarians willing to experiment. "At a time when public libraries are under budget pressures, what better way to extend services than free e-book downloads?" says Steve Potash, CEO of OverDrive Inc., Cleveland, which helps manage publishing digital rights.

Mr. Potash noted that CliffsNotes -- those handy study guides -- are among the most popular e-book titles. Unlike the copies lent by libraries, he says, kids can't tear them up or fail to return them.

Katherine Schowalter, senior vice president of professional and consumer publishing at John Wiley & Sons Inc., says its CliffsNotes series is its No. 1 e-book seller. John Wiley & Sons makes the e-books directly available to consumers at CliffsNotes.com, where they can be purchased for $5.99, the same price that users pay for the paperbacks.

"We don't necessarily single them out in our marketing to libraries, but these titles have been very successful -- and the libraries know it," says Ms. Schowalter. "So it feeds upon itself."

She adds: "We knew they'd be popular online; what we didn't anticipate was that they'd be popular for libraries. People are using the library very differently these days: Now you don't have to leave your room. It's about a generation comfortable in the electronic media."

The sales potential from libraries is so intriguing that in September, closely held Follett, of River Grove, Ill., which distributes books and operates college bookstores, in September made e-books available nationwide to schools with grades K-12 through its Follett Library Resources unit. Two months later, a second Follett company, BWI, offered e-books to public libraries.

"The searchability feature is a key" selling point, says Michael Johnson, vice president of the Follett Library and School Group. "Our goal is providing librarians with whatever they need, and e-books are part of that solution." Mr. Johnson declined to speculate on how fast the library and school markets will grow. (Typically, the Follett e-books being sold to school and public libraries are priced about the same as the printed version.)

Baker & Taylor, which distributes the e-books of more than 200 publishers and imprints, has recently struck agreements with four public libraries to distribute e-books to their patrons.

"We expect academic libraries to follow shortly," says Ms. Peterson, the Baker & Taylor executive. "This is about the generation coming up behind us. They are always online. As the devices become more portable, and the reading experience improves, options will increase."

For Rosetta Books, the library market may mark the turning point for the company.

Mr. Klebanoff and his investors started out in the fall of 2000 and quickly signed up approximately 100 titles. Their strategy was to acquire the electronic rights directly from authors or their estates, under the legal theory that the digital rights hadn't been referenced in their original book contracts. "We were signing books written in the 1930s, 1940s and 1950s -- nobody was thinking about these rights then," says Mr. Klebanoff.

The company put its first titles up for sale in February 2001, and was promptly sued by Random House, which alleged Mr. Klebanoff was infringing on its rights. The battle that unfolded was closely watched by industry insiders, and after Rosetta won on several fronts, a settlement was worked out. The company struck a deal with Random House to license 51 titles written by such authors as Margaret Atwood, John Cheever and Pat Conroy. Today, Rosetta offers 150 e-books and has deals in the works for several internationally known authors.

But having a lot of titles may not be enough. Although Rosetta's revenue more than doubled in 2003, it amounted to only $100,000 or so -- tiny even by traditional publishing standards. There aren't any profits, and virtually all of the company's functions are outsourced. The three full-time employees have been whittled down to one: its CEO, Mr. Klebanoff.

Profits are probably a year or more in the future. Despite the setbacks, Mr. Klebanoff says he still sees opportunity for Rosetta, whose titles are priced between $6 and $9, with the book-distributing deals.

"The really broad implication for e-books is the path into the classroom," says Mr. Klebanoff, who makes his living as owner of the Scott Meredith Literary Agency. "It carries you potentially into an enormous number of accounts. The key word, of course, is potentially."

He adds: "Some of this is about the last man standing. A ton of money has been lost on e-books. But the category is far from dead."

-- by Mr. Trachtenberg, news editor in The Wall Street Journal's New York bureau.