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A Return to Print? Not Exactly

Justin Fox is a Bloomberg View columnist. He was the editorial director of Harvard Business Review and wrote for Time, Fortune and American Banker. He is the author of “The Myth of the Rational Market.”
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E-books are not taking over the world! That seems pretty clear from a Pew Research Center survey released last week, which showed that the percentage of Americans who read digital books hasn't risen since 2014.

How We Read Our Books
Share of U.S. adults who in the past 12 months have ...
 
Source: Pew Research Center

The survey didn't show any real sign of a print resurgence either, though. Overall, the percentage of Americans consuming books in any form appears to be trending modestly downward. By holding steady, e-books are thus gaining a bit of ground over print.

This is not exactly the "return to print" story that the nation's book publishers have been telling lately. Yes, the Association of American Publishers reported in June that physical book sales were up in 2015, and that sales in brick-and-mortar bookstores rose, too. The percentage of people who read books is down a little, but the people who do read books are buying more of them. That's what one should expect of a mature industry in an improving economy -- which is certainly better than being in a rapidly declining industry like newspaper publishing.

The AAP also reported, though, that e-book revenue was down 11.3 percent in 2015 and unit sales down 9.7 percent. That's where things get misleading. Yes, the established publishing companies that belong to the AAP are selling fewer e-books. But that does not mean fewer e-books are being sold. Of the top 10 books on Amazon's Kindle bestseller list when I checked last week, only two ("The Light Between Oceans" and "The Girl on the Train," both mass-market reissues of novels that have just been made into movies) were the products of major publishers. All the rest were genre novels (six romances, two thrillers) published either by the author or by an in-house Amazon imprint. Their prices ranged from 99 cents to $4.99.

The website Author Earnings, a collaboration of science-fiction author Hugh Howey and the pseudonymous "Data Guy," keeps track of these things more systematically. It reported that "Big Five" publishers' share of Kindle unit sales fell from more than 40 percent at the beginning of 2014 to 23 percent in May. Because they tend to sell their e-books for a lot more than $4.99, the Big Five's share of gross revenue is still around 40 percent, but it's falling fast, too. And self-published "indie" authors -- in part because they get a much bigger cut of the revenue than authors working with conventional publishers do -- are now making much more money from e-book sales, in aggregate, than authors at Big Five publishers.

source: authorearnings.com

Book publishers are what business-school professors call two-sided platforms, or two-sided markets. They're selling books to readers, but also selling publishing services to authors. When it comes to e-books, the established publishers are choosing not to offer a very good deal to either. After Amazon's early experiment with limiting Kindle prices to $9.99, publishers now set the prices, and for prominent new books they're often in the $12.99 to $14.99 range -- not much less than the discounted hardcover price on Amazon. And even though publishers spend a lot less to produce and distribute e-books than paper ones, they generally don't offer authors a bigger cut of the proceeds.

The publishers have instead chosen to prioritize physical books, and you can't entirely blame them. Most book buyers still seem to prefer reading books on paper (I do, unless I'm traveling), and keeping physical bookstores alive seems like a much better deal for publishers than relying on an all-powerful Amazon to distribute all of their products. Amazon's attempts to break into physical book publishing haven't amounted to much (in part because bookstores have been so resistant), so maybe what we have is a durable detente. The publishers cede cheap genre fiction to Amazon and the digital-self-publishers -- occasionally signing the most successful self-published authors to give their work wider distribution -- and keep most of the rest of the business for themselves.

There are a few problems with this steady-as-she-goes scenario. The most obvious is that Amazon doesn't really do detente. It's now opening its own physical bookstores, and surely has other plans up its sleeve. Another is that cheap genre fiction is a lucrative business that publishers didn't really want to give up. (News Corp, owner of Big-Five publisher HarperCollins, bought romance-novel publisher Harlequin, which has been hammered by the rise of digital self-publishing, in 2014.) Finally, the rise of e-books fits Harvard Business School professor Clayton Christensen's classic model of disruptive innovation so perfectly that it seems unwise to assume that it is already all played out. This is from the introduction to Christensen's book "The Innovator's Dilemma":

Generally, disruptive technologies underperform established products in mainstream markets. But they have other features that a few fringe (and generally new) customers value. Products based on disruptive technologies are typically cheaper, simpler, smaller, and, frequently, more convenient to use.

Established companies naturally focus on serving their existing customers, who aren't all that interested in the new product. They also look at the lower profit margins on the cheaper, simpler new product and think, "No, thanks." This leaves the field to new entrants, who keep improving their product and luring new customers until it becomes dominant. The former industry leaders are left on the sidelines wondering what went wrong.

At least, that's Christensen's story. It's not an immutable law, and these days its applicability is probably affected somewhat by the fact that executives at established companies are all quite familiar with it. In book publishing, everybody knew that e-books were a potentially disruptive technology, and none of the big publishers ignored them. But apart from some experiments with short, cheap digital-only releases (my Bloomberg View colleague Tyler Cowen's "The Great Stagnation," which was later made into a physical book, was one of the most prominent), they mostly resisted that notion -- pushed hard by Amazon -- that digital books should be seen as a new kind of product with a much different pricing approach. To the publishers, they're just another book format.

This approach seems to have succeeded in keeping the print business reasonably healthy. It's also probably responsible for some of the slowing of e-books' rise. But it also means the book publishers are largely absent from the low end of the e-book market, which is where most of the growth and innovation are.

Today that market is the territory of aspiring to moderately successful writers of romance, mystery, science-fiction and fantasy novels and a fan base of dedicated readers who consume such work in mass quantities. It probably won't stay hemmed in like that, though. It's getting easier and easier for successful digital-first authors to move into print and even bookstores without the help of a publisher, and the spread of e-book reading from dedicated devices such as the Kindle to tablets and smartphones (22 percent of Americans age 18 to 29 read books on their phones, according to the Pew survey) seems to offer new opportunities for those who get the format and pricing right. In short, the e-book story probably isn't over yet -- and book publishers aren't helping themselves by acting as it if were.

  1. Apple's iBooks bestseller list tilts more toward established publishers, although self-published authors have been making inroads there, too.

  2. Hachette, HarperCollins, Macmillan, Penguin Random House and Simon & Schuster. Here's a list of their many imprints.

  3. The usual disclosure: I was once the editorial director of the Harvard Business Review Press, the publisher of this book. I had nothing to do with either its initial publication in 1997 or its reissue in 2013, but its sales definitely contributed to my paycheck.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

To contact the author of this story:
Justin Fox at justinfox@bloomberg.net

To contact the editor responsible for this story:
Stacey Shick at sshick@bloomberg.net