This Year's Bestseller

Published in Investing on 8 March 2011

From the iPad 2 to snowballing digital sales, the ebook story is thrilling.

The move to digital distribution wasn't kind to the music business and the jury is still out for video gaming's incumbents, too.

Will the book publishing industry fare any better? We'll soon find out, because sooner than anyone expected, the shift from paper to ebooks is upon us.

Multi-million bestsellers

At the unveiling of the iPad 2 last week, Apple's CEO Steve Jobs revealed consumers have downloaded 100 million ebooks from Apple's iBookstore. That's an incredible statistic, given Apple's online retailing platform was only launched nine months ago along with the iPad -- a device which at that point had an installed base of precisely zero.

The iBookstore has since been expanded to all Apple devices running its newer mobile operating systems. With Random House confirming it will bring 17,000 new titles to the iBookstore, all six major publishers are now on the service and the momentum can only build.

Apple takes a 30% cut of the sales price those publishers set. That's very different to the old bricks-and-mortar publishing model -- where retailers bought books at a fixed cost from publishers and set their own prices -- and just one way in which the shift to ebooks is about more than just a shift away from paper.

Up the Amazon

The other technology company that's rewriting the business of bookselling is Amazon.

Of course, Amazon has previous form in upsetting the industry's apple cart, having competed with traditional book retailers since 1994 on both price and the depth of its catalogue to devastating effect.

Amazon's wildly popular Kindle device makes its previous strategy of posting cheap books look positively cumbersome, however. In January, the company revealed it now sells more copies of ebooks than it does paperbacks. When you sell as many books as Amazon that's a monster-sized statistic -- especially given how it has excluded free ebooks from the count, yet included in sales of paper-based books those that don't have a Kindle edition.

An extra plank to Amazon's strategy is that its Kindle book platform is also available on other devices as well as its own eponymous reader.

But just sticking to the dedicated hardware, independent estimates put the number of Kindles in the wild as high as eight million. Add that to the more than 15 million multi-functional iPads Apple's sold, and that's a lot of people who are reading pixels instead of print. And that's before you factor in other far less successful specialist devices, such as Sony's Reader and Barnes & Noble's Nook.

We're picking up ePenguins

Apple and Amazon are clearly already big winners, at least for now, in our transition to digital book browsing. These companies are making money both from the cut they take as ebook retailers, as well as from the sales of devices.

What's less clear is how traditional book publishers will fare, but two London-listed companies in the sector have given us tantalising clues recently.

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Last week Penguin owner Pearson (LSE: PSON) said that its ebook revenues rose 186% over the past year. They now account for 6% of all Penguin revenues worldwide.

The far smaller Bloomsbury (LSE: BMY) went one better, when it revealed that its ebook sales grew 18-fold. Sales were being achieved across a range of reading devices as well as smart phones and tablets, said chief executive Nigel Newton, adding that:

"Our overall trade e-book sales are currently running just under 10% of print sales. This proportion is expected to increase as more negotiations are concluded on e-books for backlist titles and as the UK and elsewhere gains the kind of momentum currently seen in the US."

In fact, Bloomsbury has just undergone a big company reorganisation, partly in response to the ebook opportunity, which it sees as globalising the demand as well as the sales and promotion of books.

The next chapter

As owners of compelling content and copyrights, Bloomsbury and Pearson believe the new digital devices are an opportunity, not a threat.

They're helped by having seen what's already happened to the music industry: they've every incentive to embrace the medium in an effort to avoid extinction! And they'll be aided in this effort by the much more evolved digital marketplaces like iTunes and the Kindle store that have emerged over the past decade, which are far superior to anything the music industry was offering when it was first confronted with peer-to-peer piracy a decade ago.

Apple alone already has over 200 million billing relationships with customers via the iTunes store. That's a lot of existing customers who may pay for books just like they pay for apps and music, which could stop book piracy ever taking off.

As for the losers, it's pretty clear they'll be traditional retailers. Numerous booksellers -- chains like Borders as well as independents -- have already gone under for a host of reasons. 

With retailers like struggling struggling HMV (LSE: HMV) (it owns Waterstones, the UK's last book chain, as well as its record shops) and supermarkets mopping up an ever greater share of the low-hanging bestseller sales, it's hard to see a future for more than niche stores.

We'll probably always read some books in paper form -- a Kindle or even an iPad 2 can't compete with a pretentious arty tome on your coffee table. But the idea that such a shrinking market can support a string of bookstores cum coffee shops, like we saw in the 1990s, seems fanciful.

More from Owain Bennallack:

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Comments

The opinions expressed here are those of the individual writers and are not representative of The Motley Fool. If you spot any comments that are unsuitable hit the flag to alert our moderators.

LeeJG 08 Mar 2011 , 11:35am

Not always a money spinner. In fields like computing things can change so quickly that buying a static text is often a pointless exercise and most people stopped working like that years ago.

LeeJG 08 Mar 2011 , 12:29pm

Also the ipad 2 isn't even on sale yet? And the Barnes and Noble Color Nook was removed from sale as you could install Android onto it and free it from their service.

TMFFlaneur 08 Mar 2011 , 3:08pm

@LeeJG -- I can imagine that in the future technical ebooks will update from the web, like a webpage does. Publishers will need to be very careful how they go down this route, as they don't want to end up in the equivalent of the iPhone App universe, where updates are expected to be for free -- in that case a person would only buy an ebook once!

LeeJG 08 Mar 2011 , 4:57pm

@TMFFlaneur - I also thought of that but didn't want to pass on any ideas for multi-million pound business ideas (oh well), I think we are reaching the realms of monthly/yearly subscription journals offering entire subjects that have sections that correct themselves when new ideas and discoveries occur and list the changes that the reader has an interest in (or pay per update for the parts you marked as relevant to you).

pinbonce 08 Mar 2011 , 5:34pm

Students have already rejected ebooks much preferring the traditional textbook format. The ebooks market will run in parallel with paper. Ebooks are already seen as throw-away reads, just as cheap paperbacks were.
I recently had a customer bought the new Jonathan Franzen from us in hardback at full price (£20.00). As I wrapped it she said she already had it on her iPad ( cost around £12.00 ) and liked it so much she wanted the hardback to keep. The ebook will also become a give-away with the hardback, just like cds.
I think all these electronic hand held devices are just a first stage. Not long from now you will buy a hardback book with a computer embedded. Publishers are already working towards this.

TMFFlaneur 11 Mar 2011 , 11:00am

@Pinbonce -- Interesting thought. Not sure I agree, but it reminds me of how people first thought every home would have its own electricity generator, versus how they also thought there would be six computers in the entire world, serving all requirements. From history, it seems it could go either way!

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