Asking the wrong questions on e-books

The New York Times published a story the other day asking,Will Books be Napsterized? It’s conclusion? Probably, now that e-book readers are going mainstream and file-hosting sites like RapidShare are making it easier than ever for people to post pirated e-books online (speaking on a network filtering panel at the Future of Music Coaltion Policy Summit in Washington on Monday, Daniel Klein of London-based cyber-security firm Detica Group gave it 12 months before RapidShare becomes the new Public Enemy No. 1 among copyright owners).

napster-logoWhile the article, written by Randall Stross, professor of business at San Jose State University, is never explicit as to what it means to be “Napsterized,” it’s pretty clear it is referring to the loss of legitimate e-book sales–and perhaps even hardcover sales–due to people downloading for free illicit electronic editions of books rather than paying for the licensed product–much as the recorded music industry has suffered a sharp decline in CD sales since the advent of Napster and other peer-to-peer file-sharing networks.

“We are seeing lots of online piracy activities across all kinds of books — pretty much every category is turning up,” said Ed McCoyd, an executive director at the [Association of American Publishers]. “What happens when 20 to 30 percent of book readers use digital as the primary mode of reading books? Piracy’s a big concern.”


We do know that people have been helping themselves to digital music without paying. When the music industry was “Napsterized” by free file-sharing, it suffered a blow from which it hasn’t recovered. Since music sales peaked in 1999, the value of the industry’s inflation-adjusted sales in the United States, even including sales from Apple’s highly successful iTunes Music Store, has dropped by more than half, according to the Recording Industry Association of America.

Given that the piece ran off the front page of the Week in Review section of the Sunday Times, and was therefore likely read by 98% of the American publishing industry, it’s likely to have a lot of influence.

Which is too bad, because it suggests the industry is asking the wrong questions about its future, and is likely to reach the wrong conclusions.

For starters, the music industry wasn’t actually “Napsterized” as Stross uses the term. What hit the music industry, first and foremost, was a format and configuration shift, from album-length CDs to single-track MP3s, one in a long series of such shifts in the industry’s history. The difference was, the switch to MP3s, which was well underway before Napster was released, was neither anticipated nor sanctioned by the major industry players. Rather, it was effected by consumers themselves, by converting and disaggregating their CD collections into single-track MP3 files.

Napster was simply a tool for exchanging MP3 files over the Internet. Yes, it made individual music tracks free for the taking, but taking htem would not have become as popular as it did, as quickly as it did, were there not already significant demand for music in that configuration.  Napster didn’t cause the “Napsterization” of the music industry, it exploited it.

rock-band-beatlesMoreover, while CD sales have unquestionably declined since 1999, the year of Napster’s introduction, affecting record companies’ bottom lines, it’s not at all clear that overall consumer spending on music has declined. As a recent study by two Harvard researchers pointed out, other sources of revenue, such as concert tickets, merchandise sales, licensing, online fan clubs and sponsorships have all grown significantly over that time. Add in consumer spending on iPods and other types of MP3 players and the amount of revenue flowing into the music industry–as opposed to the record companies–has almost certainly increased overall since 1999.

What’s changed is who is capturing that revenue. Much of it has gone to video game makers (Rock Band, Guitar Hero), to Apple, and in the case of live performance revenue, to musicians themselves. For the record companies, which have relied predominantly on CD sales, not so much.

Napster and its progeny, in other words, have certainly helped scramble the music value chain, but they haven’t destroyed it. (This, too, it’s worth noting, is not a new phenomenon. The introduction of recording technology–an earlier format and configuration shift–tilted the value chain in favor of recording companies, partly at the expense of musicians.)

By focusing on the threat of digital piracy, Stross also overlooks (or at least leaves out) important distinctions between e-books and e-music. As I’ve noted, the format and configuration shift that has swept through the music business was largely effected by consumers themselves, without sanction from the industry, as they converted their own CD collections to MP3 files. A similar dynamic occurring with books is unlikely. While it’s technically possible to scan printed books–one page at a time–and convert them to PDF files, it’s hardly as easy as ripping a CD and there’s no sign that anyone is doing it on any meaningful scale. Nor are there widely marketed commercial products for “ripping” books the way there were for copying and converting CDs long before Napster came along.

The format shift from print to e-book is almost entirely sanctioned, licensed and driven by the industry itself. There’s no reason to assume that the same outcome will automatically follow from the format shift in the book industry as in the music industry when the dynamics propelling those shifts are fundamentally different.

For the same reason, there’s no reason to assume that e-book reading devices will become as popular among readers as MP3 players became among music fans. Like the first iPods and Diamond Rios, the Kindle and its ilk are expensive, single-purpose devices. Unlike an iPod, however, there’s no practical way to load up a Kindle with content transferred from your existing collection of printed books. That makes for a very different price/value calculus for the consumer, which is likely to manifest itself as a much longer adoption curve.

kindle-womanThere are also important and significant demographic differences between book readers and music consumers. On average, regular book readers tend to be older and more female, two groups that tend to be less-well represented among admitted illegal music and movie downloaders.

So, publishers have nothing to fear from digital piracy? Hardly. E-book piracy is happening now and will continue to happen. My point is that to view the changes to the music business wrought by the shift to a digital format as primarily a problem of piracy–as conveyed by the glib shorthand of “Napsterization”–is not only inaccurate but likely to lead to asking the wrong questions and reaching the wrong conclusions about similar format shifts.

Of much greater concern to publishers than the threat of being “Napsterized” should be the threat of platform capture. In their zeal to combat what they saw as MP3 piracy, the record companies willingly threw themselves into walled-garden of Apple’s proprietary iTunes DRM, only to find they had left themselves at the mercy of Apple’s business model, which had much more to do with selling iPods than selling music. With the leverage of its captive audience of iPod users, Apple was able to set prices, take control of the labels’ margins and shift value from the copyright owner to the device maker.

Publishers today are facing the same danger. Already, Amazon has been able to fix the price of Kindle books at $9.99–less than half the average price of a hardcover–which is quickly establishing itself as the industry-standard price point, just as Apple’s $0.99 iTunes download set the benchmark for competing services that eventually emerged. That’s likely to have a far greater impact on publishers’ revenue than is RapidShare.

While some degree of revenue erosion–like some degree of piracy–may be an inevitable part of the coming format shift, the deeper threat to publishers is from losing control of the value chain, and hence their own margins, by ceding control of the next dominant publishing platform. And there, the music industry is certainly no guide, except in how to fail.

The question publishers should be asking themselves is not whether they’ll be Napsterized but whether they’re fated to be Apple sauce.