Has the ebook disruption been cancelled?

Has the ebook disruption been cancelled?The New York Times published an interesting article yesterday titled The Plot Twist: E-Book Sales Slip, and Print Is Far From Dead. In the article, the author Alexandra Alter paints a picture of a publishing world where an ebook apocalypse had been coming for years, but now the fear has subsided and print is gaining a stronger position again.

However, not all the claims made in the article are ready to stand up to scrutiny. Let’s take a closer look at the market situation and the strategic choices made by major publishing houses.

The state of print and ebook markets (in the US)

The most recent figures reported by the American Association of Publishers show that ebook sales of its 1200 participating publishers have declined by 10.2% in the first five months of 2015. This, combined with hardback sales decline of 11.6% and paperback growth of 8.4% contribute to an overall decline of 3.4%.

The latest available charts from AAP are from March 2015, and show market shares for Jan-Mar 2015 as follows:

  • Trade ebooks: $374.1 million (29%)
  • Trade hardback: $463.0 million (36%)
  • Trade paperback: $442.9 million (35%)
  • Total trade market $1280 million (100%)

However, AAP is not the whole market. Can we estimate the entire market? For ebooks sold on the Amazon’s Kindle store, Author Earnings has been doing a spectacular job on estimating the market shares, and their latest figures detail the sales up to September 2015 – and with some surprising results: the market share of AAP-reported publishers has rapidly declined this year from around 60% in January to 50% in September.

Can we use these figures to estimate the size of the entire market? Not completely reliably, but join me on a journey with some assumptions.

First, let’s assume that in print sales, AAP-reporting and non-AAP reporting publishers have comparative market shares similar to their ebook market shares (actually, the market share of AAP-reporting publishers is likely larger, as the big publishers do not have 60% of their revenues in ebooks) and that self-publishers essentially have no market share in print. As the market share of non-AAP reporting publishers on Kindle store is around 10%, this assumption would lead to a 15% non-AAP share of the print market early in 2015.

Second, let’s assume that the Kindle store market shares are representative of ebook market shares in general, and use the 40% market share from January 2015 to represent the market share of AAP-reported publishers for the first quarter of 2015.

Now, if we adjust the AAP-reported figures for the first three months of 2015 with these assumptions, we get the following figures:

  • Trade ebooks: $623.5 million (37%)
  • Trade hardback: $544.71 million (32%)
  • Trade paperback: $521.06 million (31%)
  • Total trade market $1689.27 million (100%)

Obviously, these are not actual figures. However, given that the assumptions were intentionally designed to avoid overestimating the market share of ebooks, it is quite stunning that even with these assumptions we end up with ebooks having 37% share of the trade market in the US in early 2015.

Add in to the mix the fact that Amazon has stated that ebook sales are up in 2015 in both unit volume and gross revenue, and it looks like ebooks are doing just fine.

What about the reported resurgence of print sales?

The fact that paperback print sales have increased has been used to give an appearance that print sales overall have increased. However, even according to the AAP figures this is not the case, as the decline in hardback sales is greater than the increase in paperback sales.

One might argue that if this is the case, then why are major publishers investing in new warehouses and distribution systems for print books: Hachette adding 218,000 square feet and Penguin Random House adding 365,000 square feet last year with Simon & Schuster following suit with a 200,000 square feet expansion this year.

The explanation is simple and strategic. The number of independent bookstores is on the rise (after the collapse of Borders), and the way to get books sold through them is to have a good logistics setup that can effectively put books on the shelves while reducing the number of returns. After all, many book purchases are still impulse buys that can be affected a great deal by what is available at the local bookstore.

Another thing that this setup makes possible is reducing the power of Amazon. By supporting the independent bookstores with high-quality services, the publishers are promoting an alternative platform – one of the main ways to improve your strategic position when facing a dominant intermediary.

This same support extends to ebook pricing: after the dust settled in the battles between Amazon and the major publishers, all of the major publishers increased the prices of their ebooks, thus making them less attractive when compared to paperbacks (but not so much so when compared to hardbacks). So is it any surprise that hardback and ebook sales are down and paperback sales are up?

Are major publishers making good strategic choices?

I analyzed the competitive position of Hachette last year, and back then I criticized them for not pursuing alternative platforms to reduce the power of Amazon. Now they have definitely done so, but in a manner I did not expect and do not necessarily agree with.

Basically, what the publishers are doing by focusing on print logistics, better service to independent bookstores, and higher ebook prices is setting up print to compete with digital offerings. Last year, Hachette estimated the digital market to plateau at below 40% of the total book market, and given this assumption the strategy makes sense – their strongest competences are in print, not in digital, so instead of attempting to acquire the competencies required to compete in this new market, they bolster their position in the old print market. (My suggestion from last year was to milk the pre-digital markets in many of the countries they operate in while they build up the competences required to compete digitally in the US, and then use those competencies to retain their position in the other markets once the inevitable digitalization takes place.)

There is a major weakness in this strategy. It is built on the assumption that the digital market will plateau soon. If the assumptions I have used earlier in this post are even nearly correct, the digital market may have already surpassed the 40% market share that Hachette considered to be the highest it can go. (The official line from Hachette as of September 2015 is that the ebook market in the US has been declining for more than a year)

However, this strategy can also be viewed in a different way. Sometimes the best strategic choice is not to compete in the new market, but to remain in your existing market, even if it is a declining one. There are always profits to be made even in declining markets, and if the capabilities of the firm are ill-suited for transition into a new market, it can make strategic sense to remain in the old market.

When it comes to print market, it is a comfortable place to be for a major publisher as independent bookstores are on the rise. They can use their marketing machine and logistics system to work with a large number of independents, who have very little bargaining power over large enterprises, and reach audiences that a small publisher cannot. A fragmented retail space is a good barrier to entry to publishing, and one that major publishers will be happy to take advantage of.

It is not either/or

So, it seems that New York Times had it half right. Ebooks are currently stronger than ever, and yet, print is still not dead. At the moment the major publishers are positioning themselves strongly to defend print against ebooks, but whether this will result in two largely separate markets (assuming that barriers to entry to the print market remain significant) or whether the publishers are preparing for new moves in the digital space remains to be seen.

If I were to guess, I would still place my bets in favor of the digital as the main market of the future, even if print can still compete alongside it.

 

Photo: ebook by Danial Sancho @ Flickr (CC)

 

Author: Ville Kilkku

I run my own consultancy business, so if you find the ideas on this blog intriguing, contact me at consulting@kilkku.com or call me at +358 50 588 5043 and we can discuss how I can help you solve your business problems. I am currently based in Tornio, Finland, but work globally. Google+