Are e-books an opportunity or a threat to book publishers? Will enhanced digital content ever sell? How will book readers discover content beyond the bestsellers? These are the questions posed by the ever-entertaining Laurence Orbach in his latest letter to the shareholders of Quarto, the group he founded in 1976 and has run ever since.
"Given the shifting sands underpinning the book publishing business, do shareholders need to be sceptical about the solidity of the entire industry?", asks Orbach in typically unflinching style.
"This is a reasonable question. Even those uninvolved in book publishing, might find it difficult to ignore the apocalyptic tone of many reports about the industry, and the evidence that it is facing profound challenges that must be addressed."
But Orbach isn't impressed by the talk of a wipe-out. First he does not think e-books will become big business for the bits of the sector Quarto inhabits, and neither does he think Quarto is best placed to become the pioneer.
"While Quarto is feeling the ripple effects of this evolutionary change, the impact to date has been slight. To satisfy the curiosity of analysts and commentators, we have noted above that our digital revenues climbed five-fold in a year. But they still only represent a little over one percent of group revenues. Quarto's book output is substantially non-fiction titles that are useful and, often, necessary for readers pursuing a craft, a hobby, home improvement, self-improvement, and so on. This is not a large part of the current e-book market, and efforts to build both apps and e-books around the kind of content we create have not been well rewarded. This is not surprising, as they have not taken advantage of the benefits that the new tablet computers and e-readers now offer. At the moment, and seeking to take advantage of better and less cumbersome software authoring tools, more efforts are being made to create enhanced e-books. No doubt, some will turn out to be very fine, but it remains unclear whether there is a profitable commercial model lurking in all of the experimentation.
"In software terms, Quarto has been staying very close to technological progress, however we believe it is not yet good enough and are waiting patiently for an improvement which will compel us to participate more actively. At the moment we cannot even glimpse the outline of a business model for enhancing the kinds of books at which Quarto excels. If others blaze a successful trail, we shall travel it, dragging our mountainous piles of proprietary content."
Orbach says he speaks from experience, drawing a comparison with the CD-Rom bubble of the '90s. "Quarto did not invent 'enhanced' books, but in the late 1980's, pioneered in creating 'interactive books plus' for consumer audiences, including children's titles, and continues to produce them today at Q+ and Walter Foster. We invested in the first iteration of digital enthusiasm in the 1990's, for CD-ROM's. The public expressed its enthusiasm for these products by ignoring them."
All good so far, but then it gets really interesting, as Orbach questions whether the book itself will ever really become digital: "the book, as we still know it, has an implicit structure, what we like to think of as 'rhythm', that distinguishes it, and that is understood by the reader", asserting that "it remains to be seen whether this organizing approach will transfer to other media".
Even if it does, he doubts that traditional publishers will easily adapt. "We cannot ignore the evidence that it has been extremely rare for firms entrenched successfully in one line of production to transfer their prominence into a newer area of production. How many railroad businesses went into making automobiles successfully? How many manufacturers of carbon paper (remember it?) moved into making copying machines? The list can be extended endlessly, easily swamping the exceptions.
"Firms successful in one line of business will experiment with moving into an area that poses challenges and offers opportunities but, inevitably, do so from a defensive standpoint, i.e. trying to extend their reach. In our view, that's what is happening now in the book publishing business. The notion that supplying digital versions of narrative titles represents a major economic opportunity for publishers is largely window-dressing and hokum."
I don't agree with his reading of the e-book market, but his analysis is nevertheless compelling: a steady erosion of the value of books sales and of the outlets selling those books, leading to a scenario where the revenue can no longer sustain the cost structures built to bring in those sales. Bad news for publishers, writers and the reader.
There is more . . .
"E-books are probably not growing the overall audience much (except for a brief honeymoon with a new device) and, so long as outlets for printed books remain significant, the costly infrastructure of many existing publishers may have to remain largely in place. The evidence is becoming overwhelming that, in popular, narrative areas of fiction and non-fiction (not an area of focus for Quarto), e-books are eating into sales of printed books. This may not challenge the economics of book publishing fundamentally for bestselling titles but, as bookshops diminish, and the exposure of less popular titles declines as a result, the committed book reader will be ill served by the outcome."
Orbach, who is retiring in 2013, seems not unwilling to change his mind, but is unwilling to risk his business shooting for a market that he thinks might end up like so much vapourware. "While we watch vigilantly what is going on, we have a business to run. We manage it with an eye on the future but acting firmly in the present. We face up to the challenges, explore the opportunities, and will move as we see a good outcome for shareholders."
It is worth contrasting Orbach's view with that of UsTwo's Mills who earlier this week blogged about the failure of its widely heralded Papercut app. Mills essentially encountered the same problems outlined by Orbach, costly enhanced content meeting with little demand. "The hard facts were that for PAPERCUT to break even we’d have had to sell 25,000 copies at its intended full price, £3.99. To date, PAPERCUT has sold 1,341 copies and there’s little chance we’ll ever recoup our investment in it."
But Mills does not believe the market is dead, he just thinks we have not yet evolved to take advantage of the new opportunities. "As barriers to entry are smashed down, we’ll no doubt see a new generation of authors emerge—authors who are as well versed in video and audio design as they are in constructing a story."
Orbach's cautious view of a developing market is dead-on, but his overarching view that the fundamentals haven't changed seems wrong-headed. To early observers of the printing press it probably just looked like a device to put ink on paper (a monk's nightmare, if you like), but its mass adoption quite clearly shifted the fundamentals of everything. The internet does that. Mills does not address the lack of demand for his enhanced content, but he is absolutely right that there is a new generation coming through that will simply do things differently, in a world always online and connected 24/7, and this new generation will want different things from what we used to call a book.
But I wouldn't write Quarto, or Orbach, off. The most important line in the essay for investors was the one about the group's "mountainous piles of proprietary content". If the means of production get easier, and the methods of distribution improve, those assets will prove invaluable.
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