Reference no: EM13276888

The publishing industry is grappling with disruptive technologies that may transform its business models and the way we buy and read books. What is the impact of the Internet and e-book technology on book and newspaper publishing? Who will win and who will lose out, and how will the struggle play out? Newspapers are the most troubled segment of the publishing industry, due to the availability of alternatives to the printed newspaper and publishers’ inability to protect valuable content from being distributed for free over the Internet. Over 60 percent of newspapers have reduced news staff in the past three years and about the same percentage report reducing the size of their newspapers. Readership has been declining for about a decade and advertising is down 15 percent a year. Alternative online sources of news such as Yahoo, Google, and blogs have become major sources of news for many Americans, especially younger readers. At first glance, the online newspaper industry appears to be a classic case of a disruptive technology destroying a traditional business model based on physical products and physical distribution. But the newspapers have much valuable content worth preserving and they have acquired a huge online audience. Next to social networks, newspapers have the largest online audience of any media, and online newspaper readership is growing by 17 percent each year. Contrary to popular opinion, they are one of the most successful forms of online content to date. The problem is that online newspapers are not generating enough revenue online from paying readers or from advertising. They are trying to revamp their business models to address this problem. In the past, the papers did not charge for online content, and so the content became freely available across the Web. Aggregators such as Google and Yahoo News were able to repackage this content for their viewers free of charge. What can newspaper publishers do to stem the flow of red ink? One option is to share revenue with Internet partners such as Google and Yahoo. Another is to charge fees for newspaper content delivered to new reading devices, including smartphones, e-readers, iPads, and tablets, which enable online newspapers to be read everywhere. A third option is to charge fees for “premium” news and opinion. But because advertising remains a major source of revenue, the newspapers must clearly figure out how to grow their online revenue fast enough to offset their losses from print advertising. The Internet has been steadily taking advertising share from other traditional media, like print newspapers and magazines. While television still dominates ad spending, the Internet now ranks second and is expected to capture a 20 percent share of marketers' ad budgets in 2011, according to the eMarketer research firm. If this trendcontinues, and there is every indication that it will, more companies will be placing ads in online newspapers, and this source of revenue should grow. What about book publishing? Many physical bookstores have disappeared, especially small mom-and-pop stores competing against large chains such as Barnes & Noble as well as against online booksellers. The chains themselves have lost sales to online retailers such as Amazon. Book publishing is holding steady (U.S. consumers purchased 3.2 billion books in 2010) but book readership is flat. Young people are reading less than in the past while the expanding elderly population is reading more. When e-readers were first developed and e-books first started to become popular, many analysts speculated that they would threaten the continued livelihood of the publishing industry. That has not happened. Instead, e-books have become a new channel for book content distribution. E-book sales are skyrocketing, thanks to the popularity of Amazon’s Kindle e-book reader and the iPad. What remains unanswered is whether e-books are cannibalizing sales of physical printed books or whether they are extending book readership to a larger audience. Amazon’s Kindle was the first e-reader to realize the promise of e-books. Analysts expect that Amazon will sell 17.5 million Kindles in 2011, generating $2 billion in revenue, as well as 310 million e-books, good for another $1.7 billion in revenue. Meanwhile, sales for Apple’s iPad have been so brisk that Apple called demand for the device “staggering.” The design of the iPad appeals to many readers of magazines, newspapers, and illustrated books, and publishers view the iPad as a better potential platform for textbooks than the Kindle. Publishing companies have begun investing more resources in the Kindle and iPad as delivery platforms for their books and less money in traditional delivery platforms, like print news and bound books. Textbook publishers are working on iPad versions of their offerings; newspapers have apps out for the iPad and offer Kindle subscriptions to readers; and major publishers are contracting with software companies to convert existing files to e-reader compatible products. The publishing industry views e-books as a big potential boost to sagging sales numbers. The difficult part is developing a fee structure that will make e-book delivery profitable for publishers as well as the device manufacturers. How can publishers overcome the lower profit margins involved in selling an e-book compared to a physical book? Amazon, Apple, Google, and a host of other smaller companies are competing with one another to offer appealing e-book delivery platforms and pricing models. Apple announced in February 2011 that it would receive a 30 percent fee for each sale of digital content sold through its App Store. Apple also prohibited app developers from placing links to external Web sites within their apps, effectively preventing these developers from guiding their app users to product offerings that would not be subject to Apple’s fees. Apple believes that because it is bringing so many new customers to the publishers on the iPad and iPhone, they have a legitimate claim to a portion of the resulting profits. Apple also plans to prevent publishers and other content providers from receiving data about their iPad customers unless customers gives permission beforehand. Apple, meanwhile, will have access to much of this information. Publishing companies have strenuously objected, arguing that they need this information to successfully market and advertise their products. Apple says the rule protects the privacy of iPad owners. For many publishers, removing their content from the iPad is not a realistic response to their problems with Apple’s new rules. In fact, Apple’s bargaining position is so dominant that some analysts believe there is an antitrust case to be made against them. The changes are slated to take effect later in 2011. One company hoping to capitalize on this dissatisfaction is Google. Rather than relying on any particular e-reader or developing a device of its own, Google hopes to offer a more “open” model that allows readers to access books using any Web browser. (Kindle users can only buy books from an Amazon store and can only read those books on devices using Kindle software; the same goes for Apple and the App Store or iBooks.) Google’s advantage is that it is not tied down to any individual device, and as the number of e-readers continues to grow, this advantage will become even more significant. This model will also give Google a much larger reach. Instead of just e-reader users, Google’s target audience will be the 190 million monthly Internet users in the United States, and Google hopes to profit from the detailed information it will acquire about its e-book customers Google’s e-book venture, Google Editions, will allow users to buy books directly from Google or associated online retailers, including smaller, independent bookstores. When users buy a book this way, it’s added to an online library tied to a Google account, as opposed to buying from the App Store or Kindle store, where the book is tied to the device on which it was purchased. Google has also opened a payment system for these books and other digital content that will allow publishers to keep more revenues than under Apple’s new system. This system, called Google One Pass, allows publishers to set their prices, grants publishers more control over customer data, and gives Google only a 10 percent cut of each sale. Readers using One Pass can log into their Google accounts, visit the Web sites of participating publishers, and pay for any content, any time. So far, Germany’s largest newspaper publisher and largest magazine publisher have adopted One Pass, and other publishers in France, Spain, and the United States have followed suit. Many major U.S. publishers already have their own infrastructure to sell, fulfill, and authenticate digital subscriptions, but these publishers still want to make their publications available on Android-powered devices. Google’s offering is also far more appealing to smaller publishers and independent e-book sellers. Other Google initiatives may work against book publishers’ interests and profits. Google Books is Google’s project to scan the world’s 150 million books and make them available via Google’s search engine. Publishers and lawmakers have raised copyright and intellectual property concerns, but a 2008 settlement allowed Google to continue scanning and did not disallow the possibility of serving ads in tandem with pages from books. A federal court overturned the 2008 ruling, but Google hopes to resolve the legal issues surrounding the project. Companies are just starting to experiment with ways to place ads that readers will tolerate in books. Wowio, a lesser-known digital bookstore, has had success selling ad space in e-books downloaded from its site onto iPads and Kindles. The books are heavily discounted or free to readers. Wowio charges $1 to $3 for e-books with ads served in various says, and shares the revenue with publishers, who can then distribute ad revenue to their authors as they see fit. In the past, ads in books quickly became irrelevant after the book had been in circulation for a time, but with e-books, highly targeted advertisements can be inserted and replaced with ease. Other e-book advertising possibilities include sponsorships that give readers free books; videos, graphics, and text that appear only when books are opened; and ads that appear along the border of digital pages. The popularity of e-books and e-readers has convinced advertisers to give e-book advertising a chance, but it remains to be seen whether readers will buy e-books containing ads without a significant price decrease compared to ad-free e-books. Educators are also excited about the potential of tablets like the iPad to revolutionize learning at all levels. The iPad is portable, has a large, clear screen, a flat design that allows students to keep eye contact with their teachers, and is robust enough to handle a variety of multimedia. Schools in New York City, Chicago, California, and a host of other areas throughout the United States have launched iPad pilot programs to replace physical textbooks with electronic versions and to use this device for new interactive learning experiences. Textbook publishers are already making headway in their efforts to convert their books to iPad- compatible formats, and Houghton Mifflin Harcourt has developed the first iPad-specific algebra program, which has been used in pilot programs at several California schools. It’s possible that instead of destroying the publishing industry, technology just might save it. Sources: Emily Steel, “Big Pop Seen for Online Ads,” Wall Street Journal, June 8, 2011; Efrati, Amir Mary Lane, and Russell Adams, “Google Elbows Apple, Woos Publishers.” Wall Street Journal, February 17, 2011; Yukari Iwatani Kane and Russell Adams, “Apple Retreats in Publisher Fight, Wall Street Journal, June 9, 2011 and “Apple Opens a Door, Keeps Keys.” Wall Street Journal, February 16, 2011; Amir Efrati and Jeffrey A. Trachtenberg, “Judge Rejects Google Books Settlement,” Wall Street Journal, March 23, 2011; Winnie Hu, “Math that Moves: Schools Embrace the iPad,” New York Times, January 4, 2011; David Carnoy, “iFlow Reader Developer Rages at Apple,” reviews.cnet.com, May 12, 2011; L. Gordon Crovitz. “From Gutenberg to Zoobert.” Wall Street Journal, August 8, 2010; Jeffrey A. Trachtenberg, Jessica E. Vascellaro, and Amir Efrati. “Google Set to Launch E-Book Venture.” Wall Street Journal, December 1, 2010; and Emily Steel, “Marketers Test Ads in E-Books,” Wall Street Journal (December 13, 2010).

Case Study Questions

1. Evaluate the impact of the Internet on newspaper and book publishers using the value chain and competitive forces models.

2. How are newspapers and book publishers changing their business models to deal with the Internet and e-book technology?

3. How can newspaper and book publishers take better advantage of the Internet? What will it take for them to benefit from e-books? Explain your answer.

4. Will technology be able to save the newspaper and book publishing industries? Explain your answer.