Ebook White Paper

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White Paper

eBOOKS AT THE CROSSROADS: WHICH WAY FORWARD? Introduction The eBook market’s explosive growth continues to outpace forecasts. Near-monthly announcements of new and improved eReader devices, new alliances and partnerships, and additional investment in enabling technologies from some of the largest information technology and retail players have effectively repositioned the eBook debate from one regarding permanence to that of future adoption rates. The enormous volume of free and digital rights management (DRM)-freed content flooding the market, the emergence of new platforms and the increasing adoption of EPUB as the standard file format further demonstrate the market’s expansion and promise. Publishers and consumers are excited about the growth of the market, but this growth has also highlighted the need to address critical underlying business issues. Decisions regarding optimal eBook creation processes, cost, pricing and future royalty structures may have longlasting and profound consequences across the entire publishing business. The eBook market is young, unbalanced and volatile, but this is the time to act. Many early players have fared well with a handful of eBook channels that mirrored traditional print-based pricing and royalty models by default, but publishers realize this model is not durable. Publishers Weekly magazine reported that 72 percent of publishers surveyed on digitization’s impact said the development of new business models, multi-media products and effective marketing strategies is the biggest challenge facing publishers today. Decision-makers in the publishing industry have concluded they need to carefully navigate this potentially lucrative, yet also tumultuous, landscape. Publishers must establish a sustainable eBook operating model that provides the flexibility to maximize profits from the existing model, while positioning them for future developments that may require multiple strategies. They have arrived at a crossroads, with the majority of publishers considering three viable paths:

✔ Partner directly with platforms/eBook manufacturers ✔ Build and maintain an internal eBook conversion and distribution facility ✔ Partner with an expert third-party provider to convert, maintain and distribute eBook content to platforms This white paper presents the benefits and drawbacks of each of the approaches listed above, while providing a high-level overview of the most influential current and future trends, to help publishers and information services companies understand the market and choose the path that is best for them. Although each of the options provides certain benefits, this paper will demonstrate that collaborating with an expert provider is the optimal choice for publishers.

eBooks: Current Trends and Highlights Current Landscape The Association of American Publishers (AAP) recently released eBook sales statistics for July 2009. Trade eBook sales totaled $16,200,000, a 213.5 percent increase over July 2008 ($5,200,000). Calendar year-to-date sales are up 173.9 percent. Forrester Research reported a 150 percent increase in the number of U.S. eReader owners in the past year. Approximately three million eReaders will be sold in the U.S. in 2009, Forrester forecasts, and that number is expected to grow to 13 million by 2013. It is important to note that while Forrester is forecasting explosive growth, they also estimate that eBooks currently account for only 1.5 percent of total readership. The proportionate percentage of fiction titles, for which current eReader functionality is optimized, is likely much higher. Amazon’s “first mover” status, and seamless Whispernet1 integration of its 330,000+ available books onto its groundbreaking Kindle device, has established it as the preeminent eBook player. Amazon does not release Kindle sales information, but Jeff Bezos, Amazon's CEO and founder, told The New York Times in October 2009 that in instances where Amazon offers both a Kindle and paper version of a book, 48 percent of total sales result from the digital version. In May 2009, this number was 35 percent. A recent Amazon earning report2 stated that the Kindle is Amazon’s top selling item across all product categories, and is the “most wished for” and “most gifted” item. The Kindle is today’s leading device (although it is unknown to what extent) and its name has become a synonym for “eReader.” Competition is becoming more fierce, however, and the 1984 incident3 has underscored Amazon’s perceived lack of flexibility. Some Kindle users fear they are essentially users of a charging library. Sony is moving full speed ahead and has recently unveiled Edition devices that are EPUBcompatible. Some of these devices are attractively priced, wireless and feature-rich, and have already upped the ante. Sony has also formed what appears to be a long-term alliance with Google. One million free public domain titles will be directly available to Sony Readers, with millions more likely to follow the eventual Google Book Settlement. Expanding beyond its platform, Sony Daily Edition purchasers will have wireless access to local libraries’ eBooks, as well as other platforms’ EPUB-formatted eBooks (provided the appropriate DRM rules are in place). By targeting new monetization streams from all EPUB content, Sony may be positioning its Readers, and future versions, to access and integrate non-eBook content (perhaps including Sony’s proprietary gaming content). As expected, Barnes & Noble announced its Nook device, featuring a touch-screen LCD panel and in-store browsing and sharing capabilities that are hoped to augment, rather than replace, the bricks and mortar bookstore experience. Through its Editions offering, Google will open much of its scanned book warehouse, soon to become the biggest digital content repository, to all browser-enabled devices. Betting against the knowledge and resources of both Apple and Microsoft has proven unwise in the past. It is believed that both companies are developing multimedia tablets; meanwhile the iPhone, through applications such as Stanza and iKindle, as well as direct browsing, has become a leading eBook reading device. 1 Whispernet is a wireless delivery system for the Amazon Kindle device. 2 October 22, 2009. 3 In June 2009, Amazon remotely deleted copies of the book 1984 from customers’ Kindle devices after realizing that the digital copy of the book had been added to the Kindle store by a company that did not own its rights. Innodata Isogen – White Paper

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Value Proposition and Impact on the Publishing Model eBooks offer consumers the many conveniences of media digitization, such as portability and transferability, and eInk eReaders offer excellent letter clarity on a glare-free screen. eReaders are light, durable, energy efficient and they possess large storage capacities, ideal for the enormous amount of free and inexpensive available material. These features offer an experience that many consider superior, but also pricey, for both purchasers of new devices and the main players in the eBook market. In addition to its significant start-up costs, Amazon currently pays publishers approximately $13 for a bestseller, regardless of whether the bestseller is a costly print book or an eBook. Kindle versions, however, are sold to customers for $9.99. This scenario poses a major problem, according to the head of one of the major publishing houses. “Right now the entire economic model for book publishing…is in jeopardy from this low pricing,” he said. There is increasing concern among publishers that Amazon, for example, may eventually refuse to discount Kindle editions, which will force publishers to lower prices for digital editions. In this publisher's view, lower digital prices will pressure publishers to increase royalty rates, despite the fact that “there are no margins to do so.” Another option would be for publishers to lower advances, which would enrage authors and agents, who are not content with the current split of eBook sales. Publishers could be caught between authors, who want large advances, and consumers, who believe they should pay less for a digital edition. Publishers must address the changing pricing model and take action to minimize their potential exposure to major market shifts, while reducing current and future operating costs. Perceptive publishers recognize that the pace, momentum and magnitude of recent developments in the eBook market signal a pivotal phase in the delivery of written content. They are at a crossroads in the eBook market, with the majority of publishers considering one of three options.

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eBooks at the Crossroads: Three Paths Advantages and Disadvantages of Direct Partnership Direct partnership with platform providers offers several advantages. It enables publishers and information services companies to get their eBooks to potential customers speedily. The platforms will convert a publisher’s downstream data into their respective eBook formats and post the product. Publishers will need to supply the related marketing information, but can then wait patiently for their royalty checks. The allure of this option is working with established players and their secure customer bases. The established process already in place helps speed time-to-market. Amazon and Sony have proven themselves to be innovative and in the forefront of eBook development. When entering a volatile and uncertain space, there is a feeling of security in pairing with a heavyweight. There are, however, disadvantages to direct partnership. It is cumbersome to work with multiple platforms simultaneously, each with its own specifications, and many more platforms are likely to emerge. While it is possible to send copies of the same PDF to five platforms (for example), each will have its own particular processes and collateral requirements for posting the eBook. Following each set of procedures and adequately tracking them can become complicated, especially if the platform encounters conversion problems and requires the publisher to take action. New eReader features will continue to broaden the market. Greater functionality and interactivity will require changes to enrich internal mark-up and metadata, which further complicates the task of content management for publishers that are interfacing directly with multiple platforms and meeting their requirements. With richer upstream data requirements to support future functionality, publishers may need to create and distribute multiple “blends” of data to support and optimize the reading experience on each platform’s eReaders. Platforms may continue to take downstream print files and manipulate them to meet new feature requirements, but this process will be error-prone. Publishers and information services companies will have to keep a close eye on each platform. For instance, what if a certain platform under-serves a publisher’s content and takes sales from a more profitable platform? Publishers that choose this route will have to monitor technological and DRM developments constantly to determine which platform will best optimize their content for additional monetization potential.

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Maintain an Internal Conversion and Distribution Facility Some publishers have decided to build and manage their own conversion and digital distribution hubs (or distribution operations). This option seems appealing, because publishers and information services companies believe they will have greater control over the eBook process and will be less dependent on third parties. With the increase in EPUB standardization and rise of EPUB conversion applications, many would argue this is a cost-effective operating model. It also appears to be simple: a program ingests the PDF, or Microsoft Word document in many cases; the publisher pushes a few buttons and out comes the content in EPUB format. By retaining full production control, publishers will be able to highlight, feature and better select the future interactivity that is best for the specific content. As the technology continues to develop, the reading experience will surely change. By extending control of the content further downstream and staying attuned to device requirements, publishers will increase their ability to re-engineer their content supply chain further upstream to meet future consumer and downstream needs more effectively. Trends suggest that many who decide to go this route eventually change course. Given the eBook and eReader evolution, changes in conversion specifications will occur frequently. This means that publishers that maintain an internal conversion and distribution facility will have to sustain continual development and ongoing production, in addition to the multiple outputs required for all platforms and their multiple eReaders. An internal facility requires continual review and investment, and thus quickly becomes too costly to sustain. It is the antithesis of “lean practice” (more value with less work). Additionally, EPUB conversions performed with off-the-shelf applications often create output that does not display well with specific devices. For example, headings and footnotes may display inconsistently. Many of the disadvantages of direct partnership also apply here. In addition, this option requires an initial conversion set-up investment, including facility, tools and licensing costs. On the surface, it may appear that an internal system would enable highly automated (and therefore inexpensive) processes, but given the continually changing eBook market and eReader requirements, changes to conversion scripts, manual coding and metadata tweaks will add expense. Additional fixed costs, such as staffing and training, must be considered. There is also the more fundamental question of whether a publisher, especially in the current market environment, should divert its internal operations from fully focusing on the customers’ current and future needs: creating and enhancing desirable and saleable content, and branding. Innodata Isogen believes the content supply chain is best viewed across four dimensions: content, business processes, technology and organization. The specific roles and appropriate balance of these dimensions will vary depending on products, organizations, objectives and business vision. In an internal conversion facility model, over-weighted by technology and process, silos and self-fulfilling organizational branches are likely to form with little direct business value.

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Collaborate with an Expert Provider An expert third-party provider of eBook production services can serve as a multi-purpose bridge between publishers and the platforms. Publishers that partner with eBook specialists will preserve and promote two important attributes: flexibility and lower costs. Publishers and information services companies that choose this option are free to work with all platforms, without worrying about conversion, storage and maintenance. They can also keep their costs low by relying on the service provider’s extensive and ongoing investment in tools and technology. Publishers can focus on their core business, while the eBook specialist not only maintains all conversion and eBook management operations, but also closely tracks the latest technological and market developments. An expert third-party provider can also:

✔ Intermediate between the publisher and platforms to detail eBook conversion requirements ✔ Rationalize and reduce duplicative conversions

✔ Convert output data to desired eBook formats ✔ Manage converted eBook data; remediate as needed ✔ Input additional tagging to enable enhanced functionality

✔ Advise on changes to upstream, in-house digital asset management systems and processes to address emerging trends

✔ Assess the advantages and disadvantages of platforms and devices (relevance and longevity, for example) for the specific content sets

✔ Assess DRM policies, and advise and recommend on a course of action ✔ Incorporate leading industry practices, including data mining and semantic analysis, to ensure eContent is best-positioned for optimal monetization In this scenario, the provider can handle all production management, while closely monitoring the eBook and related markets. Analyzing developments and advising publishing partners on potential paths forward are key responsibilities of the partner. An effective partner will be aware of future eContent possibilities and the potential impact on the business model, which will help bridge knowledge gaps inherent in the current eBook paradigm. The optimal expert provider takes a consultative approach to solving problems, and leverages extensive experience in designing and implementing a wide-range of solutions to meet the diverse and continually evolving business objectives in the information services space. The expert will proactively highlight emerging trends for clients, along with potential disruptions, and collaborate with publishers on the most effective strategies. Clients will be prepared for small bumps in the road, along with the “next big thing.” The disadvantage of collaborating with an expert is that few partners have proven capable of performing the functions listed above. Publishers and information services companies must choose a partner wisely, based on the partner’s experience, list of clients and recommendations, and connections in the eBook industry.

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The Roads Ahead: Coming Chapters in Digital Reading “Television will never be a medium of entertainment.” - David Sarnoff, General Manager of RCA, in 1955. Early television programming copied heavily from the content and format heard on the radio, leading many to view the expensive new medium skeptically. After years of experimentation, however, the large companies investing in the promising new technology found the right types of television content that grabbed people in a different, more visceral way than radio. The race to develop and offer interactive eContent, as well as to create a new and improved reading and learning experience, is already under way in the eBook market. Jeff Bezos, the founder and president of Amazon.com, expressing confidence gained from decades of technological achievements, recently turned Sarnoff’s quote around by stating that the “Kindle is an example of working backward.” The medium is ready and is now merely awaiting appropriate content. Education American educators are increasingly looking to eBooks and eReaders as a more interactive, environmentally friendly and less expensive option than print materials. Both California and Texas have already launched aggressive eLearning initiatives and publishers of educational materials are starting to seize this opportunity for growth. McGraw-Hill inked a deal with Amazon recently, making all of the publisher's higher education material available on Amazon's Kindle. McGraw-Hill is also loaning students Kindle devices with the necessary texts already loaded. Cengage Learning, Wiley, and Pearson have forged similar deals with universities. Students who subscribe to CourseSmart will now be able to download their texts and digital notes to Apple's iPod Touch or iPhone to create customized study guides or cramming aids. Flat World Knowledge, an open source, Web-based digital textbook publisher, states that 40,000 students on 400 college campuses will use its texts this fall, a significant increase from the 1,000 students who used them last spring. The K-12 Foundation is a non-profit organization with a mission to reduce the cost of textbook materials for the K-12 market, both in the U.S. and worldwide. Using an open-content, Web-based collaborative model termed the "FlexBook," K12 intends to pioneer the generation and distribution of high-quality educational content that will serve as core text, as well as provide an adaptive environment for learning. While some features, such as annotations, margin notes, “dog-earing” and highlighting are eReader-enabled, the sharp, graphical nature of most textbooks is currently lost, and students find it difficult and frustrating to jump ahead or back to sections or pages (or records) on eReaders. The Kindle DX device is geared towards textbooks and newspapers and Sony has unveiled a landscape and touch-enabled device that will facilitate the textbook experience, but there is still progress to be made. eInk color is at least a year away and will certainly improve the experience.

Business-to-Business (B2B) and Business-to-Consumer (B2C) Journals and trade magazines are another area of potential growth in the eMarket. Professionals will be eager to access and organize materials on eReaders, especially once enhanced display and content interactivity are available. The ability to search and aggregate information across Innodata Isogen – White Paper

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multiple B2B publications on the same device could be a potentially game-changing eReader feature, essentially enabling professionals to assemble customized, topic-based information packages. Canned searches across the subscribed products specific to professional areas will keep professionals up-to-speed on relevant developments. Interestingly, the upcoming wireless (3G and WiFi) Plastic Logics eReader, which will connect to the Barnes & Noble platform, is targeting the office workplace by supporting popular office document formats, such as Microsoft Word, PowerPoint and Excel. Many newspapers and magazines are currently available on eReaders, but users report the experience is still largely unsatisfying. Readers typically enjoy leafing through pages, and eReaders have not yet adequately replicated, or found a suitable substitute, for this feature. Web versions of newspapers and magazines offer greater interactivity, through linking and third party collaborations, to provide optimal Web page formatting and context. The Web experience, however, lacks attention-grabbing graphics and bold colors to seize attention. Color eInk will certainly have a positive impact here. In addition, much work remains to enable eInk to display Web pages adequately. The recently unveiled Asus eReader (Figure 1 below) will offer two panels: one can be used entirely for navigation purposes; the other for reading. While not an eInk eReader, its relatively low cost (expected to be around $200) and design may greatly impact the eReader market. Barnes & Noble’s Nook device is an interesting hybrid model, perhaps the first of many, sporting an eInk screen above an LCD panel. The recently leaked view of what was allegedly a Microsoft tablet showed dual screens. An Apple tablet may emerge to harness multi-media and multi-functional computer capabilities, combined with Apple’s fabled ease-of-operation and quality design (Qualcomm, Toshiba and others are working on tablets). Likely prices for these higher-end devices will be in the $750 range.

Figure 1: Asus eReader’s Two Panels Investment and development to bring new content to eReaders continue to increase. Emerging and Future Developments Continued investment in, and enhancement of, eInk readers in a growing, content-rich market is likely to bring the following major developments4: ✔ Color of the same quality as the already crystalline eInk display will bring new life and richness to graphics and display

✔ Optimized eInk Web page display ✔ Touch-screen capability will add a new interactive dimension to the content 4 It is reported that Pixel Qi’s 3Qi product will eventually offer users exciting hybrid eInk and LCD displays. Innodata Isogen – White Paper

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✔ Margin notes and annotations will present sharable and collaborative learning opportunities on social networking sites and communities ✔ Readers will be able to indicate in an unobtrusive manner (maybe with a graphical “thumbs up” or down) whether they like particular sections or paragraphs. These preferences can be fed back to eCommerce technology to more precisely target future offerings ✔ Growth in semantic analysis will enable related contextual content to be served to the reader, creating a more personalized and interactive reading experience ✔ Publishers will be provided with extremely detailed and targeted information on tastes and trends, allowing them to best leverage these with specific types of new content

✔ Readers will more easily be able to navigate and find the content they need and use it best to meet their needs

✔ With public domain and other free content becoming pervasive in the eBook market, added features, such as eContent disaggregation from the eBook and customized reassembly into new eProducts according to personalized tastes, will create new opportunities for monetization ✔ Future eContent creation, written specifically for eReader features, may spawn new genres and certainly media convergence possibilities, opening up new monetization possibilities ✔ And perhaps most significantly, with greater eReader sales, prices will come down, enabling mainstreaming Many new features will have the ability to profile audiences for highly targeted ads. This is perhaps the main business case driving semantic and Web 3.0 exploration. Similarly, while some users may object to this intrusion into their very personalized eReader experience, others will be forgiving if ads reduce eBook, and possibly eReader, costs. Amazon has not been profiting on individual eBook sales. They have invested a substantial sum in the creation of the Kindle and its platform, and they are sustaining it with this ongoing subsidy. Amazon clearly sees enormous potential in the eBook and eContent market, both domestically and internationally.

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The Way Forward As the market continues to evolve, eReader functionality improves, prices drop and user adoption increases, there will be heightened urgency to remain ahead of a fast-changing curve. Future eBook functionality will require rich and descriptive data mark-up and metadata, and with greater eContent interactivity and disaggregation potential, digital rights should contain or wrap content at a pre-determined granular level. The more clearly and descriptively content is labeled, the more portable and valuable it will be. Now, more than ever, an eBook operating model based on flexibility that incorporates thought- and technology-leadership is imperative. Characterized by explosive growth, massive investment and media buzz, the eBook market has become one of the most potentially lucrative places for publishers to explore. Publishers have arrived at a crossroads, with three viable options before them for capitalizing on the eBook market while it continues to evolve. For publishers, content owners or licensors, a strategy of direct partnership with suppliers that offer quick-time-to-market seems simple. However, in such a quickly changing and volatile market, how can publishers remain continually attuned to developments on each platform, as well as the many devices each supports? Platforms may further complicate matters by trying to force publishers into exclusivity agreements or by promoting their devices over their competitors’ devices. Publishers and information services companies that choose this route will have to carefully monitor technology developments and involve themselves in complex DRM issues to manage their businesses successfully, depending on the strategies they adopt. Creating and maintaining an internal conversion and distribution facility promises greater control over the eBook process and less dependence on platforms and other third parties. There are significant disadvantages, however. Publishers and information services companies will have to invest significantly in an initial conversion set-up and then adapt that set-up continuously to meet new needs. This tweaking and updating will add to the overall cost, as will licensing and staffing, and will reduce the publishers’ resources and focus from key areas. Partnership with an expert provider is the more reliable and flexible option, because it will maximize publishers’ flexibility by keeping them independent of specific platforms and conversion work. This is also the most cost-effective method. Publishers and information services companies will be able to focus on their core business, while relying on the partner both to stay abreast of technology and market trends and handle the conversion and data management with leading practices. In addition to providing publishers with the necessary agility, a trusted partner will closely monitor the changing pricing and DRM models and provide sound guidance. The eBook market is replete with unknowns. Publishers must retain their agility while being continually attuned to myriad developments impacting eReaders, eBook platforms, eContent, cost and margins. Publishers and information services companies that work with a capable intermediary will increase their flexibility and best position themselves to succeed in the emerging eBook market.

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