6.0 Digital Distribution
- 6.1 Emerging Digital Distribution Systems
- 6.2 The Digital Asset Distributor
- 6.3 The Influence of Market Leaders
The past several years have seen the emergence of a parallel supply chain in the book trade—a digital supply chain—that moves digital content from publishers to retailers and other aggregators. As social and consumer behaviour, and reading behaviour in particular, continues to shift online, these new models and platforms for digital content distribution bear on the distribution of print books in a couple of interesting ways.
First, the channels by which different kinds of digital and print content are sold are becoming increasingly intertwined. The leading online retailer, Amazon, sells not only print editions but also e-books and print-on-demand books. Other major book retailers are following suit, including the following.
- In March 2008, the lead book retailer in the US, Barnes & Noble, launched an e-book website to exclusively sell digital content published by Barnes & Noble.
- Also in 2008, the #2 book chain in the US, Borders, launched a new "digital center" within its concept store in Ann Arbor, Michigan. The digital center allows in-store customers to download music (for transfer to an MP3 player or CD), download audiobooks, access a self-publishing/print-on-demand service, and buy e-books and e-book readers.
Of course, many other retailers carry some measure of digital content as well. As digital content gains a larger share of consumer purchases, it is likely that the unit sales volumes and economies of scale in the print distribution system will come under pressure. In a market such as the book business, where profit margins are generally slim throughout the value chain, it would not take a great shift—likely even a 5–10% change towards digital content—for this change to have a noticeable effect on the market structure and terms of trade in book distribution.
As a second point, some of the market-leading firms in print distribution, notably Ingram, HarperCollins, and Random House, have begun to invest heavily in digital distribution as well. As these firms adapt and extend their services to include a wide range of digitization and digital distribution capabilities, it seems likely that the move to digital represents both a new revenue source and a defensive move against an erosion of print market share. For both of these reasons, the decision to expand into digital distribution is a significant strategic step on the part of these market leaders.
In addition to what these investments represent for the individual firms making them, the active participation of these market leading firms in the digital marketplace is likely to fuel further growth in digital content sales and digital distribution generally. In February 2008, in an apparent acknowledgement of this trend, the Association of Canadian Publishers announced a broad initiative to explore collaborative opportunities for digitization and digital marketing for its member publishers.
Finally, as we see below, there are many parallels to be drawn between the market dynamics of digital distribution and those of print distribution. These include the importance of economies of scale, the natural competitive advantages of market leaders, and the presence of powerful gatekeeping effects in the marketplace. These parallels are important if we are to understand how print distribution may change in the coming years as a result of developments in the digital realm.
6.1 Emerging Digital Distribution Systems
To date, the digital distribution of books has consisted largely of different services and platforms—such as Google Book Search or the EbscoHost online research databases—each of which has been designed to serve a specific purpose or market.
Aside from managing content workflows and the delivery of digital files to printers, there are basically three main ways in which publishers can make use of digital content today:
- The sale of e-books (or other sale or licensing of electronic content)
- Production of print-on-demand editions
- Online marketing
These three basic applications of digital content can take many forms. A recent article in the American trade magazine Book Business summarizes the current digital marketplace for book publishers:
"For some years now, various technology vendors have enabled publishers to deliver electronically formatted versions of their titles for special purposes. These have included applications such as conversions to XML formats (e.g., Publishing Dimensions), proprietary e-book reader formats (Mobipocket), sight-impaired applications (National Instructional Materials Accessibility Standard/NIMAS), archiving and storing electronic versions of titles for other uses (OverDrive Inc.), PDF archives to drive on-demand printing (Lightning Source Inc.), licensing content to be sold in turn by subscription or sale for limited use (NetLibrary), browse-inside applications by e-tailers (Amazon) and specially targeted online libraries for education, training and business (ebrary Inc., Books24x7 Inc.).1"
The investment required to trade digital assets can be significant. The publisher's archive has to be catalogued and organized, and then it—or some portion of it—must be digitized, structured, and stored for delivery in various formats, and to various platforms and vendors. Most Canadian firms, however, have been understandably reluctant to invest either dollars or staff time in digital content delivery.
Book publishers in Canada spent most of the 1990s hearing that book sales would soon be surpassed by electronic reading, and that they should invest in new formats and systems in order to keep up with the new economy. These assertions seemed to fade with the dot-com collapse in the early part of this decade and the drastically slower-than-predicted growth of e-book markets. As industry consultant Mike Shatzkin has observed, "That time around, in many ways, the less cyber-minded the publisher, the more money they didn't waste…And the many publishers who did very little investing in fancy web sites or ebook conversions saved themselves a bunch of money.2"
That said, there is no question that publishing markets are evolving in ways that are creating new opportunities and market imperatives with respect to digital content. In particular, the following market factors are drawing publishers' attention back to broad questions of digital content management and distribution:
- E-book sales, while growing slower than expected, are certainly growing steadily3. Initially, competing devices and formats slowed consumer adoption, but it appears that breakthrough Internet-enabled PDAs—such as the ubiquitous Blackberry and the iPod-iPhone family of products from Apple—are boosting consumers' interest in e-books.
- Major print-on-demand (POD) providers—such as the Amazon subsidiary BookSurge, Lulu.com, and Ingram's Lightning Source—provide targeted services to book publishers. Thanks to technology and systems improvements in this area, production standards are improving and print-on-demand unit costs are falling, making POD a more viable format for professional publishing firms. In fact, POD providers, many of which offer fulfillment services as well, arguably constitute an additional category of distributor in the book trade.
- There is increasing evidence that distributing publishers' content online is good for book sales. Book buyers increasingly use the Internet to learn about books and authors; mass marketing in the book trade is shifting to niche marketing on the web; the online retail channel is claiming a greater share of the book market; and major digitization initiatives from Google (Book Search) and Amazon ("Look Inside/Search Inside" and "Upgrade") represent new platforms for sharing book information and monetizing book content.
With these points in mind, the issue for publishers is not only how best to digitize and structure book content, but increasingly, how best to store their content, manage it effectively, and serve it in multiple formats to a variety of platforms.
The accompanying challenge is the cost of building a digital infrastructure that can serve an adequate volume of files. Server and bandwidth requirements are part of that expense, but the larger issue is the cost of engineering and maintaining a system that can adapt to keep up with the changing formats, standards, and delivery requirements of the rapidly changing digital landscape.
A related issue that has emerged for publishers is that of how to retain control over digital content. The examples of Google Book Search and Amazon Upgrade mentioned above have each attracted their fair share of controversy, not least of all because they raise important questions about the security and online use of copyrighted content. By allowing Google and Amazon to hold digitized copies of their books, publishers are in effect allowing these powerful trading partners control of their content and the opportunity to create new business models on the strength of the aggregated book archives.
Recently, the growing interest among publishers in controlling their own digital assets and increasing awareness of the related systems costs have led to a greater role for publishers' consortiums and specialist firms in the digital supply chain.
Mike Shatzkin's Idea Logical Company had led some of the early research in this area, and has documented some of the early moves by industry consortia in college and professional publishing, a sector that leads many other categories of book publishing in digitization and digital content distribution.
"In the US, Pearson, Thomson, McGraw-Hill, Wiley, Houghton Mifflin, and Holtzbrinck—which comprise 85% of the US market—are organizing a consortium ‘to generate efficiencies and promote electronic demand for electronic content within higher education institutions.' In other words, they're sharing the cost of creating the infrastructure for what they expect will be an explosion of digital delivery.
Oh, and by inference, they'll control that infrastructure so the newer or smaller publishers trying to reach this market will have to gain access to their road. Real anti-trust concerns will limit abuse, but one has to believe that this step will consolidate power for the existing market leaders.4"
In this sense, we can imagine that these early moves of market-leading firms in digital distribution are driven in part by a recognition of changing consumer behaviour, but also by the interest of these category leaders in asserting or protecting their position in the marketplace.
6.2 The Digital Asset Distributor
Shatzkin has also described the emergence of several new digital distribution firms in America and Europe, and provided a glossary of terms that illustrate the roles played by major participants in the digital supply chain. In the Idea Logical lexicon, the market is composed of Digital Asset Producers (DAPs), Digital Asset Distributors (DADs), and Digital Asset Recipients (DARs). This conception of the supply chain is illustrated in the figure below.
In this model, the Digital Asset Distributor, or DAD, is a specialist firm that provides a comprehensive service, including storing DAPs' digital assets; converting them into various formats; serving them to DARs of all types (who then deliver them to end user/consumer); and providing digital rights management and transactional services. The early indication is that there are no more than 10–12 such firms operating, or soon to be operating, at any scale in North America or Europe. All of these DADs or DADs-to-be are major firms with an existing role in book publishing.
The current North American-based entrants in this category are: (1) Accenture, a global consulting and technology services firm, (2) codeMantra, a US-based DAD with a production facility in Chennai, India, (3) LibreDigital, a division of Newsstand Inc that is partially owned by HarperCollins Publishers, (4) Random House Inc, one of the world's leading trade publishers, (5) RR Donnelly, and (6) Ingram Digital Ventures, a wholly owned subsidiary of the leading US book wholesaler5. We note that all of these firms are US-based, and that both the infrastructure and practice of digital content distribution is more developed in the US than it is in Canada.
As an example of the range of digitization and digital distribution services offered by a DAD, the following graphic illustrates the relationship, and synergies, between Ingram Digital Ventures and other major operating divisions at Ingram, including Ingram Book (a wholesaler of print books) and Ingram Lightning Source (a POD provider).
Figure 9 is best read starting from the middle, with the green panels of Ingram Digital Ventures. Having processed publishers' content through its conversion, storage, and management services, Ingram is able to serve content to various DARs, or to serve the content as an e-book (sold through Ingram Book or otherwise), or to send the digital asset for print-on-demand production at Ingram Lightning Source.
This example shows how multi-faceted and integrated a digital distribution system can be, and highlights the advantages of a dominant market position in the digital marketplace—an issue that will be further explored in the following section.
6.3 The Influence of Market Leaders
There are some remarkable parallels between this emerging digital distribution marketplace and the supply chain for print books. Most notably, the digital channel also favours larger players. There are powerful gatekeepers emerging in the digital content marketplace—with every bit, or more, of the market power attributed to category leaders in print distribution.
Further, there is considerable momentum—mainly because of the level of investment required to build a comprehensive digital infrastructure and the resulting drive for economies of scale—toward consolidation of the distribution function in the hands of a relatively small number of companies.
In an interesting example of how this phenomenon can play out in the digital marketplace, Amazon announced in March 2008 that print-on-demand publishers and self-published authors with titles for sale on Amazon must use the Amazon-owned BookSurge print-on-demand printer to print their titles. In other words, authors or publishers who choose not to print with BookSurge will effectively not be able to sell through the market's leading online retailer.
Also as in the print supply chain, the market's largest publishers/content owners have opted to invest in their own DAD services, either by acquiring a related company (as in the case of HarperCollins) or by building a proprietary system from scratch as Random House has done. These firms operate on a scale that supports their direct participation in digital asset distribution in this way.
Similarly, the market dynamic favours the market leaders in distribution, such as Ingram. These companies can accommodate the investment required to build infrastructure for digital distribution. They have additional advantages in (1) their expertise in content markets, and (2) established business relationships with both publishers and DARs.
In all cases, these large firms can achieve the economies of scale required for long-term success in the digital supply chain. These scale effects allow a market-leading firm to deliver digital distribution services on a cost-effective basis for publishers, and also to support the ongoing development and systems improvements required in the dynamic marketplace for digital content.
In contrast, this also means that most publishing houses will find contracting digital distribution to a DAD to be the most effective approach—as opposed to managing this function in-house.
This last point underscores a pattern that we have seen throughout this chapter in that there are a number of important relationships between the print and digital distribution environments. While the digital marketplace is still taking shape, these parallels provide a basis for some broad observations of how the market for digital content is likely to develop.
In general, we expect the following:
- continued integration of print and digitized book content with respect to their sales and distribution;
- increased market share for digitized book content, and increased availability of digitized book content generally; and
- continued strength and market-shaping influence of category-leading firms—both in terms of the activities of larger trade and educational publishers as well as way in which dominant internet-based firms such as Amazon or Google are exerting an increasing control over digital book content.
1 Eugene Schwartz in "Distribution Goes Digital," Book Business, August 2007.
2 "Publishing and Digital Change: What's Next?" Mike Shatzkin, from a speech to the Association of Book Publishers of British Columbia, February 2006.
3 The American Association of Publishers and the International Digital Publishing Forum have reported a 400% increase in wholesale e-book sales in the US from 2002 to 2007, though the $67M in e-book sales reported in 2007 represented less than 1% of the $25B US book market. This pattern is reflected in library expenditures as well. In 2002, Canada's public libraries spent 82% of their materials budgets on print resources in 2002, but by 2006 the share of budget for print resources had fallen to 74%.
4 "Publishing and Digital Change: What's Next?" Mike Shatzkin, from a speech to the Association of Book Publishers of British Columbia, February 2006.
5 Educational publishers have a further option through Bibliovault, a digital repository, conversion, and asset delivery service operated by the University of Chicago Press.