Do readers dream of e books (atkearney, febrero 2011)

Do Readers Dream
of Electronic Books?
Reshaping the publishing industry amid the e-book revolution

A
mazon has the Kindle, Apple the iPad, Sony the Reader and Barnes
& Noble the Nook. The race is on as an e-reader phenomenon
that began in the United States is ready to spread to Europe and
beyond. More players are fighting for more customers in an ever-growing
electronic book market, and within 10 years e-books could represent up
to 20 percent of the total book market. The question is: What impact will
e-books have on the global publishing industry?

The e-book revolution has begun, capturing market has constricted slightly, e-book sales in the
consumers’ imaginations and pocketbooks. More trade sector have grown five-fold in three years, to
people today are downloading e-books, a trend $165 million in 2009, or roughly 1.3 percent of
that will only accelerate in the next decade and the market, according to the International Digital
undoubtedly change the publishing value chain. Publishing Forum. It could reach 20 percent pen-
Core industry participants—printing companies, etration within seven years (see sidebar: What Took
distributors and book retailers—will find it diffi- So Long for E-Books? on page 2).
cult to adapt. While some existing players and U.S. e-book penetration differs by segment
newcomers to the market— publishers, authors, and target sector. Within the non-trade sector,
telecommunications operators and device manu- which includes educational, reference, technical
facturers—will find this an ideal time to capitalize and scientific books, e-book penetration is near 30
on the opportunities. percent and rising, thanks to their easy access (from
In this paper, we analyze the evolution of the university workstations), search options (diction-
e-book market, the main factors around its aries and research papers) and storage capacity
growth, recent trends in the United States and (educational books and technical manuals).
Europe, and the changing structure of the pub- The real revolution, however, is occurring in
lishing value chain. Our goal is to answer a larger the trade sector. E-book sales increased 213 per-
question: What should the publishing industry cent year-over-year from 2008 to 2009, and while
expect and how should they prepare? penetration and market value remain low, future
growth forecasts are high and growing.
A World of E-Books, Finally How e-books will affect the overall publishing
After years of false starts, e-books finally took off market is hotly debated. Some believe an overall
in the United States. While the overall publishing decrease in market value is logical, since e-books

DO READERS DREAM OF ELECTRONIC BOOKS? | A.T Kearney
. 1

generally cost about half the price of paper books. effect is a limited decrease in market size and
Conversely, Amazon has asserted that e-readers a significant shift in customer mix.
such as the Kindle are not cannibalizing hard- The supporting devices used for e-books
copy sales; it says that Kindle owners are reading offer relevant insights as well. According to the
more than they would otherwise because of the Association of American Publishers, e-readers
convenience of buying new books, and that account for about 40 percent of total down-
loads of e-books; iPods, iPhones
and mp3 players account for
another 20 percent; and per-
E-book sales in the trade sector sonal computers represent the
remaining 40 percent. Further
have grown five-fold in three analysis suggests that most
downloads to PCs are not com-
years, to $165 million in 2009, or parable with e-reader down-
loads, as they relate mainly to
roughly 1.3 percent of the market. non-trade books (such as tech-
nical manuals), or products
that are eventually transferred
to e-readers or mobile devices.1
e-books are in fact increasing overall revenues.
We have analyzed recent sales data and believe the Future Scenarios in Europe
reality is somewhere in between: Between 30 and Based on the current experience in the U.S. market
40 percent of e-book sales represent incremental and taking into account lessons learned from other
gains in consumption, while the remainder is sectors, we believe the e-reader market in Europe
a cannibalization of paper books. The compound will be shaped by the following factors:

What Took So Long for E-Books?
E-books are not new—they have allows for a more enjoyable, user- and services online, such as music
received considerable attention since friendly experience—such as paper- and tickets.
the 1990s, when industry observers like reading. “Digital” environment. Digital
projected they would replace paper Supporting devices. Digital books are easier than ever to obtain—
books in a very short time. However, books can be read on e-readers, both new and old, such as through
it took a decade for sales to take off. but they can also go on laptops and the digitization of out-of-copyright
What happened this time around? mobile devices that have wider reach. publications from Google Books.
Why are e-books suddenly popular? Consumer attitude. People are
A new generation of e-readers. more accustomed than they were
New devices have technology that 10 years ago to purchasing products

1
For further details on the e-reader, see “The E-Reader (R)evolution,” at www.atkearney.com.

2 DO READERS DREAM OF ELECTRONIC BOOKS? | A.T Kearney
.

Enhanced technology devices. The devices Technical proficiency. A cultural “digitiza-
of the future will be colorful and fashionable while tion” will increase the number of people using
also maintaining flexible hardware, animation and e-readers, and those who can adopt them for
competitive prices. personal use easily.
Product availability. Consumers will have We see two different patterns for how these
increasing choices over pricing and the breadth of factors will increase the penetration of e-books,
the e-book catalog. based on the country. On one side, more “digitized”
Improved content. Multimedia convergence countries, similar to the United States in terms of
and the use of “apps” is destined to grow, ren- digital friendliness with a direct presence of Web
dering the e-reading experience closer to that of portals such as Amazon, will adopt the new tech-
printed books. nologies early. These countries include the United
Editors’ attitude or resistance. Particularly in Kingdom, Germany and those in Scandinavia—
non-English speaking countries, some within the places where we expect digital books to reach 20
industry are resisting the move to new media. percent share in 10 years. On the other side, less
Presence and power of major international digitized countries such as Italy, Spain, Greece and
players. Amazon and Apple’s popular designs and those in Eastern Europe have gaps in one or more
early presence in the market will give them the of the main factors, and will likely reach only 10
early advantage. percent penetration by 2020 (see figure 1).

Figure 1
As total book sales dip, e-book sales will rise

Percentage of total book sales
(base 2010)
100%

Total book market
80%

60%
Paper book
market

40%

20% “Digitized”countries
Less “digitized”
countries
0%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Note: Excludes non-trade books Source: A.T. Kearney analysis

. 3

Figure 2
E-books will usher in new activities and players in the publishing value chain

Existing publishing players

Distribution
Publisher Printers Booksellers
companies

E-book activities
Placement
Online Electronic
Publishing Digitizing Promoting on book
placement distribution
device

Players

• Publishers • Publishers • Publishers • Existing online • Telecom • Producers
• Digital • Existing stores companies of electronic
warehouses promoters • New players devices

Minor or no modifications Major modifications in activity New activity Source: A.T. Kearney analysis
in activity

Overall, we expect the value of the publish- structures from Apple and Amazon — quite simi-
ing market to decrease by 10 to 15 percent in the lar to what they receive for a hard copy. While
next 10 years. Price cuts (in terms of e-books competition may eventually drive prices down,
versus hardcover) and illegal downloads will have there is still a significant opportunity to increase
limited impact, as we assume the main players— revenues and margins through a clear multimedia
particularly Amazon and Apple — successfully strategy that can succeed in many different chan-
battle piracy, adopt the lessons from the online nels, new and old. In light of the uncertainty and
music market, and create the right thresholds for the strength of new players, publishers might
pricing (see sidebar: Lessons Learned from Other want to take an asset-light approach, avoiding
Digital Revolutions). big investments in IT systems to focus instead
on content development and generating addi-
Implications for the Old-Timers tional demand.
The introduction of e-books is reshaping the pub- Perhaps the most relevant threat to publishers
lishing value chain for the publishers, printing is if new technology allows authors to sell digital
companies, distributors and book retailers that rights directly to online stores. The most likely
have anchored the industry for years. How is the areas where this will happen are on opposite ends
balance of power shifting for these existing players of the spectrum. Newcomers that are usually
(see figure 2)? filtered out by traditional publishers could find
Publishers. E-book publishers receive about greater ease of publishing. Meanwhile, big-name,
$4 to $5 per e-book, according to recent pricing blockbuster authors could go out on their own —

.

Stephen R. Covey and Stephen King have already players will need to focus on the sub-segments
done this with exclusive Kindle arrangements. that are still not typically digital, such as illus-
Printers. Clearly, e-book growth brings more trated books, or on countries where digitization is
threats than opportunities for printing compa- coming slowly.
nies. E-book growth will drive down volume sales, Long term, they must prepare for a future
essential for countering the costs of large, expen- in which digital books become more wide-
sive printing machines. In the short run, these spread. In particular, printing companies should

Lessons Learned from Other Digital Revolutions
E-books arrived late to the digit- and legally by charging for down- mid-2000s as prices and quality
ization party — after music, photog- loads. In the United States, digital improved. By 2006, digital pictures
raphy and video had already gone music accounted for more than accounted for 60 percent of photos;
through massive changes (see figure). 40 percent of the music market, in 2010 penetration is expected to
Let’s examine the lessons these mar- thanks largely to Apple’s explosively be more than 90 percent.
kets can teach us. popular iPod. However, because of Video. File downloading remains
Music. Digital music entered the piracy, falling prices and competition limited in this sector, which includes
mainstream in 1999 with Napster, from other entertainment, the over- DVDs and VHS, with market share
whose peer-to-peer technology all music market is nowhere near only reaching 10 percent. Technolog-
allowed users to share mp3 files. what it used to be. ical constraints influencing download
Although Napster was eventually Photography. Digital cameras time and quality have slowed this
forced to shut down, many other gained mass-market steam in the market, but the recent growth of
operators have offered similar ser- mid-1990s and eventually ushered online rentals through Netflix means
vices to online customers, both ille- in a radical change in photography. this may be changing.
gally using peer-to-peer technology Usage increased steeply in the

Figure: What can e-books learn from other digital revolutions?

Key lessons learned Possible implications for e-books
• 10 years after Napster, the music market lost • Increases piracy and further reduces prices
marketshare mainly due to piracy and falling prices • Improves e-book sales as online stores, e-readers
Music • Digital music rose, fostered by online stores and multipurpose devices gain steam
and the iPod as a fashion item

• Digital photo penetration rose as camera prices • Boosts e-book market growth as e-reader prices
fell and quality of pictures improved fall and device quality improves
Photography • Switch is almost complete, but many still prefer • Considers offering print-on-demand services (after
to print their pictures analyzing customer reasoning behind printing
of digital photos)

• Digital penetration in the video sector is limited • Damages e-book sales due to current technology
due to technology constraints and poor quality constraints (for example, backlit screen, trouble
Video of streaming reading in sunlight)

Source: A.T. Kearney analysis

. 5

focus on making their businesses more sustain- will likely cannibalize existing sales. Lower prices
able by expanding their offerings to include next- may force book retailers to provide more dis-
generation, cost-effective digital printing. This counts and promotions, which would affect all
is already taking place in some countries, where book shops from independent dealers to major
some printers have become digital warehouses chains. The larger chains can mitigate the impact
for small publishers—one-stop shops for printing, by adopting a multi-channel strategy that includes
digitizing, distributing and promoting books for e-books in their online selling portfolio.
publishers not large enough to do it on their own.
Distribution companies. E-book proliferation What About the Newcomers?
will affect distributors more than printers, yet even While facing incredible growth opportunities, the
in the most aggressive scenarios, there remain sig- newer players in this e-book market face some
nificant opportunities to consolidate the market threats. Let’s look at their prospects.
Telecommunications companies.
Telecom companies face some impact
on their revenues from increased data
Retail booksellers can miti- flow over their networks. Major reve-
nue changes could come from offering
gate the impact of e-books more services to existing customers,
and by assuming the role of technol-
with a multi-channel strategy ogy and data provider. A market flush

that includes e-books in their with small publishers coupled with the
complexity of managing and updating
online sales portfolio. large product databases could make
these firms excellent partners for large
book retailers.
Media companies. Convergence is
profitably by restructuring operations, rethinking the name of the game for media companies.
service offerings, reducing costs and managing the E-book devices’ expansion into different areas
customer base better. The leaders can succeed along the value chain could result in downward
while broadening their services and offerings integration, such as bundled offers that combine
through efficiency improvements, including opti- devices, content and platforms.
mized logistics networks and redesigned internal Device manufacturers. Amazon and Apple
processes. New services could include new digital dominate the market for now, leaving limited
printing, digital warehouses, promotion and adver- opportunities for other manufacturers in some
tising on the e-market, and distributing other prod- markets. The top opportunity may be in partner-
uct categories. ing with local book retailers to accelerate market
Booksellers. Traditional booksellers will be entry. We expect the market to split in two ways:
most affected by e-book growth. Even if we esti- branded devices that continually launch innova-
mate that about 30 to 40 percent of e-book sales tive and multi-purpose products, and cheaper
will lead to new revenues, the remaining amount products that use open formats that can be easily

.

personalized by major e-retailers. There is little strive for operational excellence, with a radical
space in between for positioning, so the leaders approach to improving efficiencies and offering
will be those that define and pursue a clear and more tailored services.
profitable strategy. While e-books grow in prominence and
profitability, paper books will likely continue to
Rock, Paper, Scissors dominate. As the two formats coexist, leading
Two major imperatives await current industry companies will develop, distribute and sell new
players. First, they must pursue industry develop- multimedia content and formats that account for
ment, exploring innovation and new business the value that hard copies can still generate.
paradigms without a defensive approach. New In the years ahead, continuous improvement
players will arrive and easily adopt innovative will not be enough as this industry prepares for
concepts to take the lead. Second, they must a step-change transformation.

Authors
Marco Santino is a partner in the operations practice. Based in the Rome office, he can be reached
at marco.santino@atkearney.com.
Giovanni Bonfanti is a principal in the communications and media practice. Based in the Milan office,
he can be reached at giovanni.bonfanti@atkearney.com.
Omar Carcano is a consultant in the Milan office. He can be reached at omar.carcano@atkearney.com.

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Do readers dream of e books (atkearney, febrero 2011)

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