Strategy

Boom and bust in the book biz

As e-books squeeze the bricks-and-mortar chains, a venerable business is in turmoil.

The inflection point in the booming electronic book marketplace has arrived.

In July, online bookseller Amazon.com announced that quarterly sales of e-books for the company’s popular Kindle e-reader had exceeded those of hardcovers for the first time. Astonishing, said Amazon CEO Jeff Bezos, “when you consider that we’ve been selling hardcover books for 15 years, and Kindle books for 33 months.”

The surge may be due in part to the launch of Apple’s iPad. Beyond Amazon’s sale of an undisclosed number of books through their Kindle for iPad app, the much-hyped tablet has helped legitimize e-books and raise their profile. It also coincides with what Amazon claims is a tripling in the growth rate of Kindle e-reader sales, thanks to new lower price points and the rollout of a third-generation version of the device.

Those lower prices could squeeze Indigo’s upstart e-book vendor Kobo. The company claims early success for its budget Kobo e-reader and e-book sales that tripled over last quarter, but the Kobo reader seems bare-bones by comparison to the Kindle. Kobo is responding with a new version of its e-reader. U.S. Federal Communications Commission filings show the company is working on a device with wireless capabilities, and, says CEO Michael Serbinis, “you have to expect there will be ongoing price declines.” Kobo is also trying to outflank Amazon by being the first western e-book vendor to crack China. It’s quietly partnered with Hong Kong telecom giant 3 on an e-book store, a beachhead from which they’ll expand into the mainland this fall.

Meanwhile, traditional booksellers continue to struggle. Last week, Barnes & Noble unsettled the industry with the announcement that its board would “evaluate strategic alternatives, including a possible sale of the company” to improve a stock position it believes is “significantly undervalued.”

With some 1,350 stores and a $900-million U.S. market cap, the 137-year-old company is by far the U.S.’s largest traditional bookseller. But Amazon claims to own as much as 80% of the U.S. e-book market, and B&N’s digital store and its Nook e-reader have struggled to catch up. The company’s enormous bricks-and-mortar footprint presents a structural issue that’s helped strip nearly 50% from its stock’s 52-week high, but the company hopes that new investment (or new ownership) will provide the chance to retool.

The big publishing houses have not proven immune to digital disruption, either. Powerful New York???based literary agent Andrew Wylie has unveiled his own e-book imprint, Odyssey Editions. Twenty classic titles, including works by Vladimir Nabokov and Saul Bellow, will be sold exclusively through Amazon. Wylie’s gambit seeks to resolve two issues: the assumption by publishers that existing contracts written before the advent of e-books automatically confer digital publishing rights, and the assumption that authors’ royalty rates should remain at historic levels despite lower e-book production costs for publishers.

Not surprisingly, Wylie’s venture has angered affected publishers, and Random House has said it will do no new business with Wylie because, said a spokesperson, Odyssey “undermines our longstanding commitments to and investments in our authors, and it establishes this Agency as our direct competitor.”

The Financial Times predicted the dispute could “lead to the death of the 500-year-old publishing business as it is known.” More likely, the book business as we know it is already dead.