July 01, 2008

Bookstores Are Going to Close

At some point in the future, electronic books are going to put almost all bookstores out of business.


I don't like it. Even if I wasn't a bookseller, I wouldn't like it. But it's going to happen unless something really, really extraordinary happens. And I mean extraordinary on the level of World War III, a super flu that wipes out 50% of the world's population or perhaps an extinction-level asteroid strike.

The big question is how soon.

Welcome to my last article in a series of four on current trends in the book business. Last month I warned you this was going to be a gloomy set of predictions. Well, here we go.

You might have noticed that in previous articles I have stayed clear of making predictions of exactly what will happen. I'm not going to do that this month. If you're thinking, "That'll never happen. No one wants to give up books. Reading on a screen will never replace the feel and experience of curling up with a good book. People love books and won't give them up," -- please, shelve those thoughts until you get to the end of this article. Put that kind of thinking, and the emotions that go with it, aside because what I'm going to talk about has little to do with emotions and everything to do with money and convenience. And, sadly, it also has surprisingly little to do with the desires of people who love books. But we'll get into all that in a bit.

The Technology

Electronic Books (eBooks hereafter) really aren't very complicated or magical. Any model for eBooks has three parts. The first part is a device to read them on -- which can either be a dedicated eBook Reader (eReader hereafter) like Amazon.com's Kindle or some other electronic device, like a personal computer, smart phone (like Apple's iPhone or a Blackberry), MP3 player, or personal digital organizer (like the ones made by Palm). As you would expect, eReaders work right out of the box but other types of devices may need a (usually free) piece of software to read some types of eBooks.

The second part is the actual data-file that contains the words and (sometimes) pictures that make up the content of the eBook. For convenience, I'll call these files "eBooks" from now on since they are the core of the whole thing. The eBook is what the device actually displays. eBooks come in a variety of formats, just like text documents or digital photographs. Some of the formats (like plain text or RTF (Rich Text Format) are very simple and accessible to anyone who has a computer. Some are a bit less accessible and require specific types of software to read (such as PDF or HTML). All the preceding types of files are designed for storing pretty much any type of text and are not specifically designed for eBooks. Finally there are file formats that are specifically designed for eBooks, such as LRF (Sony's format), mobi (used by MobiPocket Reader, software that works on a variety of devices, including smart phones and computers), and AZW (used on the Kindle). One major difference between these purpose-built formats and others, is that they can be protected against copying and unauthorized distribution (with varying degrees of success). This quality makes them the preferred choice for publishers who plan on selling eBooks (more on that later).

The final piece is a distribution system for the eBooks. This ranges from the volunteer-operated Project Gutenberg (which has a _huge_, free library of public domain works) through publishers' web sites (Baen Books is a pioneer in the eBook field) all the way to Amazon.com and Sony. Individual authors have also offered their works for free on the internet, notably Cory Doctorow, Charles Stross, and John Scalzi. In short, there are a large number of sources on the internet for eBooks but many of the free ones require a bit of expertise to access and read easily, especially on portable devices, as opposed to sources of content for eReaders (like Amazon.com and Sony) which, though fee-based, are very simple for the average person to use.

eBooks have been around a long time in their simplest form. The first one that I read was a copy of Poe's work from Project Gutenberg and I read in on a Apple Newton PDA in 1995. But, there have been some major changes in the past year that have made eBooks much more attractive and accessible to average consumers. For eBooks to be a reasonable choice for an average user (with a decent income), all three of the parts that I just listed have to work really well. There has to be a good distribution system that people are comfortable with and that can supply a broad range of titles that people want. There has to be equipment to read on that is ubiquitous and/or well suited to reading long sections of text. And, there have to be formats that can be copy-protected so that publishers will feel that they are assured of making a profit that won't be diluted by piracy. Without all these things in place, eBooks remain what they have been since the early '90s -- a curiosity.

Last year, all the pieces were in place.

The first thing was a new type of display called "eInk" (don't you get tired of all those little "e"s and "i"s nowadays?). Without going on too long, there are three neat things about it. First, it doesn't flicker or glow like a computer screen. Second, the letters are black on a light grey background that doesn't wash out in the sun. Finally, it uses very little battery power to function. In fact it uses _no_ battery power to display a page of text -- it only uses power when you change pages. Despite manufacturers' claims, it doesn't look very much like ink on paper. But it does look much, much better than any other type of display and, based on users' comments, it looks _enough_ like paper (sort of like the typical MP3 file compared to a CD -- not as good, but good enough). Other than being limited to displaying black, white and limited shades of gray, the only real downside to eInk is that changing the contents of the display is a bit slow and the screen turns black for just a moment when you move to the next page. (Side note - Epson is getting close to releasing a new type of controller for eInk that will shorten this delay to the point that it is almost unnoticeable). Many of the current crop of eReaders use this type of screen including the nicely designed Sony eReader ($299), the Amazon Kindle ($359), and the top-of-the-line iRex iLiad ($699).

The second thing that changed is that Amazon.com jumped into the eBook game in a big way, both by producing their own eReader and by quickly building the largest catalog of non-public domain eBooks in the world. At this point Amazon has over 125,000 titles available for sale as eBooks and they're busily using their power as US publishing's #2 customer (only Barnes & Noble sells more books) to get more and more publishers to make their titles available as eBooks. All this represents a serious amount of money, both in Amazon's investment and in the potential sales income for publishers. Amazon is very significant in the eBook equation because these moves have satisfied all three of the requirements I mentioned above -- Amazon's distribution is excellent and used by a large number of average people, the technology for eReaders is good enough, and there's a big catalog of titles out there to be bought.

As the icing on the cake, Amazon also added another twist -- wireless ordering. Every Kindle has wireless internet access via the same networks that cell phones work on. Which means that books can be selected at Amazon.com, ordered, and downloaded to the Kindle anytime and anywhere there is cell phone service.

The Customers

But do people _like_ reading on a screen, even a screen that looks more like paper than a computer? And do people actually _want_ eBooks? To both questions the answer is, "Sort of but not really."

Let me throw out some numbers.

*A recent survey of 344 random computer users performed by Piper Jaffray & Co. gave this result - 71% said, in essence, that they wouldn't consider buying an eReader. In fact, 71% said they wouldn't want an eReader, regardless of the price.

*Of the titles that Amazon has available as both physical books and eBooks, eBooks sales are at 6%. In other words, for every copy of a title that's bought as an eBook, people buy fifteen physical copies.

*Simon and Schuster's eBook sales increased by 40% in 2007 compared to 2006 and it's looking like the increase will be more than 100% in 2008. Still, the probable final figure for eBook sales this year will only be 0.2% of S&S's total sales.

*Penguin Putnam's eBook sales for the first four months of this year were greater than all of last year's sales. So, if this continues, their sales should increase by 200% this year.

*Last year eBook sales overall represented a tiny quarter of a percentage point of all book sales, but that's still 67 million dollars spent on eBooks last year.

*eBooks range from being a bit cheaper to _a lot_ cheaper (i.e. $9.99 at Amazon for a bestseller that's going for $27.95) than their physical counterparts.

What all that says to me is that the sales of eBooks are growing really very fast but that's in part because the numbers were really very small to start with. It also says to me that 29% of people would consider an eBook reader. Please do remember that number, it'll be important later.

Regardless of the survey results, there are some groups of customers who are a perfect fit for eBooks and who will probably adopt them with enthusiasm.

Tech People. Reference books are big, expensive (often due to small print runs), and go out of date quickly. Medical personnel, technicians, IT people, and programmers are all groups who would like something that could hold a bunch of books without weighing a ton. If they could get updates wirelessly, that would be even better.

Students. I remember with discomfort the backpack of books that I had to carry around. It's a good thing that students are often young, otherwise I'm not sure they could carry the weight. And lower long term costs (eReaders are expensive but the books are cheaper) are a big plus as well. These are some of the reasons why Oxford, Yale, Princeton and the University of California have all started making text books available as eBooks. It also makes in easier on the University bookstores since they don't have to worry about over-ordering or not having enough copies on hand.

Travelers. Not only could you bring your pleasure reading for a six-month long trip in your carry-on but wouldn't it be nice to bring two or three travel guides as well?

Developing Countries. Even a basic eReader is likely to be as damage-resistant as a soft cover book, but what happens if someone starts marketing a ruggedized eReader (perhaps with a solar charging option - remember how little power the new displays use)? Enough readers for a school full of children would probably cost less than buying, shipping and housing a library for the same school. And the number of books that could be stored is pretty much unlimited (as well as being free if they're in the public domain -- remember Project Gutenberg?).

So, there are advantages to eBooks for some people and there are some people who like the idea, but overall most readers are quite happy with books as they are and don't really want a change. So what the hell was I talking about at the beginning of this article?

The Money

The majority of readers want physical books (based on that survey, 71% of them do). But 71% of readers ARE NOT ENOUGH PEOPLE TO KEEP BOOKSTORES IN BUSINESS.

Sorry about "yelling," but I've been hearing the argument that "people love books, they'll never go away" for a long time while I've also been watching the beginnings of the avalanche that's going to take out my business and many other businesses that I love.

Bottom line is this -- I don't believe that there is one bookstore in ten that could survive a 29% drop in sales. And I'm including Borders and probably Barnes & Noble in that figure. Closer to home, I'd probably be able to operate for about six months if sales dropped by 29% across the board and by the end, the store would be stripped of stock because I wouldn't be able to buy more.

Long term, I'm not sure that I could stay open if I lost 15% of my sales and there are many other stores in the same position.

Now that I'm done ranting, let's step back for a second and play a scenario out. Please note that, just for the purposes of this example, I'm going to give a firm timeline but, as I said at the beginning of this article, I don't actually know how quickly or slowly this will play out.

This year, eBook sales go up by 100%. That means that overall they represent 0.5% of all book sales. This trend continues for three years. Now, in 2011, eBooks are 4% of total sales. Still a very small number but not trivial. Several things have been driving this increase --

- eReaders have been getting cheaper and better (let's say that the entry price has dropped by half to $150, which is a quite conservative drop compared to other consumer electronics)

- Prices for eBooks have stabilized at close to 50% of the cost of a physical copy of the work as publishers and authors have seen that they net the same profit at this price point since there are no printing, storage, or shipping expenses for eBooks

- Shipping costs have increased due to fuel costs and that has brought up the price of physical books (regardless of whether the book was brought on-line or in a store,) whereas the price of eBooks is unchanged

- Students have gotten used to eBooks at school and continue to use them after they graduate while new students take them for granted

- Environmental consciousness has attracted people to eReaders, especially for "disposable" material like newspapers, since they save trees and gas. (Side note - a number of prominent papers like the New York Times are already available for the Kindle)

- More and more people carry devices (smart phones and wireless internet devices like laptops) that can be used for eBooks and take advantage of the content that is available, even if that's not the primary reason they carry the device

But the most major change is that publishers, though originally quite opposed to eBooks, realize that books that wouldn't sell enough copies to justify a print run of physical books can be profitable if released only in eBook format because, as we've seen with print-on-demand publishing, the financial risk in publishing is primarily due to the cost of printing, shipping and storing physical books. Also, authors realize that there is a market, albeit small, for their out-of-print works to be "re-released" as eBooks. As a result, eBooks become a profitable new tier below mass market paperbacks and short-run softcovers for books that have a small audience.

This sales increase has caused a corresponding loss of sales for bookstores which, combined with other increases in overhead (like shipping costs), starts to drive the most marginal independent stores out of business as well as closing poor-performing chain locations. As stores start to close, people's access to books decreases, unless they buy on-line and pay shipping charges (which have almost doubled in the past three years due to fuel shortages). Some percentage of readers (29% perhaps), now that their local store is closed, try eBooks and like them. This further increases the customer base for eBooks.

Since there are more and more books appearing that are _only_ available as eBooks, more people start reading eBooks when that is the only way to get their favored author's work. Some of these people even print the books out at home on their printers because they can't stand reading on a screen. But even they are buying eBooks.

It's 2013 and eBook sales have gained a few more percentage points to 7% of the market. Publishers are discovering that eBook sales are eating into the sales of physical books to the degree that it's getting harder to affordably publish physical copies of books by mid-list authors. In essence, the sales bar for profitability is moving upwards as there are both fewer customers for physical books and fewer markets for them (due to stores closing). But there isn't a way back to the old status quo because, if eBook income were eliminated, the consequence for the publishers would be even worse financially. So, more books are published only as eBooks. Which further builds the market.

At the same time, many of the factors that boosted eBook sales in the first place are continuing to affect the market - younger readers are still being introduced to eReaders in school, the hardware is still getting cheaper and better, and still more people are carrying something day in and day out that will display eBooks. And so the numbers continue to climb as we approach 2015.

It's 2015 and eBooks hit ten percent of book sales. Now the store closures start in earnest. Which accelerates the cycle that's started. More eBook-only editions, more out-of-print works as eBooks and more people switch to reading them. But still things aren't so bad. 90% of people still want physical books. Based on survey numbers, all the people who in 2008 were willing to try eBooks (29%) haven't switched over yet.

But the process continues. An author's level of popularity has to be higher and higher for a physical printing of their book to be profitable. More books are only published as eBooks because it so damn cheap and efficient. Which drives more adoption of eBooks. And more kids learn to read on a screen and add to the numbers. And the devices to read eBooks get better, cheaper and more common.

And bookstores close.

It's not a picture that I like but I don't see any way that it's not going to happen. You can argue about the timeline and you can disagree with the assumptions (who knows if eReaders will work out in schools, might not happen) but there are two things that are key -

1) There are a huge number of factors that are pushing in the direction of eBooks - price, convenience, environmental concerns, easy storage and backup of your library, and so on. And there is little pushing back other than people's affection for books and dislike of change.

2) eBooks _do not_ have to _replace_ books to eliminate the majority of bookstores, they just have to attract ten to twenty percent of books sales (counted by number of books, _not_ sales dollars).


Will bookstores completely vanish? I don't think so. In fact, I think that there will still be bookstores and people printing books a couple of centuries from now. (If you've ever been in a synagogue you probably noticed that people are still making _scrolls_ and they went out of style centuries ago.)

But bookstores won't be the same. I think that, at some point down the road (and, I should point out, close enough that we might live to see it), bookstores will be small, very upscale shops. They'll mostly be in big cities and the stock will be very limited and very expensive. They'll be filled with rare first editions, the kind that sell in the $100 and up range now, and they'll also have beautiful, hand-bound limited editions of modern classics that were printed on letter presses. And they won't have much else. Any other book that you want, you'll buy on-line and it'll be shipped to you . . . or you'll download it.

I think that we have lived through what will be looked back on as the golden age of the bookstore. The chain stores started the end, the internet opened the final chapter, and the eBook is going to close it.

But it's not a bad thing, really. I'm a reader first and a bookseller second. What a lovely prospect it is to imagine a time when I can have my entire library with me, wherever I go. And never again to have to get rid of a book because I just don't have room for it (or I can't face moving to a new apartment). Moreover, I think that we're arriving at a time where a disaster like the burning of the library at Alexandria can't happen again - what the human race has written thus far might be able to persist as long as our race is around. Perhaps longer. It's a good trade for people and the world at large. But I'm not comfortable with it and I probably never will be.

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