Scribd, Rooster try to enhance e-book publishing

Rooster service creators: CEO Jennifer 8. Lee (left), Editorial Director Yael Goldstein and CTO Jacky Chang. Rooster service creators: CEO Jennifer 8. Lee (left), Editorial Director Yael Goldstein and CTO Jacky Chang. Photo: Michael Short, The Chronicle Photo: Michael Short, The Chronicle Image 1 of / 4 Caption Close Scribd, Rooster try to enhance e-book publishing 1 / 4 Back to Gallery

When "The Search for General Tso," a documentary on the history of Chinese food in America, debuted in April, Jennifer 8. Lee eagerly logged onto Amazon.com. The film was based on her book "The Fortune Cookie Chronicles," so Lee wanted to see if the movie boosted sales of the 2008 best-seller.

Unfortunately, Amazon said the book was not available for several weeks.

"I was pretty shocked," Lee said.

As it turns out, Hachette, the book's publisher, has been battling Amazon over how to split revenue from e-books. To pressure Hachette, Amazon has been delaying orders of books from Lee and other Hachette authors like J.K. Rowling, James Patterson and Stephen Colbert.

For many, that would be a big bummer. But Lee, a former New York Times reporter, could see a silver lining: the Amazon-Hachette spat further justified the raison d'etre of her current project.

Lee is the co-founder of Rooster, which along with fellow Bay Area startup Scribd is trying to forge a new business model for the notoriously stodgy publishing industry.

Unlike music, movies and journalism, publishing has largely managed to resist the Internet age - even with the advent of the e-book. Many literary agents still accept only hard-copy proposals from aspiring authors (including stamped self-addressed envelopes). Publishers still sign authors, develop manuscripts and market the work (no disruption there). Retailers like Amazon, Barnes & Noble and a dwindling number of independent bookstores sell the books, keeping a percentage of the proceeds from each hardcover, paperback and now e-book sold.

But the growth of e-books and the market dominance of Amazon has started to change the calculus, which why the industry is closely watching the Amazon-Hachette rumble.

According to industry publication Publishers Lunch, Amazon last year accounted for 60 percent ($115 billion) of Hachette's e-book sales in the United States, about three times more than Apple and Barnes & Noble combined.

Limited market

The dispute "highlights the need for a diverse marketplace that will help connect readers with books," said Andrew Weinstein, vice president of content acquisition for Scribd. "There have been no significant new players entering the (distribution) market. There are smaller players starting up, but they're small."

Amazon is reportedly seeking to boost its commission of Hachette e-books to 40 or 50 percent from the current of 30 percent. That doesn't include the discounts Amazons gets on the print side. Publisher's Lunch estimates that Amazon's e-book demands would cost Hachette between 22 and 45 percent of American profits last year.

"Amazon will point to the profit margins of some publishers as evidence that the digital transition has made trade publishers more profitable - thanks to the investments of retailers, who see themselves as entitled to at least a share of those gains," the publication said.

Publishers, of course, sell books on their own websites. But book customers have favorite authors and titles - not publishing houses - and most couldn't care less about who printed the work.

Rooster and Scribd both say they can help publishers by offering subscription models that will expand readers' appetite for books. In Rooster's case, the startup has developed an app that presents books in a mobile-friendly format. For $4.99 a month, Rooster digitally delivers two fiction books in easy-to-read installments each day.

"Rooster is a curated reading service," Lee said. "Right now, I think a lot of the mobile reading apps are copies of hardware formats. The idea is that you have little bits of content you can tuck in throughout the day. It's very good engagement. Books are often overwhelming and we're helping you finish that book that you bought."

For $8.95 a month, Scribd offers unlimited access to 400,000 titles. Each time a reader finishes an e-book, Scribd pays the publisher its usual e-book commission. In addition to the hard-core readers, the company wants casual readers "who just like the idea of trying out the service," Weinstein said.

There lies the risk. For Scribd to make money, the startup needs to attract a lot more casual readers who might go through one or two books each month, in part to subsidize the commissions it pays to publishers for the customers who devour many books each month.

"Scribd takes on the financial risk," Weinstein said. "The biggest risk is that people stop reading, or not read as much."

In fact, the business models of both startups only work if they can significantly grow the market for e-books. For Rooster, attracting customers is all about making books easy to read on smartphones; for Scribd, it comes down to the pricing.

Sales flattening

Unfortunately, after years of double- and triple-digit growth, e-books sales last year increased only 3.8 percent to $1.3 billion, according to the Association of American Publishers. Hachette is forecasting lower e-book sales in the United States over the next three years.

Ironically, printed books have held up relatively well. Unlike CDs and DVDs, very few people have completely replaced the physical book with the digital version.

A recent report by the Pew Research Internet Project said the percentage of adults who read an e-book last year rose to 28 percent from 23 percent at the end of 2012. At the same time, about 7 in 10 Americans reported reading a book in print, up four percentage points during the same period.

That could pose headaches for Rooster and Scribd. The two companies control only a small percentage of the e-book market so they need to constantly expand their assortments by signing more publishers. But as long as print books hold steady and e-book growth stagnates, publishers might not see a reason to do so.

Then again, the Amazon-Hachette row should remind publishers how much one distributor dominates the market. Cultivating multiple distribution channels is wise strategy.

"We love publishers," Lee said. "We want to help them."