Before I get stuck in, some revision is in order — notably, a re-reading of CMAP 2: How books are made , and my mid-2007 article , Why the Commercial Ebook Market is Broken . Then continue below for a round-up of some aspects of the ebook biz that are not immediately evident from the headlines.

I am coming to this topic from two different angles. Firstly, I'm an author and some of my books are published through ebook channels. Secondly, I've got a computer science degree — having graduated in 1990, this makes me about as current as someone with an aeronatical engineering degree issued in 1937 — which qualification, along with several years earning my crust as a programmer and as a computer journalist, has fine-tuned my bullshit detector.

There is no topic in the publishing industry this decade that is the source of as many misconceptions, superstitions, lies, plausible untruths, and idiocies as ebooks. Ebooks generate more email to my from my readers than just about any other topic. And the situation is only going to get worse over the next few years, so strap your safety helmet on tight ...

The lessons I'd like you to draw from those two earlier essays are:

1. A manuscript is not the same thing as a book. Just as a random sampling of 100,000 words is not a novel, so too does a finished book differ from a manuscript (the text an author writes, which forms the core of the book). In particular, about 80-90% of the cover price of a book has nothing to do with the paper and ink object you buy in a shop; indeed, using current production standards, ebook production requires nearly as much work as paper book production. (Paper and ink are dirt cheap; proofreaders and marketing teams aren't.)

2. Ebooks differ from paper books insofar as you need a device to read them with. This device, which may be hardware, software, or both, I shall henceforth refer to as a platform. Amazon's Kindle software (or reader) is a platform. The ePub file format standard is part of a platform, which may be the Sony Reader Store/Adobe Digital Editions, or Apple's iBooks (which is just a variant implementation of ePub), or Stanza. The hardware the platform runs on has hitherto been either a PC, or a PDA, or more recently an e-ink based ebook reader, and now (with increasing frequency) a smartphone.

3. The publishing industry has been starting from a doubly-handicapped position. Firstly, publishers are used to having multiple sales channels: hardcovers, trade paperbacks, and mass market paperbacks. (I discussed the financial and structural differences between these markets in CMAP #5.) Ebooks are seen, from a publisher's point of view, as being a new format, to stand beside paperbacks or hardbacks or audio books. That's because this is the way the contracts they negotiate with their authors are set up to allocate rights, and because that's how they're set up to handle the bookkeeping. Selling ebooks cheaply is a threat to their other sales channels — the phrase "cannibalize our market" is commonly used — but readers see ebooks as being less valuable than physical objects because they consistently over-value the paper-and-ink (and we in the publishing business have systematically trained them not to recognize the fact that the price on a book doesn't reflect actual production costs, but a measure of availability — if you want to buy it early, we want to charge you more).

The second handicap hobbling the Big Six publishing multinationals is that they're owned by multimedia conglomerates, and group level policies are set at a level above the publishers — who get very little say in said policy compared to the movie, TV, and music corporations that are also part of the conglomerates. Consequently, dumb, idiotic, stupid policies get imposed by decree ... for example, that Digital Rights Management is mandatory. This worked really well for the music and film industries (not), but the publishers are stuck with it because at the highest level, the executives would rather miss out on a new sales channel entirely than risk destroying their existing ones. Consequently, ebooks have been an afterthought to the publishing industry for over a decade (even though the technology to distribute them over the internet and read them on Palm Pilots and similar PDAs has been around since the mid-1990s).

So it's no surprise that it's taken ebooks a long time to get anywhere in the market. But 2009 was a breakthrough year. Here's a graph taken from the International Digital Publishing Forum, showing recent ebook sales in the US (Click through for more meaty goodness on ebook sales):

US ebook sales rocketed in 2009, growing to over $167M — up nearly 50% on the previous year. Which may sound good, until you realize that according to the Association of American Publishers, the US publishing industry reported book sales of $23.9Bn in 2009. Yes: ebooks accounted for a gigantic 0.7% of the publishing industry's revenue.

(On the other hand, if the 50% compound growth per annum is sustained, they're going to be a major piece of the picture in five to ten years' time.)

So how have things changed since the brokenness of 2007? And what misconceptions do we need to dispel in order to have a hope of understanding what's going on?

Let's take it from the top.

Publishers initially saw ebooks as merely being a different imprint. Early-adopting readers take ebooks for a new medium.

For publishers, treating ebooks as a new imprint is the easiest (laziest) way to handle them, because it means they don't have to redesign their accounting systems, which in turn are built that way because publishers do not own copyright to the books they sell — they license them from authors, and have to be able to calculate the due royalties and open their accounts if challenged.

Amazon screwed with this model when they brought out the Kindle: the contracts they pushed at the publishers defined Amazon as being a publisher, who would license subsidiary rights from the original publisher and republic the books via Kindle. This enabled Amazon to add onerous and arguably anticompetitive contractual terms to their contracts because they weren't simply acting as consignment wholesalers, but as licensees: notably, requiring publishers not to sell ebooks for a lower price elsewhere than Amazon were selling them via their store, and allowing Amazon to pick a price point, sell at that price point, and only pay the publisher a percentage royalty, rather than a fixed discount off a (publisher-set) SRP.

Amazon got what they wanted at first, because they were the biggest ebook vendor; if you're the only game in town you can play hardball. Apple broke this perception earlier this year when they proposed an alternative model: neither wholesaler nor publisher, but agent, taking a commission on whatever the publishers sold their books for.

The agency model is ultimately going to change the structure of the ebook market; if ebooks become more profitable for publishers, we're going to see more of them. And indeed, in the past year I've seen a startling increase in the speed with which ebook editions of my work are rolled out by my publishers.

Readers ... readers see none of this, and wonder what can possibly be so hard about recognizing this revolutionary new medium for what it is ("a library in your pocket/information wants to be free/why are you charging so much for access to the file your authors emailed you?"). Mostly because they've mistaken an elephant's tail for a bell-rope.

Publishers do not develop platforms.

Platforms come from the consumer electronics industry and/or the software business. They are virtually never invented by actual publishers, or even by folks who know what publishers do for a living. The folks who develop platforms hope to get rich by selling software or hardware (harnessing the publishing folks' customers in order to gain consumers for their own product). This probably explains all those "the book will be dead in five years" puff pieces in the press (themselves no strangers to the schadenfreude that goes with some other sector of the old media collapsing in misery around them) — they're the effusions of software marketing drones, and signify nothing about the actual state of the publishing industry. Although they do succeed in scaring the crap out of the dinosaurs, who repeatedly mistake the shiny in the sky for an inbound meteor.

Just contemplate, for a moment, how you'd react to some guy from the IT sector walking into your place of work to evangelize a wonderful new piece of technology that will revolutionize your job, once everybody in the general population shells out £500 for a copy and you do a lot of hard work to teach them how to use it, And, on closer interrogation, you discover that he doesn't actually know what you do for a living; he's just certain that his WNPoT is going to revolutionize it. Now imagine that this happens (different IT marketing guy, different WNPoT, same pack drill) approximately once every two months for a five year period. You'd learn to tune him out, wouldn't you?

This is how publishers have traditionally viewed ebook platforms and readers.

Authors have nothing to do with their ebook editions.

Weird but true. When a hardcover edition comes out, I get to hear a lot about it; reviews, a crate of comp copies, and so on. (If I'm lucky, a launch party.) When a paperback comes out, ditto. But ebooks somehow slither out the back door with no publicity and no attention (and no mechanism to give the author a complementary copy, either). They're very much an afterthought, even in 2009/10. In many cases, ebooks weren't even issued at all until last year. My Merchant Princes series fell between stools: books 1-3 saw ebook editions during an early Tor experiment with ebook publishing. Books 5 and 6 came out in time for a formal group-wide ebook strategy at Holtzbrinck to be in effect, and thus are available as ebooks. But book 4 fell in the gap, and is still awaiting an ebook release. (Yes, I get email about this. A lot.) As often as not, my publishers don't even tell me when a book of mine is going to appear in ebook form. (Hint to my editors: I can't tell readers where to go to buy it if I don't know it exists!)

Publishers inflict DRM on their ebooks.

I shouldn't need to explain why DRM is bad, stupid, and doomed to failure, so I'll leave it to cryptography guru Bruce Schneier, who in 2001 pointed out that DRM is an attempt to repeal the laws of nature. When you get down to it, every DRM scheme relies on encrypting files, then giving them to someone else, along with the necessary decryption key for decrypting them, and trusting that the someone else is too stupid to reverse engineer the decryption algorithm and use the keys you helpfully provided.

The primary problem with DRM is not only that it doesn't work, but that it irritates the hell out of law-abiding customers who only buy legal products (with DRM), but doesn't inconvenience pirates in the slightest. It's actually counterproductive. Customers learn to stay away from vendors of DRM'd products, once they've upgraded a device too far and discover that their old files are locked away from them and inaccessible (because the old software or keys won't run on their new gadgets).

A secondary problem with DRM is that it fractures the market — if a consumer has to commit to a particular DRM platform in order to read their books, then they can't easily buy books by authors whose publishers picked a different platform. So unless the publishers try to support all the DRM platforms, they're going to be left offering their customers a tiny sub-set of the books they can buy if they wander off the street into a branch of B&N, Borders, or Waterstones. Supporting multiple DRM platforms is expensive and time-consuming; not providing a decent range of goods is a deterrent to building the ebook habit among your customers. QED.

DRM doesn't emerge from the publishing industry itself; it's those annoying IT marketing guys with their WNPoTs again. In this case, the WNPoT in question (each and every DRM system) is designed to deal with a ingrowing toenail, but appears to involve leg irons and a chainsaw, if not a guillotine. For some reason, senior management recommend it.

I'm hopeful that the DRM nonsense will pass, if and when the music and film industries pull their heads out of their collective cloaca. Of course, the publishing industry may be a smoking crater by then: but hey, I'm an optimist.

(Some of you may with some justification point to Cory Doctorow and say, "how come he puts out free ebooks without DRM?" To which, I'm afraid to say the answer is that Cory is a Special Snowflake with EFF superpowers and New York Times Bestseller mojo which make him immune to the normal laws of man and nature. The rest of us still get to pay cash.)

There is now a standard ebook platform.

Well, not exactly: but we're down to three overwhelmingly dominant file formats: MobiPocket (prop: Amazon — it's what the Kindle runs on), ePub (prop: everyone else, including Sony and Apple), and PDF (horrible for reading novels on handheld devices, but nevertheless ubiquitous for things like illustrated text books, scientific papers, and role playing game manuals). With fewer formats it becomes easier to produce visually appealing ebooks that run on every platform (modulo the caveats about DRM).

We're also down to a handful of competing DRM platforms. There's the Kindle, and there's going to be Apple. There's Adobe Digital Editions, there's MobiPocket (waning) and Microsoft Reader (almost dead) and Peanut Press eReader Barnes and Noble. (B&N ePub dead pool: I give them less than two years before they switch.) Finally there are the indie publishers who eschew DRM altogether, like Webscriptions.

Historically, ebook readers have been dedicated fans using eccentric niche machines or cumbersome applications on desktop PCs, trying to deal with fragmented proprietary file formats and competing DRM schemes. (Or just going to bittorrent or usenet or IRC. As noted: DRM doesn't inconvenience pirates — indeed, over time it trains law-abiding users to become pirates out of sheer frustration.)

But now we have the iPhone/iPad/iBook combination which, with 70 million users, is going to be a major player once iPhone OS 4.0 (and iBooks for iPhone/iPod touch) ship this summer. And we have the Kindle platform, which is also available on the iPad/iPhone juggernaut, as well as on PCs and Macs. These two alternatives dwarf every other platform by at least one order of magnitude in potential size. Which means an Apple/Amazon duopoly is on the horizon for 2011, and if we get that far, we're close to seeing a large, viable, barely-fragmented market.

A "market" where no platform has more than a million users is pretty much useless from a publisher's point of view. But a single market with 70 million possible consumers is something else again. And in anticipation of such a market emerging, ebooks are already rocketing up the publishers' priorities.

At the same time, something's going to have to give on pricing. Treating ebooks as a parallel imprint, equivalent to hardcovers or paperbacks, is insane. Rather, we need ebooks with variable pricing — moderately cheaper than the corresponding paper edition (to reflect the reduced cost of production), and dropping steadily over time. There's going to be a lot of experimentation and some howls of outrage as the publishers flail around, trying to square the circle of a new medium with group policy handed down in the absence of information.

The casualties

My prediction is this: ebooks will kill the mass market paperback distribution channel.

The "mass market" is not a book size, even though it's associated with the ubiquitous C-format paperback; rather, it is an abstraction of the magazine/periodical distribution system. MMPBs are shipped out in the publication month. They are sold on terms that require the booksellers to pay for sold units 90 (or 120) days after receiving them — or to destroy the books and provide proof of destruction (the stripped covers). This is how magazines are sold via newsagents, albeit magazines are sold/stripped after one month, not three or four. The strip-and-pulp thing is an artefact of the cost of returning outdated periodicals — paperbacks don't go out of date but are costly to ship and warehouse, so it has traditionally been easier to treat them as a kind of long-duration un-dated magazine.

"Trade" paperbacks are merely paperbacks that are sold like hardbacks — if unsold, the entire book must be returned for credit.

In the UK, the mass market book distribution channel collapsed more than 20 years ago. We still have C-format paperbacks; they're just treated as trade books.

In the USA, the C-format is reserved for mass market books, to avoid confusing bookstore staff (who do not want to accidentally strip-and-pulp trade books that will then have to be paid for in full).

But the inefficiencies of a distribution channel that discards and destroys up to 50% of its produce should be glaringly obvious. I am told that the US mass market channel nearly collapsed in 2008, with one of the major distributors entering Chapter 11 bankruptcy protection. With high street bookstores under constant pressure and facing competition from internet sales and now ebooks, mass market paperback distribution will only be stressed further in the next few years. Ultimately I expect the channel to disintegrate. (But if you're a reader who likes the C-format paperback format, don't worry: they'll still be around, albeit fewer of them and sold as trade books.)

Ebooks have no returns.

From a publisher's point of view, ebooks have a couple of brilliant advantages over dead-tree books. The first is that you don't print the ebook and ship it to the store until a customer actually pays for it. The fulfillment model via the iBook or Amazon store is that when a customer clicks the "pay now" button, a request is sent via the bookseller's store database to the publisher, who encrypts a copy of the master image of the book (for DRM) and sends it to the customer via the store in question. No more 90 days or 120 days of credit: the publisher can demand immediate payment from the bookseller! Why, the accounting implications are earth-shaking. (And for their part, the bookseller never has to worry about selling out or running short of shelf space to display their wares.)

But that's not the best bit ...

Ebooks may in future drive surprise bestsellers.

In 2006, when I emailed the manuscript of "Halting State" to my editor at Ace, we both thought it would do reasonably well ... but it wasn't until Ace began getting advance feedback from booksellers that they got a vibe that possibly, maybe, it would sell very well. They took a gamble, and ordered 25% more hardcovers from the printer than they had with my previous novel.

Then they had to go back to print for another 40% of their initial run, in the first month, because it sold close to double the numbers of my previous book.

If they'd had the extra book blocks in the warehouse on the day of publication, it might have generated enough momentum to get into the extended bestseller lists, which in turn generates attention — reviews and news coverage — that attracts more readers. But they didn't, because if they gambled and lost, the cost of the surplus stock would wipe out the profit on those books they succeeded in selling.

Breakthrough bestsellers (as opposed to bestsellers by established superstars like Stephen King) are generated by a kind of murky positive-feedback mechanism that nobody really understands. All we really know is that the one thing that Makes Books Sell is word of mouth: your readers are your best sales team. You can only exploit that kind of feedback loop if you're in a position to sell books to customers who want them. As it is, it takes 2-4 weeks to get a rush order to and from the printer and then into the warehouses and bookshops. This is a woefully long response loop if you're trying to satisfy instant demand for a novelty item. In a market that is largely ebook-driven, we may see unexpected bestsellers: books that nobody knew would catch fire, but which — thanks to the instant-print effect of ebooks — can go exponential very rapidly.

Finally:

Ebooks don't make typesetting, book design, and proofreading obsolete.

I get this a lot from dedicated ebook readers: "I don't care about formatting and design in ebooks!"

I think this is a peculiar kind of brain damage or mental scarring that mostly afflicts those who have read one too many OCR'd and badly proof-read scans of pirate copies on their Palm III with a 160x160 pixel black and white display. To reach a mass audience, ebooks are going to have to be comparably readable to a dead tree edition: sensible use of screen fonts, layout directives, and some eyeball candy are all part of the package. So is a cover picture, believe it or not, if only so you can spot the iconified version on your virtual bookshelf. If you think ebooks are all about text and not layout, I encourage you to contemplate the world wide web; the web was initially about semantics and information interchange too, with no idea about layout or pictures, but you won't find many designers agreeing with that thesis today. Indeed, even a primarily-textual website such as this blog requires some eyeball candy in this day and age.

So don't write the old skills off just yet!

