Tying this trend to the buzz Amazon created earlier this year when it reported it sold more e-books than paperbacks seems to result in a total head scratcher. Two key points will shed some light on why publishers are thinking paperbacks.

Paperbacks get better distribution. As brick and mortar book stores die off, paperbacks benefit from the fact they are sold in pharmacies, supermarkets, airports and even some convenience stores. In retail book settings (what’s left of them), paperbacks are more easily showcased than hardbacks given their size and make for colorful eye-catching displays.

Of greater significance is royalties. While there is no general rule of thumb, authors receive far less of a royalty cut (average, according to industry sources at 6%) for paperback sales than in hardcover sales. On hardback, there is a sliding scale based on volume, generally starting out at 10%, going up from there. Percentage-wise, publishers make out far better on paperbacks. By releasing paperbacks while the hardcover buyer is still in play, they can sell higher volumes of the product from which they make a higher margin.

And then there are e-books. Royalties for e-books are a moving target and that target is moving away from the publisher. If J.K. Rowling is successful with her Pottermore effort—an effort in which she keeps 100% of her e-book revenue—publishers will be forced to up e-book royalties or lose their best and brightest authors. Factor in the growth of self-publishing and the rise of DIY distributors such as Smashwords who offer 85% royalties to authors and you can see publishers’ incentive to reduce the hardback-to-paperback window.

There is not an easy fix for publishers in protecting existing revenue streams, cultivating new ones and understanding the role e-books will play in their future. A plan, such as decreasing the window between hardback and paperback, won’t do much to strengthen relationships between publisher and author. Conversely, publishers should be working more closely with their stable of writers to create new promotional ideas (Google + hangouts, anyone?) and provide them the services to create new digital products. Such a move might not be a long-term answer but will provide a goodwill stopgap as the publishing market evolves.

First, Amazon: The Seattle-based company is likely to come out with some sort of tablet device which no doubt will be color, and support both support web browser and video. It will be touch screen because in Feb. 2010 Amazon bought Touchco, a company specializing in touch screen design. It will support Android, but like Barnes and Noble, it will have its own implementation of the OS for its devices and sell resulting apps in its marketplace. A new device for Amazon makes sense given its vast products and services in the publishing and entertainment sectors.

A new tablet device for Amazon mostly threatens Apple’s role in the publishing space. Amazon has more publisher relationships, a larger global publishing footprint, a self publishing unit, and exclusive deals with some high profile authors and book buying data from millions of shoppers. Amazon’s role in the newspaper and magazine industries are a bit more opaque; the company delivers text versions of both media but could be positioned to quickly upgrade those relationships.
A new media tablet from Amazon threatens Google’s position as an embryonic e-book force (does it force Google to go the device route?) and perhaps even Netflix. Amazon’s streaming movie services will greatly benefit from being baked into a branded device. And tuck this into your pocket: if Amazon’s new device has a built in camera, imagine the bar code/NFC shopping apps that could be part of the device’s core features. Here’s a scenario: you are in Wal-Mart, find a HDTV you want to buy; you snap a picture of the device or scan the barcode and Amazon will give you comparison price and allow you to buy it from them in One Click.

As for Barnes and Noble, in a meeting with investor analysts on May 4, “Barnes & Noble, Inc. … indicated it expects to make an announcement on May 24, 2011 regarding the launch of a new eReader device,” Barnes & Noble said in a filing with the Securities and Exchange Commission. With a recent upgrade to Android 2.2 on its Nook Color, what could be in store?
Here’s a SWAG with some degree of logic: Barnes and Noble might be the first to come out with a device using the Mirasol screen technology from Qualcomm. Qualcomm said earlier this year that it would have a device in the marketplace in 2011. A Mirasol device, which uses Interferometric Modulator (IMOD) element is a simple MEMS (micro-electro-mechanical system) device that is composed of two conductive plates. The net result is color which uses less power in a non-reflective display. In short, a color screen which supports browser and video with an e-paper like “easy on the eyes” experience. A Mirasol device could be positioned between the Nook Color and the Nook B&W (call it the E-Nook?) and offer the reading experience of the black and white with the ability to offer enhanced books and magazines. Pricing? Good question.

Amazon and Barnes and Noble’s new device plans raise the issue of the fate of its existing black and white line of e-readers. Two things make sense: one is that the price drops to around the $50 mark and is marketed to those whose only aim is to read trade fiction and the like (perhaps an older demographic). Second, is they are given away by book publishers to customers who sign up for book clubs that carry a monthly purchase commitment. (Bertelsmann, take note).

The e-reading space is one in which speculation has become a blood sport. Microsoft, Sony and other consumer electronics companies will be watching this space. If my speculation is on the money, see you at the race track.

<

A net receipts formula is differerent than a more standard 15% royalty of list price of a print product. Most e-book retailers take a discount of approximately 50% of an e-book’s list price. If S&S, for example, collects $5.00 from the retailer on a $10 book, the author will get 25% of that, or $1.25. a reduction of twenty-five cents per sale from the previous arrangement.

Sound a tad confusing? Take my word, it’s only going to get more confusing.

While reading books on the Kindle is a delight, diving into your favorite newspaper or magazine is (as they say in Twitterspeak) a total fail. Newspapers render oddly, converting an inherent non-linear read into a stilted, non-interactive session that captures neither the context of print nor the hyperactive richness of the Web. Magazines are not only rendered in the same linear fashion, without color they lose their sense of artistry and personality. The fact that Amazon charges up to $14.99 per month for newspapers and $2.99 for magazines adds insult to an injured concept.

Lo and behold, Amazon watchers announced the company was working on a larger format Kindle that might be ready by Q4 2009 and would address the issue of the device’s current unsuitability for magazines and newspapers. So, does that mean my Kindle 2 becomes a $400 paperweight in less than one year of ownership if I want to add the San Francisco Chronicle and Fortune to my virtual lineup? Meanwhile, the picture gets cloudier (or clearer, depending on your perspective) with the advent of a new device from Plastic Logic which with a larger screen size is, out of the chute, better suited for newspapers and magazines. Hearst, publishers of both newspapers and magazines, has also expressed its intent to get into the portable reading device game, but it’s not clear whether it will build its own or OEM one from…well, Plastic Logic? All eyes will be on Plastic Logic’s upcoming trials with the Detroit newspapers as well as partners such as USA Today.

All of this begs the basic question; are newspapers and magazines well suited for e-readers and is there a business model that will work for publishers and capture the imagination of young, digital consumers? These are topics we will tackle in some upcoming research, with investors, advertisers, publishers, consumer electronics firms and e-warehouse providers (Libre Digital) having a lot riding on this trend. Needless to say, we’re on top of it.

Item one: Google adds book reading capability to the iPhone as well as phones running Android. It’s not an app per se, but if you go to http://books.google.com/googlebooks/mobile/ you see a site that has a number of books whose copyright expired that can be read on the phone’s 3.5-inch vertical display. A few scenarios could result, one in which Google (who recently resolved its feud with book publishers) sells books on behalf of publishers or one in which Google builds a book reading application and Apple sells books in the iTunes store. Everyone gets a piece of pie.

Item two: Amazon launches Kindle 2 which retails for $359. The new device includes text to speech conversion so books can be read aloud. The product will no doubt be met with initial demand (some pent up, some folks wanting to upgrade) but does it have legs in a tough economy? On the heels of the Kindle 2, Plastic Logic whose work in plastic electronics has yielded a new device that has been embraced by USA Today, the FT and book publishers via distribution via Libre Digital. Cost and business model (as in wisely partnering with publishers to offer unwritten, branded models) will roll out during 2009.

The e-reader scrum boils down to the iPhone Swiss Army Knife approach or the apparent Amazon standalone approach. It’s not a dead-on match in terms of features and functionality; from what I hear the Kindle offers up a pretty sweet book reading experience while the iPhone’s is passable as part of its multifunctional capabilities. On a cost basis, though, yet another device that has one purpose needs to offer a fairly exceptional value or experience versus one that texts, IMs, reads emails, allows you to find your lost car, read newspaper feeds and … As Alton Brown, the Good Eats guy says, there’s no room in my kitchen for a unitasker.

But maybe it’s not that simple. Amazon has a large and growing music library. Amazon also has a TV and movie service available through a growing number of partners. And, to enable smaller publishers to find their way onto the Kindle, Amazon offers free transcoding to make content Kindle ready. Add that to a bigger screen, built in WiFi (making it a de facto Web TV device, albeit in black and white for now) and content across varied media categories and things begin to take shape.. Let’s also not forget that Amazon is the music download supplier for T-Mobile’s G1 phone. So, perhaps Google is ready to partner with Amazon by building the rumored Kindle reader for Android (and other) mobile phones.

So, have we reached any new conclusions? No. Have we pointed out the e-reader space may finally be on a path to fulfill its potential? Sure hope so.

Sarcasm and bewilderment on execution aside, a cheer goes out to Harper Collins for even considering video books. The concept is bold and (done properly) has possibilities. As a free viral marketing instrument it’s a great idea; as original content with an actual original story and first-class production, perhaps it’s a standalone product. As a consumer-paid-for 20 minute infomercial, it’s a non starter.

In a recent essay in the Wall Street Journal, Chris Anderson (he of Wired and Long Tail fame) contemplates the “economics of giving it away,” the business model that has made the web what it is today: a chaotic playground of ad-supported and freemium services. Anderson suggests “free may be the best price, but it can’t be the only one.” In that spirit, book publishers, copyright holders of some truly compelling and valuable content, are in a position to break free from the shackles of the zero dollar economy and offer web users content worth paying for. As such, Harper Collins is to be applauded for even trying to step forward with this experiment. In terms of execution, I suggest publishers follow suit and not only embrace this concept but extend it in creative new ways.