Why Amazon and Apple Will Control the Book Industry

The newspaper, magazine, television, music, and radio businesses have all suffered savage beatings from the emergence of the Internet.

Traditional media companies were simply never structured to deal with the new competition that came along with the Web’s democratization of content publishing.

However, one old-school media business -- book publishing -- has managed to essentially teeter on the edge for nearly a decade.

The Association of American Publishers estimated that US book sales hit $23.9 billion in 2009, representing a 1.8% decrease from 2008, giving the industry a 1.1% annual growth rate for the prior seven years.

Year-to-date, book sales are actually up 11.4%, led by two categories: educational books, and the topic of today’s discussion, e-books.

The book industry usually isn’t a big topic of discussion among techies, but that’s quickly changing with the rapidly growing class of e-book-capable devices, led by the Amazon (AMZN) Kindle and the Barnes & Noble (BKS) Nook readers.

Both devices made news this week as Amazon and Barnes & Noble went to great lengths to emphasize the success of their respective devices.

Now again, we all know the Internet has been awful for traditional media companies. Does anyone really expect the book business will suffer a different fate?

First, e-books are much cheaper than regular books, and I expect that differential to force lower pricing of most physical books. That's bad for the industry across the board.

Physical CDs are cheaper today than they were 20 years ago. Why? Because of competition from cheap MP3 downloads, and from free illegal ones.

Secondly, the Internet makes middlemen of all kinds less valuable, and that includes book publishers. The Web makes it easier than ever before for writers to build and retain audiences.

This point was crystallized when marketing guru and best-selling author Seth Godin announced this week that his recent bestseller Linchpin would be his last traditionally published book:
 

Authors need publishers because they need a customer. Readers have been separated from authors by many levels -- stores, distributors, media outlets, printers, publishers -- there were lots of layers for many generations, and the editor with a checkbook made the process palatable to the writer. For 10 years, I had a publisher as a client (with some fun self-published adventures along the way). Twelve bestsellers later, I've thought hard about what it means to have a traditional publisher.

Traditional book publishers use techniques perfected a hundred years ago to help authors reach unknown readers, using a stable technology (books) and an antique and expensive distribution system.

The thing is -- now I know who my readers are. Adding layers or faux scarcity doesn't help me or you.

Yes, this is only one author, and yes, he has an extremely technology- and e-book-friendly audience.

But think about this: Once a publisher helps an author build an audience, the author can keep that audience and expand it independently via the Web. The publisher can be cut out of the equation.

We could very easily be on the verge of a golden age of self-publishing, led by forward-thinking writers like Mr. Godin. He certainly won’t be the last major author to leave the safety of a major publisher.

Obviously, there are costs to foregoing traditional publishing channels: the loss of up-front money, promotional and editorial support, as well as prestige.

But aside from independence and complete editorial control, self-publishing offers extremely high royalties, particularly in the case of e-books. Amazon now offers royalty rates as high as 70% on Kindle e-books -- something traditional book publishers can’t come remotely close to matching.

The economics of self-publishing e-books simply can’t be ignored by any author with an audience.

Ultimately, the e-book boom has put the book industry at a tipping point, and I don’t see it as one that skews upward.

The Winners

Obviously Amazon is uniquely positioned to win in a digital-book age. Already, it sells far more Kindle e-books than traditional hardcover books.

Amazon also has a comprehensive, end-to-end distribution platform. It can help authors self-publish both physical and electronic books, as well as supply the devices and apps on which those books are read.

And of course it will continue to take share in what remains of the traditional physical-book industry, without the burden of physical stores.

The Kindle is the market-share leader in e-book readers, and the Kindle app is installed on millions of smartphones. That means critical mass in the e-book business.

Apple (AAPL) is a secondary winner in an e-book world because its iPad and iPhone devices are two of the best e-book-reading devices out there. In addition, its growing iBookstore will only make Apple’s all-important iTunes platform stickier to consumers.