Here come 'browse and mouse' books

The currently fashionable concept of disintermediation may be viewed simply as old wine in new bottles. The idea of publishers attempting to short circuit the supply chain goes back many years. PO Box 11, Falmouth, run by wholesaler Barnicoats, was a long-running vehicle for many leading publishers to sell books "off the back page" direct to readers. Pursuing a more controversial strategy before its absorption into the Pearson empire, Dorling Kindersley developed a home sales channel based on the Avon and Tupperware models.

So is disintermediation any more than just a new strain of an old virus, and does it really threaten intermediaries? The accompanying diagrams of today's supply chain (see page 24) shows its complexity, and the three layers of intermediaries that are at risk, with the "worst case scenario" showing the possible consequences of disintermediation. There is clear evidence that strategy-driven disintermediation, such as that previously practised by Dorling Kindersley, puts existing intermediaries at risk. But there is much less evidence that technology-driven marginalisation has the same impact. In fact, some case studies show that exactly the reverse happens.

In 1998, Unleashing the Killer App: Digital Strategies for Market Dominance (087584801X) was published by Harvard Business School Press. The book had all the ingredients to make it an immediate bestseller with the digerati. Its two authors were a technology consultant and an academic, and the foreword was by the messiah of the digital revolution, Nicholas Negroponte. On page 153, following a specific case study on the growth of Amazon, authors Downes and Mui wrote: "We believe, and our wholesale clients agree, that the concept of wholesaling will soon disappear."

But, in fact, the opposite happened. Between 1998, the year of publication, and 2001, the rate of growth of book wholesalers reached record levels, and one of the main drivers was Internet supply. In the UK, Internet book sales grew from zero to 6% of the market, according to Books Sales on the Internet (Bookseller Publications), with wholesalers supplying an estimated 60% of the books.

This example is consistent with experience in other industry sectors. These show that new technologies do not eliminate intermediaries, instead they create new layers. Examples of layers driven by new technology include AOL, Napster, digital rights clearing houses such as Reciprocal and, in our own industry, print-on-demand specialist Lightning Source.

This is a cautious view of the possible impact of disintermediation. The recent failure of custom-made travel guides publisher Booktailor, and the problems of on-demand publisher House of Stratus, support this position. This needs to be balanced, however, by an understanding of the potential for disruption. Are Penguin's plans for an e-book list of 200 bestselling titles, at 20% cheaper than the print price, a sign of things to come?

Surfers equal readers

The online audience is certainly there. Research carried out by Jupiter MMXI showed that between April and June this year, 55% of the UK population (33 million people in total) used the Internet. The research also overturned the preconception that Internet surfing is limited to teenage anoraks. The heaviest Internet users were 35 to 49-year-olds, closely followed by the affluent 50-plus "silver surfers". Significantly, this profile fits closely with that for heavy book readers.

The Bookseller editorial of 17th August highlighted the astonishing growth rate in Internet use (13,000 new users a day) and emphatically said, "the Internet is not dead, and e-commerce is not going to go away". This is an important point. The Internet, with its capacity for file downloads, is now a fact of life for more than 33 million people in the UK. Moreover, if the publishing community is reluctant to offer legitimate rights-protected content online, unlicensed sites will spring up to meet the demand, cutting out a considerable number of intermediaries—including the legitimate rights owners.

Recent research by Web monitoring company Envisional found 7,267 pirated e-book titles on Internet sites and file-sharing services. A few minutes on www.google.com using the keywords "Harry Potter e-book" locates many of the sites such as www.lookwhatwefound.com that between them distribute more than 700 unlicensed Harry Potter e-books. This is yet another example of technology creating a new layer of intermediaries, albeit in this case both unlicensed and potentially highly damaging.

Statistics show that a staggering 20% of total world trade is in intellectual property. All the research indicates that, despite the bursting of the dotcom bubble, Internet usage will grow to record levels, and a proliferation of pirate sites is emerging to meet the early demand for e-books. So what is holding back the widespread adoption of e-publishing technologies?

Cambridge University Press' business development director, Michael Holdsworth, paints the following picture: "E-publishing is moving far more slowly than anyone expected. There are no clear business models emerging; the name of the game at present is to play along with every model that looks credible. Our current agenda is totally technology driven; there are huge challenges in file formats, workflows and related areas, particularly rights. It's inevitable that parts of the market will move to Web-based digital delivery. But for now at least talk of pervasive disintermediation is a lot of fuss about nothing."

So the audience is there, and the appetite for digital delivery is emerging. But does the lack of robust technology and viable business models mean we can forget disintermediation by publishers as the next big issue?

The answer is almost certainly no. Although in the near term digital delivery is unlikely to take a large share across the total market, it will still have a significant impact and bring with it risks of disintermediation. There are three main reasons for this.

First, and most importantly, digital delivery is a "disruptive technology". This means that its market impact will be disproportionate to the revenues generated, and it will force changes through the supply chain. Internet bookselling is another good example of a disruptive technology. Despite taking just 6% of the UK book market (compared with, for instance, the 22% held by independent booksellers), Internet bookselling has forced change and new partnerships throughout the industry.

Second, digital delivery will take a significant share of business in some important market sectors. The third reason is that, although total disintermediation (the complete elimination of intermediaries) will not happen, a hybrid form, which I will call "grey disintermediation", is already developing, and looks set to become an important driver of change.

Determining value

Two factors can be used to measure whether disintermediation is likely to happen in a market sector. Do the established intermediaries justify their position by the value they add? Quite simply, the less value added, the greater the risk of disintermediation. And how easy is it to reach the end user? This is usually measured by the level of customer Internet access.

Using these two measures, it is not difficult to spot the markets where digital delivery and disintermediation are real threats. The majority of university students have Internet access, and it is usually broadband that is ideally suited for downloading large files.

Despite the best endeavours of campus booksellers, it is difficult for the retailer to add considerable value at point of sale. College textbooks are mostly bought from reading lists, not by browsing or bookseller recommendation. In fact, textbook purchases are heavily influenced by speed of delivery and price, precisely the areas where new entrants such as Swotbooks.com can score.

Swotbooks founder David Taylor says: "All the dynamics in this market segment make it hugely attractive not only for p-book [paper book] supply through a Web offer, but also e-book, and parts of e-book supply. There is a clear place for new aggregators. I don't think students give two hoots about who's published the book. They just know they have to buy it and most of them resent the fact."

So, the college textbook market, which is currently worth about £160m a year, is a strong contender for disintermediation. But even here things are not completely straightforward, for two main reasons. First, university students have been conditioned by the example of Napster (which peaked at 60 million users, the majority of them students) to get their content free. Napster's move to a paying, subscription model has not resulted in 60 million users paying for their music downloads. Instead a host of alternative, unlicensed sites have sprung up (for example, www.audiogalaxy.com, www.bearshare.com, www.toad node.com, and www.imesh.com), and traffic has switched to them.

Students may have credit cards, be willing to pay for p-books bought online and end up with average debts of £5,000 (based on UCAS figures), but many attempts to get students to pay for digital content have failed (e.g. pseudo.com and pop.com); though others such as www.questia.com indicate that there is a sustainable business model for digital delivery to this market.

The second obstacle in the college textbook market is the need for "fragment delivery". University students have the technology to download whole books, but the main demand is for chapters, or fragment delivery. Conversely, mass market fiction readers want the whole book, but have neither the download capacity nor hardware devices to read them.

Michael Holdsworth has highlighted the technical obstacles that must be overcome before digital delivery goes mainstream. Fragment delivery and micro-payments add another layer of complexity to the process (although McGraw-Hill has offered it for some time through its Primis Online solution at www.mhhe.com/primis).

Taylor sees this as the next big development: "Selling students the bits they need in a digital format, which they can either download or print out, is a natural development. However, again, I can't see students wanting to visit dozens of Websites to do this—the aggregator's role will be crucial."

Targeting markets

Other market sectors meeting the criteria for disintermediation include academic journals. Again the target market is wired for digital delivery. Intermediaries such as journal subscription agents work on dauntingly low margins which give minimal scope for added value, and the technologies of digital delivery remove much of the "friction of distribution" of periodical publication.

Of course, the converse also applies. If an intermediary adds considerable value the risk of being cut out of the loop is low. As I write this, the lavish photo essay Sixties Motor Racing (0952300974), published by Palawan Press (www.palawan.co.uk) at £250, sits on the bookshelf next to me. The value added by designer Herman Leslie, Italian printer (Musemeci) and Swiss binder (Buchbinderei Schumacher no less) guarantees that the intermediaries who produce this gorgeous book will not be disintermediated by new technologies.

The emphasis on justifying your position in the supply chain by the value you add also allows in new entrants if they generate sufficient added value. This is exactly in line with the recurring theme that technology does not actually reduce the supply chain but creates new layers.

For instance, even if digital delivery becomes a reality there is no compelling reason for readers to visit publisher Websites to buy their e-book files. A healthy e-book market needs a community of intermediate "aggregator" sites where content and customer meet. At the moment this opportunity is wide open. Early players developing as aggregators of digital content include Amazon (www.amazon.com/exec/obidos/tg/browse/-/551440/ref%3Db%5Fbh%5Fl%5Fa%5Feb/002-0669776-9797602) and Netlibrary (www.netlibrary.com).

Without strong aggregator sites (supported by the appropriate digital asset management technologies), the market for digital content will be stillborn. Instead of agonising over the threat of disintermediation, established intermediaries should be looking at ways to reinvent themselves as aggregator businesses.

Across the whole book market the risk of total elimination of intermediaries is almost zero, although in specific market sectors there are real risks of the supply chain being reshaped or shortened. But it is oversimplistic to assume that there are only two possible market scenarios—total or zero disintermediation.

The hybrid or "grey disintermediation" schema is likely to become an established practice that will change the supply chain. Grey disintermediation occurs, for example, when a reader buys a conventional p-book through the publisher, printer and bookshop supply chain, and then forms a direct relationship with the publisher online. This is usually through the Website linked to the book, which offers added value material such as additional content, updated information, games and Web links. The accompanying diagram (see above) shows the "golden triangle" created by this model, although some booksellers may view it as more of a "warning triangle".

Bloomsbury's publishing director for reference and electronic media, Kathy Rooney, explains. "We find that linking reader, book, author and additional online features through a dedicated micro-site such as www.witchchild.com has helped build awareness of the book and author, and sell [print] copies. It also builds a community of readers eager for the next book."

Building customer relationships

The grey disintermediation model for books is based on what is happening in the movie industry. According to an article in Red Herring magazine, 21% of the initial three million cinema viewers of the film "A Knight's Tale" afterwards visited the film's Website, many of them to access an online game. The current big thing in the marketing world is customer relationship management. Building a relationship between producer and consumer is the Holy Grail of customer relationship management, and the grey disintermediation model delivers this to publishers.

It is easy to translate the experience of linking 600,000 viewers of "A Knight's Tale" to the film Website to doing the same with Goblet of Fire readers. Clearly, Bloomsbury has already started this with its Harry Potter site at www.bloomsburymagazine.com/harrypotter (although it is strangely divorced from the Warner Bros film site at www.harrypotter.co.uk).

HarperCollins has a similarly massive opportunity with its The Fellowship of the Ring: Visual Companion (0007116241), though as with Harry Potter, there seems, at the time of writing, to be a remarkable lack of synchronicity between the publisher's activities and the film Website at www. lordoftherings.net—a good example of the need for rights owners in the different media really to work together.

The real power of the customer relationship management model has not yet been unleashed, but within the bud there also lurks the worm. The ability of grey disintermediation to link reader and publisher also, of course, builds a platform for the future delivery of e-books, neatly disintermediating printer, distributor, wholesaler and bookseller.

The next big thing

My view is that the three-way relationship between publisher, bookseller and reader offered by grey disintermediation will be the next big thing. In fact, it is so important that we will see a whole new breed of "browse and mouse" titles emerging, titles that have been conceived as combined print and Internet projects right from original commissioning.

A good example of here and now grey disintermediation in the academic market is McGraw-Hill's excellent site www.mhhe.com/socscience/intro/cafe/psycafm.htm, which offers a full range of Web support for McGraw-Hill's psychology textbooks.

At Cambridge University Press, Michael Holdsworth says: "We will in due course almost certainly be bundling electronic access with everything we do in print. This may even include controlled full-text Web-browsing of the book's content for all print purchasers." However, Mr Holdsworth is also cautionary about the difficulties of providing complementary online content. "There are enormous problems over who will referee and validate content maintained on our behalf by our authors and other third parties."

The big win for "browse and mouse" titles, however, comes from the mass market categories. The business model for the book-related Website is not just derived from the power of the customer relationship. The real value for, say, a teenage fiction "browse and mouse" title is that the integrated Website changes the customer perception of books. Despite the Harry Potter phenomenon, books show a sluggish sales growth and an ageing readership. A key reason for this is that the important young market views the printed book as an uncool, "lean back" technology, in the same category as radio and television. Expenditure from young consumers goes first to the cool, "lean forward" interactive technologies, such as computer games and mobile phones. But the "browse and mouse" book suddenly repositions itself as a cool form of interactive entertainment with multi-media links. And the wallets of the crucial youth market open in response.

Bloomsbury's Kathy Rooney strongly endorses the power of the "browse and mouse" title—not only to add value but also crucially to sell more books. "Through www.quarterlifecrisis.co.uk we have created a digital community for 25-somethings, including online chat facilities. The melding of print and online marketing and community building through additional digital content and features is an important enrichment of the book reader's experience. Our aim is to sell more copies of the print book through all available channels, and to make best use of the digital environment to do that."

So, to sum up, traditional intermediaries, across the whole market, are at only minimal risk from disintermediation. However, in certain valuable sectors such as college textbooks and academic journals the new publishing technologies will be much greater agents of change. The main impact of the new publishing solutions will not come through the total revenue they generate, but rather from their role as disruptive technologies.

One way the supply chain will be reshaped is through grey disintermediation, or the "browse and mouse" book. This will have a significant impact, both by creating a direct relationship between publisher and reader (opening the door to future content downloads), and by repositioning the book as interactive entertainment for the crucial youth market.

The threat to booksellers, wholesalers, distributors and printers from disintermediation is not great. The technology landscape still needs to evolve before digital content can flow freely, securely and profitably between publisher and reader. However, the Internet, the new publishing technologies and digital delivery will develop and take their place alongside the p-book, just as CDs and MP3 co-exist in the music market. Soon every major player in the book supply chain will be generating revenue from both p-books and digital content, and will need the strategy, infrastructure and expertise to support both.

Finally, the creation of value will be the key to survival. Everyone in the supply chain, but most importantly booksellers, is at risk unless they justify their position by continuing to add value. As cowboy and philosopher Will Rogers said: "Even if you're on the right track you'll get run over if you just sit there."

The authors of The Killer App got it wrong when they forecast the disappearance of the book wholesaler. However, they hit the nail right on the head when they quoted a client in the classic intermediary role of travel agent as saying "add value or adiós".



This article forms part of the Frankfurt Book Fair "Big Questions" research and conference. Findings will be presented at the conference on 8th October. Further details can be had at www.frankfurt-book-fair.com/ bigquestions/bs.

Bob Shingleton is a senior consultant at digital rights management specialist Rightscom. He can be contacted at bob.shingleton@rightscom.com.