Is This Industry Walking the Plank?

Amazon.com's (Nasdaq: AMZN  ) Kindle Fire was one of the hottest gifts this past holiday season, but its growing popularity has brought more opportunistic privateers to the digital seas. E-book piracy, hardly a new subject, seems to have kicked into high gear -- London's Daily Mail reports that up to 20% of all e-books may be pirated.

That points to rougher sailing ahead for Amazon, which is counting on content sales to recoup the losses it takes selling the tablet. It's likely to be worse for major publishers, unless the industry collectively wakes up to new digital realities.

An old industry in peril
Publishing and the music industry have obvious parallels but critical differences. The music industry has seen its record sales -- including all digital formats -- fall by more than $1 billion since 2006. Publishing, on the other hand, is still reaping rewards from the e-book explosion. E-book revenues grew 1,200% from 2008 to 2010.

Pearson (NYSE: PSO  ) saw revenues at its Penguin imprints grow by 17% during that e-book boom, though youth-focused Scholastic (Nasdaq: SCHL  ) lost revenue in its non-educational publishing division during the same period. As with the music industry, content matters -- Pearson has a number of marquee writers on its roster, whereas Scholastic's only notable in-house best-seller (it also distributes other publishers' titles) is Suzanne Collins' Hunger Games.

Biting the hand that feeds
E-book sales almost certainly took off last year, largely thanks to broader adoption of the Kindle, but also with an assist from Apple's (Nasdaq: AAPL  ) increasingly ubiquitous iPad. Here, again, the music industry's example works well: Apple's iTunes reached its billionth download about three years after the service went live, but it sold 9 billion more songs in the following four years. The first-generation Kindle went on sale at the end of 2007. Four years later, the Kindle Fire is in the hands of millions. The e-book explosion is either here or is about to crash ashore.

In the e-book case, however, Apple's insistence on high margins may undermine faster adoption, as the Fool's Evan Niu reports. Rather than pushing for low prices, as it did with iTunes, Apple encouraged publishers to set their own rates, undercutting Amazon's effort to keep big titles priced below $10. That's led to antitrust investigations that threaten to undermine Barnes & Noble (NYSE: BKS  ) , which uses a similar e-book pricing model as Apple -- but more broadly, unnecessarily high prices only encourage piracy.

Same as the old boss
The Publishers Association, a printed-page analogue of the RIAA, hasn't helped its cause, either. The organization issued more than double the cease-and-desists for piracy in 2011 as it did a year prior. It seems like publishing's completely failed to grasp the iTunes lesson: Consumers are plenty willing to pay for content they want, but they want a fair price.

Amazon's positioning itself well in this battle, having founded several publishing imprints of its own. The company also makes it relatively easy for unheralded authors to get their writing into digital format, cutting out the middleman entirely. Music publishers aren't dead yet, but they're hardly thriving. Book publishers need to learn from the past before they repeat it.

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Fool contributor Alex Planes holds no financial position in any company mentioned here. Add him on Google+ or follow him on Twitter for more news and insights. The Motley Fool owns shares of Amazon.com and Apple. Motley Fool newsletter services have recommended buying shares of Apple and Amazon.com and creating a bull call spread position in Apple. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On January 10, 2012, at 6:34 AM, majurey wrote:

    "The Publishers Association, a printed-page analogue of the RIAA, hasn't helped its cause, either. The organization issued more than double the cease-and-desists for piracy in 2011 as it did a year prior."

    This statement misses the point. The PA's Copyright Infringement Portal does indeed provide publishers with a fast and efficient way of sending DMCA takedown notices to infringers (websites, not individuals). But it's real value lays in the auditing of facts and figures. A lot has been written speculatively about the size of the piracy problem, with little or no stats and facts to support either position. But the PA's database allows publishers to submit information about piracy, where it's happening, the size of the problem in each country, which platforms respond to DMCA, which don't, etc. Armed with these facts and figures, the PA has succeeded in not only informing much of the UK's Digital Economy Act and Hargreaves Report, but has also managed to get major ISPs to agree to de-list infringements in their search results. And publishers are able to see which territories and markets are most at risk and respond accordingly.

    The long view for the publishing industry is not to fight piracy with legislation (lessons indeed learned from the music and film industries), but to give publishers enough time and wriggle room to roll out and establish the new business models which all major publishers are trialling and which all markets and customers are demanding (e.g. services integrated into content, which makes piracy of the content of much less value to the filesharer -- one cannot pirate services!)

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