How E-Books Failed to Kill Paper

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Recent movies like The Hunger Games, Ender's Game, The Great Gatsby, and World War Z have done a lot for book publishers. All four were based on novels, and with each release came a bump in book sales. Surprisingly, there may be fewer e-book sales in those increases than you might think. While the PR departments at e-reader companies are working overtime to sell us on the death of the printed book, consumers -- including the younger, techier generations -- haven't bought it just yet.

In 2012, physical books sold less than in 2011, but the rate at which they fell dropped substantially compared to the previous year. That was coupled with a slowdown in the rate of e-book sales increases, as well -- a slowdown that has extended into 2013.

A small piece of the big pie
Right now, e-books still make up around a quarter of revenue from all book sales. Even with that relatively small chunk of market at stake, companies have already been duking it out. Last year, (NASDAQ: AMZN  ) and Apple (NASDAQ: AAPL  ) came to blows over potential price fixing. The dispute was resolved earlier this year, with Apple being found guilty of colluding with publishers to increase e-book prices.

The reason that companies are so eager to fight over the market is twofold. First, the business believes that digital is the future. Publishers and retailers watched the music and movie market shift from physical media to digital and took note. The second reason to fight for digital is the margin advantage that digital sales hold.

Making the most out of each e-book
Sales of e-books come with meaningfully higher margins. Last year, Random House hit pay dirt with the Fifty Shades of Grey trilogy. That helped bump e-book sales up to 20% of total sales and operating margin up over 15%. Amazon has gone all-in on digital books, selling its e-reader close to cost in order to generate a huge sales platform for digital content -- the real moneymaker.

Even with publishers and retailers rooting for the e-book, the physical book just won't disappear. A recent study in the U.K. found that more than 60% of teens prefer physical books to their digital equivalents. Oddly, part of that may be a pricing issue. While physical books are usually more expensive than their e-book version, that e-book is, in turn, more expensive than most other digital content.

Publishers who colluded with Apple were worried that by pushing e-book prices too low, customers would come to devalue traditional print books as well. A similar problem may now be haunting e-books, with mobile and tablet owners spending little to nothing for games and music. Compared to free, a $5 book seems expensive.

Desperate hope
Even with digital sales slowing, there may be no stopping the onslaught. But if sales do level out, one company is in a place to make a killing -- well, not a killing, but at least it'll stay in business. Barnes & Noble (NYSE: BKS  ) is the only major bookstore chain in the game these days. The company's shift from the Nook shows that it's no longer interested in being a tablet business, giving it a chance to focus on books. Physical books can still be a winner, too. The company's retail business saw sales fall last quarter, but they still came in at over $921 million.

The demand is still there for paper books. Digital may be slowly taking sales, but people have yet to give up on the medium that's worked so well for humanity since its introduction by Gutenberg in 1450 -- or by Bi Sheng in China during the 11th century, if you want to be technical. The bet on paper may be a long shot, but it's still a potential winner.

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