Monday, February 28, 2011

Three aspects of tipping points

The tipping point is a bit of a misnomer in technological adoption. While on small scales it happens rapidly, it is better to think along the lines of technological diffusion.

So how does it really happen?

1. The 'new technology' gains 'economy of scale.'
2. The old technology loses 'economy of scale.'
3. Vendors defect to the new technology.

Since this blog is about ebooks, we'll compare ebooks to pbooks.

1. The 'new technology' gains 'economy of scale.'

We've been seeing this for years in ebooks. There are three aspects:
A. ereader prices have dropped and will continue to drop
B. Ebook availability easily exceeds print (pbook) availability.
C. Ebooks everywhere.

The last point bears repeating. I 'consume' ebooks via text to speech when I commute. Having a Kindle fit into the diaper bag allows me to 'sneak reads' during kiddie naps or when they're occupied on the playground. We're the 'odd couple' in our playgroup as we're not reading ebooks on our cell phones. (Wife is glued to her IPad though...). Multiple coworkers read on IPod touches during flights, etc. I think ebooks everywhere has increased ebook consumption further than most predict (by 1/3rd).

I also keep bumping into casual readers who bought an ereader due to ereading on their phone. Not to replace the phone, but for bed time reading.

2. The old technology loses 'economy of scale.'

We've seen this in book store closings (e.g., Borders books) and downsizing of book distribution and print runs. An easier way is to look at sales volume. If sales volume goes up 10X, the cost per unit should drop in half (for physical goods such as pbooks or ereaders) and costs drop even faster for electronic goods (ebooks).

Robin posted a nice summary of book sales. After 3 years of sales decline, pbooks are starting to feel the loss of 'economy of scale.'

3. Vendors defect to the new technology.

Vendors are what preserve old technology. Their resistance to change makes it difficult. That isn't the case with ebooks.

Legacy publishing locks out a large fraction of the good authors for arbitrary reasons. It could be too many writers in their sub-genre or the publisher being risk adverse. I'm just doing a quick summary of what has already posted.

What happens when ebooks are the preferential way for authors to publish? Editors and cover artists often work by the job anyway...

I'm not predicting the end of pbooks. There is a love of print volumes. However, practicality rules over nostalgia. Already for my favorite genres, there is far more worth reading in ebook form.

2011 is just a transition year. 2012 is when the tipping point hits.

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Friday, February 18, 2011

December 2010 ebook Sales

Ebook sales did really well in December of 2010. :) It was also a decent month for books, but not for adult paperbacks and 'mass market paperbacks' (MMPB). My estimate of ebook sales is ~$60million/month. My low estimate for total ebook sales in a year is ~$110 million to $120 million. But if I had estimated off last year's data, my estimate would need to be increased by almost 50%! Ebook sales are on the exponential growth curve. :)

First a chart on ebook sales. I do my own estimate of indie/small publisher sales. Recall that the AAP sales numbers are only for 14 of the 88 AAP publishers and exclude the rest of the 400+ publishers out there. And there sales also exclude indie authors. I have but two data points. 10% of ebook sales in December of 2009 and I estimate off of Amazon's best seller lists that 20% of December of 2010 were Indie/small publisher.

Each year's sales has almost linear growth followed by a 'jump' and then a new growth rate for the next year. Look at how using prior year ebook sales would underestimate future sales. However, I do expect 2012 to be the last year of accelerating growth. If ebooks follows other technology adoption rates, 2013 and 2014 will grow at the same rate as 2012 (which will grow far faster than 2011 which will grow far faster than 2010). Then... growth will slow. That is the nature of technological adoption and the 'S-curve' of growth.

Ebook market share is noisy. Why? Print book (pbook) sales are noisey! But since this is the most mis-quoted number by the publishing industry, I feel bound to calculate my own estimate (as the AAP's numbers seem to be fudged).

I calculate trade sales by summing: Adult Hardcover & Paperback, MMPB, and Children's hardcover and paperback. These figures sum up closes to the AAP's 'trade numbers' that just don't quite add up (so I ignore their figures and calculate my own). This December was an 'ok' month.

Ebooks passed by MMPB sales last month and we're just not going to ever look back. December was an ok month for MMPB too, yet ebooks clearly outsold MMPB once indie/small publisher sales are included. Unfortunately, the Borders bankruptcy is likely to hit paperback and MMPB the hardest...

It was a decent December for hardcover. Ebook sales remain far less than hardcover (overall, not hardcover on Amazon). However, it wasn't a break out year either.

Ebooks are now at about half the sales rate of Adult paperback. I expect sometime in 2011 that ebooks will pass by Adult paperback sales. Sadly adult paperback will probably be hit by the Borders bankruptcy as with mmpb. :(

Ebooks have yet to impact Children's books. In my opinion, children's ebooks are back in circa 2009 mindshare. With the predicted 'explosion' of touchscreen devices sold this year, I expect children's ebooks to take off. That could be a nice addition to ebook sales. Although they will probably be tracked as 'apps.' ;)

Ebook sales are not yet a mature enough market to show seasonal trends. Right now, ebook growth overcomes and 'down seasons.'

Another way to look at seasonal sales is a bar chart of ebook sales by month. Look at those year to year exponential growth trends! This style of chart makes the rapid ebook growth the most obvious:

Adult paperback sales had a December recovery. I expected with the Borders issues to see a lower December 2010 paperback sales... I'm happy to see otherwise. I do have the question if the publishers will be paid for their sales though...

If you do an 'eyeball integration' of the last 5 months of 2010 hardcover sales... those sales were weak. I expect that the end of 2010 ereader sales will cut further into hardcover sales in coming years.

The December MMPB sales recovery certainly didn't pay for the weak sales of October and November. I expect the Borders bankruptcy and ebook sales to cut into this format. In particular, quite a few MMPB readers that I know are now reading ebooks on Android phones instead of buying MMPB books. As tens of millions of 'casual readers' switch to reading on phones & tablets, MMPB will be hard hit. 2011 and 2012 will be the big transition years for MMPB.

The last chart is comparing showing the growth of ebook availability. We're seeing 33,500 more per month. Ok, this is fractionally slower growth than reported before, but that is just due to the noise in the data.

Ebook growth was Excellent in December 2010. Unlike previous months in 2010, it is less obvious that ebook sales are impacting print sales from the December numbers. However... with the Borders bankruptcy, it is obvious that the prior impacts were significant.

I feel for those losing their favorite bookstore. For many the inconvenience will drive them to ebooks. I would rather people use ebooks for the 'pull' (convenience and variety of books). But as customers switch, it is going to have an impact on the retail stores.

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Monday, February 14, 2011

WSJ: Borders woes help ebooks

For those that have have a subscription to the WSJ they have up an interesting article on Borders and ebooks titled as my title (minus the WSJ:)

Quote from Smashwords CEO:"Once physical shelf space is gone, it's gone forever," says Mark Coker, chief executive of Smashwords Inc., an e-book publishing and distribution platform based in Los Gatos, Calif. "If you remove books from our towns and villages and malls, there will be less opportunity for the serendipitous discovery of books. And that will make it tougher to sell books."

Read more:

Also interesting is this tidbit:
"Borders plans to close about 200 stores, and possibly 50 or so more later.

But those who read my blog know I like to quantify the impact. This sums it up nicely: ""Overall, Borders is probably around 8% of sales for many publishers, but on certain titles, Borders could be 20%," said Laurence Kirshbaum, a New York literary agent. "That's a big number, especially when you are talking about smaller titles. How will those books get adequate distribution?"

20% of lesser selling titles. In other words, closing 250 of 650 borders knocks out 5% to 6% of the midlist pbook market. Combine this with the expanding toy sections and I really wonder why any new author isn't going Indie or small publisher.

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Saturday, February 12, 2011

NY times E-book best seller list Bought

Bought. Otherwise how do you explain:

"Among the categories not actively tracked at this time are: perennial sellers, required classroom reading, textbooks, reference and test preparation guides, journals, workbooks, calorie counters, shopping guides, comics, crossword puzzles and self-published books."

Utter BS. They know how well the other books in Amazon's best seller list are selling (from publisher inputs). So estimating sales would be easy. the only reason to exclude is that indie authors do not buy NT Times ad space. Grrr...

If it wasn't for the above, I could accept:
"E-books available exclusively from a single vendor will be tracked at a future date."

Read the small print. The NY Times Ebook best seller list is corporate bull. Spoon feeding the public false information. This list is intentionally trying to make the AAP publishers look better.


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Monday, February 7, 2011

Print Book Market share

I find this is one of the more abused concepts out there. How can book market share be so uncertain? Working in just rough numbers

Indie bookstores 10% pbook market share

B&N at 16% print book market share.

Borders is down to 5%

Wait, where did the 10% market share go that I've read before?!? Has Borders been collapsing that quickly or is there that much rounding in print book market share? No one expected them to hold prior market share, but that is pretty small market share...

What about Amazon? While the market share
estimated 20% to 25% of pbooks.
Now, I've read that at the end of 2009 Amazon was 15% of the book market, so this is tremendous market share growth.

Now we have 17%+5%+20% (to 25%)+ 10%= 52%. This ties in with what I've heard about big box retailers holding one third to one half book market share.

Borders 13% market share in 2006, Amazon 10% back then. B&N at 17%

Amusing link promising 70% print market share through 2020. By 2013 that prediction will be proven false.

Why does this matter on an ebook blog? Mostly the impending Borders bankruptcy. If the rumors are true of 150 out of 650 Borders stores closing than we would expect customers to distribute as per existing book market share. But how likely are these customers to go to ebook? Some will have little choice as the nearest book store is too inconvenient and if one is to go internet books, why not go all the way? Some will transfer to another print source.

So in the attempt to constantly refine my prediction, I expect Borders closing 150 stores to push about 10% of their customers to ebooks. That is 0.5% market share growth for ebooks. Before you yawn at ebooks growing another ~5%, realize this is additional 'push' market share growth above and beyond other trend lines.

I also consider Borders the #1 US retail source of 'variety' in print books. IMHO, the most valuable ebook customer is the 'variety' book buyer. Those customers tend to buy books in quantity (30+) and are willing to try new authors. My calculations estimate those buyers at 35% of the total book market. (Top 10% are 70% of the book market and I estimate half of those customers are the 'variety' customers.)

There will be a 'tipping point' at some time that "pushes" a rush of customers to ebooks. Let me be clear, we are not near the tipping point. That has traditionally happened at 20% market share for a technology. The shift from 20% to 60% market share has historically been the 'run away' growth for any technology (Examples: DVD, mp3, ps2 or Wii, etc.)

The current print distribution system is not set up to handle a 20% cut in volume. There will be a reverse 'economy of scale' effect as the costs of shutting down warehousese eventually adds up. We can 'hand wave away' the current slowdown, but eventually it will drive up unit costs. It is incredibly tough to cut unit costs with declining volume.

You might think I'm too fixated on the '20% market share' number. That's ok. Pick your own number. At some point there will be a 'push rush' to ebooks.

In my opinion, 80% of today's ebook growth is 'pull growth.' Pull growth is when customers switch technologies due to the advantage/convenience of the technology. 'Push growth' is when a new 'inconvenience' forces them too. Note: I include deteriorating vision in 'push growth'. Its not just book store closings.

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Friday, February 4, 2011

Borders keeps having Trouble

Rumors are that Borders will declare bankruptcy soon. The same link notes that 150 of 650 Borders stores are slated to close.

Borders receives de-listing warning from NYSE. Basically, the stock isn't worth enough to be listed on the exchange.

The loan from GE has a slew of conditions.

This 3rd link is the most important. Unless Borders can find lenders for another $300 million bucks, the GE load of $550 million isn't going to happen. Borders also has to find a way to make landlords allow Borders to walk away from the leases.

"Lukewarm" reception to junior debt is not something investors like to hear. I really doubt Borders can secure the GE loan without Bankruptcy court protection.

Borders needs to cut lease payment

Not all Borders locations are bad. The local two Borders are both ghost towns that unfortunately should be due for closure. :(

What really matters is that Borders closures will reduce the selection of print books. Yea... Borders isn't the store of 150k titles anymore (not after installed the larger coffee shop, toy section, etc. Yet it still carries more variety than B&N.

I have a few coworkers who are adapting to book store closings by buying either Kindles or the Nook Color. The 'Grand Dame' department secretary at work has become enamored of the Kindle. There is little point in yours truly trying to convince coworkers to buy Kindles, she is far more persuasive! ;) So for the overall book industry, the estimate 150 Borders closing will probably have little impact. I do wonder about the 'economies of scale' of print books.

In my opinion, this feels like film. As in film cameras. Once the top photographers went digital and Kodachrome (slides) went out of production, the downhill was quick from there. If you look at my prior post and extrapolate another year of 100%+ growth in ebooks (more likely 200%+), then I do not see how certain formats will thrive anymore.

Sometime in the next few months, the true fate of Borders and print books will be known.

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