Reality Check

Simply put, 2001 was a reality check for the electronic publishing industry. In all aspects of the e-publishing field, companies went out of business. Companies that performed support functions for the delivery of e-materials--such as data conversion and DRM--were among the casualties: DigitalGoods, Versaware, Reciprocal, WizeUp, et al. And several start-ups that aimed to supply digital content to consumers also closed their doors: Audiohighway.com, Bookface.com, Booktech, Contentville.com, MightyWords.com. Fledgling print-on-demand publisher Sprout didn't make it past mid-year, and the online rights marketplace Rightsworld.com, shut down, while Rightscenter.com underwent a reorganization. Netlibrary, one of the highest-profile players in the e-world, is in bankruptcy, but continues to operate as it waits for court approval to be acquired by OCLC.

Other companies that have downsized and/or changed their business models include Questia, Xlibris, iUniverse, ebrary, DigitalOwl and Intertrust. Baker & Taylor scaled back its e-publishing plans for Infomata, moving the company, which had acted as an affiliated unit to B&T, back inside its parent. Even Lightning Source, which is doing lots of POD and e-book work, eliminated some positions in response to changing market demands.

The e-book efforts of most traditional book publishers underwent a rollback last year. The most noticeable shifts were at two of the companies that were the most aggressive in testing the e-book market, Random House and Time Warner Trade Publishing. Random House dissolved its e-book imprint, AtRandom, and TWTP folded its iPublish e-publishing department. While HarperCollins went against the grain to launch PerfectBound, the attitude of many trade houses is that they need to be prepared for the digital future, but have no plans in 2002 to make major new investments. Experiments on the order of iPublish will be rare in the near future. John Sargent, president of the von Holtzbrinck trade group, noted that while his group will participate in the e-book market, "we're not going to invest in it" until the market grows.

Glenn Sanders, cofounder and director of the Electronic Publishing Resource Center, observed that the many e-publishing failures in 2001 were a normal part of developing a new industry. "A lot of people jumped into the market hoping to set some kind of standard, so I expected to see failures," Sanders said. Jim Lichtenberg, president of the consulting firm Lightspeed, noted that the shakeout brought back a sense of "reasonable expectations about where this market is going." The head of one e-publishing service company maintained that some of the companies that went out of business in 2001 did so not because of low demand, but because of high overheads. "Some forgot that this is a scrappy, start-up business," and spent money extravagantly, the executive said. Sanders pointed out that in the e-book market in particular, the smaller companies, such as Hard Shell Word Factory and Fictionwise, have been the ones that have succeeded. "They've just kept on doing what they have been doing, adding content and new customers," he said.

To be sure, a number of e-publishing start-ups were well-funded, especially by publishing industry standards, and before the Internet bubble burst, they had little reason to think the money spigot would be turned off. By the time these companies realized there was no more capital coming, it was too late. Reciprocal, for example, had raised some $80 million, while netLibrary went through more than $110 million. Questia has raised more than $136 million. "Capital may have been too free" in the early e-publishing days, opined Michael Miron, CEO of ContentGuard.

One of the consequences of easy money was that not enough companies developed sound business plans. "One of the lessons of 2001 was that companies need a real business model," Lichtenberg said. Lightning Source CEO Ed Marino is one of several executives who agreed with Lichtenberg, noting that his firm has succeeded by using its POD work to subsidize its e-book efforts. Christopher Forbes, CEO of online database publisher Knovel.com, explained that his company's most successful business tactic has been the adoption of a "very traditional model. We sell annual subscriptions" to online information.

Flexibility also has been key to survival. IUniverse, which has recently received $18 million in new funding, has evolved from primarily serving as an online vanity publisher to providing back-office digital services to publishers. Ebrary, originally designed to sell online information to college students, has not yet launched its Web site, but has licensed its technology. Varsity Group, the first online college bookstore, earned its first profits when it scaled back its business of selling books directly to college students in favor of supplying new textbooks to colleges and private secondary schools. Indeed, companies that have adopted a business-to-business model generally have fared better than e-publishers such as MightyWords and Contentville, which tried to sell directly to consumers. Forbes admitted that Knovel has had little success selling information to consumers, but pointed out that it has been extremely successful in selling blocks of information to corporations as well as to government and academia. Andres Nanetti, CEO of Rovia, which offers online access to reference materials, said, "We're a software company, not a content company. We do not advertise to consumers. We sell our services to publishers." Nanetti maintained that the corporate market is ripe for e-publishing. "Corporations do not want paper books. They want an array of information that is constantly updated. They do not want inventory or corporate libraries," he said.

As the above examples show, there have been successes in the e-publishing market. Despite the shakeout among e-companies, "there remains an industry commitment to go digital," observed an executive at an electronic service provider. "The digital delivery of information has been growing quite nicely," added Lichtenberg. The professional and educational markets have long been predicted to adopt e-publishing before the consumer sector, and huge professional and educational publishers such as Thomson Corp. and Reed Elsevier are deriving larger and larger percentages of their revenues from electronic publishing. Nevertheless, even this market has not been without its problems.

One problem that continues to plague all companies involved with electronic publishing is the lack of standards. "It's driving everyone crazy," Lichtenberg said about the inability of publishing to develop common standards. Companies "won't fully derive the benefits of economies of scale without more effective standards," agreed Miron, who hopes his XrML 2.0 DRM program will become the rights language standard. According to Miron, issues such as bandwidth, device types and transportability "need to be solved with everyone working together." Frank Daly, executive director of the Book Industry Study Group, said that different groups within the industry are "working in their areas of strength" to develop standards applicable to their field of expertise. BISG, for example, is developing a Digital Sales Reporting system that will allow publishers to track the sale of e-books (and presumably most other e-materials) by channel and hopes to have its system ready by the end of 2002. The Open eBook Forum is working to develop common specifications for transmitting e-materials.

As Sanders of EPRC said, the shakeout in the electronic publishing industry, which a number of players believe will continue into 2002, was not unexpected. According to Miron, the shakeout "is not unique to books. It took several years, and lots of missteps, before the personal computer became a widely used technology." That the early euphoria about e-books has given way to disillusionment is not a surprise, Miron said.

Disappointment with the initial demand for consumer e-products has been the major reason why traditional trade publishers have reduced their involvement in e-publishing. But another factor has also been at play--the fear of being "disintermediated" has lessened--at least for the near term. While all parties in the publishing supply chain jockey for position, there is less concern at the moment that a particular function will be totally eliminated. So while publishers dabble in selling e-books directly to consumers, and booksellers spread their publishing wings, and authors try to be both publisher and bookseller, few believe that the existing publishing paradigm--authors creating, publishers publishing, distributors distributing and booksellers selling--will change overnight.

Disillusion and disappointment not-withstanding, few doubt that electronic publishing will become a vital part of the publishing industry. Lichtenberg said publishers have learned that they must improve the consumer experience. And many e-publishing professionals note that as computing devices improve--and the prices go down--more consumers will begin to embrace the lower cost, portability and general convenience of using all kinds of electronic content-although when that will occur is a matter of some debate. Sanders sees "slow growth, but steady progress. Companies are being forced to take the long-term view." Marino also foresees steady gains in 2002, and is heartened by the fact that December was Lightning Source's best month ever. Though he acknowledged that he has no timetable, Miron said, "In 10 years you'll be surprised how big electronic publishing will be. There is too much latent demand for it not to happen."