In the May issue of Inc. magazine, Tim O'Reilly was asked his greatest extravagance. "Books. I have about 10,000," he replied, comparing his collection to "a gentleman's library in the era of Thomas Jefferson."

Dubbed "The Oracle of Silicon Valley," the Inc. profile by Max Chafkin goes on to capture the essence of the man who started his now $100 million business around computer manuals. "His company got into the e-book business more than 20 years before the release of the Kindle; it created the first commercial website; and it was making money off the open-source software movement when software patents were still the rage," Chafkin writes. "In short, [O'Reilly] is the guy who will tell you what smart people will be talking about five years from now, the guy who predicts the future."

Lucky for us, O'Reilly has chosen to apply his vision to publishing. In 2007, O'Reilly launched the popular Tools of Change conference, with the goal of bringing together a diverse array of thinkers and industry players to address the technology opportunities and challenges facing the publishing world. Over four years, the conference has thrived. In 2009, ToC went international at the Frankfurt Book Fair. The February 2010 event in New York set another attendance record. And next year, the conference will move to a larger venue in New York, a testament to its ever-growing reputation within the publishing community.

"[ToC] started as a response to a presentation that my cofounder, Dale Dougherty, made to me and Laura Baldwin, our COO, about company strategy," O'Reilly tells PW. "Dale made the point that at O'Reilly we've always done best when we organize ourselves around big ideas, whether it's open source or Web 2.0, and one of the areas that jumped out at me was publishing. Publishing is a major part of our business, but we weren't taking the time to really get organized around what matters to its future. So I started the conference as a way to organize the community." O'Reilly concecedes that the conference can be a head-spinning affair for some traditional publishers. "A lot of people in publishing say, ‘Wow, this is kind of too geeky,' " O'Reilly says of ToC, with a laugh. "It's the geeky publishing show. But this is the technological revolution. If you don't want to understand the technology, you know, don't play. But don't kid yourself that you can somehow make it go away."

By now, of course, publishers have accepted that digital is central to their future. But technology is a fast-moving target, and at a time when book publishers are trying to reconfigure their businesses for the Web, the Web giants themselves are busily trying to seize their own futures.

At his keynote address at this month's Web 2.0 conference, O'Reilly said it was "crunch time" for the Web. Over the course of his talk, he briefly evaluated the major companies that will help determine the future of the Web—companies that are now pushing strongly into the e-book space. Apple, with its App Store, has a vision of "world domination," O'Reilly observed, a vision that represents a major shift from the open Web. Google's is a more positive vision, but the company is in danger of losing its way, he suggested, with new products that perhaps now compete with, rather than cooperate with, the kind of developers the company built its business on. And there is Amazon, whose strategy O'Reilly says is not unlike Apple's in its desire to lock in certain markets, particularly books, with its retail strength and its popular Kindle platform.

"The reason it's crunch time is that we are going to be choosing what platform we use, whether it is Amazon or Apple or Google or whatever, and it seems to me that some of these guys are trying to build the same kind of ‘one ring to rule them all' platform that Microsoft did," O'Reilly explained to the BBC in a recent Web 2.0 conference follow-up interview. The "one ring" comment, he notes, is a Tolkien reference. "It means ‘we will own this thing,'... and that story doesn't end well."

As the publishing world gathers for the 2010 BEA, PW caught up with the "oracle" himself, for a quick take on the state of the industry, and its fast-moving technological transition.

PW: After another year of tripledigit growth for e-books, with more platforms and devices—Kindles, Nooks, iPads and smartphones—and more talk about tipping points, what's your assessment of the ebook market?

Well, first, I think it's a mistake to think of an "e-book market" because we're not all in the same market. Harry Potter, for example, is not in the same market as O'Reilly—in one case, somebody is buying into an imaginative world and in the other case someone is looking for information. I think you have to think specifically about what job your book does for a reader. Because there are now huge classes of products that used to be books that aren't anymore, and that will never be e-books, either. Look at Rand McNally, or even dictionaries. Erin McKean, who used to work at the Oxford English Dictionary, gave a great talk about this at one of our ToC conferences called "Dictionaries and Other Book-Shaped Objects." There's a lot of life in e-books and e-book readers, but there are also whole classes of books that are simply going away. Netflix is the new Roger Ebert Movie Home Companion, Google is the encyclopedia. These things are real replacements for books. When we say book, or e-book, we're talking about immersive reading of content assembled for a reader. But I'm a little concerned that thinking is still too narrow, because you still see a lot of people simply trying to reproduce digitally what was there before, rather than asking themselves what users really want.

PW: Safari Books has helped pioneer the e-book, but one of the things I still hear is that Safari works because you have a techoriented audience, implying your experience doesn't apply to most trade publishing. Do you think that's true?

It is probably true for some cases, but that's still kind of a silly way to dismiss a large market. I mean, publishing is all niches. The opportunity is to figure out what you can learn from any given niche. I think there are classes of books, even consumer books, where there's enough frequent reading that somebody could become a subscriber. I could easily imagine a romance subscription service. And I think Disney has played around with it for children's books. I think there's going to be a lot of niches where the Safari model could apply.

PW: What's your impression of today's e-book devices and their potential impact on the industry?

There's a lot of upside in devices like the iPad. But I think too many people are too focused on form factors. I think discoverability remains a key problem, for example. I gave a talk once where I said retail distribution exists for the same reason we have alveoli in our lungs: to increase the surface area where reactions can occur. As we move to e-commerce and physical retail goes away, the biggest challenge for publishing is to create more surface area where people can encounter books. I think publishers should be thinking a lot more about visibility.

PW: In that vein, critics have taken issue with the sort of lock-down nature of today's reading devices. Do you think the current "walled garden" e-reader model is a problem?

It's absolutely a problem. I think we're now in this sort of Apple-inspired desire for reader lock-ins to particular devices. And that's not good for customers. But I think eventually that is going to go away, because I don't think any one player is going to win. I think Google has been a benevolent player in this space, even though I don't agree with everything they've done. But with Amazon and Apple both trying to lock consumers in, throwing their weight around and telling people what they can and can't do, people are starting to realize that, "Oh, wait a minute, it's not necessarily Google that is the one to fear here!" At O'Reilly, we're very strong in saying no DRM, and we offer e-book bundles. We offer our customers PDFs, EPub, they can get a MOBI file and a PRK file for Android, whatever, or all of the above. We do that as sort of a hack because we want to make it easy for customers.

PW: Google is now entering the ebook market in a big way, with the proposed settlement, if approved, and soon with Google Editions. Do you have any thoughts on Google's foray into e-books?

Well, first off, I would say that I despise the AAP and the Authors Guild for what they did with this settlement. I despise them. They did the absolute worst thing possible, because the original position of Google was very much akin to its position for the Web; it was building an index. That would have been a really, really good thing for everybody, to build this big corpus of a search engine that would have book content, which then could be potentially modified. And if it turned out there was valuable stuff there, rights holders would come forward. That was a beautiful model. Then the AAP and the AG stuck their noses in, saying, "We want a piece of this," and they came up with this settlement, which is a far worse outcome than the original plan. And that really bugs me. Still, I believe there's been way too much heat over the settlement, because even in its worst form, it's self-liquidating.

PW: How is the settlement "self-liquidating?"

Well, let's say that the settlement does in fact give Google rights nobody else has to show all these out-of-print, unclaimed works. If something turns out to be really valuable, I guarantee you a rights holder will emerge. But the problem we have now is that nobody is motivated to clear rights for all these old books. So what Google offered was a mechanism to clear rights. Once somebody came forward and claimed a work, they could opt out, withdraw the book from Google, make it available through any other channel they wanted, or not at all. So, over time, Google is effectively left with a so-called monopoly over stuff nobody wants—except Google. And Google's vision, which I think is really idealistic, is to think about the kinds of things that could be done with all these books, for example, feeding projects like automated translation. Think about all the books that have been translated multiple times and what an amazing resource that would be for automated translation. Think about the possibilities for scholarship. But they were held up by a bunch of old-line publishers who didn't create any of that value. The settlement is one of the worst excesses of old media pretending to be standing up for the rights of others, but doing nothing but taking away something that could have been great for everyone. It is an example of how the legal system gets used by entrenched interests.

PW: Soon we'll see Google Editions and its "buy anywhere, read anywhere" e-book plan. What are your thoughts on the cloud-based vision for e-books?

I think "buy anywhere, read anywhere" is a really good vision. But where I feel like Google is still kind of doing it wrong is that they're acting like the old AOL-era Web, rather than like the Web of today. A "buy anywhere, read anywhere" vision is: I buy my EPub at O'Reilly, I register it with Google, and Google keeps track of the pointer, the cloud file, or whatever, as opposed to "buy anywhere, read anywhere, as long as the book is hosted by Google. So, I don't think they've thought through the whole distributed future of this. I wrote a blog post years ago, called "Why Book Search Ought to Work Like Web Search." If O'Reilly has a searchable repository, as we do—Safari has 10,000 books in XML that people subscribe to—why should we compete with Google to get placement in Google search with Google favoring their own versions of those books? From time to time they may push us to the point where we don't want to be in Google Editions because we want our customers to search our copy, as opposed to searching Google's copy. So there is a problem with the vertical integration. And there's some messy thinking within Google. They started their scanning project because there were a lot of books that weren't going to be available online. That was noble. Now, they want to become a repository of all the world's books as opposed to the switchboard to find all the world's books. That's very different from their original business model.

PW: Price has been a thorny issue this year for publishers, from a fight with Amazon over its $9.99 Kindle e-book prices to the introduction of the agency model with iPad. How do you approach price issues?

My ideal pricing model is any model in which there's a lot of room for experimentation. I'm not sure I like the way the agency model came out because it feels like another form of price-fixing. I think the agency model is a little better than Amazon setting prices, though, because Amazon's policy doesn't allow publishers and content creators the freedom to figure out the right price for their works. Prices vary, publishers know this. In my field [computer science], a book that's 150 pages can be $100 because there might be only 1,000 people who are going to buy it. Publishers need to be able to experiment. In our experience, we've done $4.99 books on the iPhone and found that to be a really sweet price point. So we tried to see if we could drive more sales volume if we put some of our downloadable books from O' at that low price point. Turns out it made no difference. We really don't know why, but we had the freedom to try it. Sometimes lower prices will drive a heck of a lot more volume, but publishers need the instrumentation to figure out when that's not true.

PW: What kind of impact do you think such dominant players like Google and Apple might have on the e-book business?

Well, I'll say this: the future will not be dominated by any one player because there are so many different business models. And that's a good thing. I mean, just look at O'Reilly. We don't have just one model. We sell through Safari, our own sort of aggregated subscription service. We also sell stand-alone e-books that you can download directly from O' in a variety of formats. We sell on the iPhone, in the App Store, where each book is sort of bundled with an app. We're building new kinds of apps to aggregate content around particular topic areas. We sell on the Kindle. We sell in Stanza, and we sell in all these other stores. I think this is important, because one of the problems, if not the central problem, facing content today isn't protecting it but finding it.

PW: I'm glad you brought that up, because the conversation in the digital era seems to be dominated by DRM and fears over piracy. Is that justified in your opinion?

I think a big piece of what publishers need to learn is how to live with some leakage. In 2002, I wrote an essay, "Piracy Is Progressive Taxation," that said piracy, paradoxically, is worse in print than online. If somebody steals your content online, you still have the potential of selling it to another customer, who may have even learned about your content from someone who stole it. That's sort of how I think about this.

Now, I'm not a rabid anti-DRM person, because I look at what Apple did with iTunes. They did a good job of creating "fig leaf" DRM, that's DRM that basically signals to users, "you're not supposed to just take this, it's not free" but at the same time is also really easy to get around. I think creating a little friction is good. Creating a lot of friction is not. Our experience has been that people are willing to support the artist or the publisher. We get dozens, if not hundreds, of e-mails a day telling us, "I found an illegal copy of your book on a pirate site," because our customers care. They want O'Reilly to succeed. We're part of their life, part of their business. If you treat your customers as people you care about, they will care about you. If your customers don't care about you, then you're doing something wrong, and DRM is not going to fix that.

PW: Fear of piracy is cited as one reason why publishers haven't moved more boldly into digital. If that's true, how do we get past that fear?

Thomas Kuhn said in The Structure of Scientific Revolutions that for a paradigm shift to occur, the old guys have to die off. I mean, it may be as simple as that, because I don't think some of them are ever going to get it. My ultimate faith is that the market always finds a way through to some kind of sanity. When you have a new market, it takes a while for the economic engines of it to become clear. This is why so much of this stuff is so shortsighted, because people are trying to splice or preserve old economic models instead of trying to figure out new ones. But we already have a real economy of ebooks. Are there tradeoffs? Yeah. There is some piracy, of course. But I look also at the opportunities. More than 60% of our e-book sales come from countries where we have no physical book distribution, so we have this huge expansion of our market as a result of e-books.

PW: Looking forward, can you point to the good, the bad, and the ugly? What do you think is working, and what's not?

Well, we kind of hit on a chunk of what's not working. I think it's bad when you see people trying to protect their old business models rather than trying to serve their customers, and it's ugly when people try to use lawyers instead of customer loyalty to win in the marketplace.

PW: And the good?

I think EPub is working reasonably well, the idea of open standards for content. And I think that's going to get richer and better. I think the idea that there should be many different business models is incredibly important. And I think there's going to be more and more innovation that teaches us what works.

Publishing will grow into itself in the electronic future. Somebody will invent some little piece, people will copy it, someone will do it better, someone will figure out how to scale it, and we'll have a vibrant industry. That's part of our vision with ToC, to get publishers together to share what works. That's why we spend a lot of time evangelizing the idea that it's important for publishers to share data, to tell their stories, talk about innovations that work, and to be challenged.