Digital downloads have transformed the music industry—digital sales were $1.1 billion last year. While the digital revolution, led by the explosive growth of the iPod, hasn't had that dramatic an impact on spoken-word audio, downloading is reshaping the way audio is bought and sold.

Though digital downloads still account for a relatively small part of audio publishers' overall revenue (the most recent Audio Publishers Association survey lists digital downloads as 6% of members' sales in 2004, or about $50 million), it is the fastest-growing segment of not only the audio industry but the entire publishing industry. At Random House, senior v-p and publisher Madeline McIntosh noted that digital sales represent about 10% of the audio group's total business, and growth is expected to continue at a rapid clip. For Hachette Books AudioBooks, downloadable audio was 10% of total business in 2004, but digital audio director Karen Cera said that the digital portion of the business grew more than 200% in 2005. And digital audio revenue doubled at Simon & Schuster last year.

Digital distributors are feeling flush, too. Audible, the leading distributor to consumers, had an 83% revenue increase last year, to $63 million, and new customers for Audible's various subscription levels rose 67%, to 303,000. OverDrive, a distributor of downloadable audio to libraries and organizations, which launched its digital delivery business in 2004, supplies digital downloads to more than 2,000 public libraries in the U.S. and abroad employing a one copy/one user model, rather than subscriptions.

But most growth spurts come with attendant growing pains. Digital downloads are no different, stirring up a number of issues for publishers. One of the most obvious questions is whether the proliferation of downloads will cannibalize traditional formats or eliminate booksellers' role in the audiobook sales equation. "CDs are not going away anytime soon," said Chris Lynch, publisher of Simon & Schuster Audio. "Remember, we're just now phasing out cassettes. We're still years away from downloading becoming the dominant format. When that does happen, booksellers, especially booksellers that sell music, will have the capability through kiosks or some other mechanism to sell digital downloads in their stores."

As Eileen Hutton, v-p, associate publisher of Brilliance Audio, sees it, the move away from traditional formats can't hurt retailers, since few stock a lot of CDs or cassettes anyway. "One of the biggest problems for audiobook consumers today is the very small footprint of audio in most bookstores. There just isn't enough space allocated to allow for much breadth of selection," Hutton said. "Bricks-and-mortar retailers are driving their customers to the Web, to either buy physical product or to buy downloads."

Early indications are that downloads are complementing sales of traditional formats. "We've not seen evidence of the digital format having a negative impact on CD format—just the opposite," said Ana Maria Allessi, publisher of Harper Audio. "Overall awareness of audiobooks has increased and CD sales are strong." OverDrive CEO Steve Potash concurs: "These are still new markets and everyone is to some degree experimenting. But digital will not replace CDs or even completely kill cassettes; it's an additional market." And, as Cera reasons, all formats can get along: "Different formats of audiobooks have different audiences."

In terms of getting the word out to various audiences, the nature of digital audio files has made them an ideal promotional tool. S&S Audio, HighBridge Audio and Holtzbrinck are among the companies currently using podcasts to promote audiobook titles. "We produce each podcast as if it were a weekly radio program," said Lynch. "There is no definitive way to measure the impact on sales, but we know that some of our podcasts have reached between 20,000 and 30,000 people."

Creating digital files is of course, at the heart of the audio operation, and it all begins with procuring rights to content. Like audio technology, the audio rights picture is changing. "Underlying audio rights are perceived as much more valuable—a right that is worth taking care of, and one that the author is increasingly interested in," said Allessi. RH's McIntosh said that RH buys rights to publish audio in all formats. "For digital, we do pay the authors a higher royalty rate, so digital growth is something that has made our authors happy. I think the main subject of concern for authors and agents should be, and is, whether their publisher is fulfilling the responsibility to protect the author's content and revenue stream, no matter what format the consumer chooses," McIntosh said. Hutton added that Brilliance always asks for world English rights and a minimum 10-year license. "With digital distribution, territorial rights are more important than ever," she said. The long license ensures that an audio company can sell a digital copy even when a work is no longer selling in stores.

The distribution channel is also an integral piece of the audio download puzzle. In this area, security is of paramount concern to publishers, as the threat of file swapping and Internet piracy always looms. For now, Brilliance and Naxos Audiobooks are among the few publishers distributing their own downloads on their Web sites. In addition, these companies, and the majority of publishers, make nonexclusive licensing agreements with the major distribution players—iTunes, Audible, MediaBay and OverDrive—which provide publishers with encryption and market penetration.

While there is money to be made in the digital download arena, the profit doesn't come solely from eliminating the pressing of CDs, physical packaging and warehouse space. Cera noted that there are production costs specific to the format, including encoding, converting, hosting, maintaining and delivering files. "The most significant costs we face as an audio publisher are rights acquisition and recording, neither of which goes away with digital distribution," noted McIntosh. Publishers do save on packaging, distribution and inventory costs, and those savings are passed on to consumers in the form of lower prices and to authors in the form of higher royalties.

Publishers unanimously expect digital audio to continue to grow rapidly, driven by the emergence of new outlets and formats such as satellite radio, smart cellphones and enhanced PDAs. "What's really happening here is that downloading is making audiobooks sexy again," S&S's Lynch noted. "The more people talk about downloading, the more they talk about the value of audiobooks. We went from boring 'books on tape' to a key player in the digital revolution in the era of multitasking. Right now that change in perception is helping lift sales across the board, and I think that trend will continue for the foreseeable future."

Top 5 Audiobooks on iTunes *

1 The Da Vinci Code (unabridged) by Dan Brown (provider: Books on Tape)
* As of May 4
2 How to Make People Like You in 90 Seconds or Less (unabridged) by Nicholas Boothman (provider: Listen & Live Audio)
3 The Ricky Gervais Show: The Complete Second Seasonby Ricky Gervais, Steve Merchant and Karl Pilkington (provider: Glyn Hughes)
4 Rapid Spanish: Volume 1 (unabridged) by Earworms Learning
5 Angels & Demons (unabridged) by Dan Brown (provider: Simon & Schuster Audio)

Audio Prices

Title Download Retail CD
Harry Potter and the Half-Blood Prince $49.95 $75
The World Is Flat $18.95 $29.95