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Problems with a “Kindle in Every Backpack”

Wednesday, July 15th, 2009

Interestingly, on the heels of last week’s ALA conference in Chicago, the Democratic Leadership Council (DLC) has released a proposal: “A Kindle in Every Backpack: A Proposal for eTextbooks in American Schools”.  This influential DC-based think tank promotes center-left-leaning policies related to education, trade, pro-business tax and economic reform and health care according to their website.  The report was issued by Tom Freedman, a policy analyst and lobbyist, who had worked as a policy adviser to the President in the Clinton administration as and former Press Secretary and Policy Director for Senator Schumer (D-NY).  Unfortunately, this is the kind of DC policy report that approaches these issues from a 30,000-foot level from an expert who, by the looks of his client list, has no experience with the media or publishing industries and therefore comes to the wrong conclusion.  This perspective leads to a report is light on understanding the business impacts, the pitfalls of the technology at this stage, and the significant problems that would be caused by leaping at once behind still maturing technology.

The report does make several good points about the value of e-texts. The functionality, the reduction in manufacturing costs, the up-date-ability of digital versions, the environmental impact and savings of digital distribution, all make the move to ebooks very compelling. I do agree that this is the general direction that textbooks are headed.  However, before we jump headfirst into handing out ebook readers (especially the Kindle) to every child, there’s much more to this topic than Freedman’s report details.
While a good idea from some perspectives, Freedman misses the trees through the forest.  First of all, while I am incredibly fond of my Kindle, it is not perfectly suited for textbooks.  Here are several concerns I have at this stage, in no particular order.  Many of these topics were themes we covered in the NISO / BISG Forum last Friday on the Changing Standards Landscape for Ebooks.  We’ll be posting video clips of the presentations later this summer.  NISO is also hosting a webinar on ebooks next month.
The business models for ebook sales are very early in their development.  Many critical questions, such as license terms, digital rights management, file formats and identification still need to be explored, tested and tweaked.  It took more than a decade for the business model for electronic journals to begin to mature and ebooks are only at the outset of these changes.  Even a year later, the market of e-journals is still a tenuous one, still tied in many ways to print.  It will be at least a decade before these same models mature for ebooks, which is a larger and in many ways a more complex market.

While a print book might be inefficient from the perspective of distribution, storage and up-to-date content, print has the distinct advantage in that it also lasts a long time.  Freedman’s report notes that many school texts are outdated.  A 2008 report from the New York Library Association that Freedman cites highlights that “the average age of books in school libraries ranges from 21 to 25 years old across the six regions of the state surveyed, with the average book year being 1986.”  That NYLA report also found that “the average price of an elementary school book is $20.82 and $23.38 for secondary school books.” So if one text were purchased once and used for 20+ years, the cost per year, per student is less than $1.00.  I seriously doubt that publishers would be willing to license the texts for so little on an annual ongoing subscription basis.  That would reduce the textbook market from $6 billion per year less than $1 billion (presuming if the 56 million k-12 students were each given an e-book reader with 6 books at $2 per book, which is more than twice the current cost/year/book detailed in the NYLA report.) The problem is that the textbook publishes can’t survive on this reduced revenue stream and they know it.
I don’t want to quibble, but the data source that Freedman uses for his cost estimates is simply not accurate for manufacturing as a percentage of overall costs of goods sold.  Therefore his estimate of the potential costs savings is way off the mark.  Freedman claims that the savings by moving to digital distribution would be in the range of 45% and is simply wrong.  Anyone who has dealt with the transition from print to electronic distribution of published information knows this.  To paraphrase NBC Universal’s Jeff Zucker, the publishing world cannot sustain itself moving from “analog dollars to digital pennies.”  The vast majority of costs of a product are not associated with the creation and distribution of the physical item.  Much like most product development, most people are shocked to realize that it costs less than a fraction of a penny to “manufacture” the $3.00 soda that they purchase at a restaurant, or only $3 to manufacture the $40 HDMI cable.
Physical production of books (the actual paper, print and binding) represents only about 10-15% of the retail price.  Had Freedman actually understood the business (or Tim Conneally, who wrote the cited article) he would have understood the flaw in the following statement “32.7% of a textbook’s cost comes from paper, printing, and editorial costs.”  The vast majority of the 32.7% are not manufacturing costs, they are editorial and first copy costs, which do not go away in a digital environment.  Unless people are willing to read straight ASCII-text, a book still needs to be edited, formatted, laid out, tagged for production, images included, etc.  This is especially true in textbooks.  These costs do not go away in a digital environment and will continue to need support.  If the industry is functioning on $6 billion in annual revenues, reducing marginal costs by even 20% wouldn’t allow it to survive on less than half of present revenues.  This is a problem that many publishers are finding with current Kindle sales and has been the subject of a number of posts, conjecture and controversy.
A much better analysis of the actual costs of manufacturing a book than what Freedman uses in his paper is available on the Kindle Review Blog. Even though this analysis is focused on trade publication, the cost splits are roughly equivalent in other publishing specialties.
Costs are another issue inhibiting the wide adoption of ebook reader technology.  Once the cost-per-reading device decreases to a point where they cost less than $100 per device they will likely begin to become as ubiquitous as the iPod is today. However, they will have to drop well below $100 before most school districts will begin handing them to students. I doubt that it will take place in the next 3-5 years.  The reasons for this are myriad.
At the moment, the display technology of e-book readers is still developing and improving.  This is one of the main reasons that manufacturing of the Kindle was slow to meet the demand even into its first year of sales.  Although increased demand from a program such as proposed would significantly boost manufacturing capabilities, it is still an open question as to whether e-ink is the best possible technology, although it is very promising – and one that I’m fond of.  Would it make sense for the government through a “Kindle for every child” program to determine that Kindle and its technology are most appropriate, simply because it was first to market with a successful product (BTW, I’m sure Sony wouldn’t agree with this point.) Even recently with several hundred thousand devices produced, the manufacturing costs for the Kindle are reported to be about $185 per device.  It would take a 75% reduction in direct costs to make a sub-$100 price feasible.  That won’t happen quickly, even if the government through millions of dollars Amazon’s way.
Other issues that I have about this idea are more specific to the Kindle itself and its functionality.  The note-taking feature is clumsy and when compared to writing in the margins or highlighting on paper falls short – although it is better than other devices (particularly the 1st gen Kindle).  Other devices, with touch-screen technology appear to handle this better, although these too are several years from mass-market production.   Even still, they would likely be more costly than the current e-ink technology.
At the moment, Kindle is also only a black and white reading device.  Some color display technologies are being developed, but the power drain is too significant for any but small, iPhone-sized devices to support long-term use (such as the week or more between Kindle charges).  The fact that the display on the Kindle is only in black and white would pose significant problems for textbooks where color pictures are critical, especially in the sciences.  This goes back to the underlying costs of the systems noted above.
Also, the Kindle is a closed proprietary system completely controlled by Amazon.  While fine for the moment in its current, trade book market space, it would be unlikely for a whole new class of publishers (K-12 textbook publishers) to hand their entire business model over to a single company, who many publishers already consider to be too powerful.
The rendering of graphics, charts and forms is clumsy on the Kindle, in part because of the Kindle format, but more because the file format standards are still improving in this area.  Also, the reflowable file format, EPUB, is still maturing and how it handles complex format issues, as would be the case in textbooks, are still being improved.  EPUB, an open standard for publishing ebooks, isn’t even naively supported by the Kindle, which relies on its own proprietary file format.
While a great grand vision, I’m sorry to say that even the pilot described in Freedman’s paper isn’t a good idea at this stage.  The ebook market needs time to work through the technical and business model questions.  The DLC report he wrote presumes that dumping millions of dollars in a program of this type will push the industry forward more rapidly. My sense of the energy in the ebooks market is already palpable and would progress regardless of any government intervention.   The unintended consequences of this suggestion would radically and irrevocably alter the publishing community in a way that would likely lead to diminished service, even if it were to be successful.  Eventually, educational textbook publishers will move in the direction of ebooks, as will most other publishers.  Digital versions will not replace print entirely, but they will supplant it in many cases and textbooks are likely one segment where it will.  However, it will take a lot more time than most people think.

A lesson in doing customer service well: Thanks, Amazon

Sunday, July 12th, 2009

I am often astounded by the lack of customer service in many organizations, particularly in the services environment.  We all have horror stories and more than a few of us (myself included) are not shy about complaining publicly about it when things go wrong.  Although, sadly, this doesn’t usually change the offending company’s behavior.  My belief is that we should equally vehemently praise a company when it does a good job in responding to customer needs.
Last month, I purchased a new 2nd generation Kindle.  I’ve been meaning to for a while, but finally got around to it in mid-June.  It is a great device and a substantial improvement over the 1st gen device.  The size, speed, and design particularly the navigation button placement are vastly improved.  I’m also a HUGE fan of the Whispersync service with my iPhone Kindle app.  If only Amazon would implement native EPUB support, but that’s another matter….  When I purchased it last month the price was $359 — a lot for a reader, but in all honesty, I needed a new toy!  Seriously, anyone in publishing should be paying very close attention to what is taking place in the ebook space, since it will radically transform our industry in the coming years.  Having a e-reader and engaging with electronic books is critical to understanding these changes and planning for the future and every publishing executive should have one and use it regularly.  So, while not exactly pleased with the price, I saw it as an investment in staying abreast of technology in our community.

Last Thursday, while in the cab on my way to a meeting of NISO’s Architecture Committee at the University of Chicago, I read a twitter post that Amazon had just dropped the price of the Kindle to $299.  A wise move, I thought from the perspective of boosting marketshare and increasing adoption.  Few apart from tech early adopters, publishing execs and some commuters who read vericiously would see the value at nearly $400.  As the price drops, the value becomes more apparent.  A few have mentioned a price point of $199 as the point where ebook readers will take off in a mass market way.  My feeling is that somewhere under $100 is the point at which you’ll start to see them everywhere.  Based on the estimated cost to produce the current generation Kindle of about $185, the price is not unreasonable, but still more than most people will shell out.  There’s been some analysis about what the price drop means and whether it’s a good sign or bad for ebook market. In all liklihood, it is a good sign with increasing sales (or even competition from different readers) comes efficiencies of scale, which lead to lower prices.  Since the Kindle 2 was just released in late February, it is unlikely that there is a 3rd gen product coming out the door from Amazon in the coming months.

At first, this price drop irritated me–personally–quite a bit.  If only I’d waited another couple weeks, I thought at first, I would have saved myself the $60.  Not the end of the world, but frustrating none-the-less.  However, word quickly spread online that Amazon would refund those who had purchased the device in the 30 days prior to the price change if you contacted customer service. Although I couldn’t find any specific information about the refund on the Amazon site, I knew from the postings online that contacting customer service would respond if queried.  And this is where Amazon deserves a fair amount of praise.  Thursday evening at around 11:00 pm, I sent an email to their customer service department:

I purchased a Kindle 2 on June 13th. I’ve noticed that Amazon has dropped the price of the new Kindle by $60 today.  It has been circulating on various blogs and postings that if someone purchased a Kindle in the last 30 days (which I have), Amazon was issuing refunds on the $60 difference.  If this is correct, how do I go about requesting that refund?

As a general customer service suggestion, I can find no information about this policy anywhere on your site.  Also, since your company is extremely efficient at tracking orders, couldn’t you make this account adjustment automatically, without having customers go through the hassle of tracking customer service down and requesting the refund?  Obviously, not in Amazon’s financial best interest, but it would be easy and simple as well as good PR if you did it automatically.  Everyone knows you have and store this information.  Why couldn’t you make it easier?  Just a thought from a former marketing executive and publishing professional.

With thanks,

Todd

By 9:30 the next morning, I’d received the following response:

Hello,

Thanks for contacting us about the recent price change for Kindle (Latest Generation). I’ve reviewed your order and see the price change occurred within 30 days from the time your Kindle order shipped.

Because of the circumstances, I’ll issue a refund for the price difference in the amount of $60. You should see the refund in the next 2-3 business days.

Thanks for your comments about refunding automatically to customers. We’ll consider your feedback as we plan further improvements.

Customer feedback like yours really helps us continue to improve our store and provide better service to our customers. Thanks for taking time to offer us your thoughts. I appreciate your thoughts, and I’ll be sure to pass your suggestion along.

And by 4:30 the $60 refund had been redeposited into my account.  Now, I certainly feel for those who’d missed the 30-day deadline for the refund.  Actually, the person who passed the information onto me about the refunds had actually missed the deadline by about a week and so wasn’t able to get the refund despite pleading with Amazon.  However, Amazon has always had a policy of 30-day returns and price change refunds, so this fits within established practice for them.  Regardless, I was extremely pleased with the customer service responsiveness of Amazon.  For all of my flaming companies who don’t do customer service well, I thought it was only fair to highlight a company that had done something well.  Now, if only my credit card company would pay attention…