[A2k] Wall Street Journal: Apple Tablet Portends Rewrite for Publishers

[Thiru Balasubramaniam]

JANUARY 23, 2010

Apple Tablet Portends Rewrite for Publishers


By JEFFREY A. TRACHTENBERG

Book publishers were locked in 11th-hour negotiations with Apple Inc.
that could rewrite the industry's revenue model after the technology
giant unveils its highly anticipated tablet device Wednesday.

Apple's new multimedia tablet device, with a 10-inch touch screen that
is expected to deliver video, text, navigation and social-networking
applications, is trying to change the way much of traditional media is
delivered.

For the book industry, the Apple tablet is bringing to a head a
brewing battle between Apple and industry heavyweight Amazon.com Inc.
over how e-books=97seen as the future of the book industry=97will be
priced and distributed.
[BOOKS]

Apple's business model for books, which the company has kept under
tight wraps, shifts the focus away from the bargain-basement prices
Amazon has made popular, according to publishers that have met
directly with the company. Apple is asking publishers to set two e-
book price points for hardcover best sellers: $12.99 and $14.99, with
fewer titles offered at $9.99. In setting their own e-book prices,
publishers would avoid the threat of heavy discounting. Apple would
take a 30% cut of the book price, with publishers receiving the
remaining 70%.

Apple's vision is at odds with Amazon.com, which has shaken the book
industry by slashing prices of e-books on its Kindle reader and making
the $9.99 e-book bestseller a fixture.

The Apple tablet aims to reshape many corners of the media industry,
just as Apple's iPod revolutionized the music business when it made
its debut in 2001. Apple has been in discussions with television
networks, magazines and videogame publishers about featuring their
wares on the device. On the eve of the launch, it wasn't clear to some
people briefed on the matter whether Apple had made a final decision
about wireless connectivity or the carriers involved.
Journal Community

Many television networks remained skeptical of Apple's proposal to
sell a "best of TV" subscription service under which customers would
pay a monthly fee for access to programs. The networks are concerned
about disrupting their relationships with cable and satellite-TV
companies, which pay billions of dollars in annual fees to the networks.

Among major publishers, News Corp.'s HarperCollins Publishers was in
serious negotiations with Apple late on Tuesday to appear in the
starting lineup for the tablet, set to be unveiled at a news
conference in San Francisco Wednesday morning. News Corp. also owns
The Wall Street Journal.

In the newspaper and magazine industry, several executives were in the
dark about how their content would be distributed and priced. Without
much detail, some publishers have been readying electronic editions
that could be adapted for the tablet.

Many media executives said they expected to get more clarity in
meetings with Apple executives after Wednesday's presentation. While
some of the largest publishers may not be up on stage Wednesday, their
books could appear on the device when it is shipped in March.

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Workers apply the Apple logo to the exterior of the Yerba Buena Center
for the Arts in preparation for an Apple special event in San Francisco.
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Harold McGraw III, chief executive of textbook publisher McGraw-Hill
Cos., said on an analyst call Tuesday: "In the near future you will
undoubtedly see a McGraw-Hill e-book for the college market running on
an Apple tablet." McGraw-Hill isn't expected to be part of Wednesday's
unveiling.

Apple declined to comment on its pricing model or any aspect of the
new device.

Publishers will likely have to choose between Apple and Amazon. While
Amazon has established a dominant position in e-books with its cut-
price titles and popular Kindle, publishers are anxious that consumers
have come to expect such prices. By allowing publishers to set their
own prices, Apple is enabling publishers to re-set the rules and reach
a broad audience.

Aware of the threat, Amazon has been on its own offensive. In series
of meetings in New York last week, the online behemoth made it clear
to publishers that it is opposed to the Apple pricing model, according
to people familiar with the situation. "This is as intense a situation
as the industry has ever had," said one publisher.

Amazon typically pays publishers about half of the cover price of a
new hardcover book for e-book bestsellers. For example, Andre Agassi's
recent memoir, "Open," has a hardcover price of $28.95, which means
the publisher likely received about $14.50 for the e-book edition.
Since Amazon today sells that e-book for $9.99, the bookseller is
losing about $4.50 on each sale=97a hit Amazon has been willing to take
to build a dominant market share in e-books and power sales of its
Kindle reading device. An Amazon spokesman declined comment.

Apple is about to unveil its much-anticipated tablet device, but this
isn't the first time the tech industry has touted the gadgets. WSJ's
Yukari Kane and Julia Angwin discuss what's different this time. Plus.
WSJ's John Bussey says populism will play a key part in Wednesday's
State of the Union address.

The Apple model would bring in less revenue per title for publishers
and authors. Since Apple will take a 30% fee on sales, a $14.99 e-book
will generate $10.49 for publishers. That publishers and authors stand
to make lower revenue per book sold on the Apple model is one reason
some are hesitating about signing up with the tablet.

But there is nevertheless a strong draw: In adopting the Apple model,
the balance of power would shift at least partly back to publishers,
which regain control of pricing. In setting higher prices, they could
provide a level playing field for all e-book retailers. The potential
for publishers is that the device may generate greater volume for e-
book sales. "The reason why publishers will consider this is to bring
in Apple as a major distributor of e-books," said the publishing
executive. "The gamble is if Apple comes to the table with their sexy
device and their millions of customers, will they dramatically
increase the e-book business the way that Kindle did?"

Amazon has unsuccessfully battled Apple before on pricing in the music
industry. Even though Amazon has consistently undercut Apple on prices
of digital music, it has made little headway in building market
share.Since Apple's iTunes store, software and iPod work seamlessly
together, few users see a reason to involve a third party retailerIn
publishing, however, Amazon has had the advantage of being first to
the game.

Michael Serbinis, CEO of Kobo Inc., an online e-book retailer, said
that the new pricing model could add significant profitability to the
e-book retail structure. "A good chunk, at least 20% to 30% of your e-
books, are sold at a loss. This could bring up gross margins closer to
those on physical books."

Whether publishers will be willing to risk a breach with Amazon is
unclear. "Amazon is a dedicated book channel, a longtime retail
partner," said Arthur Klebanoff, co-founder of New York-based
RosettaBooks LLC, an e-book publisher. "Is there tension between the
major publishers and Amazon today? Yes. But there are many overriding
reasons why they will find resolution."
=97Russell Adams and Shira Ovide contributed to this article.

Write to Jeffrey A. Trachtenberg at jeffrey.trachtenberg@wsj.com

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Thiru Balasubramaniam
Geneva Representative
Knowledge Ecology International (KEI)
thiru@keionline.org


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