Ebooks have been around, in some form or another, since 1971. However, it has not been until recently, with the help of Sony and Amazon, that the market has taken off. Sony and Amazon’s success is due, in part, to its control over the entire consumer experience. When these companies (re-)entered the market in 2006 and 2007, both decided to control all points of contact with the consumer. This approach overcomes the difficulties caused by a more modular, specialized market structure. In his book “Seeing What’s Next” Clayton Christensen explains:
Companies ought to control any activity or combination of activities within the value chain that drive performance along dimensions that matter most to customers. Directly controlling, or integrating, an activity gives companies the ability to run experiments and push the frontier of what is possible. Integration gives firms a full platform to run experiments to solve problems caused by unpredictable "interdependencies" between activities.
Sony and Amazon each created the device, sold the content, and managed the DRM on its own. The consumer, therefore, only needed to interact with a single company. By limiting this interaction, Sony and Amazon could better respond to the needs of their consumers and provide a better user experience.
While this vertical control may simplify the market for consumers and thereby increase adoption, it can lead to winner-take-all competition. In markets controlled by network economics, significant early consumer adoption can lead to sustained market dominance. Based on the information available, these network effects seem to be driving consumers to Amazon instead of Sony.
Recognizing this, Sony had little choice but to modify its strategy. Its proprietary platform could not compete with Amazon’s. However, Sony understands that it can still be successful if it can modularize the market and eliminate winner-take-all competition. To do so, Sony chose to reduce its vertical control and adopt the ePub standard.
As Carl Shapiro and Hal Varian explain when discussing proprietary versus open standards, a company’s total reward is a product of the size of the platform and its share of that platform. By abandoning its proprietary file format and instead selling only ePub content, the company hopes to increase the size of its new platform by an amount that more than offsets its decrease in share. To do so, Sony must do two things.
First, the company must limit the extent to which the new modular platform disrupts the user’s experience. Because users tend to care more about the quality of their experience than the format of their content, Sony must provide an experience that approximates that offered by Amazon and do so with far less control. This, as early ebook companies discovered, can be difficult. When a consumer with a Cool-er e-reader buys content from Sony’s store and has a problem, who should be contacted? The device manufacturer? The content aggregator? Or the DRM provider? In a modular architecture, problems can quickly become frustrating. And, anytime consumers adopt a new technology, problems will arise.
Second, Sony must make the argument that the increased complication necessitated by the modular architecture is preferable to proprietary platform lock-in. Amazon’s George Orwell drama continues to receive considerable coverage and serves to demonstrate that while consumers generally do not care about file formats, they will take notice when the format or the DRM protection impacts their experience. While Sony’s ePub adoption allows the company to capitalize on Amazon’s missteps, its marketing message is complicated by its own DRM policies. Fear of lock-in may cause many consumers to move to a more open system, but Sony’s new platform is susceptible to many of the same negative consequences as Amazon’s. Sony’s power over content has not disappeared -- it has simply been transferred to Adobe.
Sony’s new structure, despite being more modular, is still a platform. As such, network economics will continue to play a role in determining the winners and losers in the ebook market. What’s new, however, is that Sony’s success is now to some degree in the hands of multiple companies.