Amid increasing reports that Amazon continues to dominate the market for e-reader and ebook sales, Sony and other competitors are altering their strategies. Last week, I wrote a post on why Sony had little choice but to give up its proprietary BBEB file format and instead adopt ePub and Adobe DRM. Sony’s new strategy is an attempt to modularize the market and to thereby allow several companies to succeed.
In this respect, Sony’s embrace of ePub was necessary. However, the decision is, in and of itself, insufficient if it wishes to change the market’s overall dynamics. In a recent article on Slate, Farhad Manjoo lays out his suggestions for how Sony (and other Amazon competitors) should proceed if they wish to be successful. The underlying logic of his suggestions comes from the music industry’s transition to digital and Apple’s ability to dominate the new distribution channel. He states:
Anyone looking to beat the Kindle, then, should look to the iPod: Study everything that Apple's rivals did, and do the opposite.
While ebook companies would be well advised to study and understand the history of this market, they should be careful when extrapolating the experiences of Apple’s competitors in order to formulate their own strategies. Digital music is very different than ebooks. Having said this, Sony and others should take the following lessons from the music industry:
It’s all about the experience
As I have said before, consumers do not simply buy products. They do not merely buy content. Consumers buy experiences. With ebooks (as it was with digital music), consumers have paid little attention to the file format or the DRM protection on their content. Now, this is not to say that no one cares about these things. Many consumers do, and these individuals tend to be very vocal about their concerns. But, these individuals are a minority. In fact, according to a recent report done Imran Khan, only 15% of consumers cite Amazon’s proprietary file format when deciding not to buy a Kindle (and only as a 2nd or 3rd reason).
Switching Costs Matter
Manjoo cites the failure (or at least the underwhelming market penetration) of Apple’s competitors as an example of why the overall ecosystem matters. While he is correct, something much more significant is occurring with the Zune and the other device manufacturers that he referenced. By the time the Zune entered the market (in 2006), Apple had solidified its position and had established a large user base. To compete successfully, Zune had to not only provide a better user experience, but it needed to convince users that the Zune experience was so much better than Apple’s that it warranted the incurrence of considerable consumer switching costs. These costs included not only the amount of money invested in music (compatible at that time with only iTunes) but also the time spent learning and becoming comfortable with the iTunes and iPod systems. Consumers like consistency, and comfort with an existing platform represents a considerable obstacle to would-be competitors.
Sony is in a different position today than Microsoft was in 2006. The ebook market is still relatively small. Only 2% of consumers currently own a device and the market is expected to grow significantly. This provides opportunities to Sony that won’t be available if Amazon continues to dominate into the future. However, switching costs are still relevant in the ebook market.
According to Carl Shapiro and Hal Varian, consumers who experience lock-in go through the following cycle:
Lock-in begins when a consumer chooses a brand, begins to sample it, and then invests in it. While we can see that current Kindle consumers have done exactly this, such a view is far too narrow in its scope. The degree of Kindle’s success is due, in large part, to the fact that consumers had previously selected the Amazon brand as their platform for purchasing products. For many, therefore, the purchase of the Kindle is simply a further investment in the platform (and an additional source of overall lock-in). Sony will need to understand this lock-in and be able to address it when it makes marketing and distribution decisions.
Align incentives
Manjoo’s idea of trading ebooks among friends is similar to Microsoft’s idea for social music on the Zune. Individuals could send a friend a song who could then listen to it up to 3 times over the course of 3 days. The concept, despite its uniqueness, did not lead to the level of success Microsoft expected because the feature’s value materialized only if a consumer’s friends also bought into the Zune platform. For these individuals to buy into the system, they would need to incur those considerable switching costs for what was a pretty insignificant benefit. Listening to a song 3 times, after all, could be achieved far more conveniently. Zune’s social media concept failed because the user’s incentives were not aligned.
Manjoo’s idea -- while intriguing -- falls into a similar incentive trap. This time, however, it is the incentives of the content creators that creates an issue. Allowing Zune consumers to listen to a song 3 times for free was allowed because a user’s demand for repeat consumption is high in the music industry. So, giving away the content (while placing certain restrictions on convenience) is effective at increasing purchases. The same cannot be said for books. Once a consumer has read a book, that individual’s demand for the content decreases dramatically. If consumers are allowed to share the full content of an ebook with friends, sharing will in most situations not lead to increased purchases. More importantly, such DRM policies could potentially open the door for third party ebook rental markets that could actually reduce revenue to publishers. The incentives for publishers are simply not aligned with this proposal.
Manjoo’s idea has the correct end goal -- distinguish the ePub platform by increasing consumer options. However, ebook aggregators and device manufacturers must pursue strategies that have incentives aligned for all interested parties.
