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What Makes People Think Ebooks are a Disruptive Innovation?

14 May 2014

From Baldur Bjarnason:

By and large, a disruptive technology is initially embraced by the least profitable customers in a market. Hence, most companies with a practiced discipline of listening to their best customers and identifying new products that promise greater profitability and growth are rarely able to build a case for investing in disruptive technologies until it is too late. (Clayton Christensen – The Innovator’s Dilemma)

Unlike most disruptive innovations, ebooks were very quickly adopted by the publishing industry’s most profitable customers, people who buy the most, spend the most, and talk the most about books.

Disruptive innovations start out by addressing the needs of a small unprofitable market. They address a customer base that non-disruptive products do not. Those who buy a disruptive product at the outset are customers who are less likely buy the disrupted predecessor. Disruptive innovations are usually a viable but small business from the outset, create new markets, small at first, and then they grow them. The makers of disruptive innovations then iterate and scale into the incumbent market. That is, it’s only once the disruptive innovation begins to mature that it begins to target the customers of the disrupted product, and it goes for the segment with lowest profitability first.

Ebooks, on the other hand, when they first became an even remotely viable business by most standards (i.e. when the Kindle was launched) they directly addressed the industry’s most valuable audience. Their customers were heavy readers who bought mainstream books. This audience is the core of the industry’s profitability.

. . . .

Ebooks are to books not what tablets are to PCs but what laptops are to desktops. For a long long time laptops were a sideline in the PC business, but iteratively they improved until PC manufacturers began to make laptops that were viable as desktop replacements while retaining their portability. Laptops now dominate the market and are generally made by the same firms as those that made desktops. Much in the same way, ebooks have existed alongside the publishing industry for more than a decade (version 1.0 of EPUB’s predecessor, the Open eBook format, was released in 1999).

Amazon’s release of the Kindle was like the iteration of the Thinkpad or the Powerbook that first made them viable as desktop replacements, not a disruptive innovation but a discontinuous sustaining one.

. . . .

The tech-oriented online retail side of the publishing industry didn’t get a lead on publishers in ebooks because ebooks are disruptive. As I’ve written above, they aren’t. Publishers failed because the skills and expertise at format transitions they had built up during the various paperback/hardcover/trade paperback format revolutions weren’t applicable in the digital context.

. . . .

Ebook retailers, Amazon and B&N, were the primary retailers in print books. Kobo was launched by Canada’s biggest book retailer and bought by Japan’s biggest online retailer.

Kobo, Amazon and B&N are all classic examples of publishing industry incumbents, not disruptive new entrants.

. . . .

What absolutely is a disruptive innovation, however, is the self-publishing programme Amazon pioneered. A self-serve self-publishing service for ebooks is a disruptive innovation where ebooks as a platform aren’t. It’s also the one part of the Kindle platform that hasn’t received any update to speak of in the platform’s history.

. . . .

If ebooks, which aren’t a disruptive innovation as defined by Clayton Christensen, are disrupting incumbent businesses then we’ve either discovered a completely new type of disruptive innovation (unlikely) or these companies weren’t well-run, well-capitalised, or healthy before ebooks came onto the scene.

Given the state that booksellers were in before ebooks arrived, I think there’s a strong case to be made that they were very unhealthy businesses.

The timeline of bookseller crises worldwide doesn’t fit the thesis that the crises are caused by ebooks. They may well be exacerbated by ebooks, but ebooks are more playing the role of the pneumonia virus killing an AIDS patient than they are a lethal pathogen on their own.

For example, throughout the 2000s, booksellers (in fact, the entire offline retail sector) have been facing problems in many countries. Borders UK collapsed in 2009 but Amazon didn’t launch the Kindle UK store until mid–2010. Ebooks simply didn’t have enough of a presence in the UK for them to be the cause of the crises Borders, Blackwell, and Waterstone’s had been facing prior to the 2010 launch.

Healthy businesses quite simply aren’t rumbled this quickly by a change in the market. Even disruptive innovations take time. Ergo, booksellers were a dying business even before ebooks entered the market.

Link to the rest at Baldur Bjarnason also at another post by Baldur and thanks to William for the tip.

PG enjoys Baldur’s analysis and thinks he makes some good points, particularly that Amazon’s self-publishing platform is a classic disruptive technology.

PG suggests a couple of additional thoughts.

First, he believes the combination of ebooks and ecommerce and self-publishing are a disruptive technology because they disrupt the roles of publishers, book distributors and physical bookstores and the expensive technology which accompanies that legacy system.

Despite occasional lip service, publishers have never treated readers as real customers. The customers were always physical bookstores. Product decisions in traditional publishing were focused on what Barnes & Noble wanted. Publishers’ sales reps called on buyers for bookstores. A publisher’s sales department could and did kill any book it didn’t like.

Publishers worried about what bookstores wanted. Barnes & Noble and Borders worried about what readers wanted. Hence the lack of consumer marketing skills among traditional publishers.

Additionally, access to the physical bookstore sales channel (and the book distribution system that services that channel) was the key gatekeeper advantage of publishers, one that allowed them to charge exorbitant fees to authors (in the form of low royalties) for access to physical bookstores. It was simply not possible for an author, even a bestselling author, to effectively access retail bookstores in an economically reasonable way.

The import of ebooks to the disruption of the physical book creation and distribution system is that ebooks are ideal goods for ecommerce (as are digital files of musical performances and motion pictures). Once the infrastructure for ecommerce is in place (not a trivial task), each incremental ebook sale is essentially costless for an etailer. This allows etailers to pay the authors of ebooks much, much higher royalties than publishers do.

One of the reasons that Amazon spent so much money developing its own low-priced ereader in the days before widespread adoption of tablets together with an ebook publishing and distribution system to feed products to its ereader was to encourage the adoption of ebooks by readers and, thus, to become the premier destination for readers to purchase ebooks.

PG suggests that, in the absence of Amazon or someone like Amazon, traditional publishing and physical bookstores would never have created meaningful ebook ecosystem. The same can be said for Apple and the traditional music business.

Disruptive Innovation, Passive Guy

14 Comments to “What Makes People Think Ebooks are a Disruptive Innovation?”

  1. Dave wonders if BPH execs visit PG, even sporadically if not regularly.

  2. Your commentary is, as always, cogent, but your two paragraphs beginning “Despite occasional” and ending with “among traditional publishers” are particularly brilliant.

    In fact, the only way I can agree more is with one minor change, of one word, in that second paragraph: change “readers” to “customers.”

    I think the biggest reason Borders failed and B&N has no discernible strategy right now besides flailing like a drowning victim is that they lost sight of what services they’re providing. They started in book selling, yes, but anyone who’s been to a B&N lately, e.g., has seen the tables after tables of plastic junk and LEGO sets (not that there’s anything wrong with LEGO sets. Or action figures. Unless you’re, you know, in a book store).

    Both companies used to be a great destination for readers. But digital reading has changed that. Borders made the mistake of outsourcing their digital store to Amazon. Barnes & Noble will likely fail in the next couple of years because their digital experience is terrible.

    Of course, that’s the real disruptive innovation here: digital commerce. Everything else its just a by-product.

  3. “The customers were always physical bookstores.”

    This exactly. I don’t know Mr. Bjarnason’s background but he shows a basic and serious misunderstanding of the traditional publishing which never considered readers to be their customers. They rarely sold to readers at all. By bypassing the bookstore, ereaders served as a very classic disruptive technology.

  4. Any time someone can cut out a middleman, a way of doing things is ripe for disruption. There is nothing new about that. It used to be a big deal to control the oases along the Eurasian caravan routes. That is no longer the case.

    Conversely, there are always actors who want to re-establish the middleman/gatekeeper role after disruption. Doing so is highly profitable, if you can manage it. Many have died in wars that were basically about who gets to be the middleman in commerce and trade.

  5. The pneumonia/AIDS analogy is rather a good one. Before Amazon stepped in with the Kindle and began developing that ecosystem, reading as a pastime was on the decline. Barnes & Noble had *already* reduced its on-hand stock by 10% ‘to enable them to display more books with covers facing outward’ (wtf!!?), which converted all but their very largest bricks & mortar stores into little more than airport book-stalls. And even before that they were missing the mark. By that time it had been several years since B & N had had an on-hand copy of *any* specific title I might be looking for, and my visits had morphed into rare drop-ins ‘on the off-chance’ they would have what I needed. B & N had refocused to become a real resource for none but the stranded or lacking in direction. As a serious reader/book purchaser, I was already pissed off at them, and I know from the internet that I cannot have been the only one paying attention.

  6. Here’s how I view this. I think Baldur’s analysis is a little bit confused by his acceptance of the traditional view of the “book business” (usually called trade publishing). I think there is no such thing, at least as a useful model for reasoning about the disruption. Also, he’s just flat wrong about which readers are the most profitable to the trade industry. It is not the avid reader. Rather, the big bucks come from appealing to the reader who reads 6 or less books a year.

    If you imagine instead that there is a thing called the written narrative industry, the disruption is much easier to understand. The ecommerce -> ebook -> KDP innovation is the disruption and the disrupted are James Patterson, Steven King, John Grisham, etc. They are the well-run, dominant companies in Clay Christensen’s model. They have seen their relative market share shrink as ebooks have become a larger part of the narrative industry. They are failing to adapt to the new reality by sticking with the big advances from legacy publishers. King, in particular, looks exactly like an incumbent in Christensen’s model. He did some early experimentation with ebooks, but it didn’t pay off.

    The disruption is easiest to see in the Romance genre. Harlequin gets sold off while the Kindle bestseller list is increasingly dominated by writers who eschew legacy publishing to market directly to readers. Romance readers are exactly the type of customers we would expect pick up on ebooks in Christensen’s model. They mostly bought cheap paperbacks and participated heavily in the resale market for books.

    Legacy publishers have been able to compensate so far during the disruption by replacing hard back narrative fiction with pop non-fiction and movie tie-in marketing. Just look how the annual print bestseller lists have changed in the last five years.

    If you need proof that I am right, I will direct you once again to the comment from the head of Simon and Schuster about the impact of Apple’s price-fixing scheme:

    “Higher price slows Ebks/casual purchaser/keeps retailers/stops authors leaving.”

    The whole point of the price-fixing scheme was to keep casual purchasers buying first run hard covers in bricks and mortar stores so that authors wouldn’t realize that they would be better off without a publisher or that big advance.

    • They are failing to adapt to the new reality by sticking with the big advances from legacy publishers.

      According to the WSJ, King doesn’t get an advance, he has a big percentage deal with his publisher instead. He may be an incumbent, but I’d say he’s one of those most likely to continue to thrive in the future. He has lots of fans, and has been eager to try new business ideas in the past.

    • The interesting thing about indies, is that we DO, in large part, serve the needs of the voracious reader, and not the casual one.

      Competing to be one of those 5-6 books a year bought by everybody is nearly impossible. Competing for the folks who read 2-5 books a week – much easier!

      This is one of the disconnects between traditional and indie publishing. In a sense, we are in different businesses. If you run your indie pub business like a tradpub, you will be far less successful than if you understand that the real profitability is in reaching those voracious readers. And then pleasing them, over and over again. ;)

    • Also, he’s just flat wrong about which readers are the most profitable to the trade industry. It is not the avid reader. Rather, the big bucks come from appealing to the reader who reads 6 or less books a year.

      Yes, that was my first thought. Like your analysis, William of Ockham.

  7. What PG said.

  8. Ereaders and the ecommerce platforms that support them, taken together are a disruptive technology. It makes publishing and distributing books easy for authors and exposes the high costs and artificial bottlenecks created by the Big Publishing Houses.

    The publishers can’t duplicate the ecommerce platforms that the big tech players enjoy. In Christensen terms, they came to the party too late. At this point, it doesn’t make sense to build out that sort of platform from scratch.

    The Apple, Google and Amazon platforms were not created to sell ebooks. It just so happens that their technology scales nicely when it comes to selling digital files. And as Mike Shatzkin recently pointed out, selling books is a side business for them.

    Publishers will continue to feel the pressure of the marketplace because their way of doing things is now exposed as too expensive (the result of disruptive technology).

    Their most important functions (finding manuscripts, printing and binding, distribution, sales) are ALL outsourced. You don’t need a fancy address and exhorbitant expenses to edit manuscripts.

    The role of publisher may ultimately be reduced to being a curator and a producer of limited, fancy gold-leaf editions.

    It certainly is possible that publishing wasn’t a very profitable industry before ebooks came along. But things have gotten worse with all the competition from ebooks (that are inexpensive to publish).

  9. Terrence OBrien

    Both large publishers and independent authors are suppliers. Amazon sells to the consumer.

    Note neither the big pubs nor the independent author has their own consumer distribution and sales system.

  10. Print and eBooks serve two different markets. The two have some intersection. Me, for example. I buy 100+ books a year. Some of those — WWI aviation history — I buy in print because they are not available in eBook format. The rest I buy in eBook format.

    The genre markets — romance, mystery/thrillers, science fiction — serve readers like me. As I see it, the bestseller market serves those who are not readers; they buy a book because of buzz; that is, it is the cool thing to do at the moment. Print serves these readers well. Mass market paperback serves them best.

    I do not compete for the bestseller market. I can’t. But I can get a share of the genre market and hold on to it.

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