Sunday, December 01, 1996

Online Superstores: The Next Retail Frontier For Book Publishers?

December, 1996

What's stopping book publishers from moving beyond their currently nascent adventures in Cyberspace to aggressively leveraging their content properties? The technology's available; the audience is sizable. So what's stopping them?

Unlike many companies whose presence on the Internet was first motivated more by hype than by any defined strategy, publishing companies tend to have very clear goals in mind, and grand ideas about how to generate significant additional revenues from existing content in either its traditional or digital formats.

The growth in publisher web sites on the Internet has been dramatic over the last two years, but typical of the online experience in general. (The Economist recently estimated the number of people worldwide with Internet access at 20 million.) But while the web sites of US-based publishers reveal an overall similarity in style and function, the only real difference between these areas is their ability to offer books directly from the publisher. Most view this medium as a supplement to their traditional distribution, sales and customer service networks, not as an alternative.

So for now, booksellers who worry that publishers will soon circumvent retailers by selling over the Internet can rest easy. In fact, one major publisher's effort to stimulate sales by offering discounts on purchases made at its web site was soundly rebuffed in the press by booksellers, and the offer was quickly rescinded.

That's not to say that buying direct-from-the-manufacturer on the Internet is not done. According to Joe Budd, director of online development, HarperCollins Interactive (www.harpercollins.com), approximately 100 books per week are purchased at the HarperCollins web site, although this is not the company's prime objective.

"Pricing is not competitive with a bookstore and it is designed that way. We are more interested in interacting with [consumers] and getting information on their interests." One of the most popular areas of the HarperCollins web site, says Budd, is the Author/Tour/ Events location, where consumers can learn which authors will be visiting their neighborhood bookstore over the coming months.

At some web sites, such as Houghton Mifflin (www.hmco.com) and Bantam Doubleday Dell (www.bdd.com), no sales mechanism exists. Rather, those interested are directed to their closest bookstore. Bantam Doubleday Dell has made a conscious decision to support the bookseller and has no plans to change this philosophy.

Houghton Mifflin Interactive President, Conall Ryan, believes that the opportunity to try-before-you-buy online gives customers a better feeling about their purchases and helps sell more product. "You have to believe that online is a great preview channel; we believe that our online presence results in market expansion and will not result in the replacement of any other distribution method. [It] will not undermine current channels; it will educate customers and it will expand the market."

Similar opinions are expressed by other publishers, who believe that one of the great strengths of the Internet is that it allows them to continually inform and educate their target audience. Ryan said that Houghton Mifflin's presence on the Web facilitates both communication with customers and the building of a community interested in Houghton Mifflin - products all on a relatively cheap basis. In an effort to create even greater incentive for customers to return, Ryan has required that some aspects of Houghton Mifflin's print products - excerpts, previews, reviews, jacket cover images - are incorporated into its electronic venue. To create a more welcoming and less high-tech environment, this virtual bookstore is organized by familiar section categories and, to complete the metaphor, it even has an information desk and a cashier where orders are placed. Informational and promotional aspects like these, Ryan believes, will drive people to real bookstores looking for Houghton Mifflin titles.

Due to the nature of its content, The Encyclopedia Britannica's web site, Britannica Online (www.eb.com) is a notably commercial exception. Up and running since October 1994, Britannica Online has been experimenting over the past year with different pricing mechanisms in an attempt to maximize the value of its content. Currently, only subscribers ($14.95 monthly; $150 annual, plus a $25 one-time registration fee) have access, although you can "preview" the offering.

According to Robert McHenry, Britannica Online's editor-in-chief, the site has been very successful. Compared with the traditional product, the electronic version has additional articles and other features designed as a value-added service for online subscribers.

"There were two principal reasons for our development of this service," said McHenry. "Firstly, when this process started about three years ago, our intuition was that distribution of fact-based reference material would migrate to online media. Secondly, we believed our traditional print product was not meeting its full potential market. For example, we had low usage from university students and this distribution method could address this and other issues."

And despite the restrictions inherent in print publishing (production costs, page size, etc.) the often irritating and seemingly arbitrary need to cut and fit was, says McHenry, a useful discipline online. While electronic publishing allows for greater adaptation and flexibility, it nonetheless requires close supervision in order to remain organized, controlled and rational. Its management also demands constant communication with customers, primarily by e-mail, to enable the editorial staff to modify the product according to actual feedback.

Maintaining regular contact with consumers, and the database that grows as a result, are compelling enough reasons for publishers to continue their web efforts. Direct e-mail relationships with target audiences is an advantage publishers never had before. Response rates to traditional direct mail are often frustratingly low, but because online responses often require little more than a mouse click, it is reasonable to forecast that the number generated by web-developed databases will be considerably higher. And as a result, new products may begin appearing on the market faster. This could also lead to more effective market-testing of such things as jacket designs, and online focus groups can aid publishers in their product development. Indeed, there have already been a number of instances in which publishers have initiated development of new products based on suggestions from visitors to their web sites. Robert McHenry is encouraged by the number of e-mail responses he receives, and feels they will ultimately Britannica to re-examine its assumptions about what an encyclopedia is supposed to be.

Clearly, the ability to communicate directly with highly interested consumers is a very powerful marketing tool. One executive described the gathering of marketing data as "capturing the exhaust" off their web site, an extension of the information superhighway analogy. Joe Budd of HarperCollins noted that his department receives about 100 completed user surveys each month, providing information with which to build a deep and compelling database. "When a new mystery book comes out, we are able to send e-mail to all those who have indicated an interest and draw them to the store," he said.

Direct and regular contact with consumers will also enable publishers to monitor and hopefully anticipate changes in consumer behavior. In time, these sites will likely metamorphose into more full-service areas for consumers. For example, there exists the potential for offering technical support for the growing number of multimedia titles offered by the publishers.

Conall Ryan and his team have developed programs which invite, or even require, consumer responses. These programs have helped solidify Houghton Mifflin's relationship with its audience. And this new data, Ryan predicts, will prompt the coordinated promotional and marketing efforts among departments as they look to take advantage of these databases.

But at the end of the day, publishers provide content, and all have vast content libraries to make available to Internet users for a fee. The goal of many of these companies is to eventually enable users to search through a wide body of material, download what they want, and pay for it either by credit card or some type of electronic debit card. So for example, a student's search for information about Alexander the Great on the Simon & Schuster web page might, in its most limited form, return book bibliographies, article citations and summaries, and possibly a list of available graphical images. It is unlikely that the student will want to download an entire book on the subject (considering the time and cost factors such a download would involve today), but they might want a given article that they could access by paying a fee. If that student then wanted to share this article with a friend via e-mail, however, encryption technology embedded in the original transmission would enforce the payment of further compensation for that article before it could be reused. Eventually, pass-along tolls will increase the revenue stream as each incremental user pays for access.

Revenue collection and royalty payments are major areas of concern for publishers. Royalty accounting functions within many publishing houses today are fairly basic. The current revenue and royalty accounting systems of most, if not all, publishing companies simply could not handle the degree of micro-transactions that Internet commerce might bring, e.g. the limited-use purchase of a chapter from a text book written by five authors. As these micro-transactions become more commonplace it is conceivable that additional costs associated with royalty accounting will eat into all incremental profits unless fundamental improvements are made.

Systems solutions will need to be far more sophisticated to manage the large increase in micro-transactions and will also need to interface seamlessly with royalty management systems. Consistent terminology and data structures are necessary to maintain effective rights management systems. Technology is advancing in this area rapidly and encryption capabilities offer protection against most forms of infringement and unauthorized use. Encryption codes can track and regulate how many times a user can print, e-mail, even alter published material.

As publishers construct their business models, they will need to first determine what unit levels to offer the public; indeed, what unit levels will prove the most marketable. This analysis must support a clear business case.

Traditionally, the standard unit has been the book. In digital form this unit may become the chapter, page, paragraph or, to a much more limited extent, the sentence; it is unlikely that a single word, or clause, will ever generate overwhelming consumer demand. Therefore, publishers should avoid committing themselves to supporting even sentence-level access if that turns out to evoke little or no interest. Further, production costs will necessarily escalate as the unit gets smaller, and significant pricing issues will emerge as purchase options increase. Sufficient experimentation and testing need to take place to determine what unit level will satisfy the largest proportion of customers, and to what extent this will vary on a product-type basis. In journal and directory publishing, for example, many users are interested only in specific listings. As the electronic distribution of these products becomes more commonplace, their space-consuming print versions may become superfluous.

Even as so many publishers are well underway organizing their complete content libraries, corporate-wide buy-in to the concept of centralizing all of these assets may be the biggest hurdle they will face. Today, many of the larger publishers don't have a single compendium of every title it publishes. But in order for a publisher to fully leverage the value of its content, its online consumers must have easy access to its entire catalogue at one location. The content of one publisher's education, children's, sci-fi, biography, and current fiction divisions, must all be accessible from the same database, archived with the same software, and formatted to look the same from screen to screen.

Many people connected with the Internet believe that its current stage of development is comparable to where television was in the late 1940s and early '50s. Yet the speed at which technology is advancing ensures that it will not take 40 years to reach the online equivalent of high-definition TV. Most Internet providers, at least, are positioning themselves to keep pace with these changes.

For publishers, the long-term benefits will result in a substantially changed marketing and product development environment. Access to and responses from customers will be virtually immediate. Product assumptions about pricing and packaging will also be dramatically different as will the back office capability for managing this new publishing environment. Each publisher's current web site is merely a precursor to a much more interactive relationship with its customers, a relationship which will yield significant returns if the hard strategic decisions made today are correct.