Could Watermark Provide DRM Solution?

Publishers can’t be blamed for trying to safeguard their assets with digital rights management protection on their e-titles, particularly against large-scale file sharing.

The problem is DRM does not really deter anyone determined to share files, which led Dana Robinson, a adjunct professor of law at the University of San Diego School of Law and partner with Techlaw LLP, to propose a solution in an article for Digital Book World. His solution would be to create e-books with a watermark place throughout the book.

The e-book’s buyer would have to provide personal information for the watermark by agreeing to terms and conditions that would prohibit the resale or distribution of the title.

“The point of making a watermark that shows the user’s personal information is to create a disincentive for the user to pass the book along to unknown third parties, deputizing the user to act as a gatekeeper, protecting the book from wrongful distribution,” Robinson wrote, adding that removing the watermark could then be a violation of the Digital Millennium Copyright Act.

Robinson points out that his watermark solution would not prevent people from sharing their book with family or close friends, but that they’ve always done that with printed books. His watermark is aimed at individuals trying to gain financially from someone else’s work.

“What e-book publishers need is a way to distribute e-books with as little hassle as possible, while ensuring that the publisher can sue pirates and stop e-book sales, rental, and large-scale sharing,” he said.

Change is coming to E-Book Market

The Department of Justice recently filed a motion asking that its settlement with Hachette, HarperCollins, and Simon & Schuster in its e-book pricing lawsuit be approved in federal court. No surprise there.

If accepted, sometime around the middle of September, retailers will be able to set their own prices for e-books, at least from the three publishers in the settlement.  The settlement allows the agency-pricing model that came under DOJ scrutiny to remain, but the provisions of the settlement make anything resembling the current agency model highly unlikely.

While the settlement allows retailers to set the sales prices, publishers can prohibit discounts on their books. That provision comes into play when the total sales of a year exceed the margin the retailer has earned, according to an analysis of the agreement in The Shatzkin Files.

However, the article also points out how easily that discount prohibition may be sidestepped. For instance, a retailer such as Amazon may choose to cut e-book prices way below its costs during a specific time frame, such as the upcoming holiday season, figuring to make up the margin over the next nine months. In the meantime, other publishers who may still be clinging to the agency-pricing model may have to lower its prices just to stay competitive.

Which is exactly what many in the bookselling industry feared all along.

Cengage Places Bid to Buy McGraw-Hill Education

Last month, Standard & Poor’s reported that Cengage Learning’s cash flow was “less than adequate” to cover its needs over the next 12 to 18 months. Last week, reports surfaced that Cengage made a bid to purchase McGraw-Hill Education (MHE). So what gives?

As it turns out, buying MHE could be a way for Cengage to increase its revenue, according to the report. The S&P report about Cengage’s cash flow was based on an assumption that future refinancing costs would be too high, with the Reuters article adding that “may be driving Cengage and its private equity owners to consider acquisitions that would boost its cash flow.”

“It wouldn’t be appropriate for us to comment on what McGraw-Hill might or might not do with respect to a sale or spin-off of its education business,” said Cengage CEO Ron Dunn in the Reuters story. “With regards to Cengage Learning, we continue to generate strong cash flows from operations and we are very confident that we can service our debt while continuing to fund our business at appropriate levels as we lead the migration to digital solutions in all our markets.”

Cengage isn’t alone in its interest in MHE. Reuters reports that Bain Capital, Thomas H. Lee Partners, and Apollo Global Management have also placed bids for the firm that could be valued at around $3 billion, according to The Bookseller. Reuters also reports Cengage is looking to make a bid for EmbanetCompass, an online education services company.

McGraw-Hill decided last September to split into two publicly traded companies by the end of 2012 after calls from minority shareholders to restructure the business. MHE earned $2.3 billion in revenues and had an operating income of $260 million last year. Digital-related solutions accounted for more than 20% of its 2011 revenue

As in any business venture, there are risks for Cengage, particularly if its cash flow declines. Consolidating that much debt into one company could also be a concern for the industry, but the potential for reduced store-channel leverage and more direct-to-customer and institutional sales models are also long-term concerns stemming from more consolidated content.

Or the bid could provide Cengage with some breathing room.

Bad E-Book News or Just a Quiet News Day?

News from the e-book industry hasn’t been all that rosy of late. Profits are down at Harlequin, the Association of American Publishers announced numbers for e-book growth in February that were less than expected, Simon & Schuster digital sales continue to decline, and even sales of the Kindle Fire from mighty Amazon fell off in the first quarter of 2012.

Is this a harbinger of things to come, or just evidence of a slow news period in the digital market?

“I’m not hearing alarm bells from publishers yet, so I can’t say whether there is an overall softening or just unevenness in the data or just that each of these things is potentially explainable as due to circumstances specific to the players involved,” said James McQuivey, principal analyst at Forrester who covers the book industry, in this article from Digital Book World.

In the first place, those huge increases the e-book market was seeing could not last forever, said Kelly Gallagher, vice president of publishing services at Bowker Market Research. He also opined that the new group of e-book consumers may not be as devoted to e-reading as early adopters.

“The early-adopter, heavy book buyers who make up over 60% of volume of all e-book sales have continued to slow in their migration to digital,” said Gallagher. “Without the ongoing influx of these key buyers, the market is more reliant on a greater increase of casual to moderate buyers to move the needle.”

In addition, a recent study by the Book Industry Study Group suggests consumers are buying more tablets than e-readers, but are not buying e-books at the same pace as those who read on dedicated e-readers. Over the last six months, consumer preference for e-readers has slipped from 72% to 58%.

“Tablets will adversely affect the e-book business in that the tablet is a multifunction device and will therefore draw the reader into nonbook activities and therefore cause them to consume books slower and therefore buy fewer books vs. a single-function e-reading device,” said Gallagher.

5 Things a Consumer Wants

A recent Chronicle article suggests that with the mainstreaming of e-books there should be more reader-friendly services such as the following:

1. Let me subscribe to my favorite authors. 
2. Keep books updated for one price.
3. Buy a print copy, get an electronic copy too. 
4. Give more of my money to authors.
5. Indie bookstores should sell e-books. 

If I could pick one of the 5 myself, I would go with #3.  And if I were to add one to the list -- it would be, let me more easily lend or share my digital books.  My wife and I like to share books, but too often we are unable to do so with our ebooks -- unless we were to trade our devices.

Small bookstores in a digital era

One of our members, Roger DeLarco at East Stroudsberg University forwarded this USA Today article to me a couple weeks ago and I have been meaning to post it. The piece provides advice and suggestions to small booksellers in an increasingly competitive landscape that includes digital, such as knowing your niche, creating community, and thinking about the experience. The piece highlights a small independent bookseller in Rhinebeck, NY -- just a very short distance from where I live. The general theme of an independent store creating a sense of community should resonate with many small retailers.

One other paragraph of interest is the following one, which highlights some of the risk in partnering with just anyone, and the importance for stores to have a digital strategy. Stores must think about partnering for sure, but recognize that not all partners are there for mutual benefit.

Borders, which has had three CEOs in the past three years, was slow to develop a digital strategy. It sells reading devices and has an e-bookstore powered by Kobo, a Toronto-based e-retailer. But from 2001 to 2008, it outsourced its online sales to Amazon. "It was utterly stupid for Borders to borrow their future from a company that didn't want them to even have a future," says Michael Norris, an analyst with Simba Information, a market researcher.

Thanks, Roger.