E Ink's Q2 sales and gross margin decline, net loss increases

The Taipei Times reports that E Ink, the supplier of the electrophoretic displays used in most black & white eReaders, released its second quarter financial results yesterday. Revenues were approximately $149.5 million, down 35.37% from $231.3 million a year earlier. Gross margins were 0.6% vs. 32.5% a year ago. The company posted a net loss of $27.3 million vs. $26.3 million a year ago.

The fact that gross margins have collapsed (they were 1.1% in Q1) suggests that eReader manufacturers are putting tremendous pressure on E Ink to lower the price of its displays, and E Ink can't drive its manufacturing costs down fast enough to compensate. The Taipei Times report doesn't indicate how many eReader displays E Ink shipped, so it's difficult to figure out how to read the decline in revenue--but it's likely a combination of lower sale prices and lower demand.

Surveys in the U.S. suggest that the market for eReaders has peaked, and that color tablets will likely take the majority of the market in units over the next 12 months. (They already represent more revenues than eReaders.) There's still probably several years of life in the worldwide black & white eReader market. However, according to the article, E Ink will focus on other, more profitable applications for its displays, such as shelf price displays for supermarkets and convenience stores.

eReaders are great for casual readers, not so great for highlighting and notes

The Atlantic has an essay about the state of eReaders written by Alan Jacobs, an English professor at Wheaton College. Here's a summary:

• Both eReaders and tablets are making it easier to read at night, with front lights (eReaders) and dimmable backlights (tablets). 
• E Ink displays on eReaders are still far superior to LCD displays on tablets when it comes to glare. 
• The contrast of eReader displays has improved considerably. 
• eReaders have limited typeface options and do a poor job of handling kerning and spacing. (A large part of the problem is EPUB, which emphasizes dynamic page flow to the detriment of just about everything else.) 
• Highlighting and annotation, which are very important for literature studies, are all but impossible with eReaders. The trend to replace dedicated keyboards with on-screen keyboards has made annotation even more difficult. On the other hand, tablets handle highlighting and annotation much better, although they still have some quirks. For example, it's impossible to extend a highlight across a page break on the iPad (although it can easily be done on Nook and Kindle eReaders.) 

The bottom line is that eReaders and tablets are generally improving for general reading, but for engaged reading, there's been little improvement, and in some ways eReaders' capabilities are moving backwards.

Amazon may be having problems with new Kindle front light design

There have been rumors for some time that Amazon is working on a front-lit version of its black & white Kindle eReaders. A blog claimed to have actually seen a working prototype of a front-lit Kindle, shortly before Barnes & Noble launched its front-lit Nook Touch with GlowLight. However, DigiTimes' sources report that Amazon has told some of its parts vendors to stop shipments, and it may stop orders for E Ink displays through July and August, because of a problem with the design of its front light. If true, it suggests that Amazon won't be able to launch a front-lit eReader until late Q3 or Q4.

eBooks: After the transition

In my last post, I examined the impact that eBooks have had on the publishing industry, and I noted that things are just getting started. Most industry observers agree that eBooks now comprise around 20% of book sales by unit volume. The Forrester Research/Digital Book World survey of U.S. publishers I wrote about found that the single largest group of respondents believes that eBooks will comprise 50% or more of total book sales by sometime in 2014.

What will the book industry look like when today's ratio of eBook to print book sales is reversed--when 80% of book sales by unit volume comes from eBooks? I'm not willing to guess when the industry will get to that point, but I have no doubts that it will get to that point eventually. Here are some likely results of the transition:

• Print books will be much more expensive: As anyone who's purchased large print jobs, from business cards to books, will tell you, the unit cost for printing decreases dramatically as the size of a print job increases. It's sometimes no more expensive to purchase a larger print run than a small one, even if you end up recycling some of the printed materials rather than using them. The reason is that set-up costs are the same whether you're printing a small number of items or a large number, and that set-up cost is spread over the total number of items that you print. Books encounter additional set-up costs for binding, especially for hardcover books.
  
  Companies such as Kodak, HP and Xerox are major players in the print-on-demand market, using digital presses rather than offset or letterpress in order to make small runs economical. However, some of the costs, such as binding, remain, no matter what method is used to print. Even with digital presses, it's not going to be possible to make short-run books at the same unit cost as large-run books. We're already seeing this effect, as the "Big 6" publishers are using agency pricing to boost the prices of their eBooks in order to offset the lower profit margins they're getting on print titles. That's with 20% of sales going to eBooks. When eBooks comprise 80% of sales, publishers aren't going to be able to hide the true cost of printing and binding books.
• Nevertheless, print books will still be around: Even though print will be more expensive, I have no doubt that print books will survive, just as vinyl records have achieved a renaissance thanks to audiophiles and nostalgia buffs.
• Publishers will only commit to print runs for their "sure-fire hits": Just as the movie industry is fixated on producing sequels and movies based on existing successful books, television shows and comic book characters, major publishers will only print books that are from well-known, previously-successful authors, as well as new authors who are well-known from other arenas, such as television, movies, sports and politics. All of their other titles will be published as eBooks first, and will get print runs only if they're justified by customer demand.
• Bookstores will be very different: In the U.S., there will be far fewer Barnes & Noble bookstores, and the ones that remain will be much smaller. As I wrote some time ago, they're likely to be cafes with bookstores inside them, rather than bookstores with cafes inside them. They'll still carry some print books, albeit a much smaller selection. Big touchscreen displays will give customers a similar experience when shopping for eBooks that they have today when shopping for print books: They'll see bookshelves with book covers, and with a flick of a finger, they'll be able to see the back cover, inside covers, and leaf through the book, just as they can today with print books. With another few touches, they'll be able to buy the title as an eBook and download it instantly, or for some titles, purchase it in a print version that will be shipped directly to their home if it's not in stock at the store.
  
  As for independent bookstores, there will also be fewer of them, but the ones that focus on used books will do quite well. Used titles will be much less expensive than new ones, so for price-sensitive customers and those who have to have print books, used bookstores will be their best choices.
• Today's black & white eReaders will be a thing of the past: All eReaders and tablets will use color displays. In the case of eReaders, they'll use low-power displays such as Qualcomm's Mirasol and E Ink electrophoretic color displays; tablets will use LCD and OLED displays. The functionality of the devices will be more similar to each other than they are today; both eReaders and tablets will be able to handle audio, video and interactivity. The primary differences will be in battery life and cost.
• The "Big 6" will become the Big 3 or 4: Just as in the music industry, where financial problems have resulted in a wave of consolidation, we're almost certainly going to see consolidation among the "Big 6" publishers, as well as publishers in every market segment: Business and professional books, children's books, religious books, K-12 and college textbooks.

I would argue that most of these developments are already underway, and the ones that aren't will start once eBooks pass 50% market share. As I wrote in my last post, anyone who doesn't believe that eBooks will result in revolutionary changes in the book industry is fooling themselves.

Sony concedes the U.S. eBook reader market

Today, Sony introduced three new eBook reader models that are upgrades of existing models. Unfortunately, they seem to have been designed in a vacuum where Amazon and Barnes and Noble don't exist. All three of the new models have the same improved E-ink displays as the new Kindles, along with touch screens and a base memory capacity of 2GB. Here's more on each model (all prices in US$):

• The Reader Pocket Edition has a 5" display. Memory can't be expanded beyond 2GB, and it has no wireless capabilities. The list price is $179.

• The Reader Touch Edition has a 6" display. Memory can be expanded with up to two 16GB memory cards, and it can play MP3 and AAC audio files. It also has no wireless capabilities. The list price is $229.
• The Reader Daily Edition has a 7" display, the same memory expansion capabilities as the Touch Edition, and has both WiFi and 3G wireless connections, The list price is $299.

None of these models is competitive with either the Kindle or nook. The WiFi Kindle is $139 and has a 7" display; the 3G Kindle is $189. Sony's higher prices are clearly unsustainable in the U.S., and I think that the company will de-emphasize the North American market and focus on markets where Amazon isn't yet selling Kindles. Sony's press release confirms this:

“Today, we’re excited to announce not just the availability of the Reader Touch Edition and Pocket Edition in the countries we already serve but also plans to expand the Reader line to previously untapped markets,” said Steve Haber, president of Sony’s Digital Reading Business Division. “We take a thoughtful approach to country expansion, including Italy, Spain, Australia, Japan and China, working with local bookstores to ensure content is compatible, relevant and in the appropriate language for each market.”

Amazon is just now beginning to expand distribution of its Kindle to Europe, and Sony already has strong distribution deals with the biggest book retailers there. So, Sony will emphasize reader sales outside North America for as long as its products remain viable.

But what about North America? Sony also announced that it's developing software readers for iOS and Android. I expect to see a Sony Android tablet before the end of the year, and Sony's eBook efforts in North America will shift to selling eBooks on its own tablet(s).

Barnes & Noble drops the price of the nook to $199

CNET has reported that Barnes & Noble has dropped the price of the existing 3G-compatible nook to $199 from its previous price of $259, and has introduced a new WiFi-only model for $149. The new pricing is sure to put pressure on Amazon to drop the price of the Kindle 2 below its current $259. More importantly, it shows that Barnes & Noble recognizes that the nook and similar E-Ink-based eBook readers simply aren't competitive with the iPad.

According to the article, B&N has also made several improvements to the nook's software, and has made arrangements with AT&T to allow it to be used for free at any AT&T WiFi hotspot. This will make the absence of 3G connectivity on the $149 nook less of an issue. One could argue that the true price of the nook has been dropped not to $199 but to $149.

It'll be very interesting to see how Amazon responds, and if $149 is a low enough price to keep monochrome readers viable once Android tablets start hitting the market for $199 or less.