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TERRY GROSS, host:

This is FRESH AIR. I'm Terry Gross.

For those of us who still read books, we have the options of reading e-books if we're willing to pay the money for a reading device. We're going to talk about how e-books are changing the publishing industry. My guest, Ken Auletta, wrote an article about e-books called "Publish or Perish" in the August 26th edition of The New Yorker. He writes the magazine's series Annals of Communications and is the author of the book "Googled," about how Google has changed the world.

Auletta says that although e-books account for only an estimated three to five percent of the book market, their sales increased 177 percent last year. At the end of last year, Amazon, which produces the reading device the Kindle, accounted for about 80 percent of electronic book sales.

The landscape is changing with Apple's recent release of the iPad. Unlike the Kindle, which is a dedicated reading device, the iPad is a multimedia device that can access Web and email and download video, but the iPad costs more and is heavier than the Kindle.

Last week, Barnes & Noble announced that it would add software to its electronic reader, the Nook, that will let users access the Web and play games. So the field is getting more competitive, and the publishing industry is hoping that e-book competition will be good for their profits.

Ken Auletta, welcome back to FRESH AIR. Now, in your article you say that in some publishing circles the iPad has been called the Jesus tablet because it has the potential to be the savior of the publishing industry, but I think it's fair to say within the publishing industry, e-books are seen as part threat, part savior?

Mr. KEN AULETTA (Writer): Correct. The savior is that it opens up a new market, potentially - particularly to younger people, their hope. Secondly, what publishers hoped to do when they belatedly jumped into this, and I think they were much too late, but nevertheless, they're trying to create multimedia functionality out of a book.

So they're offering a new kind of book in an e-book. It's not just an electronic book. It's a book that allows you to go to an archive, to access things in a multimedia dimension. So their hope is that they can actually charge more for that book and open up a new revenue stream.

It is also seen as a savior in that by the iPad coming into the market, it gives the publishers leverage over Amazon, and they were afraid that Amazon, with an 80 percent market share of e-books, would basically continue to lower prices and basically have them over a barrel, and now they feel they've regained some leverage and regained leverage over their ability to price books.

A problem for publishers and not a savior, in that as e-books expand exponentially and expected one day to reach 25 to 40 percent of all books published, what does this do to bookstores?

Already independent bookstores are down to 10 percent of all the bookstores and bookselling places, and the problem with that is that independent bookstores, with a staff of people who you tend to know, you tend to have gone to that store, they are people who really are noted for reading many books and for spotting that first-time novel, that nonfiction book by a new author, and that word of mouth and their recommendations have helped spur sales for years. And the worry is: What replaces that? Because a bookstore, it's very hard to see how a bookstore, which is selling a book, let's say, for $26, can compete with an e-book selling for $13.

GROSS: So let's look at the pricing of e-books and the war that threatened to break out about the pricing. Amazon had been pricing its books at 9.99, which is much cheaper than the $20-something price that you're likely to find in a bookstore for a hardcover book. So let's start with: How had Kindle manage to price e-books so low?

Mr. AULETTA: What Kindle was doing was - let's say a book normally selling for $26 in the store, the publisher sells it to most bookstores or to Amazon for half that price. Let's say they sold it for $13. What Amazon would do was subsidize the difference, take a loss of $3 on each of those books and sell it for 9.99 and hope that they would make up for it by doing two things: one by selling Kindles - they don't tell you how much profit they make or how many Kindles sell, but the estimate is about three million Kindles are out there, and they're making a nice buck on each Kindle.

In addition to that, by gaining market share, and already they were up to 80 percent market share of electronic books, the fear the publishers had is that Amazon would continue to drop that e-book price from $9.99, lower and lower and lower, as is the tendency in the online world.

It is done more cheaply, and customers expect lower and lower prices, and publishers felt that that basically threatened their basic business.

GROSS: Now, a new - with the arrival of the iPad, the new Apple multimedia and reading device, the pricing system is changing. How is it changing?

Mr. AULETTA: Well, what the publishers got Steve Jobs to agree to is to allow them to set what's called an agency model, meaning they could basically set the price.

GROSS: The publisher sets the price.

Mr. AULETTA: Yes, and Steve Jobs will go along with that for at least one year, and obviously there's a question whether he will continue beyond a year at that pricing. But that pricing is going to be, instead of 9.99 as Amazon was doing, it's going to range between 12 and $15, let's say.

And what happened is that Amazon did not want to go along, but five of the six major publishers, who publish 60 percent of all the hardcover books, squeezed Amazon, and with the backing of Apple, and with the coming backing of Google -Google said that they would go along with the so-called agency model as well -Amazon was forced to surrender and agree to that as well.

GROSS: But Apple has agreed to the agency model for one year. So that means after a year they could say, ah, it didn't work for us, we're going to change it. Right?

Mr. AULETTA: Correct, and if you look at what happened in the music business with Apple and iTunes, the music companies were very upset that Steve Jobs set the price of a single track or an individual song at 99 cents.

Now, you can make the argument that iTunes in fact has been good for the music business and that the music companies were really stupid to say you have to buy the entire CD, you can't buy an individual song, but nevertheless there has been real friction with not just the music companies but the television companies with iTunes. Steve Jobs was setting the price, and that upset them as well.

So is that a model for what's going to happen in the book business a year from now? It might be.

GROSS: Now, you say that e-books are basically calling into question the whole system of how books are priced. What has the system been based on until now, until the arrival of e-books?

Mr. AULETTA: Well, what happened was that bookstores are taking a chance on books, and it used to be you didn't get - you didn't buy books at airport kiosks, or you didn't buy them at Wal-Marts and Price Clubs, and you didn't buy them electronically. You bought them in bookstores, first independent bookstores, then chains.

During the Depression, in order to get bookstores to take risks on books that they would stock, the publishers agreed to have a returns policy. That is to say, if you buy and display my books in your bookstore, any books you don't sell, you can return to me at no cost to you, the bookstore.

And the problem is that, according to American publishers, roughly 40 percent of all the books are returned, and that's very expensive for publishers. And with e-books there are no returns. And there's no inventory that you have to stock up and no warehousing and no distribution costs. So it's a much more efficient system and a much cheaper system to produce a book.

On the other hand, what it does is it threatens the very existence of bookstores, and that is something that worries the publishers. I mean, you could argue that the bookstores could, for roughly $100,000, buy a print-on-demand machine that can print out in a couple minutes any book, but $100,000 is not something that most - certainly independent - bookstores can afford to do.

GROSS: So publishers I think are also worried that the electronic reading device manufacturers like Amazon and Apple will start approaching writers directly and cut out the publishers altogether.

Mr. AULETTA: They're less worried about Apple doing that, since Apple really isn't selling - you know, they're in the business of selling hardware, and the iPad, the iPod, et cetera. But Amazon has actually made some deals with authors - Stephen Covey is one, but others as well - and has actually approached authors and editors to try and look to hire - not only hire editors to work for Amazon but also to procure books for them and offering authors a much larger commission than the commission they get from hardcover publishers.

GROSS: So what do you think the odds are that publishers will actually eventually be cut out of the equation?

Mr. AULETTA: I think one of the things that happens, Terry, in the online world, there's always a question, is who is the middleman? Who is the superfluous middleman that you really don't need? Do you really need publishers? I mean, if Amazon is going to provide marketing and provide editing - A, can they do that...

GROSS: Are they providing editing?

Mr. AULETTA: Well, what they were moving towards is to hire editors to do that, yeah, and to actually go out and acquire books. And there's a whole issue now about who owns the e-book rights for books that were published before e-books rights were stipulated in current publishing contracts in the last 10 years.

So those old books, William Faulkners and Norman Mailers, that were published 10, 15 years ago, who owns the electronic rights to them? And can Norman Mailer's estate go to bypass Random House, which was his publisher, and say, no, you don't have the rights to that backlist e-book, we're going to sell it to Amazon or someone else? I mean, there are a lot of others.

So there's a growth of e-book publishing people who say: You don't need a publisher anymore. Publishers really are cutting - they've cut back their marketing, and they've cut back their editing costs. And come to us, we'll do it and we'll give you a larger commission on that, and you'll be happier. And so that puts publishers in the position of saying we have to prove that we are providing a service that can't be matched by others.

And you know, the same issue apples to agents. Are they going to become middlemen? So I think everyone in this world, when you think about the Internet and what it does, think about travel agents. Think about real estate agents. What's the value added that you offer the consumer? That's a basic question.

GROSS: Now, you mentioned the whole question of, if books were written before e-books existed, and the contract said nothing about e-books, who owns the right to the e-books? And there's a big story in that world that just broke, which is that the family of the late writer William Styron has gotten the rights from his publisher to publish the e-books themselves, to not do it through the publisher but to take the rights themselves. What's the significance of that case?

Mr. AULETTA: Well, Random House, which announced that decision on - releasing it on Monday - they went to pains to say that this is just a one-time agreement with the Styron estate. It's not for all of Styron's books, I believe, just for some.

So presumably, I presume what happened there is they made some kind of accommodation where we'll let you do it with these books, but these others we'll retain. I assume that. I'm not certain of that.

But in any case, they went to pains to say - and this is actually a budding issue between authors and agents on one side and publishers on the other. If you look at the old book contracts, and there was actually a ruling on this, earlier in this century, where the court said that if a contract with an author is silent about rights, be it paperback rights or movie rights or e-book rights - there were no e-books at the time - automatically, they declared, that the rights revert to the author, not to the publisher.

Publishers are asserting that in contracts signed before e-books were a factor -in other words, now any book contract talks about e-books, but earlier contracts like Styron's did not. And publishers are claiming that that right is theirs. This will be adjudicated and fought over intensely, because it's - I mean, obviously if you're an author, if you can get those e-book rights, and if you're an agent representing that author, if you can get those e-book rights for yourself, your royalty is going to be much larger than if you have to give the bulk of it to your publisher. And your argument is that if the contract is silent about that, as the courts ruled initially against Random House, they're mine.

And publishers are saying, no, we put in all the sweat, we put in all the work, we edited it, and they're ours.

(Break)

GROSS: Now, you recently published your book about Google and how Google has changed the world. Google is figuring into the story that we're talking about now, the story of how e-books are changing publishing. What's Google's part in all of this?

Mr. AULETTA: Well, Google initially did what engineers do, which is they said, you know, hey, wouldn't it be cool, we could actually come up with a system to digitize all the 20 or so million books ever published, and wouldn't that be cool? And of course it would be cool, and great for me when - or you - when we do our searches, to have books included in those searches.

What the engineers at Google didn't think to do was to consult with the publishers and authors who own the copyrights for those books. So they got a lawsuit, and ultimately they settled that lawsuit in 2008 and agreed - and this is a very significant victory for copyright holders - they agreed to pay $125 million to authors and publishers in order to have the right to digitize those books.

But now what is Google is doing, assuming that the courts approve their settlement with the publishers and the Authors Guild, what Google hopes to do is basically to create an online bookstore as well, and compete against Apple and against Amazon. The publishers welcome that because the more competition, the more leverage they have.

GROSS: So now that you have several different e-publishers putting out books, what are the odds that you'll be able to download all books on all devices, or will devices largely be - will the books that you are able to download largely be controlled by their compatibility with the device you own?

Mr. AULETTA: Oh, you've really touched on an important difference and an issue here going forward. With Apple and with Amazon, you can only download a book on their devices. What Google is promising when they start their program, assuming they do this summer, that's their target, they are saying that you can download our book on any device of your choice.

So it's not a closed system, the way the Amazon Kindle is a closed system or the iPads, iTunes or iBook is a closed system. And that's going to be an interesting test, what happens there.

GROSS: But aren't the companies going to have apps that'll enable you to download the other companies' books on your device?

Mr. AULETTA: Well, you will have apps, which obviously Apple will get a piece of. Apple is in the app business, and they have - in fact, Amazon has an app on the iPad. So you can actually order Amazon books on the iPad.

Yes, then you can download it to, say, to your desktop computer or your laptop computer, but Apple, of course, is making a chunk of change on that.

GROSS: When Apple started iTunes, there was already a culture of free music. There was a lot of, like, sharing of free music through the Internet, a lot of sites where you could download free music. The music industry was very upset about that, and Apple, as far as the music industry was concerned, Apple was selling stuff cheaply, but at least they were selling it, which was good news for the industry, compared to the giveaways.

Now, in the book world, there hasn't been that culture of free books. There's been a culture of giving away newspaper and magazine content for free, but not books. So is that affecting how the new world of e-books is being shaped?

Mr. AULETTA: I think you're quite right. Piracy has not been the worry for book publishers that it has been for others, but the larger point here - if you go back to when iTunes began in 2003, what it really did was challenge the very culture of the Internet. The culture of the Internet is a culture that grew up around the notion that information and entertainment should be free, that the Internet is free.

What Apple did was introduce the notion that you should pay for content, and in that sense it was salutary for the music industry but also salutary for anyone in the content business.

And you see this world of the Internet changing very dramatically. I mean, Amazon is an online world that says you want to buy a book, you have to pay for it. That is a very important step in the notion that all people who are traditional publishers or in the content business are terrified of.

They say, How do we charge for our content on the Internet? How do we avoid people either pirating it or taking it, thinking that they deserve to have it for free? So you can make the argument that what's happened is that the digital world, the Amazons and the Apples, have become pioneers in the notion of charging for content, and now you see a change taking place because of the recession of late '07 and '08, where suddenly companies like Google wake up and realize that, oh my God, we are relying totally on advertising to support and sustain our business, and advertising has fallen off. We need another revenue model, another source of revenue.

That is good news for traditional publishers and for people in the traditional content business because it means that the digital world is moving closer to them.

GROSS: So how do you read now? Do you read a lot of e-books? Do you read a lot of, like, hardcover books? Do you read books?

(Soundbite of laughter)

Mr. AULETTA: When I go - I have a Kindle. I'm waiting to buy the iPad until the 3G or the faster model comes out in a month or so. When I go on vacation, I take my Kindle and read on that because it's much lighter. When I say lighter, I don't mean the three-quarters of a pound with Kindle. I mean instead of taking five books, I take my Kindle, and they're there and you can download in 60 seconds. I love that.

I actually prefer to read a book in hardcover because I can mark it in a way I can't in the same efficiency of a Kindle, and it's on my bookshelf, and I can refer to it as I'm writing. Some years later, I say, wait, wasn't there a Bob Caro(ph) story about Lyndon Johnson in the Senate that - and I can find it much more easily if it's on my bookshelf.

The other thing I don't like about the Kindle, which is an advantage I think the iPad offers, the Kindle doesn't paginate. You don't know what page you're on. It says you are 52 percent of the way through this book.

But the Apple iPad will actually paginate. So you see you're on Page 10 or 20 or whatever, and that's an advantage. I mean, I find that more attractive.

GROSS: Well, Ken Auletta, I want to thank you very much for talking with us.

Mr. AULETTA: My pleasure.

GROSS: Ken Auletta's article "Publish or Perish" was published in the April 26th edition of The New Yorker. His latest book is called "Googled." I'm Terry Gross and this is FRESH AIR.

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