Strategy & Competition December 30, 2009, 5:00PM EST

e-Books: Averting a Digital Horror Story

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The team decided the app should be like a virtual sommelier cum food critic, featuring food and wine pairings and tutorials on flavor balancing. Then they moved on to the touchy subject of pricing: Should they charge for the app? Most iPhone apps are free or very cheap. "We are in publishing," said Siobhan Padgett, digital sales and marketing manager at Hachette. "We have to make money." The hardcover of What to Drink with What You Eat lists for $35, and the Kindle edition goes for $19.25. Hachette editors eventually decided to charge $4.99 for the app, which is coming out in January. "We think we can sell a whole lot of these at this price," says Padgett.

Hachette doesn't disclose how much revenue it pulls in from its digital efforts, but the company is doing well. Strong sales of Stephenie Meyer's Twilight series, Teddy Kennedy's True Compass, and Malcolm Gladwell's Outliers helped boost revenues 15% over the first nine months of the year.

Harlequin Enterprises, the 60-year-old publisher of romance novels, started offering all its books in electronic form in 2007 and is now experimenting with several new digital formats. One, called Spice Briefs, seeks to publish short-form erotica, running 5,000 to 20,000 words long, as e-books. Another involves publishing short digital prequels, which bring in extra revenue and tend to pump up print sales. Gena Showalter, a popular author of young adult novels, wrote a prequel for her Lords of the Underworld series that came out one month before the first print book and sold for $2.99. The book, The Darkest Night, debuted at No. 8 on The New York Times bestseller list and has sold 220,000 copies, vs. 130,000 copies of her previous book.

Harlequin CEO Donna Hayes says electronic books account for about 6% of total sales now, but she expects that to double in a few years. She says digital sales appear to be adding to the company's revenue, rather than cannibalizing traditional sales. Harlequin's revenues rose 7% over the first nine months of the year, while U.S. book sales were up 3.6%. "It has grown our business so far," says Hayes.

THE NETWORKED BOOK

Tim O'Reilly may be pushing experimentation further than anyone. His company's decision to sell monthly subscription access to all its user manuals and other materials has been a hit with companies, universities, and training organizations, growing to 20% of overall revenue. "We see ourselves as the canaries in the coal mine," says O'Reilly.

Today, O'Reilly is trying out several new digital products, including one he calls the "networked book," an attempt to get readers involved in the creation of books through interaction over the Web. The company began by letting readers review authors' original manuscripts several months prior to a book's publication and now is allowing readers to post comments on manuscripts.

In the company's San Francisco office, engineer Keith Fahlgren fired up his laptop to show off a Web site for a book called The Real World Haskell, a user guide for a computer programming language. Software that Fahlgren created let 750 people post 7,000 comments for the authors to read. Many reader postings influenced the final version of the book. "This chapter seems a little bit too much like an essay," wrote one reader. "Follow the old rule, show, don't tell." Co-author Bryan O'Sullivan wrote on his blog that the feedback had "a profound effect" on the book. "We have used your input to make our coverage both more correct and more accessible," he said.

O'Reilly and other publishers are cultivating Apple as an alternative to Amazon. One reason: More than 50 million people have the company's iPhone or iPod Touch, which can be used to read digital books, compared with just four million who have electronic book readers. O'Reilly says his company is generating far more sales from Apple customers than Kindle users. O'Reilly currently offers 500 books on the iPhone, compared with 350 Kindle titles. Another 500 iPhone titles are in the works.

O'Reilly is already reaping the benefits of his investments in technology. But Young and other publishers acknowledge they don't know how all this experimentation will pay off. Still, they know they need to figure out the digital future before they lose out to Amazon or another aggressive newcomer. "We've got a long way to go before we can recoup our digital investments. The costs have been huge," says Young. "But I am optimistic, provided we sustain a healthy industry."

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The Debate over Book Delays

Should book publishers delay releasing the digital versions of popular books? There has been fierce debate over that question ever since the Hachette Book Group and Simon & Schuster said in December they plan to hold back digital versions of certain upcoming titles for several months after the hardcover's release. Nathan Bransford, a literary agent in the San Francisco office of Curtis Brown Ltd., argued against such delays on his blog, since he believes they will simply aggravate would-be readers. "We've seen repeatedly over the last decade, alienate digital consumers at your peril," he warned. "The best deterrent against piracy is making a digital edition readily available for sale at a fair price. Resisting the conversion to digital sure didn't work for the music industry."

To read his blog post, go to http://bx.businessweek.com/e-books/reference/

Ante is an associate editor for BusinessWeek.