Last week, Jeff Bezos predicted that ebooks will replace print books. Although he did not attach a time frame to the prediction and while many others reject his opinion outright, it is certainly an interesting thought. The end of print books (or even a dramatic reduction in its sales relative to ebooks) would have significant implications for publishing companies. These implications can be seen and understood by looking at the product life cycle.

Product Life Cycle

The product life cycle provides an intuitive framework through which a business can view its products and help to shape its product management approach. The model plots demand for a product (measured in sales) against time.

Products typically go through five stages: Adoption, Growth, Maturity, Decline, and Abandonment. Each stage in the product’s life cycle brings both challenges and opportunities, requiring product managers to understand the implications of the model in order to shape strategy.

Product Life Cycle and New Technologies

During a product’s mature and declining phases, new technologies (that will eventually displace the product) exist, but have yet to be adopted by the majority of consumers. Given this, it is important that companies be aware of these advancements and have a strategy to successfully transition to the new product. This strategy could be one of partnership, investment, or acquisition.

The Product Life Cycle and Complementary Goods

While the product life cycle model provides a useful context for understanding a single product, it does little to help managers understand the relationship between related, complementary products.

A complementary product is any product tha t is used with (and therefore whose demand is based on) another product. Complementary products can be divided into two general categories: those whose demand is highly specific to the primary product and those whose demand is independent of any single product.

The current product life cycle model is able to satisfactorily explain the relationship between primary and complementary products only if those products are specific to one another. If a complementary product is built specifically for its primary product, their demands will be highly correlated and the corresponding life cycle demand chart will be similar. Companies making the complementary good will therefore face similar market dynamics and can likely employ similar product management strategies as its primary product counterpart.

However, the same cannot be said for those complementary products whose demand is independent of its primary product. Information, for example, would fall into this category (where the primary product is the medium in which the information is delivered). This difference presents unique challenges to those companies who create and sell the demand-independent information.

New technologies often (but not always) bring about new cost structures, pricing strategies, and business models for the primary product. Companies providing the demand-independent information, however, have built their business models and have achieved financial success based on the rules and business norms associated with the first primary product. This transition, therefore, represents a period of vulnerability in which new entrants that embrace the new rules in order to develop cost structures and revenue models can displace the incumbents that do not.

Ebooks, Print Books, and the Period of Vulnerability

If Bezos’ prediction comes true (or if ebooks come to represent a sizable share in the overall trade book market), publishers may now be entering the Period of Vulnerability. New competitors with lower cost structures and different business models (e.g., Lulu) have entered the market, putting pressure on publishing companies to balance print and digital strategies and the cost structure associated with each.

This last week, Barnes & Noble announced its soon-to-be-released Nook e-book reader. While many have seen this as just another entrant into the already crowded market, I believe it represents a potentially significant shift in the industry. Strategists suggest that in order to successfully compete with a company in Amazon’s position, companies must embrace standards. And, in fact, Amazon’s competitors have done this. In August, Sony announced that its library would be converted to ePub, and last week, Barnes & Noble reiterated a similar, previously made commitment. However, despite this common commitment, Sony and Barnes & Noble’s strategies are very different from one another. This difference can be seen in analyzing the industry’s capability stack.

Stack analysis is a representation of the capabilities needed to deliver value to a consumer. At the bottom of this stack are those elements furtherest away from the consumer and those whose technical details the consumer is least concerned with. Additionally, each layer in the stack can use only those below it to transform data and increase overall value.

Within this framework, a company’s primary strategic decision concerns where it will compete in the stack and whether it will focus on a single layer or integrate across multiple. Amazon, for example, has chosen to integrate across multiple layers.

While this strategy of multiple level integration has brought Amazon considerable success, it can be difficult for multiple companies to follow because it often leads to significant network effects and considerable platform lock in. Recognizing this, Sony decided to alter its strategy and is currently operating in the following stack model:

While this strategy of market modularization is logical, it is certainly not the only option. Barnes & Noble, for example, is taking a considerably different approach. The c ompany, with its Nook e-reader, now has a dedicated device, additional e-book software (for the PC, Mac, iPhone, etc.), and its own content library.

However, as the above diagram shows, Barnes & Noble’s involvement in the ebook market does not end here. The company has chosen to compete not only through vertical integration but also within a single layer of the capability stack. The company sells content and makes available its platform to users of IREX and Plastic Logic devices.

Not only does this stack architecture provide Barnes & Noble additional sources of revenue, but it also provides the company options unavailable to Sony, Amazon, and other industry players. By integrating across multiple layers while simultaneously competing within a single capability, Barnes & Noble may be able to provide more value to its consumers. While the device is unproven and the performance of the overall ecosystem is completely unknown, it is possible that this stack architecture will allow Barnes & Noble to provide the benefits of an open format standard (multiple devices with no significant lock in) with those of vertical integration (solid user experience and multiple connected, synchronized devices).

A few days ago, The Atlantic ran an article titled “The Kindle Problem.” In it, author Kevin Maney gives his thoughts on why many consumers have not yet purchased one of Amazon’s e-readers. His basic premise is that when developing products, companies should focus on either providing an excellent experience or being extremely convenient -- but not both. He states:

...in aiming to provide both a great experience and supreme convenience, [the Kindle] has achieved neither. And unless it can be revamped to truly distinguish itself, either as the best reading experience around (superior to the old-fashioned book), or as the cheapest and most convenient reading outlet available, it may be doomed to fail.

Maney continues by stating that Amazon’s pursuit of both elements has required the company to charge a price too high for the majority of consumers. While this has some merit, such a view is far too simplistic to be useful. After all, those companies following Maney’s advice have sold far fewer devices than has Amazon.

This is not to say that price does not matter. It does. Price undoubtedly has an impact on purchase decisions. However, as Everett Rogers describes in his research and in his book “Diffusion of Innovations,” consumers’ adoption of innovation is impacted by numerous factors. According to Rogers, a new innovation’s rate of adoption can largely be explained by five variables: the perceived attributes of the innovation, the type of innovation decision, the communication channels used, the nature of the social system, and the extent of change agents’ efforts.

Within these five variables, Rogers identifies the perceived attributes as being most significant. These attributes -- relative advantage, compatibility, complexity, trailability, and observability -- together tend to explain anywhere form 49 to 87 percent of variation in consumer adoption of a new innovation.

When interpreted through this framework, Maney’s argument centers around the Kindle’s relative advantage, with a heavy focus on economic costs. However, Maney’s focus on these costs does not include proper attention to perceived benefit or to the other sources of relative advantage. Rogers states:

Diffusion scholars have found relative advantage to be one of the strongest predictors of an innovation’s rate of adoption. “Relative advantage” is a ratio of the expected benefits and the costs of adoption of an innovation. Subdimensions of relative advantage include economic profitability, low initial cost, a decrease in discomfort, social prestige, a saving of time and effort, and immediacy of reward.

In other words, consumer behavior cannot be explained through a dichotomous product development strategy of providing experience versus convenience.

Amid increasing reports that Amazon continues to dominate the market for e-reader and ebook sales, Sony and other competitors are altering their strategies. Last week, I wrote a post on why Sony had little choice but to give up its proprietary BBEB file format and instead adopt ePub and Adobe DRM. Sony’s new strategy is an attempt to modularize the market and to thereby allow several companies to succeed.

In this respect, Sony’s embrace of ePub was necessary. However, the decision is, in and of itself, insufficient if it wishes to change the market’s overall dynamics. In a recent article on Slate, Farhad Manjoo lays out his suggestions for how Sony (and other Amazon competitors) should proceed if they wish to be successful. The underlying logic of his suggestions comes from the music industry’s transition to digital and Apple’s ability to dominate the new distribution channel. He states:

Anyone looking to beat the Kindle, then, should look to the iPod: Study everything that Apple's rivals did, and do the opposite.

While ebook companies would be well advised to study and understand the history of this market, they should be careful when extrapolating the experiences of Apple’s competitors in order to formulate their own strategies. Digital music is very different than ebooks. Having said this, Sony and others should take the following lessons from the music industry:

It’s all about the experience

As I have said before, consumers do not simply buy products. They do not merely buy content. Consumers buy experiences. With ebooks (as it was with digital music), consumers have paid little attention to the file format or the DRM protection on their content. Now, this is not to say that no one cares about these things. Many consumers do, and these individuals tend to be very vocal about their concerns. But, these individuals are a minority. In fact, according to a recent report done Imran Khan, only 15% of consumers cite Amazon’s proprietary file format when deciding not to buy a Kindle (and only as a 2nd or 3rd reason).

Switching Costs Matter

Manjoo cites the failure (or at least the underwhelming market penetration) of Apple’s competitors as an example of why the overall ecosystem matters. While he is correct, something much more significant is occurring with the Zune and the other device manufacturers that he referenced. By the time the Zune entered the market (in 2006), Apple had solidified its position and had established a large user base. To compete successfully, Zune had to not only provide a better user experience, but it needed to convince users that the Zune experience was so much better than Apple’s that it warranted the incurrence of considerable consumer switching costs. These costs included not only the amount of money invested in music (compatible at that time with only iTunes) but also the time spent learning and becoming comfortable with the iTunes and iPod systems. Consumers like consistency, and comfort with an existing platform represents a considerable obstacle to would-be competitors.

Sony is in a different position today than Microsoft was in 2006. The ebook market is still relatively small. Only 2% of consumers currently own a device and the market is expected to grow significantly. This provides opportunities to Sony that won’t be available if Amazon continues to dominate into the future. However, switching costs are still relevant in the ebook market.

According to Carl Shapiro and Hal Varian, consumers who experience lock-in go through the following cycle:

Lock-in begins when a consumer chooses a brand, begins to sample it, and then invests in it. While we can see that current Kindle consumers have done exactly this, such a view is far too narrow in its scope. The degree of Kindle’s success is due, in large part, to the fact that consumers had previously selected the Amazon brand as their platform for purchasing products. For many, therefore, the purchase of the Kindle is simply a further investment in the platform (and an additional source of overall lock-in). Sony will need to understand this lock-in and be able to address it when it makes marketing and distribution decisions.

Align incentives

Manjoo’s idea of trading ebooks among friends is similar to Microsoft’s idea for social music on the Zune. Individuals could send a friend a song who could then listen to it up to 3 times over the course of 3 days. The concept, despite its uniqueness, did not lead to the level of success Microsoft expected because the feature’s value materialized only if a consumer’s friends also bought into the Zune platform. For these individuals to buy into the system, they would need to incur those considerable switching costs for what was a pretty insignificant benefit. Listening to a song 3 times, after all, could be achieved far more conveniently. Zune’s social media concept failed because the user’s incentives were not aligned.

Manjoo’s idea -- while intriguing -- falls into a similar incentive trap. This time, however, it is the incentives of the content creators that creates an issue. Allowing Zune consumers to listen to a song 3 times for free was allowed because a user’s demand for repeat consumption is high in the music industry. So, giving away the content (while placing certain restrictions on convenience) is effective at increasing purchases. The same cannot be said for books. Once a consumer has read a book, that individual’s demand for the content decreases dramatically. If consumers are allowed to share the full content of an ebook with friends, sharing will in most situations not lead to increased purchases. More importantly, such DRM policies could potentially open the door for third party ebook rental markets that could actually reduce revenue to publishers. The incentives for publishers are simply not aligned with this proposal.

Manjoo’s idea has the correct end goal -- distinguish the ePub platform by increasing consumer options. However, ebook aggregators and device manufacturers must pursue strategies that have incentives aligned for all interested parties.