Get Ready for Ads in Books

For those who think this too radical a notion, consider the overwhelming product placement in movies, music videos and video games.
by: Ron Adner and William Vincent

With e-reader prices dropping like a stone and major tech players jumping into the book retail business, what room is left for publishers' profits? The surprising answer: ads. They're coming soon to a book near you.

To understand why this is inevitable, consider the past few years. The historically staid and technology-averse publishing ecosystem has been ripped apart and transformed.

Take the first seven months of 2010 alone: In April, Apple came out with the iPad and quickly sold over three million units. Apple also launched its own proprietary bookstore, iBooks. In June, Barnes & Noble lowered the price of its Wi-Fi- and 3G-enabled Nook reader to $199. Only hours later, Amazon slashed the price of its 3G-enabled Kindle 2 to $189. On July 28, Amazon announced the forthcoming Kindle 3, priced at $139 for Wi-Fi-only and $189 for Wi-Fi and 3G. Barnes & Noble is rumored to have a new version of the Nook ready by the end of the year.

Not to be left out, Google plans to launch its own bookstore, Google Editions, later this year. Google Editions would be the world's largest bookstore, offering millions of trade, technical and out-of-copyright (which would also be free) books. They'd be available on any device with Internet access except Kindle, which for now maintains a closed system.

Especially in light of the rush to e-books, the industry faces a troubling future. In the first place, overall sales have been stagnant or decreasing for over a decade, even as more books are published every year. Production costs are higher than ever now that publishers must produce both physical and digital editions. Above all, pricing remains a challenge: No matter what the split between publisher and retailer, at $9.99 a digital book is far less profitable than its hardcover cousin priced at $25.

Even though periodicals like the New Yorker and the Atlantic have printed ads alongside serious fiction and nonfiction since their founding, purists will surely decry ads in books. But historically, the lack of advertising in books has had less to do with the sanctity of the product and more to do with the fact that books are a lousy medium for ads. Ads depend on volume and timeliness to work, and books don't provide an opportunity for either.

Let's start with volume. The top-selling fiction title in 2009 was "The Lost Symbol" by Dan Brown. On opening day it sold more than a million copies, but daily sales quickly dropped off. The Wall Street Journal sells twice that number each day. This leads to the second point: Advertisers want to target their audience now. In a daily newspaper or weekly magazine this is easy to do. Not so for a book, which is often years in the making and has a production lead time of many months.

In short, physical books can't compete with other print media for advertisers. Digital books can. With an integrated system, an advertiser or publisher can place ads across multiple titles to generate a sufficient volume. Timeliness is also possible, since digital readers require users to log in to a central system periodically.

Google has taken the first steps in this direction. Its Google Books archive—a collection of over 10 million scanned books from the world's largest libraries—displays advertisements next to search results. It's a small step to imagine Google including advertisements within books, especially since its 2008 settlement over copyright violations with the Authors Guild. For its part, Amazon filed a patent for advertisements on its Kindle device last year. And Apple has recently entered the advertising game with its iAd platform for mobile devices.

What would the world look like with ads in books? For consumers, the free samples of digital books now available would surely include ads. Because not every consumer who reads a sample chapter will buy the book, it's reasonable for the publisher to extract some additional value. Seeing ads in the sample may also convince a reader to pay for a premium, non-ad version of the full-length book. The old market segmentation of paperbacks and hardcovers will be replaced by ad-supported or ad-free books.

Publishers will need to come up with new ways of evaluating a book's commercial value. What is a best seller? Today the criteria is simple: total unit sales. Yet with advertising in the mix, a book downloaded 100,000 times but never read (think of that yet-to-be-opened prize-winning 600-pager) may be worth less than one downloaded 50,000 times and read cover-to-cover. Unread books suddenly become less profitable to a publisher.

Authors are likely to be concerned not only with the idea of ads, but with what particular ads are placed in their books. Imagine the value—and controversy—of placing pharmaceutical ads in healthy-living guides, or partisan attacks in political memoirs. Writers, agents and publishers will have to negotiate a fundamentally new arrangement when ad-driven e-books become a reality.

Advertising in books will introduce a whole new set of relationships into the publishing ecosystem. Ad agencies will be involved in creating a standard form for digital ads. Technology companies will be crucial to implementation. A new set of contracts will have to be created to manage these new costs, revenue sources and control rights.

Ultimately, advertising will be a way to monetize that most valuable content of all: consumers' time. In a fitting irony, the technological advancements of the 21st century may see authors returning to the 18th century concept of paying per word. Advertisements may be necessary to save book publishing, but book publishing will never be the same.

Mr. Adner is a professor at the Tuck School of Business at Dartmouth College. Mr. Vincent is a former book editor at Houghton Mifflin.

From: Wall Street Journal