Barging Into the Book Club

It happened to music, movies, television and newspapers. And now it’s happening to books. The Internet and digital technologies are threatening to bring the book publishing industry to its knees.

Book publishing is an insular business that hasn’t changed much over the past 100 years. But today it is coming under siege by a number of outside forces. Whether it’s e-books and e-readers like the Kindle, Internet-based self-publishing, or the rise of new digital publishing platforms, the industry is clearly ripe for major disruption.

“There are a very few industries that haven’t been seriously challenged by the Net economy,” says Moshe Mor, a partner at Greylock Partners. “Now it is book publishing’s turn.”

Over the past year, VCs have pumped more than $55 million into at least a half dozen book-related startups, according to Thomson Reuters, publisher of VCJ. Investors see an industry on the ropes and the opportunity to wrest power away from the traditional players. Indeed, the economic downturn has shone a bright light on the high cost structures and inefficiencies of book publishing, with publishers announcing mass layoffs and pinning their hopes on an ever-dwindling supply of proven, best-selling authors.

A host of venture-backed startups are looking to capitalize on the disarray, while thrusting the publishing industry firmly into the 21st century. One of those disruptive startups is WEbook, which recently raised $5 million from Greylock and Vertex Venture Capital.

WEbook bills itself as an online book publishing company that does for aspiring writers what American Idol did for singers. Writers upload their work to the WEbook platform, and then a community of readers votes on the best contributions. Writers can also use the platform to collaborate with other people on writing projects. Contributions that receive the most reader votes are then published by WEbook in print, e-book and audiobook formats.

“In the classical publishing route, only one in 10,000 submissions ever see the light of day, and it’s a very small group of editors and agents making those decisions,” says Mor. “We think it could be more effective to democratize the process and let the community decide what is worth publishing, rather than just a few editors.”

There are a very few industries that haven’t been seriously challenged by the Net economy. Now it is book publishing’s turn.”

Moshe Mor

Even Mor admits that the WEbook model will still have to be proven over time. But given that the U.S. book publishing market stands at $25 billion annually, it’s a gamble he’s willing to take.

For at least one new book publishing startup, the bet is already paying off. Blurb, an Internet-enabled service that allows anybody to create and publish bookstore-quality books, recently reported that it has reached profitability. The company experienced 200% annual growth in 2008 and has revenue approaching $30 million.

That’s still a drop in the bucket compared to the overall publishing industry. But it’s a noteworthy accomplishment, especially when you consider that ultra-hyped venture-backed companies like Facebook and Twitter are nowhere near profitability.

“We are thrilled with the progress Blurb has made,” says Brian Mesic, a partner at Anthem Venture Partners, which seeded the company and participated in a $5 million Series C round with Canaan Partners last November. “Blurb is a real business with people giving them money in exchange for a real product.”

For the most part, Blurb falls into the vanity publishing category. Mesic says he’s even used the service to create a biography of his 90-year-old grandmother replete with photos spanning her entire life. The service is targeted at individual creators who, in the past, would never think of creating a book on their own. But with the rise of digital media, publishing a professional-quality coffee-table book is suddenly within their reach: Prices start as low as $12.95 per copy for a softcover book of up to 40 pages.

Increasingly, the service is also making inroads into the traditional book publishing market. Blurb now enables authors to use the platform to make money from their work. Blurb lets authors set their own pricing for their books, and then handles all billing and logistics. The beauty of this model is that books are only printed when there is an order for one.

The self-publishing, print-on-demand industry led by startups like Blurb, Lulu.com, and Author Solutions is becoming a force in its own right. Since its inception in 2002, Lulu has digitally published more than 820,000 titles, with 5,000 new titles added each week. These self-publishing sites do for books what YouTube did for home videos. And they are even creating their own superstars.

Everyone likes to talk about what they are reading. We realized this was a big need that wasn’t being fulfilled on the Web.”

Travis Alber

Take the novel “Still Alice,” written by Lisa Genova. The story of an aging Alzheimer’s victim, the book was turned down by almost every publisher because the subject matter didn’t seem like the kind of thing people wanted to read about. The frustrated author finally published the book herself on Author Solutions’ iUniverse site. It was quickly noticed by readers and even received rave reviews in a local newspaper. Ultimately, the book was picked up Simon & Schuster, and is currently the 11th most popular work of fiction on Amazon.com, just one spot behind “Atlas Shrugged.”

A similar experience led Mark Coker to start his own self-publishing site called Smashwords, which has published more than 1,000 works. He and his wife wrote a comedic novel called “Boob Tube” about the behind-the-scenes lives of soap opera stars. The novel was turned down by publishers simply because they assumed that people who watch soap operas—the target audience of Boob Tube—don’t read books.

“By contrast, we publish everything on our site,” says Coker. “Sure, there is lots of crap, but some of the stuff is brilliant. Rather than letting editors and marketing managers act as filters, we let the community of readers be the filter.”

Smashwords is self-funded to date, but Corker says he can imagine needing venture money once he builds more traffic on the site. Books on the site are sold in digital format for about $4, with Smashwords taking a 15% cut.

Mor says the success of any online publishing site will ultimately depend on its ability to produce quality works. But he is quick to add that publishing is a hits business, which makes it a dangerous game for investors. That’s why he’s pleased that WEbooks is starting to experiment with other revenue models, such as offering a marketplace of editing services and writing workshops to aspiring writers.

“Finding the right business model for online publishers is a continuing challenge, but we are starting to figure it out,” he says.

Another challenge is avoiding litigation from traditional publishers. This is a problem for social publishing sites like Scribd, which lets people share and publish original writings—and sometimes not-so-original writings—on its website. For example, users could read the “Great Gatsby” on Scribd as easily as they could download music from The Black Eyed Peas on Kazaa. The company says it handles over 50,000 new documents every day and attracts 55 million users each month.

Rather than letting editors and marketing managers act as filters, we let the community of readers be the filter.”

Mark Coker

Scribd, which raised $9 million in December from Charles River Ventures and Redpoint Ventures, seems to be avoiding the legal rat holes that ensnared earlier file sharing sites. The site recently partnered with major publishers including Random House and Simon & Schuster to legally offer selected content to the Scribd community free of charge. Unlike their counterparts in the music business, book publishers seem to understand that online sharing can be a valuable marketing tool that ultimately helps to sell more books.

Another online book site currently in talks with major publishers is BookGlutton, which is looking to raise about $1 million in first round funding. It offers a twist to the standard uploading and sharing of books, with an elegantly designed interface that allows users to read, annotate and discuss books with other users while immersed in the text.

The site turns the once solitary act of reading into a communal experience, a sort of virtual book club. “It’s like having a community of friends inside your book,” says co-founder Travis Alber. “You can chat inside any chapter and attach a comment inside any paragraph.”

BookGlutton features a selection of nearly 2,000 books, but it hopes to strike deals with major publishers to add many more. “Everyone likes to talk about what they are reading,” says Alber. “We realized this was a big need that wasn’t being fulfilled on the Web.”

Though digital book publishing is still in the first chapter, venture capitalists are increasingly confident that this story will have a happy ending.

SIDEBAR: A Textbook Case

Hooks Johnston feels the pain of college students, and he wants to do something about it. A general partner at Valhalla Partners, Johnston recently led an $8 million Series A round for Flat World Knowledge, which offers textbooks free online.

Blurb is a real business with people giving them money in exchange for a real product.”

Brian Mesic

Flat World is one of at least three startups that have raised a combined $45 million to go after the $9 billion textbook market. With the skyrocketing costs of textbooks, these startups should find plenty of customers willing to at least listen to their pitch.

Today, the typical student spends more than $900 on college books a year, according to the student-led advocacy group Make Textbooks Affordable. And that figure is only going to go up: College textbook prices have increased at twice the rate of inflation since the mid-1980s, according to a 2005 report by the Government Accountability Office.

Traditional textbook publishers have little incentive to drop their prices, which average about $140 per college textbook, Johnston says. And that creates a big opportunity for a startup like Flat World, which was launched last year by textbook publishing executives Jeff Shelstad and Eric Frank. In addition to Valhalla, the company’s backers include Greenhill SAVP and High Peaks Venture Partners.

Based in Nyack, N.Y., Flat World publishes its own textbooks and makes them available for free online. It makes money by charging a fee, ranging from $20 to $60, if students print out the title or select a PDF or audio version.

The company currently publishes 30 original textbooks for digital distribution. “Students today are much more accustomed to doing things online and electronically,” says Johnston. “The notion of lugging around overpriced, five-pound textbooks is antiquated.”

Another company attacking the college textbook market is Chegg, which raised $25 million in December from Foundation Capital, Gabriel Capital Partners and Kleiner Perkins Caufield & Byers. To date, the startup has raised a total of $33.3 million.

Chegg has taken a Netflix approach to textbooks, creating a website that lets students rent their textbooks and return them at the end of the semester.

Paul Holland, a general partner at Foundation, says Chegg is growing at a phenomenal pace, primarily because students can save an average of 60% on every textbook they rent from Chegg.

Then there’s Better World Books, which collects and sells used books and donates some profits to literacy causes. It describes itself as a “self-sustaining, triple-bottom-line company that creates social, economic and environmental value for all our stakeholders.”

Based in Mishawaka, Ind., Better World raised $4 million in April 2008 from Good Capital and individual investors. The company’s website says that it has “converted more than 11 million donated books into $4.5 million in funding for literacy and education. In the process, we’ve also diverted more than 6,000 tons of books from landfills.” —Tom Stein, with additional reporting by Joanna Glasner