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By Scott Lowe

image Scott Lowe (photo) is a graduate student at Boston University, where he is earning a master’s degree in Information Systems and an MBA degree.

His academic concentration is in marketing and technology. He can be reached through his Publishing Tidbits blog. Welcome to the ranks of TeleRead contributors, Scott! – D.R.

A few days ago, I posted a blog on the benefits of horizontal markets. In researching the post, I came across a large number of e-book distributors—some vertical and some horizontal. However, nearly all were small, most with a very limited number of titles. It is not difficult to see that e-book distribution is dominated by a few companies.

Why? After all, the costs of setting up and selling e-books is relatively low. Any company willing to pay for server space could set up an e-book store and start selling. And, trust me, many have. Why, then, is e-book distribution dominated by only a handful of companies? The answer comes from understanding the nature of platforms and two-sided networks.

“Bigger” helps e-book-sellers 

E-book distributors connect readers with publishers and authors. These companies create relationships with readers (which costs quite a bit) and maintain those relationships over time (which costs less and offers considerable profit). Because of this, the industry favors larger companies that can leverage existing relationships, that can afford a significant customer acquisition investment, and that have the marketing know-how to bring consumers in. Because of this, it is not surprising that the biggest e-book distributors are large companies: Amazon and Sony. (And they are being joined by other heavyweights: Google and Barnes & Noble.)

However, something more fundamental is happening: As a company increases in size (measured by the number of users it is able to acquire and retain), its e-book platform becomes more attractive to publishers and authors. This large base of users provides an incentive for additional publishers to join and for existing publishers to add more content. Importantly, this pattern repeats itself: An increase in size on one side of the platform leads to an increase in size on the other. More users leads to more content and more content leads to more users.

Note: Part II will appear in the next day or so.

 
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