4. E-book Readers and Smartphones

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1 The Penny Drops: Olswang Convergence Survey E-book Readers and Smartphones Our view: First generation electronic readers are best targeted at the small (but profitable) book-loving demographic which is more concerned by the experience of reading an e-book than by the underlying functionality of these devices. The overall appeal of e-book readers may increase as the underlying technology improves and the price comes down but, for the non-core demographic, more sophisticated devices such as "tablet" computers may ultimately prove more compelling. Smartphones such as the iphone are changing consumer behaviour. The activities of the iphone user base make us more optimistic than previously about the future consumption of mobile TV and other rich media services on the third screen. Web TV to a TV Set 40

2 4. E-book Readers and Smartphones E-book Readers "I'm convinced they are going to take over the world." Director of Digital Strategy at UK publisher "[It] isn't the type of device that will revolutionise the market." UK network operator The consumer perspective As Figure 14(c) illustrates, our consumer survey base showed limited enthusiasm towards e-book readers such as the Amazon Kindle and similar devices produced by Sony and other consumer electronics manufacturers: We were not surprised by the low current adoption levels for these devices (in particular, our fieldwork was carried out before the launch of the international version of the Kindle on Amazon.com). More interesting are those respondents who suggested that they are likely to acquire such a device, with nearly one quarter (24%) of our Tech Vanguard early adopter segment and nearly one fifth (19%) of the 2nd Wave expressing an interest. We will return to this segment of potential adopters shortly E-book Readers and Smartphones 41

3 Those who said they were unlikely to purchase an electronic reader selected a variety of reasons for their disinterest (see Figure 15(a) for the multiple response question we asked of these respondents): 4. E-book Readers and Smartphones 42

4 Although many respondents evidently selected several reasons for their disinterest, form factor (i.e. of an electronic reader as compared to a real book which was selected by 50% of Kids and 55% of Adults) and cost (cited by 52% of Kids and 42% of Adults) were the most popular explanations given. A number of the publishing executives to whom we spoke anticipated that a significant reason for consumer disinterest would be the comparatively limited functionality of an electronic reader as compared, for example, to a laptop or tablet PC. However, whilst this proved a relatively popular reason amongst Kids (with 27% of year olds saying that if they bought a device like this they would also want it to do other, "computer-like" things), only 17% of Adults selected this as a reason for their disinterest. The commercial perspective As the quotations at the beginning of this Chapter illustrate, the executives we spoke to expressed a wide range of views on the likely commercial significance of electronic readers. However, one consistently held view was that the "first generation" e-book readers currently on the market are too expensive and unsophisticated to have any prospect of widespread adoption, with a number of executives pointing to the greater promise offered by the next generation devices currently in development: "I think that the first generation device is going to be pretty rubbish. I think it's hard to see who is going...to have to spend to have yet another device in their bag." UK newspaper publisher "...these [second generation] devices are very compelling the potential is fully flexible, rollable devices, in every regard like a newspaper they will end up having moving images." International magazine publisher "People don't believe in the current formats...they will when [these devices are] in full colour and only 50." UK magazine publisher However, the anecdotal evidence we have obtained suggests that some executives are surprised by the degree of take-up of early generation devices such as the Kindle and Kindle 2 and, more significantly, by the volume of e-book sales which have already been achieved on these devices (although we received mixed opinions as to the prognosis for the sale of subscription content - such as newspapers and magazines - to these devices). One executive explained that, whilst the segment which had expressed interest in purchasing an electronic reader was comparatively small, this group was still large enough to constitute a meaningful target market, even for the first generation of devices, and that although e-book readers would become more advanced, it was likely that they would still only be marketed to this core, "interested" demographic. We remain unconvinced as to how many of the respondents who expressed an interest in an e-book reader will be motivated to acquire a first generation device. Although the impact of second generation devices will be interesting, we suggest it is important to consider the potential effect of more sophisticated, 4. E-book Readers and Smartphones 43

5 multi-functional "tablet" devices, such as that rumoured to be in development at Apple, which may quickly overlap in terms of functionality with dedicated readers. One executive at a UK publisher suggested that: "...there will be a professional market, there will be Apple's market and then there will be the rest... The...thing is, how much are you prepared to milk this relatively small set of early adopters?" Conversely, another suggested that there are distinct demographics for a dedicated electronic reader and for a multi-functional device, with many of the "non-core" demographic from an e-reader perspective already downloading significant volumes of public domain works for free onto non-dedicated devices such as the iphone, but distinguishable from the "core" demographic, as a result of the relative unwillingness of the non-core to pay for e-books. Ultimately, however, perhaps the most significant comments we received were in respect of the need for publishers to maintain competition and constrain unauthorised copying in this market (as to which see also Chapters 7 and 9), with one UK publishing executive suggesting that profound disruption to the book publishing industry will be driven by piracy, not by e-book readers, and another concluding: "The important bit is, at this stage, that there is competition in the marketplace" E-book Readers and Smartphones 44

6 Smartphones "The iphone people are so clearly in a different kind of bubble." Media analyst In this year's survey we have segmented our responses in order to explore the extent to which ownership of an iphone impacts on consumer behaviour. We fully appreciate that many other "smartphones" exist, powered by different operating systems and produced by different manufacturers. However, our iphone user base constitutes a homogenous group of smartphone users which is large enough to be statistically valid when analysing our survey results. Amongst our survey base, 8% of Adults and 9% of Kids own an iphone. 21 As might be expected, ownership is skewed toward the early adopters and away from the Laggards 22, and, amongst Adults (and as Figure 22-8 shows), towards the segment: Tech Adoption Segment Percentage owning iphone Tech Vanguard 23% 2nd Wave 10% Mainstream 7% Laggard 2% 21 See Annex, Figure 1(a). 22 See Annex, Figure 1(b) E-book Readers and Smartphones 45

7 As we noted in Chapter 2, previous years' survey results had left us sceptical about the viability of mobile devices for any significant volume of audio-visual content consumption. However, for the first time, we think that devices like the iphone are having some kind of transformative effect on the manner in which their owners use this connected "third screen" for convergent activities and, having studied the detailed survey responses, we do not think this effect can be explained solely by the demographic skews described above. If we take the five activities described in Chapter 2 and compare and contrast responses amongst Adult iphone owners with responses across the entire Adult base (Figures 22-5(a) and (b) and 22-6(a) and (b)), 23 this transformative effect becomes immediately apparent. Whilst, as a user base, the iphone users generally show higher levels of current activity and future demand across all devices, the incremental current and anticipated future consumption on mobile phones (as compared to the total Adult user base) is striking. We are particularly surprised by the percentage of iphone users who claim that they already use these devices to consume on-demand TV content (19%). Whilst we did not ask iphone users to explain what content they were watching (or for how long), it should be remembered that, as at the date of our Report, the BBC's iplayer service may only be accessed on the iphone over a Wi-Fi connection. Given that this is likely to constrain much current iplayer/iphone viewing to the home, where the iphone will frequently be competing for attention with a dedicated TV screen, the current levels of consumption are telling. Also interesting is the very high level of social media consumption on the iphone, with demand for this type of service on the iphone apparently already nearly met: 23 Social networking and on-demand TV responses amongst iphone users are set out in this Report. For the other activities (streaming music services, music download services and online newspapers), please see the Annex E-book Readers and Smartphones 46

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10 As we will see in Chapter 7, the Adult iphone user base also demonstrates some interesting attitudes to micropayments and, again, we do not think that these attitudes can be explained away simply by reference to the demographics of this base. The executives to whom we spoke, both before and after we conducted our consumer research, shared a range of views in relation to the iphone. Some remained sceptical as to the significance of the opportunity: "On-demand on the iphone is all about syncing so...it's just derived from existing itunes spend...apps is a revenue stream but it won't grow and grow because there are too many people on the [apps] platform." UK broadcaster "Small screen, small beer, smallish market." US and international broadcaster "...we haven't even gone through the first cycle of users to see what will happen to them." Media analyst...whilst others were more optimistic, and/or sought to explain the success of the iphone relative to other similar devices: "There is nothing wrong with a lot of Android phones 24, it's just that everyone who is likely to buy one has already gone and bought an iphone." UK newspaper publisher "There's something about the iphone that's got into that older demographic." UK broadcaster "We're doing very well on itunes at the moment...people often download for their iphone...it's doing very well and that is a most extraordinary store now to sell portable content, there isn't anything else out there really." UK broadcaster Whilst we accept that some of the current claimed consumption of on-demand content on the iphone may in fact be attributable to the "sideloading" of itunes content onto an iphone rather than "over the top" direct delivery via the internet, we do not think this explanation accounts for all of the apparent consumption (particularly as our survey question used specific examples of broadcaster VOD services, such as the BBC iplayer, and made no reference to itunes). It will be interesting to see whether the competition which arises from the loss of O2's UK iphone exclusivity, and the entry into the market of Orange and (in 2010) Vodafone, will increase pressure on the network operators to permit greater delivery of audio-visual content to the iphone via 3G. 24 The open source mobile operating system originally developed by Google E-book Readers and Smartphones 49

11 Either way, we are convinced that devices such as the iphone are educating users as to the possibilities offered by the "third screen". These devices might not replace the main TV or home computer, but this is not their purpose. Rather, the advanced functionality which they now support allows the consumer to access an ever-increasing range of services at a time when the first or second screen is unavailable or its use is inappropriate at a given place and time. As we noted in the context of electronic readers, it will be interesting to observe the anticipated (re-)launch of the tablet device into the market and to see the extent to which this new category of device blurs further the distinction between the second and third screens E-book Readers and Smartphones 50