Everything under heaven is in chaos: China’s digital publishing market

Posted on 2012-09-27 by Laurence Harris
by Laurence Harris on September 27, 2012
China ereader mashup XDigital publishing has been around since the early days of the Internet in China: literary websites first appeared in the late 1990s. First accessed via desktop computers, users are now more likely to use mobile phones, e-readers and tablets.

Today, around 200 million Chinese people read digital publications, and serving the market is a wide range of mostly Chinese companies with a similarly wide range of e-readers, formats and platforms. With an as yet incomplete regulatory environment, the market resembles a formless, chaotic mass with endemic copyright infringement. Yet as the various competitors strive to produce the one device and one platform that will outshine the rest, the digital publishing market in China has a lot of business and publishing potential, even if its not currently clear when the market will sort itself out properly.

Large pond, many fish

A 2010 survey conducted by the Chinese Academy of Press and Publications (CAPP) of more than 19,000 people nationwide concluded that Chinese people read 613 million electronic books that year. According to a July 2012 report from the China Internet Network Information Center (CNNIC), nearly 200 million people regularly read ‘online literature’ (网络文学), although that term was not defined precisely. Another government body, the General Administration of Press and Publications (GAPP), says that digital publishers earned revenues of 137.79 billion yuan in 2011, an increase of 31% over 2010.

Despite the low cost of digital literature (two to three yuan for ‘original fiction’ on literary websites and seven to eight yuan for novels on platforms like Dangdang [当当]), piracy is rampant. The CAPP survey stated that an “acceptable price to download an e-book from the Internet is 1.33 yuan” and that “nearly 54 percent of digital readers say they would pay an average of 3.45 yuan to download e-books”. But whatever the respondents to that survey said, what they’re actually doing if they’re reading e-books certainly includes the downloading of a great deal of pirated material.

The market in China is fragmented. Chasing e-book revenue is a very wide range of companies: online retailers, hardware manufacturers, social networks, telecom operators, search engines and even traditional brick-and-mortar stores.

The market for e-readers in China is currently dominated by local companies Shanda (盛大) and Hanvon(汉王), collectively accounting for around 75% of the market. Growth in the e-reader market actually fell by 7.5% in the first quarter of 2012, with industry analysts attributing this to rising iPad ownership. That may perhaps also account for the fact that CNNIC recorded a drop in Internet users of ‘online literature’ from 202.67 million in December 2011 to 194.57 million in June 2012.

According to a report released on August 27 by Analysys International’s Enfodesk information service, China’s e-reader market rebounded slightly in the second quarter of 2012, selling 293,000 units. Hanvon (汉王) dominated, with a 49.9% share of the market, while Shanda’s Bambook (盛大锦书) accounted for 28.4%. The remainder of the market is divided up among a rash of minor players, led by Teclast Electronics(台电) with 1.5%, Newsmy (纽曼) with 1%, and Jinke / Hanlin [津科 (翰林)] with 0.7%. Hanvon’s share of the market continues to slip, however, dropping off from the 54.7% it commanded in Q4 2011, while Bambook’s share rose from 23.1%.

These numbers are still dwarfed by the sales of other handheld electronic devices. As Wenhuibao (文汇报) reported in August this year, “Taken together, the ten leading companies sell no more than 2,500 e-readers a day, about the equivalent of a third-string domestic mobile phone brand. In the first quarter of the year, the sales total of domestic smart phones and tablets was 110 times that of e-readers”. Underscoring this lopsided distribution, Shanda added a Bambook-branded smart phone to its e-reader line this month.

The Enfodesk analysis also noted that overseas e-reader brands were making gradual inroads even though they were not being directly marketed in mainland China. This is not entirely surprising as no single player in China yet offers anything like the stable and comprehensive ecosystem of Amazon’s Kindle.

With over 20 e-book formats, 10 prominent manufacturers of e-readers and countless e-book marketplaces, consolidation is sorely needed. Even established players like Dangdang, China’s leading online book retailer, are still far from where they want to be. Dangdang’s recently released e-reader, Doukan (都看), has been criticized by users on Weibo for delivering a poor experience, despite it being tightly integrated with Dangdang’s popular e-book store.

Q&A with Jo Lusby, managing director of Penguin China

What is Penguin doing in digital book publishing in China?
Distribution deal through Founder Apabi to sell our full list of UK and Dorling Kindersley titles in English in China – but they do not really do consumer selling yet, it’s mainly institutional (university, public library) sales.

How has the e-book marketplace changed during the time you’ve been involved with it?
No, honestly, not really – but the main players are looking like they’re almost ready – for the first time, on the verge of actually getting into it right now.

Do you see a future for e-readers or will people use general purpose tablets?
Unknown. Depends on the next 6-8 months and whether someone rolls out a device that they feel they aspire to own. If they don’t, then it will be in-app reading (tablets and smartphones).

There are a variety of sales models out there offering books at a range of prices, from a few yuan per book to Douban’s latest offerings at 15 yuan or more, close to the price of a printed book. What’s the sweet spot in the Chinese marketplace?
Let me know when you work it out! We are getting close to a ‘sweet spot’ in the US (the world’s most mature e-book market) with digital priced at 30-40% less than print, but China is a long way away from being able to even know what region the sweet spot is in.

Is digital publishing more or less encumbered by regulations than print? Do you expect that to change?
Less encumbered, but this is a disadvantage in this case. Just my opinion, but I feel very strongly on this one. Usually gaps in the law make loopholes that entrepreneurs exploit in China. For e-books, the risks (financial, reputational) to launching and then being shut down are so great that nobody is willing to get into it without solid guarantees that they’re ‘allowed’ to engage in this business. With no licenses (because how can you formally create a legal definition of what is an e-book vs. online article vs. sample chapter?), there are no guarantees.

Are there any companies or any specific products in the digital publishing industry in China currently that really excite you?
Erm… No! But there are platforms, yes, I am in fairly late stage conversation with some players (more than one) that make me believe I can make a market for our e-books here very soon – within a course of a few months. But nothing is done so I can’t talk about who or what.

Wild West

The digital publishing market in China suffers from endemic hardware and software copyright infringement claims and lawsuits. Shanda and Dangdang are among several companies that have been accused of distributing copyrighted works freely on their e-book markets, with Baidu Library (百度文库) and Sina’s ‘iAsk’ (爱问) platform cited as prolific violators. This month, a group of Chinese writers won a small judgment in a copyright infringement lawsuit against Baidu. Dangdang CEO Li Guoqing (李国庆) has been quoted as saying that his company is directly copying the Kindle, and Sina continues to do nothing to address accusations of infringement.

Foreign companies have also been accused of copyright infringement in China. Several lawsuits were filed against Apple earlier this year, for example, alleging that the iTunes store had distributed 59 works without license. These followed an earlier complaint in 2009 by the China Written Works Copyright Society (CWWCS), which alleged that Google had scanned over 18,000 books from 570 Chinese writers without the proper permissions.

With a proliferation of paid e-book platforms since 2011, digital publishers in China have attempted to shed their image of piracy. Dangdang and Baidu Library have both made real efforts to purge their e-book platforms of infringing works, although cynics may question how thorough the purges have been. China’s largest e-publisher, Shanda, with its publishing subsidiary Cloudary (云城), has re-launched its publishing platform, the Cloud Bookstore (云中书城), adopting a Taobao model and allowing publishing houses to set up their own store fronts. Shanda in particular is betting heavily on its ability to sell content. It has significantly under-priced its own Bambook e-reader (at 499 yuan) in the hopes of recouping losses through content sales, confident in its ability to enforce its copyright.

The openness of the Internet and the ease of publishing on literary websites that enable mass piracy do also have their benefits. As Jo Lusby, managing director of Penguin China told the New York Times in November, 2011, “The Internet created all, and I say all, the literary trends that took off in 2005 and afterward”. Three of the most interesting Chinese writers who are currently popular, Han Han (韩寒), Bi Feiyu (毕飞宇) and Murong Xuecun (慕容雪村) have built their reputations and readerships almost completely via the Internet.

The relative lack of regulation and order have also allowed a surreptitious entrance to China for foreign companies, with many foreign publications now available in China via Apple’s iTunes Newsstand that would otherwise require lengthy license applications or would simply be denied access to the Chinese market if distributed through traditional print media. This openness is not possible in China’s heavily regulated and systematized traditional publishing market. One should not however expect loopholes like the iTunes store to remain open once they are significantly popular.

Yet being less encumbered by regulation in China is not currently helping growth in the industry much. As Jo Lusby pointed out to us (see box to the right: Q&A with Jo Lusby), for the makers of e-books, the risks of launching and of being shut down are great, and hence they are unwilling to enter the market without solid guarantees that they will be allowed to stay in business. Yet there are no guarantees because there are no licenses – how do you create a formal legal definition of an e-book to distinguish it from an online article or a sample chapter?

Recently, there have been significant legislative steps to bring digital publishing out of its legal grey area and under greater regulatory control. At the 4th China Digital Publishing Fair in July 2011, Liu Binjie (柳斌杰), the head of GAPP, acknowledged the relative immaturity of the Chinese digital publishing market, and urged digital publishers to adopt better long term relationships with content providers and to strengthen legitimate distribution channels. In 2010, GAPP began mandating digital publishers and content providers to apply for digital publishing licenses (互联网出版许可证), with Shanda and Hanvon being among 21 digital publishers that received licenses. Although carrying few restrictions at present, the issuing of these licenses heralds the start of a more stringent regulatory environment for digital publishing. This legislative push coincides with GAPP’s stated goal of seeing digital publishing constitute 25% of China’s press and publishing industry by the end of the 12th Five Year Plan in 2015. The problem of course, is that while increased regulation might be good for the literature business, it is unlikely to be good for the literature itself.

Searching for a model

At the 2012 annual Digital Publishing Conference in Beijing, Sun Shoushan (孙寿山), the Deputy Director of GAPP, stated that he still believed China’s digital publishing market could improve, although he acknowledged that despite strong growth in the industry, long term growth opportunities seem limited. Sun was especially worried about the lack of original content. Another problem that is often cited is the relative immaturity of the core technologies behind digital publishing.

Attempts by companies in China to achieve profitability have led to the adoption of various business models, with none yet achieving any kind of dominance. Some companies have adopted the wholesale and agent models popular in Western digital publishing. In the wholesale model, publishers sell at wholesale prices with the price the consumer pays set by distributors. In the agent model, distributors take a percentage of publishers’ set prices. The market in China is still far from finding a ‘sweet spot’ for digital book sales. Yet as Jo Lusby told Danwei (see Q&A above), Penguin is only now approaching the sweet spot for the US market, the world’s most mature e-book market, with digital books priced at 30-40% less than print.

Founder Technology’s Apabi (方正阿帕比), one of the best established digital publishing platforms in China, has adopted a partnership model, setting a price floor and a ceiling, and allowing distributors to set prices anywhere between the two. As Jo Lusby pointed out to us, Founder Apabi has also signed a distribution deal with Penguin to distribute the latter’s full list UK and Dorling Kindersley titles in English in China, although as yet this is mainly for institutional clients like universities and public libraries, and not for direct sales to the consumer (see box above: Q&A with Jo Lusby). Baidu and Sina have adapted an advertising-led model, while literature sites such as Shanda’s utilise the ‘freemium’ model, where users are allowed free access to the majority of works and only ‘VIP’ authors’ works carry a nominal fee.

In short, the digital publishing industry in China has a lot of potential both as an unprecedented platform for literary publication and as a business. But there’s still a long way to go. In March this year, Jo Lusby noted at an event at the Bookworm Literary Festival in Beijing that every year seems to be the “year of e-books in China”, but every year seems to fall short. “All the parts are in place but it’s not yet coming together.”

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