Will Dangdang Get What It Wants?

By Anne Zhang, China IP,[Copyright]

    At the 4th China Digital Publishing Expo held on July 5th, 2011, E-commerce China Dangdang Inc. (Dangdang), which had been contemplating entry into the digital publishing arena, finally unveiled to the public its specific digital business ambition. From the largest distribution platform of physical books to the future largest distribution platform of electronic books, Dangdang has rolled out its business mode and strategies.
Distribution-only and no offsiding for the time being
    Dangdang launched its online reading channel in August 2009, providing users a platform for sneak previews, for which Dangdang decided to offer 10%- 30% of a book. Through the previews and online reading, users may have a taste of a book and then decide whether to buy the paper copy. It can be said that Dangdang dabbled in the digital publishing business since two years ago, which cannot be regarded as full digital publishing, though.
    To be precise, Dangdang might be positioned as a link of the E-book distribution chain in digital publishing. “In the past two years, we have been working to construct the world’s largest digital books distribution platform,” said Mr. Yi Wenfei, vice president of Dangdang who is also in charge of the company’s digital business. “To be brief, Dangdang used to be the largest distribution platform of paper books, and now is a distribution platform of E-books. Our mid-term strategy is not to directly involve in digital publishing, which should best be left to the professional publishers in the upstream business. Dangdang’s expertise is to bring into play its 12 years of experiences in marketing via the e-commerce platform and the enormous user resources to sell these contents, so as to share benefits with upstream publishers. This is the most fundamental business for us. Just because of our dedication to distribution—a link of the selling process, we are able to cooperate with any kind of distribution platforms, and therefore, our platform is completely open. What distinguishes Dangdang from other platforms of digital publishing is that our business is just a link of the industrial chain in digital publishing, and for now, we have no intention of extending to be other links.”
    In the global market, there are many traditional book dealers engaged in digital publishing-related business. For example, Amazon.com, Inc., which started its business from selling paper books, and Barnes & Noble, the largest chain bookstore in the United States, have both established their digital book platforms. Dangdang resembles Amazon in digital distribution, but they are both confronted with the same challenge as the one for upstream publishing houses, that is, readership of paper books is on an irreversible decline. According to the yearly readership survey conducted by the General Administration of Press and Publication and China Academy of Press and Publication, from “post-50s” to “post-90s,” fewer and fewer people are reading paper books, and more and more prefer reading via mobile devices, electric book devices and such terminal devices. The downtrend of traditional readership is accompanied by the upsurging of digital readership.  “Our customer survey shows that more than 1/3 of paper book readers are willing to buy electronic books. They are even willing to have both paper books and electronic books at hand at present. But in future, they may read electronic books only. This answers to the development of this industry. Generally speaking, the digital publishing industry enjoys a promising future.” Yi said.
    The book industry is composed of content creating, editing, publishing and issuing. Dangdang is now playing the role of issuing. If all readers swarm to electronic books, the first victim will be distributors. This can be seen from the closedown of numerous bookstores worldwide, such as the closedown of the well-known bookstore in Beijing—Disanji Bookstore, the survival crisis of Guangzhou Xueeryou Book House, the bankruptcy of the famous humanities and social sciences Beijing bookstore—Forest Song Bookstore, and the collapse of Borders, the second largest chain bookstore in the U.S. Bookstores in the whole world are undergoing their worst times. Although Dangdang and Amazon are online bookstores, they are in essence the same with the above book sellers. “We shall repair the house before it rains. For Dangdang, moving the battlefield to digital publishing business is a strategic decision and the only solution. We limit our E-book business to a distribution platform of electronic books, which we assume is out of a prudent and correct choice. We serve for the publishing industry, and try not to dip fingers in it.” Yi said when talking about the current strategic positioning and policies taken by Dangdang.
Establishing digital platform and setting up an online store for digital life
    The Digital Business Unit (Digital BU) is one of the few business units set up this year, and more importantly, it is Dangdang’s first BU. “Dangdang started its digital reading business and set up the exclusive division two years ago. But at that time, both personnel and financial resources were limited.” Yi said, “Now since it has been upgraded to a BU, we will invest more qualified resources in it. We define the digital distribution platform to be established by Dangdang as an ‘Online Store for Digital Life.’ This year, we will market E-books-based digitalized products and services, and will expand the business to music, movie and other digital products. Besides printed works such as newspapers, periodicals and books, we will gradually digitalize audio-visual products, which are the same as books in substance, i.e., they are both copyrighted products with cultural and creative contents. Since digitalized cultural and creative products are sold via our platform, I think it is fair and reasonable to call it a ‘Store for Digital Life.’ We position on Digital BU, instead of digital publishing. This relatively segmented market positioning enables us to provide more specialized services. We hope that before long, we will be able to provide users trans-industry and trans-media all-round digital business services.” Dangdang’s digital platform constr uction i s comprised of four parts:
    (1) Resource collection, which means getting the contents for selling. This requires cooperation with upstream publishers to obtain the copyright or authorization. “Dangdang will digitalize these contents, and conduct some resource construction and management work as needed by users. It is expected that by the end of this year, there will be tens of thousands of electronic books uploaded to the distribution platform.”
    (2) The research and development (R&D) of the platform construction, aiming at solving the protection and charging problems generated in dealing with online digital copyrighted works. “In the past, Dangdang offered only a few chapters for free reading, which seldom involved copyright issues. But now, we offer the download of the whole book, which forces us to take copyright protection measures, and do the transaction under copyright protection as well.”
    (3) Platform integration. “The major task of platform integration is to integrate Dangdang’s distribution platform with various e-commerce platforms, so as to bring into full play its advantages. Dangdang has quite an edge here. As the largest E-commerce network of books in China, Dangdang has a large pool of customer resources, which are highly valuable for its E-book business. Different from other platforms, the numerous book fans clustered on Dangdang’s platform are not only willing to, but also able to spend money on reading. This valuable customer resource is the basis for Dangdang’s E-book distribution platform. We are now trying to put this platform into operation, that is, to trigger the consumption needs of paper book lovers for electronic books.”
    (4) Terminal development, aiming at solving the problem of electric book devices. “Dangdang is also working on terminal R&Ds. People engaged in content industry may have the same concern on how to make the digital products available to readers. Here, we shall use electronic book devices. We plan to make specialized reading terminals for Dangdang, which, however, incurs many disputes. Some people think it very inappropriate for Dangdang to do such thing at such time. But we believe the timing is perfect for us to enter the market, because we can evade the mistakes made by others before. Through analysis and investigation, we find that specialized devices are necessary in the reading market. Phones’ or pads,’ however, can not fully fulfill long-time reading needs due to the limited electricity charged. The good selling performance of Nook from Barnes & Noble and Kindle from Amazon is a powerful evidence. Moreover, due to the eased competition, hardware suppliers will lower their prices accordingly, which saves our cost to explore this market. Moreover, producing electric book devices helps to reach our goal of providing our costumers with all around services.” Yi said.
Competitive edge for Dangdang
    Mr. Yi pretty much agrees with Mr. Cheng Sanguo, CEO of Bookdao (a network specialized in book publishing, digital publishing and e-books), who says that the core competitiveness for a network of the digital publishing industry depends on two powers: the goods-collecting power and the customercollecting power. “Goods-collecting power means that how many goods you’ve got to sell, and whether these goods are of superior qualities. Dangdang has been cooperated with publishers for nearly 12 years. The numerous books sold by us have brought huge benefits to them. Based on this solid cooperation relationship, Dangdang and upstream publishers have formed a stable interest community, which forms a unique advantage for Dangdang to get superior digital contents. Meanwhile, Dangdang itself has more than 600,000 different books and audio-visual products for selling, and has the ability to digitalize them. Therefore, we can say that we own the best goods-collecting power. Regarding customer-collecting power, Dangdang is now the largest online bookstore in China, whose B2C E-commercial experience all these years has won us enormous customer resources. Many digital publishing platform operators are middlemen. They have to sell their digital publishing resources through other’s platforms, and Dangdang is just such an platform having direct interface with customers. In addition, Dangdang receives a large number of book orders every day, by which we can have an accurate grasp of readers’ consumption preferences and habits that are very valuable for upstream publishers and cooperators. What’s more, we have our third edge. Besides book selling, Dangdang.com is also a comprehensive e-commerce platform with well-developed paying system and membership administration system. We can turn these online shoppers to E-book buyers. This is our uniqueness from other ordinary Internet platforms. Our readers have great consumption potentials for books, and they have got used to network consumption. Some platforms, in contrast, have high network flows but yield no consumptions. You shall first see whether your users are potential readers, then see if they have shopping experiences on your website.”
How to price a digital book
    Yi Wenfei has been hoping that upstream publishers could take up the pricing work. In China, price of digital books is much lower than that of paper books, and the profit margin is very low. Although selling of digital books requires no distribution, logistics or paper costs, it is left with very limited distributable profits because of the low selling price. That is, the gross margin rate is very high, but the absolute profit value is very low. If the price keeps uncontrolled, the entire digital book industry will go collapsing. “China is gradually gaining its copyright consciousness. If we set the price of copyrighted commodities too low, it will be adverse to the development of the industry. We hope when upstream publishers authorize the digital publishing right to digital publishing platforms, they would expressly state the price limits right in the authorization agreement, specifying their right of making suggestions to the price of terminal products. The agreements between Dangdang and upstream publishers fulfill this requirement. We give upstream publishers the suggestion right for the price of products they sold; otherwise this distribution channel will be out of their control. What distinguishes digital contents from physical contents is that they can be duplicated at numberless channels without incurring any cost. If all these channels are authorized with dramatically different prices, the market will also be out of control. Therefore, we hope this entire digital industry could be put under control at the very beginning.”Yi emphasized.
    He thinks that there shall be a very transparent but simple pricing system for digital books, just as the system used for paper books. Paper books are priced very clearly: the retail price of a book is decided by the supply price (which is based on a negotiated discount of the book’s price), plus normal gross profit rate. But the pricing of electronic books is hard to find any yardstick. Possibly, an electronic book priced tens of yuan is sold at less than one yuan, or even for free. Dangdang has advantages in price settlement, thanks to its transaction settlement system established with upstream publishers, and the goodwill accumulated all these years. Paper books and electronic books are both commodities. The only difference lies in having or not having logistics distribution. They both enjoy a discounted supply price, and both have the actual selling price. Dangdang is trying to establish a transparent and easy-to-settle transaction system. There are also many digital platforms putting the authorized contents on other platforms for selling, resulting in a very complex settlement system. Upstream publishers have no idea how much money they have earned. For example, when a database is sold, the upstream publisher will never know the sales profit if it is sold as a package, instead of a specific list of each item sold with the detailed price. Sometimes books are charged at a monthly rate, and sometimes they are re-sold to other operators. Under all these circumstances, it is very hard to detail the profit into every book. However, Dangdang has a very simple business mode: pay and download. This is exactly the same charging method as paper books. The difference between supply price and download price is the profit to be shared with upstream publishers. We believe it is the fairest way for upstream publishers, as well as the best way for readers to cultivate the paying habit. Upstream publishers shall not only emphasize on pricing system, distribution channels and agreements, but also standardize the valuation method and the paid reading method. This appears to be the only fair solution.
    Electronic books have been in existence for a long time. Many digital publishing organizations have already offered many authorizations, but usually get nothing in return. We can’t say that these operators obtaining digital contents are in lack of good faith. Maybe they did not earn money, or it is too hard to decide how much money that shall go into authorizers’ pockets. The odds for Dangdang are the mature selling mode, the good customer resources and the clear settlement mode.
Copyright transaction in the new book era
    The basic transaction mode of electronic books is copyright selling, which forces us to face the copyright problem. First, we must clarify the authorization issue. “Dangdang has its lowest limit, which is to distribute and sell only copyrighted books. We will never do such thing as some websites did to pile pirated contents on their platforms and threaten publishers to give the authorization. Dangdang is rather responsible in this aspect. We will negotiate with every publisher to get the authorization, and will never importune them. We will use our sales volume and actual figures to convince them of the cooperation.”
    Second, pirated contents shall be restricted. “Dangdang’s platform is not just a trade market of digital contents. We select contents very carefully. Even if the contents are of great popularities and in great demand, we will not sell them before the copyright issue is clear. We are very self-disciplined in this aspect. To sell no piracies, we need to protect copyright. Copyright protection is more like a technical problem in the digital publishing field, and meanwhile involves legal and supervision issues. Dangdang has independently developed a digital copyright protection system, which enables readers to enjoy and buy digital contents in a more convenient way without affecting any reading experiences or transactions, and help upstream publishers with content protection against any illegal duplication.”
    Third, we shall strengthen the regulation of copyright trading. Digital content industry is an industry of copyright. From the processing of digital contents after obtaining copyright from upstream publishers, to selling them to end users, what involved in the whole process is a virtual product. This is called copyright transaction. “Dangdang has a distinguished commercial mode, under which copyright is distributed through paid download of every book. In this mode, it is relatively easier to perform copyright transaction, supervision and review, and we can clearly see users’ preferences. A user shall go through registration, login and payment to obtain copyrighted digital contents. This makes the going of copyrighted contents more perspicuous and traceable. As for how to share copyright-generated profits with right owners, Dangdang has set a good example. We are both responsible for upstream publishers and for end users—or for the ‘IDs’ as called by us. Moreover, we are cooperating with some domestic copyright regulatory bodies, and doing some researches on copyright’s life cycle management and unique identification issues.”
    Yi is quite confident and prudent of Dangdang’s digital publishing business. “Digital publishing is a strategic business for Dangdang. It has been planned for several years, and waited till this year to be declared. We know it is a tough and laborious work, but we are all set for it. These years, we have seen so many enterprises working on E-book business, but haven’t seen one listed company either in traditional E-books industry or in original E-books industry, or even in E-book related industries. This evidently shows the toughness of the digital publishing industry. (Hanvon Reader is a different story, because it belongs to the hardware field, instead of digital publishing industry.) But we never shrink back. We believe that our clear strategic position, large number of cooperative partners and further standardized actions in this industry will bring us a bright future. Digital publishing business can be boiled down to copyright business, whose focal points are not simply copyright protection and authorization, but shall involve copyright transaction and related supervision. This is the key to the problem. In this regard, Dangdang has been fully prepared.”
(Translated by Hu Xiaoying)

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