WHITE PAPER THE EMERGING MARKET OF E-BOOKS

WHITE PAPER THE EMERGING MARKET OF E-BOOKS

E-books alter the conventional methods of production and distribution and shake the boundaries between traditional players in the field. What are the opportunities, threats, and legal obstacles of e-books? The e-book market Legal issues Contracts DRM and watermarking Libraries and e-lending Challenges for different stakeholders CONTENTS Three FAQ's Can consumers resell e-books? Will the book industry face piracy similar to the music and motion picture industry? How are e-books priced? About SOLV

THE E-BOOK MARKET LEGAL ISSUES CONTRACTS "Books are no more threatened by e-books, than stairs were by elevators Stephen Fry E-books are electronic versions of printed books. E-books can be published in a number of file formats, of which pdf and epub are the most common. An electronic reading device is required to read e-books. This could be any computer, a multipurpose device, such as Apple s ipad, or an e-reader, such as Amazon s Kindle. E-books have many advantages. They are readily available and can be purchased in an instant, without having to physically go to a bookstore or library. Users can efficiently store and carry many books at the same time. Moreover, many additional features may be offered, such as a built-in-dictionary, translation and search functions, hyperlinks, and audio and video illustrations. E-book sales are growing fast internationally. In the United States, e-book sales amount to more than 20% of the total turnover in the book sector. In 2012, market leader Amazon's e-books sales increased 70%, whereas paperback sales increased 5%. It is to be expected that e-books will constitute 36% of the United States book market by 2014, and 50% by 2016. In the Netherlands, e-books account for 4.4% of the total book market. In the first half year of 2013 a number of 769,000 Dutch e-books were sold. Since currently no more that 12% of all printed titles is available in digital format, this number is expected to grow fast. Like cinema survived television, paper books could well survive e-books. The tangible book is expected not to disappear, because of its value as an object, for example to present art works in or to give as a gift. However, the demand for digital books will increase, because of the advantages mentioned before. Stakeholders should actively grasp this digital revolution, expanding the cultural, social and economic possibilities that e-books bring. "Here are the economics: I m going to charge five bucks, or $4.99 a download. For every book sold, my online vendor will send me 70 percent of the revenue. In raw dollar amounts, that s more than three times what I d get from a mainstream publisher for each paperback sale." Neal Pollack (The Case for Self-Publishing) Whether or not a publisher can publish the e-book version of a literary work, is determined in the publishing contract. For example, the most recent version of the Model Agreement for the publication of original Dutch literary works stipulates that the exclusive license granted to the publisher entails the right to publish and exploit the work or part of the work in an electronic form [ ] for example as an e-book. Up until a few years ago, however, e-books rights were not mentioned in contracts, as they were not envisaged yet. The former Model Agreement, which is still valid for many books, is unclear about the e-books rights issue, giving rise to a number of disputes. In case publishers do not have the digital rights, further negotiations with the authors are necessary. These negotiations can be troublesome because of discrepancies between desired authors fees and the amounts publishers are willing to pay. Strictly speaking, authors do not need traditional publishers anymore to distribute their e-books. They can sell their books directly via the Internet for example via Amazon s Kindle Direct Publishing service or create their own e-book platform. The advantages of self-publishing are clear: authors benefit directly from every sale. Some authors have proven successful at marketing their own e-books. For instance, the science fiction novella series Wool is self-published as e-book by first time author Hugh Howey. Does this mean the end of publishers? Probably not. Self-publishing might prove difficult for unknown authors. Publishers, with their reputation as well as their editing, marketing, and distributions services, could therefore still offer a valuable proposition to authors. In the traditional distribution chain, the author s or publisher s copyright is limited by means of the doctrine of exhaustion ( uitputtingsleer or first sale doctrine in the United States). As a result of exhaustion, the rights holder cannot control subsequent re-sales once a book has been sold. Since the first sale doctrine is generally expected not be not applicable to e-books, any party that uses copyrighted material, can do so only based on a granted (sub-)license.

LEGAL ISSUES DRM LEGAL ISSUES E-LENDING The majority of e-books are sold with Digital Rights Management (DRM), which restricts the user in the use of e-books and allows the online retailer to remotely control e-books. DRM is used to respond to the piracy threat associated with e-books, but is it the best solution? Many consumers are critical when it comes to DRM. Indeed, DRM limits some forms of use generally associated with printed books, notably the ability to annotate, loan or resell a book, as well as the ability to read freely without surveillance. DRM allows e-book publishers to collect detailed information on readers and reading habits. DRM also leads to compatibility problems between different e-book formats and e-readers. Therefore, DRM might be an incentive for legitimate customers to download illegal versions of e-books which are often more convenient and flexible in use. Critics of DRM urge publishers to abolish DRM rather sooner than later: illegal content will be available anyway, and DRM technology can always be circumvented. So called soft DRM such as watermark is often suggested as a solution against the piracy threat. Watermarked e-books are (visibly or invisibly) personalized copies of an e-book. The watermarks associate the file to the legitimate buyer of the e-book. This way, a buyer can for example read the book on several different devices and can lend a book to a friend, but could be held liable in case the copy is found on a filesharing website. In January 2013, the Dutch central distributor of books CB Logistics started to remove Adobe DRM of 8,426 e-books. This amounts to a percentage of 74% of the available 20.000 e-books that will be sold with a watermark instead of DRM. More recently CB Logistics caught the news, as well as the attention of Dutch Members of Parliament, when it became known that CB imposes on e-book retailers the obligation to provide BREIN foundation, the rights holders' collective law enforcement entity, with the names of customers associated to copies of e-books on torrent-sites or usenet. This has raised serious privacy concerns, as to the legal grounds of this processing ("verwerken") of personal data in the Dutch Data Protection Act. I have been informed, that when circulating libraries were first opened, the booksellers were much alarmed, and their rapid increase added to their fears, and led them to think that the sale of books would be much diminished by such libraries. James Lakington 1790 The lending of e-books (e-lending) in the Netherlands occurs on a small scale. Approximately 500 copyrighted e-book titles and 40.000 in the public domain, are currently available in libraries. Since the public lending regime, which allows libraries to lend out books without the permission of the right owner, applies only to lending of physical copies of works, libraries can only acquire e-books by negotiating a license with the author or publisher. These have proved to be reluctant to embrace e-lending, because of their fear it will compete with the sale and rent of e-books by commercial parties. Whether e-lending would, indeed, distort the market, remains to be seen. Libraries urge that extending the lending regime to e-books is essential for libraries to be able to fulfil their public role in the future. Although the Dutch government showed itself willing to create a National Digital Library, the European directives on copyright law do not leave room for a copyright exception permitting the lending of e-books by libraries. Until that changes, libraries require the rights holders permission to lend out e-books. The key challenge libraries face is to arrive at license agreements which provide sufficient reassurance to publishers, while at the same time permitting the library to fulfil its core activities. A way to do that, is to settle for licenses with constraints, like libraries in the Unites States currently do. Libraries could, for example, arrange that only one reader at a time is permitted to access a title (the "one copy one user" model), or restrict the number of e-book checkouts. Another option is on-thespot-reference, allowing people to read and access e-books on the premises of the library. Although such e-lending models might not be the preferred model among library users, they may temper the rights holders' concerns.

CHALLENGES FOR STAKEHOLDERS Consumers will not pay the same amount for e-books as for paper books. Authors, publishers, distributors and resellers should develop interesting business propositions. Rent or subscription based models could be a suitable business model for the future. The longer it takes to open up the market for e-books in the Netherlands, the more likely it is that (potential) customers will turn to pirated books. When consumers have found their way to illegal books, the chances of them returning to legitimate e-books decline. Supply the market as soon as possible with reasonable priced e-books. Price e-books too high and risk alienating customers and pushing them to piracy. Price them too low and risk cannibalizing sales from other formats. Design a pricing strategy that attracts customers without undermining the value of the book. The strategy of offering e-books at a price lower than that of printed books is a good start. Drop DRM systems that deter consumers by making it difficult to use their e-books. If DRM is used at all, make sure to use the user-friendly kind. If you want to use watermarking as a means to protect content, make sure you have checked on privacy issues and appropriate contracts. FAQ #1 Can consumers resell e-books? For now, the answer is no. Many consumers do not seem to realize that they do not actually buy e-books. In stead of owning the file, they are sold a license to use the e-book under certain conditions, for instance the provision that prohibits you to sell, rent, lease, distribute, sublicense or otherwise assign any rights to the e-book to any third party. The resale of physical books and other tangible objects is enabled by the legal concept of exhaustion (first sale), as a result of which the rights holder cannot control subsequent re-sales once a book has been sold. When an e-book is purchased, however, the concept of exhaustion does not apply, because an e-book is not a tangible medium. However, change might be coming as a result of the recent Usedsoft-case, in which the European Court of Justice ruled that the principle of exhaustion applies equally to both tangible and intangible copies of software. Reason behind the ruling was that the user does not feel the difference between an eternal license for a one-off fee and the transfer of a copy as a result of a sale. Although the case concerned software, the reasoning of the ECJ could possibly be applied in non-software cases in the future. When negotiating publishing contracts, make sure to cover e-book publishing rights. Discover e-books and the many possibilities they bring. Try out free e-books via Project Gutenberg (www.gutenberg.org) or the Eregalerij of Bibliotheek.nl (www.bibliotheek.nl/eregalerij).

XXX FAQ #2 Will the book industry face piracy similar to the music and motion picture industry? Piracy is an actual threat to the book industry. Recent research shows that only 12% of the books on a Dutch tablet or e-reader is paid for. This would amount to 1.6 e-book with a valid license per e-reader/tablet. FAQ #3 How are e-books priced? Consumers expect e-books to be much cheaper than physical books, because they do not acquire a tangible object. Many publishers on the other hands, are convinced that there is a justification for setting the price of e-books at least at the level of paperback editions. Relevant factors when it comes to prices are the additional costs associated with the production of e-books, value-added tax rules and the absence of fixed pricing arrangements. For now, it seems reasonable to assume that part of e-book piracy is the result of attemps of publishers to protect their traditional print businesses by making it uneconomical for people to buy e-books. The question, therefore, becomes not whether the book industry will face the same fate as their music and film counterparts, but whether the book industry will make the same mistakes. Currently, the VAT rate for digital content is 21%. Unlike printed books, e-books are not subject to the reduced VAT rate of 6%, unless they are sold on physical data carries, such as CDs or CD-ROMs. This difference in VAT-rates leads to a substantial price difference. Moreover, prices vary considerably now that there is no fixed price arrangement for e-books. Paper books in the Netherlands are bound to fixed prices for the first year after publication, but such an arrangement is not made for e-books. The Dutch government has decided to keep the fixed price arrangement in place in the near future, in order to stimulate innovation and competition. It is likely that in the near future new business models will become more popular, such as rent of e-books (access to e-books by means of streaming for a limited period of time). Subscription models, comparable to Spotify for music and Netflix for television, are also expected to become more popular. In the Netherlands, Yindo is already active as well as Boekenwolk for children's books. Skoobe and 24symbols are other European examples. In the United States, Oyster has just launched, a service that allows consumers to read an unlimited amount of e-books on their smartphone. Amazon offers prime members unlimited access to their lending library.

ABOUT SOLV SOLV was established 13 years ago and is the most experienced law firm in the Netherlands with an exclusive focus on the technology, media and communications (TMC) sector. SOLV is one of the leading boutique firms specialized in information law, intellectual property and IT law. Being a niche player enables us to understand our clients businesses and to provide clients with relevant and in-dept advice. Because of our pragmatic approach, we are often described by our clients as legal experts acting as business partners. SOLV aims to advise its clients proactively. Our advice is of course thorough on the legal aspects, but also practical, directly applicable and written in plain language. In legal proceedings SOLV is praised for its depth and creativity. Any questions about e-books? Please contact Marieke Neervoort (neervoort@solv.nl)

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