Their new system, ReadCube Access, has an iTunes sales approach: a library can rent an article for less than $6 or can buy the same article for $11 (or less, depending on the source). Hrvatin and McGrath hope that ReadCube Access can not only lower expenses for universities, but also allow more journals to reach students around the country.

Other features allow for importing PDFs, finding new papers via Google Scholar or PubMed, downloads via institutions’ paywalled logins, recommendations, annotations, and citations.

They sold their idea to industry giant Nature Publishing Group and to the University of Utah’s library system. (See their blog post.)

Making the PDFs free is the culmination of a decade of research and sales modeling on how to finance a nimble publishing house with paid print books, with enough spare revenue to allow free release of electronic books. Here’s the evolution:

Previously, NAP priced books, including PDFs, to generate enough income to be self-supporting. According to Barbara Kline Pope, executive director for NAP, in 1994, they started offering free full text online of all reports in page-by-page format, and in 2003, they began to make all of their full books available as free PDFs in developing countries (limited by IP address). Cannibalization of sales was not a concern because a negligible number of print sales were made in the 3rd world.

Starting in 2001, they conducted careful research on buyers’ behaviors.

To optimize sales, they found they should price PDFs at approx 75% the cost of a print book, and offer a bundle deal with both the print and PDF for 120% of the printed price. (See graph at right).

But what about going free? They found that if a buyer had a book in their shopping cart, and were offered a free PDF, 42% would jettison the printed book from the shopping cart and just take the free PDF. Mapping that data over all sales channels, they estimated a 33% substitution rate of free PDF for print. This corresponded to approx a loss of $1.9 million in revenue on printed books if they gave away free PDFs.

So to give away free PDFs, the press was going to have to find $1.9 million someplace else… The largest source of money was cost savings, and NAP slashed costs. Instead of print brochures, they now do the lion’s share of marketing online. They outsourced printing in 2004, and in August 2010 they also outsourced fulfillment and warehousing. They will continue to produce printed books for readers who like paper. They dropped unprofitable products, such as their line of science books for general audiences.

In the last two years, NAP’s revenue from book sales was ~$5 million, of which ~10% was from paid PDFs. Overall, the volume of print sales has been falling. If their estimates are right, they will immediately lose all of the PDF income, and lose at least another 1/3 to buyers who will no longer pay for a print copy. So book revenue for the coming year might be around $3m. Given their mission to broadly disseminate the work of the Academies, it is now a small price to pay for much wider reach: NAP hopes free downloads of the PDFs will boost eBook downloads from approx 700k/year now to over 3 million by 2013.

In addition to PDFs, NAP also publishes to other eBook formats. They have ~200 books in Kindle, but the black & white format is not good for many of their books because of their color graphs and large tables. They have about the same number on the iPad, and are working on more. They have their entire list in Google e-books.

The Academies are a suite of private, nonprofit organizations (National Academy of Sciences, National Academy of Engineering, Institute of Medicine, and National Research Council) created by congressional charters in the 19th and 20th centuries to advise the federal government on science, technology, and health policy. The NAS, NAE, and IOM are honorific organizations (members are not paid; it’s a high honor), and is supported by approx 1,100 paid staff. They conduct studies, convene meetings, and create publications. In 2010, the Academies had a total budget of $289 million, of which 84% came from U.S. agencies (e.g., the Department of Transportation) as grants and contracts, and the rest from foundations, nonprofit institutions, and state and local government. NAP’s budget is separate.

This model for providing free eBooks works for NAP, given their structure where the writing of the books are funded by the Academies’ research projects, but Ms. Pope cautions that it does not necessarily translate to other kinds of academic publishing, such as university presses.

Sources: NAS, NAP, and Pope’s 2009 paper in Marketing Science (PDF) with Kannan and Jain.

The books for borrowing at OpenLibrary are analogous to normal library loans, with each loan lasting up to 2 weeks. That eBook can be read on a desktop Windows or Mac computer (using Adobe Digital Editions), or within a web browser using Internet Archive’s BookReader web application (this works on the iPad too). The Amazon Kindle is not supported.

A small pool of libraries who were invited for the launch, and OpenLibrary hopes to expand. The dots on the map at left show the initial 150 libraries. Brewster Kahle, founder and Digital Librarian of the Internet Archive said by email, “We would like others to join into the next phase, so we are building a list and will regroup in a month or so.” There is no fee from Internet Archive for libraries to participant, but they do have costs in that “they have to contribute to the pool of books.”

This new borrowing program is a component of OpenLibrary.org, a web site that already allows the public to read 727,999 free works. Here’s a distribution of free and for-lend works available from OpenLibrary:

The scales on these two graphs are different, but the eBooks for newly available lending tend to be in the mid-20th century, plus a few dozen commercial titles per year over the last few decades.

Growth of eBook readers

eBooks are read on desktops, laptops, and increasingly on tablets and dedicated, handheld eBook readers. Tablet computers are exploding — see our post from last week, “100 million tablets by end of 2011: What will it mean for learning?”

As for the e-book and e-reader  (dedicated devices) markets, last month, Futuresource Consulting reported that in 2010, the global e-book market grew by more than 200% to exceed 90 million paid-for units. They reported, “this equates to a value of more $900 million and was largely attributable to growth in the US region, which represented more than 80% of global revenues last year.” Rapid US e-book market growth and consumer adoption was predominantly driven by Amazon’s loss-leading strategy on key e-book titles purchased through their Kindle store and Kindle app. A similar strategy was temporarily adopted in the UK.  For many countries across the region — including Italy and Spain – 2010 was the first full year that e-readers were readily available at retail. Complementing the boom in handhelds, a recent survey of 1,201 libraries across North America conducted by Unisphere Research and Information Today reported that 73% are seeing increased demand for digital resources, 67% have increased demand for wireless access, and 62% are seeing a surge in demand for web access.

Related services

A related site, Project Gutenberg,  allows free download over 33,000 free ebooks to read on PC, iPad, Kindle, Sony Reader, iPhone, Android or other portable devices. And a related commercial service, OverDrive, provides eBooks to libraries. Overdrive is a sharepoint-like portal that delivers DRM’d ebooks (usually PDFs) to library patrons. Overdrive has 500,000+ digital titles from more than 1,000 publishers, including Random House, HarperCollins, BBC Audiobooks America, Harlequin, and Bloomsbury; and they serve 13,000+ libraries, schools, and colleges worldwide.

Benefits to libraries and publishers

In addition to broadening their collections of commercial eBooks, OpenLibrary helps participating libraries share access to older books and protect them from wear. Judy Russell, Dean of University Libraries at the University of Florida, said in a statement, “We have hundreds of books that are too brittle to circulate. This digitize-and-lend system allows us to provide access to these older books without endangering the physical copy.”

Another use case is for rare books like family histories, which are popular with genealogists. “Genealogists are some of our most enthusiastic users, and the Boston Public Library holds some genealogy books that exist nowhere else,” said Amy E. Ryan, President of the Boston Public Library, in a statement. “This lending system allows our users to search for names in these books for the first time, and allows us to efficiently lend some of these books to visitors at distant libraries.” Furthering that, Jeffrey Krull, director of the Allen County Public Library said in a statement, “Reciprocal sharing of genealogy resources is crucial to family history research. The Allen County Public Library owns the largest public genealogy collection in the country, and we want to make our resources available to as many people as possible.”

Like any interlibrary loan program, pooling collections allows libraries to stretch their funds for buying eBooks farther. That can mean more total eBooks purchased. American libraries spend $3-4 billion each year on publishers’ products. “I’m not suggesting we spend less, I am suggesting we spend smarter by buying and lending more eBooks,” asserts Mr. Kahle in a statement. Two leading eBook publishers released statements of support. John Oakes, is founder of OR Books, a new publisher which releases 1-2 titles per month as both paperback and ebook. He said in a statement, “We’re always on the lookout for innovative solutions to solve the conundrum of contemporary publishing, and we are excited to learn about the Internet Archive’s latest project. For us, it’s a way to extend our reach to the crucial library market. We look forward to the results.” Richard Nash, is founder of Cursor, a small eBook publisher with a “portfolio of editorially-driven publishing communities.” He said in a statement, “Libraries are our allies in creating the best range of discovery mechanisms for writers and readers—enabling open and browser-based lending through the Internet Archive means more books for more readers, and we’re thrilled to do our part in achieving that.”

Meanwhile, eBooks have another new market opening up, as a blog post by Edward Nawotka, “Is Monetizing the Used E-book Market the Next Big Opportunity?” and several commenters discuss at publishingperspectives.com.