by Ryan Underwood (Assistant Business Editor, The Tennessean)

In an otherwise gloomy holiday sales season, electronic book readers from Amazon.com and Sony defied the tough economic odds to emerge as one of this year's rare must–haves. Neither company disclosed sales figures, but e–book readers have been hard to find this Christmas, and analysts peg sales of Amazon's $359 Kindle at anywhere from 260,000 units up to a million. One of the season's most popular books, The Story of Edgar Sawtelle, saw as much as 20 percent of its Amazon.com sales come from e–book purchases, according to The New York Times.

Powering much of the retail distribution for the e–book market is La Vergne–based Ingram Digital Group, a division born out of Ingram Industries' Lightning Source Division and acquisitions made in 2006 of Raleigh, N.C.–based VitalSource Technologies, a player in the digital textbook field, and U.K.–based MyiLibrary, which supplies electronic content to academic libraries.

Frank Daniels III, who headed VitalSource before its sale to Ingram, now serves as chief operating officer of Ingram Digital. He sat down this week with Assistant Business Editor Ryan Underwood to discuss the current state of the e–book market, where it goes from here, and Ingram Digital's role in all of it.

Maybe it's just that Amazon's Kindle e–book reader was one of the most popular items for Christmas, but whatever it is, e–books seem to be having a moment right now. Are you seeing that?

Absolutely. In a time when publishers' sales are flat, or declining, e–books are the bright spot. You're seeing significant increases in revenue, as much as 400 percent growth for some publishers. That gets the industry's attention. And they recognize that a confluence of events – screen and distribution technologies, and the standards that the industry has adopted – makes e–books more likely to be real versus hype.

I think we're fairly sober about the way we look at what's going on. There's an opportunity for this to be an inflection point. Of course, you only know the inflection point after the fact. But having come from the newspaper business, where I was involved in launching the first Internet newspaper and saw an inflection point as it related to both the consumption of news online and the decline of business models for traditional print newspapers, I get the sense that we're in that same time frame in book consumption. You see consumption patterns changing, that their comfort level with technology is changing, and the technology itself is mirroring those behavioral changes.

Where are e–books within the wider context of the publishing industry as a whole?

It's tiny. We see that e–books are about 1 percent of the overall business. We would say that in five years, it should be between 5 to 12 percent of the business. That's a huge number because you're talking about a $50 (billion) or $40 billion business.

How has Ingram played a role in all of that?

Ingram Digital was formed in early 2006, a time when Ingram's content companies began thinking about the fact that perhaps we were approaching a time where e–books – digital content – was coming of age. (Ingram division) Lightning Source had started the downloadable e–book business back in 1999 and early 2000. That business had been very steady, but clearly adoption of e–books was sporadic at best during the early part of the 21st century. It's somewhat ironic that the first big trade book that was released as an e–book was Stephen King's Ride the Bullet. I don't know if anybody was riding it, but they may have caught it.

Lightning Source became the standard platform for people to be able to get books to download. It actually powered Amazon's programs until early 2006. Since then, Ingram Digital has been powering a variety of different retailers, like FictionWise.com and eReader.com.

When you say it powered these retailers, what do you mean?

The ability to download inventory, about 150,000 books in all. So a store like Powells.com or FictionWise can come to Ingram Digital and get all the inventory they need.

So are you basically replicating what Ingram Book Group does in the physical realm?

Yes, in the same way we have a physical warehouse full of books, we have a digital warehouse full of books, as well – the largest inventory of any provider in the world in terms of e–books. So we then power a variety of different kinds of sites, whether it is online retailers or publishers such as Penguin, DK (Dorling Kindersley) or McGraw–Hill.

How much does Ingram Digital work together with Ingram Book Group?

A lot of what is happening in digital is still in what I would call incubation mode. We work as closely as we can with the Book Group without being swallowed by that very large, complex, logistical business. We work very closely with them around our publishing relationships and thinking about the ways we can help publishers develop revenue and save money. Where we tend to diverge is that still a lot of what's happening in the digital space is figuring out what's going to sell, how you're going to sell it, what's different about an e–book.

Do you think e–books will cost less than traditional books as the business develops?

Publishers aren't going to be able to sustain a business if everything is $3.99 or if everything is $9.99. There still has to be a wide range of business models and business opportunities for publishing to be successful.

Lots of people will think that it's on the computer, so you don't have to print it, and you don't have to ship it. But the bulk of the cost of creating a book is still around authoring it, editing it and then marketing it. Those costs don't change. I think there are some false perceptions in the trade book space that e–books will be dramatically cheaper than a mass–market paperback or a hardback.

In the education space, there is some room to create more cost–effective ways to get books into students' hands. That's primarily because used books take money out of the publishers' and authors' hands.

How do you prevent that with e–books?

Sometimes they expire after a certain amount of time, or it's locked to your computer. Both models are out there. What we're trying to do in the education space is enable publishers to participate more fully in the entire market and therefore lower the cost of both developing content and selling it. We're seeing that. We've been doing this for 10 years, and we've gradually seen costs get rationalized and textbook prices come down in that space.

I should add that there's one other piece that Ingram does with e–books called MyiLibrary. That is a very good business. It's really a database of e–books that libraries purchase, primarily for academic libraries. So all together under Ingram Digital, we have an academic library focus, an education focus, and a trade and professional focus.

And e–textbooks offer more than just a replication of the book, right?

You've not only got the ability to highlight the text in an infinite number of colors, you can also share them. You can search just your highlights. You can organize your highlights so that you can create a thread of highlights across your textbooks, then share that with your study group. They also have the ability to include both audio and video, and animation right into the textbook.

What are some of the key partnerships and deals Ingram Digital has in place?

Our best partnerships have been with Powells.com, FictionWise.com, eReader.com and Adobe. We've also had very strong relationships with Microsoft.

What about on the publishing side?

Penguin is by far and away our largest relationship in terms of powering their Web site. That's a global agreement, and we continue to expand that relationship. We signed it and launched at the beginning of October.

Have you run into resistance on behalf of publishers to adapt to digital content?

All the time. Every day. The 10 major publishers, by and large, have come to grips with most of the issues. They still have many different questions and they have lots of concerns around what could happen to their business – like what happened in the music business. That's been very beneficial to Ingram because we have lots of different kinds of expertise around digital rights management and around business models. So we've become increasingly a trusted partner among publishers in this space.

There is a kind of mentality out there that if it's on the Internet it must be free.

Exactly. One reason why e–books took off this year was because all of a sudden these devices like the Kindle and the Sony Reader aren't the Internet.

What's next on the device front?

In the trade space, what I think we'll see is a period of time where we'll see a lot of experimentation. But our observation thus far is that you can't underestimate people's willingness to read on a smart phone. There have been less than 500,000 Kindles and Sony Readers sold in 2008. And there have been how many millions of iPhones sold?

Any particular goals in terms of the volume of titles you carry?

Our goal is to make sure our clients have the largest available catalog in the world. We currently provide that in all of our markets and will spend lots of effort continuing to do that.

What needs to happen next for Ingram Digital to keep moving forward with e–books?

I think we continue to want to partner with publishers such as Penguin and Macmillan. There's just a wonderful complexity to the business right now. Ingram Book works with about 52,000 different imprints right now. On the e–book side, we're working with about 1,300 – 1,600 if you count our academic publishers. We've got all the major ones. And one of our most fun customers right now is Thomas Nelson in Nashville. They are very innovative publishers, looking for ways to serve their markets most effectively in the 21st century.

And then we have some very good distribution partners in the education space – a company called CourseSmart, which is a consortia of the six largest textbook publishers, and then a company called MBS Direct, which is one of the larger campus bookstore providers. Those relationships have enabled us to work with publishers and campuses in interesting ways. I think that what we'll see is digital textbooks become more integrated into the other educational technologies, like assessment systems and course packs.