Sean Reily began his Reynolds Fellowship in August 2009 just as the market for e-readers was heating up. The Kindle, which Amazon had launched less than two years earlier, still was the only e-reader wirelessly distributing digital editions of newspapers. But Amazon’s surprising success with the Kindle was beginning to attract potential competitors. When RJI hosted its E-Reader Summit the following month, four other companies — Barnes & Noble, Sony, iRex and PlasticLogic — were in discussions with newspaper publishers about producing digital editions for their proposed wireless e-readers.

Reily soon found himself in the middle of the fray. In addition to gathering information about e-readers and evaluating potential business models for his fellowship project, he also was summoned to negotiate contracts with each of the e-reader companies on behalf of the Los Angeles Times, the newspaper from which he had taken leave.

Reily’s fellowship project took another sharp turn in January 2010 when Steve Jobs introduced the Apple iPad tablet, an entirely new mobile device that combined the features of e-readers with smartphones and laptop computers. The iPad overcame most of the limitations of e-readers and afforded newspapers publishers with a new, potentially lucrative platform for their content. As soon as it became apparent that the iPad was an unmitigated success, other companies began announcing their intentions to launch competing tablets. All of which added to the demands on Reily’s time and energy. Since returning to the Los Angeles Times, he has been applying the knowledge he gained as an RJI Fellow in his new role as the company’s lead executive dealing with e-readers and tablets. He reports directly to the publisher.

The following report updated by Reily in August 2010, addresses many of the questions publishers are asking about e-readers and tablets, as well as the still evolving business models that might transform digital editions for these devices into profitable complements or even possible alternatives to their printed editions.

—Roger Fidler

What every newspaper publisher needs to know about e-readers and tablets

1. Are there economics to support a profitable newspaper edition on e-readers and tablets?

We are at first light for this distribution platform and it has arrived with many differences in the business models where newspapers operate, so no, not yet.

If you put together any believable projected revenue scenario, even with the projected cost savings from turning off printing presses and print delivery, there is not yet a model that covers the cost of effective content creation, let alone delivers a meaningful profit.

The primary reason for this is that American newspapers on average get more than 70 percent of their revenue from advertising sales. Today on e-readers and tablets there is not yet a reader base large or centralized enough to direct real advertising towards. Nor is there yet the technology to efficiently and systematically build and deliver the new category of advertising that is needed here.

There are other significant new business complexities to work through as well, namely who controls the online stores that sell newspapers on these devices and a very serious fragmentation of this new marketplace.

Still, aside from mobile phones, this is the first new major content distribution platform since the web and if you are in the content business, one that has to be worked on till mastered.

2. Why is the issue of “who controls the online store” through which newspaper editions are sold such a critical one?

Right now it is the technology sector and not publishers who have dictated the business modeling of newspaper content on e-readers and tablets.

It is different than in print where newspapers either own the distribution channel or pay agents a fee to sell, and different than the web where newspapers engage directly with their readers. With e-readers and tablets all content is put up for sale only within and through the device makers’ online stores.

That effectively means it is the device manufacturer who maintains the ability to dictate the terms of the sale and the division of the revenue on newspaper content as well as maintains the direct customer relationship. And as advertising begins to develop, it appears the device manufacturers will assert and insert themselves in the same way.

For a newspaper to be giving up this control and division of its traditional revenue streams before it has established a working business model, and at a time when the newspaper industry is already in economic free fall has to be considered very seriously.

Newspapers have to be educated with their eyes wide open when strategizing and negotiating to put their content on these new devices.

3. Why is “who controls the online store” for content different here than it is on the Web?

It all started in another content business with iTunes. Apple used to be a hardware company. They created great computers and separately a great device in the iPod for mobile music listening. But in figuring the best way to transfer music from the computer to the iPod, Apple created the iTunes store and soon found that owning this store and taking a percentage of revenue from each item sold was such a lucrative business that it became the operating model for all its mobile devices going forward.

Amazon reverse engineered this. They were an e-commerce company that built a hardware device that operated under the same business system.

This is very different than the web where newspapers can build sites and connect directly to any reader on any computer. Seeing the success of Apple and Amazon, virtually all manufacturers entering the e-reader and tablet market have built owning and operating an online store into their business models. Left alone they are never going back.

4. The importance of the online store only is an issue if readers are willing to pay for newspaper content on e-readers and tablets. Why is that believable when readers can get that same newspaper content free on the web?

Amazon with its Kindle e-reader was the first to validate the long standing theory that one day we would not only read digital content on mobile reading devices, but we would like it so much that we would keep coming back for more. When Amazon decided to sell newspaper editions on its device, readers bought them in numbers large enough to surprise all within the newspaper industry and establish the e-reader as an emerging paid distribution platform worthy to explore.

A major reason for this is that e-readers are different than desktop or laptop computers. The physical form factor of e-readers and tablets is designed for readers to hold and use in the way they are most comfortable reading today. With content and navigation on the device, for the first time in the digital world, the form factor is better suited to provide readers the browsing, editor compiled, turn-the-page experience that has been the basis of newspaper reading. And it provides the unique content presentation and convenience that readers have valued enough to pay for.

5. The traditional newspaper presentation of editor curated content doesn’t fit precisely with the current mantra of giving “readers what they want when they want it.” Even if it leads to some paid subscriptions, can it really be a viable core strategy in today’s world?

On the Web, newspapers typically get more than half of their traffic from readers conducting self-directed searches by topic. Though gathered through great efforts, these readers stay on average just a few minutes, view a few pages, have no loyalty to the source of the content, and are gone.

In a subscription world, readers choose the source of their content first. It’s still about giving readers what they want. It’s just that what they want is the skill of the editor looking across the world of topics for them, aggregating and producing a content package, then presenting it in the most engaging format to view and read. Though readers have expectations of the content they’ll find, the package is presented in a browsing format for them to also find stories they would not have known to search for and are glad to have come upon — a value greater than the content they could have gathered on a continual basis on their own.

With subscriptions, readers stay on average six to seven times longer than on free websites, go through many more pages, return to the source on a frequent basis by choice, and understand the value equation of paying for content.

Paid subscribers should be what newspapers are after on e-readers and tablets. The key here is for newspapers to not just put up their print editions, but to understand the new opportunities and to re-imagine their content for these platforms, especially tablets with their rich media technology. This is especially true in the possibilities tablets allow for advertising within these editions.

6. There is a big technology difference and thus readers have different experiences with e-readers and tablets. Now that the iPad is here, and many tablet competitors are expected to follow, won’t dedicated e-readers fade away? Should newspapers pay attention to them at all any longer?

E-readers were designed to provide a simple, print-like reading experience. They currently appeal to an older demographic with significant disposable income and time to devote to leisure reading of books and periodicals. For all their success, teenagers, young adults and business professionals have had very little trial and first-hand awareness of these devices.

When Apple unveiled the iPad with the company’s usual marketing flare, it became known almost instantly across all demographics that buy mobile communication devices.

Instead of being an e-reader killer, the emergence of the iPad has caused greater awareness and understanding of e-readers as well as tablets. What you will see now is these devices divide into two camps based on their technology. Dedicated e-reading devices like the Kindle will keep improving and getting cheaper, but the technology will remain limited to a paper-like reading experience. The new tablets that come into the market to join and compete with the iPad will have full-color, larger screens, richer media, and interactivity, but at a much higher price.

Newspapers will have to develop different business and presentation strategies for these two device directions. But the primary new business focus for newspapers will probably have to be with tablets as only they have the rich media that give advertisers the presentation they want and expect.

7. Limiting the discussion to tablets then, what is the “new” type of advertising that these devices allow and need to be successful?

There has long been talk in media of “ads as content” that enhance the reading experience. But the practice in print, on the Internet and with smart phones is not much more sophisticated than placing ads next to editorial of similar content or within the locality of the reader.

With the web, electronic ads have been built to intrusively hook readers in their short visit times. With the immersive reading experience that tablets can create, rich media ads can be constructed to be many layers deep using more storytelling and emotional techniques. Tablet ads can be built to keep readers within the editions instead of kicking them to the web where each click sends them further away.

Built-in device analytics to match and serve ads based on learned reader preference will also be a more standard feature with tablets.

The creation of a new, more deeply connected advertising model that can command the rates of print advertising is critical and needed to make the economics of newspapers work on tablets. That seems very possible because of the greater amount of time spent by readers within newspaper editions. Tablet advertising rates might even surpass print rates because of the added rich media content.

The biggest advertising challenge for newspapers on e-readers and tablets is the serious fragmenting of the early readership by proprietary devices and stores.

8. Discuss the problem of fragmentation and its severity?

For any newspaper edition to live and prosper it has to engage a sought-after, defined consumer group in large enough numbers to support meaningful subscription revenue and more critically as discussed earlier, generate significant advertising revenue. This is even more of a challenge when validating for advertisers the potential of a new marketplace.

Because of the divisive matter of “who owns the online store,” and because virtually every e-reader and tablet entering and poised to enter the marketplace has a different display size, technology, navigation and operating system, the ability of newspapers to gather large numbers of readers in any one place today is slim.

If a newspaper grew to have 15,000 paid subscribers on the Kindle, the iPad, the Barnes & Noble Nook, and the next serious tablet to launch, it would clearly be one of the leaders in e-reader and tablet publishing today. Yet even without recognizing that these numbers still might not be large enough to attract advertisers, there is no practical way for that newspaper to build or serve one ad across that readership, let alone own the business of selling the ad and collecting the needed revenue share.

A few newspapers with national content, marketing, brand recognition, and resources have the potential — with persistence — to grow their electronic editions to critical mass numbers on e-readers and tablets. But for the other few thousand newspapers that don’t have the nation to appeal to that potential seems much less likely.

9. The newspapers that went onto e-readers early often talked about being ’device agnostic’ — to be on any device a reader might choose. With this fragmentation of the marketplace, has that reasoning changed?

At the outset of business development for e-readers, “device agnostic” seemed the right direction to take — to be everywhere and anywhere your reader might be. But for all the reasons discussed, that strategy now seems a very improbable one for success, especially since the emergence of the iPad tablet.

To help cause the number of readers to grow in a centralized and reachable way, newspapers should now decide very strategically which devices to push their content onto and which to starve.

The sooner newspapers define a full business model that works and choose only those devices that forward that business; the sooner newspapers will be in a partnership position with the technology companies that have led this development.

The next big step for newspapers to achieve this will be for them to develop an industry-wide set of standards around all aspects of their operation and then to work with the companies that will accept those standards. Industry standards are the answer in addressing the fragmentation problem and in giving the device manufacturers that want to carry newspapers common goals to build towards.

10. What are the industry standards for newspapers on tablets and e-readers that need to be defined and how critical are they?

The ultimate goal for newspapers has to be one content creation model for editorial and advertising that is served to all delivery platforms in all their disparate forms, whether it is in print, on the web or on varying mobile devices.

When it comes to e-readers and tablets, ideally newspapers need to arrive at one industry standard for sending their content feeds, one standard for minimum hardware requirements within devices to receive and display that content, one preferred screen size, one standard for ad sizes, minimum requirements for advertising functionalities, etc.

With these standards defined and communicated, those device manufacturers who most want to work in partnership with newspapers can position themselves to stand out.

Technology companies are leading the business development on tablets and e-readers, but without the right content, their devices are incomplete for consumer acceptance. If newspapers along with other content creators align themselves with mandatory standards in important areas and hold to that, as said before, they would have the best chance to move back into a partnership position in business development with the tablet and e-reader manufacturers.

11. How does a newspaper get an edition of its content onto an e-reader or tablet device?

As discussed with fragmentation, today it is a different path for most every device.

For Apple and its iPad, a Software Developers Kit (SDK) is available for anyone to build an application. The completed app must be sent to Apple for approval before it can be placed in its store and put on its devices.

For the coming iPad competitors, most seem to be choosing Android as their operating system, which also makes available a Software Developers Kit to anyone. It won’t be known what store configurations any of those competitors will enact though until they announce and launch their tablets.

For the Kindle e-reader, publishers need to call Amazon directly to see if it wants to carry their newspapers and if it has the available bandwidth to do so. If Amazon is willing, it will require a prescribed XML feed from the newspapers. Amazon takes care of the rest.

For most other e-readers, namely Barnes and Noble’s Nook, and Sony’s Daily Edition, the company most likely to call is Libre Digital. It has been chosen by these vendors to receive newspaper feeds and render them for their devices.

There are other solutions coming. Watch Adobe. It is building software to allow newspapers to build their own tablet and e-reader editions and send them to any device that has an open platform, and to conform to the requirements of those devices that have proprietary platforms.

12. Understanding all that’s covered above, how would you summarize the important next steps for newspapers that are exploring editions for tablets and E Readers?

1. Learn the real revenue versus expense potential and operating paths, and then decide on a business model to best stay in a position to control your own business.
2. Aim for platform agnostic, not device agnostic models. Choose very deliberately and strategically those practices that will allow you to create content once for delivery to as many target devices as possible, and study very carefully the requirements of any device and online store that is proprietary.
3. Negotiate for the “agent model” wherever possible and understand the consequences where devices and stores are not offering that possibility. Tenants of the “agent model” include the content creator owning all within the boundaries of any electronic content and editions they make, ownership or co-ownership of the customer relationship and data, the right revenue share, and control of pricing.
4. Strategize and work toward a plan that puts you in a position to wait or walk away from any device deal that is not the right deal.
5. Retain control of advertising and advertising sales. Partnering should be undertaken very judiciously as advertisers are customers too and those direct relationships are essential.
6. Decide where industry standards make good business sense, find the associations and places to bond with those newspapers that support those standards, and be an active advocate&. A good place to start is the Reynolds Journalism Institute’s Digital Publishing Alliance at the University of Missouri.
7. Push for an eventual operation and business strategy that allows premium newspaper subscriptions whereby subscribers can access every edition a newspaper produces — in print and electronic form on all devices.

13. With the business of newspapers on tablets and e-readers still in its infancy and with no workable business model yet defined, is it better for newspapers to wait before committing resources and getting onto these devices?

Companies that are in the content creation business also are in or at least should have an understanding of the content delivery business. If a publisher believes that tablets and e-readers will be major content distribution platforms, even if the immediate decision is not to launch, there has to be the charge to understand and work through the business scenarios of what is needed for this to become a successful reality.

Some newspapers will find this business development too challenging, not obvious or not immediately contributing to today’s bottom line. Other newspapers will find that challenge mandatory and maybe even the exciting entry into a whole new publishing platform. It is not hard to guess which newspapers will have the best chance at future success.