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The Reading World

Thinking about LibreDigital’s $15 million funding

LibreDigital this week brought down a $15 million B-round, adding Triangle Peak Partners to first-round investor Adams Capital Management, and signaling a potential flurry of investment in e-book distribution plays. The company facilitates file conversion and delivery for publishers of books, magazines and newspapers. Based in Austin, Texas, and founded in 1999, LibreDigital has evolved and suffered with the publishing industry, to which it sells content conversion, warehousing, browsing and distribution services. Now that it has $15 million in new capital and the burgeoning e-book industry on which to hang its marketing, LibreDigital is getting its day in the sun. The question is, is that sun rising or setting?

LibreDigital’s clients include major book publishers, such as Simon & Schuster, Hachette Book Group, HarperCollins, newspapers including The New York Times and USA Today, and many magazine titles. With e-book sales exploding, albeit from a very small base, LibreDigital seems poised for growth.

The company’s emphasis on helping its publisher customers experiment with marketing programs and pricing strikes me as on target, because only a wide range of options will help differentiate electronic titles from their paper counterparts. Price, of course, is only one dimension of value, though it is the one getting the most attention right now. Alas, another continuing problem is the rights management question, which LibreDigital appears to solve primarily through application-based restrictions, for example, these terms for the downloading of The New York Times. In other words, DRM is the main defensible feature of the distribution system. The solution offered by LibreDigital through Newstand.com does allow printing (no copying) of files rather than locking the data to electronic format.

There is no record of patents or patent applications by the company, a search of the U.S. Patent and Trademark Office database suggests. What, exactly, then is the company selling? Service, though they are described as products. The careers of the management team point to expertise in process development and management, exactly what the publishing industry needs as it struggles to distribute its products through new digital channels. In the long run, many of these services may blend into the background of the “semantic Web” or devolve into their component functionalities (e.g., distribution may become just delivery of a file without DRM or related features) in which case the processes may migrate in-house at publishers.

I think LibreDigital becomes a likely target for acquisition by one of the Content Delivery Networks (CDNs), such as Limelight, Akamai or Amazon’s cloud services. My bet is that this exit strategy is the one most anticipated in the company.

If LibreDigital focuses on curation of files for the reader on behalf of the publisher, it has a very comfortable annuity business after charging for the initial transaction. During my days in streaming and downloadable media, one of the cushiest-seeming positions in the market was that of encoding.com, because every time a new file format came along, the music industry was paying the company $1 million to $3 million, depending upon the size of their libraries, to convert music into the new format. The business is steady, not a growth business. I believe forward-compatibility of books is essential to consumer adoption in the long run; after a couple generations of e-books sold as one-time-only downloads (there are several marked exceptions, such as Smashwords), readers will require forward-compatibility in the books they buy.

Of course, re-encoding is also encoding.com’s business today, too, so LibreDigital needs to combine file compatibility with catalog management and other features, which it has on-hand. The challenge will be in keeping all those pieces of the puzzle in its scope of service while constantly improving each. However, the proprietary reader offered by LibreDigital will likely need to be ejected, because open formats will eventually win out. The company must recognize which fights it needs to stick with and which to let go. Curation, the combination of warehousing and access management, is its best option.

Martin Neath, the Adams Capital partner working with LibreDigital—he is its chairman—points to a $2 billion market for e-books by 2o12 in the press release announcing the deal. That’s an aggressively high figure, since e-books accounted for $113 million in sales in 2008 and appear to be headed to about $200 million this year. Yet, even if that $2 billion figure develops into reality, the market will be highly transaction and support-intensive, based on products that are expected to sell for much less than books do today. Profits will depend on lowering the cost of book conversion and delivery as aggressively as bandwidth costs have fallen in the past 10 years.

How much can the company make offering services to publishers? If the e-book market in 2012 is really $2 billion and LibreDigital provides marketing and fulfillment services to an unrealistically high one-third of the market—roughly 66 million units (at an average list price of $9.99 per e-book or monthly periodical subscription), the company might see $1 a unit by then, as competition will drive costs down substantially from the 20 percent or more being paid today. That may look good on the surface, if it were possible to be that successful. This week’s funding won’t carry the company through 2012.

In short, the trajectory for LibreDigital will look very like those of CDNs during the last decade, without the benefit of an Internet bubble to inflate values and make raising capital easier. It might also be compared to the YouTube business, too, which was declared to be at or very near profitability by many (not me) in 2006 but hasn’t reached profitability, yet. Infrastructure costs and investment in technology necessary to make programming pay race ahead of revenue at YouTube and did for many years at the CDNs. That’s why the process-centric experience of the LibreDigital executive team looks good. They have to squeeze margin out wherever they can. It will be a tough haul to get revenues to a multiple of capital invested as a service provider.

Looks like it’s high noon for LibreDigital. The company now has to extend the daylight available to it by successfully executing in order to raise additional capital to support its scaling up of infrastructure and services. It’s more likely to be acquired if it proves the model, because infrastructure scale already exists at many potential rivals.

(Disclosure: Adams Capital is invested in BuzzLogic, a company I co-founded and in which I continue to own stock.)

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