Book publishers are learning to love the Web. They have to. In hopes of avoiding the toll inflicted by the Internet on newspapers and the music business, the publishing industry is experimenting with a growing array of ways to distribute reading materials digitally. Some might even boost profits.

Publishers already sell digital versions of books for electronic readers such as Amazon.com's (AMZN) Kindle and Sony's (SNE) Reader. But other, newer methods being considered or tried out include Netflix-like online book rentals, sales of individual chapters, and placement of ads alongside digital books.

Selling lower-priced books online is likely to cut into revenue, but margins could hold up or even widen in some cases as publishers save on printing and returns—which can account for as much of 40% of the sale of a physical book, analysts say. "If they can migrate to the [digital] model and eliminate manufacturing and inventory costs, the economics could be a lot more interesting," says Peter Appert, an analyst at Piper Jaffray (PJC). "That'll drive margin upside." Today, publishers' margins hover in the high single digits, although some companies, especially those selling textbooks to college students, fare better.

Across the publishing industry, revenue rose 1.8%, to $3.71 billion, in the first half of 2009, according to the Association of American Publishers. In the first half of 2009, e-book sales reached $61.2 million, up from $24.6 million a year earlier, the AAP says.

Individual e-Book Chapters for $1.99 Alternative distribution brings some publishers into markets they might not otherwise tap. "We are growing our market," says Andrew Savikas, a vice-president at O'Reilly Media, which specializes in technical manuals. The publisher makes some books available as applications that can be downloaded from Apple's (AAPL) online App Store for as little as a quarter of the price of a physical book. Most buyers of those apps are in foreign markets where O'Reilly doesn't operate, Savikas says.

Another publisher, Cengage Learning, has found that selling digital copies alongside physical books has done little to erode demand for physical books. "It's incremental sales for us," says Stephen Hochheiser, a vice-president at Cengage. Many buyers already own paper-based books, and simply want to have a digital version for quick reference on a computer, he explains. Cengage sells digital versions of its textbooks online for about half the price of its physical titles. It also sells individual e-book chapters for as little as $1.99. "It's one of the fastest-growing parts of our business," Hochheiser says of digital books.

A handful of publishers are dabbling in online subscription services. O'Reilly and Pearson Education run Safari Books Online, a service that lets budget-conscious companies and universities make certain digital books available to large pools of users at a time. "In this economy, the business is a little stronger because when people cut their training budgets, this becomes a cheaper option," says Paige Mazzoni, vice-president of marketing at Safari, which boasts more than 15 million users and expects revenue to double this year.

With Safari, publishers get paid every time their books are viewed. "It's a very nice business to be in for our company because you have a predictable revenue stream," says O'Reilly's Savikas. Some Safari users—about one in seven—end up purchasing physical copies, too.

Revenue-Sharing on Book Rentals? Online book rentals are flourishing for textbooks, which rank among the most expensive books. On Aug. 13, online textbook renter Chegg partnered with BusinessWeek's owner, The McGraw-Hill Companies (MHP), to share revenue from a textbook rental program. On the same day, Cengage announced plans to start renting its textbooks for 40% to 70% less than the new books' suggested retail price through its own site, which is due to open in December. Students can return books to Cengage at the end of the rental period or choose to pay the difference between the rental and full price to keep the book.

Some providers of Netflix-like book-reading services hope to enter revenue-sharing agreements with publishers as well. Take Paperspine.com, whose users can keep books for as long as they want, then mail them back to get new ones for a subscription that starts at $15 a month. Today, Paperspine buys new books from publishers at wholesale prices and rents them out an average of 12 to 15 times before the book wears out. But co-founder Dustin Hubbard is now negotiating with publishers to buy the books at printing cost and to pay publishers every time the book is rented. He figures that under the proposed new system, publishers could make nearly double the current amount. Hubbard hopes to sign some publishers to this revenue-sharing deal in the next six months.

Other publishers are starting up book-rental programs to go after consumers who typically buy used books, for which publishers typically are not paid. Used books generated $614 million in 2003, the last year for which the data is available, according to Book Hunter Press, which tracks used-book dealers.

Selling e-Books to Public Libraries In one of the more controversial approaches to making money from digital books, Google (GOOG) has proposed to pay publishers to let it make digital books available at a reduced price to consumers. Under the terms of the proposed settlement of an earlier class action, Google would give publishers a cut of revenue generated from book sales or ads placed alongside a book's content. The proposal has met with opposition by the U.S. Justice Dept. and such companies as Amazon and Microsoft (MSFT), which fear it will give Google too much control over digital books.

HarperCollins, Random House, McGraw-Hill, and other companies are selling more of their e-books to public libraries for patrons to borrow for free. The sales come in addition to—rather than replacing—publishers' physical book sales to the libraries. At Cleveland Public Library, for instance, the number of people downloading e-books doubled in the past year. The library increased its spending on e-book titles while continuing to buy the same number of physical books from publishers, says Amy Pawlowski, Web applications manager at the library. "We see little overlap [with physical book retail]," says David Burleigh, director of marketing of OverDrive, which powers the library service and has enabled 10 million digital book checkouts worldwide.

Critics of new distribution approaches, including publishing consultant Thad McIlroy, worry that some publishers have become willing to accept too little money for their authors' work.

The same criticisms have been leveled against record labels and newspaper owners. But both industries have paid a high price for resisting the move to digital and book publishers are loath to suffer a similar fate.

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