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Are Digital Libraries A 'Winner-Takes-All' Market? OverDrive Hopes So

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“Schools and libraries in all forms are transitioning their spends from providing physical items that are being stored on shelves and branches to digital items -- the fastest portion of their growth,” said Steve Potash  in a recent interview. Potash is President and CEO of OverDrive, the Cleveland-based provider of technology for managing and distributing digital content for lending libraries.

Don’t just think public libraries, which have had challenging times with the financial downturn and fiscally stretched municipalities.  Add to the picture K-12 school libraries, colleges and universities libraries, corporations, and institutions such as the military. And think international.

OverDrive dominates the US public library market with its digital platform. According to the company, they have annual revenues  in excess of $100 million,  growing at a double-digit percentage and are profitable.  In terms of market share, OverDrive says that they serve over 90% of the 16,400 US public libraries,  with a 99% renewal rate in that segment. Although right now, they serve somewhat less than 6,000 schools; ultimately, they hope to serve an equally impressive share of the 98,000 school libraries in the U.S.  Internationally, the company reports it is doing business with 27,000 schools and libraries.

OverDrive’s business model is to be the most comprehensive supplier of digital material – e-books, audio books, educational materials, streaming video –  for  the most comprehensive collection of digital gadgets – iPads, smartphones, e-readers, whatever.  OverDrive even has a direct integration with Amazon, so library patrons can borrow an ebook directly to their Kindles.

The hope is, that with comprehensiveness, Overdrive’s library customers won’t bother to engage with other platforms that can not match their depth in titles and publishers -- allowing OverDrive to be the winner that takes all.

But there are competitors.  Baker & Taylor Axis 360 which is the legacy supplier of physical books to libraries has also gotten into the digital material business. OverDrive’s newest competitor is  3M Cloud Library. The gigantic multi-national corporation is hoping to leverage its relationship with libraries in an unrelated area of security products.

Still, OverDrive has relative scale advantage within this specific narrow and deep area of digital material delivery.   The question is -- can they maintain it as they expand to other segments of library lending?  As other areas open up – such the 98,000 U.S. schools market – other companies may capture a large number of customers too, so it will be hard to maintain such a high level of dominance.

Heather McCormack, 3M Cloud Library’s Collection Development Manager,  says  that 3M  saw an opportunity in the library market because of what they perceived to be a technology gap. “It was the perception that the leading provider, OverDrive, had a difficult system," she explained.  “And 3M thought that we have existing strong relationships with the library market, going back 40 years, that we can make use of to leverage this new product.  We viewed the elegance and the simplicity of the 3M app to be a huge reason to get in.  We thought it was something that was unique and was needed.”

OverDrive recognizes the technological challenge and has been investing in fixing any perceived weakness. In the last several years, they accepted a cash infusion from Insight Venture Partners; and say they have spent tens of millions of dollars in tech improvements in the recent past.

OverDrive "digs the moat"  around their competitive advantage 

OverDrive believes that additional services will enhance its business and protect the core business. The most significant revenue they earn comes from the fees derived from providing the basic digital catalog of e-books, audio books and video from the publishers to the library customers.

The additional revenue streams which are much smaller, according to the company, come from helping the customers loan out e-books more effectively. Potash describes the additional services and revenue:

  • Service based fees – “second, but much smaller” than the core catalog fees. This is revenue for supplying the platform via the Software-as-a Service (SaaS) model. These fees are compensation for the initial set up which is customized for the customer as well as ongoing support of real time authentication of the library card or student ID and providing dashboards, reports and analysis as needed for the customer
  • OverDrive Media station– “Just launched in 30 major markets," a physical touch screen to aid walk-in library users to know that ebooks and audio books are available at all – and then discover which titles they can get and download on the spot.

  • Customer tech service – “Several big markets have outsourced” this function to OverDrive.
  • Front Line Support – “Dozens of markets” have outsourced the Help desk.  Potash explains, “So when they get all those calls on December 26,  ‘My daughter has given e this new Nook… Now what do I do?’ they can handle the spike.”

The library's concept of  "comprehensive"

The libraries also dream of the single comprehensive catalog – but a little differently.  As Michael Santangelo, Electronic Resources Coordinator for BookOps, a shared service between Brooklyn Public Library and New York Public Library, explains, his ideal would be for his patrons to be able to “search and browse a single comprehensive catalog of all our offerings – whether it’s books or ebooks -- the idea of bringing everything together.”

He believes that the platforms should be accessible by a “discovery layer” which essentially would remove the advantages of one platform over another, as they would be inter-operable. This is a similar sentiment articulated by the library movement,  Readers First, ascribed to by 292 library systems;  the principles are a real challenge to any barriers that OverDrive or others are erecting.

Potash knows that some libraries will need multiple platforms. “In many cases we may be the primary vendor of e-books and audio books but there may be a number of libraries or institutions for a very specific product line.  We've seen this where publishers offer their materials exclusively in their own web site.”  Academic and research libraries in particular are forced to have individual platforms for, say Elsevier research papers,  LexisNexis, or other “walled garden” business models.

3M’s McCormack  knows that her company needs to catch up, but she is optimistic about their ability to get into the game. “What we've seen grow is the two-vendor system. There is room in the market for other players.”

This is consistent with the basic economics from the book publisher's point of view: they should want to offer their products to everyone. Since they have no way of knowing which way the market will go, they should take bets on all legitimate competitors.

This is the first post of two looking at the digital media library market.