Indigo 2.0

Inside Heather Reisman’s ambitious plan to survive the end of books.

It’s been a long time since we’ve thought of Heather Reisman as an underdog. For the past decade, Indigo Books & Music has enjoyed an untroubled supremacy in Canadian bookselling. The company Reisman founded in 1996, and then steered through a takeover of chief competitor Chapters, now boasts 247 locations nationwide, a retailing behemoth with quarterly revenues well into the hundreds of millions and growing steadily. Through the chain’s in-store Heather’s Picks promotion that highlights her favourite new volumes, she’s become that rarest of things: a Canadian CEO who’s a household name. But for a hint at what’s on her mind these days, ask the country’s most powerful book lover what she’s picked up lately. “I’m just reading the Google book, Googled, by Ken Auletta,” Reisman says. “Have you read it?”

On Dec. 15, Indigo spun out its digital book division, Shortcovers, into a new e-book seller called Kobo, which Reisman chairs and of which Indigo retains majority control. The move, which included the announcement that Kobo would produce its own e-reading device, marked Indigo’s real entry into the emerging international e-book market, and a bold challenge to some of the tech world’s biggest names. Amazon, with its Kindle e-reader, basically established the marketplace. Google has for months been dropping hints about its upcoming Google Editions e-book store. And with last month’s unveiling of the iPad and its own iBooks store, Apple marked its claim.

If the competition is daunting, the stakes couldn’t be higher. The book industry, which until six months ago had scarcely changed since Gutenberg, is in the midst of being upended. Projections that saw 3% to 5% of the physical book market going digital in a five-year period have been torn up. Publishers now predict digital sales of anywhere from 25% in three years to 80% in 10. Even if those numbers prove high, publishers and booksellers are going to have to figure out how to make money in the digital world or perish. But rather than battening down the hatches, Reisman and Indigo are using this moment of uncertainty to launch an ambitious global expansion that could see them playing a defining role in how the world reads. “If this was five years from now, I think the idea of suddenly deciding to get into this business would have been daunting,” she says. “But now, I would say it’s exciting. It has lots of the same characteristics as when I launched Indigo at the beginning.”

Heather Reisman sits in her corner office atop a modest six-floor building on Toronto’s King Street West. It’s well-appointed, but it’s a far cry from the sprawling campuses that house Google and Apple. “We’re small. We are the Davids in this battle,” she says. “Global competitors are one thing; [these are] spectacularly impressive competitors. That’s good. There’s nothing better than competing against the best. And our job is not to look at them and decide what to do. Our job is to look at the consumer.”

Reisman has long credited Indigo’s success to the way the company “lives and breathes” that consumer, and the vision of the e-book reader that animates Kobo is a clear one. Beyond Reisman’s ambition to offer “the best reading application” anywhere (and early reviews of the software have been favourable), the Kobo experience caters to a reader who is stealing moments throughout their busy day in which to read, on whatever device they happen to have at hand.

Kobo is the first major global e-book retail operation that supports EPUB files, the open standard created by the publishing industry. When you buy an e-book from Amazon, it comes in a closed, proprietary format — that e-book will only work with Amazon’s Kindle e-reader, or with the individual devices for which Amazon is gradually rolling out applications (there’s a Kindle app for the iPhone, for example, but still nothing for the BlackBerry). Because its books are in the EPUB format, though, Kobo promises they will work on any open platform — your PC, your Mac, your BlackBerry, your iPhone or iPad, any of the dozens of dedicated e-readers that were unveiled at this year’s Consumer Electronics Show, or any of the slews of tablet computers that will follow in the iPad’s wake. “While Amazon has an app in the [Apple] store, and you don’t necessarily have to buy their device, Kobo has been across the smartphone space from the beginning,” says Lisa Charters, senior vice-president and director of digital for Random House Canada. “And that unique offering is really important to us as publishers, because we want consumers to have all options to read e-books, and not necessarily have to purchase a $300 device.”

What’s more, says New York publishing consultant Mike Shatzkin, “they beat Google into the cloud.” Kobo’s library system is based in cloud computing. When you buy a Kobo book, it resides on Kobo’s servers and you access it via your device of choice. So when you squeeze in 20 pages of The Lost Symbol on your laptop in the morning, and later that day open the Kobo application on your BlackBerry, Kobo automatically plops you down on page 21. “Google’s big claim is that they want to have their books in the cloud,” says Noah Genner, CEO of the book industry supply chain not-for-profit BookNet Canada. “Kobo’s done that already.”

But just as crucial as the quality of Kobo’s purchasing and reading engine is what it plans to do with that engine. While Kobo will exist as a store in its own right, its system will also power the e-book concerns of an array of other partners worldwide, from other retailers to computer and cellphone makers. What they’re seeking to build, in other words, is the conduit through which much of the world’s digital book trade will happen. Says Rob Chaplinksy, managing director of California-based venture capital firm Bridgescale Partners, “Kobo’s trying to be the Intel inside.”

Kobo is housed on the third floor of a building in Toronto’s downtown Entertainment District, a few blocks away from Indigo’s head office. There’s no receptionist, and it looks every inch a startup: the cubicles are made of plywood, the building’s mechanical systems loom exposed overhead, and the staff is young and full of adrenalin. Two weeks ago, 57 people worked here. Last week, the staff grew to 68. By the time you read this, there will likely be more. Near the entrance, a large promotional poster from Amazon shows a Kindle displaying the front page of The New York Times. But the poster’s been customized: the Kindle is partly obscured by a circle with a line through it, a big red universal No sign.

Just down the hall from that warning to Amazon sits Michael Serbinis. This isn’t his first startup; his office, shot through with low-hanging ventilation ducts, is decorated with framed Forbes articles about what he calls his “past lives.” A Silicon Valley veteran, the 36-year-old holds engineering degrees from Queen’s and University of Toronto (he still wears his iron engineer’s ring on his right pinky). In 1997, he founded a secure file-delivery and storage platform called the docSpace. When that company was sold in 2000 to Critical Path for $580 million, Serbinis went with it. For a time, before telecom tanked and 9/11 happened, Critical Path ran a third of the world’s e-mail and text messaging. In 2006, when some in the book business were looking without envy at the death spiral of the music industry, Reisman came calling. (She calls Serbinis, the author of several patents in the area of Internet security and communication, “a full-on rocket scientist.”) As executive vice-president and chief information officer for Indigo, Serbinis was the point person on Shortcovers, which he now describes as a “pilot” project designed to take the company’s theories off whiteboards and out of conference rooms and test them in the marketplace. But as the e-book market accelerated, Shortcovers was quickly rolled into Kobo, with Serbinis at its head.

A few doors over from Serbinis is an office housing Michael Tamblyn, Kobo’s vice-president for content, sales and merchandising. Formerly Indigo’s vice-president for online operations, he’d spent six years founding and running BookNet Canada before being lured back to the fold in the run-up to Kobo’s launch. Universally described as one of the best-connected people in the global publishing industry, Tamblyn’s brief is to make Kobo’s store the world’s best-stocked, signing up publishers big and small in territories across the globe and helping them convert their catalogues quickly and cheaply into the EPUB format.

The Shortcovers team and its office space were among the assets that Indigo transferred to Kobo. To that, Indigo added a $5-million cash stake, giving it 58% ownership of Kobo. But after talking with venture capitalists in California and Toronto, Kobo opted to raise the rest of its initial $16 million in funding by pursuing strategic partnerships.

“Strategic” is the key word. The three investing partners Indigo has so far in Kobo create an instant global distribution network. “Locking up distribution gave us a competitive barrier to entry against anyone else,” says Serbinis, “and we could then very quickly establish a model as a global open player that powered every retailer, every device manufacturer, every carrier. Basically anyplace that people shop for books today, or can shop for content today, could be powered by Kobo.”

A spokesperson for Borders Group, the U.S.’s second-largest bookseller, confirms that their ownership stake in Kobo is “slightly less than 20%” and that they plan to launch their Kobo-powered e-book store in the second quarter of this year. REDGroup Retail, which has an undisclosed stake in Kobo (REDGroup confirms it is a smaller share than Borders Group’s), owns the largest book retailers in Australia and New Zealand, and has holdings in Singapore; its Kobo store will launch in May. Tamblyn and his small acquisitions team have pulled together deals with local publishers in these markets that will see their stores stocked with local, as well as international content.

The most intriguing partner in Kobo, and the one that reveals most about the company’s marketplace strategy, is Hong Kong — based Cheung Kong (Holdings), chaired by Li Ka-Shing. Known as “the Asian Warren Buffett,” Li is the richest man on the continent, and one of the most powerful. “In short, they allow us to punch way above our weight,” Serbinis says of Cheung Kong. The company had been an investor in Critical Path, and the success of that investment, and their pre-existing relationship with Serbinis, secured their participation in Kobo. Cheung Kong’s assets are bewilderingly extensive. Best known in Canada for their purchase of Husky Energy, they own a group of retail chains with roughly 10,000 outlets in Asia, Europe and the U.K., including booksellers and electronics chains. Its network of holdings includes an array of telecom carriers in those markets, as well as a stake in China’s largest publishing group and a stake in Facebook. It’s through their partnership with Cheung Kong that Kobo will be launching in the U.K. next month.

Those telecom assets suggest the other way in which Kobo plans to extend its reach. “Booksellers will not be the only place you’ll be able to buy e-books,” Serbinis says. “You’ll be able to buy them from your favourite device manufacturer, from your local carrier. Any way you buy books today.”

As early as next week’s Mobile World Congress in Barcelona, Kobo will start announcing partnerships with telecom carriers and device manufacturers that will result in co-branded, Kobo-powered e-book stores coming preloaded on their devices. Serbinis won’t confirm exactly which companies Kobo’s hammered out deals with, but he allows that agreements are in place, or are being worked on, to get Kobo on cellphones, high-end and budget smartphones, computers and tablets by manufacturers like Research In Motion, HTC, Dell and HP. A few months from now, when you buy a phone or a computer, the plan is for there to be a Kobo-powered bookstore one click away — and that, says Serbinis, will help Kobo secure the potential e-book customers “who won’t know a Kindle from a candle.”

Partnerships of this kind, Serbinis says, will be key in Kobo’s efforts to tap emerging markets, where the company is already making an effort. The top three countries from which customers have already been visiting Kobo’s store are the U.S., the U.K. and Canada, but Serbinis says India and China are numbers four and five. “India’s the perfect example of a place where not everybody’s got a library of physical books, because they can’t afford it. But many of them have cellphones, or have access to PCs. So there’s an example where there’s no access today, or limited access today, but it’ll change.”

There is also the matter of the Kobo e-reading device. Serbinis revealed its existence as part of Kobo’s December spin-out, but both Reisman and Serbinis confirm that it will be launched in April. They see it as one in a stable of devices that a consumer will likely own, a complement to your phone and computer, not a replacement for either. It will use the low-power, easy-on-the-eyes e-ink technology found in the Kindle and in Sony’s e-reader, and an as-yet-unnamed third-party manufacturer is making it. A single model will initially be offered — “for now,” Reisman says; and she hints that the price point for the Kobo e-reader is what’s really going to set it apart. Serbinis believes that a $99 e-reading device will be on shelves some time in 2010. Neither executive will confirm or deny what the price point will be for the Kobo Reader, nor will they speak to any of the other features that have Reisman excited, but it’s a good bet that they’re aiming to produce the lowest-priced major e-reader on the market — and that it will be featured prominently at most of the global tens of thousands of retail points of presence owned by Kobo’s partners. It will be another step toward Reisman’s stated goal for e-reading: “Any written material, any language, any format, any access channel.”

Nobody can fault Reisman and Serbinis for lack of ambition. But though Serbinis is among those who see e-books representing 80% of book sales in a decade, Indigo isn’t pinning all its hopes on digital. Reisman insists the bricks-and-mortar future of her “book lover’s cultural department store” remains bright. Its non-book business is expanding quickly, with strong performance from its gift, toy and food lines. “We showed a 3.8% growth this Christmas, and that’s a function of merchandise mix,” says Reisman, noting that most pure booksellers at home and abroad suffered losses. Indigo’s stores will soon offer even more of a mix, and come fall the company will expand the breadth of merchandise sold through their website. But, says Reisman, “books and the reading experience will always be at the heart and soul. You browse three dimensions differently than you browse digital. And I think people are going to continue to respond to that.” How customers respond to Kobo’s bid for their e-book business, however, remains to be seen.