But faced with a host of technical and business hurdles, the book industry is just writing the first chapter of this new medium. For the time being, it looks like the novelty -- not the novel -- is the main attraction for readers.
The Internet has already rocked the book business. As a distribution channel, it's the industry's fastest growing outlet. Online sales captured 5.4 percent of all books sold last year, up from just 0.4 percent two years earlier, according to a recent study by The NPD Group.
Now, the publishing industry is setting its sights on using the Web to distribute books themselves in digital form, joining other industries like travel and stock brokers that are already exploiting the Internet to cut costs and expand their reach.
But the first chapter of the story is still being written. Some $1.7 billion worth of paperbound books are expected to be sold via the Internet this year, but just $34 million worth of e-books will be downloaded, according to Forrester Research. While booksellers like Amazon.com (amzn) have been blazing digital trails, the publishing industry has made little headway in upgrading a production process that is still geared almost entirely toward putting words on paper.
Even pioneering publishers who are now aggressively expanding their lists of electronic book titles find themselves taking finished paperbound editions and scanning them into electronic form by hand.
That's changing, spurred by the recent success of high-profile e-book launches like Stephen King's novella "Riding the Bullet," which drew some 400,000 downloads in just two days. Numbers like those quickly caught the attention of a business in which a paperbound first run of 50,000 is considered a success. Random House followed suit last month with the online publication of Michael Crichton's new book "Timeline."
E-books are also getting a second look from readers, thanks to advances in the portable devices used to store and read electronic titles. These dedicated players, like NuvoMedia's Rocket eBook, now boast improved battery life and expanded storage capacity of up to ten full-length books. Readers can bookmark pages, make notes, search for words or phrases, or look up words in a built-in dictionary.
The e-book market for these devices -- priced at about $200 and falling -- got a boost earlier this year when Gemstar International Group bought NuvoMedia and its main rival, SoftBook Press for $565 million.
Handheld computers like the popular series from Palm Inc. (palm) are also getting better at displaying e-books, thanks to new software plug-ins designed to make e-books easier to read on a small screen. More than 30 publishers have signed up to make e-books for Pocket PC users using Microsoft Reader, a high-resolution book display that's part of the software giant's latest attempt to capture a piece of the handheld computer market. (Microsoft (msft) is a partner in MSNBC.)
By all accounts, electronic publishing promises to change the economics of making and selling books. The obvious savings come from production and distribution, as publishers eliminate the cost of things like paper, printing presses and shipping.
But the biggest savings by far, say publishers, will come when they no longer having to guess how many copies to make, eliminating costly returns that run between 25 and 40 percent of a total printing. Those unsold books are sent back to the publisher and have to be written off, increasing the overall cost of each title.
But as publishers move from paper to pixels they face a host of hurdles. For starters, there is the thorny problem of maintaining control over a digital medium that is proving ideally suited for illegal duplication. Book publishers are watching nervously as the music industry deals with the unfolding "napsterization" of its products, as digitized MP3 music files are swapped freely on the Web.
"We're very concerned about copyright protection," said Greg Voynow, general manager of Time Warner's (twx) iPublish digital publishing unit. "We're only going to be working with vendors that have very good encryption security."
But publishers eager to expand their e-book offerings face an encryption catch-22. The most secure anti-copying technologies are generally acknowledged to be those designed specifically for dedicated e-book reading devices. But the universe of those dedicated players is measured in the tens of thousands, while the much larger laptop and desktop PC platform -- measured in the hundreds of millions -- is less secure.
That dearth of devices need to store and display e-Books is also limiting the distribution of digital books. Laptops, while plentiful, are not as convenient as hand-held devices. And until recently, handhelds like the Palm suffered from limited readability.
Publishers and booksellers are also wrestling with how much to charge for e-books. Just as paperbacks are cheaper than hardcovers, readers expect publishers to pass along the lower cost of producing an e-book. That's happening for public domain classics like "Wuthering Heights" or "The Red Badge of Courage," which go for about $2. But for the latest bestseller from Mary Higgins Clark, expect to pay more like $20. For now, many popular titles, including the high-profile King and Crichton downloads, are being given away free to attract e-readers.
E-publishers are also sorting out a problem common to early stage media technologies: multiple formats. The two main contenders are the widely-used, but proprietary PDF format from Adobe Systems (adbe) and a newer Open E-book (OEB) format embraced by Microsoft and other major players.
"Right now, we're seeing dueling standards: OEB versus PDF," said Ken Brooks, head of digital publishing at Barnes and Noble. "Those two don't reconcile very well. What all the publishers and booksellers are looking for is for those two to come together."
Until a common format emerges, publishers say, e-books will be hobbled by the kind of format wars that slowed development of video cassette recorders.
In the meantime, some publishers are already taking advantage of the savings offered by electronic publishing using a hybrid production process know as print-on-demand. The idea is a lot like the just-in-time, build-to-order production method that transformed the PC industry. Instead of printing tens of thousands of copies at a time on a traditional offset press, publishers are experimenting with a new generation of printers that allows a bookstore to publish one copy at a time -- filling orders based on reader demand. Eventually, that printer may reside on the reader's desktop.
"The world is going from a print-and-distribute model to a distribute-and-print model," said Chris MacAskill, CEO of electronic publisher MightyWords.com. "Instead of the publisher having to do an advance run -- and then hope the customer will buy it and eat (into) the returns -- they'll distribute the book electronically and we'll all print it out."
Some publishers also believe the print-on-demand model will open up markets for titles that can't profitably get published under the current system. Lower production and distribution costs means publishers can offer many more slow-selling "midlist" titles without having to store unsold copies in a warehouse.
MacAskill thinks print and demand will also create a market for shorter-length texts like speeches, movie scripts and research reports. He sees the Internet spawning many more outlets for published works, reviving the kind of niche and neighborhood bookstores that have been replaced by superstore chains.
"I don't think there will be an Amazon.com of electronic distribution," he said. Because of the low cost of assembling ands distrbuting e-books, "there are a lot more people who can do this."