E-books: the end of the word as we know it

Today, in the endless, cavernous halls of the Frankfurt Book Fair, British publishers and agents are dealing in next year's books. They're buying and selling the rights to Kiran Desai's follow-up to her Booker Prize-winning The Inheritance of Loss. Martin Amis's new novel State of England: Lionel Asbo, Lotto Lout, despite its heinously awful title, is much discussed. The air is thick with hype, spin, competition.

Meanwhile, in Stockholm later this afternoon, will come the announcement of who has won the Nobel Prize for Literature – always an important moment in the books year, and a guarantee of sales, no matter how obscure the recipient.

And next Tuesday is Man Booker Prize Night. At 9.45pm, at a candlelit dinner in London's Guildhall, Sir Andrew Motion, chairman of the judges, will announce whether Peter Carey has won the prize for the third time. The winning book will be reverentially brandished. Publishers and agents will congratulate or console one another, while the nation's top booksellers will beam at the prospect of massive sales in coming weeks, as the trade gears up for Christmas.

Books – their writing, publishing, sale and celebration – make up a rich weave in the nation's cultural quilt. But who, looking at the faces in Frankfurt or Stockholm or at the Guildhall could tell that the industry that produces them is in disarray? Is this the last time that all these people (and these large, solid books) will exist in the same professional relation to each other? Will these authors, agents, publishers and booksellers be speaking to each other next year, after the current toxic dust has settled? Will they all, by then, be doing each other's jobs? Or just doing each other out of a job?

British publishing is in a parlous state. Year-on-year sales of books are down. Guaranteed-bestseller celebrity memoirs are no longer bestselling. Discounts to booksellers are unhealthily bulky, margins are narrowing, profits are down, cash advances are a fraction of their former munificence and acquisitions of exciting new books have dropped to a rumoured one per day. But worse is the turmoil into which these sensitive men and women have been thrown by the advent of the electronic book (or e-book).

"Technology has made virtually anything possible," says Neill Denny, editor-in-chief of the publishing industry magazine The Bookseller. "If you look at it conceptually – there's a five-link chain between the person who writes and the person who reads. You've got Author-Agent- Publisher-Retailer-Reader. Theoretically, the three middle bits could all now vanish and the author could write online directly to the reader."

However, he continues, "A more likely possibility is that just one of the three central links will vanish on-line. It could be that Amazon, the retailer, becomes the publisher. Or that the agent becomes the publisher, or the publisher becomes the retailer, and you go to a publisher's site to buy the book. One of those links will certainly disappear on-line. We just don't know which."

The paperback-sized e-books haven't been responsible for all the trouble, but they certainly started it. Literary types took one look at the Amazon Kindle's sleek metallic lines and rejected it on the grounds that it looked nothing like a Penguin copy of David Copperfield with dog-eared pages and a bookmark stuck inside, and was therefore Not A Book. Newspaper bibliophiles harrumphed about its lack of page numbers (they were made redundant by the variable size of the text – larger words generate more pages). Clubmen pretended to be terrified that an electronic device that could hold hundreds and access thousands of books would spell the end of the personal library. Less anxious commentators thought the Kindle might be handy to take on holiday, because it was lighter than carrying six books in your luggage.

Few noticed its incendiary power to torch the publishing world. Nicholson Baker, the lofty author of The Mezzanine, called it "an alpenhorn blast of post-Gutenbergian revalorisation". In Time magazine, Jacob Weisberg, editor-in-chef of the Slate group, called it "a machine that marks a cultural revolution. Printed books, the most important artefacts of human civilisation, are going to join newspapers and magazines on the roads to obsolescence."

Apocalyptic stuff. But you may think: "Where's the evidence? I don't see so many people reading books on screens." And the new phenomenon might indeed have remained a passing fad, had it not been for the involvement of four major companies: Amazon, Sony, Apple and Google. It's their quadrilateral Battle of the e-books that is sending gouts of blood all over the arena.

Two years ago, Amazon ran the show. It had the Kindle, and had millions of books in its warehouses that could be scanned electronically into it. Sony had the rival Reader e-book, but didn't own any books – it had to arrange with publishers for the digital rights to their authors' works. In January this year, Steve Jobs of Apple announced the iPad, a laptop computer which can run e-books while allowing its owner also to play films and games and send emails. Apple owns the iBooks store, where you can buy millions of "virtual" titles.

Suddenly the electronic publishing world was a battle for "intellectual property", the digital rights to books new and old. Then in April, Google entered the fray. It announced that it had scanned 12 million books, and its products, named Google Editions, would be ready for customers to access, online, this winter.

Holy moly, as they say. It was a battle between corporate titans to buy and sell more e-books to the world's readers. "There are no official figures yet for e-book sales," says Denny. "There are only estimates – and they estimate that e-books now constitute between 2 and 5 per cent of total UK book sales. But it's growing. I think they'll count for 10 per cent of all book sales in the next four or five years." How alarming is that? "It depends who you are. If you're a publisher, and e-book prices are kept reasonably firm, it won't matter that the electronic books are cannibalising your print sales. You'll still be making a decent margin, because you haven't got to print or distribute virtual books. The losers could be independent bookshops. They risk being cut out of the loop, because people will buy e-books direct from the publisher or, more likely, from a third-party retailer like Amazon or Apple, rather than from a local bookshop."

But who should set the basic price for an e-book? The chaps who brought it into the world? Or those who put it online? This is uncharted territory. Publishers once set a book's "recommended retail price", and it was protected by the Net Book Agreement, which forbade discounts. When the Agreement was abolished in the Nineties, there was a discounting free-for-all; bestsellers went on sale at half-price in supermarkets; small bookshops, which rely on top sellers for their basic income, saw their profits slashed. Retailers went head-to-head with each other, while publishers watched their profit margins decline.

How can booksellers survive? "It's hard for them to work in the digital arena," Denny acknowledges. "But I don't think they're finished. Their main hope is to make the local angle work. And, of course, there's browsing, which is much better done in a shop than online. Finding a book you didn't know you wanted – it's much harder to do that on Apple or Amazon." His voice becames dreamy. "Physically bumping into a book, in a shop, in real life. Having a bookseller put it into your hand..."

In July, the literary agent opened a new front in the war. Andrew Wylie, the feral super-agent who represents everyone from Martin Amis to Madonna, made a Hiroshima-like proposal. He said he was creating his own imprint, to publish his clients' books online and sell the digital rights direct to Amazon – thus cutting out the publishing middleman completely. This was a spectacular slap in the face to his former friends in the trade. Random House replied curtly that, if he went ahead with his scheme, they would never again buy or publish any of his clients' print books. Wylie eventually backed down.

"I think publishers are learning to be retailers, but I'm not sure agents are trying to be publishers," says David Godwin, former MD of Jonathan Cape, now a well-respected agent representing Vikram Seth, Howard Marks, Simon Armitage and Claire Tomalin. "I think Wylie's proposal was a wheeze to make publishers nervous. It wasn't serious. Frankly, a man less qualified to be a publisher is hard to imagine."

Godwin is a keen evangelist for the e-book. "Here's an amazing fact. I sat yesterday with Jonathan Galassi, the man who published Jonathan Frantzen's Freedom in America. There are about a million copies in print, he's sold a huge amount – and 35 per cent are e-books. That's phenomenal. That's a jump forward that's happened in America in just a year. But when there's a terrific buzz about a book, as with Frantzen, that's exactly when people want the book immediately... The bigger the book, now, the bigger the e-book sale will be."

There remains the thorny question of who decides the price of an e-book. Since the Kindle was born, most publishers resignedly assumed that Amazon would call the shots. A gripping standoff took place in January this year, when the head of Macmillan, John Sargent, told Amazon that publishers should set the price of their books in any format and, furthermore, that if Amazon didn't like the idea, Macmillan wouldn't sell them any more books. Within days, Amazon removed all Macmillan e-books from its shelves. A seismic shudder went through the industry. Other British publishers threatened to copy Macmillan – and Amazon finally gave in.

"A friend of mine bought his wife a Kindle," says Godwin, "and she bought three books in the current Top 10 for £2 each. A total of £6! Amazon priced its books very low, firstly because you can only read them on a Kindle, and secondly because they wanted to get as big a share of the market as they could. But all that's going to change now in the US – the price of the e-book is now controlled at $12.95. It's vitally important that prices are controlled, otherwise retailers will use it to take a huge share of the market and damage the profits for both writers and publishers."

On this side of the pond, Hachette, Britain's largest publishing conglomerate, has signed a deal with Apple, to try to impose a flat price for e-books – namely £6.50, less than half the price of a new hardback, and cheap for a paperback. However, warns Neill Denny, "some of the other retailers aren't agreeing to it, or they're not implementing it, even though they've agreed in principle. Or they disagree in principle because they think they know better than the publishers what the price should be. It's a hot topic, the struggle's going on right now, and it's not clear what the outcome will be."

There's the war, in plain sight: publishers on one side, retail companies on the other. What complicates things is that companies like Apple and Amazon are so huge, they don't actually need to sell books at all. "They'd be quite happy selling books for 50p," said Denny, "because they make their money from selling hardware. They can afford to make a loss on a few e-books while they're building their market share."

None of this will be apparent to the browser in the high street branch of Waterstone's this autumn. Bookshops will continue to stock thousands of print copies of old classics and modern bestsellers, the lovely mixum-gatherum of cookery and fitness and travel books alongside sober works of reference, biographies and misery memoirs. But out there in cyberspace, starting in the US and gathering strength, the digital revolution is under way.

The rise of online selling had for years threatened to put bookshops out of business. Now the e-book scramble threatens to do the same for publishers. And the agents, who own the destinies of the writers whose works we long to read, may also become redundant. All that's needed is for a bestselling novelist to publish a new book online, inviting readers to check it out – as Stephen King and Stephenie (Twilight) Meyer have done. In both cases, though, they did it for free.

Who'll be the first to charge for a money-based, author-reader relationship that dispenses with agent, publisher, retailer, editor, production department and glamorous publicity director?