31 May 2010 —  Just over a year ago, at the height of the recession, Ben Roberts, a computer programmer at a hedge fund in London, was made redundant. Armed with his severance package the 29-year-old bought an Apple computer, some programming textbooks and got together with Chris Stevens, a friend from university and a journalist and illustrator.

The two began brainstorming ideas for iPhone applications. Their first two apps were moderately successful, but it was when they turned their attention to literature and Apple’s newest gadget, the iPad , that they struck gold. Alice for the iPad, which uses the text and the original Tenniel illustrations from Lewis Carroll’s Alice’s Adventures in Wonderland , launched in the US last month. It has already featured on The Oprah Winfrey Show and was named ” the cleverest iPad book yet ” by Gizmodo, the technology news website.

What made it so different? “The other e-books out there have nice page-flip abilities and narration but in essence they’re just trying to mimic a real book,” says Mr Roberts. “We were going for something more engaging and interactive – something that really makes the most of the iPad’s capabilities.”

So if you tilt the iPad Alice grows or shrinks; turn it upside down and a bottle marked “Drink Me” hurtles across the screen. The app uses data from the iPad’s accelerometer, which senses the velocity and orientation of the device, to control the movement of objects on the screen.

Within days of the launch the inventors were inundated with calls from publishers offering contracts to convert high-profile literary properties into “enhanced” e-books.

“Publishers are desperate to get on board and find ways they can engage with [the iPad],” says Mr Roberts. “My suspicion is they will have to do that if they want to survive, just because it’s going to be a very big market and they’re losing sales elsewhere.”

The fact that the app was created by a two-man start-up from outside the world of traditional book publishing points to the challenges confronting the traditional industry in the digital age.

The dilemma for publishers is knowing just how many resources they should devote to a market that is very difficult to value and which is still being shaped.

Speaking at the launch of the Financial Times and Goldman Sachs Business Book of the Year award last week, Dame Gail Rebuck, chief executive of Random House, said: “I probably spend over 50 per cent of my time on the emerging digital market, partly because it’s a period of transformation.”

However, she also admitted: “It’s anyone’s guess what percentage of the market [e-books] will be . . . it’s quite difficult for our industry in this transitional period, because nobody knows.”

Sales of e-books are rising rapidly – last year they leapt 177 per cent in the US – but they still contribute only a small chunk of overall industry sales. In 2009 they accounted for less than 5 per cent of the £3.1bn book sales in the UK, according to the Publishers Association, and 1.3 per cent of the estimated $23.9bn sales in the US , according to the Association of American Publishers.

“You could quite easily see a rapid change in behaviour as we’ve seen with smartphones ,” says David Lancefield, a media partner at PwC, the professional services firm. “Although the market for e-books is relatively small at the moment, consumers could act quickly, which will require companies to be agile in their response.”

Publishers are mindful of the precedent set by the music business , where record companies were infamously sluggish in responding to the threat of digitisation.

However, the move to electronic reading is creating a host of challenges, from e-book pricing models – an issue that has caused disagreement between publishers and electronic retailers including Amazon – to the question of how radically a traditional publishing company needs to update its culture in the digital age.

“What is a publishing company and what is publishing are the two things that are most in flux,” says Toby Mundy, managing director of Atlantic Books.

While some publishers are building in-house teams to generate specialist electronic content, others would rather outsource.

“I’m not convinced we’re the right people to be creating interactive books,” says Richard Charkin, executive director at Bloomsbury, the UK publisher of the Harry Potter series. “It’s not necessarily in the publishers’ skillset. We’re finders of talent, we’re hunters.”

The issue of digital rights is also vexed. “This is the great territory battle between agents and publishers,” says Caroline Michel, the literary agent.

Contracts between publishers and some authors may have been drafted decades ago, before the question of digital rights was ever imagined. “For any book published before, say, 1980, there will be no comprehension of digital rights at all,” says Simon Juden, chief executive of the Publishers Association. “The question for publishers is, ‘Does the existing rights agreement include digital uses?’ “

Some writers are wary of signing away digital rights at such an early stage in the market’s development and, aware of the fact that e-books have no marginal cost of production, are demanding higher royalties. The UK’s Society of Authors advises its members to push for royalties of 50 per cent on e-books rather than the 25 per cent being commonly offered.

Traditional publishers also face increased competition. Ian McEwan, the prize-winning British novelist who is published by Random House, chose to license the electronic versions of his back catalogue in the US to Rosetta Books, an independent digital publisher, rather than with his conventional publisher. “[Rosetta Books] pays double the royalty that Random House pays on its electronic editions,” says Georges Borchardt, the author’s US agent. “And, in answer to your next question, yes we like ‘double’ better.”

These kinds of pressures – pricing, rights and the quest for innovation – have the potential to reshape the industry’s structure. “For publishers, the concern as the market shifts is to make sure that they don’t end up with an entrenched value chain that disenfranchises them,” says Benedict Evans, analyst at Enders, a media consultancy.

By far the largest proportion of digital sales to date has been in the academic and professional sectors. Some industry observers are sceptical about whether long-form fiction is well-suited to being read on a digital device. “Curling up on a sofa for a couple of hours is quite different from getting hold of a piece of information you need to carry out a clinical experiment or a piece of legislation,” says Philip Kisray, vice-president at publisher John Wiley & Sons.

Yet this could change. “Only a year ago people were saying children’s books and art books would be immune,” says Mr Evans. “No one who’s seen the iPad believes that any more.”