In Inkling Habitat, the company’s founder and CEO, Matt MacInnis, sees an opportunity to take the digital reading revolution beyond Amazon and Kindle. He believes Amazon is totally reliant on text-based titles that make up only a fraction of the total book publishing market, and calls Apple’s iBooks Author — free software that’s supposed to let anyone create interactive ebooks for the iBookstore — a flop. “Our message to the industry is that the first bit of digital publishing was great,” he told me, “but the real stuff is just beginning.” It’s early days for Inkling, which has only 400 titles in its store so far compared to Amazon’s millions of Kindle titles. But MacInnis is convinced that the next step is illustrated: Textbooks, travel guides, cookbooks, how-to books, and so on. And it’s this area, he believes, where Inkling — not Amazon — will dominate.

As I reported last year, Habitat “lets publishers create interactive e-books with HD video, interactive features and 3D content in a free, cloud-based program. E-books can immediately be published to iPad [and now the iPhone] and the Web in HTML5, with updates pushed to both platforms at once…Multiple groups can collaborate on the content simultaneously, so a production editor in New York City can look at the same project as a designer in India, simultaneously.” Starting Tuesday, publishers using the platform can also export their books as EPUB files, so that they can sell them through Apple’s iBookstore and other platforms. And each book created on the platform is fully indexable by Google.

Eight months ago, MacInnis told me, the cost of taking content from a print-destined file and turning it into structured content that can be crawled by Google or easily navigated on an iPad was $30 to $60 per page. “We’ve gotten that down to $3 a page,” he said. The tool is free for publishers and consumers, though Inkling will take a 30 percent cut of each sale through the Inkling store. Beta clients included O’Reilly, Frommer’s, Workman, and Wiley; new publishing partners announced Tuesday include HarperCollins, DK, Lonely Planet, Rick Steves Kaplan and Time Inc.

Inkling is also launching a subscription enterprise product, intended to compete with Adobe, that allows clients to build products under their own brands on top of Inkling’s APIs. Clients at launch include Pearson, the world’s largest book publisher; Elsevier; and Wolters Kluwer. Presumably, the enterprise clients’ subscription fees help keep Habitat free.

Finally, Inkling is rolling out an academic model of Inkling Habitat, which is completely free and doesn’t take a cut of sales. The company is partnering with the 20 Million Minds Foundation, which is backed by the Bill and Melinda Gates Foundation and will distribute 50 free, open-source textbooks to community colleges in California.

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Overall, the iBookstore contains 1.5 million books that have been downloaded 400 million times so far, Apple CEO Tim Cook said. The main changes to iBooks — which isn’t updated in the iTunes Store as of this writing, but will be today — are a continuous scrolling option for ebooks (so you can just flick instead of turning virtual pages — a feature readers may or may not care about) and better integration with iCloud so that ebooks sync across devices. You can tap to share a passage on Facebook or Twitter. The company also added support for Korean, Chinese and Japanese, bringing the total number of languages supported to over 40, according to Cook.

In addition, Apple’s self-publishing platform iBooks Author, which lets users create graphics-rich ebooks (like textbooks) for iPad, is being updated. It gets new templates, the option to create portrait-only (as opposed to landscape) books and other customization options.

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“Apple (NSDQ: AAPL) spent a year and a half to build eight textbooks,” Inkling CEO Matt MacInnis said. “In two years, we’ve built 200.” Inkling Habitat is available immediately to a “select group of publishers” in an early adopter program, and will be available to everyone later this year.

Inkling Habitat lets publishers create interactive e-books with HD video, interactive features and 3D content in a free, cloud-based program. E-books can immediately be published to iPad and the Web in HTML5, with updates pushed to both platforms at once. (Well, iPad is available now and Web publishing will be added later this year.) Multiple groups can collaborate on the content simultaneously, so a production editor in New York City can look at the same project as a designer in India, simultaneously. Every version of a product is saved, so changes can always be rolled back.

O’Reilly is a partner at launch. iPad publisher Open Air has already released three titles using Inkling Habitat technology, though the program has not been formally announced until today.

The program is free, but in order to use it publishers must agree to make the books they create with it available through Inkling’s store (in its iPad app and on its website). Inkling takes a cut of the revenues from those books. Unlike with iBooks Author, publishers can also sell the books they create through other channels (their own websites or as individual apps, for instance) and Inkling does not take a cut of those sales.

McInnis demoed the product for me and it looks very easy to use. It’s key for not just publishers but laso the digital content producers they work with — often, teams in India — to know how to use the platform. Inkling has already partnered with the two largest digital content producers, Aptara and Innodata, to train them and they are now ready to use it.

My first job out of college was at an independent publisher, and one of my tasks was to FedEx gigantic stacks of printed book files, marked up with red pencil notes and Post-Its, to a design team in India. (This was in 2006, not that long ago!) It was incredibly nervewracking, from my point of view — the packages got lost or sidetracked somewhere in India more than once, which I swear was not my fault — and just the process of sending them back and forth took forever, even though both our team in New York and the producers in India were working quickly.

Being able to log onto a cloud-based program, manipulate files directly, send notes to designers, publish immediately and always roll back if you make mistake is a total lifesaver — and may be regarded that way by publishers who have been wary to publish interactive e-books because it is so expensive. Also, because Inkling Habitat doesn’t charge for the platform but relies on a revenue share of the finished product, the company has an incentive to work with publishers throughout the proces. “Their win is our win,” said MacInnis, “and their failure is our failure.”

Inkling is based in San Francisco and has raised $17 million in funding.

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It’s still the case that non-iPad devices won’t support *.ibooks files without some tweaking and converting — which could cause them to lose most of their enhancements, and also is forbidden by the EULA — so the updated license agreement does not really change anything except to possibly make some people a little less mad.

Here’s the new language:

If you want to charge a fee for a work that includes files in the .ibooks format generated using iBooks Author, you may only sell or distribute such work through Apple, and such distribution will be subject to a separate agreement with Apple. This restriction does not apply to the content of such works when distributed in a form that does not include files in the .ibooks format.

And here’s the old language:

If you charge a fee for any book or other work you generate using this software (a “Work”), you may only sell or distribute such Work through Apple (e.g., through the iBookstore) and such distribution will be subject to a separate agreement with Apple.

The new EULA clarifies that Apple does not somehow own the content you create in iBooks Author; it only seeks control over works outputted in the *.ibooks format. So it’s fine for a user to repackage that content into, say, a Kindle book.

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The book Stevens created, an archive of a month’s worth of installments from his weekday comic strip, was first hosted on Dropbox, but demand caused the public folder he was using to be shut down. Once Stevens moved the file to his own server, he saw almost 8,000 downloads, leading him to surmise that at least 10,000 in total managed to get a hold of the iBooks Author-created tome.

Stevens called that performance “not bad for a file created by software which has only been out for a week on a single platform,” and we agree. Consider, for example, that the Financial Times‘ How to Spend It, a lifestyle magazine app from a world-class publication, took 10 days to reach 10,000 downloads last September.

Response to the format has been “overwhelmingly positive,” Stevens said in a blog post, but there are some downsides. First, he says bandwidth required to provide the downloads is a problem, which could be overcome by selling the via the iBookstore, but that entails additional costs and operating within the confines of Apple’s marketplace. Stevens says this isn’t palatable since he “[doesn't] like the idea of readers being geographically or economically restricted from downloading [his] comics.”

Apple adds this to every page in PDFs generated in iBooks Author.

The other problem is with how iBooks Author writes to PDF, since Stevens wants to offer the collections to anyone, regardless of platform. Apple adds branding to its iBooks Author PDF output, which Stevens says is understandable since it’s a free tool. He would have to spend additional time, then, creating a second version without said branding.

Stevens’ concerns echo some of those brought up by Vook’s Matthew Cavnar during a recent interview, but the webcomic creator seems excited about the potential of iBooks Author despite its limitations. We should see soon enough if Apple’s tools result in a flood of new iPad-tailored content from other independent creators in the months to follow. I predict it will, because despite the fact that iBooks Author may be tied strongly to only one platform, that platform also happens to be the best venue for digital comics consumption available today.

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In the introduction to the collection, called Waking Up With The Diesel Sweeties, Stevens talks about how he grew up wanting to do a monthly series, and how the iPad seemed the perfect venue for comics from the moment he saw one. He says “for every person who loves reading their daily comics every morning, there’s someone who’d love to grab a magazine of them once a month and soak them all up at once.” Hence his desire to do this iBooks Author-created edition.

iBooks Author has only been out for around four days at this point, but Stevens’ example shows it’s already stirring interest beyond textbook creators. Stevens created the book himself during “a few insomniac hours this weekend,” he says on his blog. The barrier of entry for using the product is so low it becomes a viable distribution option for independent creators looking to expand their audience beyond those they serve on the web, and if they’re willing to offer their product for free (Stevens makes income through online sales of goods tied to his comic), content creators can bypass Apple entirely and serve audiences directly.

To check out Stevens’ project, just download the .ibooks file from his website. If you’re on an iPad, it will open in iBooks, or if you’re on a desktop machine, you can simply send it to yourself via email or Dropbox. This is definitely my favorite use of iBooks Author so far, especially now that I’ve hit a creative wall with Dogs: Their Ways and Woes.

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“It’s akin to Microsoft (NSDQ: MSFT) trying to restrict what people can do with Word documents, or Adobe (NSDQ: ADBE) declaring that if you use Photoshop to export a JPEG, you can’t freely sell it to Getty,” writes Mac developer Dan Wineman.

Apple says that e-books created in iBooks Author must be sold exclusively through the iBookstore. Authors can only distribute them elsewhere — through their own websites, for instance — if they are free.

Here’s the official language from the iBooks Author license agreement:

IMPORTANT NOTE: [This is right at the top of the agreement, on the first page]
If you charge a fee for any book or other work you generate using this software (a “Work”), you may only sell or distribute such Work through Apple (e.g., through the iBookstore) and such distribution will be subject to a separate agreement with Apple. …

B. Distribution of your Work. As a condition of this License and provided you are in compliance with its terms, your Work may be distributed as follows:
(i) if your Work is provided for free (at no charge), you may distribute the Work by any available means;
(ii) if your Work is provided for a fee (including as part of any subscription-based product or service), you may only distribute the Work through Apple and such distribution is subject to the following limitations and conditions: (a) you will be required to enter into a separate written agreement with Apple (or an Apple affiliate or subsidiary) before any commercial distribution of your Work may take place; and (b) Apple may determine for any reason and in its sole discretion not to select your Work for distribution.

Some developers and Apple bloggers are upset about the restrictions: “As far as I know, in the consumer software industry, this practice is unprecedented…” Wineman writes. “When I make something myself, no matter what software I use to make it, then — assuming it doesn’t infringe any copyrights — it’s my right to distribute it however I want, in whatever format I choose, for free or not.” John Gruber calls the license agreement “Apple at its worst. Let’s hope this is just the work of an overzealous lawyer, and not their actual intention.”

Others, however, don’t see the big deal. “All Apple is doing with this restriction is saying that if you directly profit from this free tool and platform that we have created, then we deserve our cut,” writes iOS developer David Smith. He thinks it’s more significant that the books can be distributed anywhere if they are free: Apple has “created an avenue for non-commercial distribution that would exclude them entirely. That is actually unprecedented.”

Frederic Lardinois at SiliconFilter notes that the content still belongs to the author: “It’s the book Apple cares about – the final product the program generates, not the content you put into it. iBooks Author is, in the end, just a tool for laying out your content so it looks nice on the iPad. Nobody is stopping any author or publisher from using another tool to sell the same content on another platform.” (If you’re interested in what exactly the *.ibooks file format is, here’s an examination from Baldur Bjarnason.)

Overall, Apple’s rules could be a sign that Apple is gearing up for a battle against Amazon (NSDQ: AMZN) and its own proprietary Kindle format. “Platform wars have come to the book business,” writes academic publishing consultant Joseph Esposito. “There will be some publishers who will develop products for all available platforms (at great expense) and others who will focus on one platform alone (giving up a big piece of the market).” But “the publishers’ dream of creating content once and having it run everywhere is just that, a dream.”

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I talked with McGraw-Hill Education SVP of Strategic Services Vineet Madan on Friday about the company’s own vision for the future of iBooks and interactive course material in general, as well as how it makes sense for the company to have seemingly competing investments in iBooks competitors like Inkling and CourseSmart. Madan also made it clear the company has concerns about maintaining consistently high-quality textbooks that are published with iBooks Author. Here are some of the most interesting points from our conversation.

McGraw-Hill saw the iPad early on but chose not to partner with Apple on iPad textbooks right away

It turns out the publisher wasn’t too keen on the original version of iBooks, according to Madan.

“We’ve been talking with them since iBooks first came out. We said iBooks was insufficient in its form — prior to yesterday — for delivering education content…. It wasn’t a suitable delivery medium for that content. We talked to Apple about what we thought was necessary and ended up working with them to bring that to fruition.”

Instead, back in 2010, McGraw-Hill took a minority stake in Inkling, which has been making interactive textbooks for the iPad for two years, primarily for the higher education and non-education market. They’re also investors in higher-ed focused CourseSmart, whose chilly response to Apple’s entry in the market I wrote about yesterday.

iBooks 2 is only a “first half-step” to the future of e-textbooks

Using interactive material to get students engaged is great. But McGraw-Hill sees a future where students not only learn using digital books but can also can be tested and have the material tailored for particular needs.

“The next step is can you start tracking information about how students are learning and what they’re learning. You need rigorous tested assessments, something the current version of iBooks doesn’t yet support. But you need strong assessment in there and you need to link the data with how students are navigating content to provide tailored instructional paths.”

They don’t lose money charging $15 for a digital textbook instead of $75 for a physical book 

Madan explained the math to me: The high school textbooks they publish sell for between $65 and $85, or an average of $75 each. Each book is used for five years on average, which is $15 per use, per year, or the same as what Apple is setting the price for textbooks in the iBookstore.

But wait; it actually gets better for the big-time publishers: “We are then out of the business of printing books, shipping books, being responsible for warehousing when this scales,” said Madan. That can lead to new investment in more interactive and enriched content.

Even McGraw-Hill execs wonder where school districts will get the money for iPads

In the higher education market in the U.S., mostly everyone has the right hardware and has enough bandwidth. But the story is different in primary and secondary education.

“But in K-12, the big open question that went unanswered yesterday is school districts and their funding environment. They can pay $15 a book, but that’s if they choose to spend $500 to $800 to buy iPads first.”

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CourseSmart, a digital textbook company, that happens to be backed by some of the biggest players in academic publishing — including some of those who Apple announced as partners today — sent a long-ish statement right after Apple’s announcement on Thursday.

The company, which currently has 20,000 digital textbooks and an iOS app, points out that buying iPads and forcing a specific device standard may not go over well with all schools. (“Are they asking students to shell out hundreds of dollars from their cash strapped pockets to purchase a dedicated device instead of using what they already own? Did they really just announce plans to develop a ‘secret’ learning management system with the iTunesU App?” they ask rhetorically.)

But then Coursesmart starts defending its territory: professionally produced e-textbooks from the established academic publishing industry. Not just anyone can make a textbook, they say.

“This content needs to  not only be developed by subject matter experts, but, more importantly, edited through an academic lens in order to ensure learning takes place and our youth is prepared to compete in a global economy. Publishers and authors will remain the drivers of high quality content.”

CourseSmart’s texts are mainly for the higher education, and Apple seemed pretty careful to target K-12 with its e-textbook authoring tool. But still — while Apple says it wants to be additive to the industry, its very presence is upsetting to some of the established players. Will Apple start targeting college and university textbooks next? CourseSmart implies that they think so.

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