October, 2009

A coming new obsession: how to handle a smaller print-book business

Here’s a prediction that has almost no chance of being wrong. Every major player in the trade book industry is about to develop a new obsession: how must our business model change when we reach a level of ebook sales that is dynamically disruptive to the print book ecosystem?

This might not be exactly a “tipping point”, since that implies a point at which growth accelerates from some people to most people, or nearly all people. But print publishing will be seriously disrupted long before ebooks are used by “most people.” That’s because print publishing is a “critical mass” business: we need to sell enough to make a sensible print run, to keep the bookstore open, to support the sales organization and the warehouse. Our bestseller lists (with one exception) capture exclusively print sales, our author-publisher contracts and sales terms with accounts are based on the notion that we’re selling a physical object, and the biggest publishers in the land use their scale to perform capital-intensive functions that are, as much as any editorial or marketing expertise, what the authors need them for.

This presents a problem to all the incumbent players. Every powerful company in the print book supply chain: the big publishers, the big retailers (including Amazon!), the wholesalers, and certainly the independent retailers have a huge investment in competencies that revolve around print books. They can design them, jacket them, price them, print them, ship them hither and yon and keep track of each separate ISBN in the package, put them on shelves so customers will find them when they arrive and calculate when to take them off the shelves to send them back. Although there are other skills that these companies have that might port to an all-ebook or ebook-dominant world, none of these do.

Whether the challenges get acute when 20% of the sales of a narrative title are predictably e, or whether the number is 25% or 30%, the day is coming faster and faster. Growth in sales of the simplest kind of ebook — a direct lift of what is published in print — are exceeding the most aggressive predictions. The IDPF just announced that year-over-year ebook sales for August are triple what they were a year ago! Michael Pietsch, Publisher of Little, Brown, reports that 15% of total sales is the level many of their top authors are reaching now.

(Ruminative interlude: it has been my surmise that big authors will have their ebook sales “capped” at a lower level than smaller authors, just because their print books are on sale in so many more places. However, ebook sales are also very sensitive to “brand”; you don’t and can’t “browse” as many titles when you shop electronically, particularly on a device. I know that smaller publishers with less effective total distribution report Amazon sales of 60% and 80% of sales, so their ebook sales proportions are also bound to be much higher. But how the midlist authors of big publishers fare on overall ebook sales relative to the big ones is a question I haven’t asked. I will. Or, I am…)

Meanwhile, ereaders keep improving and proliferating; there have been several announcements of new devices in the past week, including the forthcoming “Nook” from B&N, which will really raise the stakes for Kindle. It will “see” Kindle’s e-ink screen and “raise” one LCD panel for link viewing, plus a 3G connection and Wifi use in B&N stores, all at the same price. B&N has the same power Amazon does to amass a robust list of titles (they have deep contacts with all the publishers) and they have at least as good a skill set for curation and merchandising to make a great shopping experience. And they’re putting their reader front and center in their bookstores (with the free wifi and some special in-store content features) which will expose the concept of the device to many people who don’t shop at Amazon and did not get blasted with a sales pitch every time they bought books.

Barnes & Noble had entertained being the ebook market leader a decade ago, losing interest when the Palm format became the early format frontrunner and wasn’t made available for intermediary distribution (one of the first in a string of futile attempts to install an iTunes device-capture model for book content, and before the iPod, at that.) Then B&N let Amazon get the jump on them in the ebook world with the Kindle; their Nook will be following more than two years later. In the meantime, B&N may have realized what all the big publishers know: that when the customer shifts to ebooks, it threatens all their business models, sunk investments, and longtime marketplace advantages. That, along with the sour experience of trying to lead on ebooks and being frustrated by what was actually a self-destructive policy by Palm, may have fed their apparent disinterest in ebooks until recently.

But it was clear to everybody that the first round of ebook growth shifted power dramatically to Amazon. Publishers have been frustrated and humbled by the Kindle’s rock-bottom, loss-leading pricing of the hottest new titles. And Barnes & Noble had to figure that, recession aside, some of those same-store sales they were missing were from shoppers who stopped coming to them because they had bought a Kindle and were now locked into the Kindle store for their purchasing to use the device.

Incidentally, the sales levels that the IDPF and Michael Pietsch are revealing are for legitimate ebook sales. Nobody knows the size of the pirate ebook market. There are some who guess it is rather small despite the robust number of files available in various hard-to-quell locations on the Internet, but if it includes any significant number of current or recent print-book customers, it only magnifies the impact on the legacy businesses.

There are a multitude of questions facing the industry about the expanding ebook market: how (some, including some highly credible voices, would say “whether”) to use digital rights management (DRM), how to price ebooks, what enhancements or updating can make commercial sense and how to manage them in the marketplace, when they should be made available, and, most important of all in the long run, what the “deal” is for the consumer (and then, based on that, for the author) who is actually licensing something rather than taking possession of something. But the questions about the declining print side are just as acute.

The brick-and-mortar bookstores, led by Barnes & Noble, are going to have to figure out how to keep their stores enticing with might be a smaller selection of print books. Nothing can grow the market for print books in the years to come, but keeping the number of points of purchase as high as possible and the traffic as high as possible are in the industry’s interests. It will require some real creativity to figure out what other activities or product offerings are compatible to keep people coming and how to drive traffic with online activity.

Amazon is not unaffected by this shift, either. Their big early lead in the ebook world was really built on the back of their superior print-book supply chain. From the very beginning, when they put out a database that had out-of-print books in it and then gave the customer a reliable delivery date for what they could sell, they created an unmatched print book shopping experience, provided a) you knew pretty much what you wanted and b) you didn’t have to have it right this minute. Their logistical capabilities are nonpareil but don’t do them nearly as much good with an electronic customer as a physical one. Their grasp on the ebook market really depends on the Kindle remaining a favored device and I think you could get good odds if you wanted to bet on that. Making hardware is not a core competency for them.

As the print business declines, Amazon continues to win if real print book demand falls more slowly than brick-and-mortar availability. But their hammerlock on the ebook market will probably not last; there will be too many better devices and they have to make a concessionary shift to selling the epub format before they can even begin to compete for those customers. They’ll do it someday, and probably soon, but they loosen the grip they have on the Kindle owners the day they do.

Publishers have an interest in continuing to support bookstore survival because the display they get there is great promotion and because being seen by a browser who put themselves at a bookstore section is still a great way to be discovered and bought. And there will still be, for some time, books which are not narrative reading which are simply better in print than in any electronic rendition. Publishers still sell a lot of these books (many of them juveniles) and bookstores, or some appropriate retail setting, are essential to them.

But publishers are going to have to rethink their operations. Sales staffs will probably contract; warehouse space will become redundant; investments in IT systems for the print operation will have to be more rigorously controlled. Publishers will likely combine, of course; the big houses now all gladly take competing publishers into their back office operations to help support them. But downward shifts in scale are not only inevitable, they will probably happen in more dramatic lurches than we’ve known in the past.

Wholesalers and distributors will both win and lose in this shift, but the shape of their business will certainly change. On the one hand, they, like everybody else, will lose sales that they have today because accounts go under and publishers they distribute cease operating. On the other hand, they are in the business of converting fixed operating costs to variable ones, and the number of customers for that proposition will grow as the apparent costs of operations (as a percentage of sales) get out of control at many companies.

Agents and the top 500 authors (an arbitrary number) are most likely to be the biggest beneficiaries of these changes in the short term. Because they themselves are powerful, searchable brands, they could actually sell ebooks themselves off their own websites, keep all the money, and make considerably more than their contracts would give them for ebook sales today even with sales of a quarter or less than the publisher and retailer get for them. (And the sales might not be that low.) I have talked to big publishers about the threat that top authors might just make their ebook deals first (you can cover the market in 4 or 5 stops and branded authors would have their own websites to sell from as well) and offer publishers print-only. Without exception, the big publishers tell me “no way we do the deal on that basis.” But if what is contended in this post is true — that keeping the print business viable is going to depend on amassing volume for it any way you can — they might not actually feel that way when presented with the problem. I think they will be getting the opportunity to make the choice.

I’ve posted on variations of this thought before. I had already decided it needed to be the topic of a keynote panel at Digital Book World. I’ve recruited Ken BrooksMichael CaderLarry Kirshbaum, and Evan Schnittman to join me on stage there to discuss it. Continually rebalancing the business between print and electronic, and maintaining the scale to run still-vital print operations, will be a topic of interest for just about all of us in the months and years to come.

Apologies for the paucity of posts lately. I’ve had a lot of work, been traveling, and had a bout of food poisoning. The food poisoning’s about gone, but the work and travel schedule remain robust for the rest of the month. I should become a more reliable correspondent again in a couple of weeks.


The new Thomas Nelson self-publishing initiative; more questions than answers

The announcement was made earlier this week through the Wall Street Journal and the blog of the publisher’s CEO, Michael Hyatt, that one of the giants of Christian publishing, Thomas Nelson, will be publishing a new list under an imprint to be called WestBow Press. The books will come from Author Solutions, the provider of self-publishing services, which will, according to the story, share the fees paid by the funding authors with Nelson.

Here are some very pertinent questions that weren’t touched by Hyatt or the WSJ reporting.

1. How many such titles will they do per season or per year?

2. How will access to Nelson’s (always limited, as is any publisher’s) sales and marketing bandwidth be allocated to this imprint?

3. Will the books be vetted as suitable for Nelson’s Christian mission? And, if so, how and by whom?

4. Will the books be vetted at all for quality? Or will an author just choose the WestBow option and, if that’s the case, how much extra will be they paying and what will they be told they’re getting for their money?

5. The story says that Nelson editors won’t touch the books but will “monitor sales to identify potential big sellers.” What’s the pre-monitoring launch plan? What’s the plan if Nelson editors actually identify a “potential big” book?

Hyatt discusses the initiative on his blog and says he sees real revenue in it. But he doesn’t answer any of the questions above.

I am not alone in anticipating that publishers may change things around in the future with big authors, sharing more risk (less or no advance in this case, not cash for services) for more reward. But it is a more radical step than I would have imagined for a publisher with an industry brand for quality to allow authors to buy their way onto the list. Their must be some controls here, one would think. But we certainly don’t know what they are yet.


Not all the victims of Hitler died before he did

To regular readers of this blog: I know I haven’t posted much lately, and this post has almost nothing to do with publishing (although there’s a book link in it!) I’m in London on my way to the Frankfurt Book Fair as I write it. I will resume more regular contributions to the dialogue about publishing and digital change, but posts may remain sparse for a couple more weeks…

Last weekend, the New York Times carried an obituary of a Polish cardiologist, socialist, and Warsaw Ghetto survivor named Marek Edelman. One untold part of his life story touched my family.

Marek Edelman was one of the leaders of what were (according to the Times) 220 armed fighters who constituted the Jewish resistance in the Warsaw Ghetto Uprising of April 19, 1943. Two of the others were a man named Friedrich (whose first name I’ve forgotten if I never knew…and, as you’ll see, I’m running out of people to ask who might remember) and another named Bernard Goldstein. Goldstein came to the US in 1948 and I knew him well in my early youth; Bernard died on December 7, 1959, which was the only day of my childhood when I remember seeing my father cry.

Friedrich was credited with being the man who followed the tracks out of Warsaw that carried the railroad cars that took Jews being removed from the ghetto to an unknonwn destination. Friedrich reported back that the destination was a concentration camp where the Jews were being exterminated. For that effort, and for his part in the doomed uprising of April 19, he was deemed a hero by the survivors after the war, particulary those in the Jewish Socialist Bund, which also claimed Edelman, Goldstein, and my grandparents on both sides as members.

Friedrich had a daughter named Elsa, born on December 18, 1936. Elsa was smuggled out of the Ghetto to live in hiding with a Catholic family in about 1941. Thus she escaped being killed when the Jews in the Ghetto were virtually exterminated during and after the uprising.

As the Ghetto was burning, Friedrich and Edelman were on a rooftop watching the final carnage. Friedrich extracted the promise from Edelman that if Edelman survived the war and Friedrich didn’t, Edelman would take guardianship of Elsa.

And, indeed, that came to pass. Elsa had been about 5 years old when she was “adopted” by the Catholic family, and although she recalled the necessity of concealing her story during the war, she was apparently happy in her new home. So when Marek came and took her away from her familiar and comfortable surroundings, honoring the promise he’d made to her father, it was a wrenching experience for a child then only about 9 years old.

The global organization of the Bund knew about Friedrich and knew about Elsa’s circumstances. They considered it anathama that the daughter of a hero could be consigned to such a bleak future, growing up in poverty-stricken, anti-Semitic Poland, even as the control of the hated Soviets (the socialists were very anti-Communist) was being established in the country.

So, using their power as a global organization, the Bund hunted for an American family that would take Elsa in and raise her in this country. My father’s parents, Julek and Helen Shatzkin, agreed to accept the responsibility. They were then in their early 50s; my father and his younger brother, Uncle Sock, were both in their 20s, married, and starting their own families. My grandparents moved from New York City, where they had lived in Manhattan and Brooklyn since arriving as immigrants in 1920, to northern Westchester. They built a house and prepared for a new life, raising a daughter in suburban post-World War II America. The political clout of the Bund found sympathetic help from New York Republican Senator Irving Ives, who sponsored the special legislation that allowed Elsa to immigrate legally to the United States.

Elsa was a girl of great talent: very beautiful and also brilliant. She was also always troubled, always haunted by the lives (intentionally plural) she had left behind. The spiritual gap between this young woman striving to be a “normal” American and my grandparents, who were culturally still very Old World, created strains. My grandmother was never particularly comfortable with the arrangement; my grandfather was smitten with his new daughter and wanted to spoil and indulge her. From the perspective of her 10-1/2 years younger nephew (which I was), Aunt Elsa was hip and pretty and virtually unapproachable for most of my childhood.

In the mid-1950s, Elsa graduated from Lakeland High School and went off to Cornell, majoring in English, from which she graduated in about 1957. She went on to study for a master’s at Columbia, where she met and fell in love with ayoung historian named Robert Dallek. They got married in about 1958. By that time, Elsa had changed her name to Ilse. I remember that Robert always pronounced it as she spelled it; she remained Elsa to the rest of us.

In about 1960, Ilse had a nervous breakdown. I remember visiting her in a mental institution of some kind (once again; I’m short of surviving family old enough to give me more details.) But she got out, ostensibly recovered; her marriage to Robert resumed. He continued to study for his PhD and she for her master’s.

Bernard Goldstein, like Marek Edelman, was a leader of the armed resistance. For the ten years I knew him in my childhood, he was much like a 3rd grandfather. My father had translated his memoir into English and it was published by the house Dad worked for, The Viking Press, as The Stars Bear Witness in 1948. (We have a copy of The Wallinscribed to Dad from John Hersey because Bernard’s book was critical research material.)

Elsa was always very uncomfortable in Bernard’s presence, which was very painful for him. He wanted to relate to her affectionately; he had known her father; to him, she was a flower that had amazingly survived the conflagration of Warsaw. But to her, he was a reminder of the beginning of her traumatic life and the loss of her real family. These perspectives could never be reconciled.

I remember spending the night at the apartment of Aunt Ilse and Uncle Robert in my early teens along with my friend,Tony Klein (now a Vermont State Legislator), after a rained-out Yankee game we had intended to go to. Ilse was then in her mid-20s. She and Robert came in from an evening out and Ilse proceeded to change into short shorts and start cleaning up the apartment. Tony was agog. This is your aunt, he said? His aunts were all old and dowdy; mine was young and vital and attractive. And tortured.

In October of 1962, Ilse committed suicide. She checked into a hotel on the upper west side, near where she and Robert lived, and took an overdose of sleeping pills. Apparently she left a note; I never saw it. My father got the task of identifying the body at the morgue. My grandfather went into an immediate depression; the pain of losing an adopted daughter he loved was compounded by the feeling of having failed in a political responsibility to the Bund. The electro-shock treatments prescribed at that time to snap him out of it were blamed by my family for the blood cancer that ensued and killed him in November of 1964.

In college, Ilse’s best friend was a woman whose married name was Faith Sale; her husband was the historian and social thinker Kirkpatrick Sale. Faith became an editor at Putnam. She died, much too young, of cancer a decade ago. Before Faith died, I had lunch with her to talk about my Aunt. This was more than 30 years after Ilse’s death, but Faith was still touched to uncontrollable tears by recalling the tragedy and pain of her friend’s existence.

In 1980, my parents’ proclivity for going where the revolutions were (a story that requires some research for another blog post some day) took them to Poland, where Solidarity was leading the change which ultimately swept across the Soviet-dominated countries. Marek Edelman, by then a prominent cardiologist, was a key player in Solidarity. He and my parents connected.

As I understood it from Dad, Edelman regretted that he had ever taken Elsa from her Polish Catholic family. He had done that to honor the commitment he had made to her father, and then he relinquished her to the Bund’s equally well-intentioned and equally ill-fated desire to find her a better life in America. He felt pain similar to my grandfather’s. He had tried to save this girl, but the demons within her played cruel tricks with those intentions.

There are few of us left to remember Elsa: my Uncle Sock’s widow; my sisters; and my cousins in Sock’s family. What we’re left with is the lesson that great tragedy can come from the best of intentions, and the fact that some victims of Hitler died two decades after he did, my aunt and my grandfather being among them.


Copyright Clearance Center could become more important in the digital future

One of the findings of our StartWithXML project was that book publishers can expect the market for pieces of their content and databases of their content to grow, even while the market for books themselves may not. In the context of our XML research, that is part of the reason publishers need to tag their content deeply (so they can find things) and make their content agile (so it can adjust itself to the different display requirements of different end users.)

After all, we’re in an era where web site content is needed by every entity on earth. Most of it will be unique and will need to be uniquely created. But an enormous volume of content for web sites has, and can, come from existing intellectual property.

The challenge is to create an efficient marketplace to enable that content to be found, licensed, and paid for. It can’t be the function of each individual publisher to peddle and transact for its own wares in this environment. It wouldn’t be cost-effective for the buyer or the seller.

And this brings us to Copyright Clearance Center, CCC, a not-for-profit corporation that licenses published content of all kinds for re-use by what must be the largest and most diverse collection of content purchasers served by any aggregator on the planet. We’ve gotten to know CCC this year as a client. We’ve never encountered an organization in our industry dealing with more complex challenges and it looks like CCC will be in a position to play a critical role helping publishers cash in on the new opportunities in digital licensing.

CCC was formed in 1977 by a group of content users, authors, and publishers and opened its doors on January 1, 1978, initially to enable publishers of all kinds to collect the payments legitimately due to them for internal-use copying of material, primarily by corporations and academic institutions. The number of entities licensing content from CCC is vast: over 35,000 businesses and more than 1,000 colleges and universities. Prior to CCC, the market was inefficient, costly, and fragmented and the cost of negotiating the use-by-use licenses made widespread unlicensed use inevitable.

Initially, CCC collected this copying money on a per-use basis, which was more efficient than the many-to-many negotiations that took place previously, but must still have been incredibly cumbersome. Beginning in 1984, CCC went to its “repertory” model, by which annual license fees allow unlimited copying of all the material covered by the license.

Because CCC effectively represents all the print content — newspapers, magazines, journals, and books, and, increasingly, photographs and blog material, it makes utter sense for users to pay them a fee to legitimize (almost) all their internal xeroxing at a stroke. CCC employs sampling-and-projection methods similar to what the music licensing agencies ASCAP and BMI use to grant radio station license fees to song owners and distribute money to rightholders.

Over the past decade, CCC has seen its revenues shift from being nearly 100% print copying to what is now 60% digital rights. They are exploring adding additional services, such as specifically licensing re-use in emails or email attachments.

CCC is a remarkable community resource that publishers need to understand better because there is no practical alternative to them for much of what they do. If two conditions apply, then CCC is essential to a publisher maximizing its revenue:

1. if the licensor needs material from that publisher, but from other publishers as well;

2. if the transaction value is low and won’t support much conversation or negotiation on either side.

The StartWithXML research definitely suggests that revenues that come with those two caveats attached will be a fast-growing part of publishers’ businesses for the foreseeable future. That means greater value for publishers in their CCC relationship in the years to come.

Our work with CCC began last December, just about the time discussion about the Google settlement and the proposed Book Rights Registry started to heat up. The question has arisen from several quarters as to whether the BRR offers competition to CCC. My own hunch is that if it ever does, that day is many years off. The BRR has a huge job in front of it validating and securing its database of books. CCC would have very few licensees if all it had were books; book publishers benefit from the presence of magazines, newspapers, and journals in the mix. The BRR is a long way from even thinking about setting up all those relationships.