July, 2011

Guessing wrong about the future happens to all of us; here are 2 times it happened to me

One very lucky thing for those of us who are in the habit of predicting the future is that very few people keep score on us. We mostly keep score on ourselves. When I want to remind readers of something I said previously, I link back to it and call it forward it again.

But there is one belief I had and stated repeatedly early in the ebook era that was wildly wrong, hopelessly wrong, and then proven clearly to be wrong. I bring it up now because it belongs in this post identifying a more current error, one which hasn’t been proven yet but about which I’ve learned enough to want to walk back.

When I started reading ebooks in about 1999, there were a couple of dedicated ereaders just becoming available: the Rocket Book and the Softbook. Neither of them interested me or very many other people either. Both failed pretty quickly.

Just about simultaneously, ebooks were first being delivered to hand-held devices. I discovered the magic of putting books on my Palm Pilot, a device I had in my pocket all the time. I had started carrying a personal digital assistant in 1986; that was a Psion Organiser with a 2-, then a 4-line screen, which would not have worked for ebooks. But the Palm, which could carry a chunk not so different in extent from what I see now on my iPhone, worked fine.

The original dedicated devices came and went without much notice from anybody. Meanwhile, I continued to read on my Palm and its successors. The shopping experience at Palm Digital was terrible, the choice of titles was extremely limited, and the ebooks cost just about as much as the print books. But I shifted over, as much as I could, because I was hooked both on the utter convenience of always having books in my pocket and because I genuinely found it preferable to read on something so small and light and have book reading, for the first time, totally manageable with one hand.

When the Sony Reader arrived and didn’t do much, I wasn’t surprised. Sometime before it debuted, I wrote or said somewhere that if you carried a personal digital assistant, nobody should have to explain the value of ebooks to you. And if you didn’t carry a personal digital assistant, they might not actually have any value for you. At that point, most ebooks purchased were read on laptop and desktop computers.

That’s why I was pretty sure the Kindle wouldn’t work. Who wanted another device to carry around just to read books, I figured? What’s the advantage in that?

I neglected to think through that people do things for lots of different reasons. And I really underestimated the degree to which the book-sized page is a requirement for a lot of people, even though it might be a transitional one. Anyhow, I was really, really, really wrong. And even though I switched back from Kindle to iPhone reading the minute the vast selection available through Kindle (and now through Nook, Kobo, Google, and Apple) was available to me on the device I was always carrying, I fully accept that most people are willing to carry something around to do their reading on a regular-sized page. Lesson learned.

It is now clear to me that another concept that was an important part of my future view is in pretty desperate need of reassessment. It also appears to be being proved wrong.

It was evident pretty early that the Net facilitated the formation of communities around interests. Putting that together with my thinking about the distinction between the unit of sale and the unit of appreciation (shortcut to understanding: the former is the album and the latter is the song; the former is the cookbook and the latter is the recipe) made me think that the big online aggregation of content for sale would also ultimately be challenged. If you went to a web community to get advice about how to build a deck or plant a vegetable garden, I figured, you’d just pick up whatever were your content purchases — books or whatever else, physical or virtual — from that same site. You wouldn’t need a separate site to go buy content from.

In other words, I expected one of the ways to monetize a community would be that you could sell it stuff, particularly content.

Although I know that O’Reilly operates in a special marketplace, I saw the success they have had selling directly to their community — both their own publications and their subscription aggregation Safari — as a sign of what we could expect to develop in other verticals.

I don’t think so anymore.

The first rude awakening for me was when OpenSky changed its business model. OpenSky began with the proposition that they would facilitate just about any web site to sell just about anything. As I understood it, if you had a blog about cooking, you could arrange to sell your favorite pots and pans right off your own site. OpenSky would source the product and operate the back end. You’d just have to pick out what you wanted and decide how much margin you could demand.

Well, apparently that business model just didn’t work. They’ve switched OpenSky from a commerce platform for bloggers to a “social network for shopping” with celebrity, expert, and author curators. I’m not much of a shopper, online or offline, so I’m not one to judge how appealing it might be compared to competition. There is some evidence that the new model works and OpenSky feels like they are now taking off. But it isn’t any longer the perfect match for the vision that I had when I first saw it, and it probably didn’t work because my vision was wrong.

By extension, I had been figuring that publishers needed to sell direct as well. Big publishers had good reasons to resist that idea which I understood, but which in themselves make me question the idea. Big trade houses are highly dependent on the goodwill of Amazon and Barnes & Noble as well as other retailers, and going into competition with your key channels is risky and problematical. And my vision of the future wasn’t really built around general publishers, anyway.

This month, J.K. Rowling opened her Pottermore site, which is intended to be the exclusive vendor of Harry Potter ebooks. Now, there’s a vertical. It appears you won’t be able to get them at Amazon, B&N, or Google (although Google checkout is “the preferred third party payment platform”); if you want them, you’ll buy them from the Pottermore site (or, as some would point out, get them from a pirate source if that’s easier.) In a ‘d’uh” moment, I read this piece making it clear that this kind of fragmentation didn’t work for musicians and ultimately wouldn’t work for authors. (The book business isn’t the music business, but some lessons do carry over.)

So mark me much less bullish on publishers selling direct than I used to be. It can add value and margin to a vertical site if the costs of running the store can be tightly managed, but it is not likely to produce much in sales very quickly.

In fact, I’m quite sure that fewer Harry Potter ebooks will be sold by the Pottermore strategy than if they were just made available through the standing ebook retail network. The margins might be higher with no retailer to pay, assuming that advantage isn’t completely swallowed up by their own costs of infrastructure (and it probably won’t be.) But not everybody who buys a Harry Potter book from Amazon or B&N (or a Nora Roberts book or a Janet Evanovich book or a James Patterson book) is a devoted fan. Some of them are just choosing their next read and if Roberts or Evanovich or Patterson wasn’t shown to them, they would have bought something else on offer.

There is evidence out there to contravene this post and confirm my original thesis. Our friends at F+W Media, with whom we deliver the annual Digital Book World conference, report success building their retailing business through their communities. A senior executive there tells me they are selling “tens of millions” in content, product, and services through 25 stores attached to the community sites they have developed over the past few years. They achieve an average order value of $40 — not too shabby — and credit a combination of true community focus which builds them large and powerful databases of names, unique curation that includes offering things that aren’t available elsewhere, selling content in multiple forms (book-like, video, webcasts), delivery of “online learning”, and special bundled packages for their success.

F+W is not unique. A smaller company that is their competitor in some spaces, Interweave, also has a community focus and sells direct. Both companies have the content to build a number of different verticals to amortize the cost of a common merchandising and retailing platform.I don’t doubt F+W when they say they’re making it work, and apparently Interweave is too, but that still leaves the question of whether they, like O’Reilly, are sufficiently unusual cases that it would be very hard for other publishers to follow their lead.

I still have my fingers crossed that the Google ebooks program could spawn some unique shopping experiences that will make a difference to the ecosystem in the long run. (This is taking powerful faith at the moment because Google has only barely detectable sales in their first half-year of operation.) By offering the opportunity for curation with personality to be done by a large number of different entities (about 300 bookstores have already started with the program in the US), the Google initiative still offers the possibility of a wide variety of curation choices, or bookstore front ends.

Of course, none of these individual Google ebook stores will have the resources of the big retail players to apply technology to their merchandising. But perhaps they can provide selection and positioning that will create its own following. Whether they apply what they know and their own unique intellectual resource base (because every bookstore has one) to highly local subjects or other verticals with global appeal, they have the opportunity to create online stores that at least some people will prefer to shop. Thousands of such entrepreneurs around the globe might produce hundreds — or dozens — of survivors with large enough customer bases to create the kind of diversity in the ebook retail network that would offer publishers the kind of opportunity they need to add value for a long time. And to do it the way they always have, by managing intermediary opportunities, not by selling direct.

This is not to suggest that publishers don’t need to be building direct contact with as many consumers as they can. Just as authors should do. But forget the idea of a huge number of vertical purchase points for ebooks all over the net. I will.

Google also announced an affiliate program for Google ebooks. That will enable any web site to sell their ebooks and get paid, extending a concept that both Amazon and Barnes & Noble have employed successfully for print books. It looks to us like Google pays more. An affiliate can earn 6-10% from Google, 6% from B&N, and 4-8.5% from Amazon.

This isn’t the original OpenSky vision, however, because that was about all kinds of products, not particularly (or even necessarily including) books or ebooks. Of course sourcing could always have been done through Amazon, but there were differences in the merchandising and pricing opportunities in the original OpenSky model.


Publishing is living in a world not of its own making

A big ebook shoe dropped on Sunday. It dropped on Kobo first. And it has nothing to do with Borders.

Kobo just delivered a new iOS (that’s Apple’s operating system for iPad and iPhone) app that no longer contains the direct link to the Kobo bookstore within it. That means that buying new Kobo books requires going to Kobo.com through the browser (not hard, but additional steps) rather than from a single click from within the app.

Later news on this developing story is that the Google app has been “pulled” and that the Nook Children’s app no longer has a link to the store. We have to expect that the Kindle and main Nook apps will undergo the same change very shortly. That will mean that the simplest and most seamless way to buy and read ebooks on the iPad or iPhone will be through Apple’s iBookstore. It will almost certainly mean a growth in iBookstore market share at the expense of all the other ebook retailers. It will also almost certainly mean that a lot of people who read their ebooks on an iOS device (I’m one of them) and prefer to use any of the other ebook retailers (and I’m one of those too) will be inconvenienced and annoyed.

However, it is also true that Apple will benefit from this move that many of their customers will resent.

The point most emphatically made by all of this is that the book business is a cork floating on a digital device stream. We don’t control our environment. We must keep adapting to what bigger players, some of which have pretty minimal bandwidth to engage us in a dialogue and pretty minimal interest in what’s best from our point of view, see as the best strategy for them.

I have been guilty of a publishing-centric view of the possibility that Apple would enforce the rule that leads to this change since it was first prominently rumored last February. That is: with wishful thinking, when I first heard about this possibility six months ago I thought they wouldn’t do it. I talked myself into believing that because Apple had benefited substantially from the presence of the book apps on their platform, and because there are millions of us who read ebooks on our Apple devices with a distinct preference for using other readers and other ebook stores, that Apple would not enforce the rules which, through a couple of iterations of clarification, say that the way these apps and stores operated was outside their rules.

I will try to remind myself not to be making that mistake again. One of the other big companies recently congratulated me on the ease with which I accept the idea that companies (and people) act in their own self-interest. That’s what Apple has done here.

What this means depends very much on where you sit.

Barnes & Noble (Nook), Google, and Kobo all benefited enormously from Apple’s arrival on the scene in April 2010 because they brought with them the “agency” sales model that leveled pricing across all outlets for the ebooks that come from the biggest publishers. Without agency, many believe (and I’m one of them) that Amazon Kindle’s aggressive loss-leader pricing policies on the biggest books would seriously have diminished the competition.

B&N needs every penny it can spare to invest in device development and marketing; they’d be seriously handicapped if they had to give away margin to compete for consumers.

Google has signed up about 300 independent stores in the US to be partners in its ebook program. They might not have 10% that many if the indies thought they had to compete with loss-leader pricing on the biggest books even to play. When Random House switched over to agency at the beginning of March this past year — 11 months after it began — one of the motivations they cited was to respond to the desire of independent stores to sell ebooks which they heard over and over again depended on agency pricing.

Kobo has always had a global strategy that could enable them to thrive even if they had also-ran status in the US market. But they were trying hard to compete with Amazon pricing in the pre-agency days and as the smallest of the big global ebook players, they would have to be considered the most vulnerable in an environment characterized by loss-leader price warfare.

This change must mean they’ll all lose sales. It is hard to see that it could mean anything else.

Amazon will lose sales too, but they may win overall just because life gets a bit harder for B&N, Kobo, and Google.

All of these retailers have gotten an enormous (but unquantified in data revealed to them) lift from the massive success of iPads and iPhones and the retailers’ ability to access all those devices pretty seamlessly and at no cost. Amazon and Barnes & Noble sold many Kindles and Nooks, of course (Kobo’s device has been a competitor and Google is about to have one), and they’d be selling lots of ebooks if there were no iOS devices. Publishers know that, of the 55-65 percent of their ebooks sales that go to Amazon and 20-30 percent of their ebooks to Barnes & Noble, some of those sales go to the dedicated devices and most of the rest to the iOS devices. But they have no idea what the split is. Now they will start to find out as they see those sales shift from the other retailers to the iBookstore. (Sales to iBookstore, Kobo, Google, and others constitute no more than 15-20 percent of sales and often far less.)

Anyhow, the unambiguous benefit that Apple and the iOS devices used to represent to the retailers is now reduced in value, but agency pricing remains (cheering everybody but Amazon), as does the ability of their customers to use iPads and iPhones to consume their content.

Some publishers will need to reconsider their strategies.

Because Amazon will only allow agency terms to the Big Six publishers (they have ways to offer a competitive 70% share of sales, but they won’t play ball with giving up control of pricing), because some publishers aren’t comfortable with the agency model, and because the iBookstore has not been as aggressive about sourcing content as their competitors (I don’t know this for sure, but it definitely feels like all of the other ebook players have much bigger teams chasing content than iBookstore does), there are publishers selling to the other players and not to Apple. I’d imagine those might be expecting a sudden drop in sales through iOS purchases, although they never actually knew how much of their sales were iOS purchases.

And this points out a big difference between the publishers and the retailers. The retailers know how much of their sales are coming through their app customers. They also know how much of the reading of their ebooks is done on iOS devices. Publishers have no idea. In the longer run, this shows how publishers can benefit if the new players they are creating — Anobii in the UK (who has told us they will share data with publishers) and Bookish in the US (which we have heard less directly will do the same) — get some market share and can provide visibility into consumption that publishers do not have now.

And that takes me back to the book business cork bobbing in the larger digital device stream. There was no ebook business to speak of until Amazon delivered the Kindle device, put massive muscle behind selling it, and used the ability they had then to sacrifice margin to create a powerful commercial proposition that was the catalyst to create the market. There was no serious competition for Amazon until Barnes & Noble’s new management delivered the Nook with an equally powerful commitment to establishing it, using their presence in stores to introduce ebook reading to new audiences and, with further innovation of the devices, contributing to the explosive growth of reading in digital formats.

There was no restraint on Amazon’s ability to use their deep pockets to discount publishers’ content in pursuit of their own market share growth until Apple’s new device, the iPad, created a whole new sales model that forced price stability in the marketplace and, at the same time, handed publishers a new capability to maximize revenue and to use price as a marketing tool.

There was no effective way to introduce book readers to the convenience of digital reading without the investment in a dedicated device until the iPad put the capability into millions of hands that didn’t know they wanted it.

There was no great motivation for ebook retailers to introduce interoperability across devices until many ebook device owners also became iPhone and iPad owners.

We note that all these changes in the marketplace were created by others, not by publishers. That’s not necessarily a bad thing, or even a new thing. Publishers also didn’t spring for the investment that created superstores and then Amazon in the 1990s, all of which increased their sales. A publisher’s role is to use the channels that are available to get books into the hands of readers.

From most publishers’ perspectives, this change might have very little impact. Any iPad or iPhone reader who wants a book can still find and buy one. If the Apple store is strengthened at the expense of Kindle and Nook, that constitutes marketplace diversification that is good for them. (If the impact somehow fell disproportionately on Nook, though, that might not be.)

But the happy symbiosis between the ebook retailers and Apple, by which the retailers got access to customers they would not otherwise have had and Apple was able to readily deliver their customers content they hadn’t otherwise aggregated, appears to have come to an end. And the iBookstore, which had been fighting others for the scraps after Amazon took half or more of the US ebook market and B&N took much more than half the rest, is about to be a much more significant competitor.


Borders Crosses the Last Frontier

The end of Borders took place within a larger context.

I was in Italy for the IfBookThen conference last February when Borders’ impending bankruptcy was a rising expectation. Somebody in the audience asked me if I attributed Borders’ difficulties to ebooks. I said:

“When the flu hits town, the old and sick die first.”

Ebooks present an enormous challenge to brick-and-mortar stores. And the growth of ebooks over the past three years or so has been nothing short of astonishing, even to somebody like me who expected a more gradual rise to have started much sooner. (The IDPF chart which shows the growth in the market, sharing data actually collected by the AAP, has apparently not been updated for the past two quarters, but this gives you the idea.)

But the disruption to brick stores started before ebook sales were even visible with a microscope, more than a decade sooner, when bookstore customers started migrating to online buying. Ebooks just accelerated what had been a trend of traffic and sales erosion that had existed for quite some time.

Ed Nawotka of Publishing Perspectives has a nice account of some serious errors Borders made around the turn of the century. Replacing a book-experienced management with merchants from outside the book trade was the gateway mistake. Eliminating the local marketing function was one that probably came from it: the local differentiation and customization required for a successful bookstore is much greater than what is needed for pets or groceries and successive managements from outside the book trade wouldn’t have known or understood that.

Turning over ecommerce to Amazon showed a shocking lack of digital vision. It is often forgotten that Barnes & Noble once made half the same mistake: they originally owned their BN.com ecommerce capability jointly with Bertelsmann until they bought their partner out. And Barnes & Noble had obvious challenges reconciling their online business with their overall business until they brought in new management that clearly saw the online business as the future. That wasn’t until much later in the century’s first decade. The problem both chains probably saw is that the skill sets required to run a successful brick store chain didn’t apply to creating a digital business so they were nervous about investing too heavily in it. When the time came that it was obvious that they had to do so, Borders was too weak to recover and Barnes & Noble, despite a web operation that had serious flaws, at least had a platform and customer base to build on.

And they had strong cash flow from a healthy, well-managed in-store print book business.

The category management idea Borders tried to implement and which Nawotka documents was a fiasco in every way: poorly conceived, poorly executed, and an idea that, if it could work for the book business at all, would have to be selectively applied, not forced on every section of the store.

The reduced selection concept that was underlying category management suggests that perhaps Borders had an early and accurate read on the fact that the Internet had diminished the power of selection in a brick store as a magnet for customers. It is true, and it was true then, that the power of aggregation had shifted from offline to online. It is just impossible for any physical location to deliver the choice that an online bookstore can. Most people now know that if you want to choose from the widest possible selection of just about anything the the last thing to do is go to a store. And that’s particularly true of books, which you don’t have to smell or taste or try on for size.

In my opinion, the defect in Borders that led to their ultimate demise was “none of the above.” It was their supply chain, which for well over a decade has been an inefficient mess.

The irony is that when Borders started, inventory management was their signature strength. The Borders brothers developed a tracking-and-purchasing system which was state of the art at the time (the 1980s) and turned it into an expansion opportunity. It all worked so well that they were able to sell the chain to K-Mart, which already owned the mall store chain, Waldenbooks, in 1992. That was probably the beginning of their downfall.

Borders and Barnes & Noble were on parallel paths building out superstore chains, featuring bookstores that pulled over 100,000 titles together under one roof. Until Amazon arrived in 1995 and started gaining traction, this was a nearly-irresistible proposition to the heaviest book consumers. Both chains, fueled by Wall Street investment, grew their number of large stores quickly. The stores were free-standing destinations, not in large shopping malls.

But this is where the chains diverged. Barnes & Noble made a substantial investment in a supply chain infrastructure. They built what was effectively an internal wholesaling operation, putting backup supplies of the books their stores carried within one day’s delivery of most of their chain and within two day’s delivery of just about all of it. They built systems to set stocking levels and maintain them. My first client work at B&N was in the late 1990s when they were crawling with logistics experts to make inventory management rules and policies, but they were also smart enough to want some book inventory expertise from outside their company (not that they didn’t have plenty of it on their own payroll) to help with the planning as well.

Meanwhile, Borders was working on gimmicks like category management and their supply chain became increasingly bureaucratic and convoluted. They pushed books through a warehouse, but only to put stickers on them. This compounded the irony. In the 1970s, the B. Dalton chain that B&N owned had virtually invented computer-assisted inventory management based on stickers they put on the books carrying an SKU number. Walden, in the days before they were owned jointly with Borders, had leap-frogged Dalton in that regard by scanning the ISBN instead of needing a sticker. Now, 15 or 20 years later, B&N regained that same advantage over Borders. Borders suffered the delay and the cost of stickering new books as they came in and B&N didn’t have to.

But, much worse, Borders backlist ordering was haphazard (almost totally human-controlled, whereas B&N’s was largely automated) and infrequent. B&N literally ordered from many publishers every day; Borders was ordering from major publishers as infrequently as every six weeks.

When you order infrequently, you face two choices. You can be overstocked on many things or out of stock of many things. There is no other alternative.

The complications to inventory management posed by the granularity and diversity of book selection utterly defeated the non-book veterans that serially ran, or mis-ran, the company. The lack of a digital strategy compounded the problem, but the supply chain lunacy was the problem. The cost of inventory is the greatest variable expense of running a bookstore. If you don’t get value for your inventory dollars, your leases and your staff couldn’t save you, even if they were good.

What this means for publishers’ sales is a bit difficult to predict and will even be harder to discern. Sales this year have been skewed by the Borders inventory dump. Publishers’ editions elsewhere and the stores their books are in have been competing with liquidation sales. This depressing effect on other retailers’ business and, as a result, their willingness and ability to order from the publishers, will be coming to an end.

Publishers Lunch got together with Bowker a couple of months ago to ask questions of Borders customers to try to discern where the business would go. They have hard data to the extent that it is possible to develop it, having asked people how their purchases would be affected and where they would buy when their Borders was gone. Only 8% said they’d buy fewer books, although nearly 20% said they’d use the library more.

My own totally hunchy math, checked out in a rigorous conversation at dinner with a good friend who is a publisher, is that Borders constituted about 10% of a publisher’s business until very recently. My guess is that half that business goes to Barnes & Noble, most of the rest is split between online purchasing and independents (with online getting more, much of it in ebooks), and maybe 1% or so, or 10% of the old Borders business, will be “lost.”

Of course, the movement of sales from print in brick-and-mortar to print and ebook online will continue, so how much lift from this will actually be felt by chains, independents, and mass merchants is still up for grabs.


Publishers Launch Frankfurt will focus on data and retailers that every publisher needs to know

Our Publishers Launch Conferences venture is doing two shows in Frankfurt: a full-day “eBooks Around the World” program on Monday, October 10 and our first conference dedicated to children’s book publishing, “Children’s Publishing Goes Digital”, which will be a half-day program on Tuesday, October 11. We’ve enlisted the capable help of Lorraine Shanley of Market Partners International to program the children’s show. This post will talk about what I’ve been developing for the all-day Monday program.

There are other things going on, but there are two central themes for Monday: data and retail.

We are always focused on data about digital change because in this transitional time we’re in, none of us can get enough of it. Things are changing fast and if you haven’t looked at the thermometer in the past week or two, you probably don’t know the temperature. That’s even more true on a global scale, because global data is that much harder to get and track.

We are focused on retail because the list of “major accounts” for all publishers will be changing in the next few years. Global players will often (but not always) be replacing local ones as each publisher’s biggest intermediary customers. The ebooks marketplace in the US demonstrates how rapidly new channels can rise with the Kindle and Nook.

To begin the day at Frankfurt, we will have what we believe is the most comprehensive research report yet produced about the digital transition country-by-country and region-by-region. The Milan office of the global consulting firm, A.T. Kearney, working in conjunction with Italy’s Bookrepublic, will update and expand some substantial research they did at the end of last year. They presented their findings at the IfBookThen conference in Milan in February.

The Publishers Launch Conferences team — Michael Cader, Emily Williams, and I — have suggested some additional lines of inquiry around the intrusion of English and the expansion of the global players’ activity which we believe will enhance the already-robust research the Kearney team did before.

We’ll have a data presentation of a different sort from Jonathan Nowell of Nielsen, the company which both is the guardian of a worldwide bibliographic database and the operators of BookScan, which collects point-of-sale information around the globe. Jonathan is going to focus on how metadata affects sales and specifically how deficient metadata costs sales. The lessons here will be the ones everybody will take home and implement immediately. Nowell will point publishers to the metadata fixes which are absolutely necessary to avoid sales leakage.

The retail conversations and presentations will be sprinkled throughout the day.

We wanted to focus our audience on what we consider to be a remarkable story, the resurgence of Barnes & Noble in the digital realm since the introduction of the first Nook device 20 months ago. B&N’s success in using their brick-and-mortar presence to combat Amazon’s two year head start with the Kindle is a case history that retailers in every country in the world will want to examine carefully. That’s why we’re giving it close attention.

Theresa Horner, B&N’s VP for Digital Content and Patricia Arancibia, Manager, Digital Content, International, will join Michael Cader and me for a conversation about how they did it. They started out with a Nook that was pretty similar in price and features to the monochrome e-ink Kindle, but then they carved out their own device niche by offering Nook Color and a touchscreen version which, to this point, nobody else has matched. The color capability enabled B&N to expand their ebook product offering to include content, like magazines and children’s books, that wouldn’t work well on a Kindle or original Nook device.

But they also expanded their content base of non-English publications, building a Spanish-language store for their domestic US market that is more comprehensive than any other in the world!

All of this has propelled B&N to a spot where they are a significant challenger to Amazon’s ebook supremacy in the United States. There have been some recent indications that Nook devices may now be outselling Kindle devices, although not everybody agrees with that proposition.

Many countries have a dominant brick-and-mortar retailer that is contemplating an impending challenge from Amazon. Whether or not the B&N formula is replicable in other markets, perhaps by licensing the Nook or the Kobo reader or the new Google reader or another device, is still a fair question. The answer might be much clearer after the B&N section of our show.

But B&N has not (yet) announced any plans for a global presence. Four other ebook retailers that will grace our Frankfurt stage are declared global players.

David Naggar of Amazon.com will talk about what publishers around the world should do to best benefit from Amazon’s continuing global expansion. We know that Amazon will be a market leader in every country they enter. They are the biggest account for most US publishers today and they will be a top account soon for every publisher in the world if they aren’t already. Tips from their experience about what works best for publishers to increase their sales are useful to every publisher in every language. We had a presentation from Amazon at our Digital Book World show in New York last January which attendees all agreed was helpful and enlightening; we’re expecting the same at PLC Frankfurt.

Tom Turvey of Google will also have a lot to talk about at PLC Frankfurt. Google has just announced a Google ereading device and we keep hearing rumors (although not yet directly from them) that they will be pushing their ebook capabilities hard this Fall when a host of new tablet computers hit the market. Google’s program is the only one really built for participation by retailers and web sites everywhere and there has been a pretty widespread uptake by independent stores in the United States in the program’s opening months. If the biggest dominant chains in each country will want to pay close attention to what B&N has to say, the independent stores around the world, and the publishers that depend on them, will be paying close attention to what Google has to say.

Kobo just opened a store in Germany, following quickly on Amazon’s heels in the biggest single European market with a title base larger that is larger than Amazon’s and larger than the German aggregator, Libreka and with a special reader for the German language. They have said they’ll have stores opening in Spain, France, Italy, and Holland in the next few months. We’re working out the details with Kobo about what they’ll discuss in conversations early next month, but we know they’ll be on the program. Kobo has been distinguished among their competitors so far by their declared willingness to share sales data with publishers and, indeed, they have established a reputation for revealing things we didn’t know about the market at presentations they have made before. Kobo is the purest ebook play among the global competitors that have been in the market for some time; all the rest have other fish to fry.

But there’s a new entrant to global ebook retailing that, like Kobo, is (at least for now) purely about ebooks. That would be the UK-based start-up, Anobii.Their CEO, Matteo Berlucchi, will explain their very enticing proposition to enable crowd-sourced curation and taxonomy for books. On Anobii’s format-agnostic discovery-social platform, you’ll be able to follow a book, an author, a reader, or a topic, and you’ll be able to name your own topics. The basic functionality is supposed to go live in the next month or so and we believe our October conference will be a debut of sorts for what promises to be an entirely new approach to ebookselling. And publishers will be excited to hear that Anobii intends to share data with their vendors as well.

It could well be that the retailers we will have on the stage at PLC Frankfurt will be delivering half the sales or more for most of the world’s publishers in a few years, or perhaps even sooner than that.

Data and retail are our features, but there will be much more covered in the show.

Tracey Armstrong, the CEO of Copyright Clearance Center (which is, along with Perseus Constellation, one of our Global Sponsors) will talk about the importance of collective licensing to capture revenue that will otherwise be lost in a world where any fragment of any book might be a key component of somebody’s new app or web site.

A panel of agents will discuss the emerging new models in that segment of publishing’s value chain.

We’ll have what I think will be a very provocative panel of trade publishers who are benefiting from the fact that their company works in segments other than trade which made the digital transition sooner.

Octavio Kulesz did a pioneering study of the digital transition in the developing world that suggests that entirely new tactics will be called for if publishers are going to realize revenue from the masses who will read books on cell phones, but can’t afford to pay much.

Chris Bauerle, the Director of Sales for Sourcebooks, a mid-sized (or perhaps we should say small-major) US trade publisher, will explain their transition to a digital workflow, done a few years ago but paying off in big ways now that they want to use their content in new creative ways.

And Michael Cader and I will have a thing or two to say as well.


Dynamic pricing: what it is and what it isn’t

Dynamic pricing is a buzzphrase making the rounds of publishers at the moment as they begin to get their arms around the opportunities inherent in the agency model. They are aware that Amazon does a lot of pricing automated by algorithms and some of the more creative and tech-minded thinkers are wondering if publishers need to employ technology in a similar way.

The most widespread applications of dynamic, or perhaps we would be clearer were we to say “automated” pricing, are in the airline and hotel industries, pricing seats and rooms. But airline seats and hotel rooms share three characteristics that ebooks don’t have.

One is that there is a physical limit to how many can be sold. Once you’ve sold out the plane or the hotel, you have nothing left to sell.

The second is that the airline or hotel actually pays for the seat or the room whether or not it is sold. There is a relatively small per-use cost: a free Diet Coke for the filled airplane seat and the cost of laundering the sheets in a used hotel room. But the airplane still has to fly and the hotel still has to pay its mortgage and bellmen regardless of the number of seats or rooms that are sold.

And the third is that there’s an effective deadline for each sale. Once morning comes, you can’t sell the hotel room that was vacant last night. And once the plane takes off, the unsold seats will remain forever unsold.

That creates the environment in which dynamic pricing is applied in those businesses. As the deadline for a hotel night or a flight approaches, calculations can tell the hotel or airline whether it makes sense to raise prices (because rooms in that town or flights on that day to that destination are scarce) or lower them (because the consumer has many choices and only lower prices will be competitive and, under the circumstances, anything you can get is incremental profit.)

Dynamic pricing in those businesses is about how to maximize the revenue from a fixed sales opportunity. Ebooks are entirely different. There is no limit to the number that can be sold. There is no deadline beyond which a cost is incurred whether or not a sale is made. And the competitive set — the equivalent of checking the availability of rooms in comparable hotels or available seats on possible substitute flights — is not self-evident.

If dynamic pricing for revenue maximization for hotel rooms or airline seats is a precise science, dynamic pricing for revenue maximization for ebooks is more like alchemy or an art.

That doesn’t mean it isn’t a good idea. But it does mean that it’s a more complicated problem than the hotel or airline industry faces and it probably means that the logic and techniques they’ve used to solve it for themselves won’t apply much to what we need in the ebook business.

The challenge and opportunity is to use data to adjust prices automatically rather than by human scanning of information and manual application of intuition.

For example, our client Dan Lubart of iobyte mapped out one interesting case that calls for further exploration that might best be done by automated pricing decisions. What Dan found was an ebook that had been selling for $12.99 and was on a very gradual, but consistent, “decay” curve.¬†(“Decay” means that sales were going down.) The publisher put a $8.99 price on the book for a few weeks and sales shot up and stayed at a consistenty higher level as long as the promotional price was offered.

But, then, when the publisher went back to “normal” pricing, they went to $14.99, rather than where they’d been at $12.99. What was interesting was that the sales dropped back down to meet the old decay curve and continued to erode along the previous path.

This raised two questions. One is whether the publisher might have been better off to stick with the promotional price longer, since sales were sustaining at a higher rate with that price. But the other is whether the book benefited at all from being $12.99 for a while rather than $14.99. The fact that the decay curve wasn’t affected by the price increase certainly suggests that the higher price might have been beneficial all along.

Because many books are similar but no two books are the same, it would require a substantial number of experiments to yield persuasive data about either of these two points. Only by testing 20 books or 30 books with similar price-and-decay profiles would a trend be both discernible and convincing. The only practical way to find the candidates for testing and to apply the tests would be by generating rules to do the price changes dynamically. And then if the publisher learned there were patterns that repeated, only by applying rules algorithmically could they benefit from that knowledge.

The number of variables is vast. There are different effects at different internet retailers. No doubt the pricing of competitive books has an impact, but even identifying the competitive books isn’t simple, let alone tracking them. (As far as we can see, tracking the pricing of competitors is a bridge or two further than anybody’s been able to go so far although we know that some are thinking about how to do it.)

In fact, the complexity of the ebook market makes using dynamic pricing techniques — creating rules about how prices should be reset based on data in the marketplace — potentially even more valuable than it is for hotels or airlines. It certainly could represent serious competitive advantage for those publishers who do it best and do it soonest.

Smart agents will be watching this carefully. They’re all aware that the ebook royalty they collect is the percentage they work so hard to negotiate times the revenue the publisher receives. Now the revenue is clearly affected by the publisher’s ability to set prices that capture the most possible consumer dollars. It will become clearer over time that changing those prices intelligently is necessary to maximize the revenue which maximizes the royalty. The publishers who figure this out first and best will have a powerful argument that publishing with them puts extra coin in their authors’ pockets.

Nobody is going to be making that argument persuasively in the next few months; we have far too much to learn and we’re still in a world where things keep changing as the switchover from print to digital is still in relatively early stages. But the publishers who get a head start developing this understanding and the tools to implement it will have something very powerful to talk about in a year or two.

At our London conference, one publisher speculated that the ebooks being priced as they are were pulling paperback sales forward when the hardcover book was out. What that would mean is that at the end of Year 1, the hardcover year, the print plus digital sale and margin would look pretty good. But if the theory that pb sales came forward is right, then at the end of the second year — the trade paperback year — there will be disappointment. This is a reasonable theory but it is very hard to know yet whether it is true. You’d need a 2-year old book to be begin to measure it, and a book that came out in hardcover two years ago was in a different world than a book that comes out today. That’s why nobody really knows much for sure yet.


Are illustrated books getting ready for their close-up? (Pinch and spread…)

Last year at this time, the people I know in the consumer electronics world were saying that Christmas 2010 would be the season of the ereader. That proved to be correct, resulting in both a sharp surge in ebook sales in early 2011 and, according to Pew data, a continued acceleration of ereader adoption in the first six months after Christmas.

This year is expected to be the year of the touch-screen tablet computer. With tens of millions of iPads already in consumer hands and a plethora of devices with Windows or Android operating systems coming on to the market this Fall, the shelf space in the consumer electronics stores is positioned to fulfill that expectation.

And somewhere between the monochrome eink ereader and the tablet we have the Nook Color, which has a color screen, some tablet-like capabilities, and more of an ereader-like (cheaper than a tablet by half) price.

I don’t know exactly how many of these devices are out there; it is hard to pin that down. But Apple has apparently sold around 45 million iPads and is on track to sell 100 million iPhones this year. Those are global numbers. They are reputed to have about 75% of the tablet market now, although that percentage will surely drop as competition proliferates. The tablet shipments for 2011 are estimated to be in the neighborhood of 53 million. Gartner says there will be nearly 100 million smartphones in use in the US by the end of this year.

That’s an awful lot of portable screens on which people can well view much more than type on a page.

It was becoming obvious a year ago that the children’s publishing business was being joined by digital competitors betting on the fact that the widespread distribution of color touchscreens would open up opportunities for children’s product that hadn’t existed before. And since publishers have tried to improve on simple book technology for young consumers for years — think about pop-ups, die-cuts, and computer chips that made the books talk and sing — it seems like a reasonable assumption that more and more parents will hand their kids the iPad to “read” in the car (or in bed) rather than a book.

When making book-like product for young people to be consumed on a color touch-screen device, employing many of the “tricks” of enhancement: audio, animation, and interactivity, is obviously called-for.

But as tablet use spreads, should we also expect to see expanded opportunity for illustrated books? My guess is that the answer to that is “yes”, but figuring out exactly what the cost-effective and reader-attractive solutions are to present illustrated books for the new display opportunities is far from self-evident. We’ve sold illustrated books to adults for years without the need to do anything except put ink on paper.

Last month, FutureBook held a conference in London about new product development. The takeaway seemed to be “nobody is making any money”. What was revealed about development costs and sales pointed to large losses. But if the number of devices which can effectively display these enhanced or enriched or app-like book-based products grows like Topsy, we should see the revenue potential go up.

At the same time, new players are developing tools to make the costs of development go down. Every day publishers have developers knocking at their door looking for content to test and develop their systems for new product construction. At this point, it appears that many of them are willing to work either of two ways: fee-for-services or development-for-a-share. For publishers, this adds organizational complexity to the deal-making since the arm of a publishing company that usually sells licenses (subsidiary rights) doesn’t often make publishing investment decisions (editors and publishers) and they could be choosing between the two models with any developer.

Illustrated books can hit the digital market through two paths: they can be an “enhanced ebook” or they can be an “app.” The distinction has largely been one of capabilities: apps are platforms that can support far more capabilities and interactivity than an ebook. But that’s changing. The developers of the epub standard (epub is the industry-approved format that makes books “reflowable”) are building in support for functions that used to be the exclusive domain of apps.

At least until now, apps have generally cost more to develop than ebooks, have been sold in an app store environment that is less search- and user-friendly than the various ebookstores are, and apps are generally much less expensive (for the consumer, not for the publisher) than ebooks. This has been an unattractive combination for a content-seller. App pricing is driven by many models that are independent of profit from the app sale itself. So far, the ebook business model is like books: the publisher makes money selling the content, not from any other activity.

When ebooks for narrative text were young, the term and concept we all had to learn was “reflow”. It is necessary to deliver text in a format that can be adjusted, or “reflowed”, to fit the screen size and font size selected. As we know, among the great advantages ebooks offer is that the user can change the type size, which changes the number of words in a line and the number of lines the screen can display. Another great advantage is the ability to read the book on multiple devices, which also requires the capability to “reflow” because the screen on your phone isn’t the same size as the screen on your Kindle or Nook and your iPad (which aren’t the same size as each other!)

The new term and concept we’ll need to learn in the illustrated ebook era is “fixed page layout.” That means delivering the page in a way that does not reflow, so that artwork and text maintain the same positions in relation to each other. Of course, that means that different size screens will require different fixed pages. You will have to actually design an illustrated book (or most of them anyway) for each form factor. In fact, you’ll frequently have to do it twice for each form factor to accommodate the page being viewed either portrait or landscape, a change the user can command with a flick of the wrist.

That’s time-consuming and expensive. And that’s just the beginning of the challenge. Here’s the really hard part. We have 500 years of experience figuring out what makes an illustrated book that the person holding it will find appealing and useful. Designers learned how to use spreads (placing content across two facing pages), which don’t exist on digital screens (unless they are artificially created there.) They learned how to use sidebars to hive off some content from the narrative flow. They understand how to approach things differently if they’re designing primarily for function, like a cookbook or a crafts book, than if they’re designing for beautiful pictorial presentation (your classic “coffee table book”).

When we get to the digital version, we have the opportunity, or perhaps we should say the temptation, to add much more, not just change the layout. There will be many situations, particularly in how-to illustrated books, when a video would be more useful than a still photo. One can add animation, sound, and functionality that can test or measure or calculate.

But, in fact, just the “fixed page layout” (different for the iPad than the iPhone, of course) along with the simple ability to put the pictures on their own page with pinch-and-spread capability, could add enormous value to the user (quite aside from the portability and reduction of weight that are inherent in moving from print to devices.) Whether you’re talking about a collection of beautiful pictures of Paris or of puppies, being able to blow up a picture to be able see a close-up of a part of it could be an enhancement that costs nothing to deliver.

And if that were all the value you needed to add, many books could be switched over for iPad viewing with a minimum of redesign. (But not all. One person I talked to last week talked about a book he was working on that had text on the left-hand pages referring to full-page photos on the right-hand pages. It has to be completely rethought for digital presentation.) What I’m thinking is that the beautiful pictorials — the coffee table books — might be the best and simplest things for publishers to move over to digital to start capturing revenue from those tens of millions of screens.

Best and simplest, of course, except for the rights issues.

This post is written with an admittedly short-term view. The interaction between content and users will sophisticate both iteratively and unevenly. My presumption (this is faith and intuition, not fact) is that those of us steeped in the habit of immersive reading will retain that desire so that the erosion of audience for that material will be very slow and probably mostly generational. Therefore, investments in enhancement of that kind of book will be hard to recover.

Illustrated books definitely are different. Digitally-enabled enhancement can add indisputable value in some cases, overcoming real limitations imposed by print. My guess is that books whose purpose is to feature fabulous art or photography can deliver added value with screen presentation with a minimum of additional investment or trial-and-error. At least for a while.

It has long been my contention that simpler digital products which are inexpensive to make are far more likely to make money than complex ones. Getting repaid for delivering everything the tech can do is very hard.


Nothing happens over 4th of July weekend, except this year

Monday, July 4, was supposed to be a quiet day in the publishing business. It turns out it wasn’t. Three developments reported as special holiday bulletins by Publishers Lunch have strategic implications worth pondering that will have trade publishing people all over the world conferring with their friends and colleagues as soon as they shake the sand off their shoes and settle in to read the weekend email.

First of all: Amazon.com bought The Book Depository. What? You’ve never heard of The Book Depository? Well, then you’re almost certainly one of my US-based readers (about 60-70 percent of you.) The Book Depository is really the other global bookstore. They don’t do ebooks, but they’ve bult their global book business to more than $150 million. No, that’s not as big as BN.com, but they have built a sophisticated many-to-many supply chain (they don’t do it holding stock in distributed warehouses like Amazon), have been growing by something like 30-40% per year for several years, and might even make money.

They’ve even invested heavily in untangling the metadata challenges of global book sales, with a large team in the Middle East tackling the problem.

If anybody were going to mount a global challenge to Amazon as a single consolidated book (and content) distribution business worldwide, The Book Depository was the platform to do it from.

This move by Amazon reminds me of when they acquired Mobi-pocket early in the last decade. In the dawn of the ebook-on-devices era, there were two formats competing as pawns of a hardware competition. Microsoft pushed MS Reader, Palm pushed their own format. Mobi had the clever idea of being able to play on either.

So Amazon acquired Mobi. That meant that they owned the only single-file solution; any other retailer trying to serve the market would have to offer both Microsoft and Palm as a choice to reach all the devices. Palm quickly took that option off the table by insisting it would serve all its files itself. That’s when B&N went out of the ebook business, not to return in a serious way until after Kindle launched in late 2007.

It sure looks to me like The Book Depository would have been a great launch platform for Barnes & Noble to go global.

Second: Pearson, owner of Penguin, became a book and ebook retailer by the purchase of the relevant assets from the bankrupt REDGroup. It appears they will run the business, web sites under the Borders and Angus & Robertson brands, with a minimal staff.

Pearson is a big company whose interests go far beyond Penguin, but it is the trade implications of this that catch my trade-centric eye. Big trade publishers are caught between a rock and a hard place on direct selling and customer ownership. Whatever the future may hold or require, trade publishers today are highly dependent on their intermediaries’ good will. It would likely cause untold grief with Amazon and Barnes & Noble if a major US trade house set up a direct selling operation, despite the fact that niche publishers often have them as adjuncts to community or professional publishing efforts (Wiley, O’Reilly, McGraw-Hill, F+W Media, Interweave. In fact, Pearson owns half of Safari, a direct-to-reader subscription service pioneered and co-owned by O’Reilly. They also own part of CourseSmart, but they’re now selling books and ebooks direct to consumers, not just content-by-subscription to geeks and textbooks to students.)

It might be well down the list of reasons why Pearson Australia is now running online trade selling operations, but it will be interesting to see how Penguin Australia benefits from the association.

Third: J.K. Rowling and the agent that actually handled her business, Neil Blair, have left the Christopher Little Agency which formerly employed Blair and was the agent of record for Rowling. Lawsuits may ensue, but this is another lesson in what disintermediation can mean and it recalls to me something I learned long ago from a lawyer in the music business.

My mother, Eleanor Shatzkin, had a chunk of her consulting career when she designed billing systems for law firms. (This was in the days before personal computers; “data processing” back then was done on punch cards sent to job shops for print-outs to be created.) So she made friends with a lot of lawyers. One of them, a very nice man named Don Engel, left the large New York firm where he’d been a litigator and moved out to California and set up a practice in the music business.

What Don told me (this was in the early 1980s) was that he found a phenomenon out there that didn’t exist in New York because people could start a law firm with just one client, and they often did. (As he said, you can’t take a piece of the AT&T business and set up shop, but you can take one big recording artist.) That meant these firms had no broad capabilities, and if any real legal challenges arose, the little firm with the big client would need savvier outside counsel. Don built a substantial business suing record companies over royalties on behalf of artists, getting cases referred by these tiny “firms” with one star client because he developed a reputation for being an honest guy who wouldn’t poach the client in turn!

I don’t want to suggest that what Rowling and Blair are doing is likely to become a trend. In fact, the prevailing industry conditions at the moment would, I think, mitigate against it. Agencies are more likely to consolidate than to splinter because the capabilities they need to serve their clients effectively are growing with digital change. Whatever threat there is to publishers from disintermediation would require that agents do more and have greater organizational capabilities, not less.

On the other hand, new services being offered by agents that other agents could employ might allow unbundling of the direct client contact from the rest of the agency functions.

I hope you had a really restful 4th of July weekend. The second half of the year begins with plenty to think about.