August, 2011

Writers who oppose agency pricing aren’t acting in their own self-interest


I hope it is a mistaken impression — it certainly isn’t scientifically arrived at — but I have the feeling that there is widespread sentiment among self-published writers opposing publishers’ attempts through the agency model to keep ebook prices up. I have said before that I think agency pricing has, in many ways, saved the ebook business from monopoly control by its strongest retailer. Today I want to posit another virtue of the model: that it boosts the revenue of all writers, whether they are published by an agency publisher or working entirely on their own.

When some workers are in a union and others who can do a similar job are not, bad feelings can arise. The union workers fight to keep wages and benefits up and they use the power of the union to express a workers’ point of view about conditions on the job. And they see workers who are willing to do the same job for less as “scabs”. Inherent in that view is the belief that agreeing to work for less undermines the objectives of the union (which the union workers pay for through dues, of course) and the opinions people hold readily take on the coloration of moral positions, not just commercially-motivated ones.

From the point of view of the non-union worker, of course, a job is a job and a wage is a wage. Union membership might not be open to them anyway, for any number of reasons, and, even if it were, the cost-benefit relationship between the union dues and the wages and working conditions might not look like an attractive bargain. For example, union benefits that deliver advantages through seniority might not be much of an attraction to somebody who doesn’t expect to stay in the job or the area for a long time.

Another aspect of this is that the unions’ ability to bargain for workers raises the costs of production for management which raises prices for everybody. The unionized workers, benefiting directly from the higher costs, may either not notice that point or not care. The workers outside the union, unemployed or less gainfully employed, might well care.

Unionized workers and union officials would argue, and I would generally agree, that the benefits the union achieves for its workers actually pull up the wages and working conditions for all workers. It might literally be more “democratic” for employers to be free to hire non-union labor and for workers to be free to take non-union jobs, but that doesn’t mean that it isn’t in the vested interest of all the workers for the unions to be pushing to improve wages and working conditions in those situations they can influence.

An analogous situation is now developing among writers of books, thanks to the democratization of access for authors created by the ebook revolution.

I think of the agented authors, published by the Big Six and other major publishers, as the unionized workers. Their union management is the agent community. The structure is different that it is for auto workers in a factory or miners in a pit, but the effect is very similar. Agents control the access that major publishers have to the labor they want: the writers who can deliver the books they can most readily sell. With that control comes the ability to drive up prices and improve working conditions.

The prices — which we call advances against royalties — that publishers have to pay for agented writers is part of the industrial cost structure of publishing. And the prices that publishers are charging consumers for ebooks through the agency model are necessary to maintain revenue levels that will support the industry as it has developed over the past century.

Agented writers pay “union dues”: 15% commission to the agents. And, like a union, the opportunity to get the privilege of paying those dues is limited, not democratically distributed. But those writers get the benefits of an environment negotiated between powerful industrial capability (the publishers) and controllers of a critical labor source.

This explains a longstanding anomaly in publishing, by which the big publishers have not only been the ones paying the big advances but have also generally paid higher royalties as a percentage of the sale price than smaller ones. Smaller publishers seldom pay 15% of retail royalties, as big publishers routinely do. They’ll often ask for (and get) 50% of foreign rights revenue, which big publishers very seldom do. So the players with the leverage and the checkbooks pay more than the players without it. That shows the power of controlling the labor supply, which agents do, coupled with professional negotiating skills, which agents have.

Of course, book consumers aren’t buying a “union label”; they’re buying an author’s name, perhaps sometimes undergirded by a known publisher’s branding, or the subject or the pass-along affects of branding (reviews and notices in credible places), or the recommendation of a friend (who bought the author’s name or subject or the endorsement.)

Thanks to agency, the most obvious way to for a consumer to distinguish between the “union” books and the “non-union” books is by price. The major publishers are (generally) maintaining prices of $9.99 to $14.99 for ebooks available in print as hardcovers for two or three times that amount and then, usually, at $7.99 and up when the printed book is in paperback. The non-union books — the self-published books by authors who (again, generally) couldn’t get into the “union” — are most often available for $2.99 or less, often for as little as $0.99.

This price differential, along with it being obvious to the purchaser that the unit cost of what the consumer receives when an ebook is purchased must have been trivial, has led to pretty widespread excoriation of the pricing levels of agency books.* This should not be confused with any apparent reluctance on the consumers’ part to buy them; the biggest books in print appear to also be the biggest ebook sellers, despite the fact that the print versions have far fewer direct competitors overall and none at the great price differentials that exist for ebooks.

That those consumers who are price-consciopus see it as a matter worth protesting that their favorite author’s book is $12.99 or $14.99 when there are many books available that are superficially comparable (same genre, same length) at a fifth or a tenth of that price, is not surprising. When you meet the consumer that says “I want to pay more”, you’ll have met a breed considerably rarer than the rich person who comes out for higher taxes. (Thank you, Warren Buffett.)

But I want to argue here that all authors, including those who self-publish for $0.99 or $2.99, should be applauding the big publishers’ efforts to keep the perception of value for branded books high by keeping prices high and stopping retailer discounting. Authors should be vocally supporting price maintenance and the agency model, even if they are not “in the union”. There are several reasons for this.

1. Although the standard big publisher split of ebook revenues (75-25 in favor of the publisher) allows a self-published author to gain comparable or even greater revenue at a lower price, those are just today’s transient conditions. It will be easier for authors (through agents) in the future to improve the split than it would be for the publishers to raise prices in the future to get authors more money. If the consumer is putting more money in the pot, then there’s more to divide. The division is something to fight over; keeping prices and value perception high benefits both sides.

2. If big publishers were to sharply reduce their ebook prices, print would die much faster. That would further reduce revenues in the pool for publishers and authors as well as accelerating the disappearance of bookstores, eliminating free visibility and marketing responsible for millions of book sales.

3. If big publishers reduced their prices sharply, the key marketing distinction that fostered the discovery of such writers as Amanda Hocking and John Locke would be eliminated. On the comment stream of a blogpost I read on this subject (can’t find it so can’t link it), one person posted a string of suggestions for major publisher survival strategies that included “cut all your prices to $2.99.” Why? Because it would eliminate all the competition from the self-published riff-raff that is using price as a marketing tool. So not only would the publishers and branded authors make less money, the aspirants would find their path to success cut off as well.

(This suggestion actually makes the point that self-publishers who scream  “big publishers are stupid and they should cut their prices like us” should be very careful what they wish for.)

A cost-driven print book commercial model has created a legacy business which has made consumers willing to pay $25-30 for what is for many an 8-10 hour immersive reading experience. Millions of readers conditioned this way find paying around half that price to be a great bargain. The entire mechanism by which those printed books have been selected and delivered — the aggregation and curation of the major publishers’ offerings — is depended upon by the consumers who spend all that money.

No doubt, over time this will change. The print book infrastructure, which has inventory and supply chain costs that are responsible for the pricing conventions that have developed, will not last forever. Almost certainly, books will get cheaper and cheaper. But writers will also make less money when there is less to divide, not more. All writers, whether they’re among the fortunate ones that have a publisher pushing them or whether they’re trying to do it themselves, should be grateful that publishers are doing their damnedest to maintain prices and the perception of value for writers’ work. If that segment of consumers that complains about prices finds fault with agency pricing and the publishers’ insistence that the digital discount from the highest print price be limited to about 50% at the moment, that’s understandable.

But if writers join in that bashing, I think that’s a failure of understanding and, in effect, opposition to their own self-interest.

* It would be misleading not to mention that much of the “consumer” opposition to agency-priced books has been egged on by the self-interested. That’s one way it is in the (short-term) interest of the self-published author to be vocal in opposition to agency. If you sell that as a point of “principle” to a reader, you’ve steered them away from your competition.

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John Locke and S&S show us another kind of deal we can expect to see again


OK, now we know another new paradigm for book publishing in the digital age with the announcement of self-publishing author John Locke’s new deal for print distribution with Simon & Schuster.

The big publishers have said for a while now that they won’t be signing up books for print rights only. That makes sense, up to a point.

It is logical that with print declining and digital sales rising, publishers don’t want to be investing in an author only to control the getting-smaller part of the sales. We’re in this moment when print sales are still vitally important but less so every day. Ebooks don’t require the same organizational scale as distributed print, so authors legitimately feel that they can get the substantial part of that sale without giving up the 75% of the ebook royalties big publishers demand as the price to gain access to the print distribution capability that makes real use of big publisher scale.

But there are limits to the publishers’ logic to walk away from print-only deals. Publishers also have the challenge of feeding the big organization they’ve built to deliver print to its shrinking marketplace. It is hard to ignore sales volume you need to support expensive operations.

The first crack in the wall of “we don’t do print-only” was Houghton Harcourt’s deal with Amazon to publish the print edition of some titles originated by Amazon imprints. Houghton made the point that although it might look like what they were doing was a print-only deal, it really broke no precedents. They pointed out, accurately, that when a publisher acquires paperback rights to a book another house did in hardcover (the most common sort of licensing deal 30 or 40 years ago but not so common now), the ebook rights would stay with the originating publisher. That, they said, was all that was happening in this case.

As a fan of Locke’s Donovan Creed books (I just finished reading another one yesterday!), I had already done some analysis and written that I thought he was leaving a lot of money on the table working exclusively on the ebook side. (I ignored a deal he had with “Telemachus Press” to do print of his books because I figured they’d hardly sell any; the deal announced today would tend to confirm that assumption.)

Although the details of the Locke deal with Simon & Schuster haven’t been revealed, it is characterized as a distribution deal. Strictly speaking, that would make Locke himself the publisher and the party responsible for the cost of inventory. S&S would warehouse that inventory and handle all the mechanics of distribution, including billing and collecting. Then they would remit the larger portion — probably more than 70% and less than 80% — of the revenue they receive to Locke.

How profitable Locke’s print sales will be for him depend on his costs for print (which are in turn a function of how well he and Simon & Schuster match what is printed and distributed to the demand for his books), the retail price he sets, and, of course, the numbers he can sell.

There is another way Locke will profit. The increased awareness of his books that he’ll gain by having them in stores should generate more ebook sales and he presumably doesn’t share those with his print distributor.

There have been a number of signs this year that the publishing world is changing dramatically.

In March we had Barry Eisler, who had sold many books through conventional deals with major publishers, decline a six-figure deal with a major house. At first, Eisler was going to self-publish, but then he decided to take a (presumably) six-figure deal to be published by Amazon instead.

Amanda Hocking, who had started (like Locke) as a startlingly successful self-publishing author, accepted a deal with a major house to continue her career, pretty much the opposite of Eisler’s originally-intended path (although closer to what he actually did in the end).

Then J.K. Rowling, the author of the Harry Potter series, announced she was creating her own online destination, Pottermore, to deliver ebooks. Rowling is apparently not just disintermediating her publisher from her ebook sales; she’s leaving out many of the online retail channels as well.

Last week we had the news that superstar non-fiction author Tim Ferriss became the first truly marquee signing for Amazon’s own publishing efforts.

And now we have Locke entirely self-publishing, but working through a major house to get his printed material into the supply chain.

When we discussed Eisler’s original decision, we talked about the fact that self-publishing left the substantial revenues from print untapped. The Hocking and Ferriss deals are similar, even though hers is with a traditional publisher and his is with Amazon. They are both pursuing what they think will be the most lucrative alternative for them, choosing from among options by which they get paid and somebody else does all the non-writing parts of the work.

Rowling’s initiative and Locke’s are both real self-publishing plays. I am skeptical that Pottermore is worth tracking as a commercial example by any but a small handful of wildly successful authors. It’s an anomaly in many ways. Harry Potter to publishing in the past decade is like the Beatles to music in the 1960s; nothing else comes close to its level of commercial success. What Rowling is doing might work just fine (although I have my doubts that it will reach more readers than if she used more conventional means, she might make more money and she might build a platform for other opportunities), but that doesn’t mean it would work for anybody else.

Locke might be an outlier as well. Nobody else except perhaps Hocking has achieved his level of self-publishing success. And, unlike Hocking, who is a writer who just wants to be a writer and is delighted to have a publisher take over her business responsibilities, Locke is an experienced businessperson who seems to prefer managing his own commercial affairs.

In the Locke deal, though, we can see the outlines of future arrangements by which publishers can reconfigure their dealmaking to adjust to changing times. It isn’t just agents who are changing their business models or offering new services to accommodate the reality of self-publishing fostered by the growing ebook market share (and Locke’s agent, Jane Dystel, is one that has announced that her office is doing just that), publishers will adjust as well.

The model of “self-publishing through a major house ” can be a workable one for all sides if it is restricted to authors whose commercial appeal has already been established. Since all the major houses have distribution deal models, it might not be long before there’s a person at each one assigned to making sure that authors and agents are as well taken care of as “clients” as they were in the past working through their editors.

These deals will morph. For example, does Locke really have to pay the printer, or will S&S cover him on that and just take the costs out of proceeds? If S&S were doing a deal like this for books that hadn’t already been published digitally, would they be able to extract a modest share of ebook sales as compensation for doing the ebook setup? And deals like this could evolve to also include some other costs — like copy-editing or cover creation — being fronted by the publisher, or I guess I should say “the distributor”.

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Tim Ferriss’s deal with Amazon is both an outlier and a harbinger


News of the 7-figure Tim Ferriss deal with Amazon that hit the news this (Wednesday) morning must have leaked out to the press yesterday (Tuesday) because I got a call from a reporter asking for comment on Amazon’s “big new hardcover” book deal. The question confused me yesterday, but seeing the announcement about Ferriss today featuring the hardcover makes it clear what the trigger was for that call.

I’d call this deal both an outlier and a harbinger.

It’s an outlier because Ferriss clearly did it for reasons that weren’t strictly financial. According to The New York Times and Publishers Lunch, Ferriss called Amazon seeking the deal. Ferriss decided he’d rather be with a technology company than a publishing company. Ferriss is excited by the unenumerated opportunities he sees having a publisher that has direct relationships with the ultimate consumers.

To analyze the competition between the big publishers and Amazon, I think we need to think about four components of the deal and the publication.

The first thing on many authors minds is the advance against royalties they can get for signing a contract. This deal is reported as 7-figures. We know that Amazon has deeper pockets than any publisher. So they can compete with advances. Since Crown (a division of Random House) had reportedly paid 7-figures for Ferriss’ last book in 2008, perhaps Amazon offered only a sensible competitive number here. But publishers, all too aware that Amazon competed in the ebook marketplace by selling big titles at a loss, have to be concerned that they might be willing to sign some big authors at a loss as well.

The other components to think about are the main channels of sale for the book. I will stipulate in advance that this is a bit over-simplified but I think simplification here promotes understanding (and unncecessarily complicating things would obscure it).

Ferriss is a non-fiction author. For big non-fiction books today, the largest sales channel is usually print sold in stores. Generalizations are dangerous (and generally wrong), but it would be reasonable to think that Ferriss sells 50% of his books that way. If so, that’s a problem for him with Amazon because store sales of print will be the hardest for Amazon to get. Barnes & Noble recently made clear that they would only consider stocking an Amazon-originated title if they could sell the ebook (Nook) edition as well as the print. Amazon hasn’t stated a policy on that, but, to my knowledge, all the publishing deals they’ve made have required ebook exclusivity for the Kindle.

At our on-stage conversation at the Publishers Launch BEA show, Barry Eisler — who had just done his own book deal with Amazon for a substantial advance — admitted that Kindle exclusivity was the one part of the deal he wasn’t crazy about. More on what that means to ebook sales further down in this post, but it would appear that ebook exclusivity is blocking print store sales at the largest possible outlet. Unless Amazon has some distribution cards up its sleeve that we haven’t seen yet, the loss of brick store print sales (and exposure) would appear to be the biggest negative for Ferriss in doing this deal.

It is likely that Amazon expects to sell a lot of those hardcover books through the next channel to consider, print books sold online. In this case, Amazon has a very high percentage of the total market, perhaps in the 80-to-90 percent range. Given their ability to give a book of theirs exposure and perhaps even using that direct customer knowledge that Ferriss seems so intrigued by, it isn’t unreasonable to think that they can sell more than their fair share of those books. It’s also seems likely (generalizing again) that 25% of Ferriss’s publisher-generated revenue could come from print sold online. Maybe Amazon is paying him a higher royalty than the standard on that as well.

Of course, the main commercial reason for both sides to do this deal is for sales of the ebook, the Kindle edition. On the one hand, Kindle sales are said by publishers I’ve spoken with to have fallen from 90% to 50-60% of the total ebook sale. (Barnes & Noble’s Nook is credited with the lion’s share of the rest.) But the publishers don’t know how much of Kindle’s sale (or Nook’s sale or Kobo’s sale) is consumed on the proprietary device. If I read on a Nook and Kindle has an exclusive on a book, I’m stuck. But if I read Nook books on my iPhone or iPad and Kindle has an exclusive on a book, I can just switch over for that one book without a problem.

That means that some big part of the 40-50% of the ebook market that isn’t Kindle is accessible through the Kindle reader on an iOS or Android device. It’s a guess, but I think a reasonable one (maybe even a very conservative one) to say that 35% of Kindle reading is done on non-Kindle devices. Adding those people in would suggest that the Kindle store has meaningful access to anywhere from 67% to 75% of the total ebook marketplace.

And we’d assume that Ferriss is getting a 70% royalty from Amazon on those sales, four times what he’d get if a publisher gave him 25% of the ebook royalty (because they’d be dividing the same 70%.)

My bottom line on this is that Ferriss would get a sliver of what would be half the business (print in stores). He could well get as little as 10 percent of that potential (or 5% instead of 50% of what would have been his total publisher revenue.) Depending on the royalty structure, he’ll get at least as much and perhaps a bit more on the online revenue piece, so let’s call it 30% instead of what would have been 25% of his total publisher revenue. So on those two pieces, he’d be getting 35% of the former total whole, rather than 75%, or a bit less than half.

But on the ebook side, he’ll get about 4 times the royalty on about 70% of the sales, or 2.8 times as much revenue as he would have gotten from a publisher. If that had been 25% of revenue of the former “whole”, it would be 70% of the former whole now. Added to the 35% he’s getting from what would have been the other 75%, that back-of-the-envelope set of guesses delivers him 105% of what he would have gotten from a publisher, even giving up almost all the print store sales.

And, of course, he has high expectations for what he and Amazon can do together with all that customer knowledge. If he’s right about that, he could do considerably better.

This is sobering math for the big publishers. The numbers would look better for Amazon if we were generalizing about fiction, where the percentage sold as ebooks is somewhat higher. But, more important, the segment of the business where Amazon is disadvantaged — print in stores — is shrinking inexorably as a total of the whole. When we run this same exercise a year from now, the percentage assumptions we’ll be making will be lower for that component and higher for the other two.

So it’s clear why the deal is both an outlier and a harbinger. Giving up the store sale is a difficult thing for any author to do, particularly when the math works out to be so close to breakeven (and we haven’t factored in the marketing impact of books in stores, which is real.) It took an author with a particular personal bent to pursue that choice. But it is a harbinger because the math would appear to be moving in Amazon’s direction. The one way I can see for publishers to improve their chances of looking good in this calculation is to raise their ebook royalty percentage. Of course, there’s no reason that Amazon couldn’t do the same thing.

If you’re going to Frankfurt, you must consider attending one of our Publishers Launch Conferences events there. On Monday, October 10, we’ll present “eBooks Around the World”, which will include lots of original data, talks from every major global ebook retailer, the scoop on the growing importance of collective licensing, documentation of the benefits that a medium-sized publisher got from a digital workflow, an instructive presentation connecting metadata quality and sales results, and (as they say) much, much more.

On Tuesday, October 11, we’ll deliver a half-day event called “Children’s Publishing Goes Digital”, chaired by Lorraine Shanley of Market Partners, which will explore creation, marketing, rights, brand new product types and brand new players in what might be the fastest-changing part of our business.

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If you like irony, you must love the publishing world of today


Anybody who doesn’t find the publishing business interesting in its time of digital change is simply not paying close enough attention. No matter what story we’re focused on, scratch the surface (or scratch your head) and you find you are pondering something else. This was a week for the press to be asking me (and many others) about the lawsuit against Apple and the publishers surrounding the implementation of agency. I have little expertise to comment on the suit’s legal merits, but a week of thinking about agency has made me (and others) realize implications that hadn’t been evident to us previously.

As I was reviewing my last blog post before publishing it, I had the new thought (referred to in a brief postscript) that Amazon was actually doing the Big Six publishers a favor by denying agency terms to everybody else. Since big authors have a common interest with big publishers in maintaining retail prices for ebooks that don’t undercut print and which deliver a per-copy revenue flow comparable to print, there is reason for a big author to prefer a publisher that has the power to maintain the ebook price across the retail network. Full-fledged agency publishers have that capability; the others do not.

A moment of explanation might be required for any readers who might be lost in the details of the agency, wholesale, and hybrid models of ebook-selling. Agency is the term for “the publisher actually sells the ebooks to the consumer, not the retailer; the retailer gets a cut but cannot change the price from what the publisher has set.” Wholesale is the term for “the publisher sells the ebooks to the retailer, based on the notional retail price set by the publisher; the retailer can then set the consumer price keeping all, part, none, or less than none — selling as a loss-leader — of the margin that the publisher’s discount provided.” And hybrid is the term for “the publisher has to agree to giving Apple a fixed percentage of the selling price; Amazon insists on a wholesale arrangement by which they set the price; therefore, Apple’s standard arrangement by which it can lower prices (and the publisher’s share) to match any other retailer on the web makes the publisher vulnerable to having its revenue from Apple readjusted downwards based on discounts offered by somebody else.”

The short story is that only under a total agency model does the publisher control price. In any other case, the price is effectively controlled by the retailer willing to offer the lowest price. That would be the retailer willing to live with the least margin and, as was amply demonstrated by the discounting that took place before agency came to publishing, that might be a negative margin. Retailers in the US (although not in all countries) can sell below cost if they think it is to their advantage to do so.

All the actors are rational here. Amazon extends agency terms to the Big Six publishers because, after the Macmillan dust-up of January 2010, Amazon has been persuaded that they could lose the ebooks of those publishers from their shop if they don’t. Losing the ebooks from one of the major houses would damage what has been one of Amazon’s main strategic advantages since the Kindle was launched: the widest selection of commercially-attractive ebooks in the marketplace. They take the gamble, which appears to be a winner, that publishers smaller than the Big Six will not want to withhold product from the world’s biggest ebook retailer, the one that still accounts for substantially more than 50% of the ebook sales for many titles.

And, in some cases, publishers have avoided the discomfort of the hybrid model — which requires them to commit to Apple that Apple will have the lowest price on the Web when they can’t actually control everybody else’s price  — by not selling to the iBookstore because Apple won’t buy on wholesale terms. So Amazon yields where they think they must (to the Big Six) and continues to enjoy the advantages of price control with the rest, while at the same time discouraging some publishers from making their titles available through a competitor. This all makes sense to me as I understand their point of view.

What I noticed while writing the last piece is that there is an unintended consequence here for Amazon way upstream from the ebooks sale: the policy is strengthening the Big Six’s already powerful grip on the biggest titles from the biggest authors. Amazon wants to compete for those authors and can offer a better royalty on Amazon sales to entice them (when Amazon pays 70% to the author, the author keeps it all; when they pay 70% to the publisher, the author does not get it all, even if s/he succeeds in negotiating something better than the industry standard of a 25% ebook royalty share.) But Amazon reportedly wants ebook exclusivity, which cuts out a big chunk of the ebook market, and they are seriously handicapped getting a print sale through brick retailers.

(If you want a more thorough explanation of the way ebook revenues get split up, I wrote in detail about ebook royalties under the agency and wholesale models here and here.)

Because print sales in stores still matter (and for as long as they do) there is a risk and a sacrifice for any author giving exclusivity to Amazon, although there are also clearly compensating considerations as well.

At about the same time I was noticing this, my friend Eoin Purcell in Ireland was noticing something else. Apple’s new policy on apps, by which you can’t sell through an app without giving Apple its standard 30% cut, also offers up a sparkling new opportunity to agency publishers that would be accessible only at some risk to any but the Big Six.

The immediate consequence of Apple enforcing this policy of theirs was to drive the direct-to-our-store connection from the Kindle, Nook, Kobo, and Google apps. Because those retailers only get 30% margin from the publishers, they can’t afford to give 30% to Apple for the privilege of in-app selling.

But publishers don’t have that margin problem. They already pay 30% for their sales, and if they put their own apps up with sales enabled through them, they’d only be paying what they already are to a retailer for the privilege. So apps for authors or genres or series of any kind could be offered as free downloads through the App Store with direct-purchase buttons inside. These could send you to the iBookstore, if the right kind of landing environment could be created, or to the publisher’s own landing page where sales commissionable to Apple could be made.

Of course, the same thing could be done as a Nook app in the B&N ecosystem, and it would be smart for the publisher to offer one, as well as a web app that constituted an Amazon version (which wouldn’t be offered through the Apple App Store but would have to get to you another way), to keep relative peace among its customers. But a publisher can only do this if it is sure its prices won’t be undercut, which would force a further margin reduction under Apple’s rules.

Like Eoin, I have no idea whether any of the Big Six publishers are working on this idea or whether any of the major agents have suggested the possibility. But we’re talking about literally hundreds of smart people here, so it would be surprising if nobody’s exploring this possibility (except if Eoin and I are both missing something that makes it a non-starter.)

The transformation of publishing is rich with circumstances to amuse anybody who appreciates irony. Cheaper ebooks, which consumers love, are making bookstores, which consumers also love, gasp for the breath to survive. The closest thing to a monopoly threat in the business, Amazon and Kindle, work to drive consumer prices down. Apple’s great success with new devices coupled with their very slow start at retailing, generates agency pricing and sales opportunities for other retailers that probably benefited Barnes & Noble the most. B&N, the brick retailer most skilled at logistics but only newly-minted as any sort of tech company, finds not one but two unoccupied niches in the eink product suite: color and touch-screen.

And now, Amazon’s policy limiting the publishers that can fully implement agency, designed to isolate the Big Six and enable discounting of everybody else’s ebooks, may be spawning a new opportunity for big authors and big publishers to work together that other publishers can’t compete with. Perhaps denying this capability to other publishers actually helps Amazon be alone as a 7th competitor, but it certainly has its ironic aspects at a moment when Amazon is putting on a full-court press to persuade big authors to work directly with them!

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Will print and ebook publishers ultimately be doing the same books?


Recent performance reports from Simon & Schuster and Penguin, which can be taken as indicative in some ways of what’s going on at the rest of the Big Six and instructive about what’s happening across trade publishing, say that revenue is flat or down, profits are up, and the ebook share of revenue is growing. The most recent reports were that ebooks grew to 14% of revenue at Penguin and at Simon & Schuster.

First a few observations about what those numbers really mean, and then some thoughts about the implications for the months to come.

We must remember we’re comparing apples and oranges when we talk about the percentage of sales that are ebooks versus print books. This percentage is, presumably, arrived at by adding print book sales (which are shipments subject to returns) to ebook sales (which are actual consumer purchases with zero or negligible returns) and then dividing the ebook revenue number by the total revenue number.

This explains the apparent anomaly pointed out in the S&S reporting which sees the ebook percentage higher in the first quarter than in the second, which has occurred in successive years. This is not actually hard to understand. One report I saw pointed to part of the explanation: that Christmas recipients of ereading devices are loading them up in January, an effect which is absent in the second quarter. But what is also the case is that Q1 print sales (which are shipments, let’s remember) are depressed by two factors: they contain returns from Q4 Christmas sell-in and Q1 is not normally a big one for new book shipments.

So as long as there are larger shipments of returnable print taking place in anticipation of Christmas sales and large numbers of new device owners created each Christmas, we can expect the Q1 number to be artificially inflated and the Q2 number to show an apparent decline.

The annual Q2 decline is only apparent; it is not real.

The percentage of revenue number lends itself to misinterpretation. It is an average. You will pardon me for repeating the truth that “the six-foot tall man drowns walking across a river that is an average of three feet deep.” Averages are misleading. That mid-teens percentage number, quite aside from the apples-and-oranges base of it, is also misleading. (I hasten to emphasize that nobody is being deliberately misleading; there is no suggestion intended here that the number isn’t real or that there is any desire to lead people to mistaken conclusions by reporting it.)

But 14%, or about 1/7, could lead people to think that the book that sells 35,000 copies is selling about 30,000 print and 5,000 digital. That’s seldom the case. First of all, “on average” ebooks generate lower unit revenues than print, because so many of them sell for less than half the print retail price when books are in hardcover. So if 14% of the revenue is digital, something more than that percentage of the units are digital. Let’s say that number is more like 17% or maybe 20%.

Secondly, that number is, at least to some extent, historical. It certainly isn’t a forecast. Everybody’s forecast would be for that number to go up. And everybody would agree that (if you factor properly for the Q1 to Q2 and shipments-to-sales anomalies) it has gone up between the period being reported and the reporting.

Third, not all of S&S’s or Penguin’s print list is available as an ebook. (As short form publishing enabled by ebooks grows, the reverse will also be true, but it isn’t in any appreciable numbers yet.) That means the title base for the 14% of revenue and (notional) 17% of units is a smaller number of titles than the print title base. So for books available as both print and ebooks, the percentage of units sold that are digital is substantially higher than that. I’m not familiar enough with the houses’ lists to make a truly informed guess about many titles are heavily illustrated or children’s book titles or deep backlist on which ebook rights are too confused to allow an edition to be published. But it would certainly be reasonable to assume that for straight-text narrative books, the percentage of ebook units to the total is routinely 30% or more.

The power of the ebook marketplace was underscored by a recent Simon & Schuster report of first day sales for a major bestseller. USA Today reported on July 13 that S&S claimed 175,000 total units sold on the first day of availability of Jaycee Dugard’s “A Stolen Life”, of which 100,000 of the sales were ebooks. (The article doesn’t spell it out, but presumably these are apples-to-apples, cash register sales of books and audio as reported by BookScan and, as always, cash register sales of ebooks. If they compared print shipments to ebook sales, the number would probably be more like 40% than the 57% this reporting implies.)

Because ebook sales are, at the moment, revenue dollar-for-dollar, more profitable than print book sales, publishers are able to report revenues flat or down and profits up. With the industry standard of 25% ebook royalties having prevailed for a year or two now, this news definitely catches the attention of smart agents. But, the agents’ future success in negotiating better terms aside, is it likely to stay that way?

One big relevant variable that is hard to predict is how successful publishers can be keeping retail prices up for ebooks with a diminished print price benchmark. If you’re getting something for $9.99 or $14.99 that you believe lots of people are paying more for in another form, there’s evidence that it is a bargain. It will be a bigger challenge to keep prices, and therefore revenues and margins, up — even with the power of agency, which only six publishers in the world today are really equipped to deliver — when the printed book price isn’t seen as a basis for comparison.

In fact, the current improvement in the profit picture suggests that the big houses have done a remarkably good job of managing the transition from print to digital so far. What is implied by the reported numbers, but receiving little attention, is that print sales are down pretty dramatically. Print runs are down with one trade house telling me that their midlist non-fiction first printings having typically declined by 40%. A larger house suggested that the print being shipped from their warehouse is down 35% in less than two years. I’m not close to the numbers but that might mean that for segments of their list shipments are half what they were less than two years ago.

Smaller press runs mean higher unit costs for printing and binding but they also mean fewer units are sharing the cost of design and page make-up. Many of the fixed overheads in publishing houses: warehouses, production departments, catalog creation, and lots of IT, are really only necessary to support the print component of the business. For the past two decades, commercial success in book publishing (and, as the demise of Borders has made clear, in book retailing) depended on an efficient supply chain. Being in stock but not overstocked, shipping quickly, being able to get fast turnaround on reprints, processing returns promptly to facilitate collecting accounts receivable, and providing accurate data to accounts as well as to internal stakeholders all require investment but generate value that shows up in profits.

Until the Kindle came out in November 2007, the question about ebooks was “will this ever be a business?” Since then we’ve watched the ebook share double or more every year, including last year. Since 2008 or 2009, the question has been “how long can this kind of growth go on?” When the share is upwards of 30% for most narrative books, which I think it is now, we know that can’t go on for two more years because that would be a mathematical impossibility.

So the questions about ebooks now are “when will this slow down?” and “is there a plateau at which there is a sustainable and substantial print book business?” If the answer to the first question isn’t “very soon”, then the answer to the second question must be “no”.

The other question being called here is whether the publishing of straight narrative texts becomes a separate and distinct business from the publishing of illustrated books. As long as the print component is commercially important to the success of narrative books, it’s perfectly logical for a publisher to do both. The narrative books and illustrated books, after all, can ride in the same box to Barnes & Noble, Ingram, or any local bookstore. Sometimes they are even manufactured by the same printer (although far less often than they were decades ago.) Their inventory can certainly be monitored with the same capabilities and people (if somewhat different algorithms).

One great imponderable is what the market for ebooks will be beyond the verbatim replication of narrative text. That’s where the growth has been. For illustrated or enhanced or apped ebooks, the success stories are anecdotal, not indisputable trending. It’s true that the right devices aren’t as widely distributed yet, but it is also true that we have no clear evidence that those ebooks will be as compelling to the consumer as the narrative text ones. We do know they’ll cost more to create.

One smart ebook head of a major house remarked to me the other day that their cookbook editors were still preparing their content primarily for the printed page and the digital versions were developed after that. “If our editors are still doing it that way two years from now,” this person said, “then as a company we’re doing something terribly wrong.” That statement is correct, and encompasses the possibility that something like the packages of cookbook content within containers won’t have a profitable market even in digital form, and will have to be monetized completely differently. We don’t know yet as an empirical fact that people will buy digital “cookbooks”, the way we know for sure that people will read narrative text on devices very happily and not look back.

(Cooking and food content? A perfect candidate for the subscription model!)

What we do know is that a high percentage of illustrated book sales is for gifts. To the extent that’s true, it adds a barrier that has nothing to do with design or functionality to the migration to ebooks. And those books, presumably more than narrative text books, benefit from the showroom effect that bookstores provide. And we know what’s happening to bookstores.

The rate of migration from print to digital for narrative text over the past four years would take us to a smidgen of a print business for that kind of book in only a couple more years if it does not abate. If publishers find their print throughput down another 35% over the next 18 months, most of the biggest narrative books are selling upwards of 75% of their units as ebooks, and most of what publishers ship from their warehouse is a different title base than their bestseller business, the game will have changed completely.

We could evolve so that the skills and organizational requirements to publish narrative content, if print becomes a small component of the revenue, will be quite different from what’s required to publish the illustrated content for which print remains an important part of the revenue. In that world, what constitutes a sensible portfolio of offerings for what we today call a “book publisher” might be defined quite differently.

One thing that occurred to me for the first time writing this piece is that Amazon’s apparent resistance to giving any publisher except the Big Six the ability to sell under agency terms gives the Big Six a useful card to play with agents on the biggest books. Agents for big authors tend to like the agency sales model. (This is inherently confusing; the “agents” being referred to have nothing to do with the “agency” in the model…Oh, well.)

The stakeholders who care most about maintaining retail prices for “branded” books (big authors and big efforts, like heavily-researched biographies that take years to write) are the most powerful agents and the Big Six publishers. If I’m right about this, I think we can safely categorize it as an “unintended consequence” on Amazon’s part to have a policy in place that actually strengthens the Big Six’s hand against the rest of their competition for big authors.

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Agents have to do it, but their new service offerings change the publishing ecosystem


Agents work for authors and sell books (mostly) to big general trade publishers, but there’s really a partnership at work there. Nearly all the books big publishers buy, and almost without exception those for which big money is paid, come to them from agents. There’s a symbiotic dependency between them.

Publishers depend on agents to sort through the possibilities to discover new talent, develop proposals to a professional level, and handhold and cajole the author through the lengthy process of actually delivering the manuscript a contract calls for. Agents live in a world where the big publishers are really the only source of substantial revenue.

So they have lunch a lot to discuss what amount to joint efforts. I don’t know if it is unique to publishing, but our industry’s convention that the buyer (the publishing editor) pays for the seller’s (the agent’s) lunch must be very unusual. By constantly monitoring what the editors are looking for and are inclined to buy and each house’s current frame of mind of what will work and what won’t, agents get the information that, in turn, directs them to what will sell. What will “sell”, to an agent, means what people who are personally known will want to buy. It doesn’t require the agent to think in terms of what the public will buy; that’s the publisher’s job. The agent’s job is to deliver what the publishers have decided is commercially viable.

There is, in general, a great deal of mutual respect here. Obviously, there is a point where the partnership becomes adversarial: publishers want to pay as little as they can for books and agents want to get as much as they can. But, in general, these competing interests are resolved in ways consistent with the need both sides have to continue working together in the future. There are only six very large houses and only a small handful of others that can occasionally play at that level. And while the agent community is somewhat less consolidated (you can be a very successful agent with only one or two big clients; you can’t be a very successful big publisher with only one or two big authors), both sides do each deal knowing there will be a next deal they’ll want to do with each other coming along soon.

This symbiosis is important to remember when we consider that one of the big publishers’ defenses against disintermediation is their ability to curate, to filter. There is a school of thought (which is an attractive one to publishers thinking about their role in the increasingly digital world of books) that when content choices become more plentiful, reliable branded filters become more valuable. All sides recognize that the principal brand value lies with the author. I am increasingly coming to the view that the big publisher name — Random House or Simon & Schuster — also communicates “value” to the consumer, although it doesn’t describe the potential reading experience with anything like the specificity that the author name does. The agent name, of course, means nothing at all to the public. So the publisher is essentially getting credit for a filtering process for which they are the last step after agents have done a lot of weeding out before them.

Two years ago, when we were organizing the first Digital Book World conference, we foresaw that ebooks would lead to much cheaper and more accessible self-publishing opportunities that some authors, at least, would be keen to explore. When we started to organize a panel on the subject, we learned that the rules of the AAR (which is, effectively, the agents’ trade association, although it doesn’t act as such in many ways because of its highly independent-minded membership and the potential for restraint-of-trade violations) were interpreted by many to mean that agents could neither set up publishing operations nor charge authors for services. In that ancient time, very few agents would openly discuss the possibility of working with authors in anything but the time-honored way of selling their proposals to publishers on commission.

But times have changed. A quick check of recent news and announcements in our office turned up nine agencies with announced digital propositions. These range from Waxman Literary Agency’s Diversion Books, an ebook publisher, to the Ed Victor Agency’s Bedford Square Books publishing arm working through Open Road, to, in most cases, consulting services for the agency’s clients on ebook development and distribution.

The other seven on our list right now are The Knight Agency, BookEnds, Dystel & Goderich Literary Management, McDermid Agency, Levine Greenberg, Curtis Brown UK, and Andrea Brown Literary Agency. There are certainly some we’ve missed. And there will undoubtedly be more in the weeks to come.

The Knight Agency did a really nice job of laying out the suite of services they’re going to provide through their offering. It’s very impressive, including content editing, line and copyeditor referrals, ISBN number assignment, copyright registration, cover copy, cover design and consultation, file conversions to ePub and mobi, uploading files to major retailers, dynamic pricing, metadata, search engine optimization, marketing plans, subsidiary rights, royalty tracking and payments, oversight of existing contracts and obligations, and, down the road, arranging for print publication through POD or other means.

But what really surprised me was that the Knight Agency says they are absorbing all costs except copy-editing and working for 15% of the revenue. The range of services they are offering, even without the copy-editing (which can be anywhere from $500 to $3000 or more, depending on the length and complexity of the manuscript), requires real humans to spend real time doing the work. They seem to be offering to design the cover at their expense, which is a value of anywhere from $200 to $2000. The Knight Agency is undertaking a substantial investment in each book that will be done in this program and, if I’m reading them right, will only get that money back at 15 cents on the revenue dollar before they earn any profit.

That’s a commitment! And even though the service is being offered only to existing clients of the agency (at least for now), it’s an impressive one.

So with that context, I’d offer a few observations.

I don’t know what other agents have planned, but Knight has definitely thrown down a marker that other agencies will be highly challenged to match. (Of course, the first thing to see is how well Knight can do against their own checklist!)

Many of the agents, but not Waxman with Diversion, are specifying that their services are only for existing agency clients. That’s a good way of putting a toe in the water and it’s a good way to minimize the concern of publishers. But it’s not likely to last as the policy for any of them that do this kind of work successfully. If their ebook publishing services actually work and the business is shifting in that direction, why would you turn down an opportunity that came from outside the client base. Why would you turn down the opportunity to offer the same suite of services to all the clients of some other agency that doesn’t want to build this themselves? (That’s an opportunity almost certain to arise for all of them.)

Publishers are also working on self-publishing services. Distributors have been noodling for some time about packaging these services for agents. Knight has promised to do a lot, including a substantial per-book investment, for 15% of the revenue. Are any of these other players now going back to the drawing board to reconsider their pricing? I would think so.

How everybody is going to feel about these agent service offerings is going to depend a lot on how they’re used. To the extent that they are used as leverage by authors with big backlists to push publishers to higher ebook royalties, the big houses won’t be pleased with them. But if they turn out primarily to be “farm systems”, giving exposure and building awareness for an author who can then “graduate” to a “real” publishing deal, everybody might be all smiles. If that’s what happens, these services become something like the new digital world’s equivalent of an agent getting an author to write a piece for the New York Times Sunday Magazine or to start blogging to build a following: a career-building step that leads to a major house. If that ends up being the prevailing effect, everybody will be smiling.

Let’s remember that Amanda Hocking went from self-publishing to a major publisher deal and that Barry Eisler decided that taking Amazon’s offer to publish him was more appealing that truly doing it himself.

Perhaps for as long as five or ten years, the print component will remain an important part of any book’s total revenue potential. None of these agents can do much to help there (although a distributor could.) Even if what Knight offers turns out to be high quality across the range of services and what they’re offering to cover out of their pocket versus what they’re planning to take in revenue is sustainable (hard to say from here), they’re still going to want to sell lots of books to publishers. Will this service offering help them or hurt them in that regard? Will publishers see them as developing competition? Or will the commercial proposition of each book on offer remain the key element of each negotiation?

We’ve come a long way in the past two years, from a time when many agents thought getting involved with self-publishing was a non-starter to a moment now when, in the words of one agent I spoke to last week, “none of us has any choice” but to provide digital publishing advice or capabilities to their clients. The next two years will probably bring much more change than that.

We’re putting together a new Publishers Launch Conferences show called eBooks for Everyone Else for both New York (on September 26) and San Francisco (on November 2). More details will be announced shortly. “Everyone else” is anybody without an IT department, and we always knew agents would be an important part of our audience (along with authors and small- and midsized-publishers) and our program. Looks like that show will be very well timed.

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