October, 2011

Can big publishers actually do tech and make books at the same time?

Something caught my eye this week that has been very little commented upon elsewhere: the news that Hachette Book Group developed an app-making capability that they are now licensing out. Their first customer was Round Table Companies, a book packager.

I found this striking because big book publishers are not generally known for developing technology; they’re more likely to be buyers of it. This is not an ironclad rule: Scholastic has an ereading platform in development to satisfy the special needs of the children’s book market and it is trying to work with other publishers who might want to avail themselves of the platform.

But from the standpoint of one who has observed publishers wrestling with technology for many years, this deal is very unusual. When Random House bought Smashing Ideas, a technology company, that seemed like the likely course for big publishers to take: acquiring technology that could be useful to them after it had been developed by somebody else.

There are other companies and entrepreneurs developing app-making tools. Most big publishers would be trying those out and getting great deals to do so because the companies making the tools need the validation of having them used by major players. The fact that Hachette even attempted to develop this capability on its own is unusual; that they succeeded at making something useful and cost-effective to the extent that Round Table preferred their solution to one developed by technologists is why it is worthy of comment.

Even acknowledging that selling the tech to a packager is not quite the same as selling it to a direct Big Six competitor, I don’t know if this is a harbinger or an outlier.

But I do know that it challenges one of my long-held assumptions about publishers and technology.

When you invest in intellectual property, whether publishing a book or developing software, you normally want to monetize that investment across the widest possible range of customers which you can only do by distributing through the widest possible array of channels. That’s the handicap Amazon has right now being a publisher: they don’t have effective distribution to brick stores and, as long as they want to keep what they invest in restricted to the Kindle for ebooks, it is pretty certain that they won’t. Over time, the number of brick stores will diminish so that will matter less and less and, if Kindle retains its position of primacy among ebook retailers, what is a real handicap today may become trivial. But traditional or legacy or real (pick your adjective) publishers really do have a wider distribution base than Amazon for books published today. (That doesn’t mean they will necessarily sell more, but it does mean they should!)

By the same token, I never thought it made much sense for a publisher, on its own, to develop software for product development or distribution that should have industry-wide application. I figured it would be hard for one publisher to sell software to another; the buyer would be afraid they were just permanently strengthening the margins and the hand of a competitor.

That same fear of strengthening a competitor is the reason that other types of collaboration that would seem obviously synergistic, like for publishers who do science fiction books to join together to create a science fiction community, haven’t happened. There was a moment a couple of years ago when Macmillan’s Tor.com suggested they’d start selling other publishers’ books to their community and invite other publishers in to strengthen it, but that never happened, even though it can’t make sense in the long run for what are ostensibly genre-driven communities to be siloed by publisher. I felt the same logic applied to publishers doing software development.

But that long-held assumption of mine is being challenged, by Random House buying Smashing Ideas and planning to keep it going as a provider of services to competitors, by Scholastic developing its own platform for displaying digital content and recruiting other publishers to join them, by three US publishers combining to create the new retailer Bookish (and three UK publishers replicating that idea with a UK version called Anobii), and, most dramatically, by Hachette creating an app-maker that a leading book packager finds a cost-effective way to build apps.

We still don’t know what will work. Will Smashing Ideas thrive under Random House ownership? Will Scholastic succeed in establishing a new reading platform for children’s books that can find a prominent place in the market? Will Bookish or Anobii succeed at becoming an important force in ebook sales alongside Amazon, Apple, Kobo, Google, and B&N?

And will what Hachette has done with their app-making capability be a trick they can repeat, developing technology to meet other challenges publishers face? Will Hachette become a specialized software vendor, developing publishing-specific tools, as well as a book publisher?

If so, they have found at least one formula that can help them through what are bound to be increasingly challenging times for general trade publishers.

We’re staging a conference next week in San Francisco which is a reprise of the very successful and well-received eBooks for Everyone Else event that we did in New York on September 26. We have a great show in San Francisco, adding a talk with successful self-publishing author Bob Mayer; a presentation from Penguin’s Molly Barton about their new Book Country initiative; a very interesting group of agents that will be interviewed by Charlotte Abbott; and a reprise of our “speed-dating” 1-on-1 sessions for attendees with service providers and experts to enable everybody to get their specific questions answered.

One major highlight of the show is going to be a presentation by my Publishers Launch Conferences partner, Michael Cader, which sorts out the myriad distribution and go-to-market choices facing today’s self-publisher. Michael did thorough research for this segment and, having seen the outline of the talk, I am certain it is the clearest and most complete survey of what has been a confusing and cluttered landscape of services that anybody attending will have ever heard.

Undoubtedly, Michael’s summary and analysis will make it to the web in the days after the conference, but if you’ll be in or near San Francisco next Wednesday, November 2, it alone will be worth the price of admission to eBooks for Everyone Else.


Is an 80% ebook world for straight text really in sight?

The recent news that digital revenues have reached approximately 20% at some of the Big Six houses makes me believe that we are on the verge of a tectonic shift in the industry. It provoked me to think through the logical extension of well-established trends and comment recently that I see an 80% ebook world for straight narrative text coming in two to five years. (By “straight narrative text” I mean books of just words.)

One of my most respected sometimes colleagues privately told me the 80% number was “absurd”. But considering the logic and evidence that was offered up to refute my projection only made me more convinced that I’m right. So it’s time to expose the thought process to one of the most acute groups of critical thinkers I know: the readers of this blog.

When the Kindle came on the scene in November 2007, almost exactly four years ago, ebook sales were in the neighborhood of 1% of major publishers’ sales revenue. Since then it has risen, by my calculations, between 2 and 2.6 times per year. So we’re at 20% of revenue now in October 2011; we were a bit under 10% a year ago, around 4% this time in 2009, and about 2% at this time in 2008, when Kindle was in its infancy and its only device competition was the Sony Reader. (When you look at “annual” numbers for each of those years they’re lower, but that’s because share was gained throughout those years, fueled by new device releases; I’m talking about where things stood at about this point of the year.)

I interpret 20% of Big Six sales revenue to mean something closer to 25% of units sold, because ebooks bring in substantially less revenue per copy sold than print on major hardcover books (although they can bring in a bit more on paperbacks). But many books were not yet ebookable: most juveniles and illustrated books are not represented in that figure. So I don’t think it is a stretch to figure that ebooks are constituting 30% of the units sold for straight narrative text.

(Working backwards, that means I think ebooks were about 15% of the straight narrative text units a year ago, about 6% of the units in 2009, 2-3% of the units in 2008, and probably fewer than 1% of the units in 2007, before Kindle.)

Although the following analysis was widely misunderstood when I offered it on a prior post (the misunderstandings are evident in the comment string), the way I’m defining the measurement of this — what percentage of a straight text book’s total sale will be ebooks? — the number cannot exceed 100%. So, clearly, it is impossible for the rate of share growth which has been sustained for four years, since the introduction of the Kindle, to continue for more than about another 18 months.

In fact, at some point the switchover from print to ebooks will slow to a crawl. Sales of straight text books won’t reach 98% digital for many years, perhaps decades. What I’d expect is that we’ll reach a point of print resistance and adoption will slow down dramatically. We can argue about where that point will be. I think it is 80%. A major executive was reported to have said in Frankfurt that he thinks ebook sales will “plateau” at 40%. (Maybe he meant 40% of revenue, which, depending on how much of the house’s output was straight text, would probably be nearer to 60% of straight text units.) Everybody’s entitled to their opinion and only time will prove us right or wrong.

There are a lot of reasons to expect a continuation of the recent trend of share doubling every year, at least for a while longer. Ebook readers and tablet computers are getting cheaper and more widely distributed, by which I mean that more and more places are selling them. (One hears widespread speculation that next year we’ll see offers for devices to be free with the purchase of a number of ebooks.) The number of titles available in multiple languages continues to grow. The price of new books in digital editions is established at about half the publisher’s suggested hardback price for the hottest new releases (and also much less than most stores would sell the print book for). Everybody who hasn’t yet switched to a digital device yet knows people who have successfully and comfortably done so. More and more libraries have ebook offerings (although they can’t obtain a lot of the bestsellers at this time.)

Cheaper books, more to choose from, and more plentiful and cheaper devices would not imply any slowdown in adoption in the short term, except that those most receptive to switching have already done so. But I don’t find that a persuasive argument for an imminent slowdown; some of the late adoptees, particularly the young, just couldn’t afford the devices until the prices came down.

In fact, one thing Amazon established very early in the life of the Kindle is that the heavier book purchasers tend to move to the readers faster. It makes intuitive sense that the price of a reader is amortized more quickly by somebody who buys more books. So, in fact, we could reach 80% of the units being purchased digitally if a much smaller number, say 40% of the people who buy books, make the transition.

Among those reading this post who would fervently hope I’m wrong would be anybody with an interest in a brick bookstore, whose survival challenge is only made more difficult if the trend to ebook reading accelerates. What this says to me is bookstores would be wise to specialize in books that make great gifts and children’s books (and there is some anecdotal evidence that the stores doing well have done exactly that; the most often cited being Books and Books in Coral Gables, FL).

So except that we know the adoption rate must (at some point) slow down as we approach saturation, I find little reason to assume that it will do so anytime soon.

If the trend that has been unbroken for four years continued for another year, ebooks would constitute 40% of big publisher sales volume and 60% of units for all straight text books by a year from now. At that rate, we’d reach 80% units on straight text in the quarter after Christmas 2012.

When I say I think we’ll hit it in two to five years, I’m being consciously restrained. To get there in two years would require that consumers switch from print to digital at about 60-70 percent of the speed they have for the last four years over the next two. Were it to take five years, it would mean the conversion rate would have slowed to a crawl compared to where it has been.

So the outer edge of the prediction I stated (five years) is, to my way of thinking, unlikely because it is too slow. Predicting the current rate for 18 months is probably too aggressive, but 2-3 years is not. Having it take longer than that would surprise me and I’d love it if anybody predicting that would explain what they think will slow things down so drastically in the months to come compared to the recent past.

The colleague who thought I had taken leave of reality offered some logic. First of all, it was observed that ebook sales rose most rapidly in 2011 right after Christmas, particularly as a percentage of total sales, rather than steadily throughout the year. That didn’t surprise me. It is due to an effect I have written about previously which last year was not softened by new device releases midyear and previously had been.

Ebook readers make great Christmas gifts (better every year than the year before because there are more to choose from and they get cheaper). This has turned Christmas Day into a great sales day for ebooks but the process of new device owners “loading up” apparently continues for a couple of months after Christmas. So ebook sales in the first quarter are artificially inflated and will continue to be until we reach saturation on readers, which will probably be at least two more years. When just about everybody who reads many books already has an ereader, the post-Christmas bump will diminish markedly.

But, at the same time, the print sales reported are depressed in the first quarter. Returns come in from what have too often recently been disappointing print sales at Christmas and, at the same time, the purchase of new titles in the first quarter is dampened because some stores give up the ghost after a failed Christmas season and others are jolted into greater conservatism in their stocking by declining sales.

Since print book sales net of returns are depressed and ebook sales are stimulated by gift devices, the percentage of sales that are digital reaches a dramatic new height in the first quarter. This has happened in recent years and will happen again in 2012 and maybe in 2013.

Ebook sales in dollars were also reduced in the past two years by switches to agency pricing. Five of the Big Six went agency on April 1, 2010, when the iBookstore opened. Random House went to agency in early March, 2011. When publishers switch from the wholesale model to agency, the amount they get from each ebook they sell goes down. So even if the book continues to sell at exactly the same velocity (and it might not, since agency also raises prices to the consumer), the publisher’s revenue will decline.

These changes, which have raised the price of major publisher ebooks, have not prevented the year-on-year growth described in this piece, but the timing of the agency switches did tend to make the increases look like they are grouped in one big step increment at the beginning of the year.

To an extent they are but not as much as they look. And we’ll be taking that step again when the calendar turns over to 2012.

(The dampening impact on revenues of the switch to agency by the five publishers in April 2010 was mitigated, indeed overwhelmed, by the impact of all those iPad devices creating new purchasers for ebooks. And there were new devices that year from Nook as well.)

Another piece of evidence I was asked to consider that would apparently contravene the 80% prediction is that music sales are still split 50-50 between digital downlads and shrinkwrapped CDs. I love knocking down comparisons with the music business (I started doing it in the very early days of the blog) but this one is almost too easy.

While sales of music may still be split 50-50 between downloads and CDs, consumption is almost certainly not. People can acquire their music on CDs and still consume it through digital devices. By doing that, they get additional value in metadata (those little books that come with the CDs) and they get a copy of the music that they can readily give away as a gift.

But when somebody switches over to consume their books digitally, purchasing the hard copy version is not an option. So it isn’t helpful or indicative to look at how music sales divide; we’d have to look at how music consumption divides. And I’ll bet anybody who wants the wager that it is not 50-50! When was the last time you saw somebody playing a CD?

It was also offered up to me that Bowker polling of book consumers has found consistently this year that only 15% of the people report having bought an ebook each month. I’d say that is entirely consistent with my hunch that 30% of straight text units are digital. We’ve observed throughout the digital transition that ebook purchasers are heavy purchasers. In fact, I’d have been surprised (and felt I had some explaining to do) if the number of ebook purchasers were higher than 15% at the moment.

Until the leap this year, the switch from print consumption to ebooks was deceptively easy for a publisher to absorb without making drastic changes to its organizational structure. That time has passed. The book business we see today — how titles are acquired, developed, marketed, and distributed — is still built on the basic industry that was constructed over the past 100 years. Unless there is something wildly wrong with my logic (and I’m counting on my readers to make me see it if there is), we’ll see more fundamental change in the way straight text books are published over the next 36 months than we have over the past 36 years.

The implications of this shift require a lot more thought than I’ve been able to give it so far. But one thing I think it will mean is that trade publishing will trifurcate in the next few years. With bookstores as the primary distribution channel, it was no problem for one publisher to do straight text narrative, children’s books, and illustrated books. They shipped to the same customers in the same box. If bookstores aren’t the primary channel, these different kinds of “books” will not have a lot of commonality: in sourcing, creation, marketing, or distribution channels. I wonder how many publishers are thinking about their publishing programs with that in mind.


Kobo’s new deals propel them into the top tier of global ebook competitors

The week I spend each year at the Frankfurt Book Fair is always the most stimulating week of my professional year. The concentration of the best thinkers and most powerful people in publishing always seems to lead me to a new burst of understanding about our global publishing world, particularly in these times of rapid change.

I saw one Big Six CEO who noted that I had said last week that I expected the US publishers to be living in an 80% ebook world pretty soon although the global head of another of the Big Six companies had just stated the belief that the switchover to digital would stop, or slow down significantly, at 40%. I respectfully disagree, but will save that argument for another post. The one I talked to, who chuckled about the wide disparity in these two predictions, didn’t express an opinion about which of us was right, but the implications of the two predictions are so different that it behooves the people running the biggest companies to at least consider mine, even if they believe his.

I also talked to a business development executive for one of the tech companies that has been converting backlists from print and pdf to epub. He made the point that his business remains robust but moves around the world as new markets discover serially that they need to get their intellectual property into digital form. We agreed that those of us who make a living on the digital transition — and that certainly includes me at the moment (what are you reading this blog for?) — have a few more years ahead of us before we’ll have to figure out how to make a living on the new reality (if we need to keep making a living when it arrives…)

With the deals announced at Frankfurt by Kobo with the English retailer WHSmith and the French retailer Fnac along with the quickening pace of store openings by Apple and Amazon, the future shape of the ebook retailing landscape has been more clearly defined. It looks to me like we’ll have three principal global players that will be active in every market — they being Amazon, Apple, and Kobo — plus perhaps a local contender in each market as well. Barnes & Noble has played the latter role extremely successfully so far in the United States; Waterstone’s will attempt the same in the UK starting next Spring; there is local competition in Germany; and certainly there will be in many other countries as the ebook revolution laps at their shores. Google, being Google, will not go away, but they will remain a relatively marginal player unless and until they put considerably more energy into their solution and into promoting what they have.

The Kobo deals are the game-clarifiers, if not game-changers. A sage observer of the digital scene stopped at my stand here in Frankfurt to discuss the WHSmith-Kobo arrangement with me and he wondered whether this was the best deal for both sides. Should Kobo have been trying harder to make a deal with Waterstone’s? Is it wise for WHSmith to be making a deal where they sell the devices but connect them to a Kobo-branded store?

But that, of course, is the key to the deal. The economics of the devices don’t work unless you also can sell the ebooks to go into them. (That’s the answer to all the geniuses who think Barnes & Noble is being thick not implementing an international rollout of the Nook!) Neither WHSmith nor Fnac is principally a book retailer: books are just another product line in stores that sell other things and have a broader identity. By selling a reader attached to an ebook store that serves customers well, they buy themselves relevance to the book consumer during the transition and extend their lives as booksellers. They demonstrate recognition that building and maintaining a ebook store is not a trivial undertaking and, in the face of several global competitors, not something they want to undertake from their position as a country-specific, and more general, retailer.

By tying up with Kobo, both WHSmith and Fnac can get into the market with ereading devices at about the same time as Amazon brings in the Kindle. And WHSmith launching for Christmas 2011 should be terrifying Waterstone’s, which will be months behind with devices and almost certainly delivering a less consumer-friendly store off the bat than the experienced Kobo offering will be.

Barnes & Noble has achieved startling success at establishing a strong second-place position in the US ebook market, but their situation may prove to be unique. First of all, they’re in the biggest single ebook market (by value, even though poorer markets may pass them sometime sooner in units) we’re likely to see for a decade or more. Second, they are a very serious book retailer that has built strong relationships among book publishers worldwide over many years. And third, their execution was nearly flawless. Even with their precedent as an example, there is no guarantee that Waterstone’s, or anybody else, can pull off what they did in another market.

So if it is a global game and you have to be a global player to be competitive, as well as a “whole ecosystem” game that requires devices attached to a well-stocked and well-presented econtent retailing environment to succeed, we can see the steep uphill fight to be waged by the other players trying to compete with Amazon, Apple, and Kobo, whether they be Google, Copia, Sony, Baker & Taylor’s Blio, or the new entrants financed by publisher collaboration: Anobii in the UK and Bookish in the US.

All other things being equal, I can see a global ebook marketplace that some years from now is 90-95% controlled by Amazon, Apple, Kobo, and a local player in each country, with Google getting most of the rest. Google may punch above its weight on the long tail because discovery of the obscure or highly niched content might be their forte; one scholarly publisher told me at Frankfurt that he is already seeing some real growth in his Google sales, which no trade publisher has said in my earshot yet.

But all other things may not remain equal. One informed member of the European digerati told me he believes that the European Competition Commission may outlaw the agency model in the European Union. Were that to happen, that would tilt the playing field substantially toward Amazon. It is ironic that the biggest, strongest, and most deep-pocketed competitor for global ebook sales could be handed an enormous competitive advantage by bureaucrats ostensibly trying to foster a competitive marketplace. Publishers may have deficiencies in their understanding of the digital transition, but it would appear that the government bureaucracies the world over might be far more confused than the publishers are.

I’m posting this before I leave the Frankfurt Book Fair on Sunday afternoon, European time. I won’t have the opportunity to respond to any comments until at least Monday night London time. I drive with a friend and the charming little hotel we stay at in Monschau doesn’t have wifi and I don’t have the digital dexterity (with “digital” in this case referring to “fingers”) to do lengthy replies on my iPhone.


Will book publishers be able to maintain primacy as ebook publishers?

Being on the road in London and on my way to Frankfurt, where we have two Publishers Launch Conferences coming up on Monday and Tuesday, I don’t have time for what my British friends would call a “proper” blogpost, with a bit of research (I admit I never do much) and some links. But I’ve been thinking about something over the past month which I ran by a marketing VP at a major house last week. It looks like one of the really big questions facing the major houses in the next couple of years, so it seemed worth airing in the run-up to publishing’s largest global gathering.

Here’s an assumption that is not documentable; it is my own speculation. I think we’re going to see a US market that is 80% digital for narrative text reading in the pretty near future: could be as soon as two years from now but almost certainly within five. We have talked about the cycle that leads to that on this blog before: more digital reading leads to a decline in print purchasing which further thins out the number of bookstores and drives more people to online book purchasing which further fuels digital reading. Repeat. Etcetera.

We’re already at the point where new narrative text units sold are well north of 25% digital (percent of publishers’ revenue is lower than that, of course) and we are still in a period that has lasted about five years (soon to end) where the penetration of digital has doubled or more annually. (I italicized that to emphasize that what I’m talking about doubling is the percentage of sales that are digital, not the absolute number of digital sales. Several people misinterpeted that when I made to it previously.)

Of course, penetration will slow down before it reaches 100%. I’d imagine we get to 80% in 2 to 5 years, then then to 90% in another couple of years, with the last 10% stretching out a long time. How long did it take after the invention of the car before the last person rode their horse to town?

Now here’s a fact which is documentable, and would be documented right here on a day when time wasn’t in such short supply: brands that are not publishing houses are directly publishing their own ebooks with increasing frequency. Magazines and television networks and web sites are recognizing the reality that self-publishing ebooks is something they can do themselves without the complications (or revenue-sharing) that working with a publisher would require.

This is not a surprise to me, but it does really raise a point that major publishers have to consider: can book publishers add enough value to the ebook publishing process to persuade another brand with content credibility, one that has direct contact with the vertical community that is the audience for their books, to do their ebooks through the publisher rather than directly?

This is an existential question for big trade publishers. They have forged partnerships with other brands, even media brands, for many years based on their unique ability to deliver printed books competently and to put them on bookstore shelves. Those are things that a magazine, a broadcast network, a movie studio, or a packaged goods company couldn’t do for themselves.

Which leads to the conversation I had this past week with the marketing VP. We were discussing marketing topics suitable for Digital Book World this January. This house is doing some very important things that wouldn’t have been on their radar a few years ago: SEO, of course, but also developing vertical communities and organizing a corporation-wide effort to gather names and data and direct contact with readers (handicapped by the fact that they almost never actually consummate the transaction). I raised the question: “will publishers be able to persuade these non-publisher brands that it is worth giving up margin and some control to work with publishers in the years to come?”

“That’s a very tall order,” he said.

Random House has apparently succeeded in doing this a couple of times recently. They have made deals with two political web sites (Politico and Real Clear Politics) to do ebooks related to the 2012 presidential election. This is a big deal. It wouldn’t be a big deal if the principal output were print; Politico and RCP can’t do print. But they could do ebooks without Random House; literary agents all over town (among others) are lining up to offer the tools to enable that.

And the profound danger to the big publishers is that if outfits like Politico and RCP start by doing their own ebooks, who is to say they’d stop there? It would be a natural extension to start publishing other people’s ebooks themselves once they had built up a network and infrastructure to sell these files successfully. The thing for trade publishers to fear is that they would lose their role in the value chain, vertical by vertical.

Developing skills and capabilities that make their ebook-publishing ability superior to vertical brands is going to be essential for publishers’ survival as the skills and capabilities to do print publishing become less important commercially over time, as they will. Even if you disagree with my aggessive expectations for ebook market penetration, I think you’ll be able to substitute your own and come up with pretty much the same conclusion.


An aspect of the Amazon-Apple battle the tech world doesn’t care much about

Almost two years ago, I wrote a post which continues to be one of the most-read in the history of this blog, the point of which was that the business model disruption (called “agency”) prompted by the iPad would have more impact on the ebook ecosystem than the device itself. I’m happy to repeat that statement today because I think events have proven that hunch to be correct.

This week Amazon announced their new tablet, the Kindle Fire. (Mine’s on order. I gave the original Kindle I had to my wife, who still uses it. I also own an iPad but never read books on it. As everybody who reads this blog regularly knows, my ebook consumption is all iPhone, largely purchased through the Kindle store, sometimes through Nook, Kobo, or Google, but never through iBookstore.)

The Kindle Fire announcement has unleashed a spate of stories in the tech press about the battle between Apple and Amazon. Who knows what Apple’s rejoinder will be, but it would seem that Fire offers much more than half of what an iPad delivers to a media consumer for much less than half the price and about two-thirds the weight. It appears it will fit in the hip pocket of a man’s suit jacket. That sounds like a competitive formula. It already was for Nook Color, and Amazon seems, at least for the moment, to have done them one better.

Books are not the central focus of this Amazon-Apple battle even from Amazon’s point of view and they are certainly are not from Apple’s. Apple is a device company and their content offerings, and their control of their content offerings, are intended to reinforce the unique experience their devices deliver. Amazon certainly knows from their Kindle experience that offering the right device can propel content sales and secure the content customers’ business (a lesson B&N has both learned and demonstrated quite successfully with Nook as well). The Fire is as much about video content as it is about books.

But in the book business, we look at these two titans in a different way because they force publishing into managing two completely different commercial models simultaneously. That’s not something most of the tech community has paid any attention to in the prolific “Amazon versus Apple” commentary following the Kindle Fire announcement. But it reinforces the point made in the post from two years ago: the fact that Amazon and Apple have different approaches to acquiring and pricing content offerngs is the most important aspect of the battle between them to the book publishing community. Who “wins”, as in “who sells the most devices?” (or even “who sells the most ebooks?”), is really quite secondary since both are significant and neither is going away.

Amazon wants to acquire its book content with the ability to control the selling price so they can continue to burnish their reputation as the lowest-cost provider and exploit other advantages that their huge customer base and extraordinarily deep pockets provide them. Apple wants a margin-guaranteed commercial model that also assures them that they won’t be embarrassed by having their customers see the same content for a lower price elsewhere.

Apple assumed they’d be able to move the most devices and, with price neutrality, create enough advantages to their device owners to shop in the device’s “home” store to satisfy their competitive requirements. That is, Apple’s content-selling strategy was to maximize their market share among their own device owners. They do nothing to move the content onto other companies’ devices.

But Amazon is a store first; the devices are in service to the store, not the other way around. Price competition is a key component of their competitive toolkit. And they are relentless at using their tools to take market share and margin away from their retailing competitors.

Publishers see their interests more closerly aligned with Apple’s strategy than with Amazon’s. After all, Apple is perfectly comfortable with the idea that others will need to provide content to whatever non-Apple devices are out there. Amazon wants to dominate content sales to all devices. Publishers want an ecosystem with as many contact points for consumers as possible to protect them from being disintermediated by somebody downstream (namely Amazon). And they like the necessity of managing a lot of resellers because it protects them from being disintermediated by somebody upstream (the agents or authors).

Amazon found out in a battle with Macmillan very shortly after I wrote the piece cited at the top that they couldn’t bully the Big Six publishers into abandoning agency pricing. So they gave up the effort to do that, and the Big Six now apply agency across the ebook supply chain, creating uniform prices through all outlets for most of the biggest commercial titles on offer.

But Amazon did not find it necessary to back down from their insistence on wholesale for everybody else. And that means that, except for the Big Six, all publishers that want to offer their ebooks through both Amazon and Apple are forced into the “hybrid” model: agency with Apple, wholesale with Amazon, and a choice between the two for everybody else.*

The models are ultimately incompatible and create anomalies (an example of which with a high-profile title not published by one of the Big Six we reported on recently.)

And that, not the device war itself, is the most important component of the Amazon versus Apple battle to the book publishing community. With the recent move by Apple to end direct-linking to their proprietary stores out of the apps of other ebook sellers, they are undoubtedly increasing the market share of iBookstore (even though their title selection still lags way behind their competitors.) There’s a price in lost sales to pay if an ebook isn’t available in all the places customers might shop for their next read.

But to make an ebook available through both Amazon and Apple, a publisher must set two retail prices: one to sell to consumers at through Apple and one to base a discount on for sales through Amazon. Publishers will continue to see titles flagged by Apple on a weekly basis because they were on sale somewhere (presumably Amazon) at a lower price than the publisher set for Apple, allowing Apple to lower the price (and to proportionately decrease their payment to publishers for sale of that ebook.)

The advantages of agency, including the ability to raise and lower prices to generate promotion or to take advantage of stronger demand, will continue to be reserved to the Big Six. So will the potential advantage (not yet realized, to our knowledge) for the Big Six of being able to sell from within apps or off their own web sites because they have the ability to do that without competing with their retailers on price. And so is the protection against the possibility that an agency reseller will lower the price to meet a wholesale reseller’s competition, thus cutting the revenue delivered to the publisher and, ultimately, to the author.

I have not yet explored the ramifications of agency versus wholesale or hybrid with an agent from the author’s commercial point of view, but it would seem to be an advantage for the Big Six publishers in signing up major authors that they alone can enforce agency. And with the device battle now joined and bound to be going on for many years to come, it would appear that the division between Apple and Amazon will perpetuate a division between the Big Six and all other publishers which will last for the foreseeable future.

* Writing that asterisked sentence (several grafs above) made me realize what I didn’t know. How do publishers set their two different retail prices, one of which is the basis fo 50 off and a retailer-set customer price and one of which is the basis of 30 off and that is the price? Who decides on which basis the other ebook retailers — B&N, Kobo, and the rest — do their purchasing? (I know they all benefit from agency, so presumably they buy agency with the same assurances of price-protection Apple takes, but do they have a choice?) And how many publishers just refuse to sell to Apple so they can put all publishers on wholesale and let the discounting occur as it will?

I know people to ask about all this, but not on a baseball playoff weekend. It will likely be the subject of a future post.