Digital Book World

No new facts today, just some perspective.

Google has launched and Copia has launched. Kindles and Nooks are on sale in consumer electronics stores far and wide. iPads continue to roll out by the millions and recent evidence suggests that consumers are very happy reading ebooks on them.

I’ve made the point on the blog before that every book purchased online is another nail in the coffin of brick-and-mortar bookselling. All ebooks are purchased online (despite some charming, but futile, fantasies to the contrary.) Even with the Google proposition enabling all stores to participate in the ebook marketplace, which may motivate Amazon to try a similar proposition (and, considering the hostility of competing book retailers toward Amazon, good luck with that), it all adds up to less support for brick-and-mortar. Google ebooks might help some bookstore owners generate some margin, but that doesn’t mean it will keep more stores open.

(Look at it this way. If you ran a bookstore and found that through Google you were able to sell more and more virtual goods while your brick-and-mortar sales were declining, would you invest what you were earning through the new and growing channel in the old and declining one?)

This is not the moment for chewing over stats. We’re in the middle of a huge acceleration in digital reading. I have seen it suggested that this year might mark the first when Christmas will be the book business’s biggest sales day, because all those ereader recipients unwrap their presents and immediately go online to load up their machines.

There will be lots of opportunities for statistics-based observation after the turn of the year and we’ll be doing a lot of it at Digital Book World. (We just got some early data from iModerate, which is looking at ebook consumption on multi-function devices for us, and it is provocative.)

I’m expecting that what brick-and-mortar booksellers will experience in the first six months of 2011 will be the most difficult time they’ve ever seen, with challenges escalating beyond what most of them are now imagining or budgeting for. If I were programming a show for six months from now for the book industry, I’d plan for that to be Topic A.

Things happen “gradually, then suddenly.” I think the next six months will make what we’ve been experiencing for the past year look very gradual. I know smart people who have thought for the past year that there would be some flattening coming soon in the ebook switchover. It doesn’t feel that way to me.

I linked immediately above to a post of mine from last Spring in which I got something pretty damn wrong: figuring that iBookstore’s early success would be sustained and that Random House would find it “necessary” to switch to Agency, even though I saw the logic in their initial decision to stay out. As it has turned out, iBookstore’s share appears to have declined, even as the use of iPads and iPhones as ereaders has grown. Many more ebook titles are available for those devices through other sources which now, emphatically and ironically, include Google. Because Google is delivering a lot more illustrated and complex-page ebooks to the market than there were before, it will make the iPad even more valuable. So as Google Ebooks succeed, iBookstore doesn’t benefit but Apple very well may.

I’m a baseball fan and I think both hitters and future predictors should be happy if they bat .300. I’m not embarrassed to be pointing out one of the times that I made an out.

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A few things worthy of a pre-Thanksgiving comment have passed in front of my eyeballs in the past few days.

1. Sainsbury’s, one of the big supermarket chains in Britain, has announced that it will open a digital download store before Christmas. They’re starting with movies and music, but plan to expand to ebooks before long.

The working assumption has been that Amazon, Apple, and Google (even though Google Editions hasn’t launched yet) would be the major global players for ebook distribution. Barnes & Noble has taken significant market share in the US, putting them second in sales to Amazon at the moment. There are rumors that B&N is going to start competing globally before long; it would certain make sense for them to do that. (Perhaps B&N’s aggregation of books in Spanish is a step in that direction.) Sony and Kobo are already active all over the world; Copia intends to be and they have just opened for business.

But if Sainsbury’s wants to be in this business, so might mass merchants in every other corner of the globe. We had already had our eyes opened by a French publisher who expressed his fervent hope that local French book retailers would carry English-language ebooks. His reasoning was very simple. Since Amazon, Apple, and Google would be carrying ebooks in French as well as English, the local merchants won’t be competitive unless they carry English as well as French.

There is a tendency in some quarters to declare the ebook wars over and that somebody (usually Amazon or Apple is the one annointed) has “won.” It is important to remember that ebooks have about 10% pentration in the US and less than 1% everywhere else (except, as we’ll see below, China). Many more players will be competing for the ninety-something-percent of the 2015 world’s ebook readers that haven’t tried it yet.

2. A story in China Daily puts the Chinese digital publishing business at $12 billion and at more than half of the Chinese book business. I have some immediate skepticism about these numbers since the US book business (all in: trade plus school plus college plus professional plus anything else you can think of) is only $30 billion and the US ebook business was just estimated by Forrester to be $1 billion. For China’s book business to be 80% or more of ours in total and for China’s digital publishing business to be 12 times ours seems very unlikely, if not impossible. Who knows what errors of methodology or currency conversion could explain these numbers? (I surely don’t.) But half digital is a powerful statement, even if the comparison with the US can’t be right.

The fact that China has moved so fast to digital opens up another line of thought to me: how translation might work in the future. Google Translate doesn’t deliver you a publishable version of anything. But it does deliver an intelligible version that a good writer or editor can turn into something publishable pretty quickly. How long can it be before a combination of Google Translate and a single literate person is delivering a perfectly acceptable translation of anything to anybody who can afford the single literate person?

(Added after publication: you’ll see a comment below pointing out that the statistics in the China Daily article referred to all publishing in China, not just book publishing. That makes the figures make more sense. It also means that much of what appears in the two paragraphs above has been mooted, except that Google Translate plus one good editor can deliver a readable version of anything in any language.)

3. Sarah Weinman, who is one of the more acute analysts of the commercial realities of digital publishing, just wrote a piece wondering whether the iBookstore is actually working. She suggests that iBookstore is trailing both Amazon Kindle and B&N Nook by a considerable amount in sales. She has data from one particular book for which the ebook sales were about 60% Amazon, 26% B&N, and only 6% iBookstore. When I asked a few publishers how those percentages broke down about four months ago, they put Amazon closer to 50% than 60% and put B&N and iBookstore pretty close to each other. The iBookstore, which I call the Walden or B. Dalton mall store of ebooks, has been a head-scratcher for me. They have far fewer titles than their competitors: Amazon, B&N, and Kobo. While they do a nice job of title presentation for the bestsellers, their lack of breadth is evident if you do any kind of subject or genre search. Meanwhile, Amazon’s very tough position (so far) resisting agency for any but the biggest publishers makes it very difficult for smaller publishers to put books in the iBookstore without exposing themselves to the danger of conflicting contracts and a downward spiral of revenue if Amazon decides to discount their books. (I have been told lately by two small entities that they’re going to get agency terms from Amazon; one actually wonders why Amazon would permit that right now since their current strategy seems to be working to keep the iBookstore uncompetitive on title breadth.)

On the other hand, it has been pointed out by others that iBookstore is going to develop a big offshore following. The iPad is making inroads abroad faster than Kindle and Apple’s iBookstore is the only book purchasing experience that comes already loaded on the iPad device.

I would never expect iBookstore to go away, but I do wonder whether it will be a significant force in ebook retailing, ever in the US and, in the long run, anywhere, unless they are willing to back off on requiring agency terms from smaller publishers. Or unless Amazon will back off on requiring wholesale to that same cohort.

4. PW reported yesterday that HarperCollins is shutting down its ebookstore. While there could be any number of factors at play, one has to assume that sales were not robust. The guess from here is that the problem of not enough traffic from consumers is going to be a generic problem for general trade publishers. You can only get traffic as a horizontal aggregator if you are a complete horizontal aggregator. iBookstore can’t do it with a fraction of the titles that Amazon and Barnes & Noble have and neither can a publisher.

With our good friends at Market Partners International, we’ve just launched a questionnaire on Survey Monkey to learn from agents what ebook deals they’re making with publishers. We’ll balance our inputs by interviewing publishers on the same subject before Connie Sayre of MPI and I deliver what we’ve learned at Digital Book World in January. If you’re an agent and you haven’t received an invitation to participate in this effort, contact Jess Johns at Idea Logical ([email protected]) and she’ll get you included.

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One of the functions of this blog is to predict important changes in the business just a bit before they happen. We think we were a bit ahead of the curve in seeing the ebook acceleration and in seeing the likely pressure on bookstore shelf space. Today it would seem that the next great pressure point in publishing houses is going to be the sales departments. In the next couple of years they will probably change more than they have in the last half-century.

When I first became aware of how the publishing business worked in the 1960s, the field reps (referred to frequently then as “the men”) were the key connection between the publishers and the market. The closest thing there were to national chains in the early 1960s were department store buying groups who seemed to all be clustered in tiny little offices on 42nd Street in the block just west of 5th Avenue. The local department stores — Marshall Fields in Chicago, Rich’s in Atlanta, Halle Brothers in Cleveland, were big and important accounts.

Because the reps were the key to getting books into the hands of readers, everything revolved around passing information and excitement to them and through them. Thus were publishing “seasons” necessary to group the books, organize them into catalogs, and to prepare sales materials (tip sheets, jackets, blads for illustrated books) in an orderly way. This pretty much required that publishing lists be frozen some weeks before the sales conferences which themselves were a couple of months before the first books on the list would ship.

Today the field reps are probably responsible for anywhere from 5-to-15 percent of a house’s sales. The major accounts: Amazon, Baker & Taylor, Barnes & Noble, Borders, and Ingram for everybody (and the mass merchants like Costco, Target, and Wal-mart for the biggest players) are now at least 70% of the business, often more. These customers are almost always covered by national account staffs, not by field reps.

National account sales almost never work with catalogs or seasons; they work by months. Each national account has its own rules and regulations governing when they need to know about a particular month’s books. Whether sales calls occur monthly or less frequently, the structure of the presentation is around each month’s deliveries, not around seasonal catalogs.

It seems transparent that the shift in sales resources has not kept pace with the shift in sales channels. The ratio of national account business versus field business has gone from what was probably about 50-50 20 years ago to 80-20 now. But field forces haven’t shrunk by anything like that proportion. The fact that 80% of the business is now season- and catalog-free hasn’t changed the procedure in most houses of building marketing around seasons and catalogs.

I checked in with a couple of veteran salespeople to confirm my notion that the structure of publishers’ sales organizations hasn’t changed as much as the structure of the account base. One of them made a couple of important points. He posited that field sales force reductions had been slow to happen because the field reps are highly visible in the industry. Outspoken independent stores, which have a public profile larger than their sales, want to be called on and complain if they’re not. Publishers in the houses who are fighting for attention for their books don’t like to see fewer reps selling more and more titles.

This same sales veteran also underscored that both marketing and publicity are living in a similarly restructured world and haven’t changed as much as they should either. He points out that Amazon coverage really calls for marketing talent and thinking, not sales talent and thinking. Sales, as this person sees it, is often about talking an account into taking a chance on stocking a book. Amazon works by algorithms and you can’t talk them into anything. (Furthermore, it doesn’t really cost you any sales if Amazon is out of stock; they’ll source the book from a wholesaler to satisfy the customer. If you’re not on the bookstore shelf, on the other hand, you aren’t going to make a sale.) So the Amazon coverage needs to be about keywords, marketing programs, and metadata. It isn’t about salesmanship, as it is in an independent account, or about navigating a complex supply chain, as it is at a chain or mass merchant.

Experiments have been tried. Ten years ago, Random House tried putting reps into the field specifically to call on the branches of bookstore chains. That has always seemed like a good idea to me: store managers and clerks affect sales; being faced out affects sales; and there’s a lot of display opportunity that is locally controlled. Only a rep calling on a chain branch can affect those things and good merchandising of the books in the store will mean fewer returns. Different chain managements (and some chains have changed their managements the way some people change their shoes) have different attitudes about those calls. Very few actually see the benefit and encourage it. Some quietly discourage it; some try to forbid it. Whether or not Random House continued that effort, it certainly didn’t become widespread.

But as independent bookstores continue to diminish in size and number, publishers need to come up with other things for reps to do to keep them in the field. Calling on chain stores would be one productive thing. Calling on local newspapers to push books or calling on special market (non-bookstore) accounts would be two others. We know of one major publisher that was trying things like that three or four years ago but it apparently didn’t work for them. That same publisher fired a bunch of reps a couple of years ago and shifted a lot of sales coverage to telemarketers.

Catalogs are slowly moving to electronic. Harper started the movement with their own initiative a couple of years ago; now Edelweiss from Above the Treeline is providing an industry solution. But seasonal list planning is still the predominant go-to-market mechanism in our industry.

I just don’t believe the status quo can hold a lot longer. Selling by seasons in the digital age is nutty. Preparing printed catalogs that are out of date before the ink on them dries in the digital age is nutty. And making the entire publishing house’s marketing staff work around sales conferences and list preparation when most of its customers don’t buy that way is beyond nutty. There needs to be a complete re-think of how publishers put books into the marketplace. The divisions of responsibility among national account reps, field reps, telesales reps, marketers, and publicists need to be rethought.

With a new step-increment drop in print book sales almost certain following what we all expect to be an ereader Christmas (and our new biggest sales day: December 25), I think we can expect some very hard thinking around this subject at many publishing houses in the first six months of 2011.

I belatedly realized that this was a very important topic that hadn’t been covered at Digital Book World. It is now. We have a great panel: Rich Freese of National Book Network, Alison Lazarus of Macmillan, and Michael Selleck of Simon & Schuster will discuss the changing role of the publishers’ sales department on a panel moderated by David Wilk, a veteran of trade book sales and distribution. I consider this a prime example of what I’ve tried to make DBW’s distinguishing proposition: discussion of business challenges caused by technology even if the topic itself isn’t primarily about technology.

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An aphorism that I picked up years ago that crosses my mind frequently in my professional life is that “a six-foot tall man drowns walking across a river that’s an average of three feet deep.”

The point is that aggregates and averages might mask important truths.

I thought of this when I read the news from the Forrester study of ebook take-up announced earlier this week. NB: Forrester is in partnership with my colleagues at Digital Book World and will present data — although not on this ebook study, but on another project — at the DBW conference in January. I haven’t been involved in those discussions and, like most of the readers of this blog, only know about the ebook study what I read in the releases and commentary.

Kat Meyer on O’Reilly Radar expressed her doubts about the Forrester data, and data just announced by Bain Consultants in France. Kat’s concerns go to methodology. Although I don’t know if we’re in a position to evaluate the methodology because I’m not aware that much has been revealed about it, I’d say her point is well-taken but it isn’t what really concerns me.

(My own first take on the headline numbers is 1) $1 billion in ebook sales now? If this trade only  – and there are some indications enumerated below that it might not be — then it is out of $15 billion which seems reasonable. If the number includes non-trade, which is $30 billion, then it is shocking for being low, not high.  2) Forecasting growth to $3 billion by 2015 from either base seems very conservative and the reduction in the growth rate over the next five years over what it has been the last two years is the story. I don’t think I’ve seen any accounts of the report that have characterized it that way. Being alone with this analysis makes me wonder whether I am missing something and don’t know enough to comment yet. That’s why this paragraph is in parentheses. It makes me feel better.)

The Forrester presentation of an industry study is one of several rooted in serious research that we’re planning for the conference. Last year we had reports from Verso Media about book readers, tracking their switch from print to electronic. Guy Gonzalez and his Digital Book World team have taken over that study and will update it for us with Verso. We also had a presentation last year from Bowker and BISG, who were just starting their study of ebook readers. They have done four fieldings since and will also be able to give us an update.

In both these cases, as long as the methodology of the studies has remained consistent, we’ll get important trending information, whether or not the precise percentages reported for various behaviors are accurate or not.

We got an opportunity to do another study when the team at iModerate, which has an online “chat” methodology to personalize research, volunteered to demonstrate what they do for our audience. We got to choose the topic and we decided to study the ereading habits on portable multi-function devices (smartphones and tablets). We chose that topic for two reasons: it is a new and rapidly-growing group of ebook readers and the color touchscreens and connectivity of the devices makes enhanced ebooks that might be hobbled on the Kindle or first-generation Nook fully accessible.

We will also debut work Bowker has done on the children’s book market supported by several publishers and organized with the Association of Booksellers for Children.

The headlines from the Forrester reporting were that ebook sales are approaching $1 billion and they expect that number to triple in five years. Also eye-catching was the fact that, three years into the Kindle era and more than six months after the iPad introduction, more ebooks are read on full-function personal computers than any other way. I say that was eye-catching; it goes to the heart of my concern about the data. It’s about the six-foot tall man.

It is my strong hunch that the content that is read on PCs is qualitatively different than what is read on portable and mobile devices. I am fully aware of the dangers of generalizing from one’s own experience, but I have never met a person who reads trade books on a PC. I know people who read on Kindles, Nooks, smartphones, and iPads. I am aware from having talked to people in the romance ebook business that people in offices reputedly read romances on their office machines (at lunch, of course).

But my intuition tells me that big chunks of that PC reading is professional and informational, not recreational and that this is where PDF sales are most likely. If 30+% of ebook readers consume content on regular computers, I’ll bet the percentages for O’Reilly’s Safari (whether reading a chunk of an ebook from that service is counted here is a good methodology question, but my intuition about interpreting the device data tells me it must be) are much higher.

So ebook reading is the river that’s an average of three feet deep. But it is only a foot or two deep near the shore (where the trade ebooks are read) and it is 15 feet deep in the middle (where the professional ebooks are read.) And the important point is that publishers who do one or the other are not usefully enlightened by data that puts those two distinctly different markets and environments together as if they were one.

This is not to suggest that nothing can be learned from Forrester’s research nor that any other study has a firm grip on this granularity. I asked a data-driven colleague who’s done a bunch of work in this area whether he shared my hunch about who’s reading those PDFs on PCs. He went into his files and ultimately agreed that the market parsing I was looking for was not evident in the extensive research he had done.

Obviously, there are people who know this. Amazon and B&N and Kobo know what devices the books they sell are read on. O’Reilly knows what devices the books they sell and the ones used in their Safari library are read on. When I interviewed the publisher of Ellora’s Cave at Digital Book World last year, she was quite conscious of the fact that many of her books were still sold as PDFs, implying a computer reader. The fact that this data has not been made ubiquitously available and parsed suggests that it is seen as having proprietary value by the people who possess it.

Trying to understand a strand of the market that might be distinct was behind our thinking when we decided to have iModerate focus on portable multi-function devices. We figured that those readers might use and value enriched ebook features more than Kindle or Nook readers and we also see them as the market segment of ebook readers likely to grow fastest. So understanding that market segment in some more detail might help publishers lead the target a bit on product development.

We have written many times before that the book business is not one business. The professional ebooks read on a laptop by a programmer in the middle of an assignment don’t tell you much about what format you should publish a romance novel in. The big change in the ebook world that hasn’t really happened yet but will in the next couple of years is greater adaptation and consumption of illustrated books in digital form. Anything heavily illustrated now pretty much has to be delivered as PDF to a laptop; that won’t be true anymore at the outer edge of the current forecast window, which is 2015.

On the day I’m writing this, new ebook sales data was announced and Cader analyzed it in a post that is behind his paywall. He calculated that ebook sales comprise 9.5% of adult trade sales but only 1.7% of children’s. That’s really charting the river bottom in a useful way.

So we’d say give us data, let us try to understand its limitations and gain insight from it at the same time, and let’s remember that the world of digital change in publishing is simultaneously dynamic and diverse and that no single body of data is likely to give us the answers to what we should do next or what we should expect in the years to come.

It is precisely because data needs to be interpreted that we set the Verso-DBW, BISG-Bowker, and iModerate sessions at Digital Book World back-to-back-to-back and will follow their presentations with a panel discussion meant to shine some light on what we can conclude from what they say.

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This post will discuss a realization I had even before this morning’s news about the developing e-products scene. I’ve always been a skeptic about enhanced ebooks, based on seeing my hunch that they wouldn’t work come true 15 years ago with CD-Roms. But it is increasingly obvious that CD-Rom type thinking will work very well for kids’ books. In fact, I’m beginning to think that enhanced ebook or app-type delivery could overwhelm books as a container-of-choice in a pretty short time. Single digit years.

The reasons that I’m skeptical about enhanced (or enriched, a recent term I’ve heard that might be better) ebooks is because most adult books are written as narrative reading experiences not intended to be interrupted and now being read by people who value the immersive experience. (Not all. But most of the kind we think of as bestsellers or literature.) My guess is that it is going to be hard to shift many of the hours of consumption now devoted to immersive reading to something quite different. And I see that as a qualitatively different challenge than moving immersive reading itself from one delivery mechanism (paper) to another (screens.)

The reason that kids’ material didn’t survive the CD-Rom period 15 years ago was the complexity of the delivery mechanism. You had to be at a computer, which usually meant a desktop computer. You had to load the CD-Rom, which on most computers (because few then were Macs) required additional navigation before they would play. These products just weren’t really accessible to kids, even if the programming they contained was designed for them.

But those reservations just don’t hold for kids’ “books” (if that’s what you call them) migrated to the iPad, a smartphone or, now, the NOOKcolor (which, I think, is how its owners would like us to spell it.)

The degree to which you can immerse yourself in a book is directly proportional to the fluency with which you read. That means that the younger you are, the more likely you are to accept the interrupted reading experience .

And as the devices get cheaper and more ubiquitous, parents and kids will learn fast how entertaining, instructive, and accessible interactive experiences can be.

I started writing this post over the weekend because we knew about several entrepreneurial ventures that were focused on developing kids’ material in this way. Then this morning’s Publishers Lunch told us the story of the developments at Callaway, which only underscore that some serious money is betting on this direction.

In short, I have come to the point of view that the juvie book business is going to migrate to enhanced digital products much faster than adult narrative text and that, as a result, the origination and publishing for the various kids’ book marketplaces will be increasingly the province of new companies and less and less the business of book publishers.

The Callaway Digital Arts story as Publishers Lunch reported it today is stunning. Not only did they secure $6 million in financing led by Kleiner Perkins Caufield & Byers’s iFund, they have won a $30 million “Ready to Learn” grant from the Department of Education. With this wind at their backs, Callaway says they plan to be producing 150 apps a year by two years from now. They’re being seen by Apple as a “strategic partner” helping the iPad to “transform education.”

While the Callaway start-up is the most dramatic, they’re hardly alone in focusing on the market for enhanced kids’ content built on books .

Oceanhouse Media is building what seems like a comparable business a completely different way. Rather than going to investors for capital, Oceanhouse managed to self-capitalize by building a network of developers willing to work for a piece of the projects they are developing. They’ve got deals with Hay House (that’s not for kids, primarily), their neighbors in San Diego. And they’ve secured rights to Dr. Seuss and Berenstain Bears. In a conversation with them, it sounded like they’d be delivering new products at the rate Callaway projects even sooner than two years from now.

Trilogy Studios has partners who have run game studios at Electronic Arts, Fox Interactive and Vivendi Universal Games and recently launched their most successful children’s product to date, a casual MMO (that’s a “Massive Multiplayer Online” game) based on a very successful animated feature film. They’ve expanded their portfolio to include interactive storybooks and social games and hired publishing veteran Marc Jaffe (recently of Rodale) to secure rights to some of the most recognizable entertainment and publishing brands for further digital development.

Rick Richter, recently the head of children’s publishing at Simon & Schuster, has his own new entrant in the field called Ruckus Media Group. They’re doing Apple and Android apps, have acquired rights to the Rabbit Ears Library (children’s classics read by celebrities) and are signing authors for original content.

Smashing Ideas is a website, game, and app studio that has been in business for 14 years. They’ve worked with youth-focused brands like Hasbro, Nickelodeon, and Disney for many years. Now they have a deal to develop projects with Random House and they’re also going to town on public domain books with apps out or coming soon for War of the Worlds, The Jungle Book, and The Wizard of Oz. This shouldn’t be a big surprise because Ben Roberts, who now leads their ebook division, helped create Alice for the iPad.

All of this investment and all of this development must be seeing the same thing I’m seeing. Kids are going to be a big market for this kind of product. Straight narrative reading can be immersive to the extent that the act of reading itself is easy and effortless. You can’t lose yourself in the story if you’re looking up words or frequently re-reading sentences to get the meaning.

That means it is a lot harder for a younger person to get immersed in just words on paper. That’s why kids’ books offer so much more than that: pictures, of course, but also pop-ups and various other entertaining three-dimensional devices, to the extent they can be delivered in something which is fundamentally bound paper.

You could say kids have been getting “enhanced books” forever!

The new devices have much better capabilities than CD-Roms did to engage in ways other than with words — ways which those of us who love immersive reading might find distracting or annoying but which kids love. Intuitive touchscreen navigation, a relatively recent development, makes it even easier to engage and interact with an active mind that hasn’t yet learned enough language to work comfortably with written cues.

I don’t live in a child-centric atmosphere, but I’ve been aware for the past couple of years that parents who thought their kids were too young for the connectivity expense of an iPhone would buy them an iPod Touch, which does what an iPhone does except make and receive calls (and, therefore, has no monthly connection fee associated with it.) A friend of mine who is pretty determinedly “old media” was recently asking me what I thought about a Touch for his 7-year old, who wanted to keep up with his friends by having one. These kids aren’t using Google for their homework; they’re playing games that are the leading edge of the new kids’ book business.

The iPad drew these new players into the explicit business of making enhanced ebooks of kids’ books. The NOOKcolor only adds fuel to the fire.

And because the NOOKcolor is half the price or less of an iPad, parents will be more relaxed about having their kids playing with it.

There is anecdotal testimony that kids can become more interested in a paper book after they’ve been exposed to the character and story through an enhanced ebook or app. We’re finding that out because the enhanced ebooks being made today are starting out from books that already exist. This is a totally sensible way into the business. Why add to the creative challenge by starting from scratch when there is a wealth of established brands and characters to license? And as the first great success in this enhanced kids genre, Alice for the iPad, demonstrated and Smashing Ideas has picked up, even the requirement of licensing can be sidestepped by using a public domain text as its basis.

The guess from here is that publishers — or whoever owns the rights — will have a nice business for a while licensing books and characters to enhanced ebook developers called “digital studios” who will make very successful products. In time — and not too much time — those studios will become the originators of the new characters and franchises and the book will become the “subsidiary right.” How soon? Not long. Three to five years?

Any publisher that wants to be serving the kids’ market in the middle of this decade better buy one of those studios, or start one.

This idea jumped into my head about a month ago; it had to get past my prejudice against annoying interruptions which is how I view most enhanced ebooks meant for grown-ups. So of course, we started to put together a panel on the subject for the Digital Book World Conference immediately. That got me talking to a lot of these companies. We haven’t made the final call on which three or four will be discussing what they’re up to at the show on January 25-26, but it will certainly be a conversation about juvie publishing’s near-term future.

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A dispute broke out on Brantley’s list this morning and I’m in a distinct minority. Maybe a minority of only a bit more than one.

The brouhaha started with observations about ebook pricing, with some very disdainful remarks about Agency pricing in principle and the big publishers’ execution of it in particular. The complaint was “ebook prices are too high” and there was support for Amazon’s protest to the ebook consumers in the UK and even a statement that one should choose what to read based on whether it was priced by Agency rather than wholesale.

Of course, I’m in the camp that believes Agency pricing has, at least (and probably) temporarily, slowed the (still) inexorable downward spiral of ebook prices for branded (big author) books. It has also contributed to breaking Kindle’s hegemony over the ebook market which is not solely a function of deep discounting (it is a great device and a great shopping experience!) As of the last time I checked (two months ago), two Big Six publishers reported to me that the Kindle share for their titles had dropped from the mid-80s to the mid-50s. They no longer dread “the call”, which is the metaphor for the message they feared would come one day from their biggest account saying “I can’t pay $15 for what I sell for $10 anymore; I’m going to give you $5.”

Now, it is possible that the Nook and the iPad would have created a lot of this market erosion under any pricing regimen, but I doubt it. I have heard that Barnes & Noble told publishers last year that Amazon’s ebook pricing was going to kill them and reduce their ability to keep bookstores open if they had to compete with loss leaders in the ebook arena. And Apple still gives a good imitation of an outlet that won’t play except on their Agency terms.

But what really caused the thinkers on the list to take issue was me was my contention that it is logical for the major trade houses to try to keep ebook prices higher in defense of print. From my perspective, the core value proposition of the major houses is “putting books on shelves.” That is the function that requires scale, capital, and a legacy organization with a lot of know-how. If that’s right, the fate of the big publishers is inextricably linked to the fate of brick-and-mortar stores. So of course, they would try to preserve them.

Not all publishers are in the same boat. O’Reilly Media, for example, has told the world that its second largest account is its own aggregated ebook platform, Safari. Print is still important to them, but they’re not nearly as dependent on bookstores as the major trade houses are; they probably sell a higher percentage of even their print online than the big houses do. (They say that Amazon is the one account bigger for them than Safari.) Perhaps it will even be to O’Reilly’s competitive advantage as bookstores diminish, raising the relative value of the customers they can reach directly. O’Reilly is an outstanding example, but not a unique one.

But without bookstore shelves to fill, I fear the major publishers have very little to offer. In their own defense, they tend to fall back on “curation” as their strong suit, but I’m afraid their curation is B2B and the B they curate for is the book trade! They have very little curation “brand” with consumers. I know there are efforts to build marketing capabilities that benefit from scale, but nobody has ever made a convincing case to me that they can do that. Generating robust metadata could benefit from scale if there were real verticality — tagging around the same subject matter again and again — but big trade houses don’t have that.

Another digital head at a big house, responding to my quest for power in scale, pointed out that they’ve been spending scads of money on tax compliance and lawyers. Of course, part of the reason they spend that money is because they have a lot to lose. But it is also true that the tax compliance issues can be offered at scale by third parties. In the US, at least, an outfit called RoyaltyShare is doing just that for publishers trying to live up to the requirements of Agency selling.

We really have at least two trade publishing businesses at the moment, the big houses and everybody else. The big houses pay almost all the substantial advances; they pay the highest royalty rates (which is actually, when you think about it, more than a little bit odd); and they generally get the best terms from their intermediaries. Their executives probably put their pants on one leg at a time (to quote an old baseball line) but, otherwise, they don’t have much in common with everybody else.

When one studies the industry and tries to analyze behavior, it is critical to keep that distinction in mind. It is appropriate that Random House and HarperCollins have a different strategy than O’Reilly or F+W Media for ebook and print pricing and for marketing. They really have different businesses.

All of this recalls the old cliche: where you stand depends on where you sit. If you’re a big publisher, every move you make should consider the fate of brick-and-mortar bookstores and you should be doing everything you can to preserve them for as long as possible. That’s the first element of a survival strategy. The second element could be to try to be “last one standing”. Our client Ingram has demonstrated with two recent deals (with Macmillan and with Springer) how publishers can pull back from their massive bookstore-supporting infrastructures but, even so, a diminution in bookstore shelf space is going to force consolidation. Maybe big houses will merge their back offices (which is, in effect, what Ingram is offering as a third party) but I think it is more likely that we’ll see a lot of mergers in the next ten years.

The most important metric for big publishers to watch over the next few years is “total shelf space available for books in retail stores.” (I’ve even come up with a pretty simple way to track that and suggested it to one of the companies that could provide it.) That’s almost certainly not the most important metric for upstart and vertical publishers.

It is often said that the big mistake railroads made was not realizing they were in the transportation business, or they wouldn’t have let airlines pass them by. I don’t buy that; running a railroad in no way qualifies you to run an airline, let alone to invent one. One listmember in the discussion in which I appeared to convince nobody suggested that the big publishers should focus on how to be more upstart and more vertical. I am afraid that trying to be something that you’ve never been is a very hard path to follow.

All this means that you need to think about which publishers you’re talking to and about when you frame conversations. At Digital Book World, for example, we’ll have a panel on ebook distribution for small and midsized publishers. But we’ll also have some unique research about the ebook royalty deals being made which focuses on agents and big publishers. The experience of smaller publishers, who almost always pay higher royalties, would almost certainly just confuse the issue. Any “industry data” that doesn’t separate the bigs from the smalls has to be parsed very carefully or it could lead to wildly erroneous conclusions.

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At the conclusion of another Frankfurt Book Fair — my thirty-somethingth — here is something I actually knew before but have taken on board in a whole new way: there is an enormous gap between the US and everyplace else in the Western world (at least) in consumer ebook takeup and acceptance.

Here is what I think: it can’t stay that way forever.

Here is what I deduce: the rest of the world is in for what will be, for many, a vertigo-inducing ride while they catch up.

It seems pretty obvious why the US is so far ahead: 300 million people in a single developed economy with a single currency and a single language. Those same factors also largely explain why the US is also so far ahead in Internet print book purchasing. (There is another big cause at play there: the service infrastructure provided by our national wholesalers, Ingram and Baker & Taylor, without which it would have taken a multiple of the initial investment to get Amazon.com off the ground 15 years ago.)

One thing leads to another. Because Amazon had, by the end of 2007 when it introduced the Kindle, built a loyal customer base of tens of millions of book buyers, they had the pillars in place to roll out an ereading device. That really required two things nobody else in any other country has even today: a big enough customer base to reach a critical mass of consumers without any assistance or partnerships and enough leverage with the publishers to get them to put their books into the ecosystem that supported their device.

One thing leads to another. Amazon’s Kindle, with a much larger selection of titles and a smoother path from file server to device than had previously been offered by other ereading platforms (which were, before Kindle, the Sony Reader device for some and reading on PCs or handhelds such as Palm Pilots for others, with me in the handhelds group), gained pretty rapid uptake. That led Barnes & Noble, which also had leverage with the publishers to get titles into their store and access to and brand credibility with millions of book readers, to follow on with their Kindle-like device, the Nook, almost exactly two years after the Kindle. As most of us know, the iPad followed the Nook shortly thereafter, coming onto the US market in April 2010.

All of this has resulted in getting the US to the point as of Frankfurt 2010 where a US publisher launching a book of straight text can expect ebook sales to be a mid-teens percentage of the book’s total sale, with occasional reports that are even more dramatic (such as the anecdote that the first wave of Jonathan Franzen’s “Freedom” was one-third ebooks!)

One thing leads to another. As has been written on this blog many times, all these Internet-based sales put enormous pressure on brick-and-mortar stores. We see shelf space diminishing and there are those among us who believe that over the next ten years it could pretty much disappear.

The Kindle hasn’t had nearly as dramatic an impact abroad as it has in the US for a host of reasons. Amazon doesn’t have the same audience share. They don’t have the same huge number of titles available as they do in the US. And they haven’t had two other big and influential companies (B&N and Apple) pushing the device-reading experience into the public consciousness. It seems Nook and iPad’s arrival have only served as catalysts for Amazon to sell even more Kindles and for the ebook uptake in the whole US market to accelerate further.

So we find ourselves today with this massive gap between the penetration of ebooks in the American market and the penetration in any other country’s market outside of Asia (I didn’t talk to any Asian publishers at the Fair, and I don’t know the situation there.) Certainly (assumption alert: a priori argument not based on any data) this is a situation that cannot last forever. In five or ten or fifteen years the percentage of book sales that are digital and the percentage of print book sales that are transacted online will be pretty much the same in all developed countries.

If that assumption is right, then other countries — starting with the English-speaking ones and then moving on from there — are going to experience the changes we’ve felt in America in a much more compressed period of time.

There are legal and institutional barriers to change which have already been “effective.” The world’s largest natural moat has protected the Australian book market, keeping print book prices high and the retail book trade healthy. It was evident from conversations I had with some Australian booksellers at last May’s BookExpo that they are feeling the winds of change beginning to blow a gale, fanned by the arrival of Kobo ebooks in the market. (Kobo is a sleeper from the US perspective: a small almost-an-afterthought ebook platform in our country but painstakingly building a presence around the globe and some impressive OEM relationships everywhere, including in the US.) Ingram’s POD setup in Australia will surely introduce a lot more titles into the print marketplace. That’s important because POD drives consumers to online purchasing by offering more titles than any bookstore could ever stock.

All of this is frightening to any sentient Australian bookseller.

Retail price maintenance, territorial and language rights restrictions, and variable rules about applying VAT (sales tax to us Americans) to books seriously complicate the development of the ebook marketplaces in Europe.

But the biggest complication of all, in the short run, will be the paucity of titles available in the epub format in languages other than English. Epub enables reflowing of text, which is essential to deliver a reader-friendly ebook experience to a multiplicity of screen sizes. We have hundreds of thousands of titles in epub in English; no other Western language is close. This is a subject that first surfaced for me in Brazil when I was there in August.

One thing leads to another. The epub gap spawns another serious issue for the European book trade as it catches up with the US. Most educated people in most European countries are comfortable reading English. A publisher in tiny Slovenia (formerly part of Yugoslavia) told me that one-sixth of the books sold through the largest chain of bookstores and the largest online bookseller are already in English. Somebody else told me that 25% of the books sold in Denmark are in English. In Holland, I was told, there has been recent legislation requiring “windowing” of English ebooks on titles that have a Dutch edition, holding back the English edition until the Dutch edition has had a minimum time of availability.

The biggest adjustments even for the players in the US book trade are still ahead of them. As far as I can tell, big publishers have not really taken on board that bookstores are pretty much going away in the next ten years and, one thing leading to another, taking the big publishers’ major value proposition with them. There is almost no visible acknowledgment of the shift from IP to eyeballs that I believe is coming. But the change we’ve had and the change we’re facing in the US publishing world is dwarfed by what will be seen and felt by our friends and trading partners in Europe and elsewhere in the next decade.

Some of what this post is about had already been anticipated as we prepared the program for the Digital Book World conference taking place January 25-26. We had already planned a panel on how territorial and language rights trading will be affected as ebook uptake spreads. Now I think I’ve found somebody who can lay out the European landscape as US publishers and agents should be thinking about it. I’m working with her to prepare what I think will be a significant addition to our program covering a topic that is, as it should be, increasingly important to American rightsholders.

Another topic for another day is that the world is getting smaller and publishers in every country will need to understand what’s going on in their foreign markets better. We’ll be delivering just one compressed seminar and a panel or two at Digital Book World because that’s what bandwidth we think conference attendees this January will be comfortable investing in the topic, relative to a lot of other things that need to be discussed. By a year from January, I think understanding how the ebook markets work in countries around the world will be a top-of-mind concern for every publisher and agent in America.

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My professional background —  indeed, most of my life that isn’t family, friends, baseball, and politics — is trade publishing: the publishing that is intended for consumers and which got its name becaiuse it has been transacted primarily through “the trade”: bookstores.

But this past week I spent two full days with the Publisher Advisory Group for my client Copyright Clearance Center where trade is a small part of the total picture. In addition to the program, I had conversations there to prepare for a talk I’ve been asked to give at the IFRRO (International Federation of Reproduction Rights Organizations) meeting CCC is hosting at the end of October. So, while I always think about trade publishing, this week I’ve been doing it within the context of other publishing — indeed, in the context of the whole world of intellectual property, one that goes well beyond publishing and includes music and art and photography. These are businesses that don’t think about bookstores at all.

There was a point at the CCC meeting (at which people who work at The New York Times, the Chicago Tribune, and Associated Press were among the participants) where it was useful to offer my own articulation of why the problems caused by digital change for newspapers and magazines and record companies were so much more grave than they were for book publishers (so far.) It is simply stated.

For those businesses, the unit of appreciation does not match the unit of sale.

By that I mean that record companies sold us albums when what we wanted were songs. That’s what their economics were built on. The minute we could buy songs, it blew up their business model. Newspapers sell us the weather when what we want are the box scores, or the horoscopes when what we want are the comics. There are many books which will be read cover to cover. Newspapers and magazines are rarely read cover to cover. It was never thought of as wasteful or uneconomic that most people actually consumed a small percentage of every newspaper and magazine they bought. But it gets harder and harder to make that sale in a digital environment.

Of course, we have felt some impact of this effect in the book business. When you get beyond fiction and certain components of non-fiction (memoir, biography, some history and science), the books aren’t read cover to cover either. You usually use (what we now call) chunks of travel books, gardening books, cookbooks, computer books, crafts books. Even in the bookstore environment, sales of these books are suffering because a more granular offering is available online.

Grasping the significance of the “unit of appreciation, unit of sale” paradigm makes me believe that the “album” (do we still call it that?) of music, the newspaper, and the magazine are ultimately doomed as organizing principles. They were built to meet the requirements for content distribution in a world where physical practicalities had to be addressed. The Times couldn’t drop sports and economics on my doorstep and world affairs and theater reviews on yours. And The New Yorker couldn’t deliver Talk of the Town to me and the cartoons to you. The units of appreciation were far too granular to be delivered as units of sale.

It would be a reasonable guess that about half the units that bookstores sell are cover-to-cover reads, where the unit of sale equals the unit of appreciation.

Brainstorming with publishing colleagues about what I need to say at IFRRO gave me a new realization about what’s likely to happen with the half that’s not.

Exploring non-trade publishing — academic, professional, sci-tech, college texts, and schoolbook publishing — makes you realize everybody else is headed in the same direction. They’re anticipating that the “unit of appreciation” for their content will always be defined by the context of either (depending on the customer base) a “learning system” or a “workflow.” The content won’t be the point. Learning something or accomplishing something will be the point and content will be delivered within a framework designed to deliver on the objective.

Pretty much without exception, smart publishers in these non-trade areas see the day coming where controlling the platform is the key and the controller of the platform will be the gatekeeper for, if not the creator of, the content. Since that tracks pretty closely to my notions about “verticals”, it all seems very logical.

But if you think about it a little harder, peel back one more layer of the onion, you realize that much of the rest of our non cover-to-cover publishing — much of what we now call trade — will also be housed within platforms. There will be platforms providing workflow, and content in context, for chefs and knitters and gardeners. They too will be buying “solutions”, not “information”, and the material we now put in the books will be served up, as needed, inside the workflow. It won’t be so much about “units of appreciation” as “units of need” or “units of purpose” for the content because the entire system will be the unit of appreciation and the unit of sale.

That is: the instruction as to how to do a particular knitting stitch will pop up or be linked to the place in the “pattern” (or whatever digital delivery has made the pattern become). The explanation of how to broil or baste something will be linked to the direction to broil or baste something. It won’t be housed in a different physical volume; it won’t even be housed in a different program or file! The beginnings of this are already evident in some apps and enhanced ebooks.

The world in which we will be living this way and routinely getting content this way is not around the corner; it is a few years off. Not twenty, I don’t think; but maybe ten. We’ll be solidly in a cloud world by then with just about all the content we consume — music, movies, TV, and what we get from newspapers, magazines, and books — and all the software we use coming to our devices from remote servers rather than from a hard drive.

In that kind of a world, I think the idea of “owning” content will be nonsensical. Everything will be licensed. “Owning” is really a tangible object-based concept. We discover the reality of that whenever we try to apply the principles of first use — like lending and resale — to the digital things we “sell” today. And, when you think about it, purchasing access to whatever you want or need whenever you want or need it is the perfect matching of the unit of appreciation to the unit of sale.

If you’ll be at Frankfurt next week and you like talking about what I write about, please come by stand 8.0 L916 and if you can catch me when I’m not in a meeting (about half the time), please say hello. I am speaking twice at the Book Fair. On Wednesday, October 6 at 10:30 am, Mark Dressler will interview me about the 2011 Digital Book World Conference program.You’ll find us at the Sparks Stage, 8.0 P923. On Friday, October 8 at 12:30, I’ll be participating in a panel discussion on “The Ebook Business – Who’s in Control” which will take place in the “Entente” room in hall 4.C. I understand Victoria Barnsley of HarperCollins UK and Ronald Schild of the German ebook-selling consortium will be my partners for the conversation whose focus will apparently be on the big companies in the ebook space: Amazon, Apple, and Google. Maybe I’ll be a lonely voice saying “don’t forget that B&N and Kobo are very much here — which Google isn’t yet — that Blio and Copia are coming and that the collective power of yet-unaggregated sites and communities, which could be harnessed by yet another player, will be considerable.”

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There is certainly more than one way to build a conference program. I have been putting them together since long before I learned about the concept of “crowd-sourcing”. I’m a bit of a plowhorse about some things so the Digital Book World conference program comes together pretty much the same way as the first digital book conference aimed at trade publishers I organized, Electronic Publishing & Rights, back in 1993. I put together a list of topics for panels or presentations and a roster of people who could either speak or lead me to speakers. Then I engender a lot of conversations between the conference-creation team and the potential speakers and audience to craft the topics, the framing, and the ultimate presentation.

Two other important conferences which appeal to an audience that overlaps Digital Book World, O’Reilly’s Tools of Change in February and SXSW in Austin in March — seem to take a different approach. As near as I can tell, they do crowd-source a lot of their programming. It appears to me that Tools of Change throws out suggested topics and requests that panels and speakers put themselves forward as components of the show. Then, presumably, the people in charge at O’Reilly (the heads of the conference are Andrew Savikas and Kat Meyer, and both of them are smart, knowledgeable, and discerning) choose what will comprise the show. At SXSW it appears that the candidates are selected by an online vote. It seems to me that you therefore guarantee that you’ll get the panels sponsored by the best campaigners, but not necessarily what would give your ultimate audience the best show. But I guess it works for them.

I should declare myself here. I am a fan of Tools of Change. I participated in a day-long brainstorming session several years ago which O’Reilly Media organized to plan the first conference. I missed that one, which was in California in the summer of 2007, but I’ve attended the three annual February conferences in New York, 2008-2010. It’s a great show and a great rendezvous for people thinking about technology and publishing. As this piece makes clear, we can’t handle every worthy subject in two full days of conference programming at Digital Book World; there’s room for lots of other conversation and TOC is a useful one. On the other hand, I have never attended SXSW. The program didn’t look like it had much relevance to commercial trade publishing (although it covered a lot of other things that neither TOC nor DBW does.) Plus it comes in the same month that has a chunk taken out of if for me by baseball spring training. There are things in life besides digital change…

As I think through what we do and how it all works, it is hard for me to see how we could produce nearly as good a show without the conversations. We are helped considerably in our work by a Conference Council of more than 30 top players in the industry from across houses large and small, agents, members of industry bodies like BISG, Association of Booksellers for Children, and the Frankfurt Book Fair, and some other consultants. We talk to literally dozens of other people as we put the show together, getting advice about whom to contact to speak and shaping and re-shaping our formulation of the panels and presentations.

This does, indeed, start in my head. I wrote a post in May outlining what I thought might be the major topics. We got comments on the blog and then we pushed the list out to the Conference Council in formation to get more input.

Once the Council was formed, we put the topic list up on Survey Monkey for them to give us feedback. What we were mainly looking for is “of what we postulated might be on the program, what’s essential and what’s a yawn?”, but we also got thoughts about things that could be combined or reframed. Then at the end of June, we had an exciting and rigorous 2-hour meeting with many of the Council and a number of our F+W colleagues at which we solicited even more ideas and honed our thinking further.

This process eliminated a number of topics that were on my initial list. Some of them were dropped because the group thought interest would be low (usually because they were too narrow or specialized); for others we couldn’t see who could speak to them effectively. But among those we knocked out were:

* Will non-US publishers start to establish a virtual sales presence in the US as ebook sales grow?

* How do publishers deal with image rights for old titles becoming new ebooks?

* What changes are on the horizon for publishers’ relationships with the library market?

* Are trade shows becoming an anachronism in the age of digital communication?

* How much of the solid print backlist is still locked up by rights issues?

* To what extent do publishers view single-title marketing as a practical endeavor?

All of these topics are “worthy” but, against very stiff competition, they didn’t make the cut.

The survey and Council conversation also helped us refine how we’ll approach a number of subjects.

Author royalties for ebooks will be handled as a survey and presentation, not, as first occurred to me, primarily through a panel of agents.

Our Council felt that how publishers make the business decisions to acquire content not necessarily intended for first use in a book was worthy of discussion. A subsequent conversation with potential speakers convinced us that “making books out of content that started another way” would be a relevant extension and should be in that same discussion.

Marketing and metadata were identified as topics that I should have included but hadn’t. As a result, we will have two metadata panels (one on core, one on enhanced) and we’re getting great help from BISG Executive Director Scott Lubeck (on the Conference Council, of course) putting these together. Although we have several panels that touch on marketing, I’m still thinking about the best way to tackle how single-title promotion has changed (which it has: profoundly).

What I had imagined as “The Tools Every Publisher Must Have in 2011″ morphed into a conversation about “industry solutions” — such things as Edelweiss and NetGalley and Filedby. A further refinement from our first idea is that we’ll have a panel of publisher-users discuss these, rather than go with my initial idea of inviting the companies themselves to present their solutions.

We knew we needed to discuss the future of bookstores. Our Conference Council meeting yielded the suggestion that we have analysts who follow industry stocks discuss that topic (and a hat tip to Michael Cader for that idea.) We’ve recruited Marianne Wolk, a market analyst who follows Amazon and Google, to speak, and she’s helping us look for other analysts or investors to join that discussion. And we’re also putting together a panel of independent bookstores; we’ve already talked to more than half-a-dozen and will talk to several more to pick the three or four that can deliver the freshest, most relevant, and most articulate content for our conference. (I would hate to leave this to self-selection.)

A panel I’d thought we needed on “ebook first” was dismissed as old news and too narrow.

We lean heavily on expertise that we know and trust.

Apparently, sometimes our technique gives us the same result as our counterparts’ crowd-sourcing. Liza Daly is the most compelling thinker I’ve encountered on ebooks. Last year we had her do 20 minutes on “ebook basics” which was one of the most-praised components of our program. I knew we had to have her back and a fast conversation with Liza quickly yielded the subject. She’s going to talk about “cost-effective development of enhanced content: how to display on multiple platforms without multiple headaches.” I’ll bet many attendees will find this the most useful 20 minutes at the show. I see that O’Reilly has her on their Frankfurt TOC program. That’s a good decision no matter how they arrived at it. (And I’d advise SXSW to make sure the ballot box is properly stuffed for Liza if she’s a candidate for their event next March.)

We had outlined three different research projects we wanted to present. Two are follow-ons from last year. Verso Media has a panel of “book” consumers and Bowker, working with BISG, has a panel of “ebook” consumers. This year, Digital Book World is sponsoring a follow-up effort with Verso and so the reports from both of those groups of consumers will be updated. (The BISG-Bowker effort was already ongoing.)

But then we discovered a new data-gathering opportunity with a company called iModerate, which does both surveys and online qualitative research, and we put them on an assignment of studying in depth a particular subset of ebook readers: those that read on multi-function devices like iPads and smartphones. Michael Cader suggested some ways to help the audience get maximum value from the data. As a result, we put those presentations together on the program, will distribute some data to the audience in advance, and have the presenters join in a panel after they say their own pieces. We thought that was a great idea; we’re doing it.

Maria Campbell, the veteran scout who has been on the foreign rights scene for decades, knows the players trading international rights better than anybody. So we drafted her to help us find the right person to lead a discussion of how the growth of ebooks will affect territorial rights. That right person is Cullen Stanley of the Janklow and Nesbit Agency, with whom we’re now working to craft the right combination of agents and publishers, American and foreign, to make this a balanced and informed discussion. The inclusion of agents is a key point of differentiation between Digital Book World and just about every discussion about the digital future I’m aware of. There are many aspects of the conversation about the digital future that simply can’t be sensibly conducted without the involvement of agents.

Lorraine Shanley, a member of our Council, is not only a consultant but also one of the leading executive recruiters in publishing. We wanted to examine how skill sets are changing in publishing. I thought I’d put together a panel of recruiters. Lorraine suggested that it made more sense to create a panel of executives who came to publishing from other industries. We liked her idea better and we now have Charlie Redmayne of HarperCollins as the first of the executives who will join Lorraine for that conversation.

I don’t mean to suggest we’re unique in doing things the way we do. Mark Dressler, who puts together programs for BookExpo America and for the Frankfurt Book Fair (and who will interview me about the Digital Book World program at a Halle 8 stage on Frankfurt Wednesday), is also a micro-programmer and very highly consultative and interactive in his program creation. I am sure some of what you see at TOC and SXSW resulted from interaction, too. I just can’t help thinking when I hear “calls” for programming how much the conversations we have inform and improve what we offer. Although I’m the proud Conference Chair who gets credit for putting together the Digital Book World program, it’s consultation with the most knowledgeable players in town that makes it what it is. Perhaps it is “crowd-sourcing” of a different kind.

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I have been helped in trying to parse the ebook royalty question by a numerate agent. While he helped with me the methodology, the numbers that appear in the tables below below are my responsibility. I hope that arraying the information this way will help everybody think through the question of ebook royalties with more precision. This is a subject we’ll have a panel talking about at Digital Book World Conference in January.

I want to think about this philosophically (I like to think about everything philosophically), but this post is about establishing a framework of understanding about what the real economic implications are, for the publisher and the author, of today’s sales practices and division of revenue. So this is pretty much a “just the facts, m’am” post.

We created three sets of tables: one to compare ebooks to hardcovers, another one comparing them to trade paperbacks, and the third comparing them to mass-market paperbacks. Because of the reports following the Random House-Wylie announcement that suggest that ebook royalties, at least on some backlist, might hit 40%, we have calculated how they work out under both the wholesale model and the agency model with the author getting 25% of net and with the author getting 40% of net.

Here’s the key to understanding the columns. For each grouping, we placed print on top, followed by two rows for 25% royalty (wholesale model and agency model), with the last two rows calculated at 40% royalty (wholesale model and agency model.) The retail price is the one the publisher establishes; the net is what they get from the channel partner for each unit sold. The cost is an estimate of print cost (10% of retail plus 25% for obsolescent inventory) or the unit cost of an ebook sale (50 cents in all cases, primarily to cover DRM.) The margin is simple subtraction of the cost from the net. The royalty rate is self-explanatory. The author royalty per unit is calculated from the rate and the price or net, as applicable. And the last column shows the percentage of the total margin that is claimed by the author at that royalty rate.

We did not factor in the cost of digitizing ebooks; nor did we include the cost of typesetting and page makeup for print books. Since we’re focused on royalties that would be paid after earn-out, the assumption is that those costs have already been amortized.

Hardcover

Trade Paperback

Mass Market Paperback

Here are a few things that jump out at me as I look at these numbers.

1. In the print world, authors are getting a much bigger share of the margin for hardcovers than they are for paperbacks.

2. Although it is true that an author gets a much bigger royalty on a hardcover under the wholesale model than under the agency model, that is not true for paperbacks. The ebook royalty for a trade paperback equivalent is quite close in the two models, although wholesale still yields more. But in mass-market, the author actually gets significantly more under the agency model than they do under the wholesale model!

3. The author suffers a real shortfall in revenue for each copy sold in hardcover at the prevailing 25% royalty. However, the author makes more money on each ebook than they do on each trade paperback or mass-market paperback.

4. Our margin calculations are strictly cost-of-sale based and include no calculations for overhead. Looking at these numbers, one can see why publishers believe, at least on paperbacks, that the 25% royalty is more than fair. (The author is getting more per copy sold and the percentage of the total margin they’re getting is as good or better than for a paper edition.) While we’re in a time where digitizing for epub is an extra step, not a simple alternative output of an XML-based pre-press process, the ebook seems freighted with extra costs. But in the longer run, that won’t be true. Ebooks should put less strain on overheads and require less of an organization to support them: no warehouse, no cash tied up in inventory, no need to monitor stock in the warehouse and in the supply chain.

Looking at these numbers it is easy to see why publishers are fighting to hold the line on ebook royalties. But ultimately the determination of what will work will not be based on what is fair or equitable; it will be be based on what the market says is the right level. That will be worth exploring in another post.

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