eBooks

My last post tried to lay out a comparison of royalties paid by big publishers to agented authors on ebooks against what they pay on print books. What it showed is that the authors suffer a bit on ebook sales that substitute for hardcover print sales, but that they do pretty well selling an ebook instead of a paperback. And the numbers also showed that a publisher selling ebooks under a wholesale arrangement pays the author a higher royalty than an agency publisher when the print is in its hardcover life, but that the agency publisher is actually paying more royalties if the printed edition is a mass-market paperback.

But this comparison has its limits. It helps an author or agent compare their economic prospects with an agency publisher as opposed to a wholesale one. But it doesn’t help an author understand the next comparison she’ll want to make, between doing her book with a publisher and doing it herself without a publisher at all

Fortunately for authors and agents, the benchmark for self-publishing revenue is clearly established by the ebook platform Smashwords, which I first wrote about at the end of a post 16 months ago. There are certainly alternatives to Smashwords: web-based solutions like Scribd, full-service offerings like our clients at Bookmasters, and things in between like Author Solutions. But Smashwords is the most automated, least expensive, and, at this point, most heavily used self-publishing solution for ebooks.

Smashwords pays authors 85% of the sales price for ebooks sold on its own site, and about 85% of the receipts for sales made through iBooks (Apple), Sony, B&N, Kobo, and the Diesel eBook Store. In other words, an author would get more than three times the “old” standard 25% ebook royalty offered by the big publishers and double the “new” possible 40% royalty implied as the new ceiling by the Random-Wylie agreement announced last week.

It is worth noting that Mark Coker of Smashwords says that all their deals will be agency going forward because control of the retail price is very important to their authors and publishers. The net to the author or publisher through their existing deals is 42.5% for sales made through Sony or B&N, 46.75% for sales made through Kobo, and 60% on their agency deals with Apple and the Diesel eBook Store.

And although Smashwords does not (yet) have an agreement to distribute through Kindle (though they’re working on it), the authors and publishers that use Smashwords would be free to make a separate deal with Kindle, giving them a possible 70% of their retail price if they can keep the potential discounters in line (that would be B&N, Kobo, and Sony.)

One thing very much in Smashwords’ favor is that the barriers to use them are very low. All you need is a doc file and a bright person to pay attention to quality control as you work through your conversion. They make metadata management simple.

What might give big authors pause about using Smashwords is that they distribute DRM-free (although the retailers listed above will be adding their own unless the publisher tells them not to) and that they depend on trust. Each retailer selling Smashwords titles has the content file and the metadata file in their possession and the sales reporting cannot effectively be audited.

But whether or not Smashwords is everybody’s solution, they certainly are establishing that pure automated ebook conversion and distribution services are worth 15% of what is collected from the consumer or from the intermediary selling to the consumer.

Smashwords is already pretty big and growing fast. They have 18,000 titles on offer from 8,000 different authors and publishers at the moment and Coker says they’ve added 2,500 titles in the past 30 days!

And I can personally attest to the fact that Smashwords has some books people will want. I found a title on iBooks called “A Year in Mudville” about the Mets first season — baseball history being a subject I know well and read broadly — which is terrific. It is well-researched, well-written, and well-edited. I found some presentation glitches (type fonts changing for no apparent reason) and pointed them out to Coker. He showed them to the author who then corrected the file. (The glitches didn’t interfere with reading the book at all.) And that book was priced at $8.99 on iBooks, which means the author was getting $5.40 from the sale! Look at that against the chart in my prior post! On a $9 list-price ebook, the author would be getting $1.125 from a wholesale publisher and $1.575 from an agency publisher at 25% royalty; $1.80 and $2.52 at 40%. (And, assuming they did an Amazon deal separately and could meet the restrictions required for the 70% royalty, that author would be getting $6.30 for each sale on Kindle!)

At per-unit revenues from ebook sales anywhere from 2.5-to-6 times what they could get from a publisher, and ebook sales rising inexorably as a percentage of total sales, authors and their agents are ultimately going to be doing their math against this option for each new book they have to offer. Some may be doing it already.

There are a few things publishers can tell authors to try to keep them from jumping.

1. “Don’t forget: we give you an advance!” That is the first, and for many authors the most powerful, argument. Agents like advances too, so they’re likely to be sympathetic to the publishers’ point here. But, of course, with that advance comes the publisher’s claim to more than half of what would otherwise be the author’s ebook profits.

2. “Don’t forget: print books are still 90% of your market!” This is really the reason established authors will be reluctant to jump to Smashwords. And as long as print is 90%, or even 80% (and it is falling to that level on many immersive reading books now), getting a multiple on the ebook sales still leaves a shortfall of revenue to the author unless they figure out how to also have the book available in print. The big publishers won’t be doing print-only deals for quite a while, but smaller publishers will certainly be available to work with brand-name authors on that basis. And when the print share falls to 50% of the total sales, which many of us believe it will over the next few years, this argument won’t be effective anymore. (There are many ways for the author to self-publish print too, but only the print-on-demand solutions don’t require big investment or risk, and you aren’t going to get what a publisher would deliver with POD alone.)

3. “You’ll have to do your own publicity and marketing.” This is true, but it is also true that publishers have wanted authors to do a lot of their own publicity and marketing already. From here, it would seem that the author’s marketing efforts will be critical either way. If the author is already big and branded (likely due at least in part to the prior efforts of a publisher, but that’s not necessarily relevant here), it’s less of a barrier than if they’re not. It might be no barrier at all. This is an uncomfortable point for publishers because the authors who need the least help are the ones they want to publish the most.

4. “If we publish you, you’re legitimatized.” I think this point carries almost no weight with any author who has had a bestseller already or has already had more than a couple of books published by established houses. I think it will carry less and less weight with everybody else. I just found my first great book by an unknown author on Smashwords. Sooner or later, you will too.

5. “We’ve built email lists and other direct contact with the consumers you want to sell to, plus we have relationships with the book retailers to get you more attractive placement and promotion through them than you can get without us.” Now, that would be attractive. Can any big publisher justify that claim?

6. “We will pay you 70% of receipts on ebooks to keep you in our stable. It isn’t the 85% you get from Smashwords, but with our advance, our print book sales, and taking all the admin and management off your hands, it’s a better deal for you.” That will probably work, but no publisher wants to let it get to that point.

Publishers better work on number five.

Bookmark It:

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 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.

Bookmark It:

What shoved other news aside this morning was the word from Seth Godin that he won’t be publishing books with publishers anymore. This is another early indication that it is going to get harder and harder for trade publishers to sign up books.

It is not the first one. Thriller writer J.A. Konrath discovered the virtues of publishing through Kindle about 16 months ago. With the help of audience-building through his own blog, plus completed manuscripts that the New York publishers didn’t buy, he was pushed into learning how to monetize his own work without a publisher.

Last December, the news was that S&S author Stephen Covey had taken his backlist to ebook publisher Rosetta which had, in turn, made a temporary exclusive deal with Amazon. The motivations, apparently, were a bigger share of the ebook pie and the unique marketing capability Amazon has to really push something direct to appropriate consumers. That deal seemed to be with the original publisher’s explicit consent. (Agent Andrew Wylie recently formed an imprint to do the same thing with a batch of his clients’ backlist apparently without prearranging consent, although no lawsuits have been filed to date.)

At the last BookExpo, one of the leading agents in New York told me he is working hard to learn about self-publishing options because his authors are asking him about it.

Last week, one of the leading publishing consultants to “brands” told me that the 25% standard ebook royalty was pushing her company’s clients to think harder about self-publishing.

And it happens that right now I’m reading a book about my favorite subject (baseball history) called “A Year in Mudville” (about the Mets inaugural season) that was self-published through Smashwords but which, in editorial quality, exceeds many titles I’ve read from established houses. I don’t know whether author David Bagdade didn’t want to bother with the bureaucracy of pitching trade publishers, was rejected by them, or just chose the control and better margins of Smashwords, but Smashwords rather than one of the established players is dividing with the author 70% of the nine bucks I gave iBooks for the purchase

This way lies destruction.

Many years ago, my friend and sometimes colleague Mark Bide and I were talking about threats to the scholarly journal paradigm. For those not familiar with how journals work, it might be an eyebrow-lifter. Universities pay professors’ salaries and encourage them to write peer-reviewed articles. The journals get the articles for free, operate the peer-review and publication process, and then sell the collection of articles back to the university’s library. So the university both pays for the content’s creation and purchases it in its published form. Since the beginning of the web awareness, it has been predicted that disintermediation of journal publishers would occur.

What Mark told me was “watch the level of submissions.” That is, he believes the first sign that journal publishing is in trouble will be if the professors stop sending in their articles. So far, that hasn’t happened (that I’m aware of.)

But it’s going to be happening in trade.

On an email list I read, you can detect the annoyance of publishers who point out that neither Konrath nor Godin would be where they are today if publishers hadn’t invested in them and built their fame. There’s some resentment that neither Konrath nor Godin emphasize this point and, by not doing so, seem to suggest “anybody can do this.” I’m not sure that they’re saying “anybody can”, but it isn’t necessary to push that idea to do real damage to publishers’ futures, because the authors who can do this are among the the ones publishers need the most.

Starting in the 1990s, publishers started to ask “what’s the author’s platform” when they signed up books. In those days, they were asking whether the author had a radio show, a newspaper column, a speaking circuit, or extensive media contacts that could give them a leg up to promote the author’s book. But with the turn of the century and the development of inexpensive websites and blogs, authors were able to build their own platforms. And, lo and behold, they were able to build them faster and better if they had legitimately published books in the marketplace.

Publishers should have remembered the axiom that you should be careful what you wish for. This was, perhaps, the beginning of the unbundling of the publisher’s suite of services to the author. It used to be that the publication of a book was the platform and the publishers’ publicity and marketing efforts worked to capitalize on it. This was all part and parcel of the package: paying an advance; editing and shaping the book; putting it into a distributable (printed and bound) form; getting it known; and, of course, getting it into a store where a customer could buy it.

Publishers still pay advances although they’re doing their best to scale them back. Many don’t provide the same level of editing services that they used to; they often expect more books to be delivered by each of their editors and they also lean to agents they can trust to do a lot of the work of putting a book in shape. Putting it into distributable form isn’t nearly as hard as it used to be and doesn’t require inventory investment if the form is digital. Getting it known is something that Godin very articulately and accurately suggests he can do better himself. He is not alone and authors who can do this are explicitly what publishers are seeking. And getting the content into the customer’s hands is a drastically different proposition in a digital context than it was in the pure print world of 20 years ago, and digital distribution can be done with far less investment and far less organizational muscle.

So there’s less for a publisher to do for an author than there once was. And the publishers sent that signal when they started to focus on the author’s own ability to promote and then, over time, turned that ability into a frequent requirement for publication. If the publisher is going to do less, the author wants to pay less for it. Joe Konrath is very clear about the advantages he sees in getting the lion’s share of the revenue his books generate, rather than a mere author’s royalty.

But, somewhat more ominously, making more money through disintermediation does not appear to be the primary driver for Seth Godin. What Seth seems to be saying is “I want flexibility. I want to use what I write in whatever is the best way to build my overall career, revenues, and audience. I don’t want to be locked into publishers’ schedules and bureaucracy.”

That’s a massive challenge for big trade houses but it will be of increasing importance to big authors, particularly big non-fiction authors. It is much easier for a publisher to provide real value if they’re vertical. On the same mailing list I mentioned above, we got a comment from a biggish independent publisher who claims that the house is finding more and better ways to work with authors and really investing in them. But, we are told, they are all in verticals.

Godin may be a unique case. There are unique aspects to Covey and Konrath too. But it is not comforting for trade publishers to see that authors have alternatives, that as ebook sales rise the viability of the alternatives grows, and that the authors most likely to strike out on their own or look for new partners are those with the strongest existing connections to audiences.

Bookmark It:

The “death” of the printed book has been under discussion for a long time. (I gave a speech with that subject as the title to publishers in Spain in 1997 — with a question mark after it and predicting correctly that the most immediate impact of digital change would be that we’d sell more printed books online and that the then-current interest in expensive-to-produce CD-Roms was a distraction.)

Nicholas Negroponte made headlines last week when he was quoted as saying that the printed book would be “dead” within five years. A deeper dive into what Negroponte actually said clarifies that he doesn’t mean there wouldn’t be any paper books anymore after 2015, but that the ebook would become the “dominant” form by then. I think even that might be going too far.

It seems reasonable to me (although not to every forward-thinking observer of the march of digital events) that by five years from now half of immersive reading — straight text novels and non-fiction — could have moved from paper to devices.

But for those who question the idea that the switch from paper to screens will ultimately be just about total, let me offer a way to think about it.

The critical thing to remember is that, indeed, the book was more-or-less perfected hundreds of years ago. There have been improvements in printing, binding, typography, and paper quality that are not trivial, but that also represent no quantum leap in user benefit. Indeed, defenders of the paper book and advocates suggesting it has a permanent role, point to that fact as support for their belief.

I think it argues the opposite.

The ebook, unlike the paper book, advances every month, if not every day. Screens and the reading platforms they run just keep improving: they get cheaper, lighter, more flexible, more capabilities-rich and there are ever more choices of them. Battery life gets longer. They develop the ability to take your notes, keyed in or handwritten. They develop the ability to share your notes or organize your notes automatically. They’ve had built-in dictionaries for a long time (a feature of the very first Kindle nearly three years ago) and now they often offer the ability to get to Wikipedia or a Google search in a click as well.

If facing pages or pages that are flexible and “turn” are your requirement, the beginnings of that have already appeared. Facing pages is a feature of the iPad’s iBooks app and just about every reader now offers a choice of “effects” for page turns. The challenge of delivering highly designed pages with pictures and captions and call-outs and on-page footnotes is being tackled, notably by Blio but they’re not alone. One of the reasons I restrict my predictions about ebook penetration in 2015 to narrative books is that it is harder to see yet how fast the development of that presentation capability and the corollary ability to make and reflow those pages for different screen sizes will be. But it will come.

Indeed, the insistence by some people that they will “never” give up the printed book — which leads to rather ludicrous glorification of the smell of the paper, ink, and glue and the nonsensical objections that the screen would be unsuitable for the beach (depends on the screen) or the bathtub (I can’t even imagine what the presumed advantage of the printed book is there) — must ignore the fundamental dynamic. Print books aren’t getting better. Ebooks are.

The biggest tipping point mechanisms for ebooks so far have been the advocacy by the three most important retailers of books (Amazon, B&N, and, less significantly so far but still important, Borders) for dedicated ereading devices; the ability of consumers to download books just about anytime directly into those devices; and, to my mind most important of all, the availability of just about all the most popular straight text books as ebooks at about the same time the content is available in print.

I started reading on a Palm Pilot in 1999 or so. Until 2008, when the Kindle’s launch began to have a real impact on publishers’ digitization practices, I was compelled to read some print books because much of what I wanted to read just wasn’t available as an ebook. When Kindle took hold, that problem went away. I can’t remember the last time I looked for an ebook I wanted and didn’t find it available. That’s why I haven’t read a print book since late 2007; if publishers had moved faster, that date could have been as early as 2000 or 2001 for me.

Now, of course, we have the news (long expected in these quarters) that the availability question is being turned on its head. The announcement last week by Hachette that their Little Brown imprint will be publishing a short non-fiction title by Pete Hamill about immigration only as an ebook now means the print reader is denied. (It will be interesting to see what, if any, print-on-demand option evolves for this experiment.) Of course, this makes complete sense. Genre publishing, particularly romance fiction, has had ebook only publications for years. Maybe that’s why romance readers — which one would not expect are necessarily more advanced technologically or economically than most of the rest of us — have apparently made the switch to digital reading more quickly than book consumers at large.

Romance publishers were not the only precursors to the forthcoming Hamill publication. Simon and Schuster announced last November that they’d be selling books by the chapter for digital purchase, an option not being offered to consumers of print. And Perseus has a deal with the web site Daily Beast which pushes the ebooks out first in the interests of timeliness.

It is very hard for me to grasp why anybody would prefer a printed book 30 or 40 years from now. I’m sure by then screen technology will be able to simulate any aspect of the printed book that could possibly be of interest (except, perhaps, for the smell of the paper, ink, and glue, but, then maybe a companion air-wick would do the trick. I wonder if you can use the same aromas for all titles, or whether some customization will be required.)

This Hamill-Little Brown experiment will be repeated with increasing frequency. (And so will what Perseus and Simon & Schuster are doing!) The screens will get better and cheaper. The platforms will deliver more and more features. The opportunities to find and buy printed books in physical locations will diminish. However one sees the balance today between printed books and ebooks, it will need to be reassessed next month. And the month after that. Maybe it will take the waterproof ereader with pages that turn to drag some of the holdouts across the paper-to-digital line, but even that can’t be as much as a decade away.

The printed book will not “die” in our lifetimes: there are too many of them already around for that. And I don’t even think the ebook will be “the dominant commercial form” (Negroponte’s position) in as short a time as five years. But it almost surely will in ten and I’d say that in no more than twenty the person choosing to read a printed book will not be unheard of or unknown, but will definitely qualify as “eccentric.”

Bookmark It:

I was struck when I visited Australia three years ago at how the protection of thousands of miles of ocean had kept their book trade looking like ours did three decades ago. Prices of books were very high in stores and there were lots of stores and lots of independent stores. But the biggest moat in the world couldn’t keep the forces of digital change at bay forever. All of the forces of online bookselling, discounting, and ebooks are now hitting Oz, and booksellers are feeling a dramatic impact. When an old publishing salt brought two Australian booksellers in to visit me last May and I was pretty apocalyptic describing what they should expect, they didn’t disagree with me. They were feeling it.

So a purely anecdotal report of the difficulties of one specialist independent in Australia resonates, even though I generally don’t put much truck in one person’s opinion about one entity’s fate.

This week I am in Brazil. My new friend Ricardo Costa, who runs Publish News, a local operation reminiscent of our Publishers Lunch (and who has been translating a post from The Shatzkin Files into Portuguese for his audience weekly for several months) gathered a group of publishers and a bookseller to join me for dinner on Monday night so I could learn a bit about the state of the Brazilian book trade. Because they were not joining us to be put on the record, I’m keeping my dinner companions anonymous.

For many reasons, the situation on the ground in Brazil is much more like Australia three years ago than it is like the US today. There has been very little take up of ebooks. One major reason for that is that there is a paucity of devices. Brazil charges punitive taxes on electronics assembled outside the country, which all ereaders are. The only device that got any play in the market previously was the Cool-er Reader, and that company has gone bust. One of our dinner companions is a bookstore owner (a small but very important chain) that started selling a new ereader yesterday. This e-ink device with no wifi or 3G, requiring (like Sony) that you import to your computer and then transfer to the device, will sell for the equivalent of just under $400. That’s about triple what Kindle is charging US consumers for its new wifi-enabled device.

I got to handle the device. It’s smaller and lighter than a Kindle, with touch-screen capability and a built-in dictionary, and a more solid feel. But at its high price and without the direct connectivity to enable acquiring new books directly into the machine, it is no more than a step on the path to widespread ebook uptake.

Discounting through online resellers has entered the market. (The retailer in the crowd, which has a very successful web operation, refuses to discount his online sales below his store prices. “That would be telling my customers not to visit my stores!”) My dinner companions were concerned about the effects of the discounting. The online resellers get books from publishers totally on consignment (no inventory carrying cost) and are selling at very deep discounts. This inevitably will have negative consequences for brick-and-mortar stores.

As one of my dinner companions, who runs a large publisher, said, “we want to know what happens in the US because it is what will happen in Brazil five or ten years later.” Both he and the bookstore owner could see that the future for stores will get increasingly difficult.

The entire table agreed that retail price maintenance, such as exists in France and Germany but which is almost universally sneered at by the Americans and British, would be a boon to the entire book trade.

One of the party, a children’s book publisher, reported that Mexico had just introduced retail price maintenance. As a result, her company was renegotiating all their terms with retailers and wholesalers in Mexico to take discounts down. And, at the same time, they will be lowering the prices of their books. From her perspective, the prices to the consumer will remain pretty much the same as they were with discounting, her take will remain pretty much the same as it was with the lower prices and lower discounts, and the effective margin to the retailers will also be pretty much unchanged. But the market will be more stable and less subject to control by the biggest players who can afford to be the most aggressive discounters.

This is not the picture that is painted by most powers-that-be and economic experts in the US and the UK.

One thing that became abundantly clear here in Brazil is that epub conversion in smaller languages is going to be a bottleneck. Most of the ebooks available in this market are PDFs because the market is too small to encourage publishers to invest in the conversions. Of course, PDFs don’t deliver nearly as attractive a reading experience. But there aren’t the same resources available for epub conversions in Portuguese that there are in English (and, presumably, in Spanish or French). That is going to slow down adoption of ereading in many parts of the world and, furthermore, tilt those who do use ebooks to read in English rather than their local language so they can get the benefits of reflowed delivery. I’ve seen ebooks as a potential boon to publishers in smaller languages, enabling them to reach a scattered diaspora, but it isn’t going be as effective if putting Welsh or Danish into epub is expensive.

Bookmark It:

There are two questions about the impact of digital change on publishing that are just about impossible to answer.

One is: how much of the sale of ebooks is incremental business and how much of it is cannibalization of prior print sales?

The other is: what will be the fate of independent bookstores?

The two are connected.

As we watch the (long-term) inexorable but (short- and medium-term) unpredictable growth in ebook sales, it is really not possible to tell to what extent we’re just selling established customers the same purchases in a different form (certainly some of it and my personal guess would be the lion’s share of it) and to what extent we’re finding new customers (also certainly some of it and, to my way of thinking, more likely to the user of a multi-function device than a dedicated book reader like Kindle or Nook) or making incremental sales to established customers.

(We plan to address the whether the multi-function device users have a different consumption profile at the Digital Book World conference in January. It’s a knotty question but we think we have a way to get at it.)

The measurements of industry sales have been far too imprecise and muddied to address a sophisticated question like that. (The AAP and BISG are making a serious joint effort to remedy that situation; I have seen some of the great work in building a new data model that has been led by Tina Jordan of AAP and Scott Lubeck of BISG. More on that very promising initiative some other day.) The aggregate industry numbers that we’re used to probably won’t be sufficient to change any closely-held opinions any time soon.

Individual publishers might see data worth intepreting in the total unit sales of major authors that  have established clear sales patterns over time, if they can analyze their way past the fluctuations that must inevitably occur in the sales of each new major release by an established bestseller writer. One place one might expect to see an uptick is in the prior titles in a series (but, even then, you don’t know if the extra sales of four prior Carl Hiaasson titles weren’t instead of sales of four other books, do you?)

My own analysis has been simplistic, assuming pretty much flat sales into the digital future because that has been the case in our overwhelmingly non-digital recent past. When I do the calculations that lead me to think that the sales available to brick-and-mortar stores will decline drastically over the next five years, I’m assuming that the rise of digital sales results in a pretty much equivalent decline in print sales. I also assume that the increase in ebook sales and the reduction in retail shelf space allocated to books accelerates the movement of print book sales to online. If ebook sales aren’t largely cannibalizing, and they don’t themselves reduce the sales available to be made in stores as much as their growth would suggest, then shelf space might not disappear as fast.

My back-of-the-envelope calculations (which have been endorsed in a series of private conversations with publishers, booksellers, and analysts but also strongly resisted in a private conversation by at least one person whose judgment I really trust and also apparently contradicted by the expectations expressed by Random House CEO Markus Dohle in his recent interview) are that brick-and-mortar’s share of total trade book sales will reduce from around 80% today (some say it is higher) to about 30% five years from now. That would be a reduction of more than 60%. Let’s say the share is still 50% in five years (which I speculated might be the number in 2-1/2 years). That would still constitute a 35-40% reduction from where we are today. That’s drastic.

But it still doesn’t tell us “who fails?” Shelf space reductions can come in a variety of ways. Stores can be closed, chain and independent. Dedicated bookstores of all kinds can become less dedicated and turn over shelf space to other items. And mass merchants can decide to reduce the space they gave books or to eliminate them. All three things will happen to varying degrees.

This is a bit like trying to do a weather forecast based on one’s confident knowledge of climate change. The two are related but there are local factors in addition to global ones. Each time a store closes or reduces its shelf space (or, for that matter, in the rarer cases where a new store opens or one increases its shelf space), it affects the fate of the other stores in its vicinity.

On Tuesday night, I came home from a late meeting with a former Cabinet official who was thinking about buying an independent bookstore and seeking my advice, which, based on no specific knowledge, was “don’t.” I walked in to receive a call from a reporter who asked me for my comment on the Barnes & Noble “news.” “What was that?” I asked. “They’re putting themselves up for sale,” he said. “What has happened recently that would motivate that?”

Without having read the press release, which would have signaled to me that they weren’t actually putting themselves up for sale so much as beginning the process of taking themselves private, I strived to answer the question. I thought the acceleration of ebook uptake, some of it fueled by B&N’s Nook device, was recent news that didn’t bode well for physical bookstores. I thought the recent rescue of Borders, which could postpone their demise or shrinking, wasn’t happy news for Barnes & Noble. And I wondered whether the Ron Burkle lawsuit might make the Riggios less interested in owning the business.

Of course, all of those things are true but none of them apply because the premise was wrong. The Riggios are probably not trying to sell the business; they’re more likely trying to buy the business.

Then I checked with a commission rep friend of mine about the bookstore the former politician I met earlier that evening wanted to buy. It turns out to be an independent with a relatively solid future, with knowledgeable staff underneath its owners and a great reputation with the publishers which assures a continuing flow of traffic-building author appearances. In other words, “don’t” might not be the right advice in this particular case.

Whether the brick-and-mortar share of the business falls by 25%, 50%, or 75% over the next five years from what it is now (and all are possible), the reduction in shelf space depends on whether that reduction is against a rising base of total sales or a stable one. And how it affects any one particular store depends on what has happened to the shelf space allocations by others in that store’s immediate vicinity. That will be very hard for anybody to track.

I am still extremely skeptical of recent celebrations of the successes of independent stores, which we’ve seen coming out of New York City and Pittsburgh in the past couple of weeks. Anecdotal information is not projectable data; it is often misleading data. Nobody seems to be making the claim that bookstore shelf space is increasing in New York or Pittsburgh or anyplace else. Any one bookstore might still, for a while, be a reasonable bet. But this is a case where the usual laws of investment (diversify as much as you can) would likely not apply. It is hard to imagine bets on five or ten or twenty independent stores paying off in the aggregate in the years to come. Unless you were making those bets with knowledge about exactly where Barnes & Noble, Borders, Books-a-Million,Walmart, Target, and Costco were reducing their shelf space the odds will be against you, and I’m pretty sure there won’t be anybody who knows all those facts in a timely way.

Bookmark It:

A year ago — even six months ago — it seemed like Amazon and its Kindle device had an insurmountable advantage in the ebook device and platform competition. Despite our admonition that Amazon’s dominance of ebooks was much more fragile than their dominance in online print bookselling, even we were impressed and sometimes daunted by the enormous percentage of ebook sales that were being made through the Kindle ecosystem.

Then Barnes & Noble introduced the Nook through their 700 stores last December and Apple brought the iPad to market in April. Nearly overnight, it seems, Amazon has gone from the dominant player to the leading player with a share that was often in the 80s for many titles having fallen to the 50s.

Three entirely new ebook platforms are now poised to make their debut. Each of them has an angle, or a USP, that the others don’t and that the vendors, devices, and platforms that preceded them — notably Kindle, iBooks, Kobo, and Sony — don’t. The three new platforms are Google Editions, Blio, and Copia.

Google’s special proposition is ubiquity; Blio’s special proposition is enhanced feature sets; and Copia’s special proposition is building social networking right into the content consumption platform.

The new entrant that is subject to the greatest anticipation, of course, is Google Editions. Whenever they go live (which they say they “hope” will be sometime this summer, which has another 6 weeks or so to run), they are likely to be offering the largest selection of ebooks from any single source. Google has a staggering number — millions — of public domain books but they will also have professional and scientific books not published on most of the prior ebook platforms. Their well-promoted proposition is their cloud model, which will allow their ebooks to be read on any device that can support a browser.

Google is also offering a wholesaling service to enable any bookstore or any web site to sell their ebooks. (What that means, of course, is that their “largest single source” claim could be usurped by their own resellers, who might have added other titles from other places.) Their arrival adds another option for potential ebook sellers who had previously been served by Ingram’s wholesaling operation or their competitor, Content Reserve, which has also reached the book trade through Baker & Taylor.

Google is working the OEM channel as well and not limiting themselves to Android-powered devices in doing so. They’ll have apps available in multiple marketplaces, including Apple. And they are offering to power sales on publishers’ own sites. We’ve seen no announcement of publishers who have accepted this proposition, but it would seem likely that some, particularly smaller ones, will find it attractive.

Baker & Taylor has been developing its own ebook platform, Blio, in concert with futurist Ray Kurzweil and the National Federation of the Blind. We were first shown Blio last December and were really impressed with its crisp presentation of integrated text-and-pictures pages. They showed us a tool kit that made it pretty easy for publishers to enhance their print books for electronic delivery with sound and video, and even to fiddle with the design in the Blio platform. Because of Blio’s roots as a tool to bring reading to the sight-impaired, the ability to adjust font sizes, a capability which all ebooks offer, had to be integrated into their delivery of complex page layouts.

We have been expecting Blio’s debut in the market for some time, and we’ve been expecting to see many highly-illustrated books, like college texts, that have not previously been in the offerings of Kindle, Nook, and Kobo. Highly illustrated books would work fine on the iPad, of course, but they were not a priority for initial inclusion for iBooks (the dedicated Apple ebookstore) and they were not what publishers would put into the eink-reader platforms that didn’t handle that material well.

Blio has announced that it will power the store Toshiba is creating to support its tablet release. Since that is expected in the next month or so, Toshiba’s offering of Blio titles will probably be their debut in the marketplace.

The tool set for Blio was what really captivated us when we saw it last December. When we saw it at the time, Blio was delivering a Blio-ready ebook from the publishers’ print PDF, and then, within Blio, the publisher could enhance the ebook. At the Untethered conference in June, Blio announced a partnership with Quark by which Blio files could be created directly from Quark. Blio says they expect the Quark release to be in beta later this Fall. Blio plans to integrate its tools into other creation software in the months to follow.

Blio introduces another format into the ebook world: rather than epub or PDF, they are using Microsoft’s XPS platform. Right now, Blio itself is handling the conversion of titles from either PDF or epub into XPS, but the Quark arrangement and the others that will take place will allow publishers to deliver XPS-ready files to Blio, cutting past the conversion queue that now exists.

The open questions have been: when will Blio arrive and what will be the retailing environment for it when it arrives? They say they have 200,000 titles committed to their platform. (They can’t just pick up the ebooks of others; they’re not vanilla epub.) The Toshiba store won’t contain them all because titles are coming in faster than the conversion process can ramp up. Blio, like Google and Copia, expects lots of OEM installation. They project that Blio could be on more than 50 million devices by the end of 2011 and that they will be working with “traditional retail partners” in 2011 as well.

Copia made a splash last week when they announced their line of ereaders, including a larger-than-a-phone-screen color model which will be $99 when it comes out in September. Since Copia is a creation of DMC, and DMC is historically a hardware company, using their own hardware to launch the platform makes great sense. But OEM relationships, and an ability to deliver their platform to any device through client apps as well as through web browsers, are part of the strategy too.

The Copia platform’s unique proposition is that they combine social networking right into the platform in which content purchasing and consumption take place. Amazon’s announcement of an integration with Facebook moves them in a similar direction, but Copia would seem to be going much further than Amazon: enabling the sharing of the content consumption experience itself among friends or a personal network. This could be critical for reading groups, areas of common (vertical) interest, or for educational applications. Inside the Copia network, users can readily share their notes and annotations. And to make it easy for people to get started on their platform, Copia enables the import of existing contacts from Facebook, Twitter, and LinkedIn.

Other ebook platforms have demonstrated the power of syncing the reading experience across platforms; you can pick up your book on one device and it will tell you where you left off on the last device. Copia takes that a step further, syncing the social experience, including the sharing of notes and recommendations as well as the reading itself, across all the devices you want: smartphones, tablets, computers, or ereaders. We saw this demonstrated on their forthcoming iPad app.

What also impressed us about the last Copia demo we saw is that they have apparently licked the problem of allowing an epub file using Adobe DRM to move painlessly into their platform, regardless of from what ebook store it was purchased.

In addition to the hardware plans they revealed last week, Copia has also announced that they will be a launch partner for Windows Phone 7, the mobile operating system Microsoft is putting forth to compete with iPhone and Android. [Maybe we know a bit more about Copia than others do because they are our client, but like all the players in this very competitive market, they're not tipping their cards before they play their hand any more than their competitors. Even to us.]

All three of these operating systems come from substantial players. Blio is being delivered by one of the two book wholesalers in America with true national and international reach and relationships with every publisher in the country. Copia is being delivered by a company with long hardware development experience and a long history of partnership with consumer electronics retailers and phone companies. And Google Editions, of course, is coming from a tech company that has had deep involvement with virtually every book publisher in the world as it has developed Google Book Search over the last seven years.

Of all the current players, Sony would seem to be the most challenged. They have the weakest device, the weakest store, and the weakest strategic position with the industry and with the public. All of the rest either have something important and unique for the developing ebook marketplace and, in many cases, they also have an outside proposition that will keep them in the ebook game regardless of how well they do in it. Whether Google’s ebooks sell 10% of their projections or 10 times their projections, they won’t be going away. Same with Apple. Same with Amazon. So I think we can expect a multi-player ebook market, with some incompatible formats and a lot of incompatible DRM for some years to come. And the players currently in the game can expect their sales to go up but their market share to go down when the three new entrants join the fray this fall. That much seems certain, but very little else does.

Bookmark It:

Apologies in advance for a much-longer-than-usual post.

It is not like the publishers haven’t seen the ebook royalty fight coming. On a panel he and I were on together in March of 2009, John Sargent, the Chairman and CEO of Macmillan, identified ebook margins as the critical issue for publishers going forward. Even though ebook sales at that point were financially insignificant and the growth surge that we’ve seen in the past 15 months wasn’t yet evident, Sargent expressed the belief that ebooks would be the future and that publishers had to be diligent to preserve their margins in the digital environment.

There are three moving parts to the publishers’ margin equation for ebooks.

The one that I think Sargent was thinking most of at that time is ebook pricing. If “misguided” publishers or market forces drive down prices a great deal, that could threaten publishers as sales migrate to digital.

The second one, which was then and remains today a focus of publishers, is the potential consolidation of sales channels so that power moves from a multitude of publishers to a small number of, or perhaps a single dominant, point of contact with the customer. Until the Nook came along from B&N last winter and the iPad from Apple in the spring, Amazon and Kindle looked dangerously close to being able to dictate both pricing and margin in the ebook supply chain.

And third, of course, is the amount of the consumer spend that is taken by the authors: the royalty.

The ebook pricing and channel consolidation issues have been front and center for the past year, ever since Dominique Raccah of Sourcebooks put “windowing”, which had been tried before for ebooks, in the spotlight as her solution to the perceived damage deeply discounted ebooks could do to print book sales, particularly of the hardcover edition. After she announced that she was holding back the ebook for Bran Hambric, similar announcements came from other publishing houses. At that time, only a year ago, Amazon was the dominant ebook vendor with Kindle sales amounting to 80% or more of the ebook sales for narrative trade books.

But the introduction of Barnes & Noble’s Nook device began to eat into Amazon’s hegemony last winter as 700 B&N stores started pushing a Kindle-type experience on their millions of customers. Then, in April, Apple introduced the iPad and changed the game two ways.

First of all, their tablet computing device, which can serve as a larger-than-a-cellphone screen for an ebook reader, started adding tens of thousands of new device-equipped potential book customers every day!

But along with the device competition, the iPad and its iBooks platform added a new business model called Agency. And, under Agency, the pricing of ebooks at retail theoretically becomes standardized across the web, not subject to discounting by individual retailers. This visibly upset Amazon, which appeared to pick a fight with Macmillan over the terms. It looked to those of us with no inside knowledge of their conversations to be an attempt to bully publishers to give up the Agency idea. In retrospect, this was perhaps a bad fight to have picked. Amazon’s threat was to stop selling the print editions of titles from those publishers who sold ebooks on Agency terms. Since five of the top six publishers were moving in that direction, and none of them blinked, Amazon had to, in their own words, “capitulate.” (On the other hand, we are not aware of any other publisher, beyond the Big Five, to whom they also capitulated, so the final score on this fight isn’t in yet.)

So it would seem that the big publishers have solidified two of the major components of their ebook margin. With their help, consolidation in the ebook channel has been reversed and they’ve taken critical steps to control prices to the consumer, while ebook sales have continued to rise at an accelerating pace.

But there remains this tricky question of royalties.

Agency pricing compounded the 25% problem from the authors’ and agents’ point of view because the base price for Agency books is 25% to 40% lower than it is for the old model, wholesale, so the authors’ share is commensurately reduced. Most agents liked the principle of getting uniform pricing, likely to create a healthier ebook marketplace, but were understandably miffed that their per-copy take could be reduced without any agreement required on their part. The publishers would no doubt point out that their take per ebook unit was going down as well. And Random House, still selling at wholesale, is no doubt making the point that their 25% amounts to substantially more per unit than the other guys’ 25%.

There had already been signs for a while that a lot of legacy backlist wasn’t being enticed by the royalty offers of its current publisher. Jane Friedman, formerly the CEO of HarperCollins and an important player on the New York publishing scene for four decades with a lot of very solid relationships, started a new publishing company called Open Road. Among her propositions was to secure ebook rights to some very well established backlist titles by offering a royalty of 50% of receipts while many of the big publishers were apparently holding the line at 25%. The early headline “get” for Open Road were novels by William Styron.

Then in December, S&S bestselling author Stephen Covey announced that he was putting some of his backlist into ebooks for a deal calling for more than 50% of receipts through Rosetta Books, which had litigated inconclusively with Random House about these matters a few years ago. Through Rosetta, Covey’s books were going to be exclusively offered for a time through Kindle. At the time that announcement was made, Nook hadn’t taken hold and iPad hadn’t come out and Kindle was the dominant platform in the market. A time-limited exclusive with them at that moment didn’t seem crazy.

Last week, the plot really thickened.

In retrospect, one could say that there were two preliminaries to the big news about the intentions of the agent Andrew Wylie.

On Tuesday Teleread carried the story that Knopf was pushing ahead to digitize more backlist. There appears never to have been a formal announcement of this, and it seemed a bit curious on a couple of counts. One is that Random House, of which Knopf is a part, has already digitized backlist for years. What could they have missed in their prior efforts? The other is that it always seemed that Random House’s digital efforts were corporate, not imprint-specific. Why would there be news about Knopf on its own?

Then my good friend Evan Schnittman published a post on his Black Plastic Glasses blog called “Pass the Gestalt, Please.” Evan’s point was simple and forcefully made. Ebooks don’t exist in a vacuum; they can’t be evaluated with stand-alone economics. Publishers acquire intellectual property and they monetize it every way they can. They make more from some formats and channels than they do from other formats and channels. But what matters in the end is how much total money they produce, for themselves and for their authors.

I have a problem jumping from the math Schnittman lays out to the characterization that agents are being unreasonable when they ask for a higher percentage of ebook receipts than they get of hardcover receipts. Schnittman argues that margin is irrelevant because the parties aren’t negotiating a profit-sharing deal. I’d say the receipts comparison that he draws is irrelevant. Hardcover receipts are offset by printing costs, handling costs, and spending for excess inventory that receipts on ebooks are not.

Schnittman’s post, which was debated as soon as it hit, turned out to be prologue to the events which then dominated conversation for the rest of the week.

By all public appearances, big publishers were being very stubborn about their 25% ebook royalty, even on very important backlist and more or less daring authors to do something about it.

On Wednesday morning, the plans of the Wylie office were dropped like a bomb, apparently by Amazon. (I am told by a source I trust that Amazon revealed the news and that Andrew Wylie himself was, and is, away on vacation. The Times, as you can see, didn’t report it that way.) It was announced that Wylie that had formed a new publishing company called Odyssey to handle some significant backlist  and — in an apparent middle finger to the entire publishing community — were putting the books into Amazon for a 2-year exclusive. Left unrevealed were what Wylie was paying the authors, what splits Amazon offered Wylie’s authors, and whether any money changed hands between Amazon and the new Odyssey entity. The announcement of Odyssey followed a long period where Wylie had complained publicly about publishers’ reluctance to pay what he (and many other agents) thought were reasonable ebook royalties for legacy backlist.

Response was quick. John Sargent, tongue deeply in cheek, welcomed Wylie to the community of publishers and suggested he should perhaps be paying AAP dues. Random House announced they would not be buying any books from the Wylie agency until this issue was resolved. And many people observed that signing an exclusive deal with Amazon when they’re losing market share quickly and are likely to lose more soon was questionable, not to mention whether there was a conflict of interest for an agent publishing his own clients’ books.

Without knowing what incentives Wylie got for his authors from Amazon in return for the exclusive, it is hard to be sure that it is a mistake (although it seems likely, given the current growth pattern of the ebook suppy chain.) But the conflict of interest for an agent charged with looking for the best possible deal for an author and then self-publishing, in the face of potential litigation, is transparent. And even if Random House is the only house that openly boycotts the agency, there’s an impact on all Wylie clients in return for a theoretical advantage for the ones being he will publish through Odyssey. One must imagine there are more than a few current authors with that office who are scratching their heads about what this might mean for them.

From my perspective, there’s plenty of justification on all sides of this argument. Although I didn’t like his math, Evan Schnittman is entirely correct to say that a publisher making a deal for a copyright plans to exploit it through all channels. In words I’ve heard often from John Schline of Penguin, “you don’t do a P&L on a format; you do a P&L on a title.” They’re right that the author negotiating a deal with them accepts a basket of compensation schemes for different channels in return for an advance. Logical fallacies can creep in when you take one element of it in isolation and say it “isn’t fair” (although, in practice, that’s exactly how contracts are negotiated.)

But the controllers of old copyrights — the Styron estate and Stephen Covey, among others, and apparently several other estates and authors represented by Andrew Wylie — are also right to believe that the ebook rights weren’t contemplated in the contracts for the books in question and that a publisher starting today to publish those books electronically will have a tiny cost base and relatively astronomical margins.

Certainly not all publishers are being stubborn about the 25% number in all negotiations. And agents usually feel they can’t talk about concessions they get publishers to make. One made it very clear to me that s/he was getting concessions from publishers on ebook royalty terms in the form of escalators, but would never say so out loud for fear of angering the customers of s/he’d wangled those concessions from.

(On the other hand, things might be changing fast. In a story I saw just as I was finishing this post, the Financial Times wonders if the Wylie plans don’t signal the conclusion of publishing as we have known it. In that story, superagent Amanda (Binky) Urban is quoted saying her ICM office is getting significant royalty concessions from major publishers, including Random House. Perhaps the Wylie story has changed the dynamic so that now publishers want all the agents to know they’re ready to be reasonable. I’m not aware of an agent having been quoted to that effect before, and it would seem highly unlikely that Urban said what she said without having consulted any house she would name in advance. All of that would anticipate the suggestion I’m making below.)

All public statements are, by definition, posturing.

But the arguments publishers have made publicly to this point have elided the fact that their negotiating position is not the same for these books as they are for a new book. When a new proposal is put in front of them for purchase today, whether they are offering $10,000, $100,000 or $1 million for the rights, they’re in a position to say “if you want my check, it comes attached to these royalty terms.” But they didn’t stipulate those terms when they published books 40 or 30 or 20 years ago, or even 10 years ago. At a minimum, they require agreement from the author on a royalty rate to publish the ebook today; they may need agreement from the author to publish the ebook at all.

Why would the publishers expect an author whose book has earned out long ago, who has no requirement to allow the publisher to publish the ebook and (at the very least) a case to make that they’re free to sell ebook rights elsewhere, to accept the same terms that are offered to authors not in that position?

Publishers may have trapped themselves by not articulating that distinction. Their public position seems to be that they can’t make a competitive deal on this backlist because it would create precedents for the new titles they’re negotiating for today. But it doesn’t have to. There’s a very simple, clear policy they could declare that would make this whole issue go away. Maybe there are one or two already acting this way, but it would be nice if even one publisher would just say this:

“Our policy for all new titles we sign up in the context of all our other standard terms is that we pay 25% royalty on ebooks. But for those books on our backlist which a) have earned out their advance and b) have ambiguity in their original contracts making it unclear what the royalty rate for an ebook should be, we will negotiate a higher royalty in recognition that a contractual element is being negotiated after the value of the copyright has been demonstrated in the marketplace and the risk profile has changed.”

Life is very complicated here. Every deal is different. There are costs and risks for authors and publishers trying to set up these separate ebook deals while a print backlist remains with a legacy publisher. The publisher might sue (although that opens up, for them, the danger that they’d lose, and the consequences of that could be dire.) At the very least, the author annoys the guys with the big checkbooks who are still the custodians of their print sales.

Although it is certainly possible that some authors or estates would want a publisher as talented as Jane Friedman remarketing their backlist, I still believe that if Open Road and others are offering 50%, publishers would find many authors receptive to avoiding the conflict if the publishers were offering 40%. But even if they had to pay 50% to some authors, the publishers would be doing themselves a favor by stating the position articulated above.

Each publisher has to do its own math about how many books of theirs would be affected and what openly paying 60-to-100 percent higher royalties on those books would cost them. Undoubtedly, it would also require them to make concessions to authors they’d roped in for the 25% royalty; certainly many of those have re-openers or most favored nation clauses of some kind in their contracts. That’s the downside. But there is a lot of upside. For one thing, Open Road and Rosetta and Wylie’s new imprint would be seriously weakened; except for Open Road, which has strong cachet with Jane Friedman at the helm, they might just disappear. For another, lots of great titles that could be selling robustly as ebooks if only they were available as ebooks would be producing revenue for the publishers (as well as the authors.) Significant legal costs and liabilities would evaporate. And they’d gain enormously in trust and goodwill with the agents, who are spending far too much time trying to figure out how to go around publishers for the best backlist they control, rather than how to work with them. The conversations I have had make me believe that most agents do not believe that most big publishers are willing to deal on the basis I’m outlining here, (although a lot of them will be calling the publishers tomorrow after they read Binky Urban’s quotes.)

Aside from the reduced per-copy royalties agents and authors are seeing from the Agency pricing, they are also afraid that robust ebook sales at the hardcover price are postponing the issuance of trade paperback editions, on which the 25% Agency royalty does exceed the normal 7% of retail paid on print. That makes them feel like they’re losing again.

It is a paradox that traditional contracts have legacy publishers — the ones who write the large advance checks — paying higher per-copy print royalties than many little publishers pay on hardcovers, even with the various high-discount clawbacks that have been built in over the years. The ebook-first publishers who do print will almost certainly pay lower print royalties than print-first publishers have, if they do hardcovers at all. Publishers will need a foundation of good will, but over time should be able to negotiate lower hardcover royalties in return for higher ebook royalties on new contracts. And that will make sense, because, ultimately, print sales are more expensive for publishers to deliver than ebook sales.

Even if the publishers pushing back manage to win this round with Wylie, and they well might, I don’t think the 25% royalty can hold for very long. As more and more of the business shifts to ebooks, companies without the legacy costs that big publishers have will find it easy to pay higher royalties than that and agents will keep doing the math about how many sales they can afford to lose and still end up ahead in dollars with a higher ebook royalty. As Amazon should have learned in their fight with Macmillan in January, it isn’t smart business to draw a line in the sand marking a position you ultimately can’t defend. I hope every big publisher in town will take that lesson on board, or, even better, that Urban’s remarks tell us that they already have.

In a dialogue with a couple of smart people in my “kitchen cabinet” between writing this piece and posting it, I was asked whether I thought the ebook should have a royalty “greater than the hardcover or less than the paperback.” My response was:

I don’t have an ideology about this. Applying logic alone, I would think a Harlequin or O’Reilly ebook author should get a lower percentage than a Big Six ebook author because the Harlequin and O’Reilly brands add to the online ebook sales power in ways the Big Six publisher brand does not. The same author and the same book wouldn’t sell as well if it were under another imprint. Fully applied, that approach would mean that every deal would be different, which is utterly impractical. I don’t like to advocate things that are impractical.

Publishers should try to make standard the lowest royalty that they can apply in the marketplace without making enemies of their trading partners. It just isn’t realistic to offer a brand name with a choice of where to go 25% in this day and age. It’s just bullheaded. My sense is that any house that offered a standard 25% to earnout and 35% thereafter would be fine for now, except with the biggest authors with whom they’ll have to negotiate escalators (or change the basis on which the not-intended-to-be-earned-out advance is calculated.) But all solutions here are temporary. The line won’t hold. When ebook sales get to 50% of the total (2014-15), even 50% is not going to cut it.

Bookmark It:

I find myself with a lot of pages open on my web browser. Even before Amazon’s announcement yesterday about ebooks passing hardcovers in sales this past quarter, there has been a lot going on.

There had been some suggestions, which I never bought into, that ebook sales were slowing in 2009. (Is this a meme that started with somebody anti-Agency? More on that later…) I look at the IDPF chart as it stands today and it is headlined 2010 Sales  ”OFF THE CHART” vs. Previous Quarters and that’s how it looks to me. A major publisher told me yesterday that AAP figures suggest ebook sales are up 210% this year and that house’s numbers are up 225%, so they feel they’re rising with the tide. That’s about what PW said the AAP said with the additional information that hardcover sales were up and paperback sales, trade and mass market, were down.

In fact, Amazon, in the face of the apparently-stiff competition from the Nook and the iPad, says Kindle book sales have tripled in the first half of the year!

Nonetheless, Madeline McIntosh at Random House doesn’t see ebooks causing problems for paperback sales. She’s quoted in the Wall Street Journal saying, “Our conclusion is that there’s no data to prove any connection—good or bad—between growth in e-books and the growth or decline, in trade paperback sales. … If anything, we may be seeing a positive effect in which the steady pace of e-book sales helps to keep a book in front-of-mind for a growing number of consumers after hardcover momentum slows.”

Kat Meyer, blogging for O’Reilly, got an indie ebookseller to talk on the record about the difficulties they’re having with the transition to Agency. This would seem to undercut the idea (which I agree with) that Agency is good for smaller sellers, because the little guys will get squashed in a price war with big guys. A seminal figure in the online book retailing world who has worked with smaller stores on these challenges for years told me in a phone conversation this week that he completely agrees with me. But the problems Kat lays out for the smaller guys during the transition are real. Let’s hope we don’t lose too many of them while this all gets figured out.

Meanwhile, Knopf made some news with the announcement that they are converting more of their backlist to ebooks. We were wondering what titles they could have missed so far. Random House has never been a laggard at ebook conversion and we’re scratching our heads wondering about a conversion initiative that would be imprint-specific. But this shows that the ebook sales records being broken are occurring without the gun being fully loaded; they’re still making ebullets out of old books.

Joe Wikert wrote a blog about the emerging ebook landscape in which he imagines that the various indies selling Google Editions will, all together, constitute a big Amazon. I don’t think so. I don’t think Google can save indies with what they’re doing. But it is good that they’re trying.

Joe also thinks that Amazon will abandon the Kindle device in favor of the Kindle as a platform. I don’t agree with that either. The device is reportedly still selling like hotcakes with sales rising quickly since a recent price cut, even while the Nook has established itself and iPad has been “competing.” I think there’s room for tablet computers and ereaders, which might be a minority position at the moment. (Being in the minority is perfectly comfortable for me.)

You know we’re all about vertical here at The Shatzkin Files. It looks like some authors from big houses are taking this vertical thing into their own hands. A bunch of gardening authors have created their own garden experts speakers bureau.  It won’t surprise anybody if I predict that this effort will be more successful than the “horizontal” speakers bureaus launched by some of the major houses over the past few years. I checked with the folks at Cool Springs Press, the gardening publisher I featured here a couple of weeks ago, and, of course, they’re involved.

I had written a blogpost recently saying that I thought ebook selling nodes would explode and be all over the web. It looks like Oprah is fueling that idea in a way that I hadn’t entertained: with an app. Why not? Who has a better brand than Oprah for “curation”? Maybe Barnes & Noble. But maybe not.

It also seems that self-publishing is growing in ubiquity and respectability. PW announced the plans of an author who told his agent not to bother selling his rights. If this isn’t the major trade houses’ worse nightmare, it should be! Joe Konrath, who may go down in history as the trailblazer who proved that some authors, at least, can make money without publishers, is reporting his rising Amazon revenues on books the New York houses have turned down, and they’re eye-catching.

And the last thing I note in this pot-pourri is the news from Farrar Straus & Giroux that they’re launching an online literary magazine. On the one hand, this is the kind of niche marketing we’ve been advocating that larger houses pursue. On the other hand, the story suggests this is all about promoting FS&G books, not about building a community of like-minded readers, few of whom would know or care which publisher put out the last book they liked.

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The very nice people of Tata Consulting Services entertained a group of publishing executives at Yankee Stadium on Friday night in a luxury box behind first base. This was an ideal way to see an historic evening at the ballpark on a very hot night (the box is air conditioned and opening the big window in it actually leaked cold air on the two rows of great seats below) but it also gave rise to some very stimulating conversation with some smart and knowledgable publishers.

Because this was a private evening (and because this is not a muckraking blog; we traffic in insight here, not news), nobody gets identified and no quotes are attributed. But that doesn’t mean that very interesting observations about where publishing is and where it is going have to be kept secret.

There were a variety of publishers and industry leaders in the group. One of the most interesting between-innings conversations picked up from the post on this blog last week about the threat that the rapid uptake of ereading poses to brick-and-mortar stores.

One big publisher observed that he saw clearly that display in bookstores moved the needle on ebook sales. His fear, and a thought we didn’t cover in the post, is that the decline in brick-and-mortar exposure will lead to a decline in the overall sales for many titles. The several of us involved who were in this dialogue agreed that brick-and-mortar simply presented more opportunities to grab impulse sales; you can’t “promote” as many titles in the real estate available on a screen than you can in a well-merchandised physical surrounding. The online advantage is targeting, of course; the store can’t customize its impulse presentations to each individual customer, and that opportunity exists online. But except for the opening screen, we couldn’t think of any online retailer that really takes advantage of that.

Another big publisher  wondered if there might be a plateau point below which the print book erosion won’t go. “Will it level off at 50-50, say, or maybe at 70-30?” It does seem intuitively correct that there’s a hard core of paper book readers that could keep print alive.

But, of course, keeping print alive for any number of people is only half the equation for bookstores. Print can be bought online. In our post on the threat to brick-and-mortar, we posited a 2/3 drop in store sales from current levels will have occurred when we reach 50% ebooks and 50% of the print being sold online. There is a vicious cycle at work here: fewer store purchases lead to fewer stores, which will further fuel online purchasing for those readers who don’t want to give up print. And that still leaves a big problem for the remaining stores.

One publisher had some interesting observations about “ebook first” publishing, a term I think we’re going to hear more and more. To me, “ebook first” means two things. First, it means that the ebook is the primary product being considered as the project is put together. And second it means that the ebook hits the market before the print book. That second point is tactical and practical, not strategic. It takes time to print and bind and ship books, so the presumption is that, when the book development is completed, it is just faster to get the ebook into the marketplace. That wouldn’t be true if you had a “print book first” workflow and had to then do an ebook conversion from your print PDF, but “ebook first”, ending up with an XML document that will deliver all your formats, should eliminate the need to do that.

But a publisher in our group at the game who is working with a blog on publishing reported “it ain’t necessarily so.” The final QA steps with an ebook, particularly if there is any complexity at all to the design or layout, can take longer than delivering the print from the PDF. That’s not theory; that’s this publisher’s actual experience. There is nearly 100% certainty that the PDF will print what you want when you deliver it. But the epub file you deliver might not give you what you want through every ebook delivery system and for every display environment without some further tweaking.

One conversation that made me really want to learn more was a discussion of what big publishers do to prepare for the erosion of brick-and-mortar. Executives from two big trade houses agreed with the point we’ve made here that harvesting consumer names is a key. If most of the market is available online and can be reached without deploying a large-scale organization, publishers will need to raise the switching costs for major authors beyond the cash flow shuffle that the author would suffer if they lost their advance. At the game, I heard two major houses agreeing that emailable names that the house owns will be a key author retention tool going forward; one wonders if there is a sophisticated consumer name gathering and managing process taking place in the big houses that is beneath the radar; or, at least, beneath my radar! Of course, getting into the details of “what exactly do you do” would not have been an appropriate question with a curious competitor listening in so it will have to wait for some other time.

Thinking about the Digital Book World program I’m planning for January, though, this seems like a really important topic. And it also seems like one agents ought to know a lot about. Gathering the names of an author’s fans is a place for publishers and agents both to cooperate and to look for a negotiating advantage. It is very tricky ground.

Several of us also had a bit of conversation about Google and Apple as retailers. One of the publishers expressed skepticism about how well Google Editions would sell ebooks. “Google has never sold things successfully,” he said. I pointed out that “never” for Google was not a very long time; the company is barely more than a decade old. But it is true that whether Google sells three times as many ebooks as they expect or one-third as many, it won’t move the needle for them financially. (More than 95% of Google’s revenue is from advertising.) The same is true of Apple, which seems to put only the most minimal effort into merchandising at the iBooks store.

One TCS executive, with a strong background in the telecom industry, was pretty sure the publishers are underestimating the speed with which the online component of their business will grow. He says the coming G4 installations — the next generation of cell phone signal technology — will mean a four-fold increase in bandwidth and speed. The new “free wifi” offer from Starbucks is a leading indicator, he said. Free wifi will be just about everywhere very soon.

I had been thinking that the only significant advantage of an app store app on the iPhone versus a web-based app was that the “true” app would hold content resident in the phone that would require connectivity to be delivered through the web. But that’s a distinction without much of a difference if wifi is ubiquitously available (or if the app itself has to access an online database to be effective.) And delivering a web app steers clear of the whole Apple approval and vetting process and is, at least today, a lot cheaper to develop. The new Google Android app tool kit apparently presents another cheaper alternative to deliver value than delivering through the Apple app framework. TCS has been responsible for a large number of the apps developed for the iPad but, nonetheless, my new friend from TCS agreed with my observation. “When do apps make commercial sense” is another topic we’ll have to explore at Digital Book World.

As a serious fan, I can assure you that my involvement in all these conversations was between pitches and between innings. There was a helluva ballgame going on. The evening began with tributes to Yankee owner George Steinbrenner and longtime public address announcer Bob Sheppard, both of whom died in the past week. The Yankees’ new primary rival, the Tampa Bay Rays, took an early 3-0 lead, but the Yanks came back with a couple of home runs in the 6th inning to tie the game. The Rays broke the tie in the 7th but the Yankees answered with another solo homer in the 8th. After the greatest player of the Steinbrenner era, relief pitcher Mariano Rivera, preserved the tie in the top of the 9th, the Yankees won in the bottom half on a 2-out single by Nick Swisher. The TCS box exploded with cheers along with the rest of the Stadium. It was a perfect night at the ballpark.

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