eBooks

This is a teamwork play that could really give Amazon a headache if they got together


I will admit that I have long been among those who believe that Amazon has what amounts to an enduring stranglehold on the book business. They have achieved a market share — which could be in the neighborhood of half the trade books sold if you combine print and digital versions — that is unprecedented in book business history. This is a smaller share than the two giant bookstore chains — Barnes & Noble and the now-defunct Borders — had combined at the peak of their marketplace power.

Lately, I have seen that point of view challenged. Jake Kerr wrote a very thoughtful piece making the point that Amazon’s desire to take margin out of the ebook business is a good defensive move that diminishes the appetite of their mega-company ebook competitors — Apple, Google, and, less so, Microsoft — to invest in beating them back. Suw Charman-Anderson picked up on the theme that Amazon is being defensive, “looking tired”, and found others who seemed to think the same way. Both of them express doubts about Amazon’s continuing hegemony without even using one powerful argument I think is important. Amazon is protected from ebook competition by the inability of competitors to put DRMed content onto dedicated Kindle ereader devices. (Another barrier is that so many early ebook adopters did so via a Kindle account, so their content and login credentials are in the Amazon platform along with a lot of other shopping data that raises the switching hurdle.) But the share controlled by dedicated devices is diminishing and anybody reading on a multi-function device can choose from a range of ebook retailers. (And that’s not to mention that somebody might invent a way to place protected content on Kindles without Amazon’s help; rumors have it that somebody already has!)

Contemplating Amazon’s weaknesses is new thinking for me. What I see is Amazon’s power over the book business, which is great. Amazon has achieved this position through smart and efficient operations and brilliant tactics like Amazon Prime that build customer loyalty, as well as being beneficiaries of the natural migration of sales from brick stores to online. But, most of all, Amazon benefits from its broad business base. They don’t have to support their business exclusively, or even substantially, from their book sales margin. And, on top of that, they don’t have to finance the building and maintenance of a global operation strictly from what they earn in the United States.

So they trump everybody. Barnes & Noble, their only competitor selling both print and digital books, seems to have stalled in its bid to build a rival global empire with the Nook device as the leading edge. Their lack of stores outside the US robs them of the main tool they used to build Nook from a standing start to what seemed for a while to be a serious threat to Kindle and the consequent lack of global scale is hobbling their Nook business. The US stores are still profitable as print-sellers, but very few are those who maintain that print-in-stores is anything but a declining market. (As for BN.com, the less said the better. Of the four principal components of B&N’s business: bookstores, college stores, Nook ebooks, and their online retailing operation, the most dramatic and persistent failure has been BN.com.)

Kobo, Apple, and Google are all ebook purveyors only with no print book complement. Kobo has nominally tried to deliver a combined offering, and claimed some store support to sell their devices, by making alliances with leading local booksellers in many markets. Apple, a company primarily interested in selling its hardware and the ecosystems it builds around them, has no apparent interest in print. Google appears to have hit on a broader variation of the Kobo strategy, making alliances with physical retailers by offering a combination of its power in search and a same-day delivery capability called Google Shopping Express — competing with Amazon Prime — that retailers in a single vertical couldn’t deliver for themselves.

Under that rubric, Google is now allied with Barnes & Noble. But I see this as an initiative with the accent on the wrong syllable. The combined companies’ offering is only of real value applied to the small number of book purchases for which same day delivery adds substantial utility (and for which the digital version — always delivered instantly — doesn’t constitute an adequate solution for the need for speed). They are further limited by the books available in the particular B&N store plugged into the program in each locality and each store carries far fewer titles than the chain does as a whole. So the number of books customers will need delivered with that alacrity will be further reduced by the imperfect match between the demand and what’s available. Even if this program steals a high percentage of the same-day demand sales from Amazon, I’m not sure how much it would shift market shares. And with Amazon also offering rapid delivery and probably around a greater number of titles, it is not a given that the new offering from Google and B&N will steal much market share at all.

That doesn’t make it a bad move. The sales and visibility are incremental pluses for Barnes & Noble. Google’s new Google Shopping Express has a business model into which B&N fits very nicely. Books are a nice-to-have additional product line to offer within that service, designed to compete with Amazon’s growing same-day goods delivery. This is a fight between two behemoths that is much larger than the book business (as it has to be to interest them). B&N has a role to play, but it is a supporting position, not a lead.

From where I sit, this offering from Google and B&N doesn’t look like a game-charger for the book business. Nothing about it would seem to threaten Amazon’s overall (and still growing) hegemony in book retail. The migration of sales from print to digital and from stores to online has clearly slowed down, perhaps even plateaued, in the past year or two but few are those who believe those trends are permanently over.

Google is on a right track with Google Shopping Express; people who buy physical goods use Google search to find them and see Google ads when they do. But going after the smallest corner of the print book business — those books on which 6-hour delivery presents a very big advantage over 24-hour delivery — is not going to bend the curve much on Amazon’s future, even if it provides some marginal benefit to B&N and Google.

But there is a different combination that could give Amazon a real headache. There are two companies that together could deliver print and digital, just about anywhere in the world with competitive delivery speed, with discovery capability that would rival Amazon’s as well. Between them, they really have almost all the capabilities and infrastructure required already in place.

One of those companies is, of course, Google.

The other is Ingram, the book business’s biggest US wholesaler and, through its present activities already providing global digital and print distribution as well as print-on-demand. Ingram is positioned to deliver any book in any form anywhere extremely efficiently. They also have a robust and accurate database of book metadata which, if combined with Google’s data and search mastery (and capabilities that match Amazon’s “Search Inside” offering as well), could challenge Amazon effectively as a “best first place to look” for any information about books.

What Google needs to take on board to make the strategic leap to explore a partnership like this is that most book consumers read both print and digital and probably will for some time to come. It will get harder and harder to compete with Amazon without a print-and-digital offering; you can’t be fully effective with either one unless you do both.

And it would help if Google saw the book business as distinctly different from the other media businesses that with books constitute Google Play. The differences play to and can enhance Google’s core strength. Book marketing is almost infinitely granular, because the number of possible motivations to buy a book are so great in number. Rarely do you buy music or video because of where your next vacation will be or because you want to put a new roof on your house or change careers. Associating specific book suggestions to discerned interests and motivations is the key to effective book marketing in the digital environment. And the insights about any individual by analyzing their book search also can tell you what else they may be looking for. Nobody does those things better than Google. They have limited impact on the ability to suggest music or movies, but enormous value in selecting what books to feature to any particular customer at any particular time and what else they can be sold after they’ve bought a book.

A Google-Ingram partnership would not only start with every capability necessary to compete with Amazon as a global bookseller, they would have some additional Secret Sauce as well. Google and Ingram wouldn’t actually have to make money on the combined retailing component because they make money other ways that are associated with it. Google would be adding incremental search and ad placement opportunities. Ingram would be benefiting as a wholesaler providing all the print books and many of the ebooks the new “store” sells. They could make nearly nothing from the new retailing operation, just like Amazon does with its book retailing operation, and still have the enterprise return a profit for their engagement.

A joint digital retailing enterprise to sell books and ebooks from Google and Ingram is the only possibility I can see on the horizon that would save the legacy publishing business from being entirely subject to Amazon’s inexorably growing marketplace power. It is almost certain that Ingram — part of the book business Amazon is so successfully disrupting — sees this very clearly. (Full disclosure seldom necessary in this space: Ingram has been a client of The Idea Logical Company for many years.) Being a hero to the book business may be a less immediate objective for Google, but making life a bit more difficult for Amazon almost certainly is. Nothing they could do would create more challenges for Amazon than a partnership with Ingram to create an all-media store that sells both physical and digital versions of everything, including and especially books.

Since I posted my last piece, triggered by Amazon’s invoking of Orwell and Streitfeld’s accusation that they got him wrong, two conflicting posts have arisen. I’m indebted to Hugh Howey for pointing out that apparently Orwell really did want to destroy cheap paperbacks but Orwell’s estate takes a different view. In fact, I don’t think which side got it right is particularly germane to the arguments I was making. The Orwell connection made a cute hook, but it is not really an essential part of either side’s story.

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Amazon channels Orwell in its latest blast


Anybody who reads Amazon’s latest volley in the Amazon-Hachette war and then David Streitfeld’s takedown of it on the New York Times’s web site will know that Amazon — either deliberately or with striking ignorance — distorted a George Orwell quote to make it appear that he was against low-priced paperbacks when he was actually for them.

This recalls the irrelevant but delicious irony that the one time Amazon exercised its ability to claw back ebooks it had sold was when they discovered that they were selling unauthorized ebooks of Orwell’s “1984″. The right thing to do was exactly what they did: pull back the copyright-violating ebooks and refund the money to the purchasers. This (apparently) one-time event has often been cited as some sort of generic fault with ebooks, as though ebook vendors would make a practice of taking back what they had sold their customers. This was a case where Amazon was villified in some quarters for doing the right thing which simply adds to the irony.

However, the most misleading aspect of the Amazon piece is not the Orwellian treatment of Orwell, but the twisted metaphor in which the low-priced ebook is the low-priced paperback of today’s world. (The analogy was one I wrote about three years ago with, I think somewhat more care for the facts.) Yes, they were both new formats with a lower cost basis that enabled a lower retail price to yield positive margins. And there’s one other striking similarity: they both unleashed a spate of genre fiction to satisfy the demand for the format, largely because the rights to higher-value books were not available for the cheaper format, but also because lower prices attract some readers more than others. But that is where the similarities end.

This argument against Hachette, using authors as proxies and lower-prices-for-consumers as the indisputable public good, once again employs two logical fallacies that are central to their argument that Hachette (and its parent company, invoked to give the appearance of relative equality of size between the combatants, which is still nowhere near the case) is craven and muleheaded and that Amazon is merely engaged in a fight for right.

1. Amazon’s logic is entirely internal to Amazon. It does not attempt to take into account, or even acknowledge, that publishers and their authors are dependent on other channels besides Amazon. And, in fact, the publishers and authors know for sure that the more the sales do concentrate within Amazon, the more their margins will be reduced.

2. The price elasticity statistics they invoke (for the second time in as many public statements), which are also entirely internal to Amazon, are averages. They don’t even offer us a standard deviation so we can get a sense of what share of the measured titles are near the average, let alone a genre- and topic-specific breakdown which would show, beyond the shadow of a doubt, that many Hachette books would not achieve the average elasticity rate. See if you can find anybody with an ounce of statistical sophistication who thinks a book by Malcolm Gladwell has the same price elasticity as a romance or sci-fi novel by a relatively unknown author.

The actual history of the paperback in America contains elements of what Amazon claims. It actually begins after World War II, not before (although Penguin began in this country in 1939). During World War II, under the leadership of historian and renaissance man Philip Van Doren Stern, the military made 25 cent paperbacks available to the troops. That introduced the idea to the masses and after the war several mass-market paperback houses started.

They distributed through the magazine distribution network: local wholesalers that “pushed” copies of printed material to newsstands and other intermediaries who took their distribution of copies, displayed them until the next edition of the magazine would come out, and then sent back the covers to get credit for what was not sold. The first paperback books had a similar short shelf life in that distribution environment.

What made the cheap prices possible were several factors:

1. The books themselves were frequently formulaic and short and therefore cheap for the publisher to buy. The universe of titles for the first several years was, aside from classics from the public domain, a different set of titles than those sold by mainline publishers through bookstores.

2. There was no expensive negotiation between publishers and the accounts over an order for each shipment of books. The wholesaler simply decided how many copies each outlet would get and, in the beginning, the wholesaler pretty much distributed what the publisher asked them to. The “check and balance” was that the publisher would get worthless covers back for the unsold books and that was their constraint against oversupplying the system. Over time, that aspect of things broke down and the publisher had to work the wholesalers to get the distributions they wanted.

3. The books themselves were cheaper too: less and cheaper paper and much less expensive binding.

4. The adoption of the magazine system of covers-only for returns created a big saving compared to the trade book practice that required returns of the whole book in saleable condition to get credit.

5. The retailer took a considerably smaller share of the retail price than bookstores got on trade books.

At the same time that the mass-market revolution was beginning, conventional trade publishers also started experimenting with the paperback format. The first extensive foray of this kind was by Doubleday in the early 1950s, when wunderkind Jason Epstein (later the founder of NY Review of Books and still active as one of the founding visionaries behind the Espresso Book Machine) created the Anchor Books line.

My father, Leonard Shatzkin, was Director of Research at Doubleday (today they would call it “New Business Development” or “Change Management”) at the time. He often talked about a sales conference at Bear Mountain where Sid Gross, who headed the Doubleday bookstores, railed against the cheap paperbacks on which the stores couldn’t make any money! So, it was true that the established publishing industry and the upstart paperback business had a period of almost two decades of very separate development.

It took until the 1960s — a decade-and-a-half after the paperback revolution started — before the two businesses really started to coalesce into one. And the process of integrating the two businesses really took another decade-and-a-half, finally concluding in the late 1970s when Penguin acquired Viking, Random House acquired Ballantine and Fawcett, and Bantam started to publish hardcover books.

My own first job in trade publishing was in 1962, working on the sales floor of the brand new, just-opened paperback department of Brentano’s Bookstore on 5th Avenue. Even then, the two businesses operated separately. The floor of the department had chin-high shelves all around with what we’d call “trade paperbacks” today, arranged by topic. They were mostly academic. On a wall were the racks of mass-market paperbacks and they were organized by publisher. If you wanted to find the paperbacks of a famous author whose rights had gone to a mass-market house, you had to know which house published that author to find the book. (That was good; it made work for sales clerks!)

There was a simple reason for that. The two kinds of paperbacks worked with different economics and distribution protocols. The trade paperbacks were bought like hardcovers; everything that was shipped in was because a buyer for Brentano’s had ordered it. The mass-markets were “rack-jobbed” by the publisher. They sent their own reps in to check stock on a weekly basis and they decided what new books went into the racks and what dead stock was pulled. It was to make the work of the publishers efficient that the mass-markets were grouped by publisher.

The highly successful commercial books that became mass-market paperbacks got there because the hardcover publisher, after it had booked most of the revenue it expected to get for the book, then sold mass-market rights to get another bite of the apple.

Little of this bears much resemblance to what is happening today. Little of this is comparable to the challenges trade publishers face keeping alive a multi-channel distribution system and a printed book market that still accounts for most of the sales for most of the books.

But the most striking difference today is that a single retailer controls so much of the commerce that it can, on its own, influence pricing for the entire industry. The mere fact that one single retailer can try that is itself a signal that we have an imbalance in the value chain that is unprecedented in the history of publishing.

One other aspect of this whole discussion which is mystifying (or revealing) is Amazon’s success getting indie authors to cheer them on as they pound the publishers to lower prices. (The new Amazon statement is made in a letter sent to KDP authors.) This is absolutely indisputably against the interests of the self-published authors themselves, who are much better off if the branded books have higher prices and leave the lower price tiers to them. That seemed obvious to me years ago. Yet, Amazon still successfully invokes the indie author militia to support them as they fight higher prices for the indies’ competition! You will undoubtedly see evidence of that in the comment string for this post (if history is any guide).

The tactic of publishing Michael Pietsch’s name and email address with a clear appeal for the indie authors to flood his inbox is an odious tactic, but, in fairness to Amazon, that odious tactic was initiated by the Authors United advertisement headed by Douglas Preston which gave Bezos’s email address. This is something that both sides should refrain from and, in this case, Amazon didn’t start it.

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Amazon’s clarifications always come when I’m on the road


Amazon’s recent brief “clarification” calls for some brief annotation, which is all I can give it while I’m traveling this week. The material below that is not bolded is the complete statement Amazon has just issued. The bolded paragraphs preceded by [MS] are my annotations.

With this update, we’re providing specific information about Amazon’s objectives.

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

[MS] “Unjustifiably high” is an opinion, not a fact. Everyone is welcome to their opinion, but everyone is welcome to not share it as well. Publishers pay money for the right to exploit copyrights and their “opinion” on pricing should be at least as important as anybody else’s. Agency publishers had a lot of experience with higher ebook prices that couldn’t be discounted before the DoJ stepped in and they apparently disagree.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

[MS] This elasticity measurement considers only sales of ebooks at Amazon. What is the impact on print book sales when the ebook price goes up and ebook sales go down? What is the impact on the bookstore distribution network when ebook prices go up and ebook sales go down? It would be commercially irresponsible of publishers not to consider those effects as well.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

[MS] The publisher also benefits from bestseller list effects and is not likely to ignore them. The total ebook pie is bigger for that title; whether the total pie is bigger depends on a) the impact on print sales for that title and b) the total marketplace impact.

Keep in mind that books don’t just compete against books. Books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.

[MS] It is true that ebooks live in a world where they compete with other media. It is also true that the they live in a world which includes print, also an important component of a publisher’s and an author’s economic world. This analysis is very short on measurements of the impact on print sales of lower ebook prices.

So, at $9.99, the total pie is bigger – how does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% — we did have a big problem with the price increases.

[MS] It is good to hear that Amazon accepts a 30% share for retailers as reasonable. Will they now extend terms reflecting that to all the non Big-Five publishers who are trapped in “hybrid” terms, giving 50% or more in wholesale discounts to Amazon for ebooks? Of all the points raised by Amazon in this document, this is the most consequential in terms of commercial impact.

Is it Amazon’s position that all e-books should be $9.99 or less? No, we accept that there will be legitimate reasons for a small number of specialized titles to be above $9.99.

[MS] Which titles are those? How about the academic and professional title universe that never operated on trade discounts until Amazon forced them into the trade discount world recently? The economics of those segments of the book industry are being devastated by trying to put them into the trade paradigm where they never belonged and never intended to be. It would be helpful if Amazon addressed with more specificity which titles they mean here and whether the differences in pricing that would apply to those titles might also suggest a difference in terms within the supply chain as well.

One more note on our proposal for how the total revenue should be shared. While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.

We hope this information on our objectives is helpful.

[MS] And I hope the same for these annotations.

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Publishers need to rethink their marketing deployments and tactics in the digital age to take advantage of their backlists


Well-articulated complaints about the way traditional publishing compares to self-publishing have recently been posted by two accomplished authors, one who writes fiction and one who writes non-fiction.

These point to what most publishers really should already know. Some fundamental and time-honored truths about publishing need to be reexamined as we continue the digital transition. And one of the things that really needs to change is the distinction between backlist and frontlist.

There is a real baked-in logic to how publishers see their responsibilities and effort allocation across their list. Books have always been launched like rockets. The publisher commits maximum firepower to getting them off the ground. Most crash to earth. Some go into orbit. The ones that go into orbit have “backlisted” and, like satellites, it takes no power or effort to keep them in orbit for a long time if the initial blast-off gets them there.

In fact, a virtuous characteristic publishers have always recognized about backlist stands in the way of developing the right 21st century approach: backlist books sell without the marketing effort that it takes to introduce a new book. (This has, unfortunately, too often been interpreted in a way that discouraged extra effort that would make them sell better if they were actively marketed.) My Logical Marketing partner, Pete McCarthy, who worked for both Penguin and Random House in his corporate career, points out that titles in the backlist make can make up more than half the profits for a Big Five house in a given year.

But in the digital age, the “guided missile” is a more appropriate metaphor for best practice than the “rocket”. Audiences are discerned and they are targeted. The messages delivered to the target audiences should be as topical and current as today’s news and social graph and as relevant and useful to them as possible. And that means that marketing efforts for all books need to be continuous, or, at the very least, adjusted over time as necessary. It doesn’t make sense anymore to stop the marketing of a book after its first month, whether it has early success or early failure.

Experienced publishers learned over the years that it didn’t matter what promotion you did for a book not fully distributed. If it wasn’t available in stores, promotion and advertising wouldn’t make it sell. Savvy publishers would ignore news breaks or marketing opportunities for books that had gone through their peak bookstore distribution cycle — which can be as short as a few months or even less if a book doesn’t gain initial traction — because chasing them was wasted effort.

None of this is true anymore. Any break can get around quickly, or even “go viral”. And there don’t need to be books in any stores for a break to move print and digital copies. For many categories of books, most copies are already bought online. It’s probably the case for the majority of titles published and it is true for periods of time for just about any title, particularly an older one past its bookstore peak that has a sudden moment of relevance or fame. With hundreds of millions of consumers having online accounts, publishers should have no concerns about them finding and buying the books they feel they want or need at any moment.

The common experience of the two authors who have switched from traditionally published to self-published and written about it is that some marketing effort, including price-fiddling, applied to long-ago backlist can resuscitate a dormant book and that fact, combined with the higher share of revenues self-publishing brings, can make the effort of managing their own publishing business well worth the effort to them. Another component is that both authors want to work on making their books sell.

Of course, this constitutes a loss to the publishers whose initial efforts helped create both the product and the platform that the self-publisher and the self-publishing infrastructure (most prominently Amazon, but there are plenty of players there) then capitalizes on. This squares with our recent observation that there are two (and only two) categories of successful self-publishing authors so far: those who somehow manage to reclaim and republish a backlist and extremely prolific genre fiction writers. (There are other success stories, but they are isolated and relatively rare.)

Traits just about all of them share (along with the authors of the linked posts above) are marketing and publicity capability and constructive business sense. These are traits publishers should be looking for in their author partners and the fact that they can gain better expression and leverage outside a publishing house is a failing the industry really needs to fix. We have seen indications of some awakening to this in the literary agencies, some of which are actively learning about and teaching their authors how to best leverage their efforts and networks.

Aside from marketing effort that these authors expended long after their publishers’ efforts had ceased, the other variable here seems to be consolidation of effort across publishers’ lists. An author who has had a long career, as these two have, frequently find their backlist spread among several publishers. So only when the author reclaims rights across those publishers is a meaningful author-centric marketing effort even possible. This is a kind of middling-scale application. An author with a few books of his/her own to push can amortize marketing and management efforts — from putting titles up to watching sales to fiddling with prices — across a real list. Scale is supposed to be the advantage that the publisher provides, but it is diffused and ineffective if each of an author’s titles is viewed as a separate SKU and that is particularly likely if the number of SKUs each publisher has is a minority of the author’s total output.

There is a critical strategic question here that the industry has not resolved. Authors really need to control and manage their own personal web presences and decide on how to best leverage those presences — in conjunction with their publisher(s) or not. But managing a personal web presence is knowledge-, cost-, and labor-intensive and there is no great correlation between how well a person can write and how well they can manage their online opportunities. Still, an author can’t really totally entrust that work to any one publisher, because each is only really interested in the books they publish. Agents are aware of this reality and many of them work to help their clients understand the opportunities. But somebody’s got to pay for web sites and maintaining the Facebook account. Whoever does will effectively own the names and attention they can harvest. (At Logical Marketing, we’ve already done work with three of the largest literary agencies in New York, sometimes totally independently and sometimes in conjunction with publishers. And it is only about 100 days since we opened the doors.)

Publishers really need to work out ways to support authors who can contribute to their own marketing. But it is complicated and it can only done between a publisher and an author who acknowledge their own and each other’s interests and responsibilities. Working out how to make these efforts both fair and synergistic — including rules of the road for how email addresses that could really be attributed to either should be shared and used — will be a key characteristic of productive agent-publisher partnerships over the next ten years.

Digital marketing in this business can be defined as identifying and building audiences for books and for authors — two separate endeavors that need to be complementary — by enhancing discovery and understanding and using the social graph. Agents and publishers working together on marketing in a sustained way will increasingly be the key to commercial success. And the minute a publisher recognizes the author as a true marketing partner, the old industry attitude about backlist marketing must yield, because authors have a very long attention span to push their work. (Remember, in many cases it took them years to write!)

My longtime friend Charlie Nurnberg, who spent most of his career at Sterling and was always a champion of backlist, often said “any book is new to somebody who didn’t know about it before”. That’s an aphorism that must become every publisher’s motto. Combined with our ability today to understand audiences categorically, and to understand them better for backlist books (because the evidence of who really constitutes the audience is sprinkled across the Internet), the fact is that it is easier to do intelligent and targeted marketing for a book that is a year old than for one that hasn’t been published yet.

But publishing organizations are not structured to take advantage of that fact. In the past ten years, the ratio of marketing personnel to sales personnel has changed in every house: more marketers and fewer sales people. But there has not been a comparable shift in marketing deployment between new titles and backlist. If publishers want to stop losing their most marketing-savvy multi-book authors to self-publishing, that’s something that urgently needs to change.

Publishers need to apply both big scale and middling scale to address this issue. They need to create and employ new tools, such as an engine that digests the news and social graph on a daily basis to help identify specific backlist titles that could benefit from additional effort right now. To make that investment in tools productive, they need to go into their backlist and create new metadata — short and long descriptions — that reflect the audiences for those books. Doing all of that is a six-figure investment for big publishers, but not a seven-figure one. Though it is penny-wise and pound-foolish not to do it, we only know of one trade publisher who possesses the tech to digest today’s reality and systematically bounce it off their backlist. (Of course, there may be others; we don’t pretend that everybody tells us everything they do. But if a publisher “doesn’t know how”, Pete McCarthy and our Logical Marketing team can guide you or do it for you.)

Publishers should have specialist marketers for genres, topics, and multi-book authors. Having staff dedicated to marketing authors will make another unusual step that needs to become common much more likely: acquiring the rights to titles of that author that now belong to other publishers or to the author. As we move into the digital age, selling “one title at a time” — which was pretty much the only way to do it when books were bought in bookstores by consumers and bought by bookstores order by order — becomes decreasingly efficient. Publishers have always built their marketing around their understanding of their distribution channels. Those are changing and the marketing and publishing tactics need to change with them. Working in a collaborative way with an author who may have titles at other houses or self-published is essential. Acquiring the rest of the list of an author in whom a publisher wants to invest building their name should be even better.

There are a variety of additional tactics, some well-recognized already, that are all about marketing across a range of titles. Most publishers already know the value of discounting (or even giving away) the initial title of a compelling series. But to maximize sales, it is also necessary to spell out clearly the sequence of publication of a series so a consumer can easily read them in the order the author intended. It would probably also be helpful to provide a roster of characters with descriptions. All of these can be tools to stimulate additional sales, but they don’t fit comfortably with the “marketing each new title” workflows that publishers are used to.

One new publisher that I’ve seen reflect this thinking is Open Road. Their publishing program has always been about about bringing in authors with backlists. So their publishing calendar is not centered on pub dates of new and upcoming titles; it is about the holidays and occasions that we all celebrate. They think about “Easter” or “Father’s Day” and look for the books on their list that can benefit from the connection. Coding holiday connections into the metadata needs to be a standard part of preparing each new book for the market, but it also requires expending the effort to do it for backlist to be fully effective. (The longtime ebook publisher Rosetta Books is similar to Open Road in many of these respects.)

Of course, the new title publishing activity can’t stop; each new book needs to be properly introduced into the marketplace and, for at least a few more years, sales in the opening week or weeks need to be optimized. But that should become just part of the marketing effort and it should ultimately be the smaller part (if it shouldn’t be that already).

Publishers need to recognize that if authors can sell their backlist more effectively than their publisher(s) did, the publisher was doing something wrong — or failing to do some things right. Authors are right to leave and take matters into their own hands when that happens. Publishers further need to recognize that the authors who can effectively market themselves are the very authors they most want, and that figuring out how to create an environment of collaborative synergy with them is what the successful publisher of ten years from now will have done. More imagination, energy, and resources devoted to the backlist is a very good, and likely a very profitable, place to start.

Industry statistics on backlist and frontlist don’t exist. In fact, the definition of when a book is considered backlist varies across the industry or people work without any standard definition at all. Nonetheless, it is likely that most publishers are already benefiting from digital discovery and shopping increasing their backlist sales. Recent financial reporting from big publishers has been very upbeat, a fact usually attributed to the more favorable margins publishers achieve on ebook sales, which have positive margin attributes around costs of inventory, costs of royalties, and elimination of returns. However, it is almost certain that improved sales of backlist due to the natural effects of “unlimited shelf space” for discovery and fulfillment also play an important role in improving the financial picture for the publishers with the biggest backlists.

Our wildly unreliable Feedburner distribution system hasn’t emailed last week’s post on subscriptions as of when this one is being published.

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Subscriptions are in the news this week


Subscriptions for ebooks are certainly in the news this week. Amazon just announced their Kindle Unlimited offering, taking its place beside Oyster and Scribd as a “one price for all you can eat” Netflix- or Spotify-for-ebooks program. And the Book Industry Study Group has released a lengthy and fact-filled report from Ted Hill and Kate Lara covering subscriptions across publishing segments.

It is hard to quarrel with the report’s contention that “subscriptions are here to stay”. The report makes clear, and documents extensively, that there are a great variety of ways subscriptions can be offered and that tools making it easier to manage them are becoming cheaper, better, and more ubiquitous. The report suggests that subscriptions could occur for as narrow an offering as one author’s works. As technology enables subscription offers to be economically viable with less and less revenue, the tendency for more and more publishers to want to “own” their customers, combined with the tendency for publishers to build up their intellectual property inventory in an audience-centric (vertical) way, either organically or by acquisition, it is easy to see how they could proliferate.

When I have expressed skepticism in the past about the commercial viability — or commercial importance — of subscription services, my intention was (is) to confine my skepticism to broad-based services like KU, Oyster, and Scribd. In other segments, the viability of the model is obvious. Safari has operated successfully for a decade-and-a-half. Journal publishers figured out in the 1990s that selling annual access to the whole catalog of their publications, including backlist, was an opportunity presented by digital delivery because of the value of being able to search across the catalog. The science-fiction publisher Baen has had an apparently successful subscription offering for years. And patron-driven acquisition, which the BISG report calls a form of subscription (loose defining, to be sure), allows a publisher’s whole catalog to be exposed to a library’s patron base with purchase decisions to follow (rather than patrons only being able to see what a library had already bought) just makes sense for everybody.

But the consumer ebook business is a different animal and it is far from obvious (to me) that a model can be constructed that will satisfy all the stakeholders and provide profits for the model owner. But the pieces are certainly in place for us to find out.

It is clear from the catalogs presented by KU, Oyster, and Scribd that the jury on subscriptions is still out because big publishers are still reluctant to participate. No Big Five house has put books into Kindle Unlimited. Only HarperCollins and Simon & Schuster are (as yet) participating with Oyster and Scribd. Penguin Random House, Macmillan, and Hachette have — so far — held out. What those houses do in the next few months will tell us a lot about how likely the concept of the broad-based ebook subscription is to succeed in the future.

The BISG report surmises, and I agree, that only PRH could possibly deliver a general subscription offer on their own. I “predicted” some time ago that they would. A top Random House strategist tried to set me straight on that some months ago. This person asked the rhetorical question: “why would we want to turn $1000 a year book customers into $100 a year book customers?” Last week, an even more senior executive, recalling that s/he had read this speculation from me told me directly and assertively, “we aren’t going to do that.” (Random House executive Madeline McIntosh is quoted in the Hill-Lara report issued by BISG saying “Many people who are buying our books today are spending more than they would with a subscription.  If that amount starts to dip, then subscription services will become more interesting to us.”)

These people are straight shooters. I believe them when they describe their current intentions. But what if Scribd and Oyster and KU build big subscriber bases? And what if those subscriber bases tend to buy fewer books outside the subscription offering? It is in a publisher’s DNA to push books into any channel that will take them. They have resisted the subscription offers so far because they don’t want to empower an aggregating intermediary the way Amazon is now empowered (which is why KU has the hardest time pulling big publisher books into its aggregation) to beat them down on terms. This is good forward thinking if staying out stops the subscription services from reaching viability. But what if it doesn’t? How long can publishers refuse to participate in revenue opportunities for their books and authors?

The offers (as we understand them) by Scribd and Oyster, and in other ways by Amazon, have been very generous. Scribd and Oyster are apparently paying 80% of the cover price (to the big agency publishers; others don’t get that deal) once a book is deemed “bought”, which requires a threshold amount of the book — often suggested to be 10% for the Big Houses, which is where Amazon put the bar for Kindle Direct Publishing authors within Kindle Unlimited — has been perused by the subscriber. (Not everybody gets that deal either.) 

Amazon presumes the right to include books in Kindle Unlimited from its wholesale trading partners (everybody but the Big Five), but it considers the ebook “sold” when it is cracked, a far more generous interpretation of when a book has been consumed. (Nor is that deal for everybody. For authors and pubs participating in KU via KDP Select, the threshold for a “sale” is 10% like Oyster. Then they are compensated from the “KDP Select Global Fund”.) The introduction of KU and the various terms around it have been met by initial grumbling in Amazon’s indie author community, according to both Publishers Lunch and Hugh Howey.

Agents will be seeing what the subscription revenues mean to their clients. It will be harder for them to get a handle on whether those subscription services are cannibalizing regular per-copy sales, but they will have ample information from which to form opinions about that as well.

Part of what holds back the big publishers from participation in subscriptions is a fear that agents share. Today Scribd and Oyster offer 80 percent of cover price, and Amazon pays the minute an ebook is opened, because that’s what they have to do to get books in their service. And the books in the service are what bring in the subscribers.

But if one of these services has a million members three years from now, each individual book won’t be quite as important anymore. Just as Amazon can get along without maximizing their sales of Hachette books today, the subscription owners will see a different, and lower, value for each book and each publisher then. Amazon gambles today that the customers of theirs who don’t find the Hachette book they’re looking for will often just buy something else rather than go shop somewhere else. Their own subscription lock-in, PRIME, shifts the odds in their favor there.

Amazon will be in this game to stay. Offering Kindle Unlimited is relatively painless for them. They have the books and they have the audience; it is just another way to keep their customers loyal. The big questions for the industry are whether Oyster and Scribd succeed in taking a substantial number of single-purchase customers out of the market and, if they can, whether they have a sustainable model with the prices they charge customers and the way they compensate publishers.

If what they have works for them, then all publishers will eventually have to play. That will mean that HarperCollins and S&S will be joined by Hachette and Macmillan. And despite what their executives tell me today, I’d bet a steak dinner that Penguin Random House will see more opportunity and less risk in creating their own service than in joining one of the existing ones. In fact, a Penguin Random House “backlist only” subscription offer today would constitute the most robust commercial assortment in the marketplace if it existed.

It has seemed to me for a long time, and I said in a public forum over a year ago, that all the Big Five (and others) should immediately create a subscription service for kids’ books. Parents want their kids to be able to “shop” without actually delegating to them the decisions to spend money; many would love a service of this kind, even if it were publisher-specific. As the support services Hill and Lara describe get cheaper and better and better known, perhaps that will start to happen.

We will cover subscriptions at Digital Book World with a panel chaired by Ted Hill. Scribd and Oyster have already agreed to participate.

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It is hard for publishers to apply even Harvard B School advice in their struggle with Amazon


Harvard Business Review published an article recently by Benjamin Edelman called “Mastering the Intermediaries” which gives advice to businesses trying to avoid some of the consequences of audience aggregation and control by an intermediary. The article was aimed at restaurants who don’t want their fate controlled by Open Table or travel companies who don’t want to be beholden to Expedia. The advice offered is, of course, scholarly and thoughtful. It seemed worth examining whether it might have any value to publishers suffering the growing consequences of so much of their customer base coming to them through a single online retailer.

The author presents four strategies to help businesses reduce their dependence on powerful platforms.

The first suggestion: exploit the platform’s need to be comprehensive.

The author cites the fact that American Airlines’ strong coverage of key routes made its presence on the travel website Kayak indispensable to Kayak’s value proposition. As a result, AA negotiated a better deal than Kayak offered others or than others could get.

Despite some suggestions in the late 1990s that publishers set up their own Amazon (which they subsequently half-heartedly tried to do with no success) and a couple of moves to cut Amazon off by minor publishers that were minimally dependent on trade sales, this tactic has never really been possible for publishers on the print side. Amazon began life by acquiring all its product from wholesalers — primarily Ingram and Baker & Taylor — before they switched some and ultimately most of its sourcing to publishers to get better margin. But the publishers can’t cut off the wholesalers without seriously damaging their business and their relationships with other accounts, and the wholesalers won’t cut off Amazon. So for printed books, still extremely important and until just a couple of years ago the dominant format, this strategy is not worth much to publishers.

However, the strategy was and is employable for ebooks, which are sold via contractual sufferance from agency publishers, even if the sourcing is (sometimes, not typically by Amazon) through an aggregator. That was the implied threat when Macmillan CEO John Sargent went to Seattle in the now-famous episode in 2010 to tell them that ebooks would only be available on agency terms. Amazon briefly expressed its displeasure by pulling the buy buttons off of Macmillan’s print books. (Publishers can’t cut them off from print availability, but they can cut publishers off from print sales!) In the meantime, Amazon’s share of the big publishers’ ebook sales has settled somewhat north of 60 percent, and those Kindle customers are very hard to access except through Amazon. This is considerably more share than Kayak had when American Airlines threatened their boycott.

In fact, it is likely that Amazon could live without any of the Big Five’s books for a period of time, except for Penguin Random House, which is about the size of the other four big publishers combined. The chances are that PRH’s size will prevent Amazon from treating them the way they are now treating Hachette. And the massive share that Amazon has of both print and ebook sales makes it extremely difficult for Hachette, or any other big house except PRH and possibly HarperCollins, to sustain an ebook boycott (with consequent print book sales reductions) for any significant length of time. In other words, for publishers dealing with Amazon, this horse has left the barn.

Where it has not yet left the barn is with the ebook subscription services, and for them many publishers actually appear to be following the strategy being suggested here. Only two of the big houses have put titles into Scribd and Oyster, and it appears that they got extremely favorable sales and payment terms in order to do so. Indeed, these fledgling subscription offerings must have the big houses’ branded books to have a compelling consumer proposition.

The second suggestion is to identify and discredit discrimination.

The HBS piece cites the complaints that eBay was giving search prominence to suppliers who advertised on the site forcing a reversal of the policy.

Although the search algorithms on powerful platforms are ostensibly geared only to give the customer what they’re most likely to want, it is probably generally understood that these results are jiggered to favor the platform’s interest. It is not surprising that Google has underwritten White Papers from UCLA professor Eugene Volokh and from Supreme Court nominee Robert Bork defending that conduct. Volokh argues that the first amendment prevents the government from interfering with search results and Bork says nobody is harmed if Google favors its own interests.

Could we apply that same logic to Amazon? How about this scenario?

Amazon is well on its way if not already past the point where they sell more than half of the books Americans buy (combining print and digital). Book consumers are highly influenced by the suggestions made and choices surfaced by their bookseller, whether physical or virtual. That is: the process of buying books is inextricably linked to the process of discovering books. So Amazon is getting a stranglehold on recommendations which for many consumers also means a stranglehold on marketing and promotion.

The “damage” to society that results from results being gamed in fiction is probably minimal, and restricted to Amazon promoting either its own published titles, its favorite self-published authors, and books from other publishers that have paid to play. But, with non-fiction, the consequences could be much more severe and of real public interest.

Imagine a persuasive book arguing that the government should sharply increase the minimum wage and let’s also imagine that Amazon corporately doesn’t like that idea. Is it really okay if they suppress the awareness of that book from half or more of the book-buying public?

This is the kind of an argument that can arouse the government which, so far, has shown scarcely more interest in Amazon’s dominance of book commerce than they would if they dominated the commerce in soft drinks or lawn fertilizer. Can they be awakened by publishers to this concern before dramatic cases affecting public awareness and policy are documented? We don’t know, but we do know that Hachette sent lawyers to Washington early in the Obama Administration to call attention to Amazon’s growing marketplace power and their willingness to use it. That apparently had no affect (unless, in some perverse way, it contributed to the government’s interest in pursuing the “collusion” case).

There could certainly be some consumer blowback to the gaming of search results by a platform, perhaps including Amazon. The Harvard article says Google changed algorithms that seemed to be burying Yelp because consumer sentiment, partly measurable in search queries, showed dissatisfaction among the public. But in the absence of an aroused government, it would seem unlikely that this suggestion will do publishers large or small much good.

It is definitely worth noting here that Hachette authors are involved in just such an effort right now over the current Hachette-Amazon dispute. (And Amazon authors, also often called “indie authors”, are pushing back in the other direction.) There is a difference of opinion about how much this is “hurting” Amazon or whether it will push them to a quicker resolution of the dispute; I’m not sure anybody will ever know the answer to that.

The third suggestion is to create an alternative platform.

As the piece explains, when MovieTickets was on the verge of dominating phone and online ticketing, Regal Entertainment and two other large theater chains formed Fandango.

Unfortunately, this is a strategy that simply won’t work as an antidote to Amazon. In fact, trying it, which publishers have, demonstrates a failure to understand the source of Amazon’s power in the marketplace.

Amazon’s strategy is in plain sight and is the title of the best and most recent book about them: Brad Stone’s “The Everything Store”. Books had a central role in getting Amazon started, but have now declined to very likely less than 10 percent of their revenue and far less of their operating margin. Books are strategic for Amazon, but not commercially fundamental. This is one of the reasons, perhaps even the principal one, why they operate their book retailing on margins so thin that the incumbent book retailers can’t match them. After all, B&N can’t make up the margin shortfalls created by offering books cheaply by selling that same customer a lawnmower. Nor do they benefit from additional scale provided by selling lawnmowers or cat food or server space.

The fact that Amazon did book retailing in a thorough and sophisticated way as they established their business to become an online Walmart made them different from omni-retailers in the past (going back to departments stores a hundred years ago) who sold some books.

The story has been told on this blog before about Amazon cutting prices more than fifteen years ago to discourage competition coming into the market. Although publishing is a profitable business for them, it is also a strategic component of larger objectives: getting an increasing share of its customers’ purchases across a range of physical products as well as to compete as a streaming content provider across the entire range of digital media.

No enterprise focused primarily on books can compete with that. Amazon takes too many customers off the table before whoever else is competing gets to begin and keeps them for a wide range of reasons. They’ve got the most admirable competitive position conceivable: a first-class operation supported by scale provided by myriad other enterprises, totally wide-ranging and broad knowledge of the details of book retailing, and the financial heft to accept diminished (or even negative) margins from time to time to support strategic objectives.

So, Bookish, the attempt to compete (although that objective was not explicitly stated) forged by three major publishers more than a decade after Ingram’s I2S2 attempt to create a broader base of online retailers, was never a serious threat. (It is now owned by another Regal, Joe Regal, whose Zola Books — an ambitious upstart ebook retailer — bought Bookish, apparently for its recommendation engine, from the publishers.)

This is probably the 20th year in a row, dating from their start in 1995, that Amazon has gained market share for sales of books to consumers. And that’s because consumers are making what for them is the obvious choice for convenience, total selection, and competitive pricing, as well as getting tied into Amazon through their PRIME program. Unless one of the other two tech giants in the bookselling world — Apple or Google — decides to make a dedicated effort to take some of that market share away from Amazon in both print and digital (and neither of them is much interested in print), it is hard to see where a serious competitor can come from.

As of this moment, there is no way for any ebook retailer except Amazon to put DRMed content on a Kindle, which eliminates a big part of the audience from play for any competitive platform.

The fourth suggestion: deal more directly. The article points out that people ordering takeout through online platforms like Foodler and GrubHub have often already chosen their restaurant so that restaurants that deal directly can afford to exit the platform.

As I was working on this post, HarperCollins announced that they have redesigned their website to be consumer-facing which enables them to sell books directly to consumers. They’ve collaborated with their printer-warehouse partner, Donnelley, to handle print book fulfillment and have a white-label version of indie ebook platform Bluefire to deliver ebooks. They promise that authors will be able to use the capability very easily to connect their own web presences and they’re thinking about additional compensation to authors that generate those sales.

This bold move has a hole in it, though, and it is one that publishers so far have no easy way to fill. All the non-Amazon platforms use Adobe DRM, which HarperCollins/Bluefire supports, so they can put your ebook on a Nook or Kobo device with copy-protection. Of course, they have their own “reader”, which can be loaded with ease on most web-capable devices and can apparently also be squeezed onto a Kindle Fire. But, because HarperCollins wants to continue to use DRM protection for the content, they won’t be able to sell directly to users of Kindle devices that are dedicated e-readers.

Although publishers have certainly encouraged that competition to Amazon which exists, their direct efforts have for the most part been limited to cultivating direct interaction with the end user audience to influence awareness and selection. Many smaller publishers are willing to sell direct without DRM and other large publishers sell direct in a more restrained way, but this seems to be the first concerted effort by a major player to drive direct sales.

It will be interesting to watch the pricing interaction between Harper and Amazon and whether Harper can come up with “specials” (bonus content, some connection to the author, bundling) that Amazon or another retailer can’t match. Competing on price is the retailer’s first instinct, but for publishers competing with Amazon on price is a fool’s errand, fraught with the potential for retaliation in many ways (including that “discounts” from publishers, the retailers’ margin, is presumably based on the publisher’s price. What does “publisher’s price” mean if they sell for less?)

But HarperCollins doesn’t need to get a big volume of direct sales for this to be a worthwhile initiative for them. I’d expect it to be copied. Any sales they can get directly increase their power in the marketplace.

There is one other initiative we’re aware of that can perhaps help publishers disintermediate Amazon for direct sales. That’s Aerbook, which widgetizes a book or promotional material for a book so that it can be “displayed” in any environment. Aerbook’s widgets can contain the capabilities for transacting or for referring the transaction to a retailer, Amazon or anybody else. Putting the awareness of the book directly into the social and commercial streams can be a big tool for authors and publishers. But even Aerbook can’t put a DRMed file on a Kindle. They offer a version of “social DRM” — essentially “marking” the ebook in a way that identifies its owner — which can be loaded onto the Kindle. But big publishers and big authors have apparently not yet come to a comfort level with that solution; perhaps the need to get to the Kindle customer directly and the experience Aerbook develops with their method will encourage a more open mind on that question over time.

So, it would seem, the best thinking presented by Harvard Business Review for how producers and service providers can dodge platforms trying to lock in their audiences has precious little that can be usefully applied by publishers to escape the grip of Amazon. Having taken about half the retail book market over the two decades of their existence, they have given themselves a reputation, tools, and momentum that will make it very hard to stop them from eating into the other half substantially in the years to come.

The fact that competing with Amazon is difficult doesn’t stop smart people from trying to figure out how it might be done. A group of publishing thinkers are holding a 2-day brainstorming session at the end of this month to come up with ideas. Two of them, Chris Kubica and Ashley Gordon, will be presenting at a session at Digital Book World in January called “Blue Sky in the ebook future”, which will include thoughts on how to improve the narrative ebook itself from Peter Meyers and somebody not yet chosen to speak about complex ebooks.

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New data on the Long Tail impact suggests rethinking history and ideas about the future of publishing


For most of my lifetime, the principal challenge a publisher faced to get a book noticed by a consumer and sold was to get it on the shelves in bookstores. Data was always scarce (I combed for it for years) but everything I ever saw reported confirmed that customers generally chose from what was made available through their retailers. Special orders — when a store ordered a particular book for a particular customer on demand, which meant the customer had to endure a gap between the visit when they ordered the book and one to pick it up — were a feature of the best stores and the subject of mechanisms (one called STOP in the 1970s and 1980s) that made it easier. But they constituted a very small percentage of any store’s sales, even when the wholesalers Ingram and Baker & Taylor made a vast number of books available to most stores within a day or two.

It was an article of faith, and one I accepted, that if you could expose most books to a broad public, they would “find their audience”. The challenge was overcoming the gatekeepers or, put another way, the aggregate effect of the gatekeepers (the store buyers) was to curate, or act as a filter, to find the worthwhile books that the public would really see from which they would choose what to buy.

There was also ample evidence over time that a large selection of books in a store acted as a magnet to draw customers. That fact was noted by my father, Leonard Shatzkin, in the early 1960s, when they doubled the inventory at the Short Hills, NJ, Brentano’s store (the chain reported to my father, who was a Vice-President of Crowell-Collier, the company that owned Brentano’s, Collier’s Encyclopedia, and Macmillan Publishers, among other things) and it went from the worst-performing store in the chain to the best. In the 1970s, BP Reports published a survey that said that nearly half of bookstore customers chose the store they were in on the basis of the selection they’d find and more than half reported their particular purchase decision was made in the store.

By the late 1980s, both of the big national bookstore chains — Barnes & Noble and Borders — were undergoing a massive expansion of “superstores”. Whereas chain bookstores (B&N’s B. Dalton and Borders’s Walden) carried 20,000 or 30,000 titles, and large independents carried as many as twice that, now the new superstores would carry 100,000 titles or more! Customers flocked to the massive bookstores and the ever-expanding chains ordered lots of the publishers’ backlists and everybody celebrated a new era, except the independent bookstores who were increasingly squeezed by their new large competitors. The era was less than 10 years old when it got disrupted.

In the 1970s, it was my responsibility for a couple of years to write the orders for stores that accepted vendor-managed inventory from Two Continents, my family’s distribution company. I was being careful to make sure that each store earned $2 gross margin per dollar of inventory investment, which was what you’d get from 40% discount with inventory turned 3 times a year. This gave me a hands-on look at how stock turn in the aggregate was affected by the inventory decisions on specific titles.

When you do this, you figure out pretty fast that you can produce very high stock turn on books that are moving consistently. If a store were selling five copies a month of a title on a sustained basis and I put in 10 and replenished monthly, they would be getting an annual turn of 10 or perhaps much more on those moving books. (Turn calculation: sales divided by average inventory for a period multiplied by the number of such periods in a year.) That would support a lot of single copies of books that moved very slowly or, as it turned out, not at all. Since very few stores managed a turn of 3 or 4 on their own (chain store turns were usually under 2), giving the stores on our Plan a good result with the advantage of shipping monthly was shooting fish in a barrel.

But if you think about the turn you’re achieving with the titles that really move, know that the titles that move are a large percentage of the store sales, and take on board what stores’ overall turns tended to be, it leaves you with the uncomfortable feeling, or calculation, that a very high percentage of the titles each store ordered didn’t sell a single copy in that store. In fact, one big advantage of vendor-managed inventory is that it gives you the ability to use the high turn on your titles to stock the titles of yours that turn slowly or don’t sell at all, rather than having the store “waste” those margin dollars your books produce stocking somebody else’s slow-moving books.

Remember, in physical retail, selection was the magnet. The books that didn’t sell were helping to pull in the customers for the books that did sell. Stores knew that too. Later work I did demonstrated that there were whole store sections that turned at half or less of the rate of the store as a whole. But if you want, say, a philosophy section that “turns”, it would only have about ten titles in it. If you want a philosophy section people will browse and shop from, you have to carry a lot of slow-moving titles.

But just when the bookstores put the inventory in place to stimulate book buying all over the country, along came the Internet, Amazon.com, print-on-demand, and ebooks, in that order. All four were fully integrated into the book publishing ecosystem over a decade-and-a-half starting in 1995. As quickly as the magic of selection via the 100,000-title store was implemented, it was superseded by the “total” selection provided by Amazon’s, and then BN.com’s, “unlimited shelf space”. Now every book would have its full chance to sell, or so it seemed.

Unlike the period of superstore expansion, when substantial orders for deep backlist suddenly became commonplace in a continuing windfall for publishers, the new era with Amazon was characterized by things getting harder for many publishers. That wasn’t necessarily clear at first, but the impact of Amazon, and then Lightning (print on demand offered by Ingram) was to dramatically increase the number of titles competing for sales. It gave the Long Tail a real opportunity to get to customers which, through bookstores — even very big bookstores — only the top 100,000 titles were able to do. Publishers were a bit like the metaphorical frog in heating water; the challenges imperceptibly became greater over time. In 1990, a new book competed with about 100,000 available titles. In 1997 it competed with many hundreds of thousands and that number just kept growing. Today it competes with millions.

The challenges for conventional publishers got steeper again when ebooks became mainstream, pioneered by Amazon’s Kindle in late 2007. There had been a modest ebook business building for about a decade, but until Amazon committed its resources to creating a dedicated device, a repository of content, and audience awareness, it had a trivial impact. But a full-fledged ebook business unleashed a new wave of competition from self-publishing authors. Amazon fostered growth by creating an easy on-ramp for self-publishing, a move quickly copied by B&N, Apple, and Kobo. In the several years that ebooks have been commercially important, many — certainly hundreds and perhaps thousands — of authors have achieved meaningful sales. Many of those have been of backlist books originally published conventionally but there have also been thousands of successful original ebooks. Whether revived formerly-dead backlist or new titles, these are books that are competing with the output of the conventional publishers and wouldn’t have been a decade or two ago.

So the Long Tail for books has been a topic of conversation for most of the past 20 years. Amazon’s limitless shelves and Ingram’s Lightning contributed heavily to this before the turn of the century; self-publishing has accelerated it dramatically. The early expectations, including mine, were that the Long Tail would take sales from all the books being “currently” published. But it became evident pretty early that the big books were just getting bigger: the head of the sales curve wasn’t diminishing. In fact, both the head and the Long Tail took sales from the middle of the curve. This was particularly challenging for publishers because publishing mid-list, those books they do that aren’t bestsellers, became much more challenging.

The Long Tail continues to grow. There are a limitless number of aspiring authors and their aspirations to self-publish successfully are fueled both by success stories and by a growing band of indie authors who tout their success and question the business models and practices of the majors. Because being conventionally published has its own set of hurdles and time requirements, it has seemed to many (and I haven’t been immune from this thought) that self-publishing would just continue inexorably to take share from the publishing business.

But now we have some data that calls that assumption into question. I encountered two examples of that in the past week.

In Toronto last Wednesday, Noah Genner of Booknet Canada presented information about the Canadian market showing that the number of ISBNs was expanding rapidly, but that the number of individual ISBNs selling at least one single copy was about flat.

Then this week, Marcello Vena of RCS Libri in Italy published a White Paper based on his company’s data (link through to the White Paper from the DBW piece introducing it) which showed something similar. Sales of his company’s books were becoming increasingly concentrated in a small number of titles. Vena added an analysis using the Herfindahl-Hirschman Index (HHI). HHI measures the concentration in a market and is, according to Vena, used by the US Department of Justice to measure concentration in an industry. The HHI is calculated by adding the squares of the market shares of the players. So if one company owned 100% of a market, the HHI would be 100 squared, or 10,000. But if 100 players each owned 1% of the market, the HHI would be 100 times 1/10,000 (1/100 squared) or 0.01. Using the market concentration and title concentration numbers in tandem, Vena finds that they’re linked. As market concentration increases, the sales move to the head of the sales curve and flatten further in the Long Tail.

Of course, Italy and Canada are not the United States. Our market is bigger and richer. But Italy and Canada are not trivial samples, either.

One further point about Long Tail sales. In the aggregate, they can be very significant. But for each individual title, they are trivial. So the real commercial benefits flow to the aggregators — Amazon and Lightning — and much less to the publishers or authors of the individual titles. There certainly are situations where particular publishers have a lot of Long Tail books: the Oxford and Cambridge University Presses would be prime examples of this. For them, with thousands of titles in the Long Tail, the aggregate sales are probably commercially significant. But for a publisher with 100 titles, or even 1000 titles, selling a copy or two a year (or none), and that’s what we’re talking about here, it hardly makes any difference. I personally own several Long Tail titles. I get checks from somebody every month, but it adds up to three figures a year, not four.

The implications of this in the discussion of how the publishing industry might be affected by self-publishing disruption are interesting. It would suggest to me that the boosts publishers can give a book — even their catalogs provide more marketing lift than most self-published books start with — will become increasingly important as the market becomes increasingly flooded. If the data Vena has presented turns out to be the future trend, the increase in self-published titles will drive more and more sales to a smaller number of winners, and my hunch would be that the winners will most likely be from publishers. That would indeed be a paradox and a totally unintended consequence.

Of course, the publishing business isn’t one business; it is segmented. So far, the commercially successful self-published authors overwhelmingly, if not entirely, fall into two categories. There are authors who have reclaimed a backlist of previously published titles and self-published them. And there are authors of original genre fiction who write prolifically, putting many titles into the marketplace quickly. Successful self-publishing authors are often in both categories but very few are in neither. Those two categories are nearly 100% of the self-publishing success stories but a minority of the books from publishers. So, even before Vena published his White Paper, the idea that self-publishing would upset the commercial establishment was way overblown. If Vena’s data turns out to be prophetic, the road is going to get harder and harder for all books, but especially the self-published.

Two big items in the news today. On B&N’s decision to spin out Nook and college into a separate public company, I have little to say except to wish them all well. On Hachette’s and Ingram’s division of the two Perseus businesses, I’d say this. 1) The notion that this is about Hachette “bulking up” for the Amazon battle is almost certainly wildly wrong and anybody saying that has disqualified themself as an expert. 2) The titles Hachette get here really change the character of their list, adding a non-fiction and academic dimension they never had. 3) Ingram has made a major leap in scale for their Ingram Publisher Services business which now, in the aggregate, is Big Five sized.

Once again, the Feedburner service failed to distribute my most recent post, which was a graf-by-graf disagreement with a post by Hugh Howey. The comment string of that post contains ample evidence that the fact contained in the last paragraph here is not widely acknowledged.

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Much as I like Hugh Howey, I disagree with just about all of this recent post of his


I need to say couple of things at the outset here. The first is that I really like and admire Hugh Howey and the fact that I disagree with almost every paragraph of this post of his shouldn’t suggest that I don’t. That’s not snark or irony; it is sincere. I think it is both noble and natural for people to defend the entities and circumstances that make possible their commercial success and it is just human nature that those who have benefited from a paradigm reflexively want to defend it. I only wish that Hugh would exhibit the same respect for that tendency when it is exhibited by authors who have done well with publishers.

The other is that I don’t see the “Amazon versus the publishing establishment” battle as a moral choice, just a tug of war between competing business interests. (There are societal questions at stake, which some might see as moral choices, but the companies involved are doing what is best for them and then arguing afterwards that it is also better for society.) When I wrote what I intended to be a balanced piece about the Amazon-Hachette battle, it brought out the troops from the indie author militia in the comment string to call me to task and accuse me of many things, including being a defender of the people who pay me (although my overall revenues from Big Five publishers is actually pretty paltry with not one active consulting client among them for well over two years). I expect this post will do the same, which I find an unpleasant prospect. On the other hand, I’m sorta stubborn about saying the things I believe nobody else is saying…

I am not trying to “make a case” here for anybody: not for the publishers and obviously not for Amazon. All I am trying to accomplish is to call out what I see as the almost certainly unintended bias in the arguments as Hugh frames them. I continue to believe that self-publishing is a useful tool that most authors should employ at one time or another but that, still almost all of the time, an author who is offered a publishing deal from a major house willing to pay an aggressive advance is better off to take it than go it alone. (If you’re not offered a substantial advance, the calculus shifts, but there is a lot of work involved in self-publishing that is not described in much detail in this post, even though Hugh Howey knows much better than I do how much work it is!) And I think that generalized advice to authors to eschew publishers in a world where print still matters and stores still matter remains, as of today, unwise. That may well change in the future, but it hasn’t changed yet.

In this post, everything preceded by [HH] was written and posted by Hugh Howey. Everything preceded by [MS] is my response. I have left nothing out from Hugh’s original post.

[HH] A few weeks ago, I speculated that Hachette might be fighting Amazon for the power to price e-books where they saw fit, or what is known as Agency pricing. That speculation was confirmed this week in a slide from Hachette’s presentation to investors:

HachetteLivre-Investor-Slide

So, no more need to speculate over what this kerfuffle is about. Hachette is strong-arming Amazon and harming its authors because they want to dictate price to a retailer, something not done practically anywhere else in the goods market. It’s something US publishers don’t even do to brick and mortar booksellers. It’s just something they want to be able to do to Amazon.

[MS] Uh, yes. It is something they want to do in the market for ebooks that they don’t need to do for print. And it is something they want to do to the entity that controls 60% of their ebook sales, which no print bookseller does. And you’d be forgiven if you got the impression from this that Hachette only wanted to control the price Amazon sells at, not the price everybody sells at, keeping it the same across retailers. It does matter how you frame things…

[HH] The biggest problem with Hachette’s strategy is that Hachette knows absolutely nothing about retail pricing. That’s not their job. It’s not their area of expertise. They don’t sell enough product direct to consumers to understand what price will maximize their earnings. Amazon, B&N, Kobo, and Apple have that data, not Hachette.

[MS] But what Amazon, B&N, Kobo, and Apple know is not how to maximize Hachette’s or Hachette’s authors’ “earnings”, however they get divided between author and publisher. What they know is how to maximize their earnings and, mainly, their market share. And only Amazon and B&N have any picture of how the interaction between ebook prices and print sales works, which deeply affects an author’s and publisher’s earnings. None of the other ebook retailers have a clue about that, and Amazon doesn’t know how bookstore sales are affected (and it would be their objective to have them affected negatively, wouldn’t it?)

[HH] Beyond their ignorance of pricing strategy, Hachette also has a strong bias toward print books. Their existing relationships with major brick and mortar retailers gets in the way of their e-book pricing. This has been confirmed by my own publishers, who have admitted privately that they would like to experiment with digital pricing but don’t want to upset print book retailers. This puts their pricing strategy at odds with their investors’ needs, their authors’ needs, even their own profitability. In sum, they are making irrational decisions with their pricing philosophy. Hachette is making the same mistake that many publishers make, which is to think that harming Amazon somehow helps themselves.

[MS] Publishers are trying to keep a print book physical distribution infrastructure alive. That’s not irrational. It is rational. And it is the crux of the difference in objectives between a publisher’s strategy and Amazon’s strategy. The more bookstores fade, the better it is for Amazon and the worse it is for publishers. This is a problem you could have read about on this blog a long time ago.

[HH] The same presentation by Hachette to investors stressed the importance of DRM and the need to fight piracy. The presentation had very little to say about authors, which would be like an oil company giving a report to prospective investors and not discussing how its current wells are performing, the proven reserves it has on-hand, and what they are doing to discover new sources of oil. You know . . . the product they make their money from. Little is also said in the presentation about readers, possibly because Hachette doesn’t know who their readers are. Again, this is a presentation to investors by a company that doesn’t know its customers. Because they have too long relied on and been beholden to middleman distributors.

[MS] I’d substitute “leveraged” for “relied on and been beholden to” in the sentence that concludes that paragraph. Up until very recently, there was no efficient means or mechanism for publishers to sell directly to readers. Their “customers” were bookstores, and they understood them very well. And all the big publishers I know are investing in learning more about who are their readers. This graf begins with the complaint that authors aren’t acknowledged by publishers and ends with the complaint that publishers don’t know their readers. And the cherry on top is a biased characterization of the value and role of brick and mortar retailers. I guess the oil company reference is just to associate bad people with each other, but it otherwise seems gratuitous. The important and relevant point is that we’re still waiting for the first major author to say “no” to a publisher. It will happen, but it hasn’t happened yet.

[HH] DRM, piracy, and high e-book prices are not what a publisher should be fighting for and bragging to its investors about. Many consumers aren’t even aware that Amazon isn’t the source of their e-book DRM. Publishers (and self-published authors) opt in or opt out of DRM as they see fit. Those of us who think about the paying customer first and foremost opt out, and we are rewarded with their repeat business and their advocacy. Those of us who don’t fret over piracy invest our time where it can actually achieve something. Publishers need to adopt these same policies with all haste. More importantly, they need to stop ripping off their authors and their customers when it comes to digital pricing.

[MS] Recent data suggests pretty strongly that taking down pirate copies increases sales. But the efficacy of DRM is a good debatable point and it shouldn’t be in a paragraph that concludes with a gratuitous slam at big publisher pricing and royalties, which have nothing to do with DRM.

[HH] We know publishers are ripping off artists and readers when it comes to e-books. Harpercollins released this slide one year ago this month:

Harper-NewsCorp-Profitability

As author Michael Sullivan broke down in this damning blog post, it shows publishers making $7.87 on a $14.99 e-book while the author only gets $2.62. For a hardback that costs twice as much at $27.99, the publisher makes $5.67 to the author’s $4.20. What used to be a fair split is now aggressive and indefensible as publishers make more money on a cheaper product while the author makes far less. Publishers are ripping off readers and writers as they shift to digital, and they are getting away with it. They are even winning the PR campaign against Amazon, a company that has fought for lower prices for its customers and higher pay for its authors.

[MS] I agree that ebook royalties should be higher. But, in fact, only authors who sell their books to publishers without competitive bids (which indicates either “no agent” or “limited appeal generated by the proposal”) are living on that 25% royalty. The others negotiated an advance that effectively paid them far more than that. And guaranteed it before the book hit the marketplace. Publishers are making a massive PR error not raising the “standard” royalty since they effectively pay much more than that now, but the authors signing contracts with them know the truth.

[HH] Let me repeat: Publishers are waging a war here for higher prices and lower royalties. $14.99 is their ideal price for an e-book that costs nothing to print, warehouse, or ship. That’s twice what mass market paperbacks used to cost, which is what they are replacing. Reminds you of how cheaper-to-produce CDs suddenly cost twice as much as cassettes simply because they were new, doesn’t it?

[MS] Now, who’s not paying attention to authors? Right, it cost nothing to print, warehouse, or ship an ebook. But it cost something to create. And for many, if not most, publisher-published books, the publisher gave the author a substantial payment before publication. Focusing on the price without considering the value is the grossest form of “ignoring the author”. And the $14.99 price is more like the equivalent of the hardback; most publishers I know charge much less for the ebook when it is being published against a printed version that’s a paperback. And, in fact, they often charge less than $14.99 when the print edition available is a hardcover!

[HH] Publishers are also colluding with one another to offer lockstep digital e-book royalties of 25%, which is indefensible. Their every actions, when it comes to DRM, to pricing, to selling direct, to offering abusive services like Author Solutions, screams to anyone with ears that they don’t care about the writers and they don’t care about the readers. It doesn’t matter what they say, it matters what they do. And what they do is charge as much as they can get away with and take as much of the split as they possibly can. And they work with their competitors and against their retail partners to pull it off.

[MS] Publishers live in a competitive marketplace in general but nowhere more than when it comes to signing authors. The 25% hasn’t moved, but every book that is signed based on a competitive situation (one agent told me that’s at least 2/3 of them; one big publisher believes they compete for 95% of what they sign) is getting an advance that is calculated on a much higher percentage than the “standard”. So they “care” about the writers. If “caring about readers” is only demonstrated by low prices, then I’d say “Hugh has a point.” The problem is that the point is in direct conflict with “caring about the writers”, whose revenue is directly related to what readers pay (with only one exception: unearned advances paid by publishers).

[HH] Their own authors defend them, partly because they don’t spend any time investigating or understanding the business in which they are engaged. One Hachette author — a good friend of mine — said something to me the other day that made me realize they don’t understand how their books are ordered by retailers or delivered by the publisher. I suppose it’s okay to write books and not worry about the rest of the business, but this same author and friend had much to say about the Amazon/Hachette dispute, but without the basic understanding of how the relationship between those two companies works. Part of the blame for not knowing falls to publishers, who keep authors at bay and away from the business aspects of publishing. It was one of my primary complaints in that old blog post. Publishers need to embrace authors as business partners, and any author who hopes to make a career at this needs to be at least a little curious about how the industry works.

[MS] This slam at Howey’s fellow authors is both uncharacteristic of him and beneath him. The Hachette authors are doing precisely the same thing Howey is doing: defending their biggest source of revenue. What’s so surprising about that? And let’s not get too worked up about what people do and don’t understand. This piece demonstrates very little understanding of the economics of brick-and-mortar and the overall effort to sustain it as long as possible.

[HH] So we can see in their own slides that publishers do not have the best interests of their artists and consumers at heart. What about Amazon? Here we have a company that forsakes profits in order to pass along the savings to: A) Readers in the form of lower prices and to: B) Authors in the form of higher pay. That’s what we know today based on their actions. Of course, some interpret Amazon’s behavior as: “Once they are big enough, Amazon will gouge customers and take advantage of authors.” If you press on numbers, you might hear that Amazon will raise e-book prices to $12.99 one day and pay authors a miserly 25% of gross. Both of which are better than what publishers offer right now.

[MS] The pricing and split speculation is a pure straw horse. We know that what Amazon does today that pleases Howey also serves their larger strategic interests: growing market share and building the installed base of Kindle users. It’s nice when interests align. But what happens when they align tells you nothing about what will happen when they don’t. The recent changes that reduced author splits from Amazon-owned Audible shouldn’t be ignored in a paragraph like this one. (Emphasis here: I don’t think Amazon was wrong or immoral to have done this, but I think those making the argument that worrying about terms changing in the future is silly should at least acknowledge what has already happened!)

[HH] This bears repeating: The very worst that Amazon might do, in some hypothetical future, according to their fiercest critics, is still better than what publishers brag to their investors about doing today.

[MS] And this bears repeating. It’s a straw horse. The argument is attributed to these unidentified “fiercest critics” because it a straw horse. Pure speculation. Who knows what is the “the very worst that Amazon might do”?

[HH] Instead of operating under the hope that publishers will improve their business practices in the future and that Amazon will reverse course and start harming writers and readers once they gain more market share, why aren’t we condemning publishers for being the problem right now while celebrating Amazon for all they are doing to expand reading habits and to provide for artists? Why?

[MS] Simple answer. Because many authors are still being very well paid and well served by publishers. That’s why.

[HH] I think two reasons: The first is that we equate publishers to bookstores and Amazon to the loss of bookstores, and we all love bookstores. This is fallacious reasoning, though. Online shopping has impacted all of retail. These changes were inevitable, and they are the result of consumer choice. How those changes played out could have been publishers colluding with a distributor to price digital works higher than their paper counterparts. That would have been bad. Amazon leading those changes with their pricing philosophy has been good.

[MS] Much of this is true. Online shopping is inevitable; the pressure on brick-and-mortar is inevitable. And we all love bookstores, even though they don’t “map” into the future very well. But it is really disingenuous to just forget that Amazon benefits by brick stores going down faster and has discounted print books as aggressively as possible as well, which has contributed to the brick-and-mortar stores decline. I’m not demonizing Amazon over this; everybody has to run their own business and they run theirs very well. But let’s not pretend that altruism is all that is working here, or that changing circumstances couldn’t change Amazon’s pricing philosophy.

[HH] The second reason for the anti-Amazon bias is that some see Amazon as the giant and little old publishers as the underdog. That’s also wrong. The publishing and bookselling arm of Amazon is likely smaller than the combined earnings of the Big 5 publishers. Amazon makes a pittance on every e-book sold, while the Big 5 make out like bandits. Also, to say that these wings of Amazon’s operations are owned by a larger entity is to ignore that the same is true for the major publishing houses. If anything, Amazon is the clear upstart and underdog here. They are new to the market, rapidly innovating, blacklisted by brick and mortar retailers, setting up shop away from the established players, and ganged up on in an illegal manner.

[MS] No question Amazon gets “ganged up on”. We have two book businesses now: Amazon and everybody else. Everybody else includes publishers and retailers and wholesalers and agents and established authors. Amazon’s decision to “make a pittance” on certain products, including some ebooks, is tactical, not altruistic. I have to admit that characterizing Amazon as an “underdog” does activate the “gag reflex”. If this doesn’t qualify as hyperbole, I’m not sure what would. Let’s be clear and real: Amazon and Hachette are both leveraging their respective negotiating positions as best they can. It’s called business. (And,, from where I sit, it looks Amazon is in the stronger position, not Hachette. I’m not sure by what measurement Amazon could be considered the underdog here; I haven’t read any other analysis that makes that claim.)

[HH] I’ll go one step further and state something both outrageous and obvious: If the Big 5 had gotten together twenty years ago and DREAMED UP an ideal business partnership, one that would increase their distribution, provide excellent customer service to their readers, improve the livelihood of their authors, keep their backlists viable and books from going out of print, reduce their 50% return rate from bookstores to 4%, provide next-day and even same-day delivery, all while only costing them 30% instead of the 45% they lose to bookstores, they couldn’t have done better than what Amazon did for them.

[MS] Lots of truth in this paragraph, up to a point. Publishers (and authors) have benefited for years from Amazon’s willingness to sell books for almost no margin and by the shift from the less-efficient sales in stores to the more-efficient sales online. I spelled out clearly in my Amazon-Hachette post that Amazon has been the most profitable print account for most trade publishers for a long time. And I am happy to give them the full credit they deserve for making the commitment necessary to make the ebook business happen. That doesn’t change the reality that as their market share grows, we can see a concentration that changes what has been a good thing into a threat. For everybody else in the book business: those who are aware of it and those who are not.

[HH] Soak that in. Publishers should have engineered Amazon from the ground-up. A company that invests in distribution networks for their products rather than pocketing profits. And instead of celebrating all the hundreds of benefits, like pre-orders and customer reviews and the savings on print runs and returns that Amazon’s algorithms provide, they are trying to figure out how to put their best resource out of business. It boggles the mind. Like those authors who fear Amazon might take royalties away tomorrow, so are happy to give up those royalties today, publishers are siding with companies that are hurting them today out of fear of their greatest ally getting even more market share tomorrow. And readers and writers are the victims of this illogical behavior.

[MS] The unreality in the suggestion that publishers are trying to put Amazon out of business is mindboggling. I have cognitive dissonance. On the one hand, I believe Hugh Howey believes what he says. On the other hand, I can’t believe he believes that! Any publisher that thought this was possible would be deluded. The idea that it is some sort of deliberate strategy to put Amazon out of business is as far from the world we actually live in as the world of Hugh’s novels is.

[HH] What is the solution? As a writer, the solution is to retain ownership of your rights. This has never been more important than it is today. E-book royalty rates are going to move to 50% of net. I know from some insiders that this is already happening for top-name authors and hot new acquisitions. Selling your manuscript now for half of what it will be worth in the very near future is a bad move. It takes years for books to come to market with a traditional publisher. If that is your publishing goal, exercise a bit more patience. Hold on to that manuscript (or self-publish it) while you write the next. Let the market come to you.

[MS] This advice ignores the fact that a large number of authors got an advance that already pre-paid them for the royalties they could conceivably have earned by doing their own self-publishing when the publishers’ sales died. (Those “insiders” referred to are almost certainly talking about how the ebook component is calculated for advances paid to big authors, not a change in the contractual percentage.) Howey is conflating agreeing to a “half of what it should be” digital royalty with “selling your manuscript for half of what it will be worth” in the future. They’re not the same thing. I guess it’s just part of the campaign to find that first big author who turns down a publishing deal to do it themselves instead. To read this post, you’d never know we haven’t had one yet! (I thought we had one three years ago, but the one author who really threatened to do it changed his mind and signed a publishing deal with Amazon instead.)

[HH] The other option is to embrace a smaller press that has more flexibility. Online print book sales and e-book adoption have helped level the playing field for small publishers. They are becoming more viable every single day. These are the true Davids. They now have the tools and ability to see their works sell to a wide audience and win awards. I put them as the second best option behind self-publishing, and I include Amazon’s imprints in this category. They offer higher royalty rates and terms similar to small presses, though some have grumbled lately that Amazon’s imprints are becoming more and more like the Big 5, so watch what you sign.

[MS] I’m always happy to see smaller presses succeed, but they have a hard time competing against the Big Five, mainly because of Amazon. They are forced (by Amazon) to sell their ebooks on “wholesale” terms, which means giving much more of the retail price they set to the supply chain. This leaves them two choices. They can set a reasonable retail price (like an Agency price) and get nearly 30% less revenue than an Agency publisher. Or they can set an artificially high price and hope the retailer will discount from it. So even if they give the author a higher percentage of ebook sales, the net might not be higher. It is hard to succeed in today’s environment as a small press, not easy.

[HH] For readers, keep doing what you’re doing. Self-publishing and small presses are booming because you care about great stories, not where they come from. You are the disruptive force in this industry, and I say that with every ounce of love I can muster. Keep disrupting by doing what you do best: Read. Write reviews. Share your enthusiasm. Infect others. Spread the joy of this greatest of pastimes. And we will trust that those who cater to your needs and to the needs of the artists you admire will be the ones who come out on top. All others will need to change their ways or perish. If they do the former, let’s cheer for them. If they persist in the latter, let’s not be sad to see them go.

[MS] I am not happy to see anybody go. The desire to make villains out of the industry establishment is the most unattractive trait of what should be a hero class: intrepid authors who forge ahead without institutional support to make success happen. There is no doubt that Amazon has made that opportunity possible for most of them and it is easy to understand why anybody who has profited from the infrastructure Amazon created would celebrate it and want to see it grow. But author success has been achieved in a wide variety of ways and the way Hugh Howey has done it is still very much the exception, not the rule. We shouldn’t leap to conclusions from unusual cases. And I think it is an iron rule of nature that it is dangerous to generalize from one’s own personal experience.

I see from a subsequent post of Hugh’s that he will be in Toronto this week at Book Summit, as will I. I hope we’ll have a chance to have a Diet Coke and talk about this while we’re up there. My Logical Marketing Agency partner Pete McCarthy and I are kicking off the show on Tuesday morning. I always love visiting Toronto.

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All the Amazon-Hachette coverage doesn’t seem to cover some important causes and implications


A great deal has been written in many venues about the current tussle between dominant Internet retailer Amazon and one of the three smallest of book publishing’s Big Five general trade houses, Hachette Book Group. Although neither side has been particularly explicit about the precise points of contention, both what I read and what I hear tell me that the argument is about adjusting the ebook sales terms that were first hammered out in the doomed initial Agency implementation and then modified by a settlement reached under the Court’s direction. That settlement restored Amazon’s ability to discount from the publisher-set agency price (which pretty much defeated the purpose of agency from the point of view of the publishers who implemented it) but did not change the 30%-of-agency-price margin that had been established. Expanding that margin seems to be Amazon’s current objective.

My “position” on all this is that it reveals an imbalance that only the government can fix. I don’t know enough about the law to have an opinion about whether Amazon is abusing its marketplace power in an illegal way (although some seem to think they are), but I am quite sure (and so is an op-ed from the Wall Street Journal) that there is not a lot Hachette (or most publishers) can do to resist Amazon’s demands except suffer and hope the suffering is mutual. Hachette has gotten some recent strong support in the marketplace from some of Amazon’s competitors. Little fledgling retailer Zola started it, but Books-a-Million, Walmart, and now Barnes & Noble have joined to push and discount the books that Amazon is trying to bury. It would surprise me if their efforts covered Hachette for half of what they’ll lose.

Even when I’m credited by somebody else with coming up with a suggestion — raising the author split of ebook revenues so that the publishers don’t wave fat ebook margins in front of observant and powerful retailers — that would have made Hachette’s position stronger had they accepted it, I am dubious that the publishers can do much about this. Nothing publishers can do — or could have done in the past — would change the fact that Amazon controls anywhere from 35 to 75 percent of the sales for most trade books. Anybody with that much market inside its corral can charge a considerable toll for getting inside its gates.

For all that has been written, there are some critical points that I think have not been made as often or as emphatically as their importance warrants.

1. Amazon used the book business to build an enterprise no longer dependent on books. Although the executives at Amazon I know maintain that they have always had a “profitable” book business (and I don’t doubt them), the company has famously been willing to live with less margin than its retailing competitors. That takes the oxygen out of the room for any retailer competing with them within the four walls of the book business. Amazon has skillfully used books as a customer acquisition tool and focused on the lifetime customer value across product types, not the margin that could be earned from the book business alone. There’s nothing morally, ethically, or legally wrong with that, but it has been steadily demonstrated for the past two decades (and acknowledged on this blog years ago) that it makes it very hard, perhaps impossible, for somebody retailing books alone to compete with them.

2. Partly as a result of that, Amazon has changed the book business ecosystem. It was almost certainly inevitable that more and more book business would move online. But the consolidation of all the online business in one place — helped along by Amazon’s skillful integration of the used book business (the dimensions of which nobody knows much about) and their market-making Kindle initiative (more about which below) has created a distribution and revenue-source imbalance that publishing has never had before.

3. Amazon, at great expense and with great vision, made the ebook business happen. Before the Kindle, the ebook marketplace was small and unambitious. The biggest player in terms of sales was Palm, which wasn’t really interested. The most interested party was Sony, which repeatedly tried over more than a decade to establish some sort of ebook device and ecosystem. But Amazon made a significant corporate commitment — creating the Kindle device, pressuring the publishers to make much more of their catalog available as ebooks, and investing heavily in discounted sales and screen real estate to build the consumer market. When B&N with Nook in late 2009 and Apple with iPad and iBookstore in early 2010 entered the market, they were attempting to capitalize on a product class that Amazon had pretty much single-handledly created.

4. Amazon is just about every trade publisher’s largest and most profitable account. (Academic and professional publishers, which operated on “short” or “professional” discounts in their interactions with retailers, have been pushed way up on discounts so this generalization usually doesn’t apply to them.) Amazon is a unique account for publishers. They sell both print and ebooks and they sell them globally. Because they don’t have to stock tens or hundreds of far-flung stores, their efficiency of sales, as measured by their very low returns, is almost certainly the highest among retailers and probably the highest of all accounts (including the wholesalers Ingram and Baker & Taylor, which can also be pretty efficient). Amazon has no interest in being anybody’s most profitable account; what the publisher profitability suggests to them is that their efficiencies are responsible for a lot of margin generation and they are inclined to want more of it. From Amazon’s perspective, being equivalently profitable to other large accounts is “generous” enough. From many publishers’ perspective, the enormous marketplace control Amazon has was built on the back of the publishers’ and authors’ intellectual property. With Amazon now having effectively replaced large components of the marketplace: Borders being gone and Hastings in the process of going, the independent channel a shadow of what it was a decade ago (despite recent signs of “growth” that might just be partial replacement of Borders demand), and B&N — at the very least — slowly shrinking its store footprint, publishers rely on the margin Amazon provides.

The contradiction here, of course, is that the high relative profitability is all created by efficiencies in the (shrinking) print marketplace. Amazon wants to take the margin back on the (growing) ebook side.

5. Amazon wants lower prices for consumers — at least right now. (They’d say it is a core value and they’ll want it forever; there is room for an honest difference of opinion about how they’ll feel about it when their market share rises further.) Everybody else in the book business (authors, agents, publishers, other retailers) want prices at the very least maintained and probably would prefer they rise. This is the crux of the publishers’ problem with the government and with some quarters of public perception. Lower prices for consumers is catnip for politicians. They simply can’t resist it.

6. Amazon pays amateur authors, often unedited, who upload files not yet ebook-ready to them and don’t know anything about marketing or metadata, as much as 70 percent of retail if they meet certain exclusivity and price stipulations. (Obviously, there are great gems among those, but they are still mostly unproven, unknown, and unsuccessful.) They are apparently fighting hard to avoid giving Hachette — which invests substantially to be consistently superior to a fledgling author on all these counts — the same cut.

7. In the course of building the powerful position they now occupy, Amazon both made substantial infrastructure investments and subsidized sales for publishers through heavy discounting, sometimes below the price publishers charged them for the goods (particularly for ebooks in the days before agency pricing). Very few publishers complained about Amazon’s deep discounting of print books in the late 1990s when it began. Amazon’s pricing strategy discouraged many brick-and-mortar retailers from even entering online selling at that time (which, of course, must have been part of the calculus that motivated them to do the discounting the in the first place) but publishers just benefited through greater sales.

8. Hachette is, essentially, tied with Macmillan and Simon & Schuster for third place among the Big Five publishers. HarperCollins is twice as big. Penguin Random House is more like five times as big. This fight is already being costly to Amazon’s reputation among authors (many of whom, including Malcolm Gladwell, John GreenJames PattersonCharlie Stross and Michael J. Sullivan, have been heard from directly) and can’t be well-received among consumers. They’re not likely to try the same tactics with PRH. That means PRH is the most significant beneficiary of what is now going on. If nature takes its course, they should have much better terms than the other big publishers after this round of negotiations over new terms is concluded. That, along with their deepest pockets and excellent execution, puts them in a position to take down their competitors author-by-author, or editor-by-editor.

In some ways, the die for a reshaped publishing business was cast when Jeff Bezos had the vision to get Wall Street to finance an “everything store” (hat tip to author Brad Stone) built on a foundation of book-buying customers. Amazon has plenty of internal justification for believing that their investment and risk-taking has been a huge benefit to publishers for most of the 20 years of their existence. But that doesn’t change the fact that an imbalance exists that will feed on itself. Amazon will grow at the expense of all other book and ebook retailers and Penguin Random House will grow at the expense of all other trade publishers. Smaller publishers have already felt the pain and self-published authors will in the future. That’s what will happen naturally and organically from now on, unless a stronger force intervenes, and on the right side instead of the wrong side the next time.

The last two posts, the most recent one on subscriptions and the prior one about Amazon-Hachette, were not sent out by the Feedburner service that delivers email versions of the posts to subscribers. I suspect this one won’t be either. Until we move to a new distribution capability, I’ll continue to link to the undistributed posts with each new one, as I’ve done here.

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Subscription services for ebooks progress to becoming a real experiment


My long-held conviction that broad-based subscriptions for ebooks were not likely to work is partly based on facts that are now changing. It is still by no means a slam dunk that ebooks must go where Spotify has taken digital music and Netflix has taken the digital distribution of TV and movies, but it looks more likely today than it did six months ago. Still, looks could be deceiving.

The core of subscription economics is to pay less to the content supplier than they earn other ways to give you some headroom to create a value proposition for consumers. That’s how Spotify and Netflix work. That’s how Book-of-the-Month Club works.

And what happens over time with subscription services is that the power of “brand” passes from the individual titles (and authors) to the subscription service itself. In order to attract customers, a subscription offer depends on recognizable branded product to bring people in. But, over time, the value shifts. Eventually, a subscriber-reader can become used to choosing from what the service offers and will either not know about, skip, or accept purchasing the occasional book s/he wants outside the service if it isn’t offered inside. (A varient of this reality is playing out now in the Amazon-Hachette dispute, where Amazon’s brand power, including people who have a subscription to PRIME free freight, makes any particular publishers’ books subordinate to the seller’s brand with the consumer.)

None of this is particularly startling or insightful. Every agent for a big author knows it. Until very recently, that has meant that big publishers did not put the big books from big authors into these services. When the first shoe — the HarperCollins shoe — dropped and the second biggest trade publisher (and by far the largest of the four majors who trail Penguin Random House) went into Oyster and Scribd several months ago, I should have taken on board that the perception of agents must be changing. Now, with S&S having joined them, and with major authors included in the offerings from both companies, it is clear that agents are withdrawing their objections.

There are three reasons for this.

One is that the incumbents in the book business are circling the wagons against the dominance of book retailing’s most powerful brand: Amazon. As the market share of and customer loyalty to the industry’s biggest player grows, other dangers — such as those posed by subscription services if they mature — look relatively less onerous.

The second is that publishers and agents love the opportunity to establish that if subscription services want to “play” in publishing, they’ll have to pay for each ebook on a purchase deal. That is: the subscription services are establishing their “model”. And the publishers and authors are also establishing theirs!

The last is that the two big current subscription efforts are disdaining the fundamental economics to get their services started. The current model, as outlined by S&S CEO Carolyn Reidy in a letter to agents announcing her house’s participation, is that the service buys a copy of the book at “full price” when a “a certain threshold of reading has been surpassed for a given title”. But her letter also suggests that authors make even more money on these sales than they do on normal sales, which implies that Scribd and Oyster are paying more than 70 percent of the retail price for the privilege of using these books. (I have heard a range of numbers for where the threshhold of use to trigger payment is, from 10% to 40%, but I have no idea what it is and how it might differ among publishers.) Whether they’re paying 70% of retail or more, that means that it would take no more than two full-priced S&S or HarperCollins (assuming they have the same deal) titles a month to cost the service more than the revenue from a full-freight subscriber. And if the subscriber came through iOS, Apple’s 30% cut off the top would mean that even one major publisher ebook being read in a month will likely put the service in a deficit position.

Even when the purchase model is favorable, which this one appears not to be, it has been generally understood that the viability of a subscription model depends on what is called “breakage” or “health club economics” to succeed. They count on the expectation that relatively few subscribers will read and trigger payments on two, three, four books a month compared to many who will read one or less than one, or who will choose from among books (like public domain titles) that cost the services less or nothing.

The first of the subscription services for books — Safari — used a model that is much safer for the services because it assures cost stability, assigning a percentage of the revenue as a pool to compensate publishers rather than guaranteeing a purchase for every read as Scribd and Oyster are doing. I expect the purchase model to be very difficult, if not impossible, to sustain. But persuading the big players to come in depended on getting away from the safe “pool” model and purchasing the ebook anew for each new user.

A huge danger for the subscription services is the likelihood that subscriptions will be shared within families (let alone within dormitories!) That could drive up the average use per subscriber very quickly if it isn’t controlled.

Only now, with two of the Big Five in the game, giving the services about a third of the most commercial backlist titles in publishing, can they really find out whether the price-and-cost model they’ve set up will work to give them a profit. (It is important to note that HarperCollins and Simon & Schuster only put backlist titles into the services, so the most attractive commercial titles, which are new, are not part of the offer. This also means that all shoppers and purchasers of new titles will continue to use the stand-alone purchase model.)

I’m sure Scribd and Oyster have data and analytical skills that I don’t have. But, intuitively, this seems like a tough proposition. Subcription services are attractive to consumers because they’re bargains. If you normally read a single ebook or month or fewer, the $8.99 monthly subscription charge would not seem attractive. But if you read an ebook or two a month or more, the services will likely lose money on you.

Meanwhile, there are two players currently sitting on the sidelines that could really disrupt the subscription incumbents (which also include Spain-based 24Symbols, which has been around much longer than Scribd and Oyster but which hasn’t succeeded so far at bringing in the big publishers and the big books.)

There are rumors that Amazon is already canvassing for participants to deliver a subscription service of their own. Of course, they really already have one. Their PRIME subscription offer, for which the headline attraction is free shipping of hard goods, also includes access to the “Kindle Owners Lending Library”, which is effectively a broad-based ebook subscription service with some limitations and a far less robust title selection than Scribd and Oyster. Amazon could find ways to expand that. Will they match the implied compensation from Scribd and Oyster and pay more than the 70 percent which is the current standard for sales by agency publishers (which, therefore, becomes the basis for royalties to big authors)? One would suspect they would want something in return for that: exclusives, perhaps, or earlier access to the titles than Scribd and Oyster have.

Of course, Amazon (or Google or Kobo or Nook or Apple) would have an automatic advantage over the subscription incumbents if they decided to compete with them. Because they already sell all the books, they could sell you the books you wanted that weren’t in the service as part of a single offer.

The other future player of consequence is Penguin Random House, which by itself has well-known commercial titles that exceed in number what the services would have even if they signed up one more of the remaining big publishers. Hachette’s chief marketing and sales officer, Evan Schnittman, is quoted by the Wall Street Journal saying that this model is “not for us”. That leaves Macmillan, but even if Scribd and Oyster get them, PRH could have the most attractive title base on offer all by itself.

When I speculated some time ago about the opportunity PRH had to do this, one of their executives set me straight about why they wouldn’t. What I was told was that PRH was not thrilled by the idea of turning $500 and $1000 a year book customers into $100 a year book customers. Of course, that calculus changes for them if others are succeeding at doing that, and those new $100/year customers are then one step further removed from buying PRH books.

If PRH did this, they’d have one big decision to make: do they attempt to include the biggest titles from the rest of publishing in their offering or not. They’d already be starting with the most attractive title selection, but the Scribd and Oyster assortments would be competitive. If they went for some of the rest — even if only the top 10 percent of the rest — PRH could present a noticeably more attractive selection than Scribd or Oyster.

Would other publishers go in with them? I’d say, “probably”, because they can’t afford not to have their biggest books exposed to all possible substantial audiences, and PRH would almost certainly have the biggest subscription audience.

Would Penguin Random House want them? I’d say, “probably” again. It would stamp their offering as by far the best, and they’d still be advantaged dealing with authors because they’d be the only publisher not paying a third party to get the subscription revenue.

If “fear of Amazon” is the factor that made big agents relent in their opposition to subscription, would they also support joining an Amazon subscription service? That’s a trickier call, but as noted above, Amazon would have the capability to sweeten their offer to make it more compelling if that’s what they had to do.

But the main thing that works in favor of participation, now that the dam may have broken, is the psychology of trade publishing. Every big trade publisher has grown to be what they are today by selling their publications through intermediaries. Bookstores and then Amazon became the “gatekeepers”, owners of the customers. There was a symbiotic relationship: the retailers depended on publishers to deliver products to please their consumers and the publishers depended on the retailers to merchandise their offerings and manage the transactions. Access to a retailer’s customers first depended on getting your offerings into their store and then on having them be seen by the largest possible number of the store’s customers. That meant front tables and face-out display in the physical world; it means the right screen real estate, recommendations, and response to search terms in the virtual one.

That’s why the current hegemonies of Barnes & Noble and Amazon are so disconcerting to publishers. And that’s why the potential control of customer access by Scribd or Oyster might now look more like counterweight than threat.

Of course, it is also possible that the price-and-payment models Scribd and Oyster have begun with will prove unsustainable and that HarperCollins and Simon & Schuster — and their authors — will simply be the beneficiaries of a short-term bonanza financed by money that took a flyer that didn’t pay off. (And they’re not done taking those flyers.) That seems to me at least as likely as an outcome as these broad subscription offers becoming a permanent part of the bookselling landscape.

A lot going on around our place, so we haven’t had the time to switch away from what has become the horrendous service from Feedburner distributing The Shatzkin Files to its email subscribers. This one from last week on Amazon and Hachette (which is also linked to above) never was sent. (Of course, as I write this, who knows if this one will be or not?) It was written before the latest escalation where Amazon has removed pre-order buttons from Hachette book, a nasty blow that makes getting books on the bestseller list the week they come out very much harder. A lot has been written on this subject, but I think it still delivers some consideration of what it all means that hasn’t been picked up anywhere else.

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