eBooks

The sea change that comes with the latest iteration of the book ecosystem


In the past 10 years (since the mid-2000s), the ebook has arrived and the amount of shelf space for books in physical retail has declined, as book purchasing has continued to move to the Internet. This has put pressure on publishers’ distribution costs, as we discussed in a prior post.

In the 10 years before that (mid-1990s to mid-2000s), online bookselling began at what was, we now know, the very peak of book retailing, when the superstore chains B&N and Borders had built out hundreds of 100,000+-title stores and still owned mall chains Dalton and Walden that had many hundreds of smaller stores. And that was on top of the largest-ever network — many thousands — of independent bookstores, many of which were themselves superstores.

In the 10 years before that (mid-1980s to mid-1990s), Wall Street cash enabled the two big bookstore chains to build out their superstore networks, stocking publishers’ backlists deeply. With so many enormous stores opening, publishers received a bonanza of store-opening orders that went deep into their lists and were relatively lightly returned (until the store-opening process reversed itself 20 years later).

In the 10 years before that (mid-1970s to mid-1980s), the two mall chains (Dalton and Walden) rode the growth of shopping centers to a position of great importance in selling books to the public. They became the drivers of the bestseller lists. In the same decade. Ingram and Baker & Taylor built reliable national wholesaling networks, enabling the chains and a growing number of independents to replenish stock of unsold books quickly, increasing stock turn and profitability for booksellers (and lowering returns to everybody’s benefit).

In the 10 years before that (mid-1960s to mid-1970s), the department stores started to yield their strong position in book sales, victims both of their own structured discipline (open-to-buy rules) about inventory control that reduced their title selection and of the growth of the malls. The malls inadvertently doomed the department store concept (even though department stores were the “anchors” that made malls possible) by enabling specialty retailers of all kinds, including bookstores, to provide a better shopping experience than the department that sold those goods in the department store.

In the 10 years before that (mid-1950s to mid-1960s), an increasingly affluent society saw an ever-expanding number of bookstores while, in that era, mass-market paperbacks became ubiquitous in drug stores and newsstands, vastly increasing the number of places where Americans could find and buy books.

And the 10 years before that, which takes us back to the end of World War II, saw the birth of mass-market paperbacks and the development of modern publishing sales forces in trade houses. This was, in retrospect, the beginning of a half-century of uninterrupted growth for American book publishing. It has not necessarily now come to an end, but the growth of the segment controlled by big publishers may have ended.

What happens now? The online book market is likely more than half of the total book market. That is, books purchased online — print and digital — exceed the number sold in retail stores (obviously all print). Amazon is the single most powerful retailer, and they have also made themselves the first stop for any self-publishing or small-publishing entity that wants to reach readers. Ingram and the bigger publishers offer full-line distribution services to the most ambitious of those and to everybody else who wants to reach the whole book market.

Until the last 10 years, all the developments that affected book publishing tended to grow the availability of books relative to the availability of other media. When mall stores or superstores grew, there was no associated lift for television shows or movies (although recorded music also benefited from the malls). That is no longer the case. For the first time, really, books are competing with everything else you might read or watch or listen to in a way they never did before. Online doesn’t care what is in the file it displays. This is a qualitative difference in the nature of book availability growth compared to everything else that has happened in the lifetimes of anybody in the business.

The fact is that books used to live in a moated ecosystem, independent of what was going on in other media and book readers’ communication streams. Since ubiquitous broadband, that is no longer true. This presents publishers with two challenges they never faced before.

One is to take advantage of the opportunity to promote books to readers by tying them in to other media and events in ways that were never before possible. This is digital marketing promoting discovery. In fact, a greater percentage of the potential audience for any book should know about it within a few months of its publication than ever before, if publishers do their jobs right.

But the other is that publishers need to be alert to changes in book reading habits that are bound to occur because of integrated media. Yes, the publisher can promote the book to somebody watching a related video or reading an email on a related subject. But it is also true that promotion for movies and emails from friends can interrupt a reader in the middle of a chapter if they’re reading online. This is probably changing the way people read books and might even change how they want their books edited and shaped. Publishers who pay attention will see those changes as they occur.

We can interrupt people doing something else now to tell them about a book. But they now, in turn, can easily be interrupted while they’re reading the book. Digital change and media integration cut both ways. It is very early days for this reality. It only really occurs because of the combination of broadband and reading on an Internet-enabled device. That’s a relatively recent and still-growing circumstance. We don’t know where it will lead.

11 Comments »

Things are calmer than they were in the book business, but change is a constant


Among the shifts that have been taking place in publishing houses over the past decade is an increase in the head count dedicated to marketing and a decrease in head count dedicated to sales. This reflects the reduction in the number of bookstore accounts and the transfer of “discovery” from store shelves to digital search.

The reduction in bookstores and the concurrent and related reduction in print books sold in stores also affects how publishers view the economics of the sales departments and the entire support system for print distribution. The big houses still need sales forces and warehouses and sophisticated systems to track inventories and payments and returns but the “throughput” of print from their own publishing programs is declining. For many, that means that distribution clients are increasingly important. They provide the volume to support scaled operations without requiring the publisher to invest in publishing more titles. For at least four of the big five (HarperCollins being an apparent exception), distribution of other publishers’ books, with or without providing the sales force effort, is a critical component of maintaining the volume that keeps unit costs in line.

But that adds risk. Distribution contracts vary in length, but they generally only extend two or three years out. With four major publishers plus Ingram, which has, effectively, five different full distribution options to offer, on the prowl for clients, there is a plethora of choices for any publisher seeking to shed their own fixed-cost distribution or to switch distributors. Indeed, the percentages being charged for distribution services have dropped drastically over the past two decades. The competitive environment is likely to perpetuate that trend.

While the big publishers doing distribution have (so far) tended to insist on fairly large clients, Ingram is using its multiple configurations to try to serve publishers of all sizes and entities that aren’t primarily publishers at all. Today a publisher that is really a literary agency or, before long if not already, a bank, an advertising agency, or a not-for-profit with a mission, can put a book or a list of its own into the book publishing arena with sales and distribution capabilities competitive with the biggest and most experienced publishers. So a revolution that began with Amazon enabling indie authors, starting about ten years ago, to reach a big percentage of the total book market through Kindle and CreateSpace, is being dramatically extended. Going after real bookstore distribution definitely requires incremental investment and marketing savvy, even with the machinery in place to help.

But incremental investment and marketing savvy were always far easier to come by than the machinery has ever been for the small or occasional publisher.

While this levels the playing field in a major way, there are still distinct advantages to size and a B2B publishing brand. The diminishing bookstore shelf space has made the also-diminishing mass merchant (Walmart, Target) shelf space relatively more important. Between the chains — primarily Barnes & Noble and Books-a-Million — and independent stores, there are only about 1000 to 1200 points of purchase for books provided by bookstores. There were three to five times that many two decades ago. So the additional thousands of opportunities to put a book in front of the public through the mass merchants are critical, particularly to move bestseller quantities.

But relatively few titles can make the cut for those outlets and the pressure on them to perform quickly is immense. Returns are high. These slots are simply not available to publishers who aren’t recognizable B2B brands with a solid reputation for backing their books effectively. These outlets represent the competitive advantage that remains for the Big Five publishers.

For the past few years, pretty much since the demise of Borders in 2011, the number of bookstores has been going up a bit each year. (It is not clear that the bookstore shelf space has been going up; indie stores seem to be smaller, on average, today than they were two decades ago, or at least there are fewer mammoth ones.) It could well be that, aside from Borders, the indie revival is also fueled by the reduction in shelf space for books at the mass merchants. If so, that is good for smaller publishers and it is good for backlist, both of which are seriously challenged getting in front of the public through mass merchants.

So, while it is definitely true that the dizzying pace of change we saw during the early years of ebooks has subsided, and it is true that the print format has not yielded much share, if any, to ebooks in the past couple of years, it is not time to celebrate a new stability. The marketplace itself is still changing; the online share when you combine print and digital is still growing and the ratio of shelf space available for backlist and slower-sellers is still declining. The smallest publishers are getting better and better market access and the biggest publishers are seeing escalating risk in how they place the books they publish and in the danger they’ll face a sudden decrease in distribution volume that would turn their fixed costs into a burden.

This is a great time in the book business to be very big (among your peer group) or very small and focused. It is a challenging time to be anything else.

A very frequent point of contention when negotiating distribution arrangements is how Amazon will be handled and compensated. Amazon is almost always the single largest account and it is not uncommon for it to represent — on many books and even some publishers — 50 percent or more of the sales. Although sophistication definitely helps in dealing with Amazon, it is also true that Amazon provides incentives to give up the “other half” of the market and just work through them. Any sophisticated businessperson is likely to get more money out of Amazon working it themselves than any distributor can get for them, even before distribution fees. (IF, and this is a big if, you discount the marketing value of books throughout the supply chain which, counterintuitively but frequently, will raise the level of sales at Amazon from what they would have been without books broadly distributed.) In any case, being able to really add value to Amazon sales would be a Holy Grail. Right now, most of the time, distributing publishers really have to make the argument that you can’t effectively split things and that they will add so much value in the rest of the world, and do the work around Amazon, that the overall relationship is worth the trade-off.

10 Comments »

In an indie-dominant world, what happens to the high-cost non-fiction?


I first learned and wrote about Hugh Howey about four years ago. At the time, he was one of the first real breakthrough successes as an indie author, making tens of thousands of dollars a month exclusively through Amazon for his self-published futurist novel, “Wool”. As soon as I could track him down, I invited Hugh and his agent, Kristin Nelson, to speak at the next Digital Book World, which they did several months later, in January 2013.

In the years since, Hugh has had a very public profile as a champion of indie publishing and as a critic of big publishers. When I first encountered Howey, he and his agent had already turned down more than one six-figure publishing deal. Nelson ultimately did a print-only deal for “Wool” with Simon & Schuster, a deal consummated before the big publishers made the apparently-universal decision that they would not sign books for which they didn’t get electronic rights.

This week there was a lengthy interview with Howey done by DBW editor Daniel Berkowitz published on the DBW blog. In this piece, Howey reviews many of his complaints against publishers. According to him, their royalty rates are too low and they pay too infrequently and on too much of a delay. Their authors are excluded from Kindle’s subscription revenue at Kindle Unlimited. Their ebook prices to consumers are too high. And, on top of that, they pay too much rent to be in New York City and they pay their big advances to wealthy authors who don’t really need the money, while aspiring authors get token advance payments that aren’t enough to give them time off to write.

Howey’s observations are not particularly welcomed by publishers, but he has a deep interest in indie authors and, by his lights, is always trying to help them by encouraging them to indie-publish through Amazon rather than seeking a traditional deal through an agent. He has organized the AuthorEarnings website and data repository along with Data Guy, the games-business data analyst who has turned his analytical skills to the book business whom we featured at the most recent Digital Book World this past March.

Howey and I have had numerous private conversations over the years. He’s intelligent and sincere in his beliefs and truly devotes his energy to “industry education” motivated by his desire to help other authors. Yet there are holes in his analysis of the industry and where it is going that he doesn’t fill. Given his substantial following and obvious comfort level doing the marketing (such as it is, and it appears Howey’s success as an author hasn’t required much) for his own books as well as his commercial performance, it is easy to understand why he would never consider publishing any other way but as he has, as an indie author who is “all in” with Amazon. But he seems to think what worked well for him would work best for anybody.

In this interview, Howey says that any author would be better off self-publishing his or her first book than going the route of selling it to a publisher. And he actually dismisses the marketing effort required to do that. Howey says the best marketing is publishing your next book. He thinks the best strategy is for authors to write several books a year to gain success. In fact, he says taking time away from writing to do marketing is a bad choice. Expecting most writers, or even many writers, to do several books a year strikes me as a highly dubious proposition.

It is impossible to quarrel with the fact of Howey’s success. But he makes a big mistake assuming that what worked effectively for him makes self-publishing the right path for anybody else, let alone everybody else.

Howey also has an unrealistically limited view of the output of big publishing. If you read this interview (and I would encourage anybody interested in the book business to do so), you see that he thinks almost exclusively about fiction or, as he puts it, “storytelling”. Books come, like his did, out of an author’s imagination and all the author needs is the time to write. Exposure through Amazon does the rest.

He gives publishers credit for putting books into stores (although he would have them eliminate returns, which would cut down sharply on how effectively they accomplished that). But he thinks stores will be of diminishing importance. (We certainly agree on that.) He gives credit for the indie bookstore resurgence to Amazon, which would be true if you credit Amazon with the demise of Borders that wiped out over 400 big bookstores and created new opportunities for indies. But the idea that Amazon is allied with indie bookstores is contradicted by two realities. One is that the indie stores won’t stock Amazon-published books. The other is that Amazon, now in the process of opening its second retail store, may plan dozens, hundreds, or thousands more to come! We really don’t know. Certainly, very few indie bookstores would be applauding that.

Here’s how Howey sums up his advice to authors.

“Too few successful self-pubbed authors talk about the incredible hours and hard work they put in, so it all seems so easy and attainable. The truth is, you’ve got to outwork most other authors out there. You’ve got to think about writing a few novels a year for several years before you even know if you’ve got what it takes. Most authors give up before they give themselves a chance. It’s similar to how publishers give up on authors before they truly have a chance.”

This seems like sound advice, but it isn’t how it appeared to work for Howey. He published a novella which was the start of Wool and his Amazon audience asked for more. Three more novellas later, over a period of just a few months, and the four combined became his bestselling novel. Six months after he started, he was making $50,000 a month or more and had an agent selling his film rights. Then his agent started selling his book rights in non-US territories and in other languages. Meanwhile, Howey continued to earn 70 percent of the revenues from his ebooks, in a deal Amazon offered that matched what they paid to agency publishers, the biggest publishers. (Would Amazon be paying authors 70 percent if publishers hadn’t come up with that number for agency? Should big publishers get some of the credit for the very good deal indie authors are getting?)

The logic that Howey offers about how self-publishing stacks up against doing deals with a big house is very persuasive, but there are two pieces of reality that contradict it.

One is that, at this time, four years after Howey did “Wool” and eight years after the launch of Kindle, there are no noteworthy authors who have abandoned their publishing deals for self-publishing. (It appeared briefly that Barry Eisler was the first such author, except that it turned out he signed an Amazon Publishing deal after turning down a Big Six contract; he didn’t go indie. And, frankly, while he’s somewhat successful, he’s not a show-stopper author for any publisher.) In fact, Amazon’s own publishing strategy has apparently switched away from trying to persuade big commercial fiction authors to do that and is focused on the genre fiction that is the core of the self-publishing done through them. Howey has been offering the same analysis for quite a few years now but so far, the publishers have lost hardly anybody they care to keep to self-publishing. And we’re now in a period where the split of books sold online (ebooks and print) to books sold in stores (where publishers are beyond helpful; they’re necessary) appears to have stabilized — at least for the time being — after years of stores losing share.

The other is that Howey’s analysis totally leaves out one of the biggest categories of publishing: big non-fiction like history or biographies or industry analyses that take years of research and dedication to complete. Unlike a lot of fiction, those books not only take time, they require serious help and expense to research. In a imagined future world where all books are self-published, aspiring fiction writers give up very little (small advances) and successful fiction authors have the money to eat while they write the next book they can make even more money on doing it the Howey way (even though none have). But big non-fiction books like Jane Mayer’s “Dark Money” (or anything by David McCullough) took years of research to put together. “Dark Money” was undoubtedly financed at a very high level by the Doubleday imprint at Penguin Random House. How books like that will be funded in the future is not covered by Howey’s analysis.

Now, that’s not to say they must be. Economic realities do rule. Howey’s thesis that things are shifting in Amazon’s direction and away from the ecosystem that has sustained big book publishers is correct. He predicts that there will be three big publishers where once there were six and now there are five. I concur with that. As that happens, maybe the big fiction writers will take Howey’s advice.

But that solution is no solution for authors like Jane Mayer or David McCullough. A world without publishers where authors do the writing and the publishing might give us an output of fiction comparable to what we have now. But the biggest and best non-fiction would need another model if publishers weren’t able to take six-figure investment risks to support them. Amazon’s not offering it and neither is Howey. If the future unfolds as Howey imagines it, we’ll never know what books we’re missing.

78 Comments »

A first at this blog: walking back the assumptions that were the basis of the last post


In the few days since the last post here about Big Five publishers and agency pricing, I have been challenged on two specific points by comments sent privately. Both of these comments are right and therefore lead to this corrective post.

One powerful literary agent, who is inevitably informed by publishers about negotiations that affect the selling prices of ebooks (which, in turn, affect the author royalty), tells me that I have the whole motivation thing on agency backwards. It may have started six years ago as a way for publishers to control the prices of ebooks across the supply chain, so something they were “imposing” on Amazon. But that turned around. It became a way for Amazon to guarantee that they would get a full margin on all agency publishers’ ebook sales (because publishers could lower the ebook price, but the stipulated agency percentage would not be affected). So, in the recent negotiations, the big publishers had no choice about sticking with agency. Amazon insisted that they stick with agency.

The grapevine, although not this agent, also says that the original 70-30 split of revenues that agency began with has been revised in the recent contracts so that Amazon gets a wee bit more than 30 percent. I can’t verify that although, in time, agents should be able to see that picture clearly.

I have had no conversations with any friends in big houses during the recent agency negotiations. The sensitivity around those negotiations, given that they started because of the DoJ’s involvement, was very high. But now I’m being told by people in a position to know that four of the five big publishers think agency has been a big mistake. As one observer sees it, it has bled 25% out of digital sales that have been replaced by physical, resulting in an increased share for Amazon of the print portion of publishers’ businesses.

As it was put to me by one observer, agency in 2010 was a strategy; by 2015 it was a surrender.

The other challenge was a pushback against my claim that print book sales overall are rising. The commenter pointed out that more than the entire print book sales increase shown in industry stats can be accounted for by the rise in sales of adult coloring books, a category which has taken a big leap forward in the past 12 months. For one thing, it is impossible to predict with any accuracy whether or for how long those sales will sustain. But, more importantly, the sales of print that do not include adult coloring books, which have no ebook equivalents and are the good fortune of a few selected companies, are still declining.

So crediting “success” at arresting the print book sales decline to the rise in major publisher ebook prices is also a mistake.

It turns out that the real story of “agency pricing today” is that Amazon demonstrated dazzling marketplace power by keeping all the big publishers on agency terms. And all of the changes in the marketplace, including the degree by which the divison sales within Big Five houses between print and digital may have tilted in favor of print, probably work in Amazon’s favor.

This is the first time in seven years of writing this blog that I have walked back the thrust of a whole post. Ironically, the overall point to what I wrote, questioning whether agency pricing is a good thing for publishers, is correct. What I didn’t know is that most of the publishers have already figured that out but are helpless against a customer so powerful that it dictates the terms.

There is still useful insight in the original, particularly around what might or might not be worthy of anti-trust consideration. But the two core premises — that publishers forced Amazon to accept agency and that doing that had made their print sales go up — are definitely questionable.

The only thing worse than making a mistake is not correcting it.

39 Comments »

If Amazon pricing of ebooks is the problem, is agency actually the right solution?


In the past week, I’ve had conversations with leading executives at two of Amazon’s competitors in the ebook space. They had strikingly different takes on whether the agency pricing regime, which is now in place by contract with all five of the biggest trade publishers, helps keep competitive balance in the ebook marketplace or prevents it.

Agency pricing was promulgated by Apple for the opening of the iBookstore in 2010. What it meant was that publishers would set a price that was “enforced” across the retail network. Apple liked this because it meant both that they didn’t have to price-compete with Amazon and because they didn’t have to think about pricing hundreds of thousands of items on a daily basis. (And it fit the model Apple used to sell other media.) Publishers liked it because they feared the erosion of print sales that cheap ebooks might lead to and because it seemed that level prices might reduce what was then Amazon’s stranglehold on the ebook market.

As we know, the Department of Justice interceded because they saw the Apple-publisher agreements as collusive. The DoJ cares most about price; discounting is a good thing unless it is “predatory”. If companies get together to prevent low prices, that’s clearly bad. So the short-term remedy was to enable retailers to discount off agency prices. That pretty immediately stopped the decline in Amazon’s ebook market share, which started to grow again once discounting was reinstated.

Now the big publishers have replaced the original agency agreements with new ones that appear satisfactory to the court because they were obviously separately negotiated. And the new ones seem to allow at least some of them more flexibility to set and enforce higher prices than the numbers in the original Apple-promulgated deals. And all of that has led to a reconfigured marketplace.

The good news for the publishers is that print sales erosion — at least for the moment — seems to have been stopped. (Print sales started to grow even before “new Agency”; when higher prices hit the ebook market, print was immediately assisted.) A variety of industry and company sales statistics seem persuasive on that point. The percentage of revenues coming from ebooks for big publishers has declined and the sales of print have risen. And there is even some anecdotal evidence suggesting that bookstore retail shelf space is increasing again. Even if that is true, it is an open question whether it is sustainable, or whether it is a delayed and temporary marketplace response to the shuttering of 400 giant Borders stores, which occurred in 2011. Bookstores might also be helped by the diminishing book shelf space at mass merchants, a venue where print continues to lose ground.

But there is also some good news for Amazon in how all this has worked out. Their market share on the ebook side is rising. Their margins on the ebook side must have gone up even more, since they’re being “forced” to keep the margin they earn on Big Five ebook sales. (Wouldn’t it be ironic if Amazon’s internal calculations are that they can afford more losses on their Kindle Unlimited subscription program because of the margin they’re earning on the Big Five single-title sales? We can only guess…) And certainly Amazon benefits from the increased sales of print.

In fact, they could be partly responsible for it. All the searches on Amazon for Big Five books show an agency-priced ebook with a highly-discounted print book, often cheaper than the ebook, alongside of it. How much of the print book sales increase is due to the reaction of consumers being presented with that choice?

(Let’s remember how much of a “better deal” it is for the consumer to buy print if the prices are the same or close. The print book can decorate a bookshelf. It can be resold, which the ebook can’t be, or at least can’t be yet.)

Only Barnes & Noble can even attempt to meaningfully compete with Amazon in this environment. The price-sensitive book consumer needs to see both the ebook and the print book to make a wise purchasing decision. They won’t see that at Kobo, Google, or Apple’s iBookstore.

So competing with Amazon on price is confined to B&N on print and confined to non-agency titles — which means only a sliver of the bestseller list — for everybody else. So, is everybody happy? Publishers are selling more print, which they wanted. There’s growth in the indie store base, which publishers also wanted. But Amazon continues to grow market share in relation to Barnes & Noble and now threatens to open bookstores to compete with B&N and the indies. And that is most definitely not what publishers wanted.

Is there any way to achieve both robust competition for Amazon and also to protect print books from being cannibalized by much cheaper ebooks?

The conversations I had this past week with two of the competitors to Amazon surfaced diametrically opposite opinions about whether agency was helpful or not in that regard.

One ebook executive suggested that the Big Five publishers should stick to the agency pricing margin but should do it on wholesale pricing terms. That person encouraged me to think through this proposition: what if those ebooks were sold to the accounts at 70 percent of the publisher’s price (or even a bit more), but without any restrictions on discounting?

The other believes that price-competing with Amazon is a game that is impossible to win and that there is clear evidence from the experience in the UK market, where several ebook players tried to undercut Amazon on price, that it is not an effective strategy.

The advocate for the wholesale model, which would allow discounting by retailers up to whatever the authorities decide is “predatory” (and that definition is anything but clear), believes that Amazon is being given a free ride. Of their competitors, it would seem that only Google and Apple would have the deep pockets to fight Amazon by sacrificing margin, but either of them certainly could and it would certainly be, at the very least, a big nuisance to Amazon if they did.

This raises again the question of what discounting would be permissible before the discounting would be labeled “predatory”. There is no definitive answer. Some believe that retailers are not permitted to discount below their own cost (although, even then, it is not clear whether that means on a per-title basis or across all their ebook purchases and sales or some other basis). By that interpretation, if an ebook were listed at $15.99 and sold at a wholesale price of $11.19 (70 percent), there could be a legal risk that pricing below that point could be considered “predatory”. In fact, ebook pricing flexibility is such that publishers could make that same ebook $18.99 for the first month ($13.29 wholesale), when the print is fighting for bestseller status.

(It should be noted here that Amazon sold Kindle ebooks at well below cost in the days before they had competition, as a carrot to get customers to buy Kindle e-readers, which were originally priced at $400. By doing so, they made the reader-and-content equation attractive to the people who bought the most books. The DoJ and Judge Cote said that Amazon’s pricing at that time was not predatory, but the Supreme Court could, at least theoretically, change that understanding. And, in fact, Amazon has continued to behave as though the $9.99 price point is the “right” ceiling for ebooks, even as the device-and-content equation has changed with considerably lower Kindle device prices and a plethora of multi-function devices having changed the market.)

Big 5 players going to wholesale could change the ebook marketplace in two ways. One is that it would unleash Google and Apple — both of which have plenty of cash — to discount aggressively to compete with Amazon. At the very least, that would diminish Amazon’s margin as they compete on price and it might also reduce their unit sales. It could also lead to the smaller publishers now selling wholesale to attempt to reduce their discounts. And that could lead to Amazon using its market power to resist a reduction in margin. That could be construed as an abuse of marketplace power, which is another test for anti-trust.

An anti-trust lawyer explained it to me this way. The analysis is more nuanced than just looking at whether prices are lowered. Generally, the antitrust enforcers do look favorably on practices that result in lower prices.

That being said, the goal of antitrust is broader: it is to protect the competitive process. It can get complicated in two-sided or multi-sided markets where prices might be low on one side of the market, but the platform uses its power on the other side of the market to harm competition. In the case of Amazon, one side of the market faces the consumer and the other faces the publisher.

It’s particularly problematic if the conduct locks in participants, raises barriers to entry, or results in the platform extracting more than its fair share on the other side of the market.

By that measure, perhaps the most problematic aspect of Amazon’s commercial terms could be the requirement for exclusivity to be part of the Kindle Unlimited subscription program. That keeps titles away from competitors.

But going to wholesale is not viewed as a solution by all of Amazon’s competitors. One of them thinks having agency in the marketplace is a big boon to competition. That executive saw the UK market as a “test bed”, because over the last three years a number of companies have tried deep discounting to buy share. It was tried pre-agency and during the post DoJ “agency lite” period. From this executive’s perspective, the results of those efforts make discounting looks like a pretty futile competitive strategy.

Unlike the “wholesale” advocate who thought the agency publishers were helping Amazon by preventing price competition from the other deep-pocketed players, this executive presented a completely different analysis. By their lights, market share comes from two sources.

Access to cost-effective customer acquisition sources. Amazon and B&N have their own existing customer bases. Kobo has retail partners. Apple and Google have pre-loaded apps and registered customers for iTunes and Android. So everybody has a pool of customers to draw on. (We pegged this as an advantage Scribd had over Oyster when those two companies started selling ebook subscriptions.)

Then the trick is to retain customers and capitalize on lifetime value.

What this executive believes is that price-cutting as a way to recruit customers is a fool’s errand. The customers who come aboard for a cheap deal will abandon you just as fast for somebody else’s cheap deal. They don’t stick. On the other hand, offering pricing advantages based on customer loyalty is a better bet. This player thinks that having agency in the market makes it easier to hold onto customers once a platform has acquired them. As evidence, that person pointed to the loss of market share by Nook that occurred once the DoJ restored discounting under agency.

It has seemed to me from the very beginning that making ebook discounts mirror print book discounts was a major strategic mistake by publishers. The two products are not comparable from the standpoint of the store’s economics. Stores don’t have to buy ebooks in advance. There is no “shrinkage”; they don’t get lost or stolen. They don’t have to be handled. Rent doesn’t have to be paid on the space they occupy before they’re sold. With such a different commercial reality, aggressive discounting by retailers should have been a predicted outcome when they were given so much more margin than they needed to operate.

So the division of the customer’s dollar instituted by agency is more appropriate to ebook realities and probably takes things back to where they should have started.

The wholesale versus agency question is more complicated. But it does certainly seem like the time would be right for one of the Big Five publishers to break ranks, as Random House did when agency was originally instituted, in their own selfish interest. They’d achieve what Random House did then (before the Penguin merger): collecting the same or a higher price from the retailers and seeing them peddled to the public at a lower price. (Of course, nobody is doing this anytime soon. The current round of agency contracts which went into effect over the past two years still have some years to run.)

The same executive who analyzed the marketplace for me offered another observation that really matters. Less than half of the reading public has made the switch from reading print to reading digitally. There are a lot more future converts left in the pool. There is a lot of ebook growth left for retailers whether they’re attracting their competitors’ customers or not.

And so it would seem that the stability we now see in the ebook market is a temporary thing.

Thanks to Teleread for the Q&A with me they just posted.

And Digital Book World is just around the corner. I hope we’ll see you there.

17 Comments »

Now Kings of ebook subscription, what will impede the ebook share growth for Amazon?


With the news this morning that Scribd has thrown in the towel on unlimited ebook subscriptions, Amazon is the last player standing with an “all-you-can-eat” ebook subscription offer for a general audience. The juxtaposition of the publishers’ insistence on being paid full price for ebooks being lent once and the late Oyster’s and the now thrice-hobbled Scribd’s (they did a reduction of their romance offering last summer and then cut back on audiobooks to stem prior waves of over-consumption) pursuit of customers with an unlimited-use offer was always doomed. The only hope for the subscription services was that they would grow so fast that publishers wouldn’t be able to live without their eyeballs and would relent on the sale price.

That didn’t happen.

When Digital Reader reported the Scribd news this morning (the first place I learned of it, although I learned a lot more when I saw the Pub Lunch account an hour or two later), they also linked back to a story I’d missed in October explaining that Amazon was fiddling with what they put in their own unlimited sub offer, Kindle Unlimited.

Because Amazon couldn’t get cooperation from agency publishers (which, at a prohibitive and ultimately suicidal price, Oyster and Scribd did), they exploited their ability to deliver ebooks from the non-agency publishers to the max. Or, they did that at first. What Nate Hoffelder of Digital Reader uncovered last Fall was that Amazon was selectively removing those titles as they saw fit, which lowered their costs. (The information that led to this discovery was originally posted as a comment by Kensington’s CEO Steve Zacharius on this blog.)

A lot, if not most, of what Kindle Unlimited “lends” are ebooks compensated for by a “pool” of cash Amazon puts in each month. The size of that pool is solely determined by them and the per-page compensation for those books has inched downwards. Nonetheless, in the aggregate it amounts to a lot of money that is available only to ebook “publishers” (usually indie authors) who give Amazon an exclusive ebook license for the title. The publisher can sell print and audio elewhere, but if they want to share in the KU pool their ebook has to be Kindle only.

The disruptive news that I had missed last October is that a handful of smaller publishers — not just indie authors — are now seeing it as financially beneficial to be Kindle-only for ebooks.

This next bit is reporting what is still a rumor. But I have just been told by somebody who would know that Barnes & Noble will be withdrawing Nook from the UK market. That news is unrelated to the subscription business, but it is additional good news for Amazon.

For anybody concerned about a diverse ebook marketplace, these are ominous developments. With both the biggest ecosystem and the deepest pockets, Amazon can afford to continue to reward ebook copyright owners with increased compensation for exclusivity. As their share grows, it will be increasingly tempting for ebook publishers, be they indie authors or something a bit larger, to take the higher rewards for cutting out the other ebook vendors. And so Kindle progressively builds a better catalog than any of its ebook competitors. Which leads to more market share.

Etcetera. Or, in the modern parlance, “rinse and repeat”.

With Kindle Unlimited now the only “unlimited” ebook subscription play left (although Scribd can still claim a better selection of titles, at least for a while longer), presumably its market share will also continue to grow. As that happens, even big publishers may start to see financial benefits in putting some titles from their backlist into it. (Who knows? Authors, working on a percentage of the ebook revenues, might start insisting on it!) If and when that starts, the challenge for iBooks, Nook, Kobo, and Google to maintain a competitive ebook title offering will escalate.

Presumably, there is some percentage of the ebook market that Kindle could control that would lead to anti-trust concerns. Their share has been growing almost inexorably since the Department of Justice and Judge Cote put their thumbs on the scale a few years ago to punish the publishers and Apple for what they saw as price-fixing.

We will look for enlightenment on this subject from anti-trust attorney Jonathan Kanter at Digital Book World. Is there any percentage of the ebook market that if one entity controlled it would constitute a prima facie monopoly that calls for government action? Or even of the total book market, including print?

Even before we get to whether they plan 100 or 400 bookstores beyond the one they’ve got and the one more they are apparently planning, it is hard to see what will impede the growth of Amazon’s ebook market share. Inexorable growth by Amazon? That’s a topic we’ve been thinking about for years.

I was kicking this post around with Pete McCarthy before publishing it. I’m really struck by a point he made to me. Pete points out that buying and owning units of content has become anachronistic behavior for music and video. Kids today don’t stuff their own iTunes repository. They eventually move from streaming YouTube to subscribing to Spotify. (And that’s why Apple started Apple Music.) Nobody buys videos anymore; we just subscribe to Netflix or take temporary custody of content through an “on demand” service.

So book publishers are probably fighting a rearguard action trying to perpetuate the “own-this-content” model, particularly at relatively higher prices than they could command last year or five years ago.

Of course, that’s what Scribd and Oyster were thinking about when they built their repositories and committed themselves to invest to build a user base. Oyster ran out of time. Scribd has had to trim their sails. Subscriptions seemed like a natural business for Google, but they haven’t gotten into it. (Although they hired much of the Oyster staff, so perhaps that’s a chapter not yet written.)

But Amazon continues with Kindle Unlimited, able to shift their economics without disrupting their business. And, if Pete McCarthy’s insight about the direction of consumer behavior must inevitably extend to books — and renting access to a repository becomes the dominant model replacing owning-your-content — that’s another way they’re better positioned than anybody else to dominate the last mile of book distribution in the years to come. Publishers should always be aware that it’s a risky business to have a business model that contradicts the trends in consumer behavior.

23 Comments »

Agents who come to Digital Book World will learn a lot they can immediately apply


The mission of the Digital Book World conference is industry education around digital change. There is a plethora of programming for this year’s event that will serve that purpose particularly well for literary agents. Of all the people in the industry, it would seem to me that agents would get the fastest and surest “return on investment” for the time and expense of attending DBW.

At the top of the “definitely not to be missed” list for agents are two items: the main stage presentation and breakout Q&A by Data Guy, the stats guru of Hugh Howey’s “Author Earnings” website, and the panel discussion called “Finding Common Ground: How publishers and authors — regardless of what path they’re taking — are working together”.

Really necessary knowledge will also be delivered by Michael Cader, immediately preceeding Data Guy’s appearance, when he reviews the sources of industry data and clarifies what can realistically be discerned from them and what can’t. One more set of information no informed agent can be without will come from Rand Fishkin, the founder, former CEO, and Wizard of Moz, who knows more about Search Engine Optimization (SEO) and explains it better than anybody on the planet. Understanding SEO today is as important for everybody in our business as understanding “advance sale” or “coop advertising” was in years past.

And, speaking of “coop advertising”, DBW will also feature an appearance by Fred Argir, the new Chief Digital Officer at Barnes & Noble. In a conversation with me, he will be laying out some insights from the biggest bookstore chain on new ways they might collaborate on marketing with publishers in the future.

The Author Earnings website scrapes and interprets Amazon data, breaking down Amazon bestsellers by publisher type: Big Five, indie authors, and others. Then AE goes further, trying to calculate what share of the revenue went to authors. Recent enhancements to AE’s data collection have improved the precision of their sales and income estimates. They’re showing steady market share gains by indie authors with their lower-priced books, particularly since in their new contracts the publishers have “succeeded” in preventing discounting from their agency prices.

Any agent trying to advise an author curious about or tempted by self-publishing really must know what Data Guy is up to. This will be DG’s first public presentation. His breakout Q&A will be moderated by Michael Cader, so the most knowledgeable industry perspective will be present as DG delivers his compelling alternative view of our sales universe.

The “Common Ground” panel explores the new reality that author efforts constitute a critical component of all book marketing today. Jane Friedman, the leading indie author Sherpa in our business, will moderate a panel of two agents and two editors with extensive experience working with authors who have published both indie and through houses. Jane Dystel of Dystel & Goderich and Julie Trelstad of Writers House are the agents; Johanna Castillo of Atria (S&S) and Jaime Levine of Diversion Books are the publishers. These five people will draw on recent experience with dozens of authors to help us understand the current state-of-the-art for author and publisher collaboration around marketing.

The challenge of “discovery” or helping readers find their “next book” has been moving up the industry agenda since Digital Book World started in 2010. Rand Fishkin of Moz will be focusing on “choosing the right web marketing channels for your book”. Agents who might previously have pushed for an ad in New York Times Book Review or a 5-city author tour need to understand what is the most effective use of support dollars today. Fishkin’s talk is also expected to provoke a lot of questions so he, like Data Guy, will have a breakout session that will allow attendees to get him to address their personal cases.

There are two other whole categories of information agents need to know about that are big components of our DBW program.

The four additional sessions on marketing could also be considered “can’t miss” for the agent keeping up with the digitally-affected ecosystem: one on ebook pricing; one on tracking “the book buyer’s journey” from discovery to purchase; a third on inbound and content marketing; and a fourth on email marketing. Since authors are critical players on the content marketing front and many also possess substantial email lists , it’s obvious that any agent would benefit from these!

(And on the day before DBW officially opens, when we have a full slate of other programming including our Publishers Launch Kids conference, we have four “Mostly Marketing Masterclasses” — on SEO, audience research, managing paid digital media, and sales data analysis — which are a separate ticket but also worth considering for any agent that wants to do a deep dive into modern book marketing.)

The other big category is understanding the larger ecosystem in which publishing exists, mostly shaped by the biggest tech companies. For the past 20 years, publishing has been increasingly dependent on and has given up a great deal of control to the likes of Amazon, Apple, Facebook, and Google. Those “Four Horsemen” are the ongoing focus of NYU Stern School of Business Professor Scott Galloway, who will describe them and their strategies in a Main Stage talk. Two speakers with a skeptical view of tech’s impact on publishing economics are Jon Taplin of USC’s Annenberg School and anti-trust attorney Jonathan Kanter. Taplin will lay out his theory about how Silicon Valley has steadily devalued content in favor of tech and what the content industry can do to fight back. And Kanter will explore the near-term possibilities for anti-trust activity that could loosen the grip those companies, each bigger than the whole book industry, have on our ecosystem. In the same vein, Jessica Saenger of Germany’s Boersenverein will update us about anti-monopoly activity taking place in Europe that could affect those companies and, since every US company and author gets real revenue from Europe, is important to all of us.

There’s tons more: the company transformation talks (eight of them); author Virginia Heffernan on how the Internet is changing culture as well as how we buy and consume content; a session on sales reporting and analytics chaired by Hachette’s former CMO, Evan Schnittman. And what is actually a core topic for them, every agent needs to hear the panel discussing potential changes to copyright law being chaired by Roy Kaufman of Copyright Clearance Center.

It seems pretty certain that the agent who attends Digital Book World will be better prepared to do the jobs of advising authors about marketing and business, as well as negotiating their deals, than the agent who doesn’t.

No Comments »

Can crowd-sourced retailing give Amazon a run for its money?


Although it has always seemed sensible for publishers to sell their books (and then ebooks) directly to end users, it has never looked to me like that could be a very big business. In the online environment, your favorite “store” — the one you’re loyal to and perhaps even have an investment in patronizing (which is how I’d characterize Amazon PRIME) — is only a click away. So however you learn about a book (or anything else), it is very easy to switch over to your vendor of choice to make the purchase.

There is a concept called “the fallacy of last click attribution” that is important in digital marketing. You don’t want to assume that the place somebody bought something (the last click) was the place they decided to buy it (attribution). If you’re a marketer, you want to aim your messages where the decision gets made and you need to know if that wasn’t where the purchase was made. You learn quickly that the two are often not the same.

There are a variety of reasons why direct sales are hard for publishers. One is that their best retailer customers — Amazon and Barnes & Noble, of course, but many others as well — don’t like their turf encroached upon by their suppliers and they have power over their suppliers’ access to customers. They particularly don’t like it if suppliers compete on price.

But it isn’t just publishers who have trouble competing with the online book retailers and ebooks are just as hard as print. On the ebook side, many readers are comfortable with specific platforms — Kindle, Nook, Kobo — and are uncomfortable “side-loading” content into them. And when you get away from the owner of an ecosystem, the complications created by the perceived need for DRM — some ability to either lock up or identify the owner of content that might be “shared” beyond what its license (which is what a purchase of ebooks is) allows — makes things even more complicated.

Because it appears so superficially simple to transact with trusted customers, attempts to enable book and ebook sales by a wide variety of vendors are nearly as old as Amazon itself. In fact, Amazon began life in 1995 leaning almost entirely on Ingram to supply its product and began discounting in earnest when Ingram started to extend the same capability to other retailers through a division called I2S2 (Ingram Internet Support Services) in the late 1990s. The aggressive discounting by Amazon quickly and effectively scared off the terrestrial retailers who might have considered going into online sales.

When one company, a UK-based retailer called The Book Depository, organized itself to fulfill print books efficiently enough to be a potential competitor, Amazon bought them. Nobody else ever really came close. Borders didn’t try, initially turning over its online presence to Amazon. Barnes & Noble partnered with Bertelsmann in the 1990s to create Books Online, which has continued (to this day) as BN.com. But they have not (to date) managed to achieve a synergistic interaction with the stores to give themselves a unique selling proposition. And the Amazon discounting strategy, designed to suck sales away from terrestrial retailers and partly supported by Amazon’s reach well beyond books, was never a comfortable fit for BN. As a result, Amazon has never been threatened as the online bookselling king.

Barnes & Noble dominates physical retail for books; Amazon owns online. One channel is shrinking; the other is growing.

Trying to do retail for print books without a substantial infrastructure is just about impossible, but ebooks are tempting because, at least superficially, those challenges appear to be much smaller. That may have been behind the attempt by three publishers — Penguin (before the Random House merger), Hachette, and Simon & Schuster — to launch Bookish a few years ago. By the time it opened, Bookish was touted as a “recommendation engine”, but its true purpose when it was started was to give its owning publishers a way to reach online consumers in case of an impasse with Amazon. They get points for predicting the impasse, which Hachette famously suffered from during ebook contract negotiations with Amazon in 2014. But the solution wasn’t a solution. Bookish never had the juice to build up a real customer base and probably never could have, regardless of how much its owners would have been willing to invest.

There are currently two noteworthy players in the market enabling any player with a web presence to have an ebookstore selling everybody’s titles. One is Zola Books, which started out two or three years ago promoting itself as a new kind of web bookstore. They were going to let anybody create their own curated collection of books and profit from their curation. And they were going to host unique content from brand name writers that wouldn’t be available anywhere else. It didn’t work, and now Zola, having acquired much of the defunct Bookish’s tech, is trying to be an enabler of online ebookstores for anybody who wants one.

That same idea is the proposition of Hummingbird, an initiative from American West Books, a California-based wholesaler that provides books to leading mass merchants. They have created technology to enable anybody with a web presence to sell ebooks. The company told us that their internal projections suggest that they can capture 3% of the US ebook market in 24 months from their imminent launch. They promise an impressive array of resellers, ranging from major big box retailers (many of which are their customers for books) to major publishers themselves.

There are others in the space, providing white label platforms and other direct sales solutions, including Bookshout, Enthrill, Bluefire, and Impelsys. And there are distributors, etc. who support their clients’ D2C efforts — Firebrand, Donnelly/LibreDigital, Demarque.

Then, yesterday (Tuesday) morning, Ingram announced that they have acquired Aer.io, a technology firm based in San Francisco headed by Ron Martinez. The Ingram-Aer.io combination will probably motivate the owners of Zola and Hummingbird to rethink their strategies. It is motivating me to reconsider whether, indeed, a large number of Net points of purchase for books could change the nature of the marketplace.

Disclosure is appropriate here. Ingram has been a consulting client of ours for many years. In that role, I introduced them to Aerbook, the predecessor to Aer.io, two or three years ago and I knew that Ingram had invested in it. But I didn’t know about the integration the two were working on until literally moments before they announced the merger on Tuesday. It is extremely powerful.

What Martinez and Ingram have built with a simple, elegant set of tools is the ability for anybody — you, me, a bookstore, a charity, a school, an author — to build its own branded and curated content store. You can “stock” it with any items you want from the millions of books and other content items Ingram offers. You can set any prices you want, working with a normal retail margin and paying “by the drink” for the services you need, namely management of the transaction and fulfillment. And while there is certainly “effort” involved in building your selection and merchandising, there are no up-front or recurring charges to discourage anybody from getting into the game.

One of our observations in the past couple of years has been that Amazon’s competitive set is limited because most of their ebook competitors don’t sell print books. It seemed to me that the one chance to restrain their growth — and every publisher and bookseller that is not Amazon would like to do that — was for Google to get serious about promoting and selling print as well as ebooks. But that won’t happen. Google is a digital company and they’re interested in doing all they can with digital media. They don’t want to deal with physical, even — as I suggested — doing it by having Ingram do the heavy lifting.

Whether any publishers or booksellers or other merchants or entities can build a big-and-profitable business selling books using the Aer.io tool remains to be seen. But it would seem that many can build a small-and-not-unprofitable sideline to their current activities and it would be one that would underscore their knowledge, promote their brand, and provide real value to their site visitors and other stakeholders. Thousands of these businesses could be consequential; millions could be game-changing. How many will there be? That’s impossible for me to predict, but the Aer.io proposition is totally scaleable, so the answer depends entirely on how enticing it is for various entities with web traffic and brands to have a bookstore.

And, depending on the uptake here, there will be some strategic conversations taking place around this at Amazon as well. When they have a handful of competitors selling print and ebooks, as they have, price-matching (or price-undercutting) can be an effective, and targeted, strategy. But how do you implement that when there are thousands of competitors, some of which are discounting any particular title and many of which are not? And does the customer care if they’re paying a couple bucks more to buy the book “directly” from their favorite author, particularly if the author offers a hand-signed thank-you note will be sent (separately, of course) to acknowledge every purchase?

How this will play out is something to watch over the next few years but there is at least the potential here for a real change in the game.

We already had John Ingram, Chairman and CEO of the Ingram Content Group slotted as a keynote speaker for Digital Book World 2016 to talk about one of our main themes: “transformation”. More than half of Ingram’s revenues come from businesses they weren’t in 10 years ago. We’ll see how things look as they start to roll out Aer.io, but it would seem likely Aer.io would be an appropriate add to the program as well.

If you haven’t signed up yet for DBW (which runs March 7-9), the Publishers Lunch code gets you the lowest price.

35 Comments »

Ebooks change the game for both backlist and export


There are two aspects of the business that ebooks should really change.

One is that ebooks can really enable increases in sales of the backlist.

The other is that ebooks will really enable sales outside the publisher’s home territory.

The second piece of this hardly even requires much effort. At a conference called Camp Coresource hosted by Ingram two weeks ago, Mary Cummings of Diversion Books, which last year launched a romance-only eBookstore app, EverAfter Romance, reported just short of half of EverAfter’s app users are coming from outside the “home” (US) market. Of that 49 percent, only about 6 percent come from the UK and Canada. Of course, Diversion owns world rights on many titles. And the rest of the world has far more than half the people, even far more than half the English speakers, in the world. So the US is still responsible for far more users per capita, but that’s really of secondary importance. Getting half one’s customers from markets that would have been very hard to reach ten years ago — without any extraordinary efforts — is a very new thing.

This global reality comes up in another frequent current discussion. The big publishers are suggesting that ebook sales have plateaued, perhaps even declined. Amazon says “not true”, that ebook sales are still rising. Some analysis, such as what is done by Data Guy for Author Earnings, says that the publishers’ big books are losing ebook share to the indies, primarily relying on data scraped from Amazon to make the case. The most commonly-offered explanations are that publishers’ success forcing higher ebook prices for their titles, combined with a decline in new converts to ebooks (who are inclined to “load up” their devices when they first start reading digitally) account for the apparent trend.

But the comparison can also be skewed. All Amazon sales from outside the US that are not made through a local Amazon store are credited to the US store. And when Amazon distributes indie ebooks, they always (or at least almost always) have global rights. So it could well be the case, and often is, that the publisher-ebooks that are being compared to the indie-ebooks are working on a smaller territorial base for sales. There is an apples-to-oranges problem that makes it difficult to compare Amazon sales of indie ebooks to those from publishers.

The point to capture is that just having ebooks for sale around the globe can bring markets to a customer’s door, wherever the book originated. Any rights management policy that prevents an ebook from being on sale anywhere is likely to be costing some sales.

The backlist challenge is trickier and the results might not be as obvious. Two of the biggest drivers of ebook sales are discovery in response to search and the amplified effect of existing sales momentum in bestseller lists and retailer recommendations. (“People who bought this, bought that.”) A power law distribution seems inherent in ebook sales. Those that sell develop sales momentum; those that don’t remain hidden and buried.

But a lot of that has to do with metadata. Publishers have been getting better and better at writing the descriptive copy that determines whether search engines identity them as an “answer” to the right queries. That means that as you go back in time, the copy is less and less likely to be useful for the purpose.

And there are some realities about budgets and effort allocation in big companies to take into account. The lion’s share, and that means more than 90 percent, of budgets and internal effort allocations for marketing go to the current frontlist. The backlist has many times the number of titles as the frontlist, so a much smaller amount of money and assignable labor is spread over a far larger number of titles. On a per-title basis, there have hardly been any resources available for backlist. And since backlist sales of ebooks have not generally been robust, predicting the ROI necessary to increase those budget allocations requires courage. Or foolhardiness.

Then there are corporate political realities. New books have advocates. There are the editors in the house who signed them and whose careers will be affected by how well they do. There is a publisher for each imprint watching the imprint’s P&L, firm in the belief that very few backlist books can move the needle but that every new title can. And the publishers and editors are also the ones who know the books and tell the marketers what they’re about and (too often) who the audiences are for them.

And, on top of that, publishers often count on backlist sales to be the most profitable precisely because they don’t have to allocate marketing spending or staff time to those books. There sometimes seems to be a fear operating at publishing houses that starting to expend marketing effort on backlist is opening a Pandora’s Box which would compromise the most profitable aspect of their business.

But there are hopeful signs that this is changing.

Carolyn Reidy, the CEO of Simon & Schuster, keynoted the recent annual meeting of the Book Industry Study Group by underscoring how S&S has changed its approach to capture backlist opportunities. Reidy made the point that between print bought online and ebooks, more than 60 percent of the company’s sales came from Internet channels. She said that at S&S’s weekly marketing meeting, which I’m sure was almost exclusively frontlist-oriented until very recently, they are now looking at their books “through a lens of daily opportunities”. That could include noting it if a book is listed for a prize or mentioned on a TV show or in a tweet by a celebrity. The chances that a book will be discovered by somebody searching for the book that way are multiplied if the book’s descriptive copy points the search engines in the right direction.

This is an approach we first saw for ourselves at Open Road Digital Media a few years ago. Their “marketing calendar” focused on holidays and predictable events like graduations, not the publication dates of forthcoming books. Of course, Open Road didn’t have any frontlist at that time. All the books they acquired in the early days of the company were backlist for which digital rights were somehow available. They made a virtue of a deficiency. But marketing the backlist in the light of the most current “daily opportunities” is precisely the right thing to do.

It is worth noting that when Reidy spoke at Digital Book World in January 2014, she pointed to the opportunities in global. In the prior year, she noted, S&S had sold ebooks in more than 200 countries.

Recognition of an opportunity is a necessary first step and assigning human and capital resources to pursue it is the second. But the biggest publishers are also going to need digital tools to fully exploit what is now open to them. When we looked at what Open Road was doing, they had about 1000 titles in their shop, all of which had just been acquired by the team in place. They could keep them in their heads. The biggest publishers have tens of thousands of titles in their backlists, many (if not most) of which were acquired and launched by editors and publishers who are no longer in their employ. Many of them have old and out-of-date descriptive copy which is not readily updated because nobody working there now knows the book.

It will soon be seen as necessary to employ technology to monitor the news and social graph and to “bounce” the results of each “daily opportunity” off the possiblities in the backlist. It will for quite a while longer still require humans to do some targeted research into what today’s relevant search terms are and to write the descriptive copy that will respond to them, but technological assistance will multiply the effectiveness of the human efforts.

We should expect the backlists to start increasing their share of every publisher’s annual sales. And we should expect offshore ebook sales to do the same.

There are recent reports from the US and UK that print unit sales are up while ebook unit sales are down. This is being celebrated by some as an indication that book consumers are turning away from digital reading to go back to print. Perhaps because I intuitively find this so unlikely, I can think of caveats.

The presumed reductions and growth are very small and the measurement techniques are pretty crude, so there is an accuracy question. But we also know — as was referred to in the main body of the post above — that new ebook converts tend to “load up” their digital device when they start reading that way. I believe the purchases at first are somewhat “aspirational”, but then settle into a rhythm more like replacement. So ebook purchases are inflated in relation to ebook consumption early in one’s ebook-reading “career”. Fewer new ebook readers each month (which we certainly have) mean fewer people loading up.

Of course, print book sales actually rising, which is the implication from the recent data, is an independent marker that, if borne out over time, requires another explanation and that would be one that I don’t have yet.

12 Comments »

What Oyster going down demonstrates is not mostly about the viability of ebook subscriptions


The news that the general ebook subscription offering Oyster is throwing in the towel was not really a surprise. The business model they were forced to adopt for the biggest publishers — paying full price for each use of a book with a threshold trigger at considerably less than a complete read while, at the same time, offering consumers a monthly subscription price that barely covered the sale of one book, let alone two — was inevitably unprofitable. Their only hope was that they’d build a large enough audience fast enough that publishers would become in some way dependent on it (if not the revenue it produced) and agree to different terms.

It would be a mistake to interpret Oyster’s demise as clear evidence that “subscriptions for ebooks don’t work”. Obviously, they can. Safari has been a successful and profitable business for nearly two decades. The Spain-based 24Symbols has been operating an ebook subscription business, mostly outside the US and mostly not in English, for too many years to be running exclusively on spec VC money. Scribd has very publicly (and a bit clumsily, in my opinion) adjusted their subscription business model to accommodate what were unprofitable segments in romance ebooks and audiobooks, but the inference would be that for other segments the business model is working just fine. And then there’s Amazon’s Kindle Unlimited, which is sui generis because they control so many of the parts, including deciding more or less unilaterally how much they’ll pay for much of the content.

What seemed obvious to many of us from the beginning, though, was that a stand-alone subscription offer for general trade books could not possibly work in the current commercial environment. The Big Five publishers control the lion’s share of the commercial books that any general service would need. All of those publishers operate on “agency” terms, which makes it extremely difficult, if not impossible, for a subscription service to pull those books in unless the publisher allows it. The terms that the publishers would participate in the subscriptions required, which were, apparently, full payment for the book after a token amount was “read” by a subscriber, combined with a limited number of titles offered (no frontlist), made the subscription offer inherently unprofitable.

The publishers see the general subscription offers as risky business for books that are currently selling well a la carte. Not only would they threaten those sales, they threaten to convert readers from a la carte buying to going through the subscription service. To publishers, this just looked like another potential Amazon: an intermediary that would control reader eyeballs and have increasing clout to rewrite the terms of sale.

So they only participated in a limited way. Penguin Random House (the biggest, and in shouting distance of half of the most commercial books all by themselves) and Hachette Book Group did not even experiment with the non-Amazon subscriptions. HarperCollins and Simon & Schuster, and to a lesser extent Macmillan, participate in a limited way. Multiple motivations drove the participation that did take place. The primary goad, probably, was to simply oppose Amazon. Having customers nested anyplace except the behemoth in Seattle can look like a good idea to most publishers. But another was to collect at least some of that VC money poured into an unlikely-to-work business model before it was exhausted. And because the publishers got to decide which books to include, they could choose backlist titles that weren’t generating much revenue anyway and which might benefit from “discovery” within the subscription service.

(Carolyn Reidy, the CEO at Simon & Schuster, tipped to this in her talk last week at the BISG Annual Meeting where she specifically mentioned the value of the discovery S&S has seen take place in the subscription platforms.)

But not all the subscription services were equal. The established Safari was in a market niche, serving mostly B2B customers in technology companies. (They have recently gone to an expanded offering because Boeing and Microsoft techies don’t just need books about programming; they’re also parents and cooks and gardeners so general-interest non-fiction can appeal to them. But that’s not the foundation of Safari’s business and they’re not trying to push fiction.) Scribd had a foundation business as a sort-of “YouTube for documents” that the ebook subscription business both built on and enhanced. For Amazon, Kindle Unlimited just gave them another way to transact with the ebook customer and it gave them another outlet for their exclusive Kindle content.

Only Oyster and another pretty-much simultaneous startup, Entitle (which had a proposition more like a book club than a straight subscription service), were trying to make the alternative ebook revenue stream into a stand-alone business. Entitle went down before Oyster. Librify, another variation on the theme, was acquired by Scribd.

So the failure of Oyster is actually another demonstration of a “new” reality about book publishing, except it is not so new. Book publishing — and book retailing — are no longer stand-alone businesses. Publishing and bookselling are functions, and they can be quite complementary to other businesses. And as adjuncts to other businesses, they don’t actually have to be profitable to be valuable. What that means is that entities trying to make them profitable — or, worse, requiring them to be profitable to survive — are at a stark competitive disadvantage.

Amazon is the past master at making this reality obvious. Remember that they started as a “book retailer” and nothing else. They leaned on Ingram’s Oregon warehouse to enable their business model, which was to take an order for a book and accept payment, then procure the book from Ingram and send it to the customer, and then a little later pay Ingram’s bill. This positive cash-flow model was so brilliant that Ingram could have readily enabled lots of copycats, and they formed a division called Ingram Internet Support Services to do just that. So Amazon killed that idea by cutting their prices to no-margin levels and discouraged anybody else from getting into the game. That was in the late 1990s.

They could do that because the financial community had already accepted Amazon’s strategy of using books to build a customer base and to measure future business prospects by LCV — the “lifetime customer value” of the people they did business with. And it became clear pretty rapidly that they could sell book readers other things so no- or low-margin sales were simply customer acquisition tactics. This was a game Barnes & Noble and Borders couldn’t play.

Now book and ebook sales are almost certainly no more than a single-digit percentage of Amazon’s total revenue. Kindle Unlimited, like their publishing enterprises and self-publishing offerings, are small parts of a powerful organization that has many ways to win with every customer they recruit.

Scribd is not as powerful as Amazon, but they began with a network of content creators and content consumers. That gave them a marketing advantage over Oyster — not every customer had to be acquired at high cost since many potential customers were already “in the tent”. But it also gave them some stability. Eyebrows were raised recently when Scribd put the brakes on the lending of romance books and audiobooks. But tweaking the business model for those verticals simultaneously leaves open that the model is actually working in other niches.

We can see this playing out in a much more limited way in Barnes & Noble stores, where books are being replaced on shelves by toys and games. But that’s not likely to be enough diversification to matter in the long run. It is certainly not going to get B&N where Amazon is, where far more than nine out of every ten dollars comes from something other than books. And Barnes & Noble is nowhere near a point Amazon has reached: where the profit from book sales is incidental if they keep bringing in new customers and also keeps them loyal.

The story on Oyster, still incomplete as of now, is that a lot of their management team is on its way to Google, which, in effect, “bought” the company to get them. Google seems to be trying hard to make sure we don’t think they bought Oyster’s business, they just bought Oyster’s staff. Obviously, Google fits the description of a company with many other interests in which books can play a part. In the beginning, that was all about search. Now it is also about the Android ecosystem and media sales in general. An ebook subscription business, or even a content subscription business, could make sense in Google’s world. But it would be a relatively small play for them. My hunch, and it is only a hunch, is that they have something other than a mere “book subscription service” in mind for that Oyster staff to work on. Smarter observers than I seem to believe that the personnel Google recruited give them knowledge about Oyster’s mobile reading and discovery technology. Of course, that’s core information for Google.

Similarly, Apple, which now has subscription service for music, might also consider doing one for books — or for all media — at iOS at some point. They don’t have one of Amazon’s advantages — a big stable of intellectual property they control — but they are all about creating an ecosystem that people stay in and don’t leave. Book subscriptions could enhance that.

But the central point I’d take away from this is not that subscription failed, but that a pure book business play failed. One obvious question that provokes is when we will see some signs of synergy between Kobo and their owners at Rakuten, who presumably have Amazon-type ambitions but haven’t seemed to use their ebook business to help pursue them.

And what is true of book retail is also true of book publishing, as we observed in this space quite some time ago. Both publishing and book retailing will increasingly become complements to larger enterprises and decreasingly be stand-alone activities that business can dedicate themselves to for profit.

The New York Times this morning has a front-page article essentially reporting that the ebook surge is over, at least for now, and the print business appears stable. This is great news for publishers if the trend is real. Unfortunately, there were a few important points either elided or ignored that might have undercut the narrative.

One is that, while publishers report ebook sales as a percentage of total book sales steady or slightly declining, Amazon says (and Russell Grandinetti was quoted in the article) their ebook sales are going up. Assuming all this is true, is the difference perhaps sales migrating away from publishers (which sales would be reported by the AAP stats they rely on) and moving to cheaper indie titles available only through Amazon (which sales would not)?

Another is that publishers are raising prices on ebooks and making the price rises stick because of Agency. Is all the sales resistance created by higher prices resulting in print sales, or is some of it causing the book to be rejected for something cheaper? In other words, might total sales for many titles be less than publishers would have looked for before? (At least one agent tells me this is the case.)

And another is that the indie bookstore resurgence has occurred in the years following Borders’s demise and the shifting of the product mix in Barnes & Noble. It is worth asking whether the indies are temporary beneficiaries of a sudden shelf space deficiency or whether we’re really seeing not only an increase in print reading, but a renewed interest by book readers to go to stores to buy the print. That question isn’t posed in this piece.

28 Comments »