eBooks

One thing we try to do at Digital Book World is to present our audiences with useful, relevant, and, when we can, original data. It is a familiar complaint in our industry that we drive blind. Part of that is due to the sheer diversity and granularity of the “book business”. And another part is due to the blistering rate of change. The net result is that we are constantly trying to read tea leaves. We do our best to deliver some useful tea leaves to our DBW audience.

I make no pretension here to telling you all you’ll hear at DBW (which would be bad business even if I were able to do it!) But here is a roster of the data presentations and a small taste of what the DBW audience is going to get from each one.

We’ll start off with James McQuivey of Forrester Research doing a reprise of a high-level survey of publishing executives that they inaugurated at DBW 2011. Forrester got good participation in the survey, including getting fully filled-out responses from at least two of the Big Six executives.

One very interesting fact from the Forrester research is that the consensus for when the trade business will become 50% digital has moved up from 2015 to 2014. When Forrester announced the original number at DBW 2011, it seemed to many to be aggressive. A year later, it is not likely that the new prediction that it will come sooner is going to surprise a lot of people. We are apparently now used to the accelerating pace of change, but perhaps just in time to have to readjust to it slowing down. (More on that to follow.)

The team of the Milan office of A.T.Kearney (the big global consulting firm) and the Italian ebook retailer Bookrepublic have been tracking the spread of digital reading worldwide. They presented research at last year’s IfBookThen conference in Milan and followed it up with additional research presented at the Publishers Launch conference in Frankfurt. They’ve extended their investigation further — about devices, about internet purchasing, about ebook uptake, market-by-market around the world — for this year’s Digital Book World. They have added questions about self-publishing and piracy to the research they did previously and responses to them will be reported at Digital Book World.

One insight they’ve had is extremely provocative. They say, “We should stop thinking of self-publishing simply as a nice way for indie authors to be published. Viewed another way, measuring self-publishing activity calculates the amount of money Amazon (and others) are no longer sharing with publishers. And it’s growing.”

The data that will justify that insight will be part of the presentation we’ll see at Digital Book World.

We decided to take an intensive look at the romance genre because it is often considered to be the consumer segment that has moved most rapidly into the digital future. We were fortunate to enlist the help of the ebook retailer AllRomanceEbooks.com in our investigation. They circulated a survey that got responses from almost six thousand of their customers. The results of that survey will be announced at DBW and will be followed by a panel discussion with special attention to what other genres and segments of trade publishing can learn from what has happened in the romance market.

What caught my eye from the preliminary results was that only 4% of the ebooks All Romance sells have DRM. Since they carry the ebooks of all the major publishers, and all of those have DRM, what this statistic tells us is what a vast business exists in romance publishing outside the realm of the biggest players in the industry. I’ll leave the analysis to the experts we’ll have on stage for this discussion, but I personally wouldn’t leap to the conclusion that DRM-free is the only reason that 96% of the sales were of that category. Those books are undoubtedly cheaper as well. They may score higher on All Romance’s unique “flame” scoring system (which is all about how frequent and explicit the sex scenes are). But I would imagine that any big publisher hearing that statistic would, at the very least, have its curiosity piqued.

It turns out that a big component of All Romance’s sales success is that they took it upon themselves to add sub-categories describing romance — such as that flame index referred to above — that didn’t exist in the industry’s BISAC standard. That’s metadata!

Metadata isn’t ever going to be a “sexy” subject but it is certainly becoming an increasingly popular one. Our early polling of Digital Book World registrants indicates that our breakout session on metadata might be the most heavily-attended of the 30 breakouts on the schedule. (And everybody who goes will be glad they did. We just reviewed the content of the session with presenters Bill Newlin and Fran Toolan; it’s going to be great!)

Having been told for months and years that good metadata enables sales and bad metadata prevents them, I wanted to get some factual confirmation of that. So I asked Jonathan Nowell, the UK-based head of BookScan and the bibliographic source BookData, if he could do some research to connect the two (his being the only organization that has the information to tie metadata to sales data.) Jonathan did a presentation on this subject for Publishers Launch Frankfurt; he’s updating it for Digital Book World.

The most arresting takeaway last October at the Frankfurt presentation was that adding “enhanced metadata” elements to a basket of backlist books not only stopped their normal sales decay, it reversed it and actually made sales of those books rise after the metadata was improved. Everybody will really be able to visualize the importance of metadata after they hear Jonathan’s presentation.

Verso Media is an advertising agency with high digital consciousness and a deep interest in book purchasing and consumption habits. They survey book consumers looking for insights about the digital changeover. The single most startling takeaway for me from the preliminary results I saw from this year’s research is that the number of people who actually resist the idea of reading digitally has gone up from 49% to 51% of respondents. This data point is in line with other tea leaves that suggest that we might have started to hit real resistance to ebooks, slowing down the digital switchover from the rates of the past few years. And that certainly would not have been what I would have predicted. Jack McKeown, who has held senior positions at three major publishing houses, oversees the Verso research and will present it.

At our Publishers Launch “Children’s Books Go Digital” show on Monday, Conference Chair Lorraine Shanley recruited two trend analysts who are offering interesting trend and data observations of their own.

Amy Henry, VP of Youth Beat, observes that parents and kids are sharing personal experiences more than we remember from our youth. More than 2/3 of teenagers listen to music with their parents! The takeaway is that parents can be marketing conduits to their kids; they’re not just gatekeepers you need to sneak your way past, which is how they have often been characterized in the past.

Ira Mayer, Publisher of Youth Market Alerts, delivers data that tells us that two-thirds of the apps Moms get for their kids are either free or under a buck. Fewer than 10% are more than $3. These are sobering facts, but anybody entering the app space to make money better know them!

Kelly Gallagher, Vice-President in charge of research at Bowker, will have important data to share at both shows. His team has been surveying a pool of book purchasers on behalf of BISG for a couple of years and has charted the growth of the ebook market for the industry throughout that time. The data he’ll be reporting from the latest fielding is so fresh that it misses the deadline for this post. But it would seem likely that the data will show that the ebook switchover is finally slowing down after about five years of doubling or more than doubling annually. That would be of meaningful interest to everybody in trade publishing and would tend to confirm Verso’s finding that the point of more determined ebook resistance grows nearer.

Bowker also runs a study of the children’s book market and he will share appropriate data from that research at the Pub Launch show on Monday. Kelly showed me a couple of slides that suggest that young children’s print could be around for a while. Parents like the idea that a book isolates kids from what are otherwise constant digital stimuli. And what attracts kids to digital is portability (having access to more titles) which, broadly speaking, is more important as kids get older. And he’ll reprise that data presentation at Digital Book World on Tuesday, followed by a panel discussion among participating publishers in the study, including Disney, Scholastic, and HarperCollins. That discussion will be moderated by Kristen McLean, founder of Bookigee and former executive director of the Association of Booksellers for Children.

I don’t mean to suggest that data is all we do at our conferences, or even most of what we do. It isn’t. But we see it as part of our job to encourage the development of original information, such as we did in conjunction with All Romance and Nielsen, as well as to deliver information from efforts already underway within the industry, like the reports we’ll get from Bowker.

Digital Book World will also feature main-stage presentations from Amazon, Barnes & Noble, and Kobo which we expect will also be data-rich (as well as one on business model experimentation from Oren Teicher of the American Booksellers Association), helping us all understand what happened this past Christmas. Keeping up with this pace of change is hard enough; doing it without data is impossible.

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Back when my father, Leonard Shatzkin, was active with significant publishers — the quarter century following World War II — he observed that very few books actually took in less cash than they required. That is not to say that publishers saw most books as “profitable”. Indeed, they didn’t. They placed an overhead charge of 25% or 30% or more on each book so most looked unprofitable. But that didn’t change the fact that the cash expended to publish just about every book was less than the cash it brought back in.

The exceptions were usually attributable to a large commercial error, most commonly paying too much of an advance to the author or printing far more copies than were needed. But, absent that kind of mistake, just about every book brought back somewhat more revenue than it required to publish it.

This led Len to the conclusion that the best strategy for a publisher was to issue as many titles as the organizational structure would allow. That was a lesson he passed along to the next generation of publishing leadership that came under his influence. And the leading proponent of that business philosophy was Tom McCormack, who worked for Len at Doubleday in the late 1950s, then went on to Harper & Row before he ascended to the presidency of then-tiny St. Martin’s Press in 1969. Tom often credited the insight that publishing more books was the path to commercial success as a key component of the enormous growth he piloted at St. Martin’s over three decades.

(I checked in with Tom, who is long-retired as a publishing executive but a very active playwright, about how many books didn’t claw back the cash expended. He told me that his “non-confirmable recollection” is that the percentage that did at least get their money back ranged from 85% to 92%. He recalls “incredulity” from his counterparts in other houses, whom he believes simply couldn’t “wrap their minds around the meaning of the statistic: revenues minus disbursements.” He went on to tell me that this number “seemed effectively irrelevant to them. They had an overriding and deeply flawed notion of something they called title-profitability. They thought they were analyzing the profitability of a title with their ‘p&l’.”)

Despite the apparent immutability of the fact at the time that most titles brought in incremental margin, many publishers who were losing money would come to the opposite conclusion. They would decide they should cut their lists, pay more attention to the titles they published, and create more profits that way. I remember discussing the futility of that approach in the 1980s with my friend and client, Dick McCullough, who was at that time the head of sales at Wiley. When I observed that the publishing graveyard was littered with the bones of publishers who pursued cutting their lists as the path to profits, Dick said of their efforts to cut “yes, and very successfully too”.

I got another lesson about this reality in the late 1980s when a company I consulted to (Proteus Books) sued its distributor (Cherry Lane Music) for a failure of “due skill and competence” in the sales efforts for Proteus Books. One of Proteus’s expert witnesses was Arthur Stiles, who had been Sales Director at several companies, including Doubleday, Lippincott, and Harper & Row. Stiles confirmed that big and competent publishers routinely put out thousands of copies of titles in advance of publication, with extremely few failures in terms of getting the initial placements. He was testifying in a time that was still like what my father experienced: the industry’s title counts were growing, but so were the the number of bookstores in which they could be placed.

Those days are over. And, coupled with the ebook revolution, the implications of that are profound.

A few things happened to change the environment so that it became no longer true that even big publishers could get all the distribution they needed on every title to assure a positive return of cash.

1. The title output of the industry has grown enormously. In the 1960s, the total output of the industry was in the neighborhood of 10,000 titles a year. Now it is something more than 30 times that number published traditionally, with a multiple of that number being self-published. Each new book is competing against more new titles every two weeks than a book fifty years ago would have competed against in a year!

2. Nothing published ever dies. Fifty years ago, stores were smaller and, while there’s no easy way for me to measure this, I’d guess that the active backlist across publishers was probably no more than 25,000 titles. Superstore growth in the 1980s, the efficiency of Ingram as a national wholesaler, and computer systems that helped stores track their inventory and sales fueled backlist expansion. Even in the early 1990s, the total of truly competitive titles was probably in the low six figures. But then came Amazon’s unlimited shelf space and Ingram’s Lightning Print to deliver one copy at a time, and, even before ebooks, the competitive set of available titles had probably jumped to seven figures.

3. Bookstore shelf space is declining. Nobody who has been reading this blog needs much elaboration on that point.

What that means is that a list-cutting therapy that McCullough and I saw in the 1980s as suicidal and which McCormack explained repeatedly was folly is no longer crazy. (Oh, how I wish my dear departed Dad was around to discuss this with!) And the new conjecture in this blogpost is that the day might come when a publisher with an extensive backlist might decide that the most profitable path would be to hardly publish any new titles at all!

The portfolio of any longstanding publisher today contains a lot of backlist which is pure profitable gold in the ebook era. Contracts often give publishers the rights to a book for the life of copyright if they continue to sell it. (I’ll confess here that there is a caveat to this point coming up in an italicized postscript below.) So a major publisher doing $600 million and up (of which there are six), almost certainly has triple-digit millions of sales in its backlist, which is increasingly shifting to digital. Even the most sober industry observers are seeing revenues exceeding 50% from ebooks in the next two or three years, which would mean that substantially more than half the units of these books are selling electronically.

So, let’s say you’ve got a company doing a billion dollars in annual revenue and barely eeking out a profit or perhaps even losing money. With a strategy of continuing to publish what you own as ebooks, you can see digital backlist revenue of $150 million, decaying by 10% a year, with gross margins giving you $100 million or more in cash flow. Offloading all the print operations for which you own rights to a distributor or competitor will provide incremental revenue as well. (You only need help for the offline print sales. Getting the online sales requires no operational capability.) You’d then need a minimal organization to do some marketing (not a lot), sign up and put out some additional titles that would be chosen for being risk-free (not a lot), and to handle the administration and royalty processing for your thousands of contracts. Five or ten million ought to cover those costs very handily.

Of course, the other thing you could do is sell your rights to that backlist. But I think it would require somebody to overpay in relation to your net discounted cash flow to make that attractive because the costs of keeping it all for yourself would be so minimal.

One hopes that today’s publishers are looking at the simple statistic Len and Tom authored: revenues minus disbursements by title. No doubt today’s biggest publishers are looking carefully at the performance of their copyrights in a way that sorts the new titles from the backlist. But doing so is only useful if they’re apportioning their costs properly across the title base. If they are, what is described in this post will be evident if and when it is true. In the meantime, careful focus on new title acquisitions and accepting that the healthiest way to manage for the future might be to reduce the commitment to new title development will have to replace the clear truths that guided smart publishing strategy for previous generations.

The history and analysis are all valid, but there is one big monkey wrench in this scenario I’ve sketched. There is a provision in the 1978 copyright law that allows authors to reclaim rights to their books after 35 years. Titles published in 1978 become eligible for reversion, called “recapture” apparently, starting in 2013. (With logic that is ironically typical of what Congress does when it touches copyright law, older titles are on a slower track for liberation.) Agents are planning for this; publishers will have to deal with it. I am given to understand that publishers can only retain these books for life of copyright by, in effect, reacquiring them. (Should be lots of fun!)

So, in fact, the backlist attrition might be faster than 10% (but it might not, because ebooks may create more readers for backlist than we had before as well.)

It is also true that many publishers have already been moving in the direction I suggest: pruning their new title counts and being particularly cautious with midlist. Of course, there was a conviction by many that list-pruning was a good strategy even before it actually was a good strategy, but the execution of it has been much more rigorous over the past decade.

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I have made previous mention of my notion that what has been one very cohesive trade book industry would “trifurcate”: break into at least three distinct businesses: 1) books that are straight narrative text intended for immersive reading; 2) adult books that are not straight text, either very chunkable (like cookbooks or travel books) or highly illustrated; and 3) children’s books. Admittedly, even this is an oversimplification.

This conjecture is built on the reality that we’ve learned how to move immersive reading from paper to screen in a way that satisfies the consumer. A pretty simple technological trick — “reflowing” the text so that it adjusts to the screen size alloted to it — makes the text “work” across a wide range of devices and reader software. There are definitely differences among Kindle and Nook and Kobo and Google and iBooks and they don’t offer precisely the same outputs and features on their own devices or on iOS or Android, but the differences are subtle and apparently most people are comfortable with the various consumption experiences.

So relatively simple conversion from the version prepared for print, which can even be done through automated services like Smashwords or through tools now being offered by The Atavist and Vook (and others), and are handled within the workflows of many publishers at a trivial financial cost, delivers an alternative to the print version of a book that is commercially viable. It isn’t costly, it isn’t complicated, and the person who formerly read her favorite novelist or subject in print could switch to device reading with relatively little pain or friction.

And they have. Ebook consumption has been going up by double or more each year since the Kindle arrived a little over four years ago.  (And there is evidence that the growth will continue. Amazon just announced the best Kindle holiday season ever — with over a million Kindle devices sold each week in December and with the single biggest day ever for Kindle book downloads on Christmas Day. — Note “downloads” not “sales”.)

So far, this has worked to the benefit of established book publishers, their authors, and for fledgling new authors as well. Ebooks are generally cheaper than their print counterparts (and sometimes quite a bit cheaper, despite some propaganda to the contrary) but publishers’ margins haven’t suffered. Authors are getting a bit less on ebooks than they did on hardcovers in print, but they get a bit more than they did on paperbacks. There are vocal consumers who protest the agency pricing that keeps ebooks at $9.99 and up during their hardcover life, but Kobo, the only retailer to discuss these matters, reports more unit sales in the agency price bands than at the low end where the self-published authors are.

We would not suggest that stability of prices or royalties or consumer behavior going forward is to be expected; we’re still in a time of great change. But, so far, the publishers of fiction and non-fiction that is delivered as straight text have had a relatively painless switchover from selling 100% of their output in print to selling an average of more than 20% of it in digital form, with shares as high as 50% being reported on some titles in the first weeks after publication.

Until the arrival of the iPad in April of 2010 and then the NookColor and the tablets from Kindle, Nook, and Kobo which have become available more recently, the dedicated reading devices wouldn’t handle complex page layouts and the iPhone screen was far too small for illustrated material to be usefully displayed. Barnes & Noble made serious efforts to get children’s books available for their color screens about two years ago. Kobo seemed hopeful this Fall about what they’d see in ebook sales for graphic novels, but they only have 300 titles so far so I’m not sure what impact that can have. I have not seen any reports about how illustrated material is selling through either retailer.

Some research we did says that Kobo has 995 titles “just for Kobo Vox: 33 art and travel, 332 comics and graphic novels, 29 home and food, 539 illustrated kids, 57 illustrated non-fiction, and 58 read-along kids. The breakdown for Kindle Fire isn’t as clearly spelled out, but they do have 100 “comics for Kindle Fire” and 691 “children’s books for Kindle Fire”. One interesting note is that the audio-video only works on Kindle’s iOS app,, not on the Kindle Fire device itself!

Of course, the iPad started all this and might still be the best device for consuming color and illustrated material.

Nook has by far the most illustrated material listed: 1210 children’s picture books and 596 “enhanced Nook books”. They might have as many as 5000 comics, graphic novels, and manga titles, but deeper investigation makes us question that number. They list 7700 “Cooking, Food, & Wine” titles for the Nook, but we don’t know how many of those are highly illustrated.

I have been asking publishers about sales of their children’s and illustrated trade material. I haven’t found anybody yet that says they’re going well. On the children’s side, where there have been pockets of success, the one Big Six digital executive who expressed an opinion to me felt that price was killing sales for the ebook versions of successful franchises. Children’s apps from such distributors as Touchy Books are priced quite low, generally $2.99 and less. But many branded titles like Eloise are $9.99 and $12.99 and up! This executive points out that paying that price for a novel you will spend many hours with is much less painful than paying it for a children’s book your kid will work through in 15 minutes or less.

Undoubtedly, another large factor mitigating against converting illustrated print book sales to digital is that ebooks don’t make good gifts and illustrated print books do.

I recently spoke with CEOs of two companies that publish primarily illustrated books. Both of them report being stumped by the challenge of making their illustrated print output into something that will work commercially as an ebook. “Fixed page layout” is the solution du jour, delivering the book page as a unit but where the pinch-and-spread touchscreen technology enables the reader to expand type to make it readable or pictures to make them more visible. Of course, doing that means that the whole page no longer fits on the screen. And that means that the smooth experience devices offer for immersive reading, where page-turning is effortless and one can read the text without stopping to think about the form factor, is interrupted and not nearly as satisfactory for books delivered that way.

More complex page layouts are more expensive to convert, can present thorny rights issues for images, and the books haven’t sold well in digital form. On top of that, the retailers can (and often do) ask for their own specific customization of the files. These factors combine to create a very unattractive commercial equation. Until the Fall of 2011, one ebook retailer told me there were 10,000 or fewer illustrated ebooks in the marketplace, out of a total of many hundreds of thousands, perhaps more than a million, straight text titles. The plethora of larger-screen and color devices that hit the market this past fall created a burst of conversion activity of these titles, perhaps doubling the number in the marketplace during the last quarter. We await reporting on the impact of the new devices and the additional illustrated product in the market, but nobody’s reported any breakout successes yet.

This has to be frightening to anybody in the illustrated book business. Bookstores are disappearing. Sales are moving to digital. We’ve had an iPad in the marketplace for almost two years. And we have as yet discovered no formula for success to convert a successful illustrated print book to a successful illustrated ebook.

(We have reports coming at Digital Book World from Kindle, Nook, and Kobo. We’ve asked them all to report on how illustrated books did this past Christmas. Each of them limits their reporting to what they think they can tell us without compromising their competitive position with each other. We’ll see what we learn.)

While many children’s books share a commercial challenge with adult books that aren’t straight immersive reading, they have more differences than similarities. Once you get past the commonality of “more expensive to create for less of a demonstrated market”, things really diverge.

Books for digital presentation for little kids particularly will require skills that book publishers never had to have, particularly for animation and games. App technology is overkill for books of immersive reading; it is very useful for content intended to interest kids. Indeed, children’s book publishers are finding themselves competing with (or employing or acquiring or collaborating) design and animation studios that weren’t thinking much about the book business until the book business morphed into something akin to what they were doing. (A slew of these companies will be on stage for our “Publishers Launch Children’s Books at Digital Book World” conference on January 23, co-located with the big Digital Book World extravaganza.)

The adult book challenges are much more varied. There are, broadly speaking, two kinds of illustrated books: those illustrated for beauty and those illustrated to inform. The latter require tight control of the placement of illustrations and captions in relation to the text, just the kind of challenge that causes agita when readying content for different sized screens. And the beauty books, of course, have to be carefully designed for aesthetic satisfaction.

But it isn’t just illustrations that stamp a book as “not immersive reading.” Books of content chunks, like cookbooks or travel guides, are also not “optimized” merely by making them reflowable. There are some fabulous apps for both (“How to Cook Everything” by Mark Bittman and ones pulled from Rick Steves’ books like guides to the Louvre and Versailles), but these are not direct “lifts” from the books. They are separately constructed products. However well they sell, they don’t provide the same cost synergy with the book production that the publishers of novels and biographies are getting.

These very well-done apps underscore one of the problems with simple “conversion” of books other than straight text for immersive reading. If I get all the words in the novel, nothing inherently provokes the question of whether something more should have been done to make it better. But whereas a printed book requires a still picture, in a digital rendition that could just as well be a video or an animation. Remaking those choices is very expensive; ignoring them means delivering content the consumer can easily imagine being better than it is.

As less and less shelf space is allocated to books of immersive reading, there may be some temporary opportunity opened up for the publishers of other books. Books and Books, a chain begun in Miami which is catching attention for its survival strategies during what are generally tough times for bookstores, is famously emphasizing illustrated books. Not only do these not convert well to ebooks, they aren’t as well displayed in an online shopping environment.

At the same time, there are specialty retailers like JoAnn Stores and Michaels that continue to sell books related to their primary businesses selling crafts and hobby materials. These outlets become more important to publishers as bookstore shelf space disappears, but they also become more important to consumers. Since the content these consumers want does not convert as well to digital consumption, it stands to reason that they’ll still want the printed books for some time to come. Publishers of these books will be redoubling their efforts to cover these stores and enable them to substitute for the bookstores being lost.

The publishers I spoke to recently have already “verticalized”; they’ve been publishing in very specific non-fiction subject niches. They’ve been focusing efforts on building up their special sales departments, the part of a book publisher that looks for sales opportunities outside the bookstore and library channels which publishers usually call home.

As digital shifts continue to reduce bookstore shelf space and the readers of novels and biographies spend less time in bookstores where they might see the children’s books and art books and how-to books that don’t work as well on devices, more imagination and innovation will be required of publishers who formerly could make their living selling their wares through those stores. One example is what Workman has done with their soft-reference franchise “1000 Places to See Before You Die”, which they are trying to turn into a monetizable community. This is a good idea and nicely executed; whether it will turn into a profitable one remains to be seen. And, of course, it is not a template that can be broadly applied.

This much is clear. Publishers of immersive reading can, at least in the short run, largely count on keeping the sales from readers they’ve always had. The problem for these publishers will be keeping the big authors (at a sustainable royalty rate) if the business becomes largely digital and most readers can be accessed without the capabilities of a major company operating at scale.

The publishers of the rest of the book output who have depended on the bookstore network would appear to have a far more onerous challenge. They have to largely reinvent their product and perhaps their business models to get some digital revenue without any blueprint for success. In fact, there may not be a replicable template for how we satisfy consumers of much of the non-immersive content which for hundreds of years has been presented in books. But the publishers of those books have no choice except to look for one. With increasing urgency.

Of course, the Holy Grail is to monetize the content in other ways, made possible by XML workflows, taxonomies, and lots of intelligent tagging. There are instances where this works: Wiley and Random House both have robust b2b businesses with their travel content. But it is a significant incremental effort to go from being a book publisher, even a niche-y one, to creating a profitable business model around multiple uses of the content and the community the content attracts. It has been the mission of the company that is our partner in Digital Book World, F+W Media. Their scale enables them to spread the cost of investments across a substantial number of communities. This is not just about technology. For example, their crack events team, which makes the complex DBW event run like an atomic clock, is employed by a variety of the 20 or more F+W communities over the course of the year.  

One of the DBW sessions this year is “The Digital Future for the Illustrated Book” which will feature speakers from Kobo, Time Home Entertainment, Quarto Publishing, and Aptara.

One other trick being employed worth mentioning is a digital add-on to the print book. Melville House, an innovative publisher tied to a bookstore in Brooklyn, calls these web-based efforts “hybrid books” and they call the enhancements “illuminations.” A variation on the theme has been employed by the innovative publisher Black Dog & Leventhal; they add a CD-Rom with all the artwork in the Louvre to add to their Louvre book and all the cartoons in the history of New Yorker, which would never fit into a print book. It was a BDL book on The Elements which spawned the breakthrough iPad app. These are useful ideas, but I’m not sure they solve the existential problem publishers are facing.

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This is the time of year for predictions. I’ve done mine in the spirit of the holiday season in years past, going back to the late 1980s when I did a “My Say” for Publishers Weekly. (I wasn’t able to find it — some sharp reader will — but I recall that one of my predictions was that publishers would strive to put out the audio of a title at the same time they released the printed book.)

In recent years, I’ve done the predictions for PW and I’ve done them right here. This year I contributed some thoughts to a nice roundup done by Jeremy Greenfield, the new editorial brain over at the Digital Book World site.

This year, I thought I’d try something different. Rather than predict the future for the industry’s biggest players, I am posing what I think are the biggest questions faced by each category of them. Some of the questions are within their power or responsibility to answer; some depend on outside circumstances; and some may never be answered at all. But any honest futurist (and I try to be one) has to admit that questions outnumber answers. (Note: there is a great Johnny Nash song called “There Are More Questions Than Answers” that’s about 50 years old and is just as correct today as it was then.) So this post focuses on the important questions we’ll be facing throughout the industry in 2012 and beyond.

The biggest publishers:

Can their use of tech at scale — SEO and pricing seem like top candidates — add demonstrable value, cost-effective for them and persuasive to authors?

How fast do sales of print in stores decline? And how efficiently can publishers de-scale to keep overheads under control?

Can they reorganize to take advantage of the opportunities offered to the quick and nimble in a digital world?

Can they extend the “protection” of agency pricing to distribution clients and, if so, can they charge a premium for that capability? (Could this be an unintended benefit to the Big Six of Amazon’s refusal, so far, to allow agency to any except the Big Six?)

What skills and capabilities does a publisher need now that they didn’t need a few years ago, and what’s the best way (acquiring a company, outsourcing, hiring in talent) to bring those talents into the fold?

Publishers bigger than small, but not Big Six:

Can these publishers fight their way out of the box that Amazon and Apple have them in, with Amazon insisting that ebooks be transacted on the wholesale model and Apple insisting on the agency model?

Can Amazon continue to be relied upon to discount from high publisher suggested retail prices (the basis of high wholesale prices for the retailer), or will Amazon sell more frequently at the publisher’s declared price to “encourage” publishers to cut their suggested retail priceas and therefore bring Amazon’s costs, and publishers margins, down?

Smaller publishers:

Can they keep up with the technological and contractual demands of digital publishing change?

Can they find niches that present opportunities they can seize to sell something other than “the book” (whether in print or digital)?

Can they create opportunities by being nimble, opportunistic, and vertical that make them more attractive than larger competitors as partners for knowledgeable agents, authors, and brands?

Amazon:

Can they marshall their considerable resources to sell individual titles so effectively within their network that they make up for what they miss outside their network?

Can they build any noticeable or sustainable advantage in having a repository of desireable content that is not available except through them?

Can they maintain their device and platform dominance as the competition moves far beyond the early adopter online book-reading audience?

Barnes & Noble:

Do books as gifts and objects deliver enough traffic to keep a bookstore chain successful as the sales of novels and biographies go away?

Can they create a profitable international strategy? They haven’t had one yet.

Like the publishers, can they manage down their physical plant and overhead base as the revenue it was built to serve diminishes? (We presume they can’t do it with Nook sales and services alone.)

Independent bookstores:

Will the lift they get from Borders closing and B&N cutting back on shelf space for books buy them time as print book sales in stores shift to ebooks and online purchasing?

Can they make something work with Google ebooks? Or will another solution arise that works to get indies into ebook commerce in a profitable way?

Will emphasizing the books-as-objects market (gifts and otherwise) work as the customers for narrative text find it less and less necessary to visit physical locations?

Authors:

How do they know that their agent understands the new range of publishing options and directs their business activity accordingly? (It’s as hard to be effective as your own agent as it is to be your own lawyer.)

How do they build their own online platform? (And every author who plans to make a living through writing and hasn’t yet built a platform has to think about having one.)

Will any author turn down a significant advance to self-publish in 2012? (So far, that behavior has been extraordinarily rare, with Tim Ferriss being the only one really close. Barry Eisler intended to, but he took an advance from Amazon instead.)

Will the number of successfully self-published mid-list authors continue to grow? Under what terms and royalty rates do these authors return to traditional publishers?

Agents:

How do they make sure the full range of knowledge about the digital publishing alternatives is within their grasp? (if not in their head…)

Do they know what they need to know to make a “profit-sharing” deal with a publisher?

Can they direct an author’s own online marketing efforts? And, if they do, is some adjustment to the standard practice of a 15% share of the author royalties going to be necessary, or possible?

Illustrated book publishers:

Is “fixed page layout” the answer? Or, more likely, is it the answer for some books and not for others? Which ones?

How do illustrated publishers cope with the plethora of native formats, file requirements, and screen sizes?

Do “illustrated books” delivered on good portable screens achieve the same consumer acceptance that straight text did making the same transition?

Are there new retail channels available to sell illustrated books as bookstores diminish?

Are new models, perhaps built on social or community but also possibly built on non-book commerce, possible to support and extend illustrated book publishing?

The industry:

As the global ebook infrastructure develops, does it show signs of staying diverse or does it tend to consolidate as Kindle?

Does the industry show signs it will trifurcate, with narrative text, adult illustrated, and children’s books becoming three largely different businesses?

With Amazon, B&N, Apple, and Kobo established as significant global ebook outlets, will any of the other players or fledglings — Google, Sony, Blio, Copia, Bookish, Anobii — start selling enough units to be an important contributor to ebook sales?

Will either white-label B2B or publisher-to-consumer sales grow markedly in significance as the time-honored sales, distribution, and monetization models atrophy?

This could well be the last Shatzkin Files post for 2011. It’s been a great year around here. We launched a new business, Publishers Launch Conferences, with our friend Michael Cader. We started the year with a great Digital Book World last January and are concluding this one putting the finishing touches on an even bigger and better one coming next month. An ebook and a print book edition of The Shatzkin Files, Volume One (the first two years, through last February) were published. We have some great new consulting clients about whom we think you’ll hear a lot in 2012. And, despite the reality that you can’t claim 50 years in the business (which I do) and remain a young person (which I’m not), good health and good cheer remain in abundance around here. Our view of publishing’s digital future seems to have been more confirmed than contradicted by the year’s events. So we’ll take a 2012 that largely resembles 2011 very happily if we can get it.

Best of the holiday season to all our readers. And may 2012 be as kind to you as 2011 was to us.

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If you imagine the publisher’s business as one that divides most of the consumer’s dollar between two core stakeholders in the supply chain — the retailer and the author — you’d have a pretty accurate picture. The publishers, at least theoretically, decide what the retailer’s “working margin” will be with their discounts and agency agreements. And they decide what the author’s share of the proceeds will be by the advances and royalty rates they offer and agree on through their contracts.

These are the essential, and basically non-substitutable, trading partners for a publisher. They can choose a different printer or publicity firm without changing the character of their business or their economics. But the author relationships are existential and defining and the intermediaries who reach the public and enable the consumer transaction are indispensible.

Plenty has been written, by me and others, about the challenges trade publishers face due to the decline of shelf space for books. But, in some ways, it looks at the moment like those (also including me) who have said that publishers are in big trouble as bookstores decline are mistaken. Sales in stores are declining and sales of print books are declining but total sales, including ebooks, are holding pretty firm and the big publishers are reporting pretty healthy results. So if declining bookstore shelf space, which we have clearly seen over the past few years, doesn’t weaken trade publishers’ commercial performance, what will?

I have written before about asking my friend and sometimes-collaborator Mark Bide a similar question about another segment of publishing. As a John Wiley stockholder, I was worrying 15 years ago about their reliance on journals for their revenues and profits. We thought way back then that journals were likely candidates for disintermediation. After all, the university pays the professor’s salary to write the journal article that the publisher gets for free and then monetizes by charging the same university’s library for a subscription to the journal. Even in the early days of the web, we could see the potential for professors to post their own articles and for peer review to be crowd-sourced, delivering the IP to the academic community faster and saving universities a boatload of dough.

At the time Mark said the thing to watch was whether the publishers stopped getting the submissions. If the professors didn’t need the journals, they’d stop getting the raw material that feeds the whole engine.

So far, it hasn’t happened (and I still own the stock). Despite lots of open source academic publishing, the journals remain important brands in their fields and the professors want the journal publication as a credential. (In books we know that lots of people read the book and have no idea who the publisher was. In journals it is the opposite: more people will know the professor published in the journal than will read the article.) The business has changed and library budgets grow considerably more challenged, but most of the journals, including Wiley’s, remain highly profitable and highly desirable to the authors.

In fact, Mark identifed the point of vulnerability for trade publishers. If the stores and other intermediaries they rely on go away, they have to find other ways to sell their books. That’s a challenge, no doubt.

But if the authors don’t play along, they have nothing to sell. Making deals with authors is the publishers’ price of admission to the game.

As the central player whose contracts and sales terms manage the distribution of revenues throughout the supply chain, how publishers view the commerce of our business is central to how it operates. This has, historically, been challenging. The activity of publishing is complicated and its economics are complicated.

A couple of months ago, Michael Cader pointed out to me that the big publishers were making a serious tactical error in the way they were accounting for sales under the agency arrangement. (Quick reminder: under agency, the publisher is considered the “seller”, not the retailer. The publisher sets the price which the retailer can’t change and pays the retailer, or sales “agent”, a fixed 30% of the set price paid by the consumer.) Publishers simply imitated their convention from the wholesale terms transactions they’d always done before. They book as revenue the 70% they keep of the sale, not the full price the consumer pays (and which, if they did, would make the 30% paid to the retailer a “cost of sale” like printing or shipping is in the physical world or like DRM costs might be in the digital world).

Cader spelled out two important benefits that would flow to publishers if they made a different choice of how to account these sales. (He says, and I trust him, that GAAP rules don’t require them to employ the methodology they do.)

One is that that their “top line”, their “total revenue” line, would be higher. That’s critical to foster a helpful perception in the investment community, which worries when they see declining revenues. And if publishers insist on sticking to booking only the 70% they get on the ebook sales as the total revenue, they’re locked into declining revenue for years to come as competition drives down ebook prices (probably) and as ebook sales continue to replace hardcover print sales (for sure).

The other perception publishers are manipulating against their interests is within their negotiating community. Both agents (on behalf of authors) and the big accounts publishers sell through look at the publishers’ margins as a percentage of sales to decide if there’s more there for them to get. Reporting ebook sales as they do, publishers are achieving about 75% margin on ebook sales (because they give 25% of the take to the author.) If they took the full price as the revenue, they’d be achieving 52.5% margin on those sales (although, of course, nothing really changes.)

There are fewer knock-on problems for the publishers when the big accounts move to convert this (apparently excess) margin into changed business terms than if they allow agents to change the author deal. Changes forced by Amazon or Barnes & Noble could conceivably affect only them, depending on how the change in terms were framed.  But were an agent to succeed in pushing up the contractual ebook royalty, that change could affect a whole host of other contracts because of most favored nation clauses. That could mean royalties are suddenly due on contracts that under the previously-negotiated royalties hadn’t earned out their advances.

So we acknowledge that the price of raising contractual ebook royalties could be high. But it still might be worth it. As we will see later, more margin given to accounts achieves no incremental gain for the publishers; more margin to authors does.

There’s one more very big reason for publishers to change their accounting in the way Cader’s insight suggests. Right now, every big publisher’s life is being disrupted by state, federal, and international investigations into the legality of agency selling, which is characterized by some as “price fixing”. The defense is that the publisher, not the retailer, is the seller and it isn’t illogical for somebody selling something to charge the same price to every customer no matter how they reach them.

If “I’m really the seller” is the defense, it would be much more persuasive if the accounting supported that paradigm. As it stands, the accounting contradicts it.

The total situation not only argues for publishers to change their accounting, it also argues for them to give a bigger percentage to authors and to do it now! Doing so would deliver them two important benefits. It would reduce the apparently excess margin that their retail trading partners are noticing and coveting. But — of much greater importance —  it would also reduce the differential between what Amazon (and who knows, perhaps B&N in the future) offers an author and what the publisher offers, making it more difficult for Amazon to lure their authors away with higher royalty terms.

In fact, they might even get some sympathy from Barnes & Noble about having less excess margin to trade if they can make it clear that giving more to authors is keeping them out of Amazon’s clutches, which B&N and all other retailers absolutely need them to do.

Part of what prevents publishers from seeing merit in paying more to authors is their high cognizance of another accounting element they track: unearned advances. Unfortunately, either publishers aren’t looking at that category of expense in the right way or they’re eliding important distinctions when they discuss those unearned advances with agents.

Because all unearned advances are clearly not created equal. All of the biggest authors pile up unearned advances because they are intended to be unearned. When the agent for a megaselling writer sits down with a publisher to negotiate the advance, they are often negotiating around dividing up what they both see (perhaps without explicitly saying so) as the total revenue pie likely from the book. That leads to agreement on the advance against royalties, which divides the revenues at what is effectively much higher per-copy royalties than standard contracts call for.

But then, for reasons of “not establishing precedent” and, perhaps, not kicking in “most favored nation” clauses that could exist in other contracts (all in the publishers’ interest), the actual contract has conventional royalty splits. The book would have to sell a big increment over expectations to “earn out” on conventional royalties. That’s very unlikely because these are deals done with highly established authors where the track record is a good predictor of future performance.

So some of these “unearned” advances were never intended to be earned; they simply measure how much of a premium the publisher was willing to pay to get certain revenues into the fold.

In other words, publishers aren’t trying to manage all unearned advances down, just some of them. And if they don’t make that distinction (and some further nuance to their measurement) when they analyze this, they’re doing themselves a disservice in a number of ways. Right now, one of those ways is that it is persuading them not to pay higher royalties when doing so could well be in their interest, both because it will keep the author away from Amazon and because it leaves less margin on the table for their trading partners to pursue.

Declared royalty rates that are closer to what Amazon can offer are critical for publishers to turn around a PR war for new authors that they have been losing. The focus of a great deal of the author community buzz is around the ebook royalty differential. Disadvantages of self-publishing — the biggest three being the actual financial cost of necessary editing and core marketing (like a cover); the difference in risk between taking those costs versus taking a revenue guarantee in the form of an advance; and the additional marketing and sales a publisher generates (right now largely through the merchandising and additional revenue from print) — are too easy to ignore or elide. The royalty comparison is straightforward and apparently persuasive when it is as stark as it is now.

A 50% ebook royalty from an agency publisher on revenue after agency commissions would match the 35% royalty that Amazon pays when they pay advances and publish. But publishers don’t actually have to reach that number to be offering  a better deal because they offer sales through other channels Amazon currently either doesn’t reach or actually prohibits employing when they pay an advance to publish. It’s just a tough argument to make when they offer half that number.

One more reflection on unearned advances to bend your mind in the other direction, and then we’ll stop. When the publisher sells a copy of a book that has an unearned advance, the cash flow for this month on the book is better, because no payment to the author is triggered. If publishers paid authors higher royalties on ebook sales, they’d have fewer dollars in unearned advances (because books would earn out faster) very quickly. Of course, that’s not “good” for them because it means they have to pay new royalties on those books as they sell. This is just to say reiterate what I said above: publishing economics are complicated. Anytime you hear them oversimplified, like by somebody lumping together all “unearned advances” into a number or a percentage and wielding it like evidence or analysis, have your grains of salt handy.

I make no secret that my view of the world is publisher-centric. I was brought up that way and I’ve spent 50 years learning about the book business with that point of view. And I also make no secret of my high regard for the current leadership of the biggest publishing houses. With all due respect to the executives of my father’s generation and since, the current crop of leaders is the smartest and most thoughtful and innovative group I’ve ever seen in those slots. But (unless I’m missing something, which is, of course, always a possibility…) they all appear to be making the same mistake at the moment. I would sum up the observations from this post with three suggestions for today’s biggest publishers:

1. Change the way you account for ebook sales in the way Michael Cader suggests: call the consumer payment the top line revenue and the payment to the retailer a cost of sale.

2. Recognize that no excess margin will go unpunished. The forces of big author agents and powerful retail channels will assure that. You know there’s a minimum margin you need to survive; in fact there will also be a maximum margin you’ll have any prayer of holding onto.

3. Pay authors more so you can pay retailers less. There will be a direct connection between the two.

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Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 

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John Makinson, the global CEO of Penguin, was quoted in a Reuters article saying that the post-Christmas period in publishing coming up is “tougher to predict” than “any time that I can remember”. Asked what he sees in the immediate future, Makinson replied “dark clouds”.

Makinson’s concerns reflect one we have written about many times in this space: the rise of powerful ebook vendors who are tech behemoths essentially replacing the network of brick bookstores, many of which were free-standing independents. (This is true in the UK, where Makinson is based, as well as in the US, for which he is also responsible. It will also happen everywhere else.) He made a very cogent point when he said that publishing has been driven more by supply than demand. He was quoted as saying “consumer taste doesn’t actually change all that much but what does change is the availability of books in different channels.”

He’s completely correct. Up until 15 years ago (the dawn of Amazon), only books that were on store shelves had much chance at all to sell. The biggest and most successful publishers today are still the ones which ascended because of their power to put books on those shelves. It is not the publishers’ fault or doing that this is changing.

Longtime industry executive and consultant Joe Esposito wrote a post around the Borders bankruptcy that makes this general point: publishers are part of an ecosystem that is changing in ways they can’t control.

The growth in ebook sales is not an unbroken line pointing up. Industry stats suggest that sales may even have slowed a bit in September compared to August. But this is the time of year when we get the next step-increment change in the publishing reader-supply network. Starting in November, 2007, when Amazon put the Kindle on sale for the first time, the Christmas season has been when the huge leaps in device ebook reader distribution take place. That includes a huge ebook sales day on Christmas itself followed by a couple of months when ebook sales reach new peaks.

This is inevitably accompanied by bad news from the brick book trade. Last year’s first quarter included the bankruptcy filing of Borders. Stores fight hard to keep their doors open through the Christmas season but, with each passing year, if they’re not selling ebook reading devices, they find disappintment more often than salvation.

One bookstore owner I know has been doing a great job; the store held its own despite the overall slide in print. The bookseller told me that this year, through October, sales at the store were down 5%. Not bad. They were down 2% year-on-year last year. They were down 1% year-on-year in 2009. And they had a record year for sales in 2008.

There’s a pattern there. The percentage reduction is doubling each year. When I said, “so you’ll be down 10% next year and 20% the year after that, right?” Bookseller said, “probably.”

Almost no brick store can stand a sales loss of 20% and remain viable. Maybe one could make up the 20% by selling something else in addition to books. But maybe branching out into other lines of merchandise will cost more than it will generate.

Maybe they won’t be able to hold even that 5% reduction through Christmas. And maybe the 20% we see as two years away is even closer.

Anecdotal reports abound that stores that are near where there formerly was a Borders are seeing a lift in sales. One sales executive I know speculated that B&N would pick up half the Borders business. Since Borders sales were a high double-digit percentage of B&N’s sales, that should provide quite a lift. But because B&N’s store sales now include Nook devices, we aren’t able to analyze very readily from their announced results what the trend of their actual book sales in the stores (or online) is. According to Michael Cader’s report of their just-announced results, B&N tells us that “physical book sales declined”.

As the digital sales of straight text books — which are estimated by some to be 75% of bookstore sales — routinely climb past 30% of the total units, there’s just less and less print business to go around. Ebook sales seem to have doubled again in 2011 from what they were in 2010. There are high expectations this Christmas for ebook reader sales, newly fueled by color tablet-like devices from Kindle, Nook, and Kobo (all on sale at consumer electronics outlets as well as at bookstores and online). That suggests (to me) that 40% or 50% ebook sales shares might be common by early 2012.

Borders was somewhere around 10% of the print book business when they disappeared. More than 10% of the business will have shifted away from brick stores to ebooks and online sales in the year following their bankruptcy announcement.

So the lift from picking up Borders business is unlikely to replace what brick stores are losing to more customers switching to ebooks and online buying of print. And that squares with what B&N just told us about their most recent reporting.

We are seeing sales staff reorganizations all over town and in the UK as well. Fewer stores and less volume through them mandate smaller field sales organizations. One former high-ranking sales executive I know who is now a thriving consultant was telling me yesterday that finding an executive sales position in publishing today is a nearly impossible task.

If the ranks of sales reps and sales management are being thinned, how about the elaborate systems we have built to support them?

How much longer will we be publishing in “seasons”, which was a paradigm really built to serve a far-flung rep network that needed to gather to learn about new titles? It now seems like an anachronism, particularly when the biggest accounts buy from monthly lists. How much longer can that last? Sales conferences have been scaled back dramatically from what they were a decade or two ago. How long before they’re virtually defunct?

At least printing paper catalogs, which is a largely wasted expense these days has been retired by several companies. A bookseller I asked said Harper dispensed with paper catalogs already and she expects Random House and Macmillan to do so in 2012. I’ll bet the comment section of this post will attract others to say they have done so or are about to do so as well.

The old publishing sales-and-distribution ecosystem is disappearing but the new one is not built out yet. Publishers are, to greater and lesser degrees, converting to digital workflows, developing their metadata chops, collecting names, building vertical communities by genre and topic, collecting and analyzing ebook pricing data, building new models to work with authors and even self-publishers, and they’re still signing the books they want with royalty rates for ebooks of 25% of revenue.

These efforts have been financed by the margins being earned on sales of print and sales of digital that publishers were able to acquire because of their power to distribute print. In Esposito’s words, this cash provides “venture capital for the new all-digital businesses that all publishers are contemplating”. These annual step-increments of digital growth and brick store decline have so far been tolerable to most of the big players we’ve known for decades. (Borders was an exception, but we know Borders was not done in by digital change alone.)

The pace of the digital switchover is quickening. That will reduce the cash available to invest in building a new ecosystem at the same time the urgency of coming up with new answers is rising. It’s enough to make a sober executive, even at a very large, successful, smart, and innovative company, admit to serious concern for the industry’s future.

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The division of the consumer’s dollar across the publishing value chain has a history of change. When I came into the business 50 years ago, discounts from publishers to retailers often topped out at 44% and even wholesalers seldom got more than 48% off the retail price on hardcover books. Today discounts into the mid-50s for big retailers and for wholesalers are common.

The top royalty for authors was, as it is now, 15% of the retail price, but there were fewer exceptions allowing the royalty to be cut, contractually or in practice. Today “high discount” clauses, calling for a royalty of something less that 15% of retail (and sometimes a lot less than 15% of retail) will often apply to more than half of the sales the publisher makes. (It is also true that in those days the agent’s standard cut was 10%. The 50% increase they’ve achieved to 15% is the single biggest change in share in the past 50 years.)

Lower royalties subsidize higher discounts and higher discounts have subsidized price cuts to the consumer. Discounting off the publishers’ suggested price by the retailer was rare until the Crown Books chain, which had a meteoric tenure as a major retailer from the mid-1980s until the mid-1990s, made it a core component of their offering. The Barnes & Noble and Borders chains, which rose to prominence during the Crown decade, used the tactic, although less aggressively than Crown.

All of these numbers: the discount determining what the retailer will pay; the royalty calculated either as a percentage of the stated retail price (usually printed on the book) or of the net paid by the retailer on a high-discount sale; and the ultimate consumer price (whether what the publisher printed or lower if the retailer wants it lower) are based on the price the publisher sets and prints on the book in the first place. The informal internal formulas for setting the price have changed over the years too and, although it is a bit hard to really compare, it would appear that the markup over manufacturing cost has also risen steadily over the past 50 years.

So we had reached a point, somewhat before we had the Internet and Amazon.com, where, on big books at least, the publisher would charge a price higher than they expected the consumer to be charged, give the retailer a discount larger than many retailers would keep as margin, and state a percentage as the per-copy royalty in the main body of the contract that didn’t apply to most of the sales. One could say there was a “virtual” world in trade book publishing’s value chain before the term was applied to our new digital reality.

The core underlying point here — obvious but often ignored — is that the division of revenue across the value chain is never fixed. That’s important to remember as we consider how the ebook chain is shaping up. One hears authors and publishers arguing about what is the “fair” division of the ebook consumer’s dollar (as if “fair” had anything to do with it, which it doesn’t) and we have a very unsettled picture of what the retailer’s share of that dollar will be (even though Apple is doing its best to be definitive about it.)

Right now for ebooks we have two “standards” for the publisher-retailer division of revenue. For agency publishers across all retailers and for all publishers selling to (or perhaps we should, with respect for the agency logic, say “through”) Apple, the retailer share is 30% of the purchasing customer’s payment for the ebook, or the publisher’s “digital retail price”. For non-agency publishers selling to everybody else but Apple, the normal offer is 50% off the publishers “suggested retail price”. The DRP is set within boundaries basically set by Apple, primarily based on the price marked on the print version of the book. The SRP is the publisher’s own creation and has been at or close to the lowest-priced print version. The non-agency publishers who sell to Apple are obliged to have both: their DRP is the price Apple will charge (until and unless they’re undercut) and the SRP is the price that forms the basis of discounts to wholesale customers. I haven’t studied this but I think most publishers set SRPs higher than the break-even point because they want wholesale customers to go agency and would trade less revenue to achieve that, as they did when they switched over in the first place. (The publishers could set the SRP at a point where 50% of it equals 70% of the DRP, so their take is the same either way.) Theoretically, the publisher can count on the wholesale-purchasing retailer to discount the book to match the DRP, reducing their own margin and being competitive with the DRP in the consumer’s eyes.

This pricing strategy depends on the retailer discounting from the SRP to keep the pricing of the ebook from looking ridiculous. Not discounting is a way for the retailer to push the publisher to lower the SRP, which could start a cascade of price-cutting. That discounting has usually started with Amazon; others then follow suit. There are anecdotal claims that Amazon is starting to foil this strategy by letting publishers who set high prices live with the prices they set more often than they once did, but nobody but Amazon knows that for sure.

During the period when Random House stayed out of agency pricing, one thing they said was they thought the 30% agency standard was high and they didn’t want to memorialize a retailer cut that rich. Either other considerations prevailed or Random came to the conclusion that they couldn’t singlehandedly change that standard cut.

But if we maintain a competitive landscape of retailers, there is a way it could come down. What if one retailer (B&N? Kobo? Google?) were to offer publishers a deal where a discounted version of an ebook were offered through them on a temporary exclusive — say, the first 60 days the ebook was out — during which they would help subsidize the discount by taking a smaller percentage themselves during the promotion. Would publishers find it tempting to accept such an arrangement to poke a hole in the 30% standard? I think they might. (They would certanly enjoy the conversation with a competing retailer inquiring about how that happened, in which the publisher could offer a “matching” deal for some other equally appealing book and leave that retailer to think about whether to hold the line on the 30%.)

Another value chain segment the industry is still trying to value and price is the percentage a distributor can charge in the digital world. There’s wide variation here already, as there is in the print world, where the same bundle of services (sales, warehousing, shipping and returns processing, collecting receivables) can cost anywhere from around 20% to around 33% (fully loaded.) In ebook distribution, we see BookBaby willing to set up for a fixed fee (with no percentage deducted), BookMasters and Smashwords and some agent services like Knight charging about 15% of the revenue, and then offers from various publishers, distributors, and literary agents that go as high as 30% of the revenue.

Usually those offers are framed as “we pay 70% of revenue” which, I think, some hope will be confused with the 70% the agency retailer pays of the consumer dollar. Of course, if they are paying 70% of the revenue on a wholesale account buying at 50% off and the account doesn’t discount to the consumer, the distributor is actually paying 35% of the consumer dollar to its client.

The challenge for distributors is to offer services which don’t commoditize. Many authors already manage their own digital publishing affairs and sneer at the idea that a distributor or publisher has anything to offer that is worth even a token payment, let alone a substantial share. Over time, one can imagine information dashboards, metadata enhancement, dynamic pricing, and marketing assistance capabilities that will give ample justification for a distributor’s presence in the value chain for many authors and small publishers. It would be premature to predict how much value can be added and how much margin it could command. Most of these roads aren’t paved yet. What the distributors are offering at the moment is their ability to navigate unpaved roads and constant marketplace change which, despite the skeptics, is service many of us can see the need for.

What gets perhaps the most attention in the industry’s conversation about dividing the digital swag, but which is dependent on the upstream divisions of revenue, is the author’s royalty from the publisher. The majors have held the line for a year or two at 25% royalty, which means 25% of the 70% they get from the retailer, or 17.5% of the consumer’s dollar. That’s a quarter of what the author can get from Amazon or Kobo, and just a bit more than a quarter of what they can get from Barnes & Noble. Aside from publishers’ significant efforts to build marketing capabilities that will grow sales and their ability to charge a retail price often four times higher than an author would on his/her own, the publishers are offering guaranteed payments (advances against royalties) and a print revenue stream to sugar-coat the 25% digital royalty. Still, as the percentage of books sold digitally rises, it is likely to pull up the percentage of the sale authors will get along with it.

Everything happens faster with digital than it did with physical. And so it will be with changes in the revenue distribution along the value chain. My hunch (all hunch, no data) is that in the long run (5 or 10 years?) retailers will find it hard to keep 30% of the consumer’s dollar, publishers will find it nearly impossible to keep 75% of what the retailers pay, and that any author who wants to compete seriously will have a cost structure that will often make a royalty rate taking even as much as half of it away worth considering. Right now putting an ebook into Amazon and having them sell it on autopilot can get a lot more of the total market than will be the case over time as a more fully articulated and global ebook infrastructure builds out.

If I’m right, retailers should want longer contracts than publishers in their agreements; publishers should want longer contracts than authors, or at least longer terms for the stipulated ebook payout percentages; every author or publisher wants as short a contract as they can get with their distributor; and every author giving an ebook exclusive to a retail channel for longer than an introductory period should think twice about what that might cost in years to come.

Michael Cader did an absolutely fabulous reporting job on the distribution alternatives available today for our eBooks for Everyone Else conference in San Francisco. We’re doing an eBEE track at Digital Book World in January, and Michael’s doing a reprise of that presentation, with time for q&a, at a breakout session there. The distribution piece is by far the most complex of the three moving parts (the retail function and the royalty rate being much more straightforward components that don’t vary much in their definition) and a lot of DBW attendees will benefit from Michael’s reporting.

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Obviously my day job, consulting, informs a lot of what goes into The Shatzkin Files. I guess it is just as obvious that I can’t quote everybody who tells me something or attribute everything I want to write about to a specific company or individual. I don’t make a living writing this blog and I wouldn’t make a living at all if people in the industry couldn’t trust me to keep their confidences.

But once in a while people inside competitive companies tell me things that they want the world of publishing to know about what they’re doing. That’s happened twice this week and, in both cases, publishers were making it very clear that they are doing things that will add real value to authors’ marketing efforts, things that no self-publishing author could do for themselves. Self-publishing authors could be wrong, but a read through the comment string of a recent post here makes it clear that they don’t much believe publishers add value in marketing.

On Monday, I was talking to Fritz Foy, the senior VP for Digital Publishing and Strategic Technology at Macmillan. My mission was to recruit speakers from Macmillan for Digital Book World. The conversation turned to the question of “collecting names” for marketing purposes. I had learned previously that Macmillan really has a company-wide effort to do that. That’s something I have advocated. I thought it was so important that I went to the unusual (for me) effort of learning some fundamentals of direct contact management and writing about them on the blog 14 months ago. But Macmillan is the only company I’m aware of that makes email address capture an objective across the company, although we see pockets of name-gathering activity in other majors.

Fritz emphasized that collecting names wasn’t the only priority. Using them, using them well, and tracking what happened when they used them were the keys. (I was reminded, as I was again by the next conversation I’ll describe, of the adage “you can’t improve what you don’t measure”.) To demonstrate, he pulled some October numbers from tor.com, which one would assume, based on the relatively longstanding tor.com effort, probably constitutes the company’s biggest single pool of email addresses.

And they had a lot of them, enough to have sent over 650,000 emails to their lists in the month of October. That’s impressive. But what’s positively stunning is that more than 30% of those emails got opened (that’s more than 200,000) and more than 20% of those clicked through: took the action that Macmillan asked them to take in the email. That’s in the neighborhood of 40,000 actions.

Now the actions were, for the most part, to get free access to more content. (Only 15% of the mailings were purely “marketing”.) They weren’t selling anything. But what Fritz was demonstrating was the growth of what I call “investment marketing”: marketing that produces a result that makes subsequent marketing efforts cheaper or more productive. These tor.com numbers are going to grow, inexorably. Another indication of how solid Macmillan’s lists are is that only 0.1% unsubscribed!

If I were an author (or agent) looking for a sci-fi publisher, it would impress me that Macmillan has lists that get a 30% open rate. It would make me feel they could do things to promote my book that another publisher without those lists couldn’t do. I don’t know what the growth rate is on those lists, but most things (sales, device penetration, self-publishing) in the digital publishing world have been more than doubling each year and these could well be too.

The key point to take on board here is that tor.com is a flagship; Macmillan is doing this across their company. They are building other verticals as well. If other publishers aren’t systematically taking names, getting email permissions, and testing what can be done with them, Macmillan will build up marketing capabilities that it will get increasingly expensive to compete against.

There is little doubt that Amazon’s author-recruitment efforts for their imprints include the promise to mail to known buyers in the author’s genre. They almost certainly can send more than 600,000 emails in a month for many books and genres. But can they get a 30% open rate and a 20% clickthrough?

And Amazon, a retailer, can’t get trapped into just pushing the books it signs up when their consumer brand, and their sales, depend on offering full range of selection of available titles across publishers’ lists. That conflict is compounded as they sign up more and more titles as proprietary. (But it will also be ameliorated if the titles they sign are higher profile than they’ve been so far.)

The day may not be far off when agents are going to be asking publishers “how many emails can you send in support of this book on publication day?” If I were in Amazon’s shoes, I’d be pushing that question. It looks like Macmillan is methodically building the ability to provide an answer.

But not everybody with a modern view of marketing agrees with me (and Macmillan) about the importance of name-gathering, which brings us to the second conversation this week.

We got a call from Open Road Integrated Media asking us to come down to their shop and learn a bit about what they’re doing. Open Road is an ebook publishing company founded by former Harper CEO Jane Friedman which has been an annoyance to the big publishers. Jane has been in the business for more than four decades in high positions at major houses (at Random House before Harper). She knows the agents and she knows how the game of signing up content works.

So she moved against the establishment by offering a standard deal of a 50% share of ebook revenues, when the major publishers are holding the line at 25%. (Open Road’s deal includes the ability to recoup one-half the digitization cost before paying what we usually call royalties but which they call “profit share”. ORIM says that comes to less than $500 per title. Open Road pays no advances.) She used her understanding of the ambiguities in legacy publishing contracts to sign up backlists from both living authors and estates, including Willam Styron, Lawrence Block, Carl Hiaasen, Alice Walker, and others.

Those have been the headlines about Open Road and that was pretty much the extent of my knowledge of their proposition. Without any other knowledge of their economics — their ability to raise money, their burn rate, their sales — I was skeptical about the sustainability of their model, if it rested primarily on paying 50% for what others were paying 25% for and gathering high-quality backlist of titles not nailed down already for ebooks, which is a limited resource.

It turns out they have a lot more going for them than that. But they don’t gather names.

Open Road’s head marketer is Rachel Chou, who worked with Jane Friedman at Harper. Jane and Rachel, and former Scholastic CEO Barbara Marcus, who is an advisor to Open Road on children’s and YA acquisitions, made the point that Open Road is a marketing company. That’s what they do. And their bullpen with about a dozen people in cubicles working away is just about exclusively devoted to marketing. Except that, in their eyes, marketing and sales and author relations are all the same thing to them, and they see a workflow built around that perception as a key differentiator.

In fact, they see the consolidation of functions in their shop as a significant competitive advantage. In the ebook world, marketing and sales are so closely related that it is hard to see how to parse them. That’s partly because the promotions by ebook retailers could be the single most important marketing component (a point made emphatically by Diversion Books’ Scott Waxman at our eBooks for Everyone Else shows in New York and San Francisco), but it is also because all marketing efforts at Open Road are aimed at driving sales to the ebook retailers. (Their widgets all have buy buttons for the full range of retailer choices.)

But that’s not where the competitive advantage of their structure comes into play.

Rachel spelled that out. One of the major retailers came to them in the past few weeks with a big sales opportunity. They could place 15 Open Road titles in a major promotion that would sell a lot of books. One catch: they needed the titles cleared for the promotion within 24 hours.

Another catch that is characteristic of the ebook world: this was a price promotion that required clearing the participation of each book with its agent. That’s 15 agents. Rachel and her team of marketers, who have the agents of the Open Road ebooks on their own speed-dials, got the job done and got all 15 books into the promotion.

Moving that fast would be a non-starter in any significant publishing house. Whether the opportunity came in through sales or marketing, neither team would own the agent relationships. I believe in most houses it would be necessary to have the agent calls made by the editor who had signed the book. Certainly, the editor would have to be consulted before anybody from marketing or sales could make such a call. And that round of communication, which would include explaining the promotion opportunity to each of the affected editors, would never be attempted within a 24-hour window. Realistically, 24 days would be a challenge.

Open Road is organized differently than legacy publishers because there is so much they don’t have to do! There is very little in the way of a production department (there is a person who creates their covers and Pablo Defendini, who was a key player building Macmillan’s tor.com, is their “interactive producer”.) There is no sales department. There is no inventory management. Everybody works in a room that is dominated by a wall with a 2-month marketing calendar, listing all the events and anniversaries they might promote around. They have 75% or 80% of their company dedicated to marketing, which everybody — including all the big publishers who have expressed an opinion to me — agrees is the prime responsibility of the book publisher in the digital era.

But, even within that, Open Road is organized for efficiency and speed based on the realities of the value chain for ebooks. Their marketers are assigned books which “fit together”, so they are consistently going back to the same blogs and websites for promotion. They can develop relationships. They’re not really a “vertical” publisher (by genre or by topic) but they do have multiple titles from the same author, which helps.

To be fair, the other major publishers are reorganizing themselves constantly into more marketing-focused and less bureaucratic organizations. Just this past week, Simon & Schuster announced organizational changes which effectively shift resources from physical store sales to online marketing (which is admittedly an oversimplification.) The big companies all have great leadership and they’re well aware that they have to change. And I know for sure there are plenty of initiatives I haven’t heard about because the houses feel there’s competitive advantage to keeping them quiet. In fact, Rachel Chou told me about newsletters that are published readers at HarperCollins were getting open rates when she was there a couple of years ago that were even higher than Fritz’s tor.com numbers in October!

Open Road’s team would point to other distinctions between them and other publishers. (They not only claim to be different from the legacy print publishers, they don’t recognize any of the other ebook publishers as true competitors either.) They do extensive video interviews with every author (or a descendant in the case of a deceased author) which creates a rich library of video content. It’s a point of pride with ORIM that these are not fodder for video trailers, but give them real editorial material that can be made into solid programming, often combining video from several authors thematically into “mashups”. They distribute that video aggressively and claim they’ve now reached the point where they’re a recognized B2B brand by some digital media and bloggers who come to the Open Road website, unbidden, to pick up video. Of course, all the video is tagged so the Open Road marketers can track its placement, downloads, and any clickthroughs that result to the retailers.

And that leads us to metrics. Open Road is relentless about data and analytics. They make the point that they can test different covers or tag lines on Facebook or in other media and have answers within hours about what works best. The Open Road team believes that the big houses don’t give their marketers the kind of tools ORIM has to measure the impact of campaigns and that their competitors’ corporate structures don’t enable fast changes in the pitch or the artwork based on data.

These may not be sustainable advantages. Tools can be provided. Workflows can be changed to permit faster responses when that’s necessary. The established houses can raise their royalty rates. How fast things will change in the big houses is an open question (and the answer is different for every house), but it is undeniable that the decision-making structures that worked for print books readily accepted time lags that are a real handicap in the evolving ebook world.

Jane Friedman and her team claim that there is a marketing plan for every book for every quarter! (They admit there’s some ganging there; a bunch of different books might be part of the same Mother’s Day effort.) Whether that is scaleable and replicable when they are ten times their current size (approximately 1400 titles) is another question. But it is certainly a point of differentiation today.

Open Road doesn’t sell direct, only through intermediaries. And they eschew name and email address capture of end users, preferring to rely on the combination of the viral distribution of content and their always-developing relationships with bloggers and websites.

Both Macmillan and Open Road are doing things that no big trade house could have imagined five years ago. Macmillan is applying scale; Open Road is applying the speed and flexibility enabled by a smaller organization. But both of them are employing what I’d call “investment marketing”: doing things on behalf of their books that build their capabilities to do more on behalf of subsequent books. I think that’s the key for publishers who want to give authors and agents convincing reasons to publish with them in the future.

We’ll do a panel on “investment marketing” at Digital Book World in January. Of course, Open Road and Macmillan will be on it. So will F+W Media, a vertical publisher (investment marketing is much more natural for vertial publishers) and we expect to add one more Big Six house which is doing interesting things in this regard.

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I want to make clear at the outset that this post is not about “enhanced ebooks”, making something multiple-media out of a book that started as straight text. That’s a “want to do” problem that I’ve always been skeptical about and which I believe many, if not most, publishers are abandoning as “not commercially viable at this time”. Today’s ruminations are about moving illustrated books from print to digital, which many of today’s book publishers will find a “must solve” problem as the channels to reach consumers effectively with illustrated books — the bookstores — are diminished in number and power by digital change.

Amazon and Barnes & Noble are trading boasts about whose iPad-lite is better than the other guy’s. Kobo’s Vox is joining the party with Kobo now owned by Rakuten, a massive Japanese company that gives the former upstart the means to really compete with all the other players. We can be pretty sure that tablets that can deliver color-illustrated book pages will be in many hands very soon. (That’s in addition to the tens of millions of iPads and many millions of Nook Color devices that have been sold already.)

This is presenting publishers with illustrated books on their list with what seems like an enormous opportunity. But it also presents some equally enormous challenges.

It has been estimated by many that 25% of the print books sold are illustrated books. (I last saw this number in a slide from Michael Tamblyn of Kobo at our eBooks for Everyone Else conference in San Francisco on November 2d.) I am not sure what that means. Trade books only?

And even if I did know what it means, I wouldn’t know enough. Books that are primarily pretty pictures, which don’t require much integration of the pictures and text (the minority of the 25%, one would assume) are a considerably simpler proposition to port to digital than a book with pictures and captions that have to stay with them or text that needs to be on the same page with a picture or a chart.

A lot of work is being done to create new standards called HTML5 and Epub3 that will permit more faithful rendering of a publisher’s intentions through a web browser or an ebook than our current capabilities do. But there are two very big flies in the ointment that persist regardless of the technology.

One: illustrated books are considerably more complex and expensive to deliver to digital devices than straight text books. (Even if HTML5 and Epub3 accomplish everything their creators want and they’re fed by XML-workflows, converting the backlists will cost a multiple on a per-title basis of what straight text costs. And I suspect we’re many years away from relieving publishers of the need to make the decisions necessary to execute multiple versions of each book, new or backlist, as will be made clear further on in this post.)

Two: we really don’t know whether consumers with tablets or tablet-lites will choose to consume illustrated books on those devices. (I’d say we do know that people will happily read straight text on devices; what seems to be true in my experience these days is that most of the people who say they “prefer printed books” have not tried an ereader yet.)

So while many publishers are largely seeing eroding print sales for straight text more than compensated for by ebook sales, there is no guarantee that the same will be true of illustrated books.

The retailers selling the tablets and the publishers of illustrated books are excited about the possibilities. The development of HTML5 and its close cousin, Epub 3, promise to enable features and capabilities that heretofore were only available in apps to be delivered as ebooks. That’s a big deal because the app marketplace has two huge shortcomings: it doesn’t enable book discovery very well and it is loaded with very inexpensive products. Many publishers have come to the conclusion that selling apps isn’t a commercially-viable strategy going forward. They’d much rather have their IP on sale in an ebookstore.

To be fair, others (like Callaway Digital Media) think apps work just fine commercially (although I’d add that Callaway does children’s content primarily, and that’s different…) and there are more and more tools being delivered to make app-building cheaper and more economical than it was before. But I still agree with the doubters.

Getting ready for Digital Book World, we had a conversation in the past couple of weeks with a publisher that does illustrated books almost exclusively. He volunteered what we believe: nobody knows if the customer will buy these yet. And then he pointed to his enormous pain point: screen sizes.

The currently-touted solution for illustrated books on devices is “fixed page layout.” You don’t “reflow” the text, which is the technique used for straight text. Reflowing changes the number of words on the page to suit the screen size and type size. That means you are changing the amount of content that appears on the screen. If you did that for illustrated books, pictures and captions wouldn’t stay together and things you planned to be on the same page might very well not be. So you deliver a “fixed page” to the device, just like you do to a printer.

The dominant color tablet device has been the iPad, which has a 10-inch screen (this is a diagonal measurement). But the new tablet-lites have seven-inch screens. This cuts the viewing area by about 50%. There is really no way to present a “page” that combines text and pictures that works on both screen sizes. If you go from 10-inch to seven, the type will be too small to read. If you go from 7-inch to ten, the white space surrounding the page will be ridiculous, or the type will be ludicrously large.

And I haven’t mentioned the fact that the iPhone has a 3-1/2 inch screen. Imagine the fixed page for a 10-inch iPad on that!

Although tools exist that make it relatively quick and easy for a designer to see the page on the right screen size and move things around a bit, that doesn’t really solve the problem. An illustrated book publisher would really have to design and lay out each book at least twice (for the 10-inch and 7-inch screens) and possibly three times (to get the iPhone screen too.) Then those would be three different files, so you couldn’t actually move across your devices and have them auto-synch the way Kindle, Nook, Kobo, and Apple enable you to do now for straight text.

Would you get the files for all three sizes when you made the purchase?

There is a way to create the book for different sized screens with the same number of pages, which would be to use more area for the page than will fit on the screen vertically, and then scroll down to get more. Scrollmotion introduced this technique when they were making simple ebooks as a way to make ebook pages match printed book pages. But even employing that technique wouldn’t really save the illustrated book publisher any work. You’d still have to redesign each page for the particular device, and, anyway, I’m one reader who found I didn’t like ebooks that make you both scroll and turn.

One prominent ebook executive I know told me that there have been about 1000 illustrated ebooks available until a month or two ago but that the conversion houses in India have recently been working overtime to deliver more for the plethora of new tablet and tablet-lite devices hitting the market . Now they’re cranking out approximately 1000 illustrated ebooks a week so that by the end of the year, we might have 10,000 illustrated ebooks to choose from on many of the platforms.

That’s still paltry, compared to a million or more straight text ebooks, but the sudden leap in illustrated ebook titles available and screens to read them on must, one assumes, generate a real sales increase. Maybe we’ll start finding out what works and what doesn’t. This same executive, working for one of the major ecosystems, is trying to help publishers set their priorities for what books to convert. (Much of the conversion expense right now is being borne by the device-maker-retailers, so they get to call some shots.) But meaningful data points are so scarce that they offer very little guidance.

As bookstore shelf space disappears, the urgency of solving this problem grows. The sales of illustrated books have reportedly been going up in the bookstores, which is good news for as long as it lasts. It makes complete sense that retailers would emphasize the things that seeing and touching make you more likely to buy. But I’d be concerned that even the sales of illustrated books will suffer as more and more of the straight text consumers find what they want without visiting a bookstore. And a closed bookstore doesn’t sell any illustrated books at all.

I learned something interesting lately from a travel book publisher with a robust web presence that might be a useful clue. I was told that photo albums are a big new moneymaker for them. People who are traveling to Paris love the opportunity to look through a series of photos of Paris. Each photo is a new screen with new ads on it. That is creating some really easy additional revenue for this publisher’s web sites.

I think that a “500 photographs” series of ebooks could also do very well, particularly with the digital ability to present them in sequences determined by metadata. If 500 Paris pictures were properly tagged, I could see “Eiffel Tower”, “churches”, “19th century architecture”, and “Champs Elysee” pictures grouped together by clicking on a menu.

And that kind of a book, with no associated text necessary (“captions” could be on a jump screen), could be designed once for all size devices.

Of course, whether it would have a commercially-viable print counterpart is yet another question.

I have concerns that converting how-to books to digital success is going to be a very frustrating experience. The ebook will not deliver the printed material well, unless the same care is exercised optimizing the content to each different digital screen as is put into designing a book. And there will be so much more the ebook could do with video and audio and animation and interactivity that would make sense for most subjects that “converting” a book will just leave too much opportunity behind.

But publishers have to try. With millions of devices in consumer hands, some illustrated ebooks are going to sell impressive numbers. We saw what happened with “The Elements” when the iPad came out (even if comparable success hasn’t seemed to happen for any other content-based app product since).

Creating a truly interactive book-type digital experience has been the objective of countless thousands of high-quality person-hours for two decades, since even before the CD-Rom era. Nobody has cracked the code yet, by which I mean nobody has come up with a formula which will repeatedly satisfy consumers so that a publisher can approach the marketplace for digital content with something approximating the confidence that it does with straight text books. As an industry, we’re about to throw a lot more time and money at the problem. Maybe we’ll find an answer. Or maybe there isn’t one.

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