General Trade Publishing

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Publishers better work on number five.

Bookmark It:

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

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

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

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

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

Hardcover

Trade Paperback

Mass Market Paperback

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

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

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

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

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

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

Bookmark It:

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

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

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

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

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

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

This way lies destruction.

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

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

But it’s going to be happening in trade.

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

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

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

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

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

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

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

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

Bookmark It:

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

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

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

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

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

I think it argues the opposite.

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

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

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

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

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

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

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

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

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

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

Bookmark It:

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

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

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

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

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

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

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

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

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

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

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

But there remains this tricky question of royalties.

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

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

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

Last week, the plot really thickened.

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

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

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

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

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

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

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

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

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

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

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

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

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

All public statements are, by definition, posturing.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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The last post I did got more attention than anything on the blog in quite some time, but for somewhat different reasons than I intended. My central point about what increasingly common ebook growth predictions would mean for brick-and-mortar sales (that they’d decline sharply over the next five years) was that it diluted the core value proposition of the major publishers. Most of my comment traffic wanted to talk about the fate of bookstores, not the fate of general trade publishers.

Then yesterday, my friend Michael Cairns had on Persona Non Data a post which really delves into the point I was concerned about: what are the competitive advantages of big publishers? As Cairns points out, it is those things that can scale; the aspects of the operation where size presents a big advantage.

I learned long ago in a talk by industry legend Martin Levin that an acquiring publishing company looks primarily at an acquisition target’s revenue, not its cost structure. The cost structure that counts is the acquirer’s own cost structure; the revenues from the target would be ported over, but the costs would mostly be left behind. True marginal costs, like the cost of picking a title off a warehouse shelf, might remain. But the costs of collecting the order, processing the order, and shipping the box out the door with another book in it (not including actual postage) would not rise at all. Nor would the costs of accounting or negotiating the printing contract or (unless there was a step increment that required a warehouse addition) the cost of storage.

So, as Cairns demonstrates in his piece, most of the scaleable overheads and operational costs publishers have are related to print book operations. It is very difficult to scale the parts of the operation publishers can focus on in a digital delivery world, which would be title acquisition, development, and marketing. Those functions require person-power, and if you want to do more of it you have to hire more people. That’s the definition of something that doesn’t scale. And what doesn’t scale is what doesn’t offer advantage to a large player.

The only way we can think of to apply scale to marketing is to market repeatedly to the same audience. That implies “vertical.” Have you read that anywhere before?

A friend from Amazon was in the office this morning making a different point, which, on reflection, is also about scale. Amazon uses algorithms that have been 15 years in the making to set prices for their books. Publishers under the agency model are setting their own prices but without those years of experience, without algorithms, and without adding expertise — or even personpower — to their staffs. Pricing knowledge is also scalable (what you learn pricing the first ten books makes you more effective on the 11th). If publishers believe in the future of the agency model, perhaps pricing expertise would be a tool they could use to persuade authors to stick with them five years from now if brick-and-mortar sales go the way I fear they will (dragging the publishers’ main value proposition down along with them.) But pricing expertise won’t happen by accident; it will have to be developed rigorously and iteratively over time.

In one more post-script, I dug up an old post from back in the early days of the blog when it had far fewer readers than it does now. It tells the story of Ingram’s creation of the microfiche reader and their subsequent growth, which I called the first big supply chain tech disruption. If you like these posts and never read this one, it may be worth the click.

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Upton Sinclair famously said that “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”

I keep putting facts about publishing’s commercial realities that I think most of the smart people running things accept together with forecasts for the future that I think most of the smart people running things accept and coming up with a view of where we’ll be sometime pretty soon that I find very few people will accept.

We have definitely passed what Michael Cader has dubbed “peak bookstores” in the US. Shelf space for books is probably dropping faster than the number of stores as book retailers look for other items to keep their customers more satisfied and give those items space previously devoted to books. And shelf space available for publishers who don’t own bookstores is dropping faster than that because Barnes & Noble, the leading provider of bookshelf display space, is aggressively sourcing their own product both to improve their margins and to develop proprietary product not available to their competitors.

The fate of bookstores is an existential question for today’s book publishers (not to mention today’s booksellers!) Although it isn’t often stated this starkly, the core value proposition for the biggest trade book publishers is that they can put books on shelves. All of the rest of what they do (and often do quite well) — selection, editing, development, packaging, and marketing — is fungible. And usually not scaleable.

A big publisher and an agent would add to this list the “banking” function: putting up the money in advance for the author to write the book. But I’d argue that is also fungible (there’s lots of money out there looking for investment opportunities) so the publisher’s opportunity to be that banker is also dependent on the publisher’s ability to put books on retail shelves.

So, whether they know it or not (and, at the highest levels of the biggest publishing houses, they certainly do know it) the competitive advantage of the trade publisher is inextricably dependent on the survival of brick-and-mortar shelf space for books, which is distinct from total sales of books or even total sales of print books. You don’t need an organization of the scale and capabilities of a major publisher to reach customers through online channels. And, in fact, because the biggest trade publishers are horizontal in their subject matter, their size is more of a handicap than an advantage in competing for markets online.

We consume a lot of industry bandwidth considering whether the Nook and Kindle will survive the iPad and other tablets. I’d argue that it doesn’t really matter much to us. What’s important is that more and more people are reading on screens, that those who do reduce their purchases of books on paper (a fact recently documented in the BISG-Bowker study of ebook consumption), and that the digital book business is transacted online with very little potential role for a brick-and-mortar player (notwithstanding a wonderful 4-year old French fantasy video and a burst of naive optimism from an ABA executive at a BEA roundtable.)

(Digression graf: a much more realistic view of what ebooks and online shopping mean for independent bookstores today is a pessimistic one from the blog of one of the country’s leading independents, Northshire Bookstore in Manchester Center, Vermont. We know Google harbors the hope that they can provide meaningful inclusion for independents in the ebook marketplace. But even if Google’s efforts are successful, they don’t support the independent store, they support the store owner. There is a difference.)

So the race between single-function e-ink and more full-function tablets accelerates the movement from print to digital book consumption; and the move from print to digital book consumption accelerates the shift from store-based purchasing to online purchasing; and the shift to online book purchasing, whether print or digital, accelerates the reduction of brick-and-mortar shelf space.

And the reduction of brick-and-mortar shelf space increasingly challenges the core proposition of all of today’s largest book publishers.

A panel of publishing CEOs in June suggested a consensus view that 40 to 50 percent of book sales five years from now will be ebooks. Last week, another leading publishing executive, Gina Centrello of Random House, made the same prediction. I think, if anything, these predictions are conservative, but if we accept them as made, the implications are profound.

Half of sales being digital means that half is transacted online. That begs the next question, which is how much of the other half is online and how much is brick-and-mortar? The answer to that depends on two variables: the purchasing preferences of consumers and the ability of retailers to keep stores open in the face of declining sales. The two variables are connected: the further away from you is the closest decent store, the more likely you are to increase your purchasing online. And the more you purchase online, the more likely the store nearest to you is to close.

It is a conservative guess that 20% of print book sales today are made online and that ebooks are about 5-to-8% of total sales. That means that consensus estimates are that the ebook share will grow from 5-to-10 times over the next five years. That’s not unreasonable since ebook sales have more than doubled annually in recent years and 10 times would be somewhere between 2-1/2 and just over 3 doublings in five years. (Centrello said they went from 3% to 10% in the past year and, without knowing precisely what dates are meant by “the past year”, we can certainly expect more of an iPad effect in whatever is the “next” year.”)

That kind of ebook sales growth suggests an increasingly digitally-ept and digitally-comfortable reading public. That makes them more likely to buy print online too. So what’s a conservative estimate of the online share of print in five years. It can’t go up 5-to-10 times and leave any sales at brick-and-mortar at all. So let’s say (I’d say very conservatively), that print sales in 2015 are half online and that enough shelf space has survived to deliver half of print sales through brick-and-mortar. (I have to say as I write this that I have trouble believing it, but most people would have even more trouble believing me if I went with my gut on this!)

That math leaves print sales through stores at 25% of the total book sales. Today, if the stores’ share is 80% of print and we assume print is 90% of total book sales (using Centrello’s 10% number as a baseline in an attempt to be more conservative for this particular calculation), then we’re talking about a brick-and-mortar decline from 72% of the market today to 25% in 5 years! That’s a loss of about two-thirds from today’s sales levels! And that’s across all stores: chain bookstores, independent bookstores, and mass merchants.

I am not hearing anything in the statements of publishing or bookstore executives to suggest that anybody’s preparing for change that drastic. And I don’t see anything in the trend lines that suggest that we can avoid it.

Tell the truth. If I had headlined this piece, “Industry executives predictions mean sales of books through brick-and-mortar will decline by 65% over the next five years”, wouldn’t you have started out reading it assuming I was nuts?

I did a post three months ago called Why Are You For Killing Bookstores? which was on a similar topic, focusing on the see-saw relationship between ebook growth and bookstore survival. (When one goes up, the other goes down.) It was one of the most commented-upon posts in 17 months I’ve been writing the blog. I think that was a result of what could be a corrollary to Sinclair’s maxim which would go something like this: “it is very hard to get somebody to understand something when understanding it would highlight the conflict between two propositions that appeal to them.”

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One of the recurring characteristics of “change” is that the first iteration of something new looks a lot like what it is replacing. So it has been with ebooks and ebook retailing. The ebooks themselves have, for the most part, been the same as the print books except rendered on a screen instead of on paper. And when we say “the same”, we mean right down to duplicating meaningless blank pages and the legend often found in print books that tells you how many printings the book has had. (This still happens frequently; I’ve just experienced it on The Big Short which I’m now reading in B&N’s reader.)

And ebook retailing has also imitated print book retailing in that the emphasis has been on the assembling the largest possible aggregation of book title choices in one place. This is a paradigm that makes intuitive sense in the physical world; once I’ve driven to my local superstore, I don’t want to find the mysteries are here but the cookbooks are in a store down the block.

It has been a long-established “fact” (although I question if it is still true, as we’ll explain later) that the larger is the selection of books available in a single location, the more powerful is the magnet to attract customers. My father found this out when he was in charge of the Brentano’s chain in the 1960s. Their Short Hills, New Jersey store was the worse-performing store in the chain until they doubled its title selection. And then, like magic, it became the best-performing store in the chain.

Amazon dot com reproved the point when they went into business in the mid-1990s. Although they were not the first online bookstore, they were the first to really attempt to carry everything. In fact, they went beyond carrying everything by providing a database (obtained from Baker & Taylor, in which there is another story) that not only showed just about all the books in print but also books that were no longer in print! Conventional publishing and retailing theory at the time would have said it was a bad move to return suggestions in search results that were books not available for sale. But, of course, it built their competitive advantage. They rapidly became the best place to search because of the completeness of their database and, actually, confirming to a customer that “what you want is a book that was indeed published but is not now readily available” made it easier to sell the customer a substitute. Whereas the the store (online or off) that didn’t have the unavailable book but didn’t also provide that information found it harder to close the alternate sale.

The point about the importance of selection was proven again by Amazon when they launched the Kindle in November, 2007 and lit the fire for what is still a spreading conflagration of ebook reading. Before Kindle, there were perhaps 100,000 ebook titles available as PDFs that could be read on a full-function computer, but not nearly as many in formats that could work on smaller devices (Palm, Mobi, Dotlit). Amazon launched Kindle with about 150,000 titles and used their market power to get big publishers to put more and more of the newest, hottest books into their format closer and closer to publication date.

There were other features of the Kindle (the ability to load books wirelessly and instantly without going through an intermediary device; its easy-to-read e-ink; its built in dictionary; Amazon’s deep relationship with very large numbers of online book buyers; and, of course, eye-catching prices relative to the print edition prices of the hottest new books) that fueled its near instantaneous success, but the robust title selection was a critical element.

So to that point — one could say to this point — the largest possible selection in one place has been as important to the success of an ebook retailer (obviously: online) as it was historically to a print book retailer with a physical store.

Early in the decade, it occurred to me that the magnetic power of the large selection in one physical store had sharply diminished. When Dad doubled the inventory of the Short Hills Brentano’s, he delivered a selection that the consumer couldn’t match for many miles around. When Barnes & Noble and Borders got Wall Street money to replicate the Bookstop model of 100,000+ title superstores in the early 1990s, they were enabling consumers to find conveniently books which had previously been obtainable only with great effort. But the limitless shelf space of online bookselling undercut that advantage and by the early part of this decade, it seemed to me that the consumer was finding the unlimited availability of titles online which could be delivered in a day or two so powerful that the large selection in a store that might be available immediately had really diminished appeal.

But there’s another thread of bookselling history on- and offline that I believe will soon become the dominant paradigm for ebook retailing. And, of course (just so you are reminded what blog you’re reading), it fits into the concept of “verticality”.

Publishers have known for a long time that good deals can be made and large sales can be registered through what we call “specialty retailers”. (The label for these sales in a publishing house, and others such as sales to catalogers or premium sales, is “Special Sales.”) The store that sells the tools and materials to refinish your floors can sell you a book to explain how to do it. The store that sells computers and paper and ink can also effectively sell resume or how-to computer books. The garden supply store can sell books on how to make your roses bloom.

Amazon and other online merchants (and not just of books) have long operated “affiliate” programs by which a web site can earn a commission on sales made at the primary merchant by referring a customer. This generally works by having the affiliate site promote a particular book title; when the site visitor clicks on the link, s/he is delivered to Amazon or BN.com’s page for that title. If the customer buys, the referring site gets a commission. These revenues don’t often amount to big money for the referring sites (although they sometimes do), but it is believed (but as with All Things Amazon, we don’t have the critical data to confirm) that, cumulatively, referrals from perhaps millions of affiliates deliver significant volume and customers to Amazon (and others.)

This is as far as “special sales” have gone in the ebook world. But the guess from here is that this is about to change and that the change we’ll see in the next few years will obliterate the notion that “all subjects in one place” is a significant marketing advantage, online or in a store. Many book sales, and particularly ebook sales, will move to “contextual” resellers. Your accountant’s web site will sell you the book(s) that help you understand a new tax law or how to ready your business for sale. Your favorite sports web site will sell you the new biography of Alex Rodriguez. And your favorite “Literary Review” newsletter and website will take care of your needs to acquire fiction directly and without your having to shop the vaster stacks of an online superstore.

That is: curated ebook offerings (a click away from the ability to buy lots more content beyond the curated selection) will be featured on every web site with any significant traffic. Delivering purchaseable content — books right now, but ulimately magazines, shorter articles, and relevant audio- and video-content as well — will become a standard expectation of any site (or web community) that aspires to a true mutual embrace with its site visitors. “What I’ve read lately and liked, and why” is a legitimate offering to anticipate from every blogger or commentator with a following.

Last week, Barnes & Noble held its regular call to announce financial results and future expectations. In that call, B&N expressed the expectation that the ebook world would ultimately settle down to about five players and that they’d be one of them. With that perspective, they saw for themselves a reasonable proportion — say 20% — of the ebook market.

My first reaction to that was “what are they thinking? There won’t be five online booksellers; there will be five million.” A day or two later I had a conversation with one of my personal tech gurus who saw it the way B&N’s statement suggested they did  (”it will consolidate, just like the music business did…”) He also asked a lot of practical questions. On what devices will these ebooks be read? How will all these individual sites deal with the format issues, the DRM issues, the customer service? In other words, “great vision, Mike, but how can it possibly work?”

I think it will work like affiliate sites worked, but in a more sophisticated way. A strong central operator providing scale facilitates the commercial offering of the niche player. The harbinger of the future is the deal announced last week between F+W Media and Ingram Digital. Ingram is setting up all F+W specialist web sites (and they have them for many different vertical interest groups) with the ability to sell both ebooks and print of all publishers to their site traffic. (Although we have working relationships with both companies, we weren’t involved in that deal and don’t know any of the details.)

I believe that the Ingram-F+W deal is the start of something new and big. Both companies are going to find ways to improve on whatever is the starting point. F+W is going to have to learn how to merchandise what Ingram can give them into a unique shopping and content consumption experience for the consumer. And Ingram is going to have to learn how to deliver what they can offer to F+W in a way that enables F+W  to curate and enhance the selection to deliver something uniquely customized to its own community.

If that view of the future is right, the competition among the players who can provide the ebook selection and transaction services Ingram does — those in the game already like Amazon, B&N, iBooks, and Kobo and those saying they’re about to come in like Google, B&T’s Blio, and Copia — is going to take place in a whole new arena. B&N has announced deals like this, where they “power” somebody else’s bookstore. Kobo hasn’t yet, but I’d expect them to; it just seems to me like an opportunity they’d see. This is a bit odd; it puts “wholesaler” Ingram in competition with retailers to create the next round of niche retailers. Ingram obviously has the built-in capability to offer print and electronic book delivery but, of course, B&N has the internal resources to do that too, and  B&T can do it too. There are anomalies to rationalize about margin, but, in the end, customer acquisition through this strategy will be far cheaper than it is most other ways, even if a fixed margin from the publisher is shared with the niche player.

This business hasn’t really begun to happen yet; we’re just seeing the outlines of it. Initially, the competition appears to be about how each retailer delivers its vast set of content choices to the online consumer in a consolidated way. (And usually it has been the same for Ingram. Most of their business has come from large “sell everything” ebook stores.) But over time it will evolve into a competition for niche resellers. Winning is always about delivering the best consumer experience but the challenge will be to deliver the best consumer experience to somebody else’s consumers. White label is the key to the ebook (and book) retailing future.

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