General Trade Publishing

Full text examination by computer is very unlikely to predict bestsellers


PW currently has a story on a forthcoming St. Martin’s book called “The Bestseller Code: Anatomy of The Blockbuster Novel” in which authors Jodie Archer and Matthew L. Jockers “claim they created an algorithm that identifies the literary elements that guarantee a book a spot on the bestseller lists.” As readers of The Shatzkin Files know, I consider my Logical Marketing partner Pete McCarthy the industry expert on all things books-and-digital. Since we are knee deep in a new as-yet-not-announced project to build a SaaS capability for digital marketing, I have a few others with expertise to tap as well.

My team’s view is unanimous. The idea that the odds a book will make the bestseller list can be calculated from the content of the book alone, without regard to consumer analysis, branding, or the marketing effort to promote the book, is ridiculous.

This idea has arisen before. BookLamp was bought by Apple and they had a similar “full text analysis” proposition. Before they pivoted to being primarily a pathway for publishers to China, a company called Trajectory offered to generate the book marketing metadata from a full text search. Neither BookLamp nor Trajectory was so bold as to claim they could identify bestsellers from textual analysis. But even their more modest claims, to drive discovery from what they learned that way, failed to pass muster with us.

Trajectory did their demo on a Mayo Clinic Cookbook. To see how our methodology worked compared to theirs, we did what we do (audience analysis for a book’s potential customers) for the same title. We found everything useful that they did, plus a lot more.

As Pete has explained to us, repeatedly, the customers you’re looking for have not read the book. You capture them by appealing to their interests and their searches in ways that they find appealing and in language they understand.  He reminds us from time to time that the words “civil rights” “don’t appear in To Kill a Mockingbird”.

According to its Amazon page, “the Bestseller Code boldly claims that the New York Times bestsellers in fiction are predictable and that it’s possible to know with 97% certainty if a manuscript is likely to hit number one on the list as opposed to numbers two through fifteen.”

Our verdict on this: absolutely impossible.

And our hunch is that their publisher feels the same way. After all, if you had access to a capability like this, and you believed it, wouldn’t you do a few bestsellers on your own before you revealed any of it to the world?

And as a reality check and a basis for comparison, take this on board. Google now predicts the opening weekend’s box office for new movies. They look at all sorts of data: number of screens, box office results from previous movies by the headline actors, search volume for the movie itself, YouTube views of the trailer, genre, seasonality, franchise status, star power, competition, critic and audience ratings of any preview. They don’t try to read the script. They could semantically analyze the dialogue in the movie. (And Google has the most sophisticated capabilities in the world to analyze moving images or text!) But they don’t, because it wouldn’t be predictive.

Or, in book terms, it is much more predictive of bestsellers to look at the number of copies shipped and how many stores the book goes into. The Nora Roberts or James Patterson title that ships tens of thousands of copies with some going to every Barnes & Noble store will become a bestseller, regardless of the plot structure. And the greatest book in the world that ships 5,000 copies and only goes to a handful of B&N’s almost certainly won’t.

It isn’t just “books in stores”. Amazon orders printed books too. And there are ebook pre-orders (although damn few for any unknown author). From a publisher’s perspective, the book for which they can get an advance commitment from the supply chain (which today means “get it out in quantity”) will always have a better chance than the greatest book in the world for which they can’t.

The message for publishers is that audience research, with some of it specific to each title you publish, is the key to success in the digital age.

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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Four players in the book business with the power to rewrite some of the rules


The news came last week that ReaderLink has purchased Anderson News. Those two companies have been the leading suppliers of books to the mass merchandisers: primarily Wal-mart, Target, and Sam’s Club. There are other players selling books in the space, including Ingram, Baker & Taylor, and smaller distributors like the less-well-known American West. But most of the books going to most of the mass merchant accounts have gotten there through what will now be one company supplying them: ReaderLink.

By my count, that puts four companies in the book business who have extraordinarily powerful holds on their space. They are ReaderLink in the supply of books to mass merchants, Amazon as an online retailer, Barnes & Noble as a bricks-and-mortar retailer, and Penguin Random House as a commercial trade publisher.

ReaderLink, Amazon, and Barnes & Noble now have extraordinarily powerful positions from which to demand better terms from their publisher-suppliers. In all three cases, they have customer bases which are extremely difficult, if not impossible, for a competitor to take away from them.

Amazon has pretty much owned the online book customer since the year they opened for business in 1995. There is a faint hope that fragmentation of the online marketplace and the placement of commerce in the social stream, such as is enabled by Ingram’s Aer.io technology, could wrest some of their share. Perhaps, over time, that will happen. But they keep pulling further ahead of their only real competition, BN.com, and I am not aware of even one single reporting period when Amazon’s share of the online book market hasn’t grown. It is simply not an option for a publisher who wants to sell to consumers to avoid Amazon. (The only way a publisher could conceivably do that is if their customer base is reached entirely by direct sales or through intermediaries outside the book business.)

Barnes & Noble may be losing brick-and-mortar market share to independents, but they remain by far the leading bookstore chain. If a publisher wants books in the retail marketplace, Barnes & Noble has been, since the demise of Borders five years ago, the only one-stop way to get national coverage. In fact, they almost certainly control the majority of bookstore shelf space in the country, and their single biggest competitor, Books-a-Million, has fewer than half as many stores. And B-a-M’s stores are smaller.

ReaderLink is now in a similar position vis a vis the mass merchants. These stores constitute the other big component of the store retailing system and they are critical for bestsellers, mass-market paperbacks, and “merchandise” like adult coloring books and kids books. In fact, ReaderLink and Anderson lived with what was a “managed competition” controlled by their accounts; they each had stores assigned to them by their mass merchant customers. Publishers have always had to deal with both of them in order to place their books in the mass accounts. And, indeed, it could be that there will be efficiencies to this consolidation that will be beneficial for the publishers. But, if there are, it is also quite likely that ReaderLink will find ways to adjust their terms to take at least some of the benefits back and they are likely to be successful persuading publishers to allow that. (They have also manifestly strengthened their negotiating position with those accounts that are committed to stocking books.)

There is a fourth powerful player: Penguin Random House. PRH is almost (but not quite) the size of the other four members of the Big Five combined. As such, they are in a position to do things in the marketplace that no other publisher could contemplate. Since the merger of Penguin and Random House, I’ve written about what they uniquely could do with their marketplace power. The two key suggestions, neither of which has drawn any evident interest from the management at PRH, were a program to supply non-bookstores with vendor-managed inventory (creating store retail accounts nobody else would have) and to create their own ebook subscription service. (That would also create unique distribution.)

The new combination in mass-merchant supply could suggest another such opportunity. Perhaps this one will be more compelling.

The supply of books to mass merchants, as to any account that is not primarily in the book business and comfortable with both the logistical challenges and relatively low profit potential in books, is complicated, expensive, and usually inefficient. The number of titles that actually make it into these stores is a paltry percentage of the industry’s output. Only the biggest publishers have enough of the right books to really play.

And then the publisher has to cover both the retail accounts that will ultimately sell their books and the distributor-intermediary that supplies them. It will be a bit easier for the big publishers selling books to Wal-mart and Target to manage the business through one big account rather than two (one fewer account to deal with), but it is still a frustratingly inefficient segment of the business. (The one fewer account aspect of this is bound to be causing some nervousness right now in the sales departments of some publishers.) Visibility into inventory status is, relative to the store-level view available at Barnes & Noble, klunky. Returns are high. Responsiveness to breaking events is slow. And the margins are worse than for any other part of the domestic business.

But part of the reason for that is that delivering on the service requirements for these accounts is expensive. One sales executive I spoke to estimated that ReaderLink has more than 2500 detail people calling on the outlets of the mass merchants: checking stock, tidying fixtures, and replacing sold books. No wonder these distributors need hefty margins to do this work. And this also explains why Ingram and Baker & Taylor, who, of course, carry all the titles these merchants would ever need, don’t appear to move aggressively to take this business away from the incumbent(s).

To picture the Penguin Random House options, I try to view this from the perspective of one publisher with about half the books that these mass merchant accounts need. I’m giving away margin to a middle player that adds a layer of inefficiency and cost in order to be an effective aggregator. Obviously, the accounts want that aggregator. They don’t want to deal with hundreds of publishers individually, or even with just each of the Big Five. It would be a non-starter for a publisher supplying five or ten or even twenty percent of their books to say: “can we work out a way to do this directly?” So just about everybody has to accept the inefficiency.

But what about if it were a supplier that provided half the books? And what if that supplier offered, as an opening gambit, to share some of the margin that now goes to the middle player directly with the account? And what if that effectively became the account’s only way to get those books, because the powerful publisher was no longer willing to play ball with the high discounts and high returns that the current system entails?

Only Penguin Random House is in a position to take this approach. And it wouldn’t be an easy thing to do. They’d have to create a VMI system. They’d have to organize a detailing army quite different from the sales force(s) they have created and managed historically. They’d have to either gear themselves up to execute more smaller shipments or form alliances that would make that possible. But the payoffs would also be substantial. And PRH has a much bigger margin share to support their efforts than ReaderLink, or any other wholesaler or distributor, would have.

Sales would go up. Returns would go down. Margins would improve. Their competitors would be weakened. In fact, it is conceivable that, over time, a PRH direct-supply operation could morph into a ReaderLink service that was available to other publishers as well. (All big publishers, including PRH, already offer their core distribution services to competitors. This would be a variation on that theme.)

Perhaps Penguin Random House will never behave in a qualitatively different way than the other Big Five houses, exercising power that they uniquely have. They certainly haven’t so far. On the other hand, it was pointed out to me recently that the integration of what were the two biggest publishers among the Big Six when Random House and Penguin combined four years ago is, even today, not yet complete. Rationalization has occurred in the “back end”, with the consequent job losses which are part of the payoff for the owners in any big merger of this kind. But more consolidation is still in front of them, and perhaps the radical paradigm-shifting initiatives need to wait until that job is really done.

And perhaps Amazon, Barnes & Noble, and now ReaderLink are wary of poking the bear, and are less demanding that PRH honor their primacy with margin than they are of PRH’s competitors. In fact, the CEO of one of their Big Five competitors told me a year or two ago that he liked having a competitor of PRH’s size on the publisher side because this executive felt it kept the overall industry terms under control. The belief on this CEO’s part was that PRH’s size restrained the big accounts to the benefit of all the big players.

But unlike Amazon or Barnes & Noble, whose businesses can not be efficiently replaced by any direct effort, the supply of mass merchant accounts is something PRH could conceivably do better on their own. Whether the acquisition of Anderson by ReaderLink provides the catalyst to get them to try it is something it will probably take a couple of years to find out.

Although Ingram occupies a unique position in the global book supply chain and, indeed, might be the single most important player, they aren’t in the position of these other four to exercise power. In wholesaling, they have always had a powerful national competitor, Baker & Taylor, which is now even more financially stable having itself been acquired last week by Follett. Even in smaller-publisher distribution, where Ingram grew dramatically by acquiring Perseus, they will always have all the big publishers and a host of smaller distributors as alternatives for those considering their services. Indeed, Ingram could try to compete with ReaderLink for the mass merchant accounts, but they’d have to support the substantial systems and staff investments on a distribution margin, which is a much more challenging proposition than it would be for PRH with the publisher’s margin.

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A great step forward by Sourcebooks which we expect other publishers will imitate


Since I started working with Peter McCarthy, he has been impressing me with the importance of publishers doing “research” in the digital age, by which he means “audience research” done with a variety of online tools. That audience research should inform what publishers do to market their books by identifying, segmenting, locating, and understanding the potential buyers for those books. That enables publishers to “aim” their marketing efforts where they are likely to do the most good.

Indeed, everything we do at Logical Marketing, the suite of services we have built around Pete’s unique knowledge and talent, is informed by the research we do. Sometimes it is clear that the deliverable really is the research itself. At one point in the course of my learning from Pete, we published a piece in this space suggesting that every publisher really needs to have a dedicated research function.

What we were already beginning to see then (and more since) is that many publishers, and by now most of the big ones, have created an executive position with the word “audience” in the title or job description. The responsibilities to address audiences required research as a prerequisite, but it has seldom been framed that way.

This week we were delighted to see that Sourcebooks, a legitimate contender for the title of “most innovative company in book publishing”, has created a “data and analysis” department. As reported by Shelf Awareness in its newsletter (and also reported by Publishers Marketplace and Publishers Weekly):

Sourcebooks has created a data and analysis department that brings together “experts from supply chain, editorial, and sales” to streamline data functions and offer a higher level of analytical support to departments, partners and customers.

The only part about this that is disappointing is that the word “research” is not in the department name or description. But the separate department to specialize in “data and analysis” is exactly what we were advocating when we called for creation of research departments.

It is important to keep the connection between “data and analysis” and “research” in mind because, historically, “data and analysis” in publishing have meant “post mortem analysis” of specific marketing efforts. Indeed, many publishers have “analytics” roles already, but they are not cross-functional and they tend to be focused on analysis of time-honored activities, not applying new techniques on audiences as is enabled in the digital age.

As an industry, we have usually used “data and analysis” to measure the effectiveness of prior activities rather than to understand what we’re aiming at in the future. Being explicit about the fact that “research” is the core function means you are also being explicit that the primary purpose of that function is to aim future efforts, not evaluate the successes or failures of prior ones. Research is seeking to be predictive as well as to inform rapid response to an ever-changing landscape. With most of their existing capabilities and activities, in Pete’s words, “publishers don’t look out; they don’t look forward; and they don’t look ‘big'”.

This is not to say that it isn’t worth knowing whether an ad or a promotion that was tried last week paid off. Indeed, knowing that could influence whether you try that same promotion again. But it is far more useful to be better informed before money and effort are expended than after. And what useful audience identification and segmentation research delivers is the knowledge that enables marketing efforts to be aimed at the right audiences and with the right messages to have a greater possibility of succeeding, and doing so more efficiently.

Publishers will always be interested in knowing whether the front-of-store placement they bought or the author tour they paid for moved the needle on sales. But it is actually more important to figure out before they spend the money whether the customers they’re looking at are good candidates for an impulse buy at Barnes & Noble or likely to be affected by the media exposure an author tour would bring. And the same research that will uncover answers to those questions will also tell the publisher what messages to stress on their cover copy or in media opportunities. And it will tell them which search terms are both revealing of “intent” (to buy, to learn, to know) and occur in enough volume to be worth going to extra efforts to rank for them.

We applaud the Sourcebooks approach to staffing their data and analysis group, which acknowledged that “editorial, sales, and supply chain” needed to participate. (We would, emphatically, add “marketing and publicity” to the list.) Audience research and understanding can be used productively across a range of publishing house activities: acquiring the rights in the first place; shaping the book from proposal to completion; creating all the marketing copy, from that on the book itself to what’s in the catalogs or ads; the geographical placement of physical copies in the retail channels; the timing of reducing stock levels in the supply chain; and the identification and execution of newly-arising opportunities on the backlist.

All this covers the “who”s (staff members with what skills and what in-house knowledge) and the “what”s (the tasks research can inform), but not the “how”s of doing this work. The research itself is done with a set of digital tools. Some — like Google Trends, Moz, SimilarWeb, and Facebook Audience Insights — are known to a lot of marketers and we could almost say they are “commonly” used. (They should be.) But a super-expert digital marketer — like my colleague, Pete McCarthy — work with many more. Pete uses over 150 tools that help him get insights from just about every platform and understand search in a highly nuanced and targeted way.

Educational seminars are a component of our Logical Marketing suite of offerings and we are comfortable introducing fledgling audiences to very sophisticated digital tools. But learning more than a 100 of them — that they’re there, what they do, and how to use them — is not something that is done quickly or casually. It might not require the 20-plus years of experience in the industry Pete has, but it’s not something you do in a month, or even a year. And then understanding how all these tools and insights are best applied to the book business is another important requirement that also takes time and application to achieve.

We’re delighted to see Sourcebooks taking the lead at recognizing the cross-functional requirement of data and analysis and we fully expect that effort by them to be a leading indicator of where the industry will go.

The Logical Marketing team has worked with just about all the biggest publishers and, of course, that includes Sourcebooks. We have done a seminar on how to think “audience-first” with them. Currently we’re working on a project helping them create landing pages to improve traffic to two of their websites. We had absolutely nothing to do with their decision to create a department for data and analysis, but we’re not surprised they’ve taken that initiative. We’ve seen up close how seriously they take both digital change and innovation. We’re proud of the fact that the companies we work the most with are the most sophisticated and advanced at digital marketing. Sourcebooks is a prime example of that.

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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When it comes to supporting authors in marketing efforts, no publisher has it right yet


It is my firm conviction that the biggest shortcoming of traditional publishers these days is their failure to help authors help themselves with digital marketing. In my opening remarks at Digital Book World earlier this month, I said this:

At the very least, every house should do a “digital audit” for every author they sign that includes concrete suggestions for filling in gaps and improving discoverability and engagement. To my knowledge, not one does.

Perhaps it isn’t surprising that there are people in big houses, even some who view things from a high perch, who emphatically don’t agree with me. One senior executive told me I was “completely wrong”, and said their editors were very much up to speed with what authors do on social media. Another, a publisher from a different house, asked me if I really believed “landing pages were important”. Of course, if you don’t see the pay-off from creating and managing landing pages on an author’s website (or the publisher’s own!), you might make the mistake of thinking a robust social media presence obviates the need for an author web site.

That is a mistake. And it is an increasingly common one.

Citing the expertise of editors as the lead claim for a house’s expertise is a tip-off. I have never seen the publishing house where editors were more expert in digital marketing than marketers are. Most author websites are sub-standard but most editors don’t have the knowledge to know that. And, on top of that, neither editors nor authors fully understand the different roles of websites and social media in the marketing effort for a book and author.

If the feedback from these two executives were exceptional or unusual, it wouldn’t be worth mentioning. But it is typical. And both of these houses are making substantial investments to upgrade their digital understanding and performance. They don’t have their heads in the sand.

It isn’t just my imagination that there is a disconnect between big publishers and their authors on the digital marketing front. This shortcoming is real and it is going to really hurt the big publishers, far beyond the sales they’re losing, if they don’t fix it.

I recently tested this idea with one of the most digitally-ept literary agents. I asked him whether he agreed that publishers are failing in this regard. He did. Completely.

If there’s a gap here, somebody is going to fill it. Just this week, the relatively-new Diversion Books announced a new initiative called Radius, a “full-service publishing services division” with distribution through their affiliation with Ingram. They are targeting “non-fiction authors with very specific and known audiences (consultants, experts in a field)” looking for help “with various aspects of the process–editorial, cover, production, marketing and publicity etc.”

In other words, they would like to partner with perhaps the most desirable category of non-fiction authors: those with a real marketing platform independent of any book publishing activities. Those authors often have pretty decent personal marketing already set up; if they don’t, they are delighted to have professional feedback about how to improve it. Radius will provide a powerful reason for those self-promoting authors to work with them rather than with an older and more established house.

It is worth noting that Diversion was founded by a literary agent, so it is highly sensitive to the author perspective. What they have built is essentially a customized front end to industrial-strength services provided by Ingram, with easy access even for individual authors through what is called Ingram Spark. Diversion is a new-era publisher. They created a service arm and community called EverAfter to serve romance authors; Radius will primarily serve non-fiction authors who have already built audiences. Undoubtedly, other entrepreneurs will build on-ramps to these Ingram capabilities for other segments of the author community.

Should publishers worry about this? Well, the ones who depend on authors can expect more and more services and fledgling publishers trying to make a more appealing offer to them. (And those that don’t depend on authors exist, but they are the exception, not the rule.)

The author platform question is further vexed by the way publishers are organized. Editors “own” the author and agent relationships. Marketers and/or sales departments “own” the marketing resources. To be good at their jobs, editors need to recognize commercial content, negotiate the many moving parts of a book deal, and help the author craft the most salable possible book. Knowing digital marketing or best practices for search engine optimization are not what editors are hired or trained for. Those are the bailiwick of marketers who are explicitly (in most houses) excluded from direct author contact.

Beyond that, there is the confusion in publishing houses, reflected in the question I got about landing pages, about what’s important and what’s not. I can’t tell how widespread this is, but I have heard too often for comfort that “author web sites are a waste of time”, that social is more important, and that working Facebook effectively obviates the need for a web presence.

In fact, “search” is still the single most important component of discovery and author web sites are crucial for Google to “know” who the author is and to have a contextual understanding of their expertise and their audience. Precisely how the web site provides value depends on the author. For a non-fiction author, it can establish topic authority. For a multiple-title fiction author, it can provide definitive information for the order of books in a series or for the back story on the author’s characters (whose names, of course, can be important search terms for the book).

But what is always true is that the web site is the one piece of digital real estate the author can actually own, which is not subject to some change in rules or process that will affect its discovery in search or the ability to use it for any purpose of the author’s choosing. Ideally, a publishing house will evaluate an author’s own web site as part of an overall digital audit and make constructive suggestions for improving it. If the author doesn’t have one, the house should provide a simple placeholder site that gives fans a place to land or link and can be the ultimate authority of facts about the author and the book.

And only by controlling a web site can an author or publisher control the single most powerful tool there is to promote an author through search: landing pages. Best practice is to optimize a landing page on the author’s site for each of the most commonly-searched terms that could lead to real interest or the sale of a book. Anybody who really knows SEO knows that. That’s why the failure to grasp the significance of landing pages high up in a big publishing house is so disturbing.

It really is terrific that so many publishers these days have a high-level executive with the word “audience” in their title and job description. It is a sign of real progress that many of the big houses have invested in vertical sites to build audiences they can tap at any time.

But they’re still missing the most important boat. The real focus needs to be on marketing collaboration with authors and giving them the support they need to maximize their effectiveness. Doing that requires tackling a lot of tricky questions because authors own their names and careers and publishers, at best, have a long lease on one or more specific books they’ve written. But both book sales and author retention depend on publishers taking on this challenge as an essential component of their offering.

I did a post for BookMachine some months ago spelling out a strategy for authors who were marketing themselves.

Here’s a quick checklist of what a useful publisher audit of an author’s digital footprint might be looking for:

* A robust author website to anchor an author’s complete digital presence and act as the central hub and source of authoritative information on everything about the author, her books, her work, and life

* Complete author and book information at book cataloging and community sites like Goodreads and LibraryThing, as well as at all online retailers (especially an Amazon Author Central page)

* Google+ to signal to Google who an author is, what she writes about, and all of the things connected to her

* The right social media mix, which can vary — and evolve — depending on the author, the type of books she writes, and the interests and demographics of her audiences

* Mechanisms to collect, manage, and effectively use email addresses

* Ongoing efforts to maintain accuracy and relevance across all of these

* Effective cross-promotion (across titles and authors)

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If the industry is changing, publishing house structures, processes, and budgets need to change too


A thought kept recurring — one I’ve written about before — while I was learning new stuff at Digital Book World last week. The structure of publishing houses and of the publishing process as it has developed over the past century make some of the challenges and opportunities of publishing in the emerging digital era very hard to address for publishers operating at any degree of scale.

One example arose from the incredibly insightful presentation from Author Earnings’ Data Guy. As most readers of this blog know, Data Guy is the pseudonym for an author-cum-analyst who scrapes the sites of book retailers, starting with Amazon, and breaks down the sales of ebooks (and now print books too) looking for insights. One of the most compelling Data Guy insights shown in what he presented at DBW is the importance of “introductory” pricing for debut authors. What DG’s data strongly suggests is that the odds of a debut author breaking through are increased dramatically by having very-low ebook pricing.

That’s quite a challenge for a conventional publisher who has a one-book-plus-option deal with a debut author. Making money becomes very much more difficult if ebook prices are lowered dramatically. Doing that would almost certainly also require that the print edition for the debut be a trade paperback, not a hardcover, or the stores would feel really disadvantaged by the edition they had to carry. So to adopt this as a strategy, publishers would have to sign all debut authors to contracts for two (or more) books, so the debut could be seen as a loss-leader with a later opportunity to cash in.

Otherwise, the publisher takes a loss on the debut book and then, even with an option, has to bid against other publishers if the debut is commercially successful (which does not mean it necessarily “made money”).

Here’s another way publishing as it is done now structurally precludes using modern techniques. One piece of wisdom from DBW workshops last week was repeated in Monday’s New York Times. Andrew Rhomberg’s Jellybooks enables publishers to track the ebook reading of a book across enough people to draw some interesting conclusions. The Jellybooks data is being used by some publishers, apparently right now mostly in Germany, to adjust marketing spending. Publishers can reduce what was planned to be spent on a book nobody’s finishing, or increase the budget for one which is getting a surprising level of traction. But there is clearly no time, or appetite, for addressing the fact that most people abandon midway through Chapter Five.

Now that there is a tool that enables publishers to understand how readers react to a book, wouldn’t they want a publishing structure that gave them time to use what they can learn to craft a more appealing piece of intellectual property?

Here’s another takeaway from DBW that requires structure changes at publishers. The “transforming” publishers often cited the need to create consumer-facing brands to work for them. Mary Ann Naples mentioned it as part of Rodale’s strategy. Dominique Raccah’s Sourcebooks has created “Put Me In the Story” and “Simple Truths” to appeal directly to consumers, while not trying to make Sourcebooks a consumer brand at all. Marcus Leaver is in the process of reorganizing Quarto around verticals and nesting them in the “Quarto Knows” rubric to create a public face that is logical for consumers.

Publishers need to come to grips with this. Publishing brands — house names and imprints — have always cultivated their B2B reputations. They are about impressing bookstore buyers, library collection developers, reviewers, and authors. They are not about selling to the public. Yet imprints that are not audience-centric are still being created, and most big houses have books for the same or similar audiences housed in different imprints. It certainly won’t always be possible to create new brands that are also new businesses, as Sourcebooks has done (once from a standing start and once by acquisition) and which Quarto may ultimately aspire to do with Quarto Knows. But all houses need to be rethinking their imprint and presentation structures, as well as tailoring their acquisition decisions to fit an audience-centric strategy.

Another point Mary Ann Naples made, citing a speech that Dominique Raccah made a couple of DBWs ago, is that experimentation and failure are a critical requirement for success. One wonders how many of our biggest publishers — which are, after all, corporations seeking profits and measuring their sales and margins quarter-by-quarter — have built that understanding into their internal scorecards. It seems doubtful that employees of big houses are encouraged to try things that might very well not work and then take the learnings on to a next experiment.

We’ve been experiencing the structural barriers to doing the right thing throughout the building of Logical Marketing Agency, the digital marketing enterprise I work on with Pete McCarthy and Jess Johns. One of our core tenets is that valuable market research is now pretty cheap, and it should be done to inform all acquisition decisions and as a first step preceding all other marketing decisions, including the writing of any copy.

Even getting publishers to accept the idea that research should be the first step built into the marketing workflow has been hard, although we’re making progress. We’ve worked with all the Big Five houses, and lots of others, and perhaps 100 bestselling authors. We now see a couple of big houses that are really beginning to see the light. What has been much harder to get across, even though it should become standard practice, is persuading publishers to do research into a topic or author they’re looking to acquire. Only in a couple of cases where publishers were preparing for a possible bidding war have we succeeded in getting publishers to make that investment.

Understanding “why” isn’t hard. There is simply no budget for editors to do research on a book not yet under contract. But there should be a research budget for editors. To not have it means we are requiring editors to invest the house’s money based on hunches and guesses when actual data and facts could be employed. Sometime in the future, we’ll look back at a time when editors had no budget to do research into big acquisitions and wonder what we were thinking. And the answer will be that big houses hadn’t yet matched their structures, processes, and workflows to the new digital realities.

It would be nice to think that big houses are indeed rethinking their imprint structures and acquisition-to-development-to-publishing workflows from end to end, but out of the public eye. The industry is transforming. Each house has to examine itself for how it too should change.

I was flattered that the folks at Bookbub, writing about the marketing takeaways from DBW, ranked my observations about how publishers need to work more effectively with authors on their digital footprints and branding number one. This also points to two really significant structural issues.

One is that publishers sell individual titles, not author careers. Many authors have books across houses, and houses are reluctant to invest in selling other publishers’ books. That creates a real barrier to thinking through and investing in the author’s branding in many cases.

The other problem is this. Even the marketing departments of publishing houses are challenged to keep up with all the opportunities in digital and to think about them across titles and verticals as well as authors. But the house’s normal “interface” with authors and agents is through editors, not marketers. And editors are often not as conversant with these digital issues as their marketing colleagues are.

Some things have to change. Probably most houses need to start schooling editors in digital marketing, at least so they know uniformly more about what authors ought to do to help themselves than the typical author or agent does. That kind of training should perhaps extend to authors as well. But that calls for marketers to be directly in touch with authors and agents, which at the very least complicates the “control” the editors have over those relationships.

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


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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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