New Models

Print book retailing economics and ebook retailing economics have almost nothing in common


There has been a lot of conversation lately about the differences between wholesale pricing and agency pricing for ebooks and about what constitutes a “fair” division of revenue between publishers and retailers. Since the economics of bookstores have been generally misunderstood for years, it is not surprising that the understanding of what changes make sense as we switch to digital have also been misunderstood. A better grounding in the print book economic realities might enable a more informed discussion of what makes sense for digital.

Here are a couple of points about book economics that I learned at my Daddy’s knee.

1. The investment in inventory is the single biggest capital requirement for a bookstore.

2. Given that the ability to invest in inventory is limited, the speed at which inventory “turns” (a measurement of how long a retailer has to hold stock before it sells) is a much more powerful determinant of a store’s total gross margin, and therefore its profit, than the margin it earns on each sale (the difference between what it pays for the inventory and what it is sold for).

In simple shorthand, that means that a retail store selling books can improve its profit more easily by more closely matching what it buys to what it sells than it can by squeezing more margin out of its suppliers. It also means that a publisher can do more for a store’s profitability by shipping quickly and allowing smaller orders at workable discounts (which make it easier to match supply to demand) and offering delayed billing than it can by offering extra points of discount (which is what added margin is called in the book business). The additional benefit of employing this understanding is that margin division is a zero-sum game, but increased inventory efficiency is actually synergistic: both the publisher and the retailer benefit from it.

This reality about bookstore economics explains the value to the supply chain of wholesalers like Ingram and Baker & Taylor. By offering the ability to combine orders across publishers and giving rapid, often next-day, delivery, the wholesalers enable stores to gain much more inventory efficiency at a relatively trivial reduction in margin. (Where the publishers’ “deal” is sometimes better than the wholesalers’ in a meaningful way is that publishers will often allow a longer period before demanding payment. Inventory “investment” only really begins when the books the store received are paid for.)

So, in fact, there is very little similarity between the economics of retailing print and retailing ebooks. The tech infrastructure for selling is not a trivial investment, and DRM — including customer service — is a significant expense that ebook retailers deal with that bookstores do not. The print retailer has to build a customer-friendly location and invest in (presumably knowledgeable) clerks. How those costs of doing business compare is a complicated question that changes over time as the tech gets cheaper and the cost of physical locations — driven by ever-higher real estate values in the attractive neighborhoods where bookstores tend to thrive — goes up.

But the things that change aren’t nearly as important as the things that don’t.

The stock turn of an ebook retailer is infinity. There is zero inventory investment.

Publishers first had to deal with the question of what the bookstore’s margin should be on ebooks back in the late 1990s when Palm Digital and Microsoft created the first reflowable ebook platforms. Prior to that we had PDFs, which delivered — in the current jargon — “fixed page layout” ebooks which didn’t adjust the number of words per screen to the screen size. At that time, the ebook retailers were inclined to sell at publishers’ “list prices” and publishers tended to price ebooks at about the same level as print.

But nobody paid a lot of attention because the sales and revenue were de minimus. Since Palm had the most hand-held digital assistants (Palm Pilots) in circulation back at the turn of the century and because (as we have clearly learned since) portability is one of the big drivers of ereading, Palm’s ebooks were the best-selling format. But Palm decided not to enable widespread distribution of their ebook format; they sold the ebooks themselves through a controlled vendor (originally called Peanut Press and then Palm Digital).

In fact, the mobi format that Kindle uses today was developed at the time as a bridging format, able to be read on both Microsoft and Palm devices. This was before the creation of the epub format used by everybody except Kindle today. When Amazon bought Mobi, it was apparently to prevent any other retailer from building a real ebook business selling to what was then the “entire” ebook market. B&N’s one-time exit from ebooks was because they could sell only to Microsoft and not to Palm devices, which meant they had the smaller piece of what was a very small market. Amazon apparently figured then that they’d enter the market when they were ready, but they wanted to prevent B&N from building a foothold in it before then.

I’d argue that the biggest mistake B&N made in the history of ebook evolution was not buying Mobi before Amazon did.

So it became “established” that ebooks would be sold on a similar basis to print books with discounts of 40 percent or 50 percent off publisher-set retail. It should have been no surprise to anybody that once “real” retailers — not software companies like Microsoft and Palm — took the reins, they’d give away a lot of that margin to go after market share. That’s what real retailers do; it’s in their DNA.

In fact, the first wave of discounting of print in the 1980s by the Crown Bookstores chain followed very quickly behind increases in publishers’ discounts to stores from the low 40s to 46 percent and up. Most people never noticed that; others think there’s no connection. It always seemed to me that the increased publisher discounts and the discounting to consumers were linked.

In the early days of ebooks, the volumes were so low and the tech was still under development, so the significant margin the publishers offered — and the retailers employed — might have been necessary to have any ebook retailing at all. As time passes, the fixed retailing costs get lower and the customer service costs also tend to get lower.

Once a real retailer, Amazon, got into the ebook business, deep discounts off publisher prices had to follow, and they did. The move to agency pricing had purposes beyond the principal one, which was to remove pricing as a weapon from the retail competition arsenal. It also put publishers on a path to set realistic retail prices for consumers and to reduce the notional share given to the sales intermediary from around 50 percent to 30 percent.

There’s reason to believe that even 30 percent is too high, given the plunging cost structure for retail and the economic reality of infinite turn on inventory investment. A senior Random House executive told me during the period they were not in agency (the first year it existed) that part of the reason they stayed out is that the 30 percent figure Apple wanted and the other publishers agreed to seemed “too high”. As it turned out, Random House came in a year later and accepted the 30 percent. They said at the time it was because indie bookstores were attracted to ebook retailing by the assured 30 percent margin and fixed retail prices, and Random House always wants to support independent retailers.

It was always curious to me that the preference of all the other retailers except those who can use the book business as a loss leader — Amazon, for sure, and perhaps Google —  for publisher-set retail prices never made its way into the discussion of the publisher motivation at the time, nor to Judge Cote’s reasoning, nor to the arguments which have taken place about it since.

Ebook pricing today is very confused. Apparently, many of the retailers will accept wholesale terms at a lot less than 50 percent, although this is not widely known and, indeed, isn’t even really confirmable. Discounts of print to bookstores were published, standard terms. That’s not the case with ebooks (because they’re not really sales, they’re licenses, no matter what anybody says, and they are individually negotiated contracts, the terms of which are kept private). Nobody outside Amazon really knows what margin Amazon actually takes from ebook sales; it is certainly true that most of the ebooks are discounted from whatever prices publishers “suggest”. (And sometimes those publisher-set prices may be inflated, particularly if the publisher is selling at a bookstore-like 50 percent discount.) Perhaps they only really take the 30 percent that they get from agency publishers and that they take from individual authors in KDP and that they have said in their arguments with Hachette is the “right” share for a retailer.

We actually still don’t know what the “right” or “fair” margin is for retailers of ebooks. Random House had some idea of that in 2010 when they were holding out and they seemed to think “less than 30 percent”. Comparing ebook retailing economics to print book retailing economics only tells us that physical retailers of print need a lot more to have a viable business. Dad also taught me is that the reason publishers give stores a discount off the publishers’ retail price — which should be the price a publisher would sell the book at if a member of the public came directly to them — is to give stores the margin they need to operate. Because publishers want there to be stores. First purposes may have been forgotten in course of the digital transition.

There is programming relevant to this post at Digital Book World 2015 in addition to the main-stage appearance of Amazon’s Russ Grandinetti main-with Michael Cader and me. We have a great panel discussion on “price promotion” with Josh Schanker of BookBub, Rachel Chou of Open Road, and Matt Cavner of Vook. And “Blue Sky in the Ebook World” where a panel of visionaries will talk about what is over the horizon for ebook retailing, rethinking simple ebooks, making complex ebooks, and creating ebooks with soundtracks. Jonathan Nowell of Nielsen Book’s talk about how the profile of what sells in print has changed will enlighten around this topic as well.

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Export sales is one of the few areas of predictable growth for book publishers


For a client meeting last week, I was shown a chart that came from Bookstats of channel revenue for publishers. Bookstats is the recent (and now no longer) partnership between the AAP and BISG collecting book publisher shipment information. It has four years of data, which were arrayed in a neat bar chart.

Since the chart showed publisher shipments, it was an imprecise gauge of sales. The third largest channel was “jobbers/wholesalers”, and those books went somewhere else (if they got re-sold and not returned), but we don’t know where. Basically all the other channels got those books eventually.

But it is noteworthy that of the eight channels enumerated (one of which is “other”), only two showed increased sales from 2010 to 2013: online retail and export sales.

Indeed, export sales are one of the real growth opportunities for publishers, and particularly English-language publishers, in the future.

The reasons for this aren’t hard to understand. English is the most important second language in most countries that are not English-speaking. And, obviously, ebooks create no-inventory and little-friction distribution opportunities that make it easy for a publisher in New York or London (or Sydney or Toronto) to deliver to a customer separated by any distance or number of oceans.

In addition, the search engines are global so “discovery” can take place anywhere as well which can increase the demand for printed books as well as digital ones, even though the printed books present a more complex delivery challenge.

The opportunity brings along its challenges. One is that rights conventions need to change. Publishers often have their rights to distribute in some parts of the globe limited by contract. But even when rights aren’t an issue, marketing — including both customizing the metadata and the pricing to a very large number of local territories — can be.

This opportunity has grown rather recently at the same time that many publishers have been preoccupied with overcoming obstacles in their home markets. Both the US and UK markets have been roiled by the relatively sudden emergence of a strong ebook market and the concurrent (and related) weakening of the brick-and-mortar infrastructure for print. Publishers have been scurrying to change many of their practices: licensing differently, learning to do SEO well and employing other digital marketing techniques, shifting their internal structures and workflows, and grappling with the opportunities presented by social media. Many have expended effort on apps and enhanced ebooks which were time and money traps in markets that briefly looked promising but then didn’t pan out.

But in a more settled marketplace, which we have now (perhaps temporarily), the opportunities for growing revenue through export sales is going to get increasing attention from all publishers, who will be happy to know that entrepreneurial companies — some new but some quite established and familiar — have been building out the capabilities to help them.

There are three panels at Digital Book World that will really inform publishers that want to work harder to exploit this opportunity.

The mostly obviously relevant one is called “Global Publishing Tactics: understanding distribution, metadata, pricing, and marketing to maximize sales in different markets”. Two of the panelists are Marcus Woodburn of Ingram and Gareth Cuddy of ePub Direct — we have other conversations pending — and moderated by Len Vlahos, the executive director of Book Industry Study Group. Marcus and Gareth and the panelist(s) who will join them have experience selling around the world on behalf of many publishers. Their insight and advice will be gold for publishers looking to expand their export sales.

We also have a panel discussion “Global Market Spotlights: reports from markets around the world”. The four markets we’ll discuss are Germany, Italy, Brazil, and Russia. The panel will be moderated by Thomas Minkus of Frankfurt Book Fair. Our panelists — all of whom are local players — will talk about the switch to digital reading and online sales in those markets, but will also give specific insight into the market for English-language books.

Another discussion which is a bit more tangential, but will still be informative for publishers trying to grow ebook exports, is one on “How People Read”. What we’re trying to get at here is to use the knowledge that ebook platform providers have about the granular detail of reading consumption: about devices, how far people go in various kinds of books, whether they read more than one book at a time, and how they respond to pricing changes. All of our panelists — Micah Bowers of Bluefire, Michael Tamblyn of Kobo, David Burleigh of Overdrive, and Andrew Weinstein of Scribd — are superintending global platforms. Another aspect of what they’ll reveal is how these consumption patterns vary across markets, including how much English is read in various export markets. Chris Kenneally of Copyright Clearance Center, which also has an increasing international focus, will moderate.

We could well also learn more about global opportunities from the keynote talk we’ll hear from Brian Murray, the CEO of HarperCollins, and Michael Cader and I will certainly be asking Russ Grandinetti of Amazon about how publishers can maximize their export sales through them.

So if export sales is on your current agenda, a visit to DBW on Jan 14-15 also should be. And, in that case, sign up before the end of the day on Monday and save yourself some dough. Early bird pricing ends on Monday night.

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The motivation of the publisher-bashing commentariat is what I cannot figure out


Once again this morning we wake up to a piece by David Streitfeld in The New York Times about Authors United and their ongoing effort to discredit Amazon. The message coming loud and clear from the legacy publishing establishment is that Amazon doesn’t appreciate, and perhaps doesn’t understand, the value that agents, publishers, and chain and independent bookstores bring to authors and readers and, by extension, to society as a whole. The challenge they face in this ongoing discussion is that many of those values — multiple (agent, publisher, bookseller) levels of curation, investments in quality editing, giving worthy authors the financing to do the creative work that must take place well before the IP will generate any revenue — are pretty esoteric and hard for most people to relate to. And they apply to a small and possibly diminishing number of writers.

The critical services publishers provide are marketing and distribution and those functions, as we all know, are undergoing change and revision as part of the digital disruption. And because they are rapidly changing, there is even greater-than-usual variability to how well these things are done across publishers and, within publishers, across their imprints and lists. Indeed, many authors at legacy houses are not enamored of their publishing experience, but the ones who are defending the publishers are also defending something of their own.

What is equally loud and clear from Amazon’s own statements and those of their supporters (including many authors who would be less well known and less well off today if Amazon hadn’t built the tools and market share they have over the past several years), is that the legacy industry doesn’t appreciate, and perhaps doesn’t understand, that commercial publishing was built on an ecosystem which is rapidly being dismantled and will ultimately be irrelevant. And they point out that what is replacing what came before delivers much lower-priced ebooks (print is another matter) to consumers and a substantially larger portion of the revenue to the authors than published contract splits would give them. (The fact is that those splits are irrelevant more than 80 percent of the time for the most commercial books because big agents get big authors advances larger than what they “earn”, but that’s another story.) The authors that work in the new paradigm also gain unprecedented control of their professional lives: publishing when they want to, pricing and changing prices as they want to, and playing with marketing opportunities (bundling print-and-digital, entering subscription services) or not, as they and they alone decide.

The fact that both options are commercially viable today means we might actually now be living in a golden moment for authors. Publishers are certainly aware that a brand-name author has a truly workable self-publishing option (although, frankly, the biggest surprise to me so far is that basically no major author has taken it, which is objective evidence that the execs running the big houses are navigating at least some aspects of the digital transition very well). And Amazon started paying authors 70% when publishers switched to agency and extracted 70% for themselves, a connection that seems not to have been made by much of the publisher-bashing commentariat.

While there is a symmetry to the two sides’ dismay about what is appreciated or understood, there is a massive asymmetry here that is hardly, if ever, mentioned. And that asymmetry makes the motivation of the legacy defenders very clear — they’re fighting for their lives — but actually suggests that the “side” fighting them (to the extent that it consists of indie authors) is at least sometimes simultaneously fighting against their own interests.

Those who feel well served on the legacy establishment side have much to fear from Amazon’s continued growth and success. The clear self-interest of all the publishers, agents, and those authors fortunate enough to be continuously “employed” through book contracts — which includes many, and certainly the most recognizable, of the authors in the Authors United effort — who are fighting for Hachette to “win” (which means maintaining the publisher’s share of the sales that flow through Amazon) in the current dispute is obvious, if perhaps insufficiently emphasized or acknowledged.

Cynicism about whether it is really the greater societal “goods” that get so much emphasis in their appeals that are really motivating these authors or whether they’re just protecting their own gravy train is not unreasonable.

Assuming that the publisher-bashing commentariat, who could also be characterized as the “pro-Amazon” advocates, has a healthy number of authors whose revenue is as largely dependent on Amazon as James Patterson’s is on Hachette, one can see the emotional motivations to fight for the home team could be similar. But the practical side of it is precisely opposite. It is obvious that Amazon getting stronger weakens Hachette’s (or HarperCollins’s or Bloomsbury’s or Cambridge University Press’s) ability to pay advances and publish more books, which directly affects various stakeholders and particularly steadily-working authors. But if Hachette “wins” — or if Amazon’s margins on transactions with publishers are not improved — how does this injure the self-publishing authors who are working successfully that way now? Simple logic says that Amazon will treat them best when the possibilities offered by publishers are the best.

Do they really think that Amazon will offer them more if Hachette is weaker? History and logic would suggest the opposite.

In other words, publisher-published authors definitely lose if Amazon gains strength in relation to them. But Amazon-published or KDP authors (and the publisher-bashing seems to come from both flavors) lose nothing if legacy publishing remains strong. They are, allegedly, fighting for the “good” of those authors who are signing “exploitive” publishing contracts, but their own interests are not served.

This asymmetry plays out in another way in the Lee Child exchange on the Konrath blog. Child says, again and again, that he thinks it makes complete sense for authors to exploit the opportunities in KDP if it looks like the best commercial choice for them. Maybe I’ve missed it (and I admit that I am disinclined to read most of the publisher-bashing posts and I certainly don’t make a habit of reading the bloggers who specialize in them), but the message I keep getting from Konrath, Eisler, and Howey is not “choose the course that is best for you based on the choices you have in front of you” but is more like “never sign one of those exploitive publishing contracts!” (Howey tells me he blogs about that “all the time” and cites this post of his. You can decide for yourself what you think, but it seems to me that he is saying “only sign with a publisher after you’ve built yourself up by self-publishing first”.)

The motivation of the authors who spend a great deal of time and energy bashing big publishers has puzzled me before. Because “price-shoppers” are a core audience for indie ebooks, indies actually got a shot in the arm when the publishers and Apple put in agency pricing, which in its original form prohibited even the retailer from taking a loss to bring branded ebook prices down.

There’s no way for an outsider to compile the data to prove this, but the chances are very good that indie author breakthroughs were easier to achieve during the years when the price gap between the majors and the indies was greatest. But most of the voices now demonizing Hachette (and the rest of what is being called the Big Five “cartel”) also bashed agency pricing. I see the benefit to Amazon in that position, but I don’t see how crippling agency pricing helped indie authors.

It is not only Judge Cote’s decision which has changed things since, but also the growing awareness of publishers about the value of temporary price drops, or “daily deals” and services — most prominently BookBub — to amplify the effect of promotional pricing in the marketplace. But how did ending agency pricing benefit independent authors?

Hugh Howey maintains that he is better off if his books and those from the big branded authors are priced the same. Hugh’s a smart guy so maybe I’m just not bright enough to get it, but that makes no sense to me. Except in the luxury goods market, there is virtually no situation where you gain advantage with a higher price than the alternative pitted against you. The bigger the saving you can offer, the more you’ll sell. In fact, Hugh makes that argument himself when he claims that lower ebook prices will raise industry revenue because it makes the ebooks more affordable. It’s fine to argue that the big publishers are dumb not to lower prices and sell more, but, even if it is true and especially if it is true and they pay attention and obey, how does that do him any good? (The answer from Hugh, by the way, is that we’re all better off if all prices are lower.)

I have been persuaded in Howey’s case that he personally rises above self-interest in his industry commentary. Hugh’s a nice guy, a smart guy, and a socially-conscious guy. He and I have had many candid and mutually respectful exchanges. And I read “Wool” and recruited him to speak at Digital Book World long before he was such a celebrity on the anti-publisher side. I believe him when he says “I’ve made more money than I ever imagined I would; I’m grateful; and one benefit of that is I don’t need to be motivated by money in my decisions.”

Howey is a true believer and a crusader who is sincerely convinced that the standard publisher terms for authors are unfair and need to change. He has occasionally expressed skepticism and concern about some of Amazon’s decisions and behavior, particularly around the complex compensation schemes for Kindle authors with their KOLL (lending library) and Kindle Unlimited (subscription) initiatives which buys him a certain amount of credibility. But I still can’t understand why he’s in KU but not Oyster and Scribd and 24Symbols, a set of decisions that strike me as being in Amazon’s commercial interest but not his own. (One possible explanation is that going into additional distributions creates more “work”, but I don’t take that too seriously. Hugh can afford to hire people to do the work, and he does all kinds of other things, like his AuthorEarnings blog, purely to add to industry knowledge. It would add a lot of useful insight if he were in the subscription services and reported on it.)

Perhaps the problem has to do with Amazon’s KDP rules, which apparently require “exclusivity” to be in KU. That is almost certainly not a requirement visited on publishers. If that’s what is stopping Howey, it would be nice if he would say so. Could Amazon be preventing its authors from pursuing revenue opportunities? If that’s true, wouldn’t that belong in any discussion of an author’s choices?

Another persistent Amazon advocate is author Barry Eisler, whom I first encountered during a brief moment when he was going to eschew taking advances and being published by somebody in favor of doing it on his own. (In the end, he became an Amazon-signed author.) When I posed the quandary that is the subject of this piece to Eisler, he referred me to this post of his which I don’t believe addresses the question. You can check out the link and decide for yourself.

Trying really hard to understand this and think imaginatively about it, I can only really come up with two “selfish motivations” that make sense. One — and I think this is the one that is claimed — is that the publisher-bashing is designed to improve life for the victimized authors who choose those deals. Indeed, the content of the anti-publisher rants often includes specific suggestions, or demands: raise the digital royalty, make shorter contracts, pay royalties more often, etc. that are, no doubt, author-friendly. But it does seem a bit weird for people committed to demonizing, weakening, and ridiculing the big publishers to be the ones to tell them what they could do to stay competitive. If publishers accepted the suggestions, of course, perhaps Amazon would be pushed to improve author terms too, but that seems a pretty indirect and distant reward to explain all the time and energy some people expend on this. (Or are they promising to sign with the big publishers if they follow these suggestions? I don’t think so!)

Another conceivable legitimate motivation, of course, is ego. These publisher-bashers have managed to “do it” without them, and continuing a high-profile running criticism of the establishment they outdid and outmaneuvered, particularly when you can get a lot of applause, might be alluring. But even that feels weak to me. If self-aggrandizement were what motivated these people, it would be even more impressive if their frame were “this is hard, but I managed to do it” whereas the message feels much more like “anybody can do this and you’re a bit of a dolt if you don’t.”

None of this constitutes enough of an explanation to satisfy me. I am either missing something in plain sight or I’m not in possession of all the facts. Perhaps the “explanation” that the published authors defending Hachette pursue their selfish interests but that the indie authors who bash Hachette and the others do it out of public-spiritedness, even if their own revenue suffers, does it for you even though it doesn’t for me.

Amazon has a strong case to make for itself. They really made online book retailing work through strategic brilliance and excellence of execution, without being first and against industry entities that should have had competitive advantage. They made ebooks into a thriving business for everybody pretty much singlehandedly, also without being first. They’re entitled to feel that the powerful position they’re in is because of the virtue of their model and execution, and they’re entitled to feel that a different publishing industry than the one they came into is the future they have to work towards, whether or not they want to spell out that vision in full and whether or not the incumbents “get it”.

If every argument being made by the publisher bashing commentariat were coming from Amazon, I’d understand the motivation and factor it in, as I do with Authors United or Hachette when they speak.

But I need to understand a rational motivation to put anybody’s advocacy in context. And it seems to me the very best thing for indie authors is for all the existing publishers to retain their capability to hire authors on that model as much as they can for as long as they can. That’s not the best thing for Amazon, but I really think it is the best thing for authors, and as true for those who do-it-themselves as for those who are published.

A senior Amazon executive, in a meeting we had two or three years ago, complimented me on the fact that I “understand entities acting in their own self-interest.” My response then was, and my feeling now is, “I’m mistrustful when they don’t.”

After I wrote this, I found that blogger Chuck Wendig had asked a similar question, with far less editorial speculation than appears here, in what appears to be an undated, but recent, post. He framed it differently than I do and I’m not sure what I read at his attempt at irony (“why are self-publishers trying to save the Big Five?”) was seen that way by his many respondents. My focus is narrower: this fight is being carried by a handful of very persistent and energetic critics, spending time and energy that one would think takes more motivation than is required simply to  “have an opinion” on this subject one way or the other. “What fuels all this energy and vitriol?” is a different question than “which side are you on in the dispute?” 

Early Bird pricing for Digital Book World 2015 is only open until next Monday. There will be lots of programming that will provide context and insight around all things Amazon. Michael Cader and I will have a half-hour wide-ranging discussion with Amazon’s Russ Grandinetti. Judith Curr, the CEO of Simon & Schuster’s Atria imprint, will present her view of  the “publisher-or-self-publishing” choice authors face. An expert on the school and college market, Matthew Greenfield of Rethink Education, will include an assessment of Amazon’s role in his review of what publishers need to know to compete for those sales as things change. Jonathan Nowell, the CEO of Nielsen Book, will use his company’s historical data to look at how the mix of what sells in print has changed since ebooks took off. Media veterans and authors Walter Isaacson and Ken Auletta will let us see the book business alongside other media undergoing technological change, which is necessary for any valid understanding of Amazon. We have a panel of publishers talking about selling direct. Oh, and of course, Founder/President Josh Schanker of BookBub will be on a panel on price promotion! There’s a lot more that is relevant, which you’ll find if you scan the entire program.

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Are Amazon exclusives the next big challenge for everybody else in publishing?


Somebody smarter (or more patient about wading through data) than I am could probably figure out how far along this bifurcation is already, but Amazon is doing its very best to build a body of content that is desirable and available from nobody else but them.

This is something you can do when you’re in the neighborhood of 70 percent of ebook sales and already more than half the total sales for many works of fiction, which is where the self-publishing world is strongest. It is not an opportunity that is really available to any other retailer. Apple has given it a try for more complex ebooks for which they provide ebook-building tools and, presumably, offer the most productive distribution environment for complex content. But they’re playing on much less fertile ground and they don’t have anything like the audience share necessary to drive this strategy very far.

It is hard, if not impossible, to imagine that any other ebook ecosystem could offer benefits that would make it worth skipping Amazon.

Two recent developments call attention to this situation.

David Streitfeld in the New York Times reports that Amazon has held a private by-invitation-only conclave for writers the past four years. I knew about this before because I’m a subscriber to Publishers Lunch and they reported on it about three years ago. (I like to say about my conference business partner Michael Cader, proprietor of Publishers Lunch, that you go to him for the facts and you can come to me for opinions.)

It is a smart and sensible thing for Amazon to do. Amazon has been demonstratively aware of the ability of writers to promote their own books to their audiences but also to promote Kindle Direct Publishing among their peers. Bringing authors in for a private chat to exchange ideas is not only flattering to those invited (a benefit to Amazon in and of itself), it almost certainly also informs them about how to be more successful courting authors in the future. This shouldn’t be viewed pejoratively, although Streitfeld’s piece and a companion blog post seem to position it that way.

The other is Hugh Howey’s very public rumination about whether to go exclusive with Amazon or not, in which Howey wonders out loud whether he should stay exclusive with Amazon beyond a 90-day trial period based on his calculation that his audience (perhaps counterintuitively) goes up while his revenue takes a small hit. I’ve had an off-line exchange with Hugh in which he emphasizes what his post says: he really can’t decide which way to go on this.

(It is worth noting, as Hugh does, that when he makes these decisions, they are only commitments for 90 days at a time. Of course, each time he switches he creates work for himself, either putting up the titles in other venues or taking them down. But he can get the benefits of Amazon exclusivity in 90-day chunks with no commitments beyond the 90 days and go in and out as many times as he likes. Hugh makes what I think is an unhelpful and invalid comparison to the life-of-copyright deals publishers ask for in return for advances against royalties and inventory investments that Amazon and other retailers do not make for self-published authors, but he’s right that it is much easier to make a decision when you only have to live with it for three months.)

His open thought process became the subject of a post by Chris Meadows on Teleread. One thing on Hugh’s mind was whether he needed to help keep alternatives to Amazon viable by contributing his content to their mix. Meadows says “that’s not your problem” and I agree with that. Each writer should be making the publishing decisions that are best for their personal brand and career. The first decision — if a publisher offers them a choice — is whether to take an advance and a deal or whether to self-publish. If they self-publish, they have to decide whether to be exclusively Amazon or go for the widest possible distribution.

The reflexive, intuitive choice is to get the most distribution possible. There are certainly readers who shop exclusively in non-Amazon retail environments. There could even be a growing number of those in light of the recent publicity around the Hachette dispute and the negativity directed at Amazon by Authors United. There are certainly people who make a point to avoid shopping at Amazon or buy from them as little as possible. (I’m even related to some of those people.)

But with Amazon’s enormous market share, their ability to promote both through normal commerce and special exposure like their subscription service Kindle Unlimited, and their willingness to put a thumb on the financial scales (KDP Select authors get higher royalties; they pay bonuses to top sellers and top titles being seen in KU), they can make up for whatever might be lost by eschewing other channels of distribution.

The idea that having content that is not available elsewhere can strengthen a retail offering is not the exclusive province of Amazon. It was a core component of the strategy originally announced by upstart retailer Zola Books.

Amazon has not yet ever suggested that “content only available here” was any important part of their customer-marketing strategy. (Update: I’ve been corrected on this. In fact, they do promote the exclusive content, both in press releases and in their Kindle Unlimited promotion online. They tout “over 500,000 digital titles you won’t find anywhere else”.) The exclusive-or-not conversation has been mostly (should be: largely) confined to their dialogue with authors. In fact, the rest of the publishing world has nudged them in that direction by being resistant to stocking books from Amazon Publishing. If at one time the author recruitment team at Amazon might have hoped to deliver ubiquitous distribution for their books, the path to bookstores was effectively blocked by their brick-and-mortar competitors’ lack of willingness to support their program.

The self-publishing revolution, despite the enthusiasm of its strongest advocates (which definitely include Hugh Howey), has only made small inroads among authors who have the option of a substantial advance from a traditional publisher. For that reason, the pool of authors exclusive to Amazon contains very few that could change a book consumer’s shop-of-choice (except perhaps one time for a particular book they wanted to get).

But if a big earner like Hugh Howey thinks he might be better off accepting Amazon’s standard terms for exclusivity, that’s a dangerous sign for everybody else in the book ecosystem. A traditional publisher still offers brick-and-mortar visibility and revenue that Amazon and any self-publishing effort will not. The transfer of market share from stores to online and from print to digital hasn’t ended. Every point of market share that shifts strengthens Amazon’s proposition for exclusivity and increases the likelihood that a high-visibility author will make the self-publishing leap. The combination of the two — highly branded authors and Amazon exclusivity — is among the most unwelcome inevitabilities the rest of the industry will probably face in the years, if not months, to come.

What is already the case is that Amazon is piling up a repository of content that nobody else has. When that hits a tipping point that starts influencing substantial numbers of consumers is another shoe waiting to drop.

Programming at Digital Book World that is highly relevant to this post will be a presentation by Judith Curr, president of the Atria division of S&S, on the math of the author’s decision whether to go with a publisher or publish on their own. Curr’s division works hard to recruit new authors and, in fact, Peter K. Borland, who heads up Atria’s Keywords Press partnership with UTA to publish books from highly successful “digital influencers” (people with big YouTube audiences, for example), is a participant on a panel of “new publishers” who are making their mark. The other participants on that panel — Entangled and Georgia McBride Media — don’t have Big Five roots.

As we were about to post, a rumor hit the Net of a new Amazon program to recruit more self-published authors. The idea is that submissions of manuscript and cover are given a crowd-sourced review; then the highest-ranked are “considered” for a new kind of Amazon publishing contract. This doesn’t seem to have been “officially” announced, but a conversation with an Amazon person is reported and the source, The Digital Reader, is normally reliable. This initiative would be further evidence that Amazon is using its platform to control the distribution of more and more of what authors generate.

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What makes books different…


Before the digital age, retailers that tried to sell across media were pretty rare. Barnes & Noble added music CDs to their product mix when the era of records and cassettes had long passed. Record stores rarely sold books and, if they did, tended to sell books related to an interest in music. For those stores, it wasn’t so much about combining media as it was about offering a defined audience content related to their interest, like Home Depot selling home repair books. For the most part in pre-Internet times, books, music, and video each had its own retail network.

But when media became largely digital in the first decade of the 21st century, the digital companies that decided to establish consumer retail tried to erase the distinction that had grown up dividing reading (books) from listening (music) from watching (movies and TV). The three principal digital giants in the media retailing space — Amazon, Apple, and Google — all sell all these media in their “pure” form and maintain a separate market for “apps” as well that might contain any or all of the legacy media.

The retailing efforts for all of them are divided along legacy media lines, acknowledging the reality that people are usually shopping specifically for a book or music or a cinematic experience. Most are probably not, as some seem to imagine, choosing which they’ll do based on what’s available at what price across the media. (This is a popular meme at the moment: books “competing” with other media because they are consumed on the same devices. Of course, only a minority of books are consumed on devices, unlike the other media. Even though this cross-media competition might be intuitive logic to some people, it has scarcely been “proven” and, while it might be true to a limited extent, it doesn’t look like a big part of the marketing problem to me.)

It seems from here that Amazon and Barnes & Noble have a distinct advantage over all their other competitors in the ebook space because, with books — unlike movies and TV and music — the audience toggles between print and digital. And this might not change anytime soon. The stats are scattered and not definitive, but a recent survey in Australia found that ninety-five percent of Australians under 30 preferred paperbacks to ebooks! Other data seem to indicate that most ebook readers also read print. To the extent that is true, a book shopper — or searcher — would want to be searching the universe of book titles, print and digital, to make a selection.

It should be more widely understood that the physical book will not go the way of the Dodo nearly as fast as the shrink-wrapped version has for music or TV/film. It hasn’t and it won’t. There are very good, understandable, and really undeniable reasons for this, even though it seems like many smart people expect all the media to go all-digital in much the same way.

Making the case that “books are different” requires me to unlearn what I was brought up to believe. My father, Leonard Shatzkin, used to ridicule the idea that “books are different”, which was too often (he thought) invoked to explain why “modern” (in the 1950s and 1960s) business practices like planning and forecasting and measuring couldn’t be applied to books like they were to so many other businesses after World War II. In fact, Dad shied away from hiring people with book business experience, “because they would have learned the wrong things”.

But in the digital age, and as compared to other media, books are definitely different and success in books, whether print or digital, is dependent on understanding that.

First of all, the book — unlike its hard good counterparts the CD (or record or cassette) and DVD (or videotape) — has functionality that the ebook version does not. Quite aside from the fact that you don’t need a powered device (or an Internet connection) to get or consume it, the book allows you to flip through pages, write margin notes, dog-ear pages you want to get back to quickly, and easily navigate around back and forth through the text much more readily than with an ebook. There are no comparable capabilities that come with a CD or DVD.

Second, the book has — or can have — aesthetic qualities that the ebook will not. Some people flip for the feel of the paper or the smell of the ink, but you don’t have to be weirdly obsessed with the craft of bookmaking to appreciate a good print presentation.

But third, and most important, is the distinction about the content itself. When you are watching a movie or TV show or listening to music through any device, the originating source makes only the most nuanced difference to your consumption experience. Yes, there are audiophiles who really prefer vinyl records to CDs and there probably are also those who will insist that the iTunes-file-version is not as good as the CDs. And everybody who has watched a streamed video has experienced times when the transmission was not optimal. There are almost certainly music and movie afficionados who will insist on a hard goods version to avoid those inferiorities.

But the differences between printed books and digital books are much more profound and they are not nuanced. In fact, there are categories of books that satisfy audiences very well in digital form and there are whole other categories of books that don’t sell at all well in digital. That is because while the difference between classical music and rock or the difference between a comedy and a thriller isn’t reflected in any difference between a streamed or hard-goods version, the difference between a novel and a travel guide or a book of knitting instruction is enormous when moving from a physical to digital format.

For one thing, the book — static words or images on a flat surface, whether printed or on a screen — is often a presentation compromise based on the limitations of “static”. The producer of a record doesn’t think “how would I present this content differently if it is going to be distributed as a file rather than a CD?” But the knitting stitch that is shown in eight captioned still pictures in a printed book could just as well be a video in an ebook. And it probably should be.

In fact, this might be the use case for which a consumer would make a media-specific decision. If you know what knitting stitch you need to learn, searching YouTube for a video might make more sense than trying to find instructions in a book!

Losing the 1-to-1 relationship between the printed version and the digital version adds expense and a whole set of creative decisions that are not faced by the music and movie/TV equivalents. And they are also not a concern for the publisher of a novel or a biography. But these are big concerns for everybody in the book business who doesn’t sell straight-text immersive reading. The point is that screen size and quality are not — and never were — the only barriers in the way of other books making the digital leap.

So even though fiction reading has largely moved to digital (maybe even more than half), most of the consumer book business, by far, is still print. Even eye-catching headlines like the one from July when the web site AuthorEarnings (organized and run by indie author Hugh Howey, who is a man with a strong point of view about all this) said “one in three ebooks” sold by Amazon is self-published, might not be as powerful at a second glance.

Although Howey weeds out the ebooks that were given away free, the share of the consumer revenue earned by those indie ebooks would be a much smaller fraction than their unit sales. The new ebooks from big houses, which is a big percentage of the ebook sales they make (and that AuthorEarnings report in July said the Big Five still had an even bigger share of units than the indies), are routinely priced anywhere from 3 to 10 times what indie ebooks normally sell for. So that “share” if expressed as a “share of revenue” might be more like five or ten percent. It really couldn’t be more than 15%.

(In fairness to Howey, he tries to make the point that indie authors earn more from lower revenue because their cut is so much bigger and he makes the argument that they are actually earning more royalties than the big guys. He also tells me that he calls some S-corp and LLC publishers “uncategorized”, even though they are almost certainly indies, in his own attempt to be even-handed. In fairness to the industry, I will point out that his accounting doesn’t take unearned advances into consideration, and since most sales of big house ebooks are of authors who don’t earn out, that lack of information really moots the whole analysis about what authors earn. Another big shortcoming of the comparison is that most published authors are getting a much more substantial print sale than most indie authors.)

But indie authors on Amazon are the industry high-water mark of indie share and ebook share. They are almost entirely books without press runs or sales forces, so they are almost entirely absent from store shelves. And they are also entirely narrative writing.

The facts, apparently, are that even heavy ebook readers still buy and consume print. There is not a lot of clear data about whether “hybrid readers” make their print-versus-digital choice categorically or some other way. There is some anecdata suggesting that some people read print when it is convenient (when they’re home) and digital when it is not. There are a number of bundling offers to sell both (offered by publishers and one called “Matchbook” from Amazon), which certainly seems to say that publishers believe there’s a market of people who would read the same book both ways at the same time!

What that all would seem to say is that the retailer selling ebooks only is seriously disadvantaged from getting searches for books from the majority of readers.

Do we have any independent evidence that selling to the digerati only — selling ebooks only — might limit one’s ability to sell ebooks? I think we do. It would appear that B&N has sold roughly the same number of Nooks as Apple has iPads. (This equivalence will probably not last since Nook sales seem to be in sharp decline.) That is somewhat startling in and of itself, since Apple is perhaps the leading seller of consumer electronics and B&N was entirely new to that game. Nook also seems to have — at least for a while — sold more ebooks than Apple. (This “fact” may also be in the rear view mirror with the apparent collapse of Nook device sales.) I will be so bold as to suggest that this is not because Nook has superior merchandising to the iBookstore. More likely it is because the B&N customer is a heavier reader than the Apple customer and prefers to do his or her book shopping — and even his or her book device shopping — with a bookseller.

[Correction to the above paragraph made on 11 Sept. I misheard and therefore misreported something that was caught by a reader in the comments below, but I should also correct here.  Apple has sold ~200M iPads but are only roughly 12% of the ebook market whereas B&N has sold only about 1/20th the number of Nooks and are about 18% of the ebook market. That fact makes little sense to anyone in Silicon Valley but speaks to how book audiences really behave. We all know a very high % of Nook owners are active store buyers.]

There is one more huge distinction between books and the other media and it is around the motivation of the consumer. While sometimes TV or movies might be consumed for some educational purpose, most of the time the motivation is simply “entertainment”, as it is with music. While analysis of prior video or music consumed and enjoyed might provide clues to what should be next, figuring out what book should be next is a much more complex challenge.

And the clues don’t just come from prior books consumed and enjoyed. Books are bought because people are learning how to cook or do woodworking, or because they are traveling to a distant place and want to learn a new language or about distant local customs, or because they are going to buy a new house or have suddenly been awakened to the need to save for retirement. You can’t really suggest the next book to buy to many consumers without knowing much more about them than knowing their recent reading habits would tell you.

But not only do (most of) the ebook-only retailers not know whether you’re moving or traveling, they don’t even know what you searched for when you were looking for print. And, even if they did know, operating in an ebook-only environment would make many of the best suggestions for appropriate books to address everyday needs off limits, because many of those books either don’t exist in digital form or aren’t as good as a YouTube video to satisfy the consumer’s requirements.

Indeed, it is the sheer “granularity” of the book business — so many books, so many types of books, so many (indeed, innumerable) audiences for books — that makes it so different from the other media.

Of course, there is one company — Google — that is not only in the content business and the search business but which also handles “granularity” better than any company on earth, down to the level of the attributes and interests of each individual. Google not only would know if you were moving or traveling, they would be in a great position to sell targeted ads to publishers with books that would help consumers with those or a million other information needs. (They also know about all your searches on YouTube!) But because Google’s retailing ambitions are bounded by digital, they are walking past the opportunity to be the state-of-the-art book recommendation engine. They’re applying pretty much the same marketing and distribution strategy across digital media at Google Play. They aren’t seeing that book customers are both print and digital. They aren’t seeing that books are, indeed, different.

When the day comes that they do, this idea will look better to them that it might have at first glance.

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Is the new Amazon acquisition something publishers need to think about or not?


If you’re like me, you know a thing or two about the book business but you didn’t know there was a business called Twitch until you heard the announcement this morning that Amazon had bought it for about $1 billion, apparently outbidding or somehow finessing Google to make the purchase.

Twitch, I have learned, streams video games played by champions and by amateurs, and has a business because people watch other people playing video games in substantial numbers. Since Amazon is so existentially important to anybody in the book business, anything they do is of interest to those of us in the book business. But not everything they do — think selling cloud computing capabilities or running a marketplace for all sorts of non-book goods — has much to do with the book business.

Whether Twitch is something we book people have to understand or fear or gain benefit from is not clear to me yet. (I’ve only known about it for a few hours.) But Amazon’s purchase of it brings forth some points worth considering.

1. In the digital age, new pastimes can spring up and become large very quickly. At the very least, the millions (or billions) of minutes consumers are spending with Twitch are not being spent reading, or watching a movie, or watching the sporting events we used to think were dominant.

2. Amazon is both in the “selling stuff” business and in the “consumer attention” business. This is definitely the latter and might also be the former.

3. One informed observation from James McQuivey about the acquisition was that it showed Amazon wants to control as much content as it can. Twitch is a content-streaming machine, not just a game-hosting site.

4. It has long been the contention of some publishing visionaries like Bob Stein that the digital revolution for books will, in the long run, not just be about the form of delivery and consumption of the same old stuff books have always been (which is pretty much what the ebook revolution has been so far) but that over time what we call a “book” will become something quite different. Stein’s particular interest is in the book as a social construct, where the comments and annotations of many readers can become part of the intellectual property itself for subsequent readers. Stein told me that he sees this as a “game-changer” (pun perhaps intended), suddenly making Amazon a leader in the gaming world. He also sees the “second screen phenomenon” as exemplified by Twitch as extensible to other live events, like concerts and lectures and even television. He has clearly followed gaming for a long time.

Richard Nash expressed a similar idea in a recent speech: that ebooks mean that books are now “reading services”, not “objects”. Does Twitch point the way to that? Are we on the verge of “watching people read” in any substantial numbers? Or, at the very least, looking at the detritus of other people’s reading with interest?

It could be that Amazon’s acquisition of Twitch means exactly the same thing to Penguin Random House, Netflix, and the New York Yankees, just constituting another way people can spend their time which reduces what they have available to spend with older media forms and older brands. But Amazon having acquired it and the massive (and, frankly, unexpected by those of us not in the gaming world) participation it has to consume “media” that are totally outside the historical creators’ domain is another reminder that books in a virtual world particularly have competition that we wouldn’t have dreamed of 20 years ago. The Wall Street Journal says Twitch is the 4th largest source of US internet traffic, and the Times says it’s among the 15 most-trafficked sites in the world

And it certainly adds a dimension to an observation I offered 18 months ago: that books are becoming part of other people’s businesses, not just a business on its own. We’re living in an increasingly complicated world.

We haven’t switched off of Feedburner yet (maybe next week) so many of you might not know about the post I just did suggesting a combination that could compete with Amazon for media sales. It’s right here.

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Amazon channels Orwell in its latest blast


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

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

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

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

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

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

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

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

What made the cheap prices possible were several factors:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

* The customer is paying 33% less.

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

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

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

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

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

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

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

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

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

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

We hope this information on our objectives is helpful.

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Subscriptions are in the news this week


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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