New Models

Dynamic pricing is a buzzphrase making the rounds of publishers at the moment as they begin to get their arms around the opportunities inherent in the agency model. They are aware that Amazon does a lot of pricing automated by algorithms and some of the more creative and tech-minded thinkers are wondering if publishers need to employ technology in a similar way.

The most widespread applications of dynamic, or perhaps we would be clearer were we to say “automated” pricing, are in the airline and hotel industries, pricing seats and rooms. But airline seats and hotel rooms share three characteristics that ebooks don’t have.

One is that there is a physical limit to how many can be sold. Once you’ve sold out the plane or the hotel, you have nothing left to sell.

The second is that the airline or hotel actually pays for the seat or the room whether or not it is sold. There is a relatively small per-use cost: a free Diet Coke for the filled airplane seat and the cost of laundering the sheets in a used hotel room. But the airplane still has to fly and the hotel still has to pay its mortgage and bellmen regardless of the number of seats or rooms that are sold.

And the third is that there’s an effective deadline for each sale. Once morning comes, you can’t sell the hotel room that was vacant last night. And once the plane takes off, the unsold seats will remain forever unsold.

That creates the environment in which dynamic pricing is applied in those businesses. As the deadline for a hotel night or a flight approaches, calculations can tell the hotel or airline whether it makes sense to raise prices (because rooms in that town or flights on that day to that destination are scarce) or lower them (because the consumer has many choices and only lower prices will be competitive and, under the circumstances, anything you can get is incremental profit.)

Dynamic pricing in those businesses is about how to maximize the revenue from a fixed sales opportunity. Ebooks are entirely different. There is no limit to the number that can be sold. There is no deadline beyond which a cost is incurred whether or not a sale is made. And the competitive set — the equivalent of checking the availability of rooms in comparable hotels or available seats on possible substitute flights — is not self-evident.

If dynamic pricing for revenue maximization for hotel rooms or airline seats is a precise science, dynamic pricing for revenue maximization for ebooks is more like alchemy or an art.

That doesn’t mean it isn’t a good idea. But it does mean that it’s a more complicated problem than the hotel or airline industry faces and it probably means that the logic and techniques they’ve used to solve it for themselves won’t apply much to what we need in the ebook business.

The challenge and opportunity is to use data to adjust prices automatically rather than by human scanning of information and manual application of intuition.

For example, our client Dan Lubart of iobyte mapped out one interesting case that calls for further exploration that might best be done by automated pricing decisions. What Dan found was an ebook that had been selling for $12.99 and was on a very gradual, but consistent, “decay” curve. (“Decay” means that sales were going down.) The publisher put a $8.99 price on the book for a few weeks and sales shot up and stayed at a consistenty higher level as long as the promotional price was offered.

But, then, when the publisher went back to “normal” pricing, they went to $14.99, rather than where they’d been at $12.99. What was interesting was that the sales dropped back down to meet the old decay curve and continued to erode along the previous path.

This raised two questions. One is whether the publisher might have been better off to stick with the promotional price longer, since sales were sustaining at a higher rate with that price. But the other is whether the book benefited at all from being $12.99 for a while rather than $14.99. The fact that the decay curve wasn’t affected by the price increase certainly suggests that the higher price might have been beneficial all along.

Because many books are similar but no two books are the same, it would require a substantial number of experiments to yield persuasive data about either of these two points. Only by testing 20 books or 30 books with similar price-and-decay profiles would a trend be both discernible and convincing. The only practical way to find the candidates for testing and to apply the tests would be by generating rules to do the price changes dynamically. And then if the publisher learned there were patterns that repeated, only by applying rules algorithmically could they benefit from that knowledge.

The number of variables is vast. There are different effects at different internet retailers. No doubt the pricing of competitive books has an impact, but even identifying the competitive books isn’t simple, let alone tracking them. (As far as we can see, tracking the pricing of competitors is a bridge or two further than anybody’s been able to go so far although we know that some are thinking about how to do it.)

In fact, the complexity of the ebook market makes using dynamic pricing techniques — creating rules about how prices should be reset based on data in the marketplace — potentially even more valuable than it is for hotels or airlines. It certainly could represent serious competitive advantage for those publishers who do it best and do it soonest.

Smart agents will be watching this carefully. They’re all aware that the ebook royalty they collect is the percentage they work so hard to negotiate times the revenue the publisher receives. Now the revenue is clearly affected by the publisher’s ability to set prices that capture the most possible consumer dollars. It will become clearer over time that changing those prices intelligently is necessary to maximize the revenue which maximizes the royalty. The publishers who figure this out first and best will have a powerful argument that publishing with them puts extra coin in their authors’ pockets.

Nobody is going to be making that argument persuasively in the next few months; we have far too much to learn and we’re still in a world where things keep changing as the switchover from print to digital is still in relatively early stages. But the publishers who get a head start developing this understanding and the tools to implement it will have something very powerful to talk about in a year or two.

At our London conference, one publisher speculated that the ebooks being priced as they are were pulling paperback sales forward when the hardcover book was out. What that would mean is that at the end of Year 1, the hardcover year, the print plus digital sale and margin would look pretty good. But if the theory that pb sales came forward is right, then at the end of the second year — the trade paperback year — there will be disappointment. This is a reasonable theory but it is very hard to know yet whether it is true. You’d need a 2-year old book to be begin to measure it, and a book that came out in hardcover two years ago was in a different world than a book that comes out today. That’s why nobody really knows much for sure yet.

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Last year at this time, the people I know in the consumer electronics world were saying that Christmas 2010 would be the season of the ereader. That proved to be correct, resulting in both a sharp surge in ebook sales in early 2011 and, according to Pew data, a continued acceleration of ereader adoption in the first six months after Christmas.

This year is expected to be the year of the touch-screen tablet computer. With tens of millions of iPads already in consumer hands and a plethora of devices with Windows or Android operating systems coming on to the market this Fall, the shelf space in the consumer electronics stores is positioned to fulfill that expectation.

And somewhere between the monochrome eink ereader and the tablet we have the Nook Color, which has a color screen, some tablet-like capabilities, and more of an ereader-like (cheaper than a tablet by half) price.

I don’t know exactly how many of these devices are out there; it is hard to pin that down. But Apple has apparently sold around 45 million iPads and is on track to sell 100 million iPhones this year. Those are global numbers. They are reputed to have about 75% of the tablet market now, although that percentage will surely drop as competition proliferates. The tablet shipments for 2011 are estimated to be in the neighborhood of 53 million. Gartner says there will be nearly 100 million smartphones in use in the US by the end of this year.

That’s an awful lot of portable screens on which people can well view much more than type on a page.

It was becoming obvious a year ago that the children’s publishing business was being joined by digital competitors betting on the fact that the widespread distribution of color touchscreens would open up opportunities for children’s product that hadn’t existed before. And since publishers have tried to improve on simple book technology for young consumers for years — think about pop-ups, die-cuts, and computer chips that made the books talk and sing — it seems like a reasonable assumption that more and more parents will hand their kids the iPad to “read” in the car (or in bed) rather than a book.

When making book-like product for young people to be consumed on a color touch-screen device, employing many of the “tricks” of enhancement: audio, animation, and interactivity, is obviously called-for.

But as tablet use spreads, should we also expect to see expanded opportunity for illustrated books? My guess is that the answer to that is “yes”, but figuring out exactly what the cost-effective and reader-attractive solutions are to present illustrated books for the new display opportunities is far from self-evident. We’ve sold illustrated books to adults for years without the need to do anything except put ink on paper.

Last month, FutureBook held a conference in London about new product development. The takeaway seemed to be “nobody is making any money”. What was revealed about development costs and sales pointed to large losses. But if the number of devices which can effectively display these enhanced or enriched or app-like book-based products grows like Topsy, we should see the revenue potential go up.

At the same time, new players are developing tools to make the costs of development go down. Every day publishers have developers knocking at their door looking for content to test and develop their systems for new product construction. At this point, it appears that many of them are willing to work either of two ways: fee-for-services or development-for-a-share. For publishers, this adds organizational complexity to the deal-making since the arm of a publishing company that usually sells licenses (subsidiary rights) doesn’t often make publishing investment decisions (editors and publishers) and they could be choosing between the two models with any developer.

Illustrated books can hit the digital market through two paths: they can be an “enhanced ebook” or they can be an “app.” The distinction has largely been one of capabilities: apps are platforms that can support far more capabilities and interactivity than an ebook. But that’s changing. The developers of the epub standard (epub is the industry-approved format that makes books “reflowable”) are building in support for functions that used to be the exclusive domain of apps.

At least until now, apps have generally cost more to develop than ebooks, have been sold in an app store environment that is less search- and user-friendly than the various ebookstores are, and apps are generally much less expensive (for the consumer, not for the publisher) than ebooks. This has been an unattractive combination for a content-seller. App pricing is driven by many models that are independent of profit from the app sale itself. So far, the ebook business model is like books: the publisher makes money selling the content, not from any other activity.

When ebooks for narrative text were young, the term and concept we all had to learn was “reflow”. It is necessary to deliver text in a format that can be adjusted, or “reflowed”, to fit the screen size and font size selected. As we know, among the great advantages ebooks offer is that the user can change the type size, which changes the number of words in a line and the number of lines the screen can display. Another great advantage is the ability to read the book on multiple devices, which also requires the capability to “reflow” because the screen on your phone isn’t the same size as the screen on your Kindle or Nook and your iPad (which aren’t the same size as each other!)

The new term and concept we’ll need to learn in the illustrated ebook era is “fixed page layout.” That means delivering the page in a way that does not reflow, so that artwork and text maintain the same positions in relation to each other. Of course, that means that different size screens will require different fixed pages. You will have to actually design an illustrated book (or most of them anyway) for each form factor. In fact, you’ll frequently have to do it twice for each form factor to accommodate the page being viewed either portrait or landscape, a change the user can command with a flick of the wrist.

That’s time-consuming and expensive. And that’s just the beginning of the challenge. Here’s the really hard part. We have 500 years of experience figuring out what makes an illustrated book that the person holding it will find appealing and useful. Designers learned how to use spreads (placing content across two facing pages), which don’t exist on digital screens (unless they are artificially created there.) They learned how to use sidebars to hive off some content from the narrative flow. They understand how to approach things differently if they’re designing primarily for function, like a cookbook or a crafts book, than if they’re designing for beautiful pictorial presentation (your classic “coffee table book”).

When we get to the digital version, we have the opportunity, or perhaps we should say the temptation, to add much more, not just change the layout. There will be many situations, particularly in how-to illustrated books, when a video would be more useful than a still photo. One can add animation, sound, and functionality that can test or measure or calculate.

But, in fact, just the “fixed page layout” (different for the iPad than the iPhone, of course) along with the simple ability to put the pictures on their own page with pinch-and-spread capability, could add enormous value to the user (quite aside from the portability and reduction of weight that are inherent in moving from print to devices.) Whether you’re talking about a collection of beautiful pictures of Paris or of puppies, being able to blow up a picture to be able see a close-up of a part of it could be an enhancement that costs nothing to deliver.

And if that were all the value you needed to add, many books could be switched over for iPad viewing with a minimum of redesign. (But not all. One person I talked to last week talked about a book he was working on that had text on the left-hand pages referring to full-page photos on the right-hand pages. It has to be completely rethought for digital presentation.) What I’m thinking is that the beautiful pictorials — the coffee table books — might be the best and simplest things for publishers to move over to digital to start capturing revenue from those tens of millions of screens.

Best and simplest, of course, except for the rights issues.

This post is written with an admittedly short-term view. The interaction between content and users will sophisticate both iteratively and unevenly. My presumption (this is faith and intuition, not fact) is that those of us steeped in the habit of immersive reading will retain that desire so that the erosion of audience for that material will be very slow and probably mostly generational. Therefore, investments in enhancement of that kind of book will be hard to recover.

Illustrated books definitely are different. Digitally-enabled enhancement can add indisputable value in some cases, overcoming real limitations imposed by print. My guess is that books whose purpose is to feature fabulous art or photography can deliver added value with screen presentation with a minimum of additional investment or trial-and-error. At least for a while.

It has long been my contention that simpler digital products which are inexpensive to make are far more likely to make money than complex ones. Getting repaid for delivering everything the tech can do is very hard.

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Monday, July 4, was supposed to be a quiet day in the publishing business. It turns out it wasn’t. Three developments reported as special holiday bulletins by Publishers Lunch have strategic implications worth pondering that will have trade publishing people all over the world conferring with their friends and colleagues as soon as they shake the sand off their shoes and settle in to read the weekend email.

First of all: Amazon.com bought The Book Depository. What? You’ve never heard of The Book Depository? Well, then you’re almost certainly one of my US-based readers (about 60-70 percent of you.) The Book Depository is really the other global bookstore. They don’t do ebooks, but they’ve bult their global book business to more than $150 million. No, that’s not as big as BN.com, but they have built a sophisticated many-to-many supply chain (they don’t do it holding stock in distributed warehouses like Amazon), have been growing by something like 30-40% per year for several years, and might even make money.

They’ve even invested heavily in untangling the metadata challenges of global book sales, with a large team in the Middle East tackling the problem.

If anybody were going to mount a global challenge to Amazon as a single consolidated book (and content) distribution business worldwide, The Book Depository was the platform to do it from.

This move by Amazon reminds me of when they acquired Mobi-pocket early in the last decade. In the dawn of the ebook-on-devices era, there were two formats competing as pawns of a hardware competition. Microsoft pushed MS Reader, Palm pushed their own format. Mobi had the clever idea of being able to play on either.

So Amazon acquired Mobi. That meant that they owned the only single-file solution; any other retailer trying to serve the market would have to offer both Microsoft and Palm as a choice to reach all the devices. Palm quickly took that option off the table by insisting it would serve all its files itself. That’s when B&N went out of the ebook business, not to return in a serious way until after Kindle launched in late 2007.

It sure looks to me like The Book Depository would have been a great launch platform for Barnes & Noble to go global.

Second: Pearson, owner of Penguin, became a book and ebook retailer by the purchase of the relevant assets from the bankrupt REDGroup. It appears they will run the business, web sites under the Borders and Angus & Robertson brands, with a minimal staff.

Pearson is a big company whose interests go far beyond Penguin, but it is the trade implications of this that catch my trade-centric eye. Big trade publishers are caught between a rock and a hard place on direct selling and customer ownership. Whatever the future may hold or require, trade publishers today are highly dependent on their intermediaries’ good will. It would likely cause untold grief with Amazon and Barnes & Noble if a major US trade house set up a direct selling operation, despite the fact that niche publishers often have them as adjuncts to community or professional publishing efforts (Wiley, O’Reilly, McGraw-Hill, F+W Media, Interweave. In fact, Pearson owns half of Safari, a direct-to-reader subscription service pioneered and co-owned by O’Reilly. They also own part of CourseSmart, but they’re now selling books and ebooks direct to consumers, not just content-by-subscription to geeks and textbooks to students.)

It might be well down the list of reasons why Pearson Australia is now running online trade selling operations, but it will be interesting to see how Penguin Australia benefits from the association.

Third: J.K. Rowling and the agent that actually handled her business, Neil Blair, have left the Christopher Little Agency which formerly employed Blair and was the agent of record for Rowling. Lawsuits may ensue, but this is another lesson in what disintermediation can mean and it recalls to me something I learned long ago from a lawyer in the music business.

My mother, Eleanor Shatzkin, had a chunk of her consulting career when she designed billing systems for law firms. (This was in the days before personal computers; “data processing” back then was done on punch cards sent to job shops for print-outs to be created.) So she made friends with a lot of lawyers. One of them, a very nice man named Don Engel, left the large New York firm where he’d been a litigator and moved out to California and set up a practice in the music business.

What Don told me (this was in the early 1980s) was that he found a phenomenon out there that didn’t exist in New York because people could start a law firm with just one client, and they often did. (As he said, you can’t take a piece of the AT&T business and set up shop, but you can take one big recording artist.) That meant these firms had no broad capabilities, and if any real legal challenges arose, the little firm with the big client would need savvier outside counsel. Don built a substantial business suing record companies over royalties on behalf of artists, getting cases referred by these tiny “firms” with one star client because he developed a reputation for being an honest guy who wouldn’t poach the client in turn!

I don’t want to suggest that what Rowling and Blair are doing is likely to become a trend. In fact, the prevailing industry conditions at the moment would, I think, mitigate against it. Agencies are more likely to consolidate than to splinter because the capabilities they need to serve their clients effectively are growing with digital change. Whatever threat there is to publishers from disintermediation would require that agents do more and have greater organizational capabilities, not less.

On the other hand, new services being offered by agents that other agents could employ might allow unbundling of the direct client contact from the rest of the agency functions.

I hope you had a really restful 4th of July weekend. The second half of the year begins with plenty to think about.

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The experience of the most successful self-published author I know of, just described in his newest book, makes a powerful but unintended case that authors who want to really make money are still better off with a publisher.

I discovered the author John Locke a few months ago when I was learning a bit about the self-publishing world from Joe Konrath and Barry Eisler. I tried one of his 99 cent books and loved it. Now I’ve read four. He strikes me as a cross between the long-dead Jim Thompson and the very current Carl Hiaasen. More sophisticated readers than I have told me his plots are derivative. None of the books struck me that way, but it could well be that savvy acquiring editors would have dismissed him if had no track record of commercial appeal.

Locke has just published a new book explaining (and titled) “How I Sold One Million eBooks in Five Months”. It reveals a hard-working, tightly-focused, very sophisticated marketer with a clear plan and the discipline to follow it. Every self-publishing author should read it, of course, which is the market Locke identifies. One of his key tenets is to really understand whom a book is intended for so that the content itself and the marketing approach are always aimed at precise targets.

One of the problems Locke sees with publishers is that he thinks that they will always push to broaden the appeal of a book, which he thinks would diminish its appeal to the core niche audience that he sees as the key to successful author brand-building. I’m about to reinforce that stereotype because it is obvious to me that he really missed identifying a key target audience with his new book. Editors and marketers in publishing houses ought to read it. They have a lot to learn from John Locke’s insights and techniques.

His book will help them make better publishing decisions and marketing decisions. His book will help them make more money.

But if John Locke’s also interested in making the most money, he ought to rethink whether issuing his books at 99 cents without a publisher is really the best commercial strategy.

Let’s do the math. Locke has sold 1 million ebooks at 99 cents each. He gets 35% of the revenue, so that amounts to something less than $350,000 (credit card fees are deducted from the net). There are some production costs involved (he hires a cover designer and he gets help formatting his books), so knock off another ten or fifteen grand. That means his net for nine novels averages out to about $35,000 each. He’s getting no apparent revenue from print and he’s getting no print exposure in stores which would further stimulate online sales. At 35 cents per copy, he’s earning less than the per unit royalty he’d get from a publisher selling his books for about $2.99, the point at which the 70% payment from agency re-sellers would kick in, even if the publisher didn’t yield at all on the now-prevailing 25% royalty standard. And if his books were $9.99, he’d be getting $1.75 a copy from a publisher, or about five times what he’s getting now.

Of course, if Locke himself sold the ebooks at $2.99, he’d be taking in six times more per book, or about $2.10 a copy.

But, either way, he seems to be leaving a lot of money on the table. Without a publisher’s efforts, he’s certainly leaving a lot of marketing on the table too. And the print in stores is only the single most important part of it. Selling even a modest 10,000 hardcovers would net him in excess of $20,000 in royalties, or more than half of what he’s averaged so far from each of his ebooks.

It would be facile, and I think it would be mistaken, to attribute Locke’s success primarily to the fact that his books sell for 99 cents. In fact, Locke himself bristles at that notion. He points out in his new “how-to” book that there are a lot of authors selling for 99 cents that haven’t achieved the sales that he’s achieved. He downplays the degree to which that would be due to the appeal of his writing but instead attributes his sales to his thoughtful and systematic marketing efforts.

I agree that his thoughtful and systematic marketing efforts are more important than his 99 cent price. (That’s sort of the point to this whole post!) But there is nothing about what he’s done that couldn’t be just as well done to support a book from a publisher that is in hardback at $20 or more and is a $9.99 ebook. Would he sell as many as the 100,000 or so units he’s averaging per title that way?

Nobody knows for sure, but with the same effort on his part and the additional marketing, exposure, and accessibility he’d gain with a publisher, my own hunch would be that he’d sell more. I’ve read four of the books featuring his major character Donovan Creed and I’m nowhere near sick of him yet. I’m as cautious as anyone about generalizing from my own experience, but I know that if the next one were ten bucks instead of one, it wouldn’t deter me. I pay ten bucks or more for most of the ebooks I read, as do a lot of people.

One of the things that the ebook retailers know for sure but that publishers can only guess about is the degree to which the purchasers of 99 cent books are a market separate from the purchasers of “branded” books at $9.99 and up. Many believe, and I’m among them, that there are distinctly separate groups of buyers here and that people like me, who mix it up, are the exception. If that’s true, there would be some risk for Locke (and to an acquiring publisher) in switching him over to a model which requires that he get his success from a different pool of customers and makes it hard for his existing readership to come along.

But if the markets are distinct, there is also some great potential reward. If there are people who only choose from the cheap books, there are also people who want to choose from the professionally validated books, the ones from the major publishers. The more you believe the markets are distinct, the more opportunity there could be for Locke in using what he’s done to launch himself independently as the springboard to a career as a published author with a major player.

Amanda Hocking succeeded with an independent effort but then signed with a major house. Barry Eisler intended to leave publishers behind and do it himself, but quickly found that Amazon’s publishing program — how long before we start referring to the Big Seven? — actually suited him more than doing-it-himself. Now we do the quick math on Locke and find that it constitutes a weak argument for the economic benefits of self-publishing.

It is important to for us all to remember that we’re still in a world where most of the books are sold in print and in stores; that this is more true outside the US than it is here; and that it will remain true outside the US for quite a while longer than it will here. The challenges of the digital age for publishers are very real and the self-publishing option is much more viable than it was a decade ago, or even three years ago. But there’s still plenty of life in the legacy model. I’d be surprised if some big publishers aren’t preparing offers for Mr. Locke that he’d be obliged to consider seriously if his goal is to make the most money from his writing that he possibly can. If Amanda Hocking could get $2 million for four books, how well is John Locke really doing financially getting less than 20% of that for nine?

The most frequently persuasive argument I can think of for self-publishing is speed to market, particularly for an outsider who doesn’t even yet have an agent. Finding an agent takes time. Getting a proposal up to an agent’s professional standards takes time. Publisher consideration and contract negotiating following offers take time. All of this can often take a year or more; it is rare to accomplish it in six months. And then the publisher will need persuasion to deliver it to the market in less than six months. (This is not irrational on the publishers’ part; maximizing sales in print still requires a long runway because the planning in mass merchant outlets requires assigning specific titles to slots many months in advance. That’s a marketplace reality, not an invention of publishers.)

I think self-publishing as a path to publisher discovery may become a new standard and, if it does, the ebook operations being set up by literary agencies may ultimately be viewed in a different light.

My prediction with Locke is that he will end up getting an offer he can’t refuse from a publisher to create a new character. The Donovan Creed series and his westerns will continue to be issued for 99 cents, but something new will be done the conventional way. And, unless my hunch is way wide of the mark, for the next several years the ones done the conventional way will make Locke a lot more money.

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There are lessons that can be taught or learned in one segment of publishing that can then apply to another. Well over a decade ago, Mark Bide and I were discussing the business model for journals. The way it works is that the university pays the professors a salary and rewards them with promotions and tenure for writing publishable material for the journals. Then the journal publisher pays nothing for the article (although they spend lots of money managing peer review and doing other things associated with editing, curating, and delivering the content.) Then the university pays for the IP all over again by buying (now licensing) the journal.

From our earliest understanding of the Internet and its potential for disintermediation, this seemed like a very vulnerable model. “How will we know when there’s a problem developing with the model?” I asked Mark. “When the publishers are having trouble getting submissions,” he said. “The problem will become obvious on the supply side before it becomes obvious on the demand side.

One of the challenges for a retail player trying to be a publisher is the difficulty of getting other retailers to play along. Even the most dominant US retailers, Amazon in the online world and Barnes & Noble in brick stores, don’t have a total monopoly on the customer base. People buy books online through outlets other than Amazon and people buy books in stores that aren’t owned by Barnes & Noble. And, of course, either of the two delivers grossly incomplete access to the total customer base without the other.

Barnes & Noble has been acquiring content directly for a long time. They’re very aware of the dichotomy between having a monopoly on content for your stores’ benefit versus making it more broadly available in the content’s best interests. Almost from the minute B&N acquired Sterling, Borders stopped stocking Sterling books (a problem that matters much less today than it did a few years ago.) And Sterling had a real sales force, retailer-friendly sales policies, and all of the systems necessary to support moving their books through intermediaries. Amazon does not.

Amazon took the first steps to fill that gap by making a deal with Houghton Mifflin Harcourt a few months ago, giving HMH a right of first refusal (apparently) to purchase paperback rights (excluding Amazon, we’d assume) to the books Amazon was publishing through their proprietary imprints. I have no inside information, but I would assume that one of the things Larry Kirshbaum will figure out early in his new role there will be how to get real print book distribution for the books he will be acquiring.

Amazon’s strategy appears to be that they’ll use their checkbook, the offer of 70% ebook royalties from the most powerful ebook platform, and their close connection to the online consumer, to get the books they want on the terms they want. And what they seem to want most for the books they pay for is “Kindle exclusive”: the ability to build up an inventory of titles available through Kindle but not through Nook, iBookstore, Google, or Kobo, let alone the stores here and abroad served by Ingram and OverDrive.

Barnes & Noble is familiar with that idea. They wouldn’t let other stores sell their Sparknotes study guide line. They never made it generally available through Sterling’s organization because they perceived value in having it be uniquely available through their stores and online channels.

But they didn’t avoid that dichotomy. The value they perceived is to the retailing entity, not to the content holder. Since their retail business was something like 50 times bigger than Sterling, it might not have been seen as a terribly difficult decision even though the content holder is always better off if the book is sold in as many places, online or offline, as possible.

Last week, PW did a story introducing Amazon’s “summer list”: ostensibly the books being published by them in the next few weeks. Obviously, these books were signed up before Kirshbaum’s arrival.

I’m not a bookseller. I have no expertise to apply to look at a list of books and decide what should be in any particular bookstore. But nothing on this list looked like a “must have” for an independent bookseller. To make sure, I reached out to a smart one I know and asked her to look at the PW list. “Would you stock these books?” was my question.

Her answer was interesting. “I don’t know about any of these,” she said. “For the most part, I learn about books by sales reps visiting our store and telling us about them. Nobody has ever told us about these.”

I had my staff do a little bit of searching. We couldn’t find a consolidated list of Amazon’s summer offerings online. What we found was the press release announcing 32 titles that PW referred to, but that release only listed 19 of the 32. We couldn’t find anything on any of these books at the Houghton Harcourt web site. We were able to find 14 more titles by looking under the various Amazon imprints (including Seth Godin’s Domino partnership with them) for a total of 33 coming or having been released from last March through November. Is this the “summer list”? Maybe, with global warming…

We found nothing about any of the titles on the Houghton site. Oddly enough, they did publish a prior title by one of the Amazon authors, Max Allen Collins, but they haven’t listed the current one, a collection of short stories.

(Here’s an ironic thought. You think Amazon will place an ad in the PW Announcement Issue to get this all straight?)

So, as far as we can tell, the Amazon summer list contains very few books that the old publishing guard, publishers or booksellers, will suffer much for having missed.

Except, of course, that maybe Amazon can create demand among the millions of online customers they have for books and ebooks. If they do, and the word of mouth grows to a point that independent booksellers find they must stock these books, Amazon will really have created a new publishing paradigm. That certainly seems to be what Godin is counting on.

Nobody — or at least very few — outside Amazon knows what new capabilities will be put in place to support the publishing programs Kirshbaum will build. Barry Eisler indicated at our Publishers Launch BEA conference that he had received a six figure advance for the book he just signed directly with Amazon to publish. He seemed to expect, or at least had hopes for, a robust bricks-and-print strategy along with his high ebook royalty. But he’ll have the same problem with Barnes & Noble and independents that Sterling had with Borders: it will take the perception of a very high level of demand to compel them to stock a book from a company they think is taking the bread right off their table.

A related development is that Arthur Klebanoff, one of the original ebook publishers founded on the idea that the big publisher standard of 25% ebook royalties creates opportunity for entrepreneurs, told the British AAA (the agents) this past week that he’d be delighted to publish their backlists and pay a 50% royalty. To agents who are already planning to do this themselves (and quite a discussion has broken out in the UK about whether that is a legitimate thing for agents to do; the AAA has decided it is) Klebanoff points out that things can go wrong with ebook publication (it might not sell, for one thing) and agents would be wise not to jeopardize their relationship with an author client when there are alternative ways to get a high royalty.

Klebanoff seems here to be jumping squarely into competition with Jane Friedman’s Open Road, which has been signing up content with very much the same pitch. (Open Road also has other attributes to tout, primarily some very talented digital marketers and a focus on developing tools and techniques to do that work effectively.)

Meanwhile, other agents are setting up their own digital publishing capabilities and service offerings continue to mushroom. Agents tell me — two were in the office this week talking about this — that their authors are frequently asking about self-publishing.

Does the insight Bide offered to me late in the last century about scholarly journals end up applying to trade publishers? Will the most obvious sign of a challenged model become the resistance of authors to their blandishments and their advances? There seem to be a lot of entities betting on the idea that it will.

It is worth noting here that there’s one dog that hasn’t barked. Richard Curtis was the first ebook publishing agent. He set up his E-Reads business over a decade ago. He also pays 50% royalties. Richard did not create E-Reads to compete with publishers on royalties but because when he did publishers just wouldn’t do the ebooks. He has built his enterprise since that time to nearly a $1 million annual business (meaning that he’s delivering half-a-million a year to authors for properties that, at least until very recently and perhaps still, would never have been put into ebooks by a publisher.) But his name is noticeably absent from the chorus using higher ebook royalties as a public prod to bedevil publishers.

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My new buddy and client over at iobyte, Dan Lubart, inspired a post last week about Amazon’s new Sunshine promotion because he documented its impact on their bestseller list.

Since then he’s put up two new posts that are only worth reading if you care at all about the effect of price on today’s ebook market. I think that includes most of us.

There is legitimate debate about how bestseller lists should be organized in the ebook age. I pointed out last winter that it really wasn’t tenable for ebook lists to keep score on unit sales only when the price range extended from 99 cents to $19.99. And, in fact, that kind of price variation has already led to clever authors and publishers gaming the system: lowering prices to get on bestseller lists and then raising them to capitalize on the additional discovery that takes place once they’re on. My suggestion was that the grading be on “price times units”.

Those who like that idea quickly see that this is similar to how movies work; they report the box office receipts, not the number of tickets sold. Those who don’t like the idea say that what a bestseller list is supposed to communicate is what books are being read by the most people.

Dan’s two most recent posts illuminate how this question plays out in the real marketplace.

In the first, he appears to have discovered that Barnes & Noble may have arbitrarily decided that an ebook priced at $2.99 or less won’t be placed in the top 125 of their bestsellers. This conclusion is based on convincing circumstantial evidence. What Dan first noticed was that only one book in the Sunshine promotion, and then two, had hit the Nook bestseller list. Watching those books, he saw one, “My Horizontal Life”, fall from rank number 1 to rank number 127 in one day.

That’s beyond a statistical anomaly. That’s damn near an impossibility, unless the rules of the game were changed.

So Dan checked further and found that all the inexpensive ebooks had dropped below rank 125, but that they were dominant from 126 to 200.

Since I’m the guy who pointed out a few months ago that lumping 99 cent ebooks with $19.99 ebooks was mixing apples and broccoli, I think it is fine that Barnes & Noble has taken this additional curatorial step. The New York Times makes it clear that its ebook bestseller list does not “actively track” a variety of titles including those that are self-published. I think it is fair to say that neither has a “transparent” methodology. But putting their thumb on the scale might be delivering a more useful result for the users of their lists.

I found Dan’s next post even more revealing about the nature of the ebook marketplace, particularly at Amazon.

What he showed, through analysis of the price of the titles and their rankings, was that the disruptive effect on the bestseller list of the Sunshine promotion was very brief. It lasted about a week. Seeing this recalled a story my Dad once told me and therein lies the explanation.

In the 1950s, Doubleday tried an experiment of putting books into supermarkets. What they found, repeatedly, was that the books sold well the first week and then sales collapsed.

The explanation for this was very simple. Bookstores see their customers — even most of their best customers — relatively infrequently. But supermarkets see their customers weekly or even more often. So a display of books is quickly seen by just about all who might be interested. They either buy something or they don’t. But after a week, everybody who visits that store has seen it and, unless the choice of books the next time they pass it is very obviously different, they will have no need to shop from it again. (By the way, this is a reason to create automatic title rotation by not assigning one title per pocket, but that’s a different subject than we’re discussing in this post.)

What Dan’s Amazon data would suggest is that the low-priced shopping cohort is a herd that responds quickly. When Amazon announced their Sunshine promotion, the most avid low-price buyers shopped it immediately and made their purchases. That created the spike in low-priced bestsellers which we acknowledged in our prior post.

But in the second week, with the same selection of books in the Sunshine promotion, that effect virtually disappeared. The low-price shoppers had done their purchasing from that selection. The normal buying patterns on the site reasserted themselves on the list. What one can see from Dan’s data is that the highest-priced band of ebooks took a real hit in ranking during the first week of the Sunshine promotion but in the second week the impact was much reduced and the lowest-priced books were apparently taking share only from the next band up. The highest-priced band had totally regained its pre-promotion share of the list.

Dan always reminds me that “ranking” and “sales” are not the same thing. It is possible that the Sunshine promotion elevated the spotlighted inexpensive books without reducing the sales of the books knocked down or off the list. In fact, I am one who believes that the purchasers of low-priced books are really a different group of people, for the most part, than those who buy the higher-priced books.

But since those bestsellers definitely lost the discoverability created by their presence on or high up on the list, it would open up a whole new set of questions if they got the same sales without what most of us assume is the important lift to discovery provided by bestseller ranking.

The ebook world is rapidly shifting and changing. With the pool of ebook consumers continuing to grow quickly, the buying patterns are bound to be temporary. The next batch of ebook customers might be more price-sensitive or less; they might respond to a price promotion as quickly as the Kindle customers did to Sunshine in the future or they might get slower. But what Dan Lubart is making clear is that the impact of price promotion is visible, if you have the right tools to look.

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It looks like we’re going to have a bit of an unintended debate stretching across several of our panels at the Publishers Launch show in London. Since I’m the guy who put the show together, I can speak with authority to the fact that it was really unintended. But I consider it serendipitous and proof of Branch Rickey’s axiom that “luck is the residue of design”.

I first started probing the question of new business models for agents two years ago when I was organizing the first Digital Book World conference. I had been asked by F+W Media to create a program that would be (in their words) “more practical” than they found Tools of Change to be. I was in partnership with O’Reilly at that time working on a “StartWithXML” show to take place in London. I wasn’t really looking for a reason to compete with them; we were collaborators.

But as I thought about what they did (which I like) and what I might do, I realized that our approaches would be different and our shows would be different. In my mind, the clearest delineation of the difference was that I put agents squarely into the middle of our show planning. This move is a bit counterintuitive in the conference business since agents have never been big ticket-buyers for the industry’s digital education events. But I thought then — and events have subsequently confirmed — that agents were key actors in the digital transition. You can explore the tech challenges of digital change without them, but you can’t really think about the changing economics of trade publishing without bringing them into the conversation.

What seemed logical then — also confirmed by subsequent events — is that agents might become ebook publishers. This had actually happened a decade before, when agent Richard Curtis set up his E-Reads business at a time when most publishers just wouldn’t do ebooks for most titles, if at all. Richard had run into political problems with the agents’ association (AAR) which I believe he headed at the time. They have a code of ethics which could be interpreted to prohibit an agent-publisher such as he had become. In fact, I was a bit surprised (but definitely sensitized and enlightened) when a good friend of mine who is a successful and highly ethical agent told me she couldn’t possibly participate in a conversation that might be seen to endorse the idea of agents becoming publishers.

We put together a panel on “new models” for agents at DBW 2010. We repeated it last year (even though there’s a natural reluctance to repeat things year to year), and we surely are going to include the topic at DBW 2012 next January.

And that brings us to what is going to happen in London on June 21.

We have four prominent agents speaking on different panels on the program. At least three of them are likely to renew the conversation about whether an agent can become a publisher and still be a credible representative for an author.

One of the panels I’m most looking forward to on that day is called “An Emerging Opportunity: Selling into the US”. Charlie Campbell, an agent at Ed Victor Ltd., will participate on that one. We wanted Charlie on the panel based on a conversation we had with him a few months ago about the possibilities he saw for his office’s clients to capture sales in the US through ebooks. When Victor’s office announced the creation of a new publishing operation to handle their own authors’ books, our interest heightened. So Charlie will be explaining how that publishing operation will work and how it benefits the authors in their stable within the context of capturing US sales from a UK or Ireland base. His fellow panelists will be publishers.

Our last panel of the day has Michael Cader and me interviewing four leading luminaries of UK publishing. Three of them are publishers, but the fourth is the agent Jonny Geller of Curtis Brown. Curtis Brown is frequently rumored to be about to start an operation similar to what Victor has announced. (In the US, by the way, agent Scott Waxman — a member of the DBW Conference Council and one of the original participants in our conversations about this — has created a publishing adjunct to his business called Diversion.) Our focus in that panel was not intended to be on the ethics of agents starting publishing companies, but now I think the topic is likely to arise.

Why? Because a third agent on the program that day, Peter Cox of Redhammer, has placed it front and center with a post he published yesterday called “Your Agent Should Not Be Your Publisher”. Peter is on a panel about “Innovation in Marketing and Business Practice.” He caught our attention because he’s been training his authors in digital marketing for years and because he told us he was thinking that the agent’s model had to change to handle fewer clients for a higher-than-standard percentage of the revenue. We didn’t ask Peter at the time how he felt about agents becoming publishers.

It turns out he is very firmly against it and is very clear and articulate about why he thinks that. The moderator of that panel is Richard Mollet of the Publishers Association. I’m sure his membership will very much want him to invite Cox to expand on his ideas. Cox’s panel takes place after Campbell’s but before Geller’s. The juxtaposition of the commentary across the panels will probably be of great interest to the audience and should make for some very interesting tweeting. Maybe we’ll need a special hashtag just for #agentsaspubs!

It was the fourth agent on the program that we thought was going to have the trickiest assignment. David Miller of Rogers, Coleridge and White Ltd. will be discussing “Territorial Rights and Open Markets” with Richard Charkin and Toby Mundy. Since the future of both practices depends very largely on what agents will agree to as the publishing landscape changes, I had thought David had the most politically challenging conversation of the group. It turns out that he’s excused from what will certainly be one of the most controversial aspects of the day’s discussions, although in our very open format, everybody’s free to say pretty much what they want. Perhaps Philip Jones, the moderator of that panel, will want to touch on this question with his panel as well.

It might be that at Publishers Launch Frankfurt we’ll stage this more directly as a debate (but that’s a crowded program and it might be hard to fit it in). You can bet it will be aired thoroughly at Digital Book World next January. And you can be pretty damn sure we’ll be generating some news on this topic (and others too, I’m sure) out of “A Global View of Digital Change”. If you’re in (London) town on June 21, you ought to be there.

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Amazon began a program on June 1 that will apparently run for two weeks. When you go to the Kindle home page, there’s a banner across the top reading “Sunshine Deals, Over 600 Books on Sale for $0.99, $1.99, and $2.99″.

These books are not from the big agency publishers, who set their own prices. Amazon apparently reached out to smaller publishers and worked out deals with them. Amazon could have simply cut these prices themselves, but doing that would require them to take a big margin hit. More likely, the markdown is being shared. (And, in addition, Amazon has plenty of books priced in that band all the time that could simply be featured in this promotion.)

Amazon gains a great price promotion. The publishers in question gain substantial additional visibility for their titles.

Fortunately, there is one entity tracking the impact of price on ebook sales able to tell us: this is having a real impact.

Dan Lubart of iobyte’s “eBook MarketView” blog tracks ebook sales rankings by price band at Amazon. (He tracks it at other retailers too, but, in this case, Amazon is the one that matters.) Dan’s graph tracking the average price of Kindle bestsellers shows a pronounced impact from this promotion.

The average daily price of Kindle bestsellers took a leap on March 1 when Random House moved to agency and a whole slew of bestselling titles could no longer be discounted by Amazon. The Sunshine promotion has very suddenly brought that average bestseller price down to about where it was on March 1!

Dan has another chart showing the distribution of bestsellers among four price bands: up to $2.99, $3-$7.99, $8-$9.99, and $10 and up. Most agency-priced ebooks of titles whose currently available print versions are hardcovers are in the top two price bands. Since the promotion began, the number of bestsellers in the cheapest band has grown from 31 to 47. (He’s charting the top 100, taking out anything that he recognizes as “not a book.”) Half of the increase came out of the top-priced band with the other half distributed between the middle two bands.

In a conversation with Dan about this research, he pointed out that what he’s tracking is ranking, not sales. The movement of titles on and off and up and down on the bestseller list (top 100 rankings) doesn’t tell us anything about unit sales. That’s the piece of the puzzle that the publishers do know (for their own books).

There are a some critical points here, all of which are more important than they are surprising.

1. Amazon can create pricing promotions that will have an immediate and dramatic impact on the ebook bestseller list. (We observed three months ago that publishers might suddenly have a pricing problem with bestseller lists.)

2. Agency publishers are disadvantaged by this fact. The only way they can participate in a price promotion with Amazon is if they lower their agency price across all retailers (which isn’t going to be that exciting to Amazon). On the other hand, publishers on wholesale terms have much more flexibility to “buy into” a promotion (although that flexibility isn’t complete: Robinson-Patman would probably require them to participate in similar promotions with other retailers if other retailers wanted to create them).

3. Since Amazon has demonstrated so clearly that price has a major impact on ebook sales, and since agency publishers can control their prices, it follows that agency publishers need to be experimenting with the impact of price promotion (as self-published authors have already been doing, by the way).

But experimentation only makes sense if you can evaluate the results of what you test. As far as we know, the iobyte database is the only tool that exists right now to help publishers do that. That’s why we’ve started to work with Dan to introduce what he’s doing into the routines and workflows of the major houses.

One observer of Amazon’s new program speculated that it might be a step toward “dynamic pricing”, which is what airlines and hotels use to maximize their revenues for seats and rooms. I’m not sure that forecast makes sense. Airline seats and hotel rooms are limited in number; if you sell one too cheap, you can’t sell it to the next person for more money.

But ebooks are infinitely replicable. The trick for the airlines and hotels is to maximize revenue over a limited — fixed — number of sales. The trick for publishers is to maximize revenues over an unlimited — variable — number of sales. Cutting price to get on a bestseller list that might increase discovery and awareness and maybe generate sales at a newly-raised price is a tactic that almost certainly should be routinely, but not capriciously, employed.

It can’t be a good thing for agency publishers if the only price promoting taking place is with their competitors’ books.

I also discovered looking closely at this promotion that Amazon is not flawless. When I go to the Kindle store on my iPhone and tap on the Sunshine deals, I find lots of agency books listed, which, of course, are not price-promoted. Obviously a mistake — and from my experience a pretty rare one — by the folks at Amazon. (Since I know there are a few readers of The Shatzkin Files in Seattle, perhaps this will be corrected before you have the chance to see it but I first noticed it yesterday — Saturday — and it is still that way as I post much later in the day on Sunday.)

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Amazon dropped a shoe last week when they announced their new mystery imprint, Thomas & Mercer Books, and started signing authors, including self-publishing evangelist, Joe Konrath.

Last night they dropped the other shoe, which turned out to be a very heavy boot. They signed former Time Warner Publishing (the company that is now Hachette Book Group) CEO Larry Kirshbaum to head up a new general trade imprint for them.

The next thing to drop will be a few pennies as the industry wakes up to a very new day.

Konrath complained in a blog post over the weekend that independent bookstores planned to boycott the Thomas & Mercer imprint. It would appear Konrath (who, in his pre-ebook-evangelist days worked hard to promote through independents) took very personally what was meant to be resistance to Amazon.

One would suspect that the books Kirshbaum is going to acquire will be very hard for any bookseller that wants to serve and keep her customers to avoid stocking. In other words, the Kirshbaum signing might have cured Konrath’s concern.

Where did this arise before? Many times, many places. Borders stopped buying Sterling books when the independent publishers was acquired by B&N. The relationship between Sterling and Amazon is more complicated, but it would be safe to say that sales of Sterling books were not Amazon’s highest priority and sales through B&N’s biggest competitor were not Sterling’s.

Amazon briefly (for a couple of days) turned off Macmillan’s buy buttons in January 2010 in an fleeting and unsuccessful attempt to persuade the big houses not to go to agency pricing.

When Barnes & Noble bought Sterling, they stated clearly that they did not intend to publish precisely the kind of books Kirshbaum is now going after: “non-fiction and literary fiction.” Although things have changed in what has been nearly a decade since that acquisition, Sterling was a “category” publisher when B&N acquired them and have never stepped aggressively into the high-advance, agented arena that is Kirshbaum’s natural milieu.

I’d say one of the pennies dropping might be at B&N, where they are probably reconsidering their title acquisition strategy. If their biggest retail competitor is going after the biggest authors directly, can they afford not to?

Five years ago we lived in a world where every book that mattered sold more copies at brick stores than it did online. Five years from now every book that matters will sell more copies online than it does in a brick store. The Amazon decision may mark the commercial turning point of that massive shift.

The edge in maximizing online sales revenues will go to the publisher that can manage online pricing and marketing most effectively. That not only means raising and lowering prices dynamically to get the most possible revenue, it might also mean experimenting with free sample sizes to see what delivers the best rate of conversion to a sale. It certainly also means having the best list of potential readers to alert to a book’s publication.

Publishers have a steep hill to climb to develop skills in that regard that Amazon has been honing for years. The announcement of Bookish, a community and information site for readers, seems like a weak counterweight to this Amazon announcement. I would imagine Kirshbaum will have signed away a few books the Big Six publishers wanted before Bookish even opens its doors.

Agents, who have just gotten a big new bidder to drive up the prices of everything valuable they have to sell, are having a very good day. Publishers, as they say: not so much.

I hope I’ll see you at either the memorial celebration of Ruth Cavin’s life tomorrow (Tuesday) afternoon at 5:30 at the Salmagundi Club at 5th Avenue and 11th Street or at our “eBooks Go Global” conference at Javits all day on Wednesday, where the topic of this blogpost will surely arise!

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One of the commenters on the blog asked last week about consignment selling, because, he believes, a number of publishers are entertaining it. (I am not personally aware of that, but it doesn’t seem unreasonable that they would be contemplating it.) This is a subject I’ve paid some attention to over the years, partly because I had a hand in creating a business which puts the books of many publishers into specialty retail chains on a consignment basis, and has been doing so for well over a decade.

Of course, we’ve had pretty widespread (but not universal) returnability of books in the US market for the better part of a century. (It might be worth noting that Britain has ubiquitous return privileges now, but returns were not the norm when I first became aware of the UK trade in the early 1970s.) But it is not the same thing for a bookstore to buy books from a publisher with the right to return them as it would be for the store to receive books on consignment although much of the logic behind the two is very much the same.

Consignment underscores that the inventory risk is mostly with the publisher, as well as timing the store’s responsibility to pay to the date of their sale rather than to the date when goods were shipped to them. But just like there is variation in sale-and-return terms that is material, so there is with consignment terms.

Under the sale-and-return convention that governs the sale of most books today, here are some important variables.

1. The discount off the retail price.

2. Whether the store pays the inbound freight or the publisher does. (I am not aware of a publisher who pays return freight.)

3. Whether the amount credited for a return is equal to the amount the store originally paid for the book or, as is often the case, just a little bit less.

4. The payment terms: how soon after shipment (which is usually the invoice date) the publisher expects to be paid.

All of these except the amount credited for a return would also be variables in a consignment arrangement. Saying “consignment” doesn’t promise a particular discount, doesn’t imply anything about who pays freight, and doesn’t in and of itself stipulate a speed of payment.

The point is that saying “consignment” isn’t saying enough to describe the commercial relationship. What’s the discount compared to the sale-and-return discount? How often and how soon after the sale is made is the store obliged to pay?

The reason that stores ask for consignment is that they believe it will improve their cash position and enable them to carry more inventory. In fact, there are circumstances in which consignment would speed up payment. When hundreds of thousands of copies of a new novel from a perennially bestselling author land at Barnes & Noble, they’ll sell a large number of them long before the 60, 90, or 120 days they’re going to take to pay the publisher. If consignment called for weekly payments for sales made through the prior week (which is a reasonable formula), the cash flow on hundreds of thousands of sales would be worse for the chain than it is in the current paradigm.

For consignment to be an advantage to the store, one or more of three things must be true. Payment must be delayed after the sale is made, payment must be infrequent, or the store must be permitted to carry many books that it would otherwise have deemed too slow-moving to be worth the investment.

Consignment will add responsibility for publishers, just like the agency model, which also changed the buy-sell relationship between publishers and retailers, did in the ebook world. Consignment inventory is owned by the publisher, not by the store. It is possible that consignment could create “nexus” and possible tax liabilities for the publishers in locales they’ve never heard of.

Of course, consignment would have been a great advantage to the publishers if the inventory Borders possessed had been consigned because publishers would have been entitled to take it back. Under sale-and-return terms, Borders “owns” that inventory, even if the invoices for it haven’t been paid. Lots of unpaid-for inventory is now being sold at fire-sale prices, making it more difficult for publishers to sell replenishment inventory of those titles to stores which are in sound financial health and paying their bills.

From the store’s point of view, consignment terms are all about cash flow. Publisher, however, particularly those whose results are reported in a public company, also think about the balance sheet. When publishers print a book (as I understand it; I’m not an accountant) and put it in their warehouse, it is on their books valued at the unit cost of manufacture. When they ship it to a store and invoice it, the value of the book as an asset grows to the price they invoiced. If they consigned it to the store, its value would remain the manufacturing cost until it was sold.

What that adds up to is that any publisher switching to consignment terms would take an apparent “hit” to their financials. It would be a one-time hit because once the new system took hold, books would steadily be moving from inventory-value to sales-value. And there would be a longer-run balance sheet benefit that large returns wouldn’t suddenly erase value. (This would happen because the returned inventory had been valued at the publisher’s sale price; now it will be valued at cost of manufacture if the returned stock is returned to inventory. If it isn’t, and it often isn’t, it’s a write-off.) It might be a lot to explain to shareholders or senior management that very large slugs of sales were substantially delayed in being recognized.

The store, on the other hand, would suffer no comparable impact. Under sale-and-return, they had the books at their cost on their balance sheet, but they were also debited for the cash they paid or owed. With consignment, they recognize neither the value of the books nor the payment for them until they’re sold, when they book the sale and also recognize the obligation to pay.

Consignment would definitely give the stores an apparently infinite return on inventory investment; there would be no inventory investment. The only limitation on how much stock the store would want is the available space to display it. The incentive to be rigorous about monitoring inventory really shifts from the retailer to the publisher or distributor.

Retailers have been striving for consignment terms, also called “pay on scan”, for years because, overall, inventory investment is one of the major working capital requirements for most of them. When we set up the distributor mentioned above in the late 1990s, we used consignment as a way to “guarantee” a store’s margin and their ROI. The retailer gets a fixed margin based on the retail price. The distributor makes all the inventory management decisions — shipments and returns — and pays the freight to ship the books in and out.

One other wrinkle of consignment is that “shrink” — inventory disappearing without going through the cash register — becomes a shared problem because it delays payment until inventory is ultimately reconciled. That is only really forced to happen when the publisher or distributor takes a complete inventory (rare) or calls for the return of a book that hasn’t been reported as sold but the store finds it isn’t there.

Under sale-and-return, the store pays for what is shipped to it. Shrink is entirely the store’s problem. This is an important concern to any publisher contemplating moving to consignment.

Another reason — and a good one — that publishers resist consignment is that they have a much-less-certain accounting of what they are owed. They are depending on the store’s POS system capturing every sale, with the differences being made up on a very delayed basis when inventory is taken or returns are requested and not found. Orders by a retailer of the same books from another source — if the consignment relationship isn’t a sole-source relationship — can seriously complicate the record-keeping.

If it is true that a number of publishers are contemplating a consignment model, that’s a good thing because it would demonstrate creative thinking is occurring where it is required. As we have said over and over again, shelf space at retail is going to be an increasingly vexed issue in our business in the months and years to come. Anything publishers can do to make it easier and more attractive for owners of brick locations to put books on their shelves is going to be needed and appreciated. Consignment, properly done and properly positioned, can be helpful, but it isn’t a panacea and it requires a lot of consideration of the details of implementation.

Consignment terms for retailers, I must admit, is one of the few important topics not being discussed at either our “eBooks Go Global”  conference at BEA on May 25 or our “Global Perspective on Digital Change” conference in London on June 21. If you’ll be in the vicinity on those dates, click the links and check out the programs. We’re very excited about what we’ve been able to put together.

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