Print-On-Demand

Although there are some very good minds working on the next publishing model — Jane Friedman with Open Road and Richard Nash with Cursor being the first two that leap to mind — I have developed a couple of thoughts that might be helpful to them or to others planning to avail themselves of the new opportunities which are bound to be arising.

What I think both Jane and Richard have spotted is that “scale” is diminishing in its ability to provide a publisher with competitive advantage. Certainly, it is still true that the surest-fire big successes still require substantial advances to authors and aggressive laydowns of inventory that do require scale. If you want to publish Patterson or Evanovich or any author with a proven track record of bestsellers, guaranteed to move hundreds of thousands of copies, you have to take a cash risk for advance and inventory commensurate with their guaranteed minimum sales level and you have to go after the entire market, which takes money and organization, to recoup that investment.

But that covers no more than one percent of, let’s say, 100,000 titles a year published by established publishers and an even tinier percentage of the total number of new books if one includes those issued through self-publishing operations. (I am staying away from real numbers here because I haven’t done the analysis needed to discern them. The million-plus number of new ISBNs reported by Bowker contains hundreds of thousands of titles that are neither new nor self-published, but which are reissues of out-of-copyright books set up by companies that use technology to process the files into a print-ready state.)

Nash is explicitly expecting the collapse of the overall trade publishing model. Friedman has never expressed that expectation, but she’s exploiting the combination of old contracts that are ambiguous about ebook rights and the big trade houses’ reluctance to go beyond a 25% of net receipts royalty on ebook sales to make high-profile ebook captures. Her company professes to be “marketing-focused” and she has hired two of trade publishing’s most expert digital marketers, Rachel Chou from HarperCollins and Pablo Defendini from Tor. She has a partner, Jeffrey Sharp, with a filmmaking background. So there appears to be a clear emphasis on ebooks, new publishing forms, and digital marketing, not on “scale.”

A month ago I wrote that I expected 50% of the market for narrative books (words, not pictures; simple design, nothing complex like a cookbook) to be delivered through online purchases by the end of 2012. That was based on an expectation that 25% of the sales of those books would be ebooks.

Since then, I’ve decided that prediction is too conservative. Now I think narrative books might pass that benchmark six months or a year sooner than that. Hachette’s most recent financial results attributed 8% of US book revenue to electronic in the first quarter of this year. In a speech delivered last week in Australia, Carolyn Reidy of Simon & Schuster gave the same number — eight percent — as her company’s current share of revenue attributable to digital. Eight percent of revenue is something more than 8% of units (because ebooks are cheaper), and the number would be higher on their narrative books (because the 8% is across a list that includes a lot of books not available as ebooks.) If they were at 12% of units on narrative books in the first quarter of this year, they could be at 25% of units on narrative books by the first quarter of next year, which would be about two years ahead of what I was expecting just a month ago.

And what is true of both Hachette and Simon & Schuster must be a pretty reasonable approximation of what we’d see at any of the other Big Six companies.

The portion of the market that buys online doesn’t require pre-printed inventory. Setting up with Lightning and Amazon and perhaps Baker & Taylor would enable all online purchasers to get their print copies on demand. Today I am offering what I think is the solution for distributing  inventory more broadly into brick-and-mortar stores without a publisher risk. If Nash or Friedman have thought of this already, they haven’t announced it.

The brick-and-mortar world has three main components: chains, mass merchants, and independents. Here’s a deal structure that I think can be appealing to the big customers and, which, with a bit of tweaking,  can work to the benefit of the smaller ones as well.

When publishers sell to the trade channel, they collect approximately half of the retail price of the book for each one sold. They bill their channel partner that full amount when the books are shipped to the store, and credit their channel partner that full amount (with some relatively minor exceptions) when returns come back. Of that half they collect from the channel, about 20% (10% of retail) is the publisher’s cost of printing the book, 20-30% (10-15% of retail on hardcovers; actually less on paperbacks) is the author’s royalty, and the balance (about 50-60% of the money received) covers the publisher’s cost of doing business, including paying for books printed and not sold, and profit.

In a print-on-demand scenario, the manufacturing cost doubles (or more), so 20 or 30 points of the 50 or 60 remaining to the publisher are chewed up. Some contracts allow the publisher to get back some of the author royalty in that scenario, but absent that the publisher’s margin is definitely reduced so that they only “clear” 20 to 30 percent of the cash received. On the other hand, they shed the costs of unsold inventory (which can be substantial), they lose the requirement to capitalize inventory, and they can diminish or eliminate all sorts of operational costs for warehousing and inventory management. Sellers of print-on-demand services, including Lightning, have been laying out this reality to publishers for years.

In the present scenario, the channel partners — retailers or wholesalers —  are at cash risk for the return freight (and sometimes the inbound freight). And they have the full cost of the book tied up until they sell it or return it.

Here’s the new solution for a no-returns, no-inventory-risk-for-publishers world.

Publishers say: we are doing an initial press run which you can be part of. There will be no inventory maintained at the publisher. If the channel demands a subsequent run and will support it, we’ll do it. But otherwise, everything beyond the press run is available only from the wholesalers providing POD services.

The press run offer to channel partners works like this: you pay the cost of printing and delivering the book. And that payment is firm. You buy that inventory at its cost and you own it; no returns. That’s going to be about 10% of the established retail price.

But the payment above that, the rest of the purchase price by the channel, is paid on sale (or, to use the term of art, “pay on scan.”) To provide some incentive for the retailer to support a book with inventory and push up that first (and often only) press run, and then later to give them the margin for markdowns, I’d suggest that the second payment diminishes over time. The total “cost” to the retailer should be 55% of the retail price for the first 60 days after inventory is delivered, dropping to 50% for the next 60 days, and 40% thereafter. That would leave the publisher 30% of the retail price in margin on the slowest-selling books, of which the author, under the best contracts that exist today, would get half. The publisher would get half, but would have no inventory cost (that was paid up front) and no returns processing.

This formula should work fine for Barnes & Noble, Borders, Books-a-Million, and the mass merchants, who can buy 1000 or 2000 copies of a book they want to carry and get that press run price. Serving the independents is more difficult.

We stipulated at the top that all books are set up for print-on-demand at Amazon and Ingram; perhaps at Baker & Taylor too. If those books are ultimately sold to the wholesaler on normal discounts (about 50%), the relatively higher POD cost would chew up most of the publishers’ margin. We’re positing that POD could be 25% of retail (rather than about 10% for press run), which would leave only 25% for royalty and publisher’s margin. By today’s standard contracts, that might only leave 10% for publisher’s margin. There are two possible ways to claw back margin and both of them could work.

One is to negotiate lower author royalties for sales made through print-on-demand. Let’s remember I’m formulating how a new publisher ought to operate; they don’t have any legacy contracts yet. And, I might add, both Open Road and Cursor have aspects of their model that are more advantageous to authors than today’s standard. That’s how Open Road is getting those ebooks, paying 50% instead of 25%. And Cursor offers a short-term deal that nobody else does. So, on balance, the author might see herself as better off even though the royalty on some trade sales would be reduced.

Another possibility is that Ingram or Baker & Taylor (and you only need one to say yes to more or less oblige the other) can be persuaded to accept a lower discount on these POD books. For one thing, they make a bit of margin on the POD. For another, these books will not be available at all direct from the publisher (which has moved to a no-inventory model), so the wholesaler can offer a lower discount to their customers as well and still be “competitive.” And the wholesaler has no inventory risk or carrying cost either and no cost of sending returns back to the publisher. A slightly reduced margin structure still ought to work out profitably for them.

Of course, many devils are in the details. Publishers would need retailers working this way to report sales to the publisher on a daily basis and pay promptly, perhaps weekly (after all, the retailer is only paying after they’ve collected the customer’s money.) There is “shrink”, books stolen or which otherwise disappear without going through the cash register. That cost is entirely borne by the retailer today and the publisher will need some check and balance to assure that it doesn’t become a payment dodge under this arrangement.

But as the publishers move to a world where inventory risk can be substantially reduced, it just makes good sense to look for a way for the brick-and-mortar sales channel to gain some benefit from that idea as well. Working this way can enable a 21st century publisher to cut operations costs dramatically and even, perhaps, improve their cash flow.

When I first recognized that we’re in sight of the day when half the sales can be achieved without inventory, it looked like an obvious game-changer for publishing. Now I’m seeing the way to change the other half of the game as well.

And having walked through this door of perception, I close with a message for all the no-returns advocates out there among publishers. You want to eliminate returns to reduce your risk. That’s reasonable. But your risk is really the cost of printing the books; it wouldn’t be royalty on books not sold and it shouldn’t be profit on books not sold. So shouldn’t any no-returns policy also relieve the store of those elements of the risk as well?

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Before the Internet deconstructed the publishing value chain and enabled new models, both publishers and booksellers benefited from a lot of what I’d call “secondary business”. Secondary business was not what they were set up or primarily intending to do, but which they easily could accommodate to earn easy margin that supported their primary operations.

Publishers controlled an apparatus that could make bound books out of manuscripts and put them on bookstore shelves for patrons to buy. These were not trivial capabilities and they were much in demand. Although  the principal business model for a commercial publisher was to select what to publish, develop it editorially in collaboration with the author, and then take the risk of printing inventory and distributing it in hopes that it would sell, sometimes opportunities arose that were less risky ways to employ their skills.

I had my first experience with this kind of publishing in the late 1970s when my friend Caroline Latham was the writer-for-hire and then publishing consultant to a wealthy man named Jack Eisner. Eisner was a Warsaw Ghetto survivor with an exciting and moving story of his experiences on the run from the Nazis during World War II. After the war, he built a very successful import-export business so that by three decades after the war he had the time and resources to deliver his story to the broadest possible audience.

Caroline co-wrote his book, The Survivor. Eisner hired Abby Mann (the Academy Award-winning screenwriter of Judgment at Nurenberg) to write the screenplay for the movie, and the play was written by Susan Nanus. Jack financed the production of the play on Broadway, where it had an extremely brief run.

Caroline engaged me to help her make the book deal. We were working with William Morrow, a fine and venerable publisher. They paid Eisner no advance. Eisner agreed to put up a substantial sum (I think it was $75,000) for advertising and promotion of the book. Morrow made all the decisions about printing and distribution. With a deal like that, they couldn’t lose. And they didn’t, although the book didn’t sell very well in relation to the investment made in it by Eisner. It is worth noting that there is a paperback edition of the book, renamedThe Survivor of The Holocaust, still available from Kensington.

The more common author of this kind for publishers would have written a business book that “paid off” for the author in ways other than trade store sales. Sometimes it just enhanced their reputation and improved their primary business. Some business book authors move large numbers of copies of their books themselves. In bygone days, “selling” your book to a trade publisher (for little or no advance) with contractually-stipulated author buy-backs was a deal that worked for both sides. I remember a very significant trade publisher telling me over a decade ago that “author sales” constituted one of their largest distribution channels.

Working with an established publisher has a couple of distinct advantages: the imprimateur of a brand name is one and their ability to move copies through commercial channels is another. But it also comes with definite drawbacks for the commercially-minded author. The profit on books the author moves is shared with the publisher. And the time schedules for trade publishing are traditionally glacial; virtually every author’s first disappointment is how long it takes from the time their book is completed until the time a publisher puts it out.

One stark example of an author who does better self-publishing than he could do with a trade house is Michael Durkin. Michael is a sales trainer and motivational speaker who sells his own self-published book, bundled together with audio CDs that are simply recordings of his speeches. The package of the book with about six of the CDs sells for $100 and he sells about 25,000 of these a year, mostly through the 100 or more speaking engagements he usually does, plus a few from his own web site. Durkin is so averse to sharing his margin that he doesn’t even try to sell his material through Amazon! Durkin also points out that his book is a fabulous prospecting tool; he uses it regularly as a door-opener. It gets people to hire him for the speaking engagements that fuel his product sales which, if you figure that his cost of goods leaves him with a margin of more than $80 per package sold, is producing a solid seven-figure profit for him annually.

Durkin agrees that 20 years ago he almost certainly would have worked through a publisher with a buy-back arrangement which would have meant a significant hit to his margin. And it would have constituted a very nice subsidy for a publisher.

Bookstores also have lost what is collectively a vast amount of secondary income to the Internet. My father briefly fought a battle in the 1950s to stop the practice of giving wholesalers more discount than bookstores got. Len wanted to force library supply to go through retailers so that library purchases were subsidizing the retail bookstore network, not warehouses that simply extended the publishers’ supply chain. It was a great insight (although both libraries and wholesalers, deeply cognizant of the value-added services wholesalers perform today for libraries, would argue persuasively against it today as, apparently, they did then.)

What often distinguished a successful independent store was its ability to do “back door” trade: serving local businesses, schools, and community groups. If a local reading group needed 10 copies of a book, they’d buy it from their local bookshop. Bulk business, and there is lots of it in every community in America, was most conveniently transacted through a local merchant. Now it is most conveniently transacted through the Internet. When a “back door” book business succeeds (like Jack Covert’s 800CEO-Read business based in Milwaukee and originally spawned by the independent Schwartz Bookstores), it is because it develops a far-flung following (served largely through the Net) rather than a local one.

It only works now if it is built on a vertical principle so it can appeal to a global audience. Being local doesn’t provide enough of a competitive edge for a local purchaser who is looking for wide selection, the ability to buy in bulk, the ability to ship to different recipients, and the ability to handle all that business online.

It is almost impossible to prove this with data, particularly retrospectively, but my intuitive hunch is that competitive independent stores in the 1980s and 1990s outdid their chain competition largely because of their ability to develop and serve secondary business — business above and beyond what is delivered by the traffic that comes in  the front door, shops the displays, and walks out with the goods. If that were true, it would explain why independents seemed to be hit harder than the chains in the first decade and more of the Amazon-led online bookselling revolution.

But all publishers and all brick-and-mortar book retailers earned critical margin in bygone days from sources that have alternatives they didn’t have then, even though neither the publishers nor the booksellers would have identified this business as critical to their survival. That’s another manifestation of the permanent alterations occurring to the ecosystem that spawned and enabled the existence of a general publishing business.

BookExpo America is this week. I’m really sorry I’m missing the Self-Publishing Day on Monday. That’s clearly a movement that is rapidly growing in importance; one we’ll have to “cover” a bit at Digital Book World next January. It’s an increasingly potent commercial force that all elements of the trade community — authors, agents, publishers, wholesalers, and retailers – will want to understand. I can’t make it because I’ve got meetings elsewhere in the city all day Monday. I am planning to be on the floor all three days the exhibits are open. I know many big houses are off the floor in meeting rooms this year; I’ll be paying attention to  how that changes the feel of the show.

I can already tell I’m glad to have Cader’s BEA LunchtoGo app; I don’t believe I’ve had such a simple stand number look-up device. (It has lots of other data and functionality as well, but that’s mainly what I’ll use it for.) I’ve got an iPhone now but I have had a handheld organizer since 1986. I remember a few years ago Frankfurt offered data of this kind for the Palm Pilot which you secured by having it “beamed” from one of the kiosks they set up around the Book Fair for the purpose. The process was klunky and, as I remember, so was the tool. I don’t think the experiment made it into a second year. But Lunch’s tool is much cooler, and it shows how a web site can work just like an app (as long as you’re connected; the data’s in the cloud, not in your hard drive) and dodge the restrictions of the Apple environment.

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A shoe dropped today.

Author J. A. Konrath, who has been self-publishing on Kindle and reporting about it for quite some time, just contracted to have the latest in his series of novels featuring female cop Jack Daniels published by the new Amazon Encore imprint. Encore was originally announced as Amazon’s way to pick up and feature already self-published books. They apparently bent the guidelines a bit to include Konrath’s yet-unpublished book, Shaken. Amazon will publish the Kindle edition at $2.99 in October and release a paperback at $14.95 next February.

Although Konrath is a media- and tech-savvy author who has published with major New York houses (the Jack Daniels series was previously published by Hyperion), he is not a regular NY Times Bestseller brand. Not only is he not a multi-million dollar advance recipient, he makes it clear that the novel he just signed with Encore was rejected by the New York publishing houses. So Amazon had a low bar to jump to secure him for its Encore line.

Nonetheless, this is a significant jolt to conventional publishing economics. Sales of Konrath’s $2.99 ebook will deliver him about $2.10 a copy (Konrath says $2.04; not sure where the other six cents is going…), as much or more as he would make on a $14.95 paperback from a trade publisher, and significantly more than he’d make on a $9.99 ebook distributed under “Agency” terms and current major publisher royalty conventions. And, however one feels about the degree to which pricing is a barrier to ebook sales, one must assume that the $2.99 price will result in a lot more ebook sales than a $9.99 price would. Many times the sales!

We’ve been imagining a split market for ebooks: “branded” ones from conventional publishers being sold in the $10-$15 range and “commodity” ones from lesser-known sources (authors and publishers) at $1.99 and $2.99. Over time, we figured that improved curation of the cheaper ones, plus promotional pricing by the branded ones, would drag the overall pricing down. That’s been behind our concern that maintaining anything close to the current pricing for print will be almost impossible to do over time.

I think “over time” just became more compressed as a result of Konrath’s move.

Here are a few things to think about and watch as we go.

1. Konrath made it clear that his deal with Amazon is under a strict NDA. We’ve gotten used to reading about his financial results and, indeed, Amazon loses a major benefit of their relationship with him if they don’t allow him to talk about how much money he’s making.

2. We got a comment on another blogpost from a reader complaining about not being able to get books on Nook that were available on Kindle. Without any detail as to what books the reader was talking about, it was impossible to diagnose the reason. I could only assure the reader (who wondered if the retailer was declining to stock some titles) that Barnes & Noble certainly wanted everything possible available on Nook. Although Amazon intends to try to sell the print book through non-Amazon channels (an effort Konrath frankly admits he doesn’t place great stock in), it would be a bit of a surprise if they made the ebook available through any non-Kindle channels.

3. Giving up non-Kindle channels today for an ebook isn’t necessarily giving up a lot, particularly with Kindle clients available to be used on other devices. Publishers have been hoping that iBooks and the Agency model would result in a more diverse ebook ecosystem, reducing their dependence on Kindle to reach the ebook audience. What happens if more authors, and bigger authors, follow Konrath’s lead. Could Kindle end up being the only ebook outlet for enough important titles to seriously impede attempts to compete with it?

4. In explaining his decision to sign with Encore, Konrath credits Amazon with being able to “send an email to every person who bought” a previous book of his through their website.  This underscores the importance of email list organization at publishing houses, and the opportunity almost totally missed by publishers to entice book purchasers to register their interest in an author. (Yes, some publishers make a half-hearted effort in that direction, but where are the experiments — like Thomas Nelson’s — to give all the bookstore purchasers something of value if they’ll check in with the publisher after they’ve bought the book from a retailer?)

5. It will be fascinating to see how the rest of the retail trade — bricks-and-mortar — reacts to buying a book which delivers profit to Amazon on each and every copy sold. Sterling was a client of mine when Barnes & Noble bought them. Borders stopped stocking their books almost immediately. Only long-standing relationships with independent retailers saved their distribution through that channel, but there was definitely negative feedback from indies about supporting their perceived enemy. A retailer’s first loyalty is usually — and should be — its audience. By the time Shaken comes out in print, it is likely to have sold tens of thousands of copies as a Kindle ebook and, especially because of its unique role as a groundbreaking publishing model, is going to be known and anticipated by the audience of print book customers who haven’t made the switch to digital reading.  Will Amazon sell print to their competitors successfully? Will they offer return privileges? Will they offer competitive discounts? Will they use wholesalers? This will be fun to watch.

Konrath’s deal with Amazon was negotiated by his agent (which, according to Publishers Marketplace’s “Who Represents” database is Jane Dystel, but this was last updated in 2006.) We know that Amazon has reached out to agents lately. Many authors will be asking their agents to investigate this alternate avenue to the marketplace on their future books. Signing up new books for what publishers would consider reasonable advances just got harder. So did maintaining a 25% royalty rate for ebooks.

I met Joe Konrath once, in January 2007 at Google’s Unbound conference, which I emceed and at which he spoke. So I’ve been aware of his ongoing narrative, making pretty serious bucks selling books of his he controlled (out of print or never published) through Kindle. I have been surprised recently at who did not know about him, including a close friend who herself is a successful mystery writer and all of the agents at a pretty large NYC shop thinking hard about their digital future. His days of relative obscurity are over; Konrath has carved out a permanent place for himself in the annals of publishing history with this move.

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I have found a way to describe the difference between the Digital Book World conference we organize for F+W Media and the O’Reilly conference Tools of Change which I believe is accurate and is certainly not intended to be a pejorative description of  Tools of Change. I go to TOC and I find it very valuable, but different from what we’re trying to do.

Tools of Change explores developments in technology that have impact or can have impact on publishing (in general) and helps publishers (of all kinds) understand how to apply them. Digital Book World explores business challenges to trade publishing (defined as book publishers who work primarily through the retail network, or “the trade”) generated by digital change and helps publishers address them. So if I were organizing Tools of Change, I’d want to scan the horizon for technologies that could have an impact and ask “how?” Because I’m organizing Digital Book World, I’m looking at trade publishing’s commercial environment and operations for the impact of technology and asking “what should we do?”

The next Digital Book World Conference is set for January 25-26, 2011. That obliges us to ask: what will the hot digital change questions be eight months from now? What should we be planning to discuss then that will be immediate and relevant to the attendees we’re targeting: the editorial, marketing, sales, and digital strategy people in trade book publishing houses?

To help us figure that out, we’re in the process of recruiting the DBW 2011 Conference Council. That group of about 30 people — CEOs, digital strategists, and marketers from publishing houses large and small, agents, retailers, and independent industry thought leaders — will help us define the panels and choose the speakers that can enlighten and inspire. I’ll introduce you to that group in a future post; the team is in formation at the moment.

Today’s blog is to recruit the readers of The Shatzkin Files to help too. I hope you will.

Here are 15 topics, or speculations, we’ve identified to start building an agenda for discussion next January. Do you have any thoughts on any of these to refine our thinking? Some of these are ideas looking for examples: do you know particular people or companies doing things suggested here (or not suggested here) we should be highlighting? And, most important, what are we missing?

1. What’s going to be in an ebook? We’re definitely moving past the stage where the ebook is a “straight lift” from the print: half-titles, blank pages, and all. As ebook sales are rising, publishers are paying more attention to presentation and quality control. And there have been a few experiments with “enhanced ebooks” that contain added content and features, some of which are presenting books as “apps” to increase the functionality that can be offered. Where will we be drawing the line between “standard” new ebook features — dictionaries and linked notes, for example — and enhancements that might be worth extra money? And what enhancements will we see working in the sense that consumers see them to be worth paying for?

2. What will ebook sales channels look like eight months from now? In addition to the main ones we have today — Kindle, iBooks and the App Store, Nook and B&N, Sony, Ingram Digital and Content Reserve — will we be seeing substantial sales through Google and the Android marketplace, B&T’s Blio, and Copia as well? Will the mobile phone service providers be creating retail outlets that matter too? Will the retailers newly in the ereader game — Walmart and Costco and Best Buy — also be motivated to create a branded outlet of their own to sell ebooks?

3. To what extent will publishers view single-title marketing as a practical endeavor? We’ve maintained that title-by-title marketing is the Achilles heel of general trade publishing and that the steady erosion of book-format-oriented marketing opportunities (book review pages in newspapers, radio and TV talk shows) and verticalization call for different marketing strategies. Where will publishers’ thinking be next January on the challenge of launching each new title into the marketplace?

4. How much progress will publishers be making on establishing direct-to-customer contact? What has characterized trade publishing is its dependence on intermediaries to reach the market. And what has made trade publishing possible is the leverage provided by those intermediaries, allowing publishers to reach millions of readers through mere thousands of touch points. But all publishers today acknowledge that the intermediary structure is breaking down and direct contact with end users is necessary. How is that working out? We may need two panels to answer that question: one of niche publishers that will find it pretty natural to do and one of general trade publishers who will undoubtedly find it very hard and complicated.

5. How important is the mobile phone market? How fast is it growing? What kind of books work best on it? And what do publishers have to do differently to please that market than what they do for larger-screen PCs, tablets, and ereaders?

6. How are publishers tackling the shrinking marketplace for printed books? Are they shedding warehouse space or considering consolidation with other players? Are they renegotiating printing contracts, reconsidering what constitutes a “minimum run” or acceptable print book margins? Are they developing new short-run and POD models to complement their prior pressrun models? Are they launching any new books with a no-pressrun strategy?

7. How much progress are publishers making toward changing their workflow, so that we have “ebook first” editorial processes? Since the beginning of ebooks over a decade ago, the standard technique has been to make them after the print book has been completed, and for the editor and author to focus their efforts on making the best possible print product. There is an increasingly widespread belief that this is backwards, and more complex ebooks help make a compelling argument for reversing the order of things. How far will we have moved in that direction by next January?

8. Does the growth of ebook sales change the thinking of publishers and agents about the efficacy of dividing up the territories for single languages? Do publishers start to see a growth in offshore sales facilitated by ebooks? Anecdotal reporting by O’Reilly, which owns global rights in all its titles, suggests that they’re seeing big sales growth in digital from markets that are hard-to-reach with print.

9. Do non-US publishers start to establish more of a sales presence in the US exclusively through virtual means? We’ve been suggesting on this blog that the growth of online sales — print books and digital books — will soon enable reaching a majority of the US sales potential without inventory, which means without the need for a warehouse or a distributor. That should lead to greater penetration of our market by offshore publishers, in all languages. Will we see enough signs of this by January 2011 to build a discussion around it?

10. How does the future look for the brick-and-mortar bookstore marketplace? On this blog (and elsewhere), concerns have been expressed about the impact on bookstores of the increasing shift to online purchasing for both print and ebooks. Christmas 2010 is being viewed in the consumer electronics industry as the “ebook Christmas”. When we’ve had a chance to digest the sales numbers of new devices and we combine that with what we know about the impact devices have on a consumer’s print book purchases, how do we see the future of bookstores when next January rolls around?

11. Is “profitable self-publishing” an idea gaining credibility or is it a pipedream? In 2009, author J.A. Konrath made a bit of a splash when he blogged about the substantial revenues he was earning putting his short stories and out-of-print backlist on Kindle without a publisher. Will there be more stories like this by January? Will this look like a viable option for established authors?

12. What’s the best approach to ebook distribution for small and mid-sized publishers? Will the original DADs (digital asset distributors) like Ingram Digital and LibreDigital provide the full service suite and sales effort that smaller publishers need? Or will the publishers-as-distributors model — notably including O’Reilly, who went into the business last February, as well as trade publishers and trade distributors like Perseus and NBN and Ingram Publisher Services, be the better option? How much is effective ebook distribution dependent on technical competence and how much of it requires sales competence?

13. After many years of discussion, are we yet beginning to see some new revenue models with any impact, like subscriptions (Disney has tried it now, in addition to O’Reilly’s Safari), selling books by the slice, or new models to compensate for library lending? We know that publishers need metadata-labeled fragments of their books for marketing purposes, but, for trade publishers, is there yet any indication that there’s a real payoff for that kind of tagging in sales revenue?

14. How much of the print backlist is still locked up by rights issues and what impact can different royalty offers have in clearing it up?Jane Friedman’s Open Road has had some success signing up established backlist for higher ebook royalties than the majors want to pay. Is the reservoir of candidates for this treatment substantial? How are agents and big publishers going to resolve these issues?

15. Is the notion of publishers building vertical presences on the web, so often expressed and promoted on this blog, gaining any significant traction in the real world? How are Poetry Speaks and Oxford Bibliographies Online and the forthcoming Pixiq from Sterling doing at establishing a new publishing model? What other examples are emerging or will emerge of publishers using delivering vertical solutions to create new business models?

At the Digital Book World conference, we want to be strategic and we want to be practical. And we want to be focused on the real-world problems digital change is forcing trade publishers to face. Have we left out any of yours?

I have finished this but not posted it yet and am already thinking of things I left out. A substantial publisher I spoke to last week learned from having his trip to the London Book Fair cancelled that he doesn’t need to go there anymore. This company has already given up its BEA floor space in favor of a meeting room. And this CEO himself is no longer going to go to Frankfurt and can see the day not far off when his company will no longer take space there either. Are trade shows  an anachronism in the age of digital communication? I have a feeling you readers and the Conference Council will think of a lot more.

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I contributed to a long-standing industry argument I usually try to avoid when I speculated that ebook growth could lead to a situation which threatened the returnability model for book inventory shipped to retailers and wholesalers. I should have been more emphatic that what I was actually suggesting was that the model of using speculatively-printed inventory to sell books was threatened, and that returnability, which is a subset of that model, would go along with it.

Coincidentally, Ken Auletta wrote a New Yorker piece at the same time in which he demonstrated that lots of smart people, he among them, don’t actually understand the economic impact of returns, let alone the promotional impact of the practice of using books as posters and display props, which is responsible for most of them.

Misunderstanding the economic implications of returns, failing to grasp how it is most useful to think about and analyze them, and various misinterpretations of them are very common up and down the ranks in publishing, in big companies and small.

I recall in the early 1980s I had a small publisher client that was distributed by a larger one. I used to go into the big publisher’s office every couple of weeks and leaf through the sales rep orders, trying to figure out which reps were best selling my client’s books effectively and which ones perhaps needed to get a refresher course on the sales handles.

The sales director in this shop, who ran sales departments for several large publishers in his career and who was both a nice guy and thought of as a “numbers man”, kept tabs on the returns percentage from the two national chains: at that time, Walden and Dalton. He calculated those percentages meticulously at the end of each month, based on that month’s shipments out and returns processed.

Well, you could count on the fact, every year, that returns percentages for both chains were astronomical in February, when few new big books shipped and every excess of optimism going into Christmas was punished. And you could also be sure that both chains had low returns in November and December, when retailers are much too busy building up stock for holiday sales to send anything back.

In other words, the calculation produced a result that was, literally, useless. It simply confirmed the obvious. I bring up this straw horse because it demonstrates an important fact that is just as true when analyzing returns for an account for any period of time, even a year.

The returns in any period of time are at least partly driven by purchases made in a previous period of time. So if sales in a prior period were high, the returns percentage in a subsequent period of lower sales will also be high, and that’s regardless of the appeal of the books being shipped in either period.

So as sales fluctuate, as they inevitably do, publishers will find that all weak sales years have apparently high returns and strong sales years have low returns. This isn’t cause and effect; it is more like a tautology: the inevitable consequence of the fact that returns are based on the sales made three months ago, six months ago, and sometimes a year ago, not on the sales being made right now.

One way a publisher might try to analyze their way around the timing problem is to look at returns by title which, if the calculation were done when an edition’s life was completed (perhaps on the hardcover after it has been remaindered deep into the paperback’s life), would seem to be a valid number to analyze on a stable base: the shipment of one particular book.

But even calculating things that way is not very useful as an analytical device. Returns come from the inventory in the pipeline when the book declines or dies. If the book has already sold for years in that edition, the base for the returns calculation (all books shipped) includes those from many printings long past. The copies in the pipeline at that point might only be 10% or 5% of the total the book has shipped in its lifetime, so the returns will, of course, come in under those percentages.

A publisher trying to manage inventory efficiency needs to be concerned with the books in her own warehouse and the books currently in the supply chain and subject to return. Those sold long ago are not part of that inventory. Taking 100,000 copies back on a book that sold a million or two million and calculating the returns percentage won’t produce any flashing caution lights, whereas taking back 25,000 of 35,000 pushed out on a new “make” book will produce a lot more internal scrutiny and hand-wringing in most houses. But a tighter focus on how to to manage the inventory actually in the supply chain in the face of declining sales would be much productive than an “analysis” that produces nothing but a historical observation. A publishing company can realistically make a lot more progress and save a lot more money figuring out how to reduce the 100,000 than the 25,000.

One factor that affects returns percentages and is not often considered by a publisher is the frequency with which an account orders. I’ve never had the opportunity to do the analysis, but I’d bet there is a very strong inverse relationship between the frequency with which an account orders a publisher’s books (whether direct or from wholesalers) and returns percentage. There are two interrelated reasons for this.

The obvious one is that the store that reorders is signaling that they’ve sold books, meaning that what is available to be returned as a total of what they’ve ordered is less, the effect we’ve noted above. But the other is that an account that orders less frequently is raising returns as a percentage in one of two other ways (depending on the book): they’re either over-ordering to prevent going out of stock or they’re failing to reorder when they are out and losing sales, which means that whatever is returned (of other titles, in this case) is calculated against a smaller sales base than should have been the case.

And all of this is very important to take on board right now because publishers are likely to be entering a sustained period of declining brick-and-mortar sales (which is the part of the inventory pipeline most likely to generate returns), caused in part by declining brick-and-mortar shelf space. That means that advance sales on new titles are going to be lower than before and the number of backlist titles being stocked is going to steadily decline at the same time. And that adds up to a higher returns percentage on a declining sales base.

It doesn’t take a rocket scientist to understand that if stores close or cut back their shelf space, they’ll be sending books back that will increase returns rates. But it will not be simple to separate out how the current strategies for inventory placement are working and to avoid having the “noise” of returns made because of contraction cloud those judgments.

The “good news” is that the old measurements (total returns in a year against total shipments out in a year) will deliver an exaggerated picture of how much current new title sales are declining (although they will be delivering a true picture of a very sad fiscal reality.) The bad news is that we’re going to start hearing about companies whose overall returns percentages have gone from the 20s to the 30s and then higher.

I wrote in the piece that I referred at the top that it looks like sales registered online — whether print or electronic — will be half the sales of new narrative text books published by 2012. When that number gets to 90%, there won’t be much of a premium on a publisher’s ability to understand, and thus to be able to manage, their returns with sensitivity and sound analysis. But between now we will be living through several years when it will be one of the critical skill sets for all publishers fighting to survive sea changes in the business.

For a few years earlier in the decade, we had a thriving little business called “Supply Chain Tracker” in which we took the sales and inventory data provided by major accounts and delivered publishers reports in Excel to help with analysis. We created what we believe were some critical metrics to watch: percentage of stock on hand sold, week by week in each account; percentage of each book’s stock in an account’s Distribution Center (if they had one); total inventory in the retail pipelines we could see and what percentage was selling through in a week (by title), and then the same for wholesale and distribution centers. Most of a publisher’s supply chain inventory is really visible today, if a publisher takes the time and care to look. Just glancing at each spreadsheet an account delivers for how things are going on top sellers was never sufficient; the price to be paid for such inattention in the future will only escalate.

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This is the last of a 4-part series describing what I was intending to say to a live audience at the Publishers Association in London on April 28. In Part 1, I tried to make clear that a lot can happen in 20 years, which is the prediction arc for the first three posts. In Part 2, I described what I think is the world of information that will include publishing in 20 years. In Part 3, I suggest what I think publishers will evolve to and make some suggestions about how to get from where we are to where we’re going. And now, in Part 4, I take a shorter view, looking at the changes we can expect to see in the next two or three years.

Now let’s think about the pretty immediate future.

The year-on-year growth of ebook sales as charted by the IDPF shows overall sales volume growing by more than 2 or 3 times over the same period in the previous year and accelerating. Squinting at the chart, it looks to me like wholesale volume in the fourth quarter of 2007 was about $7 million, in the fourth quarter of 2008 the sales were about $16 million (2+x over last year), and in the fourth quarter of 2009 they were about $55 million (3+x over last year, about 8x over two years ago).

Anecdotal reports say that for new narrative books, ebook sales are already in high single or low double digit percentages of the total number of units the book sells.

You have to figure that the percentage growth on a per-title basis is less than the overall number for industry growth. The overall sales growth is partly attributable to more and more titles being made available as ebooks, so the expectations for unit growth for an individual title wouldn’t be quite as fast.

If ebook sales for new titles now are 7.5%, which seems like a low-but-reasonable estimate, and if that number doubles annually, which also seems conservative, we’d expect the ebook percentage to be 15% a year from now and 30% two years from now. In that light, a forecast of 25% ebook sales for new narrative books published by the end of 2012 (a bit over two-and-a-half years from now, and not to be confused with saying 25% of dollar sales volume will be produced by ebooks by then) is actually pretty restrained.

The volume of print book units sold online is likely to be a similar number to the number of ebooks by then. That means that by the end of 2012, the expectation would be that fully half of the unit sales in the US for a new narrative title will be rung up online. Online sales not only require almost no sales force, no warehouse, and no complex support apparatus to achieve (that is: the services normally offered as “sales and distribution”), they also really require no inventory. Print books ordered online can be printed on demand.

Making this forecast even more likely to be valid is the trend of diminishing sales in brick-and-mortar stores. Both major chains have reported substantially lower same store sales, year on year, for the past two years. Like the growth in ebook sales, this is a trend which it is hard to see changing over the next few years. Or ever, if the 20 year view we contemplated in an earlier piece in this series pans out.

There are a number of obvious implications of the situation we see unfolding if this fairly short term analysis proves correct. Authors will be more inclined to self-publish, particulary their out-of print backlist and any title a publisher doesn’t offer an advance reflecting high expectations. That means that, on average, desireable books will be harder and more expensive for publishers to sign. The pressure for publishers to give more than a 25% ebook royalty will intensify. There will be excess capacity throughout the print supply chain: printing, warehousing, and sales operations, and the price of distribution services on offer will go down because the overhead cost of maintaining it, as a percentage of the sales it supports, will have gone up for those with fixed operations.

Because the whole motivation for this lengthy multi-part post was to address the publishers in London, I want to close with a thought about a re-think that should be taking place among British publishers and agents over the next few years.

In general, it is true that the Web diminishes the value of “local”. Part of the reason that bookstores are so challenged is that the customer around the corner from them who wants to shop online finds Amazon.com or BN.com just as “close” as their local store. On the other hand, the Web opens up a potential global market to anybody connected with it.

For the past decade or more, the UK publishers have, in the stated interests of defending their territorial rights in their own home market, tried to bring English-language rights for Europe, which for years was ceded as “open” to books from the US or UK, into their exclusive grant of rights. The stated justification for this has been that the rules of the European Union allow any wholesaler in Holland or France to ship books into Britain and, if they bought from US sources, US editions could find their way onto UK bookstore shelves. Ignoring for the moment the number of ocean miles, warehouse handlings, and individual company profits a book taking that route to the UK would have to pay for (making one wonder, “you can’t compete with that?”), the wisdom of building high territorial walls might very shortly be called into question.

For if a British publisher has an inside track to a British writer or a British-told story that has global appeal; and if the marketing for that book is mainly going to take place online through niche communities on the Web that are often geo-neutral but are certainly accessible from anywhere at no particular cost whether they are or not; then a British publisher can reach half the US market for that author with no inventory risk at all. Furthermore, territorial disputes between English-language publishers about ebook rights are making total global sales coverage increasingly problematical. The blogosphere is full of stories about people who can’t download an English-language book in Peru or Greece because the rights situation is ambiguous. Having one global publisher will assure total worldwide availability in a way that rights-dealing is making increasingly difficult. Agents will understand that.

So I’d bet that a number of British publishers will, over the next few years, find the defense of territoriality a rear-guard and retrograde reaction to the new realities. In fact, aggressively selling the books you publish throughout the world, is not only possible but the most profitable and author-friendly way to navigate the next, and (from the long historical perspective) one of the last, twists of the book market.

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I have gotten some requests, in comments and off-the-blog, to write what I was going to say to the AGM of the PA in an appearance I was supposed to make there on Wednesday, April 28. I felt terrible about having to cancel an engagement that was booked many months ago but it was tied into a trip to the London Book Fair which was cancelled due to the Iceland volcano. Since I was really prepared for the talk, updating the “Stay Ahead of the Shift” speech from last year’s Book Expo and adding some thoughts about the immediate future in the US market that I think British publishers should take on board, the suggestion is one I can readily respond to.

The premise underlying this piece (and really much of my work) is that all of us, to function, must have a view of how we think things in publishing will change. Change has been a constant in publishing forever, of course. In my lifetime, in the US, mass-market paperbacks and mall stores have risen and fallen; wholesalers have gone from local warehouses that replenish bestsellers to national operations that can provide hundreds of thousands, if not millions, of titles to any store in 24 hours; general trade publishing has consolidated from tens of real competitors to a Big Six; and, in the past 20 years or so, the superstore, usually run by a chain, with over 100,000 titles has became about the only brick-and-mortar formula that seemed sustainable. (NB: On that last point, I think more focused, smaller stores would actually work better, but it would take a large player with a real supply chain to try them to find out.) When I started in the 1970s, the big national accounts were less than 20% of a publisher’s sales and the field reps were responsible for much more than half the business. It would be inflating the importance of the field now to say that those numbers have reversed.

But the changes we’ve been experiencing in the last ten years have been much more dramatic. The combination of used books and the Long Tail enabled by print-on-demand, all delivered by Internet retailing, has eaten relentlessly, if invisibly, into the market for publishers’ new offerings and estabished backlist. The growth of Internet ordering has sapped the viability of the brick-and-mortar network and in the past decade we’ve seen shelf space shrink following relentless growth since the end of World War II.

And, at the same time, even before the recent growth in ebook sales provoked a new digital consciousness, marketing opportunities have been shifting from the print and broadcast world to online.

Publishers have adapted to these changes by changing their sales force deployments, discovering the virtues of social network marketing, and, more recently, going to XML-based origination procedures that make it easier to deliver a book’s content in a variety of ways (the principal ones being as a book, as an ebook, and as a web page.) Publishers who saw the future coming were able to prepare for it. Cambridge University Press, for example, had tens of thousands of old backlist titles set up for print-on-demand long before other publishers did and they reaped a harvest of sales and profits in the past decade as a result. Last year, Simon & Schuster shifted resources from field reps to telemarketers. In an age when Skype allows free face-to-face phone calls and gas prices do nothing but rise, one can’t help feeling they are also getting ahead of a curve by doing that.

Changes of this kind make it clear that a publisher is required to have a view about where things are likely to be going  to plan their business intelligently. It is our purpose to explore that: first with a long view, looking perhaps 20 to 25 years out, and then with a more immediate one thinking about changes that are literally “coming right up.” Because it’s what I know best, this view is US-centric, but because the US is the largest English-speaking market in the world and the view from where I sit (intellectually, not geographically) is that the world is now any and every publisher’s market, these thoughts should be relevant to a UK publisher even if they aren’t primarily centered on the UK market.

I hope we can agree on two things before we start, though. One is that increasingly profound change is inevitable. And the other is that all future planning, just as inevitably, depends on one’s view of what that change will be.

So, with that as preamble, I want to try to envision two futures: one long-term — which we will call “the next 20 years” — and one short-term, looking ahead just two or three years.

Before tackling the 20 year vision, which will be disturbingly dissimilar to where we are now, I want to remind you from recent history how much can change in 20 years. Once again, I cite US-based examples, but I think these will probably be reminiscent of some aspect of local history for every market in the world.

In 1968, television in the United States was dominated by three over-the-air networks that divided pretty much 100% of the national audience, approximately in thirds on average, but it was not uncommon for a single show to have half the national audience. Major cities had a few local stations available in addition; most of the country did not.

By 1988, cable television penetration had reached well over half US households, delivering a choice of many dozens of channels and network TV’s share of the audience had plunged. Today there are five national TV networks in the US and they share substantially less than half the total audience. Top-rated shows fight for the attention of 15% of the country, not fifty.

In 1982, record companies were on the verge of explosive growth. The Sony Walkman and other portable cassette players were joining cassette players in cars, creating an incentive for maturing boomers to re-buy music they’d purchased 10 or 20 years before on records. A very few years later, the same phenomenon repeated with CDs. Back catalog in new formats became a gold mine for established companies.

But by 2002, the CD sales had turned into a curse. They were gold masters, easily ripped by any computer into the new digital formats which ultimately meant iTunes and iPod for the most part. The transition from analog to digital, which stripped the record companies of the power they had which was based on their ability to put product on store shelves, was accelerated by the CDs that all consumers had by then. The fuel for the final burst of record company profitability in the 1990s resulted in the fire that burned them up.

Newspapers in the US had their biggest year yet for advertising sales in 1989. Things got even better in the early 1990s, with growth in classified ads leading the way.

But then along came the Web. Classified advertising moved to Craig’s List, in some ways to eBay, and to many niche sites for camera buffs and auto aficionados and a host of online real estate communities. Google and Yahoo and the web itself disaggregated and reaggregated the content newspapers produced. Both the advertising model and the circulation that drove the advertising were challenged. Twenty years later, many newspapers have died and those that survive are hanging on by their fingernails and desperately grasping for a formula that will allow them to sustain their business online.

In 1975, the mass market paperback business in the United States was the tail wagging the hardcover dog. Agents and authors were balking at the idea that the hardcover house would get 50% of the subsequent paperback income, even though it had always been that way. In 1979, Crown Publishing sold the paperback rights for the long-forgotten novel “Princess Daisy” to Bantam for $3.1 million, a number that still stands as the record for a mass market licensing deal. As my father predicted in his seminal book, In Cold Type, published in 1982, the distribution model for mass markets was inherently inefficient and couldn’t last for trade-type books. It didn’t. By 1995, mass market publishing was a genre business, which was how it started after World War II and what it is, for the most part, today.

Twenty years ago, we went online through very slow modems to very limited and klunky online portals: Prodigy, Compuserve, and the seemingly-modern America Online. The World Wide Web hadn’t yet been invented!

Today we carry the world’s information in the palm of our hand and we’re annoyed if we can’t get a connection, 24/7/365.

And twenty years ago, the book business was on the verge of its last great boom. In the US, Wall Street was just discovering that very large free-standing bookstores, offering consumers 100,000 titles or more under one roof, were cash-generating machines. They opened the vaults for Barnes & Noble and Borders to open hundreds of such stores across the United States. In the mid-1990s, Amazon.com was founded, enabling sales even deeper into the backlist.

But, although it wasn’t as dramatic as the record companies’ distribution of CDs, there were the seeds of old publishing’s destruction sown. Amazon also enabled the sales of used books and the Long Tail, books that had — before Amazon and Ingram’s Lightning Print made the idea of “out of print” an anachronism — stopped competing with the new offerings of publishers. Now they were alive again. That alone would have made things much more difficult. In addition, the impact of growing online sales steadily weaken bookstores and consequently undermine the primary USP  publishers always had: that they could put books on retail shelves. These factors have made establishment publishing an increasingly difficult proposition every day of the past decade.

This admitted stage-setter is the first of what will be a four-part post. The next installment will spell out a vision of the world of communication into which publishing will fit 20 years from now. The third piece will suggest what a publisher will look like then. And the fourth will cover some changes we can expect over the next three years which, among other things, might call for some recalibration of the competition between UK-based publishers and US-based ones. I’ll publish one each day that I don’t have something else until all four are up. And I’ll have added links to the subsequent pieces in this postscript as they’re made available.

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The monthly release of ebook sales figures by the IDPF provides a regular reminder about how fast this market is growing and it always provokes me to project the curve into the future and think about the implications. It was an IDPF data release that triggered the thought that we needed a “Tipping Points” panel at Digital Book World last January which turned out to be one of the highest-rated presentations by the attendees of the conference. And it was another release of that data that made me say on this blog on March 22 that I thought ebook sales would reach 20-25 percent of the sales for new works of narrative writing by the time of Obama’s reelection in November 2012.

Then last week, The Economist had a story quoting Carolyn Reidy, the CEO of Simon & Schuster, forecasting S&S ebook sales in that range in “3 to 5 years.” This is the first time that I’m aware of that a Big Six CEO has been willing to put their name on a forecast that is just about as aggressive as my own. Another conversation with the head of another one of the Big Six companies captured a forecast that is in the same ballpark.

So I think it is worth a few moments to contemplate what it means if this forecast is accurate, or even close to accurate.

If by the end of 2012, 25% of sales for a new book are digital, then about half of new book sales will be made through online purchases if we count the print book sales made through online retailers (mostly Amazon.)

Online print sales can be served through inventory generated on demand. So, if these estimates are right, we are less than three years away from a publisher (or author) being able to reach half the market for a book without inventory risk!

Having half the market reachable without print-run risk or inventory storage; having half the customers connecting with their reading through online paths that make them at least theoretically identifiable; and having a quarter of those customers reading through a medium that enables interactivity will make all the changes we’ve seen so far in trade publishing appear trivial. And if the very perspicacious Carolyn Reidy, her unnamed counterpart, and I are right, that disruption is going to take place before many books now under contract reach their publication date.

The immediately disruptive effects of this, for which every major publisher should be preparing right now, include:

1. Publishers are going to really have to rethink the development process for their ebooks. Right now, publishers put their creative energy into optimizing print books; ebooks are an afterthought.  The most forward-thinking houses are going to XML workflows which will reduce the costs of conversion to ebook formats. But are any of them fundamentally rethinking how the editor and author shape the project to optimize the ebook experience? That working relationship is going to have to undergo fundamental change.

2. It will be eminently sensible to launch books with a no-inventory strategy and move to press runs with returns allowable when reviews or sales have proven that it makes sense. Of course, publishers will be happy to sell anytime on a no-returns basis and for some books launched “digital first” there could be enough no-returns demand to generate a printing, but the idea of printing and distributing speculatively will make less and less sense as the potential market to be reached by that tactic diminishes as a share of the whole. By the way, this reality would give B&N, the only retailer with its own DC resupply infrastructure, an additional competitive advantage.

3. A non-US publisher will be able to reach half the US market without needing an operation of any kind in the States. This is a sea-change that could even encourage our UK counterparts to reconsider their staunch defense of territorial rights. We already know that the greatest part of marketing value beyond the display and positioning in a bookstore is generated online. That means it can be done from anywhere without a local nexus. By the end of 2012, we’re saying half of all the sales potential can also be reached with the product without a local nexus: no requirement of local inventory or any shipping or revenue collection facility beyond your digital distribution and print-on-demand partner.

4. Because books or ebooks will be purchased by half of their customers electronically, the potential exists to know exactly who those are and to establish interaction with them. Obviously, the intermediaries have both selfish and customer-oriented reasons not to share data, but for ebooks, at least, publishers will find hooks to get readers to check in with the publisher and establish contact. (Of course, they will also be selling more and more units direct to consumers, without any intermediary at all.) This opportunity presents a new battleground for competitive advantage that publishers will have to pursue both for marketing and for author relations.

5. Publishers will have to start devoting the bandwidth and resources to direct sales that they devote to intermediary sales today. The notional 50-50 split of sales between terrestrial and online means that half the sales are actually direct sales. Publishers will increasingly find ways to influence those sales decisions, but the companies that devote management attention and resources to the challenge will find those ways faster, to their competitive advantage.

6. There’s an inevitable concurrent downward spiral of brick-and-mortar retail inherent in this forecast that sales are moving online. The nearly-limitless online selection has been an increasingly powerful magnet since the day Amazon opened and in the new paradigm there will be a growing body of talked-about content not visible on store shelves. It is beyond the scope of today’s speculation to consider what this means for the strategy and survival of bookstores and wholesalers and for publishers’ expectations for them, but it’s not likely to be pretty.

7. Self-publishing strategies for entities that can do the marketing become much more compelling. It is no secret that an author can make more money on each copy sold managing her own publication through Lulu or Author Solutions or Bookmasters. If half the market is directly available without regard to the effectiveness of a field sales force then we can be sure, at the very least, new title acquisition will be more challenging for established publishers. The big players will still be the only big bankrolls in town, but that’s a two-edged sword that can lead to overspending and losses as well as to securing desirable projects.

8. If the infrastructure for direct sales management at most publishers will be woefully lacking, the infrastructure for print warehousing and delivering print orders at most houses is likely to be heavily underutilized. That should lead to a reduction in the charges for distribution services, adding pressure to a business that will already suffer from the growing viability of no-inventory publishing. And publishers with volume-related pricing contracts with their printers will find they don’t need as much capacity as they contracted for a year or two before.

For the past three years, Ted Hill and I have conceived and organized the program for the Book Industry Study Group’s Making Information Pay conference, coming up on May 6. Our theme this year — Points of No Return — addresses precisely this issue from the perspective of how functions will be organized, what the changing skill sets will be, and how secure people doing jobs today can feel about having a job they can do tomorrow. If you found that this post gave you something to think about, you’ll find MIP a morning very well spent.

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If the reporting by Publishers Lunch today is accurate (and I’ve never known it not to be), publishers may have used the entry of Apple into the ebook arena as an opportunity to change the entire paradigm of ebook distribution for major books. And while the great excitement about Apple and ebooks has been based on hopes that the new Apple Tablet that the world expects to be announced next week will add a lot of new ebook consumers, the change in the sales protocols will probably have a much more profound impact on the ebook market than the device. Or at least that’s how it looks from here.

Sorry, I can’t link to this story because it is only in the subscriber version of Lunch and a link would just send you into a pay wall. If you’re paying, you’ve got the story in your email version of Lunch.

What Michael Cader reports in Lunch is that publishers have worked out agreement with Apple to switch from a “wholesale” model to an “agency” model for ebook sales. The wholesale model imitates the physical world: the publisher “sells” the “book” to an intermediary (could be a retailer like Amazon or BN or a wholesaler like Ingram) based on the publisher’s established retail price and a discount schedule. Then the purchaser will re-sell that ebook at whatever price they like. When publishers offered discounts that were the same as the physical world discounts, they partially subsidized retailers who wanted to offer much lower ebook prices to consumers.

The “agency” model is based on the idea that the publisher is selling to the consumer and, therefore, setting the price, and any “agent”, which would usually be a retailer but wouldn’t have to be, that creates that sale would get a “commission” from the publisher for doing so. Since Apple’s normal “take” at the App Store is 30% and discounts from publishers have normally been 50% off the established retail price, publishers can claw back margin even if they don’t get Apple to concede anything from the 30%.

So making this change, if it works, accomplishes three things for big publishers. The obvious two are that they gain a greater degree of control over ebook pricing than they ever had over print book pricing and they get to rewrite the supply chain splits of the consumer dollar.

But the third advantage for the big guys is the most devilish of all: they may gain a permanent edge over smaller players on ebook margins. That is one that, truth be known, was already playing out as Amazon used its leverage to reduce the share smaller publishers got from Kindle sales. But this could institutionalize it.

Cader reports that the conversations between Apple and publishers have, so far, been confined to the Big Six (Random House, HarperCollins, Hachette Book Group, Simon & Schuster, Penguin, and Macmillan.) Obviously, these are separate conversations and they might not all come up with the same splits. (One can only imagine how hard publishers are fighting for “most favored nation” clauses. What a nightmare it would be to find out two months from now that you’re paying 5 or 10 points more commission than your competitors!)

To say that this news leaves us with more questions than answers would be a major understatement.

How will this work, mechanically? Will the publishers actually serve the titles, or will Apple or the other consumer-connected entities making the sale? Well, of course, we don’t know, but Brian Murray of HarperCollins, extensively quoted by Cader and, after all, the publisher whose discussions with Amazon were the first to break in a Wall Street Journal story, has long championed the idea that publishers should maintain control of their files, not distribute them to many intermediaries. The agency concept fits neatly with that paradigm. On the other hand, one would presume that Apple has to serve what comes from the App Store and, certainly, that Amazon would have to deliver what went into a Kindle. So departures from executing a pure agency model should be expected. Call it a “virtual” agency model!

How will retailers not named Amazon react? Presumably this will make players like BN.com, Kobo, and others very happy because, with publisher-set pricing, they no longer have to lose money on every sale to compete with Amazon. On the other hand, retailers really like to control pricing; it’s one of the main weapons in their arsenal. And if Amazon doesn’t play along (yet another question), then these other retailers could have a temporary advantage because they’ll have hot titles that Amazon would not.

How widespread will be the implementation, across publishers and across lists? One has to assume that the hidden hand of the agent community is present in these decisions. For one thing, agents have been as concerned as big publishers with the market and pricing power being concentrated at Amazon and this tactic addresses that directly. Since big publishers are even more responsive to agents than they are to major accounts, that would suggest a) that all the Big Six will play and b) that they will implement this strategy across their lists. And, as Cader points out, having some books handled as Agency and others as Wholesale is a potential management nightmare.

What will Amazon do? The question might be “what can Amazon do?” It is relatively easy for Amazon to pressure one publisher at a time, using their control of buy buttons and marketing recommendations. Nobody I know can say how extensive that kind of behavior is from them, but we know they engaged in a public spat with Hachette in the UK and threatened publishers a few years ago that they wouldn’t sell their POD books if they were at Lightning and not in Amazon’s own POD repository. And there are stories told privately — never publicly — of pressure tactics of a similar kind aimed quietly at particular recalcitrants at particular times. But if all the Big Six publishers do this with widespread support from the agent community, it is hard to see exactly what Amazon can do. Certainly, not having high profile titles available that are being sold at competing retailers for competing platforms would not be an acceptable situation, even for a fairly short time. But Amazon is resourceful and creative, they have a lot of power, and they are being faced with the first real threat to their marketplace power.

What does all this mean for enhanced ebooks? Frankly, if this works, I think publishers may find enhanced ebooks (except in very standardized ways such as I suggested in one, two, three blogposts many months ago) losing their allure. As I wrote last week, nobody has really invented an enhanced formula that has gained widespread public acceptance. The attraction of enhanced ebooks was their potential for keeping ebook prices up for branded authors. If the agency solution works, that mission might be accomplished with a lot less investment and risk, and delivering a product we know the public wants: books in the creative form that they have enjoyed for years.

Although I’m as excited as the next guy by the coming Apple Tablet, I really don’t think it will change the world for ebooks. It’s too big, too heavy, too expensive, and likely to be too consumptive of battery power to be a better ereader for most people than a Kindle, a Sony Reader, an iPhone, or one of the many other devices announced last week at CES. My own hunch is that the Tablet won’t be as powerful a catalyst for ebooks as the Kindle was or the iPhone has been. (That’s okay: year-on-year ebook sales are up 300% through November so they don’t actually need a lot of extra impetus…)

But Apple’s entry into the market, if it was the tool to get this Agency model off the ground, might have a very profound effect on the ebook world going into the future. I wonder if this is the last big disruption before Google Editions. And I the next thing to ponder, although we have a bit of time, if this will in any way disrupt that.

All of this just makes me glad that Michael Cader is one of my panelists on the Ebook Tipping Point panel next week at Digital Book World! And that I’ve got a powerful agent, Larry Kirshbaum, joining Michael, Ken Brooks, Evan Schnittman, and me on the stage for that discussion.

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The tactic of keeping the ebook off the market to “protect” hardcover sales, first executed by Sourcebooks this month on behalf of Bran Hambric, is becoming more widespread. At the same time that Dan Brown’s The Lost Symbol was released simultaneously in cloth and digital, Ted Kennedy’s posthumous True Compass was released in print with the ebook withheld. Now Harper has announced that the new Sarah Palin biography will come out in cloth in November, but the ebook will be held back until the day after Christmas.

The Kennedy case is a bit different because the book contained color pictures that would not render on the most popular ebook platform (the Kindle), but in all these cases the primary motivation of the publisher seemed to be to avoid having a low-priced ebook competing with its hardcover sales.

Kassia Kroszer has written a nice little rant about the counterproductiveness of this strategy, with which on purely economic and marketing grounds, I substantially agree. She points out that there is no evidence that ebook sales come at the expense of hardcover sales (of course; there’s also no evidence that they don’t…) She also posits that the ebook reader and print reader are often different people. If that’s true (and it is a general notion I’m inclined to share), then holding back the ebook is bound to just lose sales because the title won’t be available as an ebook during “maximum buzz.”

If a publisher’s concern is that reckless ebook pricing bleeds sales away from the hardcover, there is another solution. (One that can work; I have proposed solutions that can’t work.)  The publisher could just sell the ebook exclusively at its own site and price it any way they want. It would be like the publisher download is the ebook “hardcover” (i.e. expensive) which is replaced by the ebook “paperback” (i.e. sold at retailers and priced more aggressively) with whatever timetable for that the publisher wanted.

If publishers maintain their retail prices and their discounts, then the aggressively-priced ebooks aren’t costing them any margin. In that case, they’d be making more money per unit on the ebook than on the print books. There’s a degree to which the retailers’ aggressive pricing constitutes a gift to publishers and authors, even if none of them seem to be seeing it that way.

But there are also two other elements  major publishers have to  considere when they make ebook decisions: their relationship with Amazon.com and the health — even the existence — of a brick-and-mortar retail book trade.

Amazon is the driving force behind cheap ebooks, and they’re doing it to herd more and more people into their closed market with the Kindle. That’s a perfectly reasonable objective from their point of view, but it is very threatening to everybody else in the industry, all of whom would prefer a more diversified ebook market for their own reasons. That’s part of why I think selling direct off the web site at the higher price is something you might see happen. It’s a polite way to stick a finger in Amazon’s eye.

The retail book trade is important for many reasons, but the under-appreciated one is that bookstore shelf space, at 45 to 50% discount off retail, is the cheapest marketing investment publishers can make. It sorts their books out and puts them on display (hey! sometimes even in shop windows!) in front of people who want to buy a book. There isn’t any better product placement than that. Every ebook sold weakens the trade, accelerates the reduction of opportunities to put books in front of readers in the most efficient possible way. Publishers have a real interest in preserving that asset.

Earlier today we interviewed Raelene Gorlinsky of Ellora’s Cave as part of our preparation for Digital Book World. (They will be on the program!) I was aware that Ellora’s Cave existed and vaguely aware that they were an ebook-first publisher, but, not being a romance reader I was not as clued in to them as I should have been. They’re nine years old and the company is quite a story.

I’ll save the story for another time but I want to pass along one piece of wisdom from this morning’s conversation that is relevant to this post. Ellora’s Cave publishes printed-on-demand editions of those books of theirs that they can (many are too short to be print books and are only put into print as part of anthologies.) Raelene explained to us that they generally hold the print book back for 18 months after the ebook is published (and they publish about 10 new titles a week!)

Why does Ellora’s Cave hold back the print book? Because they make more money on the ebooks, of course, even though the print books cost somewhat more! (They have to pay for that paper, presswork, and binding somehow…)

Of course, I’d tell them to just raise the price of the print book for the first 18 months rather than withhold it. They’re making a close cousin to the mistake I’m accusing the conventional publishers of. But at least they’re preserving the higher margin sale, not the lower margin one.

Sometimes being in publishing makes you feel like Alice in Wonderland.

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