Publishers Launch Conferences

The American Booksellers Association held their seventh annual “Winter Institute” in New Orleans this year, and it took place last week. When I had a meeting at Frankfurt in October with the ABA’s Chief Executive Officer, Oren Teicher, to recruit him to speak at Digital Book World 2012 (which he will do this coming week), he urged me to attend so I could get a taste of the optimism and innovative spirit of the independent booksellers who gather to share best practices and learn more, largely from each other, about how to run successful stores.

(Actually, Skip Prichard of Ingram captured this “learning from each other” zeitgeist beautifully in his opening remarks when he stopped talking and told the attendees, seated at round tables in the ballroom in front of him, to tell each other the most important new thing they had done in the past year. The room buzzed with activity for a few minutes and then Skip resumed his talk, confident that everybody in his audience had learned something during his time on the stage. It was an artful moment.)

I attended about half of the 3-day show and it is easy to see why a number of publishers are so enthusiastic about it. The publishers and other hangers-on (press and observers like me) are hardly noticeable in a sea of booksellers. And, indeed, this year (at least), they were a very optimistic bunch. The anecdotal impression was of many stores who had great years. Some attributed this to the demise of Borders but others thought there had to be another explanation because the closest Borders to them was too far away to be responsible.

There is data and anecdata that suggest that we’ll look back on 2011 as a year when the hockey-stick-like ebook growth slowed. (“Plateaued” would be too strong a word.) We may learn that even the Christmas devices-as-gifts effect on ebook sales wasn’t as strong this year as in years past because many of the “new” devices are actually “replacements”, which won’t spark the same sort of pipeline-filling buying spree that is apparently set off when people get their first ereader. Combined with Borders closing and the closing of other indies, this could have brought national store inventory more in line with more-slowly-reducing print book purchases in stores by consumers.

Anyhow, the vibe at WI7 was great. And so was the program. What I enjoyed most was bestselling author and fledgling Nashville bookseller Ann Patchett, who claims she not only doesn’t read ebooks or write a blog; she claims never to have even read a blog! (I was wondering if she does email.) But she talked about her experiences encouraging booksellers to handsell her work and the joy she gets from handselling the books she loves. Her talk was inspirational and witty and charming. Even though the only “practical” suggestion (not a bad one) was that stores find a local author to be part of their ownership-management (they do attract press coverage, as Ann pointed out), it was a highlight for most of the people there.

But there were two other sessions, which opened my eyes in one case and turned my thinking around in another, that delivered the most compelling additional insights for me.

Matt Sutko of ABA moderated a session of booksellers talking about their experiences selling ebooks. He delivered data before the panel discussion (ABA has visibility into the activity on many member web sites and can present an aggregate picture) and one particular element really caught my attention. This is the one that opened my eyes.

What I found startling were two things in juxtaposition. Matt reported that the percentage of ebook sales to total sales on ABA member web sites rose from 0.7% to 5.2% in 2011. That’s a 750% increase, which is impressive even though the Google eBook capability kicked in during that year. But it is also actually understated, because the total volume of business on these sites rose by 82%. So the share increase of 750% is in an environment where total sales nearly doubled.

(I only wish that Matt had given us a breakdown of the same data by half-year, so we could see the growth within Google’s first year. I think ABA would benefit going forward by tracking and reporting those stats by quarter.)

There is good reason to believe that kind of dramatic share growth can continue into the future. Many stores just got started with their ebook program (Chris Morrow of Northshire, one of the most successful and innovative indies in the country, told me he only started selling ebooks in December! He’s not alone.) And store after store reported steady efforts educating their staff, educating their customers, making things clearer on their web site, and learning how to be good merchants online as they are in their shops. (They also pointed to improvements in the infrastructure being made by Google at their request.) All of these things take time. But they also improve the customer experience and increase sales.

Many people acknowledge that Barnes & Noble performed a bit of a miracle with the Nook, moving to a strong second-place position in ebook sales in a year. But B&N is a chain; their booksellers are paid staff and their learning is all aggregated and reflected on one centrally-controlled web site. The ABA membership, somewhat fewer stores and less shelf space to begin with and without a highly-visible device to anchor their efforts, moves more slowly and with less cohesion into the digital age. But they’re moving and they’re making progress. And they have loyal customers who want to shop with them if they can.

So I personally will postpone writing off Google ebooks or the possibility that indies can be important ebook vendors until we see at least one more year of data.

The thing I got turned around on was World Book Night.

World Book Night, which will take place on Monday, April 23, is an “event” in which it is envisaged that about 20,000 people in the US will each give away 50 books to total strangers, for a total of 1 million books passed from human to human in one book-awareness-raising night. It was first done in the UK and was deemed a success: the books chosen for giveaways spiked in sales and the participating stores and publishers all seemed to think it gave the business a shot in the arm.

I first heard about this from a presentation by Madeline McIntosh of Random House at the BISG annual meeting last September. Certainly no fault of Madeline’s, but I just didn’t “get it” the first time. Twenty thousand people to give away books? Where are they going to find them? How much distracting effort is this going to take? The “harumph” in my brain overwhelmed my imagination, I guess.

But as Carl Lennertz, who quit his job with HarperCollins to head up the World Book Night effort, explained what had taken place and what would, imagination picked up the idea. (Maybe the “harumph” piece was rendered inactive by the overall vibe of WI7.) He described an effort that has already gotten contributions of paper and printing for the giveaway books, aggregating and reshipping (by Ingram) to the contact points, as well as permissions from publishers and authors to include the books and waive royalties. B&N is in. Libraries are in. Everybody is in!

But it was actually Oren Teicher’s appeal to the stores to get involved that brought back lessons of my youth to see the real virtue in World Book Night.

My first post-college “real” job was putting together the McGovern campaign in upstate New York in 1971 and 1972. We saw various hurdles we needed to jump — winning over delegates to the annual state convention of reform Democrats, holding a delegate nominating caucus in each congressional district, getting petitions signed to put the delegate candidates on the ballot, and then components of the primary campaign itself — as a series of discrete “organizing opportunities”. When you have a “cause” and you need help with a specific and comprehensible task, it brings out volunteers who will ask you to tell them what to do.

And that’s what World Book Night presents local stores: an enormous “organizing opportunity”. They get to galvanize their customers around their mutual love of books, enlisting them to participate in spreading the joy of reading. That strengthens the bonds to particular people and to the community at large. They get to take these efforts to the local media and give them a local spin and generate more conversation around these books and books in general. And that is something, as Oren pointed out, that 500 independent bookstores can do better than 500 Barnes & Nobles!

The collective effort of many individuals can have a galvanizing national impact, as we saw two years ago with the Tea Party and over the past few months with the Occupy movements. I’m not promising to stand on the corner of 2nd Avenue and 51st Street and hand out books next April 23, but I’m sure way past believing it is a waste of time to find 20,000 people who will do the equivalent in their neighborhood.

[Subsequent to posting this, I got a note from Jamie Byng of Canongate in the UK, whose idea this whole effort was. It's clear in that note that WBN is looking for 50,000 US volunteers to give books away, not 20,000 as I mistakenly reported here. I believe the target of 1 million total books as reported here is still correct.]

In addition to Oren Teicher speaking from the main stage at Digital Book World this week about indie booskeller data from last Christmas, the growth of the ebook program, and the business model experiments being conducted by various indies with different publishers, we’ll have a panel of indies discussing new business model approaches in a breakout session moderated by John Mutter of Shelf-Awareness. I hope to see lots of you at Digital Book World or at our kickoff Publishers Launch Conference on childrens books on Monday, also at the Sheraton. If you’re a reader of The Shatzkin Files and you see me, please say hello.

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One thing we try to do at Digital Book World is to present our audiences with useful, relevant, and, when we can, original data. It is a familiar complaint in our industry that we drive blind. Part of that is due to the sheer diversity and granularity of the “book business”. And another part is due to the blistering rate of change. The net result is that we are constantly trying to read tea leaves. We do our best to deliver some useful tea leaves to our DBW audience.

I make no pretension here to telling you all you’ll hear at DBW (which would be bad business even if I were able to do it!) But here is a roster of the data presentations and a small taste of what the DBW audience is going to get from each one.

We’ll start off with James McQuivey of Forrester Research doing a reprise of a high-level survey of publishing executives that they inaugurated at DBW 2011. Forrester got good participation in the survey, including getting fully filled-out responses from at least two of the Big Six executives.

One very interesting fact from the Forrester research is that the consensus for when the trade business will become 50% digital has moved up from 2015 to 2014. When Forrester announced the original number at DBW 2011, it seemed to many to be aggressive. A year later, it is not likely that the new prediction that it will come sooner is going to surprise a lot of people. We are apparently now used to the accelerating pace of change, but perhaps just in time to have to readjust to it slowing down. (More on that to follow.)

The team of the Milan office of A.T.Kearney (the big global consulting firm) and the Italian ebook retailer Bookrepublic have been tracking the spread of digital reading worldwide. They presented research at last year’s IfBookThen conference in Milan and followed it up with additional research presented at the Publishers Launch conference in Frankfurt. They’ve extended their investigation further — about devices, about internet purchasing, about ebook uptake, market-by-market around the world — for this year’s Digital Book World. They have added questions about self-publishing and piracy to the research they did previously and responses to them will be reported at Digital Book World.

One insight they’ve had is extremely provocative. They say, “We should stop thinking of self-publishing simply as a nice way for indie authors to be published. Viewed another way, measuring self-publishing activity calculates the amount of money Amazon (and others) are no longer sharing with publishers. And it’s growing.”

The data that will justify that insight will be part of the presentation we’ll see at Digital Book World.

We decided to take an intensive look at the romance genre because it is often considered to be the consumer segment that has moved most rapidly into the digital future. We were fortunate to enlist the help of the ebook retailer AllRomanceEbooks.com in our investigation. They circulated a survey that got responses from almost six thousand of their customers. The results of that survey will be announced at DBW and will be followed by a panel discussion with special attention to what other genres and segments of trade publishing can learn from what has happened in the romance market.

What caught my eye from the preliminary results was that only 4% of the ebooks All Romance sells have DRM. Since they carry the ebooks of all the major publishers, and all of those have DRM, what this statistic tells us is what a vast business exists in romance publishing outside the realm of the biggest players in the industry. I’ll leave the analysis to the experts we’ll have on stage for this discussion, but I personally wouldn’t leap to the conclusion that DRM-free is the only reason that 96% of the sales were of that category. Those books are undoubtedly cheaper as well. They may score higher on All Romance’s unique “flame” scoring system (which is all about how frequent and explicit the sex scenes are). But I would imagine that any big publisher hearing that statistic would, at the very least, have its curiosity piqued.

It turns out that a big component of All Romance’s sales success is that they took it upon themselves to add sub-categories describing romance — such as that flame index referred to above — that didn’t exist in the industry’s BISAC standard. That’s metadata!

Metadata isn’t ever going to be a “sexy” subject but it is certainly becoming an increasingly popular one. Our early polling of Digital Book World registrants indicates that our breakout session on metadata might be the most heavily-attended of the 30 breakouts on the schedule. (And everybody who goes will be glad they did. We just reviewed the content of the session with presenters Bill Newlin and Fran Toolan; it’s going to be great!)

Having been told for months and years that good metadata enables sales and bad metadata prevents them, I wanted to get some factual confirmation of that. So I asked Jonathan Nowell, the UK-based head of BookScan and the bibliographic source BookData, if he could do some research to connect the two (his being the only organization that has the information to tie metadata to sales data.) Jonathan did a presentation on this subject for Publishers Launch Frankfurt; he’s updating it for Digital Book World.

The most arresting takeaway last October at the Frankfurt presentation was that adding “enhanced metadata” elements to a basket of backlist books not only stopped their normal sales decay, it reversed it and actually made sales of those books rise after the metadata was improved. Everybody will really be able to visualize the importance of metadata after they hear Jonathan’s presentation.

Verso Media is an advertising agency with high digital consciousness and a deep interest in book purchasing and consumption habits. They survey book consumers looking for insights about the digital changeover. The single most startling takeaway for me from the preliminary results I saw from this year’s research is that the number of people who actually resist the idea of reading digitally has gone up from 49% to 51% of respondents. This data point is in line with other tea leaves that suggest that we might have started to hit real resistance to ebooks, slowing down the digital switchover from the rates of the past few years. And that certainly would not have been what I would have predicted. Jack McKeown, who has held senior positions at three major publishing houses, oversees the Verso research and will present it.

At our Publishers Launch “Children’s Books Go Digital” show on Monday, Conference Chair Lorraine Shanley recruited two trend analysts who are offering interesting trend and data observations of their own.

Amy Henry, VP of Youth Beat, observes that parents and kids are sharing personal experiences more than we remember from our youth. More than 2/3 of teenagers listen to music with their parents! The takeaway is that parents can be marketing conduits to their kids; they’re not just gatekeepers you need to sneak your way past, which is how they have often been characterized in the past.

Ira Mayer, Publisher of Youth Market Alerts, delivers data that tells us that two-thirds of the apps Moms get for their kids are either free or under a buck. Fewer than 10% are more than $3. These are sobering facts, but anybody entering the app space to make money better know them!

Kelly Gallagher, Vice-President in charge of research at Bowker, will have important data to share at both shows. His team has been surveying a pool of book purchasers on behalf of BISG for a couple of years and has charted the growth of the ebook market for the industry throughout that time. The data he’ll be reporting from the latest fielding is so fresh that it misses the deadline for this post. But it would seem likely that the data will show that the ebook switchover is finally slowing down after about five years of doubling or more than doubling annually. That would be of meaningful interest to everybody in trade publishing and would tend to confirm Verso’s finding that the point of more determined ebook resistance grows nearer.

Bowker also runs a study of the children’s book market and he will share appropriate data from that research at the Pub Launch show on Monday. Kelly showed me a couple of slides that suggest that young children’s print could be around for a while. Parents like the idea that a book isolates kids from what are otherwise constant digital stimuli. And what attracts kids to digital is portability (having access to more titles) which, broadly speaking, is more important as kids get older. And he’ll reprise that data presentation at Digital Book World on Tuesday, followed by a panel discussion among participating publishers in the study, including Disney, Scholastic, and HarperCollins. That discussion will be moderated by Kristen McLean, founder of Bookigee and former executive director of the Association of Booksellers for Children.

I don’t mean to suggest that data is all we do at our conferences, or even most of what we do. It isn’t. But we see it as part of our job to encourage the development of original information, such as we did in conjunction with All Romance and Nielsen, as well as to deliver information from efforts already underway within the industry, like the reports we’ll get from Bowker.

Digital Book World will also feature main-stage presentations from Amazon, Barnes & Noble, and Kobo which we expect will also be data-rich (as well as one on business model experimentation from Oren Teicher of the American Booksellers Association), helping us all understand what happened this past Christmas. Keeping up with this pace of change is hard enough; doing it without data is impossible.

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The division of the consumer’s dollar across the publishing value chain has a history of change. When I came into the business 50 years ago, discounts from publishers to retailers often topped out at 44% and even wholesalers seldom got more than 48% off the retail price on hardcover books. Today discounts into the mid-50s for big retailers and for wholesalers are common.

The top royalty for authors was, as it is now, 15% of the retail price, but there were fewer exceptions allowing the royalty to be cut, contractually or in practice. Today “high discount” clauses, calling for a royalty of something less that 15% of retail (and sometimes a lot less than 15% of retail) will often apply to more than half of the sales the publisher makes. (It is also true that in those days the agent’s standard cut was 10%. The 50% increase they’ve achieved to 15% is the single biggest change in share in the past 50 years.)

Lower royalties subsidize higher discounts and higher discounts have subsidized price cuts to the consumer. Discounting off the publishers’ suggested price by the retailer was rare until the Crown Books chain, which had a meteoric tenure as a major retailer from the mid-1980s until the mid-1990s, made it a core component of their offering. The Barnes & Noble and Borders chains, which rose to prominence during the Crown decade, used the tactic, although less aggressively than Crown.

All of these numbers: the discount determining what the retailer will pay; the royalty calculated either as a percentage of the stated retail price (usually printed on the book) or of the net paid by the retailer on a high-discount sale; and the ultimate consumer price (whether what the publisher printed or lower if the retailer wants it lower) are based on the price the publisher sets and prints on the book in the first place. The informal internal formulas for setting the price have changed over the years too and, although it is a bit hard to really compare, it would appear that the markup over manufacturing cost has also risen steadily over the past 50 years.

So we had reached a point, somewhat before we had the Internet and Amazon.com, where, on big books at least, the publisher would charge a price higher than they expected the consumer to be charged, give the retailer a discount larger than many retailers would keep as margin, and state a percentage as the per-copy royalty in the main body of the contract that didn’t apply to most of the sales. One could say there was a “virtual” world in trade book publishing’s value chain before the term was applied to our new digital reality.

The core underlying point here — obvious but often ignored — is that the division of revenue across the value chain is never fixed. That’s important to remember as we consider how the ebook chain is shaping up. One hears authors and publishers arguing about what is the “fair” division of the ebook consumer’s dollar (as if “fair” had anything to do with it, which it doesn’t) and we have a very unsettled picture of what the retailer’s share of that dollar will be (even though Apple is doing its best to be definitive about it.)

Right now for ebooks we have two “standards” for the publisher-retailer division of revenue. For agency publishers across all retailers and for all publishers selling to (or perhaps we should, with respect for the agency logic, say “through”) Apple, the retailer share is 30% of the purchasing customer’s payment for the ebook, or the publisher’s “digital retail price”. For non-agency publishers selling to everybody else but Apple, the normal offer is 50% off the publishers “suggested retail price”. The DRP is set within boundaries basically set by Apple, primarily based on the price marked on the print version of the book. The SRP is the publisher’s own creation and has been at or close to the lowest-priced print version. The non-agency publishers who sell to Apple are obliged to have both: their DRP is the price Apple will charge (until and unless they’re undercut) and the SRP is the price that forms the basis of discounts to wholesale customers. I haven’t studied this but I think most publishers set SRPs higher than the break-even point because they want wholesale customers to go agency and would trade less revenue to achieve that, as they did when they switched over in the first place. (The publishers could set the SRP at a point where 50% of it equals 70% of the DRP, so their take is the same either way.) Theoretically, the publisher can count on the wholesale-purchasing retailer to discount the book to match the DRP, reducing their own margin and being competitive with the DRP in the consumer’s eyes.

This pricing strategy depends on the retailer discounting from the SRP to keep the pricing of the ebook from looking ridiculous. Not discounting is a way for the retailer to push the publisher to lower the SRP, which could start a cascade of price-cutting. That discounting has usually started with Amazon; others then follow suit. There are anecdotal claims that Amazon is starting to foil this strategy by letting publishers who set high prices live with the prices they set more often than they once did, but nobody but Amazon knows that for sure.

During the period when Random House stayed out of agency pricing, one thing they said was they thought the 30% agency standard was high and they didn’t want to memorialize a retailer cut that rich. Either other considerations prevailed or Random came to the conclusion that they couldn’t singlehandedly change that standard cut.

But if we maintain a competitive landscape of retailers, there is a way it could come down. What if one retailer (B&N? Kobo? Google?) were to offer publishers a deal where a discounted version of an ebook were offered through them on a temporary exclusive — say, the first 60 days the ebook was out — during which they would help subsidize the discount by taking a smaller percentage themselves during the promotion. Would publishers find it tempting to accept such an arrangement to poke a hole in the 30% standard? I think they might. (They would certanly enjoy the conversation with a competing retailer inquiring about how that happened, in which the publisher could offer a “matching” deal for some other equally appealing book and leave that retailer to think about whether to hold the line on the 30%.)

Another value chain segment the industry is still trying to value and price is the percentage a distributor can charge in the digital world. There’s wide variation here already, as there is in the print world, where the same bundle of services (sales, warehousing, shipping and returns processing, collecting receivables) can cost anywhere from around 20% to around 33% (fully loaded.) In ebook distribution, we see BookBaby willing to set up for a fixed fee (with no percentage deducted), BookMasters and Smashwords and some agent services like Knight charging about 15% of the revenue, and then offers from various publishers, distributors, and literary agents that go as high as 30% of the revenue.

Usually those offers are framed as “we pay 70% of revenue” which, I think, some hope will be confused with the 70% the agency retailer pays of the consumer dollar. Of course, if they are paying 70% of the revenue on a wholesale account buying at 50% off and the account doesn’t discount to the consumer, the distributor is actually paying 35% of the consumer dollar to its client.

The challenge for distributors is to offer services which don’t commoditize. Many authors already manage their own digital publishing affairs and sneer at the idea that a distributor or publisher has anything to offer that is worth even a token payment, let alone a substantial share. Over time, one can imagine information dashboards, metadata enhancement, dynamic pricing, and marketing assistance capabilities that will give ample justification for a distributor’s presence in the value chain for many authors and small publishers. It would be premature to predict how much value can be added and how much margin it could command. Most of these roads aren’t paved yet. What the distributors are offering at the moment is their ability to navigate unpaved roads and constant marketplace change which, despite the skeptics, is service many of us can see the need for.

What gets perhaps the most attention in the industry’s conversation about dividing the digital swag, but which is dependent on the upstream divisions of revenue, is the author’s royalty from the publisher. The majors have held the line for a year or two at 25% royalty, which means 25% of the 70% they get from the retailer, or 17.5% of the consumer’s dollar. That’s a quarter of what the author can get from Amazon or Kobo, and just a bit more than a quarter of what they can get from Barnes & Noble. Aside from publishers’ significant efforts to build marketing capabilities that will grow sales and their ability to charge a retail price often four times higher than an author would on his/her own, the publishers are offering guaranteed payments (advances against royalties) and a print revenue stream to sugar-coat the 25% digital royalty. Still, as the percentage of books sold digitally rises, it is likely to pull up the percentage of the sale authors will get along with it.

Everything happens faster with digital than it did with physical. And so it will be with changes in the revenue distribution along the value chain. My hunch (all hunch, no data) is that in the long run (5 or 10 years?) retailers will find it hard to keep 30% of the consumer’s dollar, publishers will find it nearly impossible to keep 75% of what the retailers pay, and that any author who wants to compete seriously will have a cost structure that will often make a royalty rate taking even as much as half of it away worth considering. Right now putting an ebook into Amazon and having them sell it on autopilot can get a lot more of the total market than will be the case over time as a more fully articulated and global ebook infrastructure builds out.

If I’m right, retailers should want longer contracts than publishers in their agreements; publishers should want longer contracts than authors, or at least longer terms for the stipulated ebook payout percentages; every author or publisher wants as short a contract as they can get with their distributor; and every author giving an ebook exclusive to a retail channel for longer than an introductory period should think twice about what that might cost in years to come.

Michael Cader did an absolutely fabulous reporting job on the distribution alternatives available today for our eBooks for Everyone Else conference in San Francisco. We’re doing an eBEE track at Digital Book World in January, and Michael’s doing a reprise of that presentation, with time for q&a, at a breakout session there. The distribution piece is by far the most complex of the three moving parts (the retail function and the royalty rate being much more straightforward components that don’t vary much in their definition) and a lot of DBW attendees will benefit from Michael’s reporting.

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Obviously my day job, consulting, informs a lot of what goes into The Shatzkin Files. I guess it is just as obvious that I can’t quote everybody who tells me something or attribute everything I want to write about to a specific company or individual. I don’t make a living writing this blog and I wouldn’t make a living at all if people in the industry couldn’t trust me to keep their confidences.

But once in a while people inside competitive companies tell me things that they want the world of publishing to know about what they’re doing. That’s happened twice this week and, in both cases, publishers were making it very clear that they are doing things that will add real value to authors’ marketing efforts, things that no self-publishing author could do for themselves. Self-publishing authors could be wrong, but a read through the comment string of a recent post here makes it clear that they don’t much believe publishers add value in marketing.

On Monday, I was talking to Fritz Foy, the senior VP for Digital Publishing and Strategic Technology at Macmillan. My mission was to recruit speakers from Macmillan for Digital Book World. The conversation turned to the question of “collecting names” for marketing purposes. I had learned previously that Macmillan really has a company-wide effort to do that. That’s something I have advocated. I thought it was so important that I went to the unusual (for me) effort of learning some fundamentals of direct contact management and writing about them on the blog 14 months ago. But Macmillan is the only company I’m aware of that makes email address capture an objective across the company, although we see pockets of name-gathering activity in other majors.

Fritz emphasized that collecting names wasn’t the only priority. Using them, using them well, and tracking what happened when they used them were the keys. (I was reminded, as I was again by the next conversation I’ll describe, of the adage “you can’t improve what you don’t measure”.) To demonstrate, he pulled some October numbers from tor.com, which one would assume, based on the relatively longstanding tor.com effort, probably constitutes the company’s biggest single pool of email addresses.

And they had a lot of them, enough to have sent over 650,000 emails to their lists in the month of October. That’s impressive. But what’s positively stunning is that more than 30% of those emails got opened (that’s more than 200,000) and more than 20% of those clicked through: took the action that Macmillan asked them to take in the email. That’s in the neighborhood of 40,000 actions.

Now the actions were, for the most part, to get free access to more content. (Only 15% of the mailings were purely “marketing”.) They weren’t selling anything. But what Fritz was demonstrating was the growth of what I call “investment marketing”: marketing that produces a result that makes subsequent marketing efforts cheaper or more productive. These tor.com numbers are going to grow, inexorably. Another indication of how solid Macmillan’s lists are is that only 0.1% unsubscribed!

If I were an author (or agent) looking for a sci-fi publisher, it would impress me that Macmillan has lists that get a 30% open rate. It would make me feel they could do things to promote my book that another publisher without those lists couldn’t do. I don’t know what the growth rate is on those lists, but most things (sales, device penetration, self-publishing) in the digital publishing world have been more than doubling each year and these could well be too.

The key point to take on board here is that tor.com is a flagship; Macmillan is doing this across their company. They are building other verticals as well. If other publishers aren’t systematically taking names, getting email permissions, and testing what can be done with them, Macmillan will build up marketing capabilities that it will get increasingly expensive to compete against.

There is little doubt that Amazon’s author-recruitment efforts for their imprints include the promise to mail to known buyers in the author’s genre. They almost certainly can send more than 600,000 emails in a month for many books and genres. But can they get a 30% open rate and a 20% clickthrough?

And Amazon, a retailer, can’t get trapped into just pushing the books it signs up when their consumer brand, and their sales, depend on offering full range of selection of available titles across publishers’ lists. That conflict is compounded as they sign up more and more titles as proprietary. (But it will also be ameliorated if the titles they sign are higher profile than they’ve been so far.)

The day may not be far off when agents are going to be asking publishers “how many emails can you send in support of this book on publication day?” If I were in Amazon’s shoes, I’d be pushing that question. It looks like Macmillan is methodically building the ability to provide an answer.

But not everybody with a modern view of marketing agrees with me (and Macmillan) about the importance of name-gathering, which brings us to the second conversation this week.

We got a call from Open Road Integrated Media asking us to come down to their shop and learn a bit about what they’re doing. Open Road is an ebook publishing company founded by former Harper CEO Jane Friedman which has been an annoyance to the big publishers. Jane has been in the business for more than four decades in high positions at major houses (at Random House before Harper). She knows the agents and she knows how the game of signing up content works.

So she moved against the establishment by offering a standard deal of a 50% share of ebook revenues, when the major publishers are holding the line at 25%. (Open Road’s deal includes the ability to recoup one-half the digitization cost before paying what we usually call royalties but which they call “profit share”. ORIM says that comes to less than $500 per title. Open Road pays no advances.) She used her understanding of the ambiguities in legacy publishing contracts to sign up backlists from both living authors and estates, including Willam Styron, Lawrence Block, Carl Hiaasen, Alice Walker, and others.

Those have been the headlines about Open Road and that was pretty much the extent of my knowledge of their proposition. Without any other knowledge of their economics — their ability to raise money, their burn rate, their sales — I was skeptical about the sustainability of their model, if it rested primarily on paying 50% for what others were paying 25% for and gathering high-quality backlist of titles not nailed down already for ebooks, which is a limited resource.

It turns out they have a lot more going for them than that. But they don’t gather names.

Open Road’s head marketer is Rachel Chou, who worked with Jane Friedman at Harper. Jane and Rachel, and former Scholastic CEO Barbara Marcus, who is an advisor to Open Road on children’s and YA acquisitions, made the point that Open Road is a marketing company. That’s what they do. And their bullpen with about a dozen people in cubicles working away is just about exclusively devoted to marketing. Except that, in their eyes, marketing and sales and author relations are all the same thing to them, and they see a workflow built around that perception as a key differentiator.

In fact, they see the consolidation of functions in their shop as a significant competitive advantage. In the ebook world, marketing and sales are so closely related that it is hard to see how to parse them. That’s partly because the promotions by ebook retailers could be the single most important marketing component (a point made emphatically by Diversion Books’ Scott Waxman at our eBooks for Everyone Else shows in New York and San Francisco), but it is also because all marketing efforts at Open Road are aimed at driving sales to the ebook retailers. (Their widgets all have buy buttons for the full range of retailer choices.)

But that’s not where the competitive advantage of their structure comes into play.

Rachel spelled that out. One of the major retailers came to them in the past few weeks with a big sales opportunity. They could place 15 Open Road titles in a major promotion that would sell a lot of books. One catch: they needed the titles cleared for the promotion within 24 hours.

Another catch that is characteristic of the ebook world: this was a price promotion that required clearing the participation of each book with its agent. That’s 15 agents. Rachel and her team of marketers, who have the agents of the Open Road ebooks on their own speed-dials, got the job done and got all 15 books into the promotion.

Moving that fast would be a non-starter in any significant publishing house. Whether the opportunity came in through sales or marketing, neither team would own the agent relationships. I believe in most houses it would be necessary to have the agent calls made by the editor who had signed the book. Certainly, the editor would have to be consulted before anybody from marketing or sales could make such a call. And that round of communication, which would include explaining the promotion opportunity to each of the affected editors, would never be attempted within a 24-hour window. Realistically, 24 days would be a challenge.

Open Road is organized differently than legacy publishers because there is so much they don’t have to do! There is very little in the way of a production department (there is a person who creates their covers and Pablo Defendini, who was a key player building Macmillan’s tor.com, is their “interactive producer”.) There is no sales department. There is no inventory management. Everybody works in a room that is dominated by a wall with a 2-month marketing calendar, listing all the events and anniversaries they might promote around. They have 75% or 80% of their company dedicated to marketing, which everybody — including all the big publishers who have expressed an opinion to me — agrees is the prime responsibility of the book publisher in the digital era.

But, even within that, Open Road is organized for efficiency and speed based on the realities of the value chain for ebooks. Their marketers are assigned books which “fit together”, so they are consistently going back to the same blogs and websites for promotion. They can develop relationships. They’re not really a “vertical” publisher (by genre or by topic) but they do have multiple titles from the same author, which helps.

To be fair, the other major publishers are reorganizing themselves constantly into more marketing-focused and less bureaucratic organizations. Just this past week, Simon & Schuster announced organizational changes which effectively shift resources from physical store sales to online marketing (which is admittedly an oversimplification.) The big companies all have great leadership and they’re well aware that they have to change. And I know for sure there are plenty of initiatives I haven’t heard about because the houses feel there’s competitive advantage to keeping them quiet. In fact, Rachel Chou told me about newsletters that are published readers at HarperCollins were getting open rates when she was there a couple of years ago that were even higher than Fritz’s tor.com numbers in October!

Open Road’s team would point to other distinctions between them and other publishers. (They not only claim to be different from the legacy print publishers, they don’t recognize any of the other ebook publishers as true competitors either.) They do extensive video interviews with every author (or a descendant in the case of a deceased author) which creates a rich library of video content. It’s a point of pride with ORIM that these are not fodder for video trailers, but give them real editorial material that can be made into solid programming, often combining video from several authors thematically into “mashups”. They distribute that video aggressively and claim they’ve now reached the point where they’re a recognized B2B brand by some digital media and bloggers who come to the Open Road website, unbidden, to pick up video. Of course, all the video is tagged so the Open Road marketers can track its placement, downloads, and any clickthroughs that result to the retailers.

And that leads us to metrics. Open Road is relentless about data and analytics. They make the point that they can test different covers or tag lines on Facebook or in other media and have answers within hours about what works best. The Open Road team believes that the big houses don’t give their marketers the kind of tools ORIM has to measure the impact of campaigns and that their competitors’ corporate structures don’t enable fast changes in the pitch or the artwork based on data.

These may not be sustainable advantages. Tools can be provided. Workflows can be changed to permit faster responses when that’s necessary. The established houses can raise their royalty rates. How fast things will change in the big houses is an open question (and the answer is different for every house), but it is undeniable that the decision-making structures that worked for print books readily accepted time lags that are a real handicap in the evolving ebook world.

Jane Friedman and her team claim that there is a marketing plan for every book for every quarter! (They admit there’s some ganging there; a bunch of different books might be part of the same Mother’s Day effort.) Whether that is scaleable and replicable when they are ten times their current size (approximately 1400 titles) is another question. But it is certainly a point of differentiation today.

Open Road doesn’t sell direct, only through intermediaries. And they eschew name and email address capture of end users, preferring to rely on the combination of the viral distribution of content and their always-developing relationships with bloggers and websites.

Both Macmillan and Open Road are doing things that no big trade house could have imagined five years ago. Macmillan is applying scale; Open Road is applying the speed and flexibility enabled by a smaller organization. But both of them are employing what I’d call “investment marketing”: doing things on behalf of their books that build their capabilities to do more on behalf of subsequent books. I think that’s the key for publishers who want to give authors and agents convincing reasons to publish with them in the future.

We’ll do a panel on “investment marketing” at Digital Book World in January. Of course, Open Road and Macmillan will be on it. So will F+W Media, a vertical publisher (investment marketing is much more natural for vertial publishers) and we expect to add one more Big Six house which is doing interesting things in this regard.

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Getting ready for our eBooks for Everyone Else conferences, I discovered an author named Bob Mayer who impressed me with his self-publishing zeal and apparent success. Bob has written lots of military fiction, science fiction, even a romance novel, and some non-fiction: dozens of books over the years for major publishers. Most of it was mass-market, most of it reverted relatively easily and Bob systematically secured those rights reversions for years.

He caught my attention with the bare bones of his story. He started putting his work up as ebooks in January, when he sold a few hundred books. By July he had more than 40 titles available and was selling a total of over 100,000 units a month. I had long wanted to put an author before my conference audiences who had achieved self-publishing success to talk about how s/he’d done it.

Joe Konrath and, more recently, John Locke had politely turned me down. I booked a 1-on-1 conversation with Barry Eisler at our Publishers Launch Conference at BEA right after he announced his decision to turn down a 6-figure advance to self-publish. Alas (for this objective of mine), the morning of the event Barry signed a contract with Amazon to do his next book with them. Although he has self-published some short fiction. Eisler’s story became that he is an Amazon-published author, not a self-published author. That’s a good story and we had a good session on-stage that the conference audience benefited from, but it was not a a self-publishing report from an author who truly did it on his or her own.

(Eisler’s wife, the literary agent Laura Rennert, reported at eBEE in San Francisco that Amazon is succeeding very well with Eisler’s current book, The Detachment — which I read and enjoyed – and that his substantial advance has already been earned out.)

So I was pleased to learn with a phone call that, not only was Mayer an enagaging talker, but that he was willing to make the journey from his home in Seattle to San Francisco to discuss his success with a conference audience.

But what became clear when I had a further conversation with Mayer the day before our conference, buttressed by what was said by many other participants at the event, is that the Hocking-Konrath-Locke story — an author managing all the pieces of their publishing program and and achieving a totally private success — is a Dodo bird. Unless we consolidate down to an only-Amazon ebook world, which, despite Amazon’s best efforts, doesn’t seem likely anytime soon but would undoubtedly create a whole new rule book if it ever arrived, the work and expertise required for successful publishing will lead inexorably to one of two results.

Either an author will get help to publish their own material — a distributor like Constellation or Ingram or a publisher — or they’ll find what they built to serve themselves would be better and less-expensively maintained with the work of additional authors to go along with their own. There’s enough work and expertise involved in what had first seemed to many such a simple process that it requires building a bit of a machine to do it. And once a machine is built, it is just wasteful to leave it idling between the works generated by any one writer.

This point was made by Mayer when he told me that he is now recruiting other authors to publish. He started out by finding a partner to handle the technology component and mechanics of his efforts. In his already-substantial experience in less than a year, he has learned that proper editing is essential, as are eye-catching covers, as is the right metadata. He told me and our audience that a single complaint from a reader to Amazon about a typo in one’s book can result in the ebook being taken down for a required correction. He has learned, as others have, that maximizing revenue requires changing and re-changing your prices, which is more work.

Bob says he has even fixed plot errors that were pointed out by Kindle readers.

(Another view of this aggressiveness to satisfy customers was offered to me by a Big Six executive a few months ago when he related the story of a book published by his house that had been taken down. There the “culprit” was vernacular language that was interpreted by a reader as poorly copy-edited grammar. There was nothing wrong with the ebook, but one reader thinking there was resulted in a takedown that cost everybody sales for several days until the ebook could be put back up!)

Bob says books can disappear from major retail sites for no apparent reason as well. He says that anybody who believes that ebook publishing is like “sending the book to a printer, after which you can forget about working on it” is mistaken.

And he believes that any author whose work is good and wants to take a self-publishing route would be wise to cede a percentage of sales to him, or somebody else, who has learned what he has and equipped themselves to prepare books properly for sale and manage them after they’re launched.

This is establishing ever so much more clearly that publishers are right when they say there’s a role for them in an ebook world. Amazon itself makes that clear by the difference in the deals it offers self-published authors and authors it signs for its imprints. Although authors will continue to self-publish, the debate that matters in the future is what the basket of services will be that authors require and what will be the right price for them. The lines are drawn for that discussion and the opinions are really all over the lot.

There are ebook publishers — the granddaddies eReads and Rosetta, Scott Waxman’s Diversion Books, and the giant in the space: Open Road — who are saying the “right” ebook division between author and publisher is 50-50. (We should make clear that this is the division of the revenue obtained from the retailer or “sales agent”, which would normally be 65-70% of the selling price or 50% of a publishers suggested list which could be discounted, depending on what kind of sales arrangement is in place.) Smashwords, an entirely automated service, and BookMasters, a service provider, provide distribution for 15% of the take. Two agents speaking on our panel in San Francisco, Deidre Knight and Laura Rennert, are capping their agency’s take at 15% of the revenue as well, as they walk the ethical line that is perceived by some to require that they make no more money self-publishing an author than they would selling the rights to a publisher.

Then there are many other service offerings with prices that fall in between 15% and 50%.

Amazon’s rules offer some insight on this. If you work with them through their KDP service, you get 70% (if you set your price within their accepted bands). But, as Mayer and others at our conference made clear, through KDP you can’t even purchase any special merchandising or promotion. But if you are published by Amazon’s imprints, the take is cut in half and the author gets 35% of retail, but you get lots of promotion by positioning. (Deals are private, and the details of Eisler’s deal have not been revealed, but the presumption would be that he earned out his rumored six-figure advance from Amazon at the 35% rate.) Thirty-five percent matches what a 50-50 publisher could deliver if they had an agency-like deal with the retailer.

Amazon agreements also come with the requirement that you participate in their other programs, including library lending in cooperation with OverDrive and, presumably, the new subscription program they have just announed. (It appears they chose not to include all KDP titles in the subscription program; there are only 5,000 titles announced for that initiative and since we know that Smashwords has nearly 100,000 titles, it is likely that KDP has more than that. On the other hand, late reporting by Publishers Lunch on Thursday spells out that Amazon will simply “buy” copies of any non-agency titles it wants to lend. That means they make one purchase for each loan, so it is expensive for them, but it demonstrates again that only publishers with agency arrangements have control of their distribution and how their books might be used to strengthen any one distributor’s ecosystem.)

The comparisons get complicated, but, if a conventional publisher is providing the full range of services that our speakers said is needed to maximize sales: good covers, changing covers, dynamic pricing, constantly improved metadata, monitoring to catch glitch take-downs, as well as developmental editing, line-editing, copy-editing, and proofreading, the author wouldn’t be doing badly at all to get 35% of the consumer’s dollar for an ebook. Throw in real print book distribution and sales and the royalties and marketing from that, plus a publisher’s core marketing effort (being part of a “legitimate” list gets attention from reviewers, bloggers, library collection development, and other places that matter), and, perhaps, some dedicated marketing as well, and it can be a relatively profitable exercise for an author to be with a publisher for even less than that.

When agency publishers pay 25% royalties, they are giving the author 17.5% of the paying customer’s dollar. Everybody will draw their own lines, deal by deal, but that doesn’t strike me as totally crazy as long as print sales remain more than half the total and the publisher is paying an advance that carries with it some risk that the actual royalty paid will be higher than what the contract stipulates.

That’s a moving target, of course, I personally don’t expect print sales to remain at half the total very much longer. But if major publishers were paying 50% royalty on a 70% agency sale, they’d be matching the 35% Amazon pays the authors it publishes. Amazon can do much more to promote on Amazon (which panelists at eBEE said is what really moves the needle); but publishers make noise in a lot of other places Amazon (yet) doesn’t. Presumably Open Road and Diversion and eReads and other 50-50 ebook publishers can’t match the agency terms with Amazon (they can get 70% through KDP, but that comes with pricing restraints and required agreement to those other deals we discussed earlier), so only the Big Six, who can apply agency across all accounts, can offer a comparable deal with a manageable percentage payout.

Amazon is demonstrating what they see as the value of securing the loyalty of digital book consumers for its ecosystem by their willingness to pay full wholesale price for an ebook that will then get lent once, as well as their penchant for pricing for sale well below their cost. The evidence that agency pricing is the only wall between a multi-channel ebook business and a single-retailer monopoly continues to grow. But as long as print in stores matters, and it will for a while longer, the Big Six have a legitimate commercial argument to defend ebook royalties between 25 and 50 percent. After that, everybody except Amazon will be hoping that that the Nook, Kobo, Google, and Sony market share is enough to keep it essential to an author to cover them all. And that means of discovery and merchandising will emerge that are a meaningful alternative to what is provided by the world’s biggest virtual retailer.

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Something caught my eye this week that has been very little commented upon elsewhere: the news that Hachette Book Group developed an app-making capability that they are now licensing out. Their first customer was Round Table Companies, a book packager.

I found this striking because big book publishers are not generally known for developing technology; they’re more likely to be buyers of it. This is not an ironclad rule: Scholastic has an ereading platform in development to satisfy the special needs of the children’s book market and it is trying to work with other publishers who might want to avail themselves of the platform.

But from the standpoint of one who has observed publishers wrestling with technology for many years, this deal is very unusual. When Random House bought Smashing Ideas, a technology company, that seemed like the likely course for big publishers to take: acquiring technology that could be useful to them after it had been developed by somebody else.

There are other companies and entrepreneurs developing app-making tools. Most big publishers would be trying those out and getting great deals to do so because the companies making the tools need the validation of having them used by major players. The fact that Hachette even attempted to develop this capability on its own is unusual; that they succeeded at making something useful and cost-effective to the extent that Round Table preferred their solution to one developed by technologists is why it is worthy of comment.

Even acknowledging that selling the tech to a packager is not quite the same as selling it to a direct Big Six competitor, I don’t know if this is a harbinger or an outlier.

But I do know that it challenges one of my long-held assumptions about publishers and technology.

When you invest in intellectual property, whether publishing a book or developing software, you normally want to monetize that investment across the widest possible range of customers which you can only do by distributing through the widest possible array of channels. That’s the handicap Amazon has right now being a publisher: they don’t have effective distribution to brick stores and, as long as they want to keep what they invest in restricted to the Kindle for ebooks, it is pretty certain that they won’t. Over time, the number of brick stores will diminish so that will matter less and less and, if Kindle retains its position of primacy among ebook retailers, what is a real handicap today may become trivial. But traditional or legacy or real (pick your adjective) publishers really do have a wider distribution base than Amazon for books published today. (That doesn’t mean they will necessarily sell more, but it does mean they should!)

By the same token, I never thought it made much sense for a publisher, on its own, to develop software for product development or distribution that should have industry-wide application. I figured it would be hard for one publisher to sell software to another; the buyer would be afraid they were just permanently strengthening the margins and the hand of a competitor.

That same fear of strengthening a competitor is the reason that other types of collaboration that would seem obviously synergistic, like for publishers who do science fiction books to join together to create a science fiction community, haven’t happened. There was a moment a couple of years ago when Macmillan’s Tor.com suggested they’d start selling other publishers’ books to their community and invite other publishers in to strengthen it, but that never happened, even though it can’t make sense in the long run for what are ostensibly genre-driven communities to be siloed by publisher. I felt the same logic applied to publishers doing software development.

But that long-held assumption of mine is being challenged, by Random House buying Smashing Ideas and planning to keep it going as a provider of services to competitors, by Scholastic developing its own platform for displaying digital content and recruiting other publishers to join them, by three US publishers combining to create the new retailer Bookish (and three UK publishers replicating that idea with a UK version called Anobii), and, most dramatically, by Hachette creating an app-maker that a leading book packager finds a cost-effective way to build apps.

We still don’t know what will work. Will Smashing Ideas thrive under Random House ownership? Will Scholastic succeed in establishing a new reading platform for children’s books that can find a prominent place in the market? Will Bookish or Anobii succeed at becoming an important force in ebook sales alongside Amazon, Apple, Kobo, Google, and B&N?

And will what Hachette has done with their app-making capability be a trick they can repeat, developing technology to meet other challenges publishers face? Will Hachette become a specialized software vendor, developing publishing-specific tools, as well as a book publisher?

If so, they have found at least one formula that can help them through what are bound to be increasingly challenging times for general trade publishers.

We’re staging a conference next week in San Francisco which is a reprise of the very successful and well-received eBooks for Everyone Else event that we did in New York on September 26. We have a great show in San Francisco, adding a talk with successful self-publishing author Bob Mayer; a presentation from Penguin’s Molly Barton about their new Book Country initiative; a very interesting group of agents that will be interviewed by Charlotte Abbott; and a reprise of our “speed-dating” 1-on-1 sessions for attendees with service providers and experts to enable everybody to get their specific questions answered.

One major highlight of the show is going to be a presentation by my Publishers Launch Conferences partner, Michael Cader, which sorts out the myriad distribution and go-to-market choices facing today’s self-publisher. Michael did thorough research for this segment and, having seen the outline of the talk, I am certain it is the clearest and most complete survey of what has been a confusing and cluttered landscape of services that anybody attending will have ever heard.

Undoubtedly, Michael’s summary and analysis will make it to the web in the days after the conference, but if you’ll be in or near San Francisco next Wednesday, November 2, it alone will be worth the price of admission to eBooks for Everyone Else.

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Being on the road in London and on my way to Frankfurt, where we have two Publishers Launch Conferences coming up on Monday and Tuesday, I don’t have time for what my British friends would call a “proper” blogpost, with a bit of research (I admit I never do much) and some links. But I’ve been thinking about something over the past month which I ran by a marketing VP at a major house last week. It looks like one of the really big questions facing the major houses in the next couple of years, so it seemed worth airing in the run-up to publishing’s largest global gathering.

Here’s an assumption that is not documentable; it is my own speculation. I think we’re going to see a US market that is 80% digital for narrative text reading in the pretty near future: could be as soon as two years from now but almost certainly within five. We have talked about the cycle that leads to that on this blog before: more digital reading leads to a decline in print purchasing which further thins out the number of bookstores and drives more people to online book purchasing which further fuels digital reading. Repeat. Etcetera.

We’re already at the point where new narrative text units sold are well north of 25% digital (percent of publishers’ revenue is lower than that, of course) and we are still in a period that has lasted about five years (soon to end) where the penetration of digital has doubled or more annually. (I italicized that to emphasize that what I’m talking about doubling is the percentage of sales that are digital, not the absolute number of digital sales. Several people misinterpeted that when I made to it previously.)

Of course, penetration will slow down before it reaches 100%. I’d imagine we get to 80% in 2 to 5 years, then then to 90% in another couple of years, with the last 10% stretching out a long time. How long did it take after the invention of the car before the last person rode their horse to town?

Now here’s a fact which is documentable, and would be documented right here on a day when time wasn’t in such short supply: brands that are not publishing houses are directly publishing their own ebooks with increasing frequency. Magazines and television networks and web sites are recognizing the reality that self-publishing ebooks is something they can do themselves without the complications (or revenue-sharing) that working with a publisher would require.

This is not a surprise to me, but it does really raise a point that major publishers have to consider: can book publishers add enough value to the ebook publishing process to persuade another brand with content credibility, one that has direct contact with the vertical community that is the audience for their books, to do their ebooks through the publisher rather than directly?

This is an existential question for big trade publishers. They have forged partnerships with other brands, even media brands, for many years based on their unique ability to deliver printed books competently and to put them on bookstore shelves. Those are things that a magazine, a broadcast network, a movie studio, or a packaged goods company couldn’t do for themselves.

Which leads to the conversation I had this past week with the marketing VP. We were discussing marketing topics suitable for Digital Book World this January. This house is doing some very important things that wouldn’t have been on their radar a few years ago: SEO, of course, but also developing vertical communities and organizing a corporation-wide effort to gather names and data and direct contact with readers (handicapped by the fact that they almost never actually consummate the transaction). I raised the question: “will publishers be able to persuade these non-publisher brands that it is worth giving up margin and some control to work with publishers in the years to come?”

“That’s a very tall order,” he said.

Random House has apparently succeeded in doing this a couple of times recently. They have made deals with two political web sites (Politico and Real Clear Politics) to do ebooks related to the 2012 presidential election. This is a big deal. It wouldn’t be a big deal if the principal output were print; Politico and RCP can’t do print. But they could do ebooks without Random House; literary agents all over town (among others) are lining up to offer the tools to enable that.

And the profound danger to the big publishers is that if outfits like Politico and RCP start by doing their own ebooks, who is to say they’d stop there? It would be a natural extension to start publishing other people’s ebooks themselves once they had built up a network and infrastructure to sell these files successfully. The thing for trade publishers to fear is that they would lose their role in the value chain, vertical by vertical.

Developing skills and capabilities that make their ebook-publishing ability superior to vertical brands is going to be essential for publishers’ survival as the skills and capabilities to do print publishing become less important commercially over time, as they will. Even if you disagree with my aggessive expectations for ebook market penetration, I think you’ll be able to substitute your own and come up with pretty much the same conclusion.

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It occurred to us about a year ago that the children’s book business was wide open for disruption from new players outside the publishing business. Already, two of the companies we mentioned in a post back then about the new entrants that might be the actual instruments of disruption have linked up with established publishers. That suggests that the legacy publishers and the new ones need some help from each other to deliver profitable children’s book publishing going forward.

Even though I’ve been a skeptic about the commercial viability of “enhanced” ebooks and content-based apps, my reservations are inversely proportional to the age of the intended reader. For the past 18 months or so, it has become clear that tablets and color ereaders would become ubiquitous. Roger McNamee of Elevation Partners, one of the visionary investors in Silicon Valley, has been making the pitch that tablets will be replacing PCs and that the opportunity for content creators is to figure out what will work best in the tablet form factor. (To be fair to Roger, I vastly oversimplify: his analysis, which includes the decline of Microsoft and Google and the rise of HTML5, is much more sophisticated than that.) That’s more or less what the companies cited in the post from last November were already working on a year ago, focused on children’s books.

That focus is totally logical. While enhancement for adult books, particularly for books of immersive reading like novels or narratives of history, has required creators to figure out ways to change established behavior that immersive readers will accept (with a stark lack of success so far, I’d say), we’ve been delivering “enhanced” children’s books for years. Die-cuts, pop-ups, and computer chips to make books talk, sing, squeal, and be responsive to touch commands have been implemented for a long time.

And allowing a book to deliver on another established behavior — reading aloud to a child — is a trivial technical problem in the digital context. Touchy Books has an app that will deliver a wide selection of books that with a “read aloud” option for 99 cents and up. Every household with a digital device with color and touchscreen capabilities can give these to a kid for far less than the cost of books.

The companies we talked about in that post — Oceanhouse Media, Ruckus Media, Smashing Ideas, and Trilogy Studios — were focusing on that opportunity. It struck me at the time that these digital content packages could rapidly overtake the appeal of books for these younger audiences and their gatekeepers. I concluded the piece by saying that publishers who wanted to stay in the kids’ books game in the next few years would have to buy one of these studios or start one.

Regular readers of this blog know I’m comfortable acknowledging that predictions made here can be wrong. This one is already being proven right.

Last May, Random House bought the digital developer Smashing Ideas. Smashing Ideas was actually not a newbie formed around the tablet opportunity; it was a digital developer with a decade of experience working with a variety of big non-publishing brands. But they had the tech chops to pursue the tablet opportunity and had been developing children’s apps for Random House for several months before the acquisition. Random House saw the opportunity to accelerate their own development of digital product creation skills by cross-pollinating the SI team with their own. And their stated intention, at least so far, is to allow SI to sustain its third-party development business, even for competing publishers.

Last week, Ruckus Media formed a new partnership, described by Ruckus CEO and experienced book publishing veteran Rich Richter as like a music business “label deal”, with Scholastic. (In a “label deal”, a small record company develops the content and then turns it over to a large record company for manufacturing and distribution, sort of like an “imprint deal” — rare these days — in publishing. There is the implication there that Scholastic also invests and shares ownership in the product. If it were described as a “distribution deal”, that would not be implied. )

There are some interesting wrinkles here. Ruckus is developing original digital content for Scholastic to sell and market. Projects that are starting from scratch are in the pipeline, but Ruckus is also looking for out-of-print children’s books that deliver some brand recognition and can be built more quickly into interesting digital products to jumpstart the list. They’re paying advances for those and it would seem likely that agents will give them a lot to choose from.

What is made very clear by the Ruckus-Scholastic deal that wasn’t as obvious in the link between Random House and Smashing Ideas is that digital developers can use help from publishers, not just the other way around. Although there have definitely been commercial successes delivered by these non-publishers, most of them appear to be from licensing brands already established elsewhere or leveraging public domain titles. Those are thin reeds for a sustainable business model. The licenses will get harder to obtain as publishers figure out how to make these products themselves and the field could get very crowded with multiple digital versions of public domain classics.

Ruckus is doing a smart thing jumping in to mine the world of “out-of-print”. With their visibility, early start, and willingness to pay advances, they have a good chance to harvest the best low-hanging fruit before others get into the game. But this strategy also has a shelf life; a few years from now there won’t be many opportunities of this kind left to be exploited.

And when you can’t get properties that already give you a branding head start, the ability publishers have to introduce books into the marketplace — knowing the influencers and, at least for a while, having the additional marketing and revenue opportunities delivered by print — can provide crucial help that is necessary no matter how clever the new digital products are.

Scholastic, of course, has a very special marketing platform. They are in direct touch with an enormous number of teachers, probably more than a million, who are the gatekeepers for many times that number of kids. (It should be noted that while Scholastic’s position there is dominant, it is not unique. There’s a division of Readers Digest called Weekly Reader that delivers a similar mindshare opportunity to a smaller number of teachers, probably about 200,000. One must wonder how that marketing capability will become part of this picture. Who will acquire whom?)

But the other big players in children’s publishing, even if they don’t have frequent email exchanges with hundreds of thousands of teachers, also have a great deal to offer. Even the newbies who have started successfully (Oceanhouse Media began with a unique partnership business model for its developers which, combined with its license of Dr. Seuss product, has apparently enabled it to be profitable without needing outside capital) will probably find that what big companies like Random House and Scholastic can deliver will be useful, if not essential, before very long.

And, conversely, the big publishers will find it hard to muster the dedicated focus on original digital products (as Richter said to me last week, “that’s all I think about from the time I get up in the morning”) that these new studios do. Alliances, whether by acquisition or some other means, are natural. We should expect to see more combinations like this developing in the months to come.

Both Ruckus Media and Scholastic are on the program for our half-day Publishers Launch Conference in Frankfurt “Children’s Publishing Goes Digital”. (Thanks to our esteemed Chair for that event, Lorraine Shanley of Market Partners, for that!)

That event shouldn’t be confused with our all-day Publishers Launch Conference in Frankfurt “eBooks Around the World”. Follow the links to learn more or register for both. 

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As the shift from a print-centric book world to a digital one accelerates, more and more digital publishers are creating themselves.

The biggest publishers, with the resources of sophisticated IT departments to guide them, have been in the game for years now and paying serious attention since the Kindle was launched by Amazon late in 2007. But as the market has grown, so has the ecosystem. And while three years ago it was possible to reach the lion’s share of the ebook market through one retailer, Amazon, on a device that really could only handle books of straight narrative text, we now have a dizzying array of options to reach the consumer on a variety of devices and with product packages that are as complicated as you want to make them.

Free or very inexpensive service offerings through web interfaces suggest to every publisher of any size, every literary agent, and every aspiring author “you can do this” and, the implication is, “effectively and without too much help”. Indeed, services like Amazon’s KDP (Kindle Direct Publishing) service, Barnes & Noble’s PubIt!, and service providers Smashwords and BookBaby, offer the possibility of creating an ebook from your document and distributing it through most ebook retailers, enabled for almost all devices, for almost no cash commitment.

Is it really that simple? One suspects not, since literary agencies are creating ebook publishers (for example: The Scott Waxman Agency’s Diversion) and baskets of services (for example: The Knight Agency in Atlanta) and consulting to help their authors. And a bit further upstream, ebook distribution companies (for example: MintRight) and ebook-first publishers (for examples: Open Road, Rosetta, and the granddaddy of them all, Richard Curtis’s e-Reads) are creating more alternatives, sometimes propositions explicitly addressed to the agents. If publishing ebooks to all channels were really a simple matter of uploading a file, it would hardly seem necessary to build all this infrastructure.

We know that small publishers, literary agents, and authors are becoming publishers at an astounding rate. Two years ago when I was trying to organize a panel of literary agents to talk about working with authors on a charge-for-services basis instead of a share-the-royalties basis, it was hard to get volunteers to discuss new models. Two weeks ago, a major agent outside New York said to me, “we all have to think about it now; we have no choice.”

In short, it isn’t just the big publishers who are compelled to develop a digital strategy to adjust their businesses to changing times. Their smaller competitors, the agents they depend on to deliver their content, and even the authors that have always just depended on the publishers to handle the business of getting a book from a manuscript to a purchase, are all assessing the new landscape. They are considering what new approaches might reduce or eliminate their need for a publisher, or at least reduce the publisher’s share of the take.

Although the correct strategy for any entity would depend on the factors that prevail in each case, there are things it would seem that everybody entering this arena needs to know and understand.

First of all, what are all the things publishers do to get from manuscript to sale, are all the steps necessary, and what do they cost? Developmental editing, copy-editing, mark-up for design, creating metadata: these are all things publishers do routinely. Are they critical for every book? Would a purchaser-reader notice if a publishing newbie left any of them out? Will the services that promise to make and distribute an ebook without a cash investment do these things well?

The ebooks themselves have gotten increasingly complicated. The ebook standard epub (used for just about every ebook not intended for the Kindle ecosystem) has risen to the challenge posed by apps to be able to accommodate color and video and audio and software elements. Everybody who knows that “you get what you pay for” expects complicated ebooks to take more effort and money to create than ebooks of straight narrative text. But what constitutes “complex”? And how much more money does that additional effort cost the publisher that wants to deliver an ebook more complicated than just simple text?

Marketing ebooks also requires a whole new set of knowledge and skills. The key to all ebook marketing is the accompanying metadata: coding that travels along with the file specifying its core bibliographic information and price, but which can also tell a retailer or a search engine much more than that. Search engine optimization (SEO) is the art of delivering metadata that makes the book more likely to be found in response to various searches and queries; that’s yet another set of understandings new ebook publishers have to acquire.

That is just the beginning of what is possible (and therefore necessary) in ebook marketing. Sample chapters can be given away. Web sites can be invoked as partners.

And authors and publishers can, and therefore must, engage in “social network marketing”: using Twitter and Facebook and commenting in high-profile streams to catch attention and gain credibility with core audiences for the books. This is more knowledge to acquire.

Any new publisher will need to understand the paths to market. Yes, Amazon gets more than half of the US ebook sales and Barnes & Noble gets half of the rest. But it isn’t that way on every book, ignoring the others leaves a big chunk of the market unexploited, and things are changing quickly. Amazon’s market share has dropped by a huge percentage in the past two years.) OverDrive is the primary path to libraries. Ingram aggregates many independent stores. Baker & Taylor is opening up markets among mass merchants. Kobo is as important in Canada as B&N is in the US and works in markets all over the world. Google has the ebook ecosystem making the most serious penetration of independent book retailers. Sony is about to introduce new devices that could increase their importance. And Apple is doing its best to dominate sales to its own device holders, who constitute a large wedge of the ebook customer pie.

One can go to all of these channels directly but there are also a slew of services to handle what is the increasingly complex job of delivering to and administering the multiple channels. Perseus Constellation, Ingram Digital, INscribe Digital, LibreDigital (just bought by Donnelley), and Bookmasters as well as the automated services like Smashwords, BookBaby, and MintRight we mentioned above, and others offer service packages to do that and to help with the creation and marketing needs as well.

As we said at the top, nowhere is the change in publishing greater than in the agent community. What has been a stable business model for generations is now, suddenly, changing. There seem to be as many new models and approaches as there are literary agencies. That adds another thing that all of the fledging epublishers — some of which are agents, others being small publishers and authors — need to know about and understand. The relationships among authors, agents, and publishers are getting much more complicated and everybody needs to spend some time thinking that through and discussing what it means.

If all this strikes you as a set of topics worthy of a day’s discussion, we’re in agreement. We think it is too. And that’s why our new Publishers Launch Conferences partnership with Michael Cader is delivering a day-long event called “eBooks for Everyone Else” in New York (in conjunction with The Center for Publishing at New York University’s School of Continuing and Professional Studies) on Monday, September 26 and in San Francisco (co-located with F+W Media’s new StoryWorld conference) on Wednesday, November 2.

Not only do we have an expert-packed lineup to deliver the information, we’ve carved out time for our attendees to get their own specific questions answered by the experts and by the providers of many of the services that are part of the new ecosystem. If the business of ebook publishing is part of your future strategy, you’re bound to get the knowledge and make the connections you need at eBooks for Everyone Else.

Among the leading service providers who will participate in eBooks for Everyone Else in New York and be available for “speed-dating” conversations with attendees are our global sponsors Copyright Clearance Center, Constellation, and Bowker, as well as supporting sponsors Ingram Content Group, INscribe Digital, B&N’s PubIt!, Kobo, and BookBaby. (Kobo and PubIt! will be speaking from the main stage as well.)

Our New York show features an all-star lineup of literary agents including Jane Dystel, Robert Gottlieb, Sloan Harris, and Scott Waxman. We have a distinguished group of publishing veterans — including Jack Perry and David Wilk, Smashwords founder Mark Coker, Renee Register, Iris Blasi, Rich Fahle, Ron Martinez, and Joshua Tallent — who will present advice and insight to help you develop a comprehensive ebook strategy. Most of them will be available at the breaks and alongside the speed-dating sessions to lead small group discussions and answer your questions about creating, marketing, and distributing your ebooks. (The San Francisco roster is slightly different, but just as powerful.)

Michael Cader and I will be moderating all the day’s activities, asking questions, and helping to put an enormous volume of facts into a strategic context for an audience with a staggering array of choices as to how to proceed with ebook publishing.

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News of the 7-figure Tim Ferriss deal with Amazon that hit the news this (Wednesday) morning must have leaked out to the press yesterday (Tuesday) because I got a call from a reporter asking for comment on Amazon’s “big new hardcover” book deal. The question confused me yesterday, but seeing the announcement about Ferriss today featuring the hardcover makes it clear what the trigger was for that call.

I’d call this deal both an outlier and a harbinger.

It’s an outlier because Ferriss clearly did it for reasons that weren’t strictly financial. According to The New York Times and Publishers Lunch, Ferriss called Amazon seeking the deal. Ferriss decided he’d rather be with a technology company than a publishing company. Ferriss is excited by the unenumerated opportunities he sees having a publisher that has direct relationships with the ultimate consumers.

To analyze the competition between the big publishers and Amazon, I think we need to think about four components of the deal and the publication.

The first thing on many authors minds is the advance against royalties they can get for signing a contract. This deal is reported as 7-figures. We know that Amazon has deeper pockets than any publisher. So they can compete with advances. Since Crown (a division of Random House) had reportedly paid 7-figures for Ferriss’ last book in 2008, perhaps Amazon offered only a sensible competitive number here. But publishers, all too aware that Amazon competed in the ebook marketplace by selling big titles at a loss, have to be concerned that they might be willing to sign some big authors at a loss as well.

The other components to think about are the main channels of sale for the book. I will stipulate in advance that this is a bit over-simplified but I think simplification here promotes understanding (and unncecessarily complicating things would obscure it).

Ferriss is a non-fiction author. For big non-fiction books today, the largest sales channel is usually print sold in stores. Generalizations are dangerous (and generally wrong), but it would be reasonable to think that Ferriss sells 50% of his books that way. If so, that’s a problem for him with Amazon because store sales of print will be the hardest for Amazon to get. Barnes & Noble recently made clear that they would only consider stocking an Amazon-originated title if they could sell the ebook (Nook) edition as well as the print. Amazon hasn’t stated a policy on that, but, to my knowledge, all the publishing deals they’ve made have required ebook exclusivity for the Kindle.

At our on-stage conversation at the Publishers Launch BEA show, Barry Eisler — who had just done his own book deal with Amazon for a substantial advance — admitted that Kindle exclusivity was the one part of the deal he wasn’t crazy about. More on what that means to ebook sales further down in this post, but it would appear that ebook exclusivity is blocking print store sales at the largest possible outlet. Unless Amazon has some distribution cards up its sleeve that we haven’t seen yet, the loss of brick store print sales (and exposure) would appear to be the biggest negative for Ferriss in doing this deal.

It is likely that Amazon expects to sell a lot of those hardcover books through the next channel to consider, print books sold online. In this case, Amazon has a very high percentage of the total market, perhaps in the 80-to-90 percent range. Given their ability to give a book of theirs exposure and perhaps even using that direct customer knowledge that Ferriss seems so intrigued by, it isn’t unreasonable to think that they can sell more than their fair share of those books. It’s also seems likely (generalizing again) that 25% of Ferriss’s publisher-generated revenue could come from print sold online. Maybe Amazon is paying him a higher royalty than the standard on that as well.

Of course, the main commercial reason for both sides to do this deal is for sales of the ebook, the Kindle edition. On the one hand, Kindle sales are said by publishers I’ve spoken with to have fallen from 90% to 50-60% of the total ebook sale. (Barnes & Noble’s Nook is credited with the lion’s share of the rest.) But the publishers don’t know how much of Kindle’s sale (or Nook’s sale or Kobo’s sale) is consumed on the proprietary device. If I read on a Nook and Kindle has an exclusive on a book, I’m stuck. But if I read Nook books on my iPhone or iPad and Kindle has an exclusive on a book, I can just switch over for that one book without a problem.

That means that some big part of the 40-50% of the ebook market that isn’t Kindle is accessible through the Kindle reader on an iOS or Android device. It’s a guess, but I think a reasonable one (maybe even a very conservative one) to say that 35% of Kindle reading is done on non-Kindle devices. Adding those people in would suggest that the Kindle store has meaningful access to anywhere from 67% to 75% of the total ebook marketplace.

And we’d assume that Ferriss is getting a 70% royalty from Amazon on those sales, four times what he’d get if a publisher gave him 25% of the ebook royalty (because they’d be dividing the same 70%.)

My bottom line on this is that Ferriss would get a sliver of what would be half the business (print in stores). He could well get as little as 10 percent of that potential (or 5% instead of 50% of what would have been his total publisher revenue.) Depending on the royalty structure, he’ll get at least as much and perhaps a bit more on the online revenue piece, so let’s call it 30% instead of what would have been 25% of his total publisher revenue. So on those two pieces, he’d be getting 35% of the former total whole, rather than 75%, or a bit less than half.

But on the ebook side, he’ll get about 4 times the royalty on about 70% of the sales, or 2.8 times as much revenue as he would have gotten from a publisher. If that had been 25% of revenue of the former “whole”, it would be 70% of the former whole now. Added to the 35% he’s getting from what would have been the other 75%, that back-of-the-envelope set of guesses delivers him 105% of what he would have gotten from a publisher, even giving up almost all the print store sales.

And, of course, he has high expectations for what he and Amazon can do together with all that customer knowledge. If he’s right about that, he could do considerably better.

This is sobering math for the big publishers. The numbers would look better for Amazon if we were generalizing about fiction, where the percentage sold as ebooks is somewhat higher. But, more important, the segment of the business where Amazon is disadvantaged — print in stores — is shrinking inexorably as a total of the whole. When we run this same exercise a year from now, the percentage assumptions we’ll be making will be lower for that component and higher for the other two.

So it’s clear why the deal is both an outlier and a harbinger. Giving up the store sale is a difficult thing for any author to do, particularly when the math works out to be so close to breakeven (and we haven’t factored in the marketing impact of books in stores, which is real.) It took an author with a particular personal bent to pursue that choice. But it is a harbinger because the math would appear to be moving in Amazon’s direction. The one way I can see for publishers to improve their chances of looking good in this calculation is to raise their ebook royalty percentage. Of course, there’s no reason that Amazon couldn’t do the same thing.

If you’re going to Frankfurt, you must consider attending one of our Publishers Launch Conferences events there. On Monday, October 10, we’ll present “eBooks Around the World”, which will include lots of original data, talks from every major global ebook retailer, the scoop on the growing importance of collective licensing, documentation of the benefits that a medium-sized publisher got from a digital workflow, an instructive presentation connecting metadata quality and sales results, and (as they say) much, much more.

On Tuesday, October 11, we’ll deliver a half-day event called “Children’s Publishing Goes Digital”, chaired by Lorraine Shanley of Market Partners, which will explore creation, marketing, rights, brand new product types and brand new players in what might be the fastest-changing part of our business.

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