Publishing History

Back when my father, Leonard Shatzkin, was active with significant publishers — the quarter century following World War II — he observed that very few books actually took in less cash than they required. That is not to say that publishers saw most books as “profitable”. Indeed, they didn’t. They placed an overhead charge of 25% or 30% or more on each book so most looked unprofitable. But that didn’t change the fact that the cash expended to publish just about every book was less than the cash it brought back in.

The exceptions were usually attributable to a large commercial error, most commonly paying too much of an advance to the author or printing far more copies than were needed. But, absent that kind of mistake, just about every book brought back somewhat more revenue than it required to publish it.

This led Len to the conclusion that the best strategy for a publisher was to issue as many titles as the organizational structure would allow. That was a lesson he passed along to the next generation of publishing leadership that came under his influence. And the leading proponent of that business philosophy was Tom McCormack, who worked for Len at Doubleday in the late 1950s, then went on to Harper & Row before he ascended to the presidency of then-tiny St. Martin’s Press in 1969. Tom often credited the insight that publishing more books was the path to commercial success as a key component of the enormous growth he piloted at St. Martin’s over three decades.

(I checked in with Tom, who is long-retired as a publishing executive but a very active playwright, about how many books didn’t claw back the cash expended. He told me that his “non-confirmable recollection” is that the percentage that did at least get their money back ranged from 85% to 92%. He recalls “incredulity” from his counterparts in other houses, whom he believes simply couldn’t “wrap their minds around the meaning of the statistic: revenues minus disbursements.” He went on to tell me that this number “seemed effectively irrelevant to them. They had an overriding and deeply flawed notion of something they called title-profitability. They thought they were analyzing the profitability of a title with their ‘p&l’.”)

Despite the apparent immutability of the fact at the time that most titles brought in incremental margin, many publishers who were losing money would come to the opposite conclusion. They would decide they should cut their lists, pay more attention to the titles they published, and create more profits that way. I remember discussing the futility of that approach in the 1980s with my friend and client, Dick McCullough, who was at that time the head of sales at Wiley. When I observed that the publishing graveyard was littered with the bones of publishers who pursued cutting their lists as the path to profits, Dick said of their efforts to cut “yes, and very successfully too”.

I got another lesson about this reality in the late 1980s when a company I consulted to (Proteus Books) sued its distributor (Cherry Lane Music) for a failure of “due skill and competence” in the sales efforts for Proteus Books. One of Proteus’s expert witnesses was Arthur Stiles, who had been Sales Director at several companies, including Doubleday, Lippincott, and Harper & Row. Stiles confirmed that big and competent publishers routinely put out thousands of copies of titles in advance of publication, with extremely few failures in terms of getting the initial placements. He was testifying in a time that was still like what my father experienced: the industry’s title counts were growing, but so were the the number of bookstores in which they could be placed.

Those days are over. And, coupled with the ebook revolution, the implications of that are profound.

A few things happened to change the environment so that it became no longer true that even big publishers could get all the distribution they needed on every title to assure a positive return of cash.

1. The title output of the industry has grown enormously. In the 1960s, the total output of the industry was in the neighborhood of 10,000 titles a year. Now it is something more than 30 times that number published traditionally, with a multiple of that number being self-published. Each new book is competing against more new titles every two weeks than a book fifty years ago would have competed against in a year!

2. Nothing published ever dies. Fifty years ago, stores were smaller and, while there’s no easy way for me to measure this, I’d guess that the active backlist across publishers was probably no more than 25,000 titles. Superstore growth in the 1980s, the efficiency of Ingram as a national wholesaler, and computer systems that helped stores track their inventory and sales fueled backlist expansion. Even in the early 1990s, the total of truly competitive titles was probably in the low six figures. But then came Amazon’s unlimited shelf space and Ingram’s Lightning Print to deliver one copy at a time, and, even before ebooks, the competitive set of available titles had probably jumped to seven figures.

3. Bookstore shelf space is declining. Nobody who has been reading this blog needs much elaboration on that point.

What that means is that a list-cutting therapy that McCullough and I saw in the 1980s as suicidal and which McCormack explained repeatedly was folly is no longer crazy. (Oh, how I wish my dear departed Dad was around to discuss this with!) And the new conjecture in this blogpost is that the day might come when a publisher with an extensive backlist might decide that the most profitable path would be to hardly publish any new titles at all!

The portfolio of any longstanding publisher today contains a lot of backlist which is pure profitable gold in the ebook era. Contracts often give publishers the rights to a book for the life of copyright if they continue to sell it. (I’ll confess here that there is a caveat to this point coming up in an italicized postscript below.) So a major publisher doing $600 million and up (of which there are six), almost certainly has triple-digit millions of sales in its backlist, which is increasingly shifting to digital. Even the most sober industry observers are seeing revenues exceeding 50% from ebooks in the next two or three years, which would mean that substantially more than half the units of these books are selling electronically.

So, let’s say you’ve got a company doing a billion dollars in annual revenue and barely eeking out a profit or perhaps even losing money. With a strategy of continuing to publish what you own as ebooks, you can see digital backlist revenue of $150 million, decaying by 10% a year, with gross margins giving you $100 million or more in cash flow. Offloading all the print operations for which you own rights to a distributor or competitor will provide incremental revenue as well. (You only need help for the offline print sales. Getting the online sales requires no operational capability.) You’d then need a minimal organization to do some marketing (not a lot), sign up and put out some additional titles that would be chosen for being risk-free (not a lot), and to handle the administration and royalty processing for your thousands of contracts. Five or ten million ought to cover those costs very handily.

Of course, the other thing you could do is sell your rights to that backlist. But I think it would require somebody to overpay in relation to your net discounted cash flow to make that attractive because the costs of keeping it all for yourself would be so minimal.

One hopes that today’s publishers are looking at the simple statistic Len and Tom authored: revenues minus disbursements by title. No doubt today’s biggest publishers are looking carefully at the performance of their copyrights in a way that sorts the new titles from the backlist. But doing so is only useful if they’re apportioning their costs properly across the title base. If they are, what is described in this post will be evident if and when it is true. In the meantime, careful focus on new title acquisitions and accepting that the healthiest way to manage for the future might be to reduce the commitment to new title development will have to replace the clear truths that guided smart publishing strategy for previous generations.

The history and analysis are all valid, but there is one big monkey wrench in this scenario I’ve sketched. There is a provision in the 1978 copyright law that allows authors to reclaim rights to their books after 35 years. Titles published in 1978 become eligible for reversion, called “recapture” apparently, starting in 2013. (With logic that is ironically typical of what Congress does when it touches copyright law, older titles are on a slower track for liberation.) Agents are planning for this; publishers will have to deal with it. I am given to understand that publishers can only retain these books for life of copyright by, in effect, reacquiring them. (Should be lots of fun!)

So, in fact, the backlist attrition might be faster than 10% (but it might not, because ebooks may create more readers for backlist than we had before as well.)

It is also true that many publishers have already been moving in the direction I suggest: pruning their new title counts and being particularly cautious with midlist. Of course, there was a conviction by many that list-pruning was a good strategy even before it actually was a good strategy, but the execution of it has been much more rigorous over the past decade.

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If you imagine the publisher’s business as one that divides most of the consumer’s dollar between two core stakeholders in the supply chain — the retailer and the author — you’d have a pretty accurate picture. The publishers, at least theoretically, decide what the retailer’s “working margin” will be with their discounts and agency agreements. And they decide what the author’s share of the proceeds will be by the advances and royalty rates they offer and agree on through their contracts.

These are the essential, and basically non-substitutable, trading partners for a publisher. They can choose a different printer or publicity firm without changing the character of their business or their economics. But the author relationships are existential and defining and the intermediaries who reach the public and enable the consumer transaction are indispensible.

Plenty has been written, by me and others, about the challenges trade publishers face due to the decline of shelf space for books. But, in some ways, it looks at the moment like those (also including me) who have said that publishers are in big trouble as bookstores decline are mistaken. Sales in stores are declining and sales of print books are declining but total sales, including ebooks, are holding pretty firm and the big publishers are reporting pretty healthy results. So if declining bookstore shelf space, which we have clearly seen over the past few years, doesn’t weaken trade publishers’ commercial performance, what will?

I have written before about asking my friend and sometimes-collaborator Mark Bide a similar question about another segment of publishing. As a John Wiley stockholder, I was worrying 15 years ago about their reliance on journals for their revenues and profits. We thought way back then that journals were likely candidates for disintermediation. After all, the university pays the professor’s salary to write the journal article that the publisher gets for free and then monetizes by charging the same university’s library for a subscription to the journal. Even in the early days of the web, we could see the potential for professors to post their own articles and for peer review to be crowd-sourced, delivering the IP to the academic community faster and saving universities a boatload of dough.

At the time Mark said the thing to watch was whether the publishers stopped getting the submissions. If the professors didn’t need the journals, they’d stop getting the raw material that feeds the whole engine.

So far, it hasn’t happened (and I still own the stock). Despite lots of open source academic publishing, the journals remain important brands in their fields and the professors want the journal publication as a credential. (In books we know that lots of people read the book and have no idea who the publisher was. In journals it is the opposite: more people will know the professor published in the journal than will read the article.) The business has changed and library budgets grow considerably more challenged, but most of the journals, including Wiley’s, remain highly profitable and highly desirable to the authors.

In fact, Mark identifed the point of vulnerability for trade publishers. If the stores and other intermediaries they rely on go away, they have to find other ways to sell their books. That’s a challenge, no doubt.

But if the authors don’t play along, they have nothing to sell. Making deals with authors is the publishers’ price of admission to the game.

As the central player whose contracts and sales terms manage the distribution of revenues throughout the supply chain, how publishers view the commerce of our business is central to how it operates. This has, historically, been challenging. The activity of publishing is complicated and its economics are complicated.

A couple of months ago, Michael Cader pointed out to me that the big publishers were making a serious tactical error in the way they were accounting for sales under the agency arrangement. (Quick reminder: under agency, the publisher is considered the “seller”, not the retailer. The publisher sets the price which the retailer can’t change and pays the retailer, or sales “agent”, a fixed 30% of the set price paid by the consumer.) Publishers simply imitated their convention from the wholesale terms transactions they’d always done before. They book as revenue the 70% they keep of the sale, not the full price the consumer pays (and which, if they did, would make the 30% paid to the retailer a “cost of sale” like printing or shipping is in the physical world or like DRM costs might be in the digital world).

Cader spelled out two important benefits that would flow to publishers if they made a different choice of how to account these sales. (He says, and I trust him, that GAAP rules don’t require them to employ the methodology they do.)

One is that that their “top line”, their “total revenue” line, would be higher. That’s critical to foster a helpful perception in the investment community, which worries when they see declining revenues. And if publishers insist on sticking to booking only the 70% they get on the ebook sales as the total revenue, they’re locked into declining revenue for years to come as competition drives down ebook prices (probably) and as ebook sales continue to replace hardcover print sales (for sure).

The other perception publishers are manipulating against their interests is within their negotiating community. Both agents (on behalf of authors) and the big accounts publishers sell through look at the publishers’ margins as a percentage of sales to decide if there’s more there for them to get. Reporting ebook sales as they do, publishers are achieving about 75% margin on ebook sales (because they give 25% of the take to the author.) If they took the full price as the revenue, they’d be achieving 52.5% margin on those sales (although, of course, nothing really changes.)

There are fewer knock-on problems for the publishers when the big accounts move to convert this (apparently excess) margin into changed business terms than if they allow agents to change the author deal. Changes forced by Amazon or Barnes & Noble could conceivably affect only them, depending on how the change in terms were framed.  But were an agent to succeed in pushing up the contractual ebook royalty, that change could affect a whole host of other contracts because of most favored nation clauses. That could mean royalties are suddenly due on contracts that under the previously-negotiated royalties hadn’t earned out their advances.

So we acknowledge that the price of raising contractual ebook royalties could be high. But it still might be worth it. As we will see later, more margin given to accounts achieves no incremental gain for the publishers; more margin to authors does.

There’s one more very big reason for publishers to change their accounting in the way Cader’s insight suggests. Right now, every big publisher’s life is being disrupted by state, federal, and international investigations into the legality of agency selling, which is characterized by some as “price fixing”. The defense is that the publisher, not the retailer, is the seller and it isn’t illogical for somebody selling something to charge the same price to every customer no matter how they reach them.

If “I’m really the seller” is the defense, it would be much more persuasive if the accounting supported that paradigm. As it stands, the accounting contradicts it.

The total situation not only argues for publishers to change their accounting, it also argues for them to give a bigger percentage to authors and to do it now! Doing so would deliver them two important benefits. It would reduce the apparently excess margin that their retail trading partners are noticing and coveting. But — of much greater importance —  it would also reduce the differential between what Amazon (and who knows, perhaps B&N in the future) offers an author and what the publisher offers, making it more difficult for Amazon to lure their authors away with higher royalty terms.

In fact, they might even get some sympathy from Barnes & Noble about having less excess margin to trade if they can make it clear that giving more to authors is keeping them out of Amazon’s clutches, which B&N and all other retailers absolutely need them to do.

Part of what prevents publishers from seeing merit in paying more to authors is their high cognizance of another accounting element they track: unearned advances. Unfortunately, either publishers aren’t looking at that category of expense in the right way or they’re eliding important distinctions when they discuss those unearned advances with agents.

Because all unearned advances are clearly not created equal. All of the biggest authors pile up unearned advances because they are intended to be unearned. When the agent for a megaselling writer sits down with a publisher to negotiate the advance, they are often negotiating around dividing up what they both see (perhaps without explicitly saying so) as the total revenue pie likely from the book. That leads to agreement on the advance against royalties, which divides the revenues at what is effectively much higher per-copy royalties than standard contracts call for.

But then, for reasons of “not establishing precedent” and, perhaps, not kicking in “most favored nation” clauses that could exist in other contracts (all in the publishers’ interest), the actual contract has conventional royalty splits. The book would have to sell a big increment over expectations to “earn out” on conventional royalties. That’s very unlikely because these are deals done with highly established authors where the track record is a good predictor of future performance.

So some of these “unearned” advances were never intended to be earned; they simply measure how much of a premium the publisher was willing to pay to get certain revenues into the fold.

In other words, publishers aren’t trying to manage all unearned advances down, just some of them. And if they don’t make that distinction (and some further nuance to their measurement) when they analyze this, they’re doing themselves a disservice in a number of ways. Right now, one of those ways is that it is persuading them not to pay higher royalties when doing so could well be in their interest, both because it will keep the author away from Amazon and because it leaves less margin on the table for their trading partners to pursue.

Declared royalty rates that are closer to what Amazon can offer are critical for publishers to turn around a PR war for new authors that they have been losing. The focus of a great deal of the author community buzz is around the ebook royalty differential. Disadvantages of self-publishing — the biggest three being the actual financial cost of necessary editing and core marketing (like a cover); the difference in risk between taking those costs versus taking a revenue guarantee in the form of an advance; and the additional marketing and sales a publisher generates (right now largely through the merchandising and additional revenue from print) — are too easy to ignore or elide. The royalty comparison is straightforward and apparently persuasive when it is as stark as it is now.

A 50% ebook royalty from an agency publisher on revenue after agency commissions would match the 35% royalty that Amazon pays when they pay advances and publish. But publishers don’t actually have to reach that number to be offering  a better deal because they offer sales through other channels Amazon currently either doesn’t reach or actually prohibits employing when they pay an advance to publish. It’s just a tough argument to make when they offer half that number.

One more reflection on unearned advances to bend your mind in the other direction, and then we’ll stop. When the publisher sells a copy of a book that has an unearned advance, the cash flow for this month on the book is better, because no payment to the author is triggered. If publishers paid authors higher royalties on ebook sales, they’d have fewer dollars in unearned advances (because books would earn out faster) very quickly. Of course, that’s not “good” for them because it means they have to pay new royalties on those books as they sell. This is just to say reiterate what I said above: publishing economics are complicated. Anytime you hear them oversimplified, like by somebody lumping together all “unearned advances” into a number or a percentage and wielding it like evidence or analysis, have your grains of salt handy.

I make no secret that my view of the world is publisher-centric. I was brought up that way and I’ve spent 50 years learning about the book business with that point of view. And I also make no secret of my high regard for the current leadership of the biggest publishing houses. With all due respect to the executives of my father’s generation and since, the current crop of leaders is the smartest and most thoughtful and innovative group I’ve ever seen in those slots. But (unless I’m missing something, which is, of course, always a possibility…) they all appear to be making the same mistake at the moment. I would sum up the observations from this post with three suggestions for today’s biggest publishers:

1. Change the way you account for ebook sales in the way Michael Cader suggests: call the consumer payment the top line revenue and the payment to the retailer a cost of sale.

2. Recognize that no excess margin will go unpunished. The forces of big author agents and powerful retail channels will assure that. You know there’s a minimum margin you need to survive; in fact there will also be a maximum margin you’ll have any prayer of holding onto.

3. Pay authors more so you can pay retailers less. There will be a direct connection between the two.

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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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The end of Borders took place within a larger context.

I was in Italy for the IfBookThen conference last February when Borders’ impending bankruptcy was a rising expectation. Somebody in the audience asked me if I attributed Borders’ difficulties to ebooks. I said:

“When the flu hits town, the old and sick die first.”

Ebooks present an enormous challenge to brick-and-mortar stores. And the growth of ebooks over the past three years or so has been nothing short of astonishing, even to somebody like me who expected a more gradual rise to have started much sooner. (The IDPF chart which shows the growth in the market, sharing data actually collected by the AAP, has apparently not been updated for the past two quarters, but this gives you the idea.)

But the disruption to brick stores started before ebook sales were even visible with a microscope, more than a decade sooner, when bookstore customers started migrating to online buying. Ebooks just accelerated what had been a trend of traffic and sales erosion that had existed for quite some time.

Ed Nawotka of Publishing Perspectives has a nice account of some serious errors Borders made around the turn of the century. Replacing a book-experienced management with merchants from outside the book trade was the gateway mistake. Eliminating the local marketing function was one that probably came from it: the local differentiation and customization required for a successful bookstore is much greater than what is needed for pets or groceries and successive managements from outside the book trade wouldn’t have known or understood that.

Turning over ecommerce to Amazon showed a shocking lack of digital vision. It is often forgotten that Barnes & Noble once made half the same mistake: they originally owned their BN.com ecommerce capability jointly with Bertelsmann until they bought their partner out. And Barnes & Noble had obvious challenges reconciling their online business with their overall business until they brought in new management that clearly saw the online business as the future. That wasn’t until much later in the century’s first decade. The problem both chains probably saw is that the skill sets required to run a successful brick store chain didn’t apply to creating a digital business so they were nervous about investing too heavily in it. When the time came that it was obvious that they had to do so, Borders was too weak to recover and Barnes & Noble, despite a web operation that had serious flaws, at least had a platform and customer base to build on.

And they had strong cash flow from a healthy, well-managed in-store print book business.

The category management idea Borders tried to implement and which Nawotka documents was a fiasco in every way: poorly conceived, poorly executed, and an idea that, if it could work for the book business at all, would have to be selectively applied, not forced on every section of the store.

The reduced selection concept that was underlying category management suggests that perhaps Borders had an early and accurate read on the fact that the Internet had diminished the power of selection in a brick store as a magnet for customers. It is true, and it was true then, that the power of aggregation had shifted from offline to online. It is just impossible for any physical location to deliver the choice that an online bookstore can. Most people now know that if you want to choose from the widest possible selection of just about anything the the last thing to do is go to a store. And that’s particularly true of books, which you don’t have to smell or taste or try on for size.

In my opinion, the defect in Borders that led to their ultimate demise was “none of the above.” It was their supply chain, which for well over a decade has been an inefficient mess.

The irony is that when Borders started, inventory management was their signature strength. The Borders brothers developed a tracking-and-purchasing system which was state of the art at the time (the 1980s) and turned it into an expansion opportunity. It all worked so well that they were able to sell the chain to K-Mart, which already owned the mall store chain, Waldenbooks, in 1992. That was probably the beginning of their downfall.

Borders and Barnes & Noble were on parallel paths building out superstore chains, featuring bookstores that pulled over 100,000 titles together under one roof. Until Amazon arrived in 1995 and started gaining traction, this was a nearly-irresistible proposition to the heaviest book consumers. Both chains, fueled by Wall Street investment, grew their number of large stores quickly. The stores were free-standing destinations, not in large shopping malls.

But this is where the chains diverged. Barnes & Noble made a substantial investment in a supply chain infrastructure. They built what was effectively an internal wholesaling operation, putting backup supplies of the books their stores carried within one day’s delivery of most of their chain and within two day’s delivery of just about all of it. They built systems to set stocking levels and maintain them. My first client work at B&N was in the late 1990s when they were crawling with logistics experts to make inventory management rules and policies, but they were also smart enough to want some book inventory expertise from outside their company (not that they didn’t have plenty of it on their own payroll) to help with the planning as well.

Meanwhile, Borders was working on gimmicks like category management and their supply chain became increasingly bureaucratic and convoluted. They pushed books through a warehouse, but only to put stickers on them. This compounded the irony. In the 1970s, the B. Dalton chain that B&N owned had virtually invented computer-assisted inventory management based on stickers they put on the books carrying an SKU number. Walden, in the days before they were owned jointly with Borders, had leap-frogged Dalton in that regard by scanning the ISBN instead of needing a sticker. Now, 15 or 20 years later, B&N regained that same advantage over Borders. Borders suffered the delay and the cost of stickering new books as they came in and B&N didn’t have to.

But, much worse, Borders backlist ordering was haphazard (almost totally human-controlled, whereas B&N’s was largely automated) and infrequent. B&N literally ordered from many publishers every day; Borders was ordering from major publishers as infrequently as every six weeks.

When you order infrequently, you face two choices. You can be overstocked on many things or out of stock of many things. There is no other alternative.

The complications to inventory management posed by the granularity and diversity of book selection utterly defeated the non-book veterans that serially ran, or mis-ran, the company. The lack of a digital strategy compounded the problem, but the supply chain lunacy was the problem. The cost of inventory is the greatest variable expense of running a bookstore. If you don’t get value for your inventory dollars, your leases and your staff couldn’t save you, even if they were good.

What this means for publishers’ sales is a bit difficult to predict and will even be harder to discern. Sales this year have been skewed by the Borders inventory dump. Publishers’ editions elsewhere and the stores their books are in have been competing with liquidation sales. This depressing effect on other retailers’ business and, as a result, their willingness and ability to order from the publishers, will be coming to an end.

Publishers Lunch got together with Bowker a couple of months ago to ask questions of Borders customers to try to discern where the business would go. They have hard data to the extent that it is possible to develop it, having asked people how their purchases would be affected and where they would buy when their Borders was gone. Only 8% said they’d buy fewer books, although nearly 20% said they’d use the library more.

My own totally hunchy math, checked out in a rigorous conversation at dinner with a good friend who is a publisher, is that Borders constituted about 10% of a publisher’s business until very recently. My guess is that half that business goes to Barnes & Noble, most of the rest is split between online purchasing and independents (with online getting more, much of it in ebooks), and maybe 1% or so, or 10% of the old Borders business, will be “lost.”

Of course, the movement of sales from print in brick-and-mortar to print and ebook online will continue, so how much lift from this will actually be felt by chains, independents, and mass merchants is still up for grabs.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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I stumbled across a Sarah Weinman post from a few months ago that posits the notion that the chain bookstore (by which it would appear she means the superstores of the past 20 years, not the chain bookstores in malls that grew up in the prior 20 years) perhaps had a natural life cycle which is now coming to an end. She points out that the investment by Wall Street in the concept of massive destination bookstores enabled their creation, but ultimately resulted in great excess: too many stores with too many square feet to fill and too many books in them that don’t sell.

This is a really good and thoughtful post and I think the observation that the availability of capital built the excess which is now partly responsible for dragging down the structure is correct. But it triggered some additional thoughts that make me want to again trace the history (which I believe has called for smaller bookstores for several years) from before the 1990s when Sarah’s post picks it up and to look at bookstore history through the lens of tech development, which I think both enabled the massive bookstores and is now bringing about their demise.

The core challenge of bookselling — in the past, present, and future, online and in stores, for printed books or digital ones — is curation. How does the bookseller help the reader sort through all of the possible reading choices, of which there are, literally, millions, to find the reader’s next purchase?

In a shop, that curation begins with with what the store management puts on the shop shelves. The overwheming majority of customers in a brick bookstore who buy something choose from what is in the store.

The second line of curation in a shop is in the details of the shelving itself. Is the book face out or spined? Is it at eye-level or ankle-level? Is it on a front table in a stack? Is it displayed in more than one section of the store, which would increase the likelihood it will be seen?

And the third line of curation in a brick bookstore is what the sales personnel know and tell the customers.

In the period right after World War II, there was virtually no technology to help booksellers with curation at all. Sales reps would call (or not) and show catalogs of forthcoming books from which the bookseller would order. There were hundreds of publishers any full-line bookstore would have to do business with. But there weren’t very many full-line bookstores then. Departments stores and small regional chains (Burrows Brothers in Cleveland, Kroch’s & Brentano’s in Chicago) were the principal accounts.

Frankly, what was stocked in most stores then had a huge randomness component. This was the world my father, Leonard Shazkin, encountered when he became Director of Research at Doubleday in 1954 and, a few years later, created the Doubleday Merchandising Plan. By offering the service of tracking the sales in stores, using reps to take physical inventories in the days before computers could track it, Doubleday took the order book out of the bookstore’s hands for the reordering of Doubleday backlist titles. That solved the problem of breaching the first line of curation. And the reps, now freed of the enormously time-consuming task of selling the buyer on backlist reorders title by title, had more time to affect the second and third lines of curation: the display of the books in the stores and the knowledge the store personnel had about Doubleday books. Sales of Doubleday books exploded, approximately quadrupling for the backlist.

In the early 1960s, Len saw the impact of increased selection from the bookstore’s side of the table. He had moved from Doubleday to Crowell-Collier/Macmillan, which owned the Brentano’s chain. He was put in charge. At first, Brentano’s weakest store was its outlet in Short Hills, New Jersey. They doubled the selection of books and, almost instantly, Short Hills became the best-performing store in the chain.

It took until the late 1960s, when shopping centers were springing up across the country, for the first two national book chains, Walden and B. Dalton, to develop and become a serious force in the industry. And in the early 1970s, Ingram and Baker & Taylor became the first national book wholesalers to cover the country with a wide selection of titles. Dalton and Ingram became industry leaders and both were boosted by technology breakthroughs.

Dalton installed smart cash registers that enabled them to key in a number for each book, telling them what had sold. They didn’t use ISBNs, which were in their infancy; Dalton assigned their own SKU (stock-keeping unit) numbers which were stickered onto the books. The system was far from perfect, but it was revolutionary. For the first time, a bookseller and its publisher suppliers knew some real sales data in a timely fashion (Dalton’s numbers were tallied weekly). And the system also enabled Dalton to keep books that were selling in stock through automated means as well.

Ingram was the first wholesaler to employ microfiche technology to tell booksellers what was available right now in their warehouse. The weekly microfiches were, of course, primitive signals of availability compared to today’s instantaneous online capabilities, but this was also a revolutionary breakthrough. It enabled rapid resupply for all stores, including the chains, of the books they sold each day..

In the late 1970s, scanning technology had developed so that the Dalton key-in-the-SKU system could be leapfrogged by Walden using ISBNs at the register, which could often be scanned into the computer record. Also being developed at that time were various methods for automated order processing between publishers and their customers. By the middle of the 1980s, just before the period when Sarah’s narrative begins, bookstores were growing rapidly. The cost of putting the books on the shelves was dropping in relation to sales and the ability to put the right books on the shelves at the right time was enhanced for everybody. Good curation became much cheaper and much easier and, not surprisingly, sales of books grew dramatically.

Paradoxically, the decline of mass-market paperback distribution created new opportunities for the biggest publishers in hardcover. Mass-market grew on the illusory efficiency of forced distribution. For the first two decades after World War II, the rack-sized paperbacks would show up in the pockets at your local drug store or five and dime without a local buyer having to make a selection. That, combined with a much smaller share of margin going to the retailer, paid for the inherent inefficiencies of ham-handed curation. (And, let’s remember, only the covers had to be sent back for “returns”.)

But as paperbacks became more important and more mainstream, the biggest customers of the local wholesalers who racked them wanted better margins and more control. And the sales volumes had built to the point that many of them could now afford a buyer to deal directly with a number of mass market publishers, so the best accounts started shifting to direct. This weakened the original distribution network, but it opened up the opportunity for publishers to put books other than the rack-sized paperbacks into what had been rack-only accounts.

The first probes with larger trade paperbacks were with romance authors like Rosemary Rogers. The mass channels were more comfortable trying an experiment with format and price with authors they already knew.

The first great exploitation of mass distribution for what was really a trade book was by Peter Mayer (the boss) and Bill Shinker (the marketer) at Avon with the book “The People’s Pharmacy” in about 1975. Avon, a paperback house that published a lot of romance titles, had been one of the pioneers putting the larger books into the mass channel.

Bantam then used the technique for hardcovers, again starting with authors the mass channel already knew like Louis L’Amour and Clive Cussler, before hitting a massive all-channels mass-market home run with “Iacocca” in 1985. (And thanks to Jack Romanos, who was running things there then, for helping me get my recollections straight.)

The increased efficiency of distribution through technology and disintermediation in turn enabled discounting. Crown Books built a chain in the 1980s which mostly sold remainders and bargain books but carried a good selection of current titles with bestsellers deeply discounted. This fueled a further increase in unit sales.

Meanwhile, independent bookstores beginning to use primitive computerized inventory management systems were proving repeatedly what Brentano’s had demonstrated to Len Shatzkin in 1963: a big selection of books attracts a very substantial clientele. So technologically-driven efficiency lent a hand to delivering a more attractive selection (curation) by making it a bigger selection.

And in the late 1980s, these two things — the Crown discounting attraction and the independents large selection attraction — were combined by entrepreneurs in Austin, Texas, who created a store called Bookstop that provided both. Bookstop became the prototype “super” bookstore and, before long, Wall Street money was financing Barnes & Noble (which had bought Dalton) and Borders (which had bought Walden) to roll out these bookselling behemoths nationwide.

Which is where Sarah’s post kicks in. But in the context of what came before, I’d add one element she didn’t to the analytical mix. It created a paradigm shift in curation using technology. It’s called Amazon dot com.

While even the largest bookstore had shelf space limiting its title selection, Amazon did not. Through good luck (licensing the Baker & Taylor database which contained a lot of out-of-print titles), good thinking (providing a clear “promise date” for the available books and assisting people’s search efforts by telling them explicitly if a book was not available), and brilliant execution (Amazon’s hallmark from its first moment until the present day), Amazon completely shifted the psychology of book shopping.

Until Amazon, if you wanted any particular book or if you didn’t know exactly what you wanted, your best strategy was to go to the shop with the biggest selection to try to find it. Once Amazon happened, the magnet of in-store selection lost its power for many customers. If you knew what you wanted and you didn’t need it right this minute, the most efficient way to buy it would be to go to Amazon and order it. Customers who would have been browsing store aisles and, if necessary, placing special orders with their bookstore, now just shopped online.

I first saw what is clearly the impact of this through some work I did with Barnes & Noble sales data for university presses about a decade ago. In the recent years before that work, starting in the late 1990s, Barnes & Noble had tried to expand its selection of university press titles. This was applying a time-honored understanding of curation to improve the store selection.

But the results were beyond disappointing. Sales were not rising for the university presses; returns were. What became increasingly clear was that professors, the biggest market for university press books, were a leading edge demographic shifting their buying online. Makes sense, really, considering that they were often finding out about the books they wanted to order through something that had occurred online!

It was at that time — about 2002 or 2003 — that the late Steve Clark, then sales rep for Cambridge University Press and one of the publishers I was working with, told me that Amazon was a bigger account for his company than all other US retailers combined.

This was a big “aha” for me. I had grown up with the Brentano’s “selection” story and had seen it demonstrated over and over again throughout my career that increasing the title selection in a location increased the traffic and increased the sales. Technology had changed the reality. The magnetic power of a physical space full of books to bring in shoppers had been weakened. The surest way to find something that wasn’t as ubiquitous as a current bestseller remained a visit the store with the most selection. But that store was no longer in a building. It was in your computer.

And, ultimately, that is the single most powerful force bringing the era of the super bookstore to an end.

Of course, massive selection is only the first aspect of curation and the other parts are not nearly so well done online. Or, at least, they haven’t been yet. This is a major conundrum for the industry as bookstores fade and it’s the reason three big publishers have financed the startup Bookish. The stores depend on the publishers’ metadata to do this work and the publishers’ depend on the stores’ systems and merchandising creativity. Perhaps partly because the necessary collaboration hasn’t occurred, an effective online equivalent to in-store browsing hasn’t yet been developed.

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Sometimes something seems very obvious to me, but other people — smart people I respect — don’t see it that way and it makes me wonder if I’m missing something.

What I’m thinking about that way today is the future of “open territories” in the ebook world.

When English-language rights are sold to US and UK publishers, some territories outside the home markets are “closed” and others are kept “open.” Closed territories are reserved to the publisher who owns them; in open territories a US edition and a UK edition can both be legitimately sold.

For most of my career in publishing, Europe was an open market. Both the American and British editions of a book would be available there. Although currency fluctuations came and went and could temporarily change these things, most times the US edition carried a lower cover price (when converted to the local currency) but the UK editions were usually more widely available. Sales reps from the UK tended to call on the once-small but persistently growing number of bookstores that carry English-language books. British publishers had warehouses that were closer, shipping costs that were lower, lead times that were shorter, and customer service groups that were more comfortable dealing with Europeans.

With the coming of the EU, British publishing has moved to formalize and make contractual what was previously just their natural advantage. British publishers pointed to the fact that once an American edition was sold in Europe, EU rules would allow its importation into the UK itself! So unless the European market were closed to US editions, Britain itself was not closed to US editions. And that, quite naturally, was not a situation that British publishing could accept.

Of course, for an American edition to wind up on a British shelf would require two trips across the water: one from a US warehouse to Europe and then another from Europe to the UK. It might seem that this double-shipping would wipe out any presumed US pricing advantage, and I don’t recall any evidence of US-published imports showing up in any number. Nonetheless, for the past several years, UK publishers have succeeded frequently, if not universally, in excluding the American editions from Europe.

As with all things in publishing this subject is being revisited as publishing adjusts to ebooks.

As we know, the ebook market started to take off in the US in late 2007 and has grown to be a solid double-digit percentage of publishers’ sales with much higher numbers, often 50% or more, of the units sold in the opening weeks for major titles. In the past few months, British ebooks have started on a similar, perhaps even more accelerated, growth trajectory. So ebook revenue is squarely on the radar screen of the English-language publishers who are increasingly cognizant of English’s position as the world’s leading second language. Nowhere is this effect more evident or the future sales expectations greater than in Europe.

Right now, the European ebook market is still miniscule. Germany, one of the countries with the most advanced local-language digital infrastructures, recently reported ebook sales of one-half of one percent of the market. But it is not uncommon for German bookshops to see double-digit sales percentages of English-language books in their shops so we know there’s an English-language market there. English-language publishers, with the experience of explosive growth in their home markets under their belts, have good reason to expect the same thing to happen in Europe and for them to be among the principal beneficiaries.

But there’s a problem. Or, at least, I think there’s a problem.

The open-market competition for print books is waged primarily around service. The reps that call on the stores tend to take business away from the companies that call less often. The advantages of proximity and familiarity favor the British; sometimes the advantage of price can favor the Americans. But no trade publisher in either country tries to create cheaper, locally-priced editions of trade books for the European market.

In the ebook market, the competitive factors that prevail in print are moot. If a store sets up to sell ebooks, it will list every one in the catalogs it offers. As the ebook market matures, that will mean that, if the territory is open, both the UK and US editions will be available to the consumer. And with no other basis on which to make the decision of which to buy, the customer will almost certainly choose the ebook edition with the lowest price.

The logic of this seems inexorable to me. As the market grows, as the publishers become more aware of it, and as the consumers learn more about what is on offer, offering a lower price will be the only effective way to grow share in an open territory. This is damaging to everybody except the ebook consumer, who will get windfall price cuts. The publishers will gain share, but lose revenues. The authors, operating on a piece of the sale price, will lose revenues. And the lower prices for these English-language ebooks will further erode local-language sales and further undercut brick bookstores.

(European bookstores are extremely vulnerable to sales erosion as the market shifts to digital because the English-language selection they offer will look increasingly paltry compared to what will be available online.)

But some very smart agents seem to see something different from what I see. At our “eBooks Go Global” conference at BEA last week, Simon Lipskar of Writers House specifically declined to insist on closed markets and celebrated the virtues of “competition” on behalf of his writers. In another BEA session, Stephanie Abou at Foundry was quoted by one reporter saying “our goal to get authors the best shot at being published the best way. what that means is we have this fight to keep Europe non-exclusive.”

Of course, timing is everything in life and in dealmaking. There really is no European market for ebooks to speak of yet. There are structural impediments to growth. A panel including Google, Kobo, Ingram, and OverDrive at “eBooks Go Global” spelled out some of the complex local compliance issues that make it take time to set up a store in each new country. My concern about a “race to the bottom” assumes a much more developed market than we have today, with both US and UK editions made ubiquitously available in a European ebook market that resembles what we’re seeing today in the UK, if not in the US. That may be two years away, or even more.

So maybe Simon and Stephanie do see what I see but they might also see it as far enough away not to be relevant yet for deals they’re making now. But maybe our difference is more fundamental. They both referenced “competition” in expressing support for open territories. It is precisely my concern about the effects of price competition that it seems to me they’re ignoring.

It feels to me like I must be missing something somewhere. Not only do I think the agents should be moving to close markets in the interests of their clients, I think publishers in both New York and London should be moving to close markets because they’ll ultimately make no money on the books for which the markets are open. I’d say it is better to control a closed market for half your list (or even a third of it!) than have an open market for all of it.

This subject is of great interest in the US but it is existential in the UK. Sales made in Europe are already critical to UK-based publishers, on titles where Europe is open as well as on titles where they control it contractually. Since UK publishers are already trying to close the market in their favor for print, one can hardly expect them to be less zealous about closing it for digital books. But their leverage to close Europe, for digital or print, is primarily based on their ability to sell print in the UK. Those are the sales they can make that nobody else can. And those are the sales that finance serious advances that nobody else will pay.

But will that leverage vanish as bookstores diminish and the sales of print become less important?

The panel that will explore this subject at our “Global Perspective on Digital Change” conference in London on June 21 will be my next chance to be enlightened on this subject and shown the flaw in my thinking if open territories for ebooks are not a race to the bottom. We’ll have publishing CEOs Richard Charkin of Bloomsbury and Toby Mundy of Atlantic Books and agent David Miller of Rogers, Coleridge and White discussing this topic with Philip Jones of Future Book moderating. I’m sure this panel, along with many others on that day, will be opening some minds. Mine is lined up to be among them.

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Although the value chain in trade publishing for the last century has, for the most part, kept retailers between publishers and consumers and kept publishers between retailers and authors, that has never been 100% true. Doubleday covered the whole value chain in the 1950s, when it not only owned the Doubleday Book Shops and the Literary Guild book clubs, it also owned printing plants. In the early 1960s, the Crowell-Collier Publishing Company bought (and eventually renamed itself) Macmillan (and that’s the old Macmillan that became part of Simon & Schuster in the 1980s, not the new Macmillan which was what the renamed Holtzbrinck group became a few years ago) and they also bought the Brentano’s bookstore chain.

I sold books to both Brentano’s and Doubleday in the 1970s and I don’t recall it ever being an issue that they had publisher ownership. Of course, that was before trade publishing consolidated into anything remotely resembling a Big Six.

After those two chains were sold in the 1980s (and I’m going to admit that I forget whether Walden which became Borders or Dalton which became Barnes & Noble bought each of them), in a period of two decades when publishers and book retailers grew enormously, the neatness of the division between the publisher’s role and the retailer’s was mostly respected. A number of retailers — notably B&N and Borders, but suppliers to the mass merchants as well — bought bargain books directly from packagers during that period, but joint ownership of significant publishing and retailing capabilities was, temporarily, suspended.

But Barnes & Noble was particularly aggressive at direct sourcing of book content and around the turn of the century announced the goal that 10% of their volume should come from directly-sourced product. To further that objective, in late 2002, B&N outbid several other companies (including at least one very large publisher) for the independent niche publisher, Sterling. Immediately, Borders stopped buying Sterling books and Barnes & Noble started stocking a lot more of them than they had in the past.

Meanwhile, the Internet was forcing everybody to rethink the paradigm. Even before the Kindle was launched in November, 2007, Amazon was encouraging authors to “publish” with them directly. All they could offer was the connection to the vast majority of online consumers — no print runs, no presence in any brick stores — but this could still be attractive and productive for some authors. My friend and client, David Houle, a futurist who blogs at Evolution Shift, published his “Shift Age” book with Amazon before Kindle and has sold thousands of copies, many of them at his own speeches. He’s very happy earning about $7 on every sale of a $17 book. No publisher was going to offer him as much as a third of that per copy.

As online sales grew, and then were further fueled by ebook sales starting in late 2007, it became increasingly obvious to many that publishers would have to start selling direct themselves. Some did. Harlequin has done so for years. F+W Media, one of the most aggressive publishers employing a vertical community strategy, announced a year ago that they would use Ingram to sell their books as well as those of their competitors to their direct audiences. Macmillan announced a similar plan for science fiction through Tor.com, although that idea has apparently never been implemented.

Part of what has discouraged the big publishers from selling direct is the threat of retaliation by Amazon and Barnes & Noble, both of which are much happier if the customer contact for big books is through them, thank you very much. Since both companies really exercise direct influence on many consumers, big publishers are inclined to respect their concerns.

To a certain extent.

And then we had the events of last week.

Amazon, which had previously established imprints for author-direct publishing and for translations of foreign works and had created a relationship with Houghton Harcourt to address their prior inability to get brick store distribution for books they owned, announced a new romance imprint called Montlake Romances. (Personally, I thought it was a bit strange that they announced it with just one book coming this Fall, rather than 10 books coming next week!) That put them squarely into the publishing business in a new way, and one could only imagine that the mystery shoe and thriller shoe and sci-fi shoe will be soon to drop.

In the same vein, Barnes & Noble has a program called Pub It! to enable authors to by-pass publishers and earn bigger royalties. They also still own Sterling, which gives them in-house the distribution capabilities that Amazon had to team with Houghton Harcourt to get. And with Sterling they also have the entire infrastructure in place to deal with authors and their care and feeding which could constitute competitive advantage when the gloves come off chasing brand-name authors.

So both of the giant retailers are looking more and more like publishers.

But it turns out the publishers were cooking something up too. On Friday, we learned about a new business called Bookish, which will be the “new digital destination for readers.” In its announcement release, Bookish promises to use content and software tools to promote discussion and discovery around books and to answer the reader’s question: “what book should I read next?”

What was most eye-catching about Bookish was its backing by three of the Big Six: Hachette, Penguin, and Simon & Schuster, who have apparently been planning this move for quite some time.

What was downplayed, but perhaps most significant, is that Bookish is trying to straddle the same fence that Google, and, to a lesser extent, Kobo are: being an ally of existing retailers while selling direct to consumers itself.

It really is impossible to speculate intelligently about Bookish’s potential for success. What they’re suggesting they’ll do is reminiscent of Copia and Goodreads and Library Thing, and none of them have yet replaced the marketing power of the brick store, a fact which is front and center in the minds of the trade publishers who depend on that merchandising.

But it will certainly accomplish one thing: giving the big publishers a direct path to the consumer. The hunch here is that if any one of these three big publishers had gone aggressively into direct sales, they would have risked serious retaliation from both of their two biggest customers: Amazon and Barnes & Noble. But it will be hard for them to retaliate against three publishers who, among them, deliver about half the biggest commercial books in the marketplace.

Let’s remember a year ago January when Amazon briefly sought to block agency terms for ebooks by removing buy buttons from Macmillan books when they briefly thought they could stop the plan from being implemented. As quickly as it became clear that the five publishers determined to implement agency would not be deterred from doing so, Amazon retreated. (In fact, they graciously joined Macmillan in compensating authors who might have lost sales during the brief period the buy buttons were inactive.)

And that brings up another important point about Bookish: what it says about the common interests among fierce adversaries, which the trade publishers certainly are. The times call for collaboration among competitors in trade publishing. It is a little bit nuts that several of them are building competing romance, mystery, and science-fiction “communities”, which only leaves the field wide open for a third party to be the biggest aggregator in each of the verticals and also allows much smaller competitors to look comparable on the web. But collaboration models have to withstand anti-trust concerns. Presumably three of the biggest publishers jointly investing in this web venture will.

Whether or not the Bookish team can invent the general book marketing future, or, through competition, spur Amazon and BN.com to be more creative about online merchandising, remains to be seen. But this past week certainly gave us further indications that the publishing value chain is being drastically reshaped and that the neat roles we’ve been used to for 100 years have less and less applicability to publishing’s future.

I chuckle when I think about a very smart person from a major house who was telling me just about a year ago, right after agency was implemented, “whew, now I think things can settle down for a while.” Actually, “things” are just getting moved over to the fast track so they can really change. Montlake and Bookish within a day of each other; Barry Eisler (who’s speaking at our “eBooks Go Global” show at BEA on May 25) and Amanda Hocking going in opposite directions within a week or so of each other a couple of months ago; these are significant events but they’re also signs of accelerating change.

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I wasn’t planning to write a post this past weekend for Monday morning publication. But then Joe Konrath and Barry Eisler contacted me on Saturday to tell me what Barry is up to. I’ve read their lengthy conversation about Barry’s decision to turn down a $500,000 contract (apparently for two books) and join Joe (and many others, but none who have turned down half-a-million bucks) as a self-published author.

To use a metaphor that connects with the current news: this is a very major earthquake. This one won’t cause a tsunami and a nuclear meltdown, but you better believe it will lead everybody living near a reactor — everybody working in a major publishing house — to do a whole new round of risk-assessment. Because, in its way, this is more threatening than the earthquake that just hit Japan. This self-publishing author will much more assuredly and directly spawn followers.

As news of Eisler’s decision spreads, phones will be ringing in literary agencies all over town with authors asking agents, “shouldn’t I be doing this?”

I submit a bit of perspective from another part of publishing: scholarly journals. A few years ago I asked my very smart friend Mark Bide, who knows that part of publishing much better than I do, how I’d know if the business model for journals — by which they publish work the university paid the professor’s salary to write and then sell the published version back to the university’s library — was threatened. Mark told me to watch their submissions. As long as the scholar-authors felt the need to be published in journals, the journal business model would continue to function.

I am not alone in having long known that self-publishing would ultimately present big authors with the opportunity to disintermediate their publishers, but I wouldn’t have thought when I asked that question that the sci-tech journal would hold its ground longer. Now I wouldn’t be so sure.

The decision for Eisler, at its core, was pretty simple. On the basis of what he’s learned from his friend Joe Konrath, who seems to be banking in the mid-six-figures self-publishing annually after a career as a non-bestselling author for established publishers, and what Eisler learned himself by self-publishing a short story, he figures he can earn more, much more, in the long run by publishing himself. This is not about ego or vanity; it is not about hating the publishing establishment. It is a coldly calculated decision (by an author who should make those well; he started out in life as a covert CIA operative) that says, in effect,  ”it would not be smart to take half-a-million bucks considering what I’d have to give away to get it.”

In the conversation between them which they just published, Konrath and Eisler touch upon many aspects of the publisher-author interaction and the author’s self interest. The conversation is smart, sophisticated, and mostly entertaining (although it is definitely too long; should they have hired an editor?) It is a conversation that everybody in the industry thinking about its future will likely read more than once (particularly the highlights, which are sure to be extracted by many people from the entire text.) Contained within it are certainly a number of points made to which there are valid rejoinders that could be offered. And certainly some will point out that Eisler’s BookScan figures suggest a decline in commercial appeal. But, in the overall scheme of things, the contentious portions are minor and the fact that his sales through publishers have been declining would mitigate the expectations for him somewhat and make any success he achieves on his own even more noteworthy.

The overall thrust is that an author has just made an entirely rational decision to turn down half-a-million bucks of big publisher money to self-publish. And what is said in their dialogue, but perhaps not emphatically enough, is that the direction of change makes this decision likely to make more sense to more authors each successive week than it did the week before.

What we do here at The Shatzkin Files is try to provide insight about the implications of news events rather than be the best reporter of them. If the implications of self-publishing to the business models of established publishers interests you (and what are you doing here if it doesn’t?), then you need to read the entire exchange they’ve published and the reporting others will do of it. I will limit this post (longer than mine usually are as it is) to a few points which for the most part are intended to extend their discussion, rather than contend with or correct it.

1. They didn’t do the math on what the loss of print sales and print merchandising might mean in dollars and cents and how to address it.

One of the themes that I’ve been working on for some conferences I’m planning (more on that upcoming later this week) is how the arguments about rights, royalties, and publisher leverage change as the balance between digital and print sales continues to shift. What this conversation can make you forget is that far more than half of most books’ sales, perhaps more than 70% for the majority of titles, are still print copies selling because they’re on-hand in a physical retail location. And that’s in the US. The number is higher in the UK and is almost certainly more than 90% in most other places in the world. So even if the math Konrath and Eisler put forth showing that the author share of ebook sales can increase by three or four times through self-publishing; even if we ignore (as they did) the fact that the higher percentage will be on a lower retail price (they trumpet the lower retail price they can charge as a key motivation for the shift); and even if we forget about the costs in time and actual expense involved in self-publishing, the author who follows this formula has to take into account the loss of presence and revenue from the retail channel.

But, having said that, the shift to digital seems to be increasing in speed worldwide. The percentage of print sales will keep declining. Eisler would have been signing a contract for a book that would come out a year from now and digital will be more important then, perhaps twice as important then, as it is now. And, as he points out in the conversation, the book a publisher would put out a year from now will have been selling and delivering revenue for a year before the publisher would have had something in the marketplace. To paraphrase the great author and publisher, Mark Twain, “the self-publisher will be halfway round the world before the legacy publisher can get his boots on.”

And that leads me to…

2. I’d be amazed if Barnes & Noble doesn’t detect an opportunity here to do a completely different kind of deal. What if B&N went to Eisler and said, “we’d like to buy print rights to sell your books just to our own customer base”? I can’t see why he wouldn’t just say “yes.”

What I’m envisioning here is something like a book club deal. B&N pays an advance and licenses the right to print its own copies for display and sale through its own stores and dot com. This could work many ways, but one might be for them to pay a royalty based on the actual selling price for every copy shifted. That would allow them to manage their downside risk on the printing because they could cut the price when sales slow down.

That might lead (or even trail) a wholesaler like Ingram or Baker & Taylor or Charles Levy to make a similar offer to print copies for sale through other retail outlets. The big publishers have taken a firm position (which, in my opinion, they’ll be figuring out how to walk back in a year or two) against buying print rights only, but one has to figure that a smaller publisher or a trade book distributor, looking at lots of underutilized capacity to handle print in the coming months, might see commercial merit in handling the print side of a major ebook bestseller.

Konrath does tout his sales through Amazon’s CreateSpace, which enables his books to be available in print for their online customer base. But he doesn’t talk about B&N’s PubIt program or setting up his title at Lightning Source, which would make it available as print online more broadly. None of these solutions put speculative inventory in stores, though, and that’s necessary to get the full marketing and sales impact for any book today (and probably for a few more years to come.)

3. Because Konrath has proved to be such a multi-talented combo do-it-yourselfer and finder-of-resources, the conversation doesn’t touch on the range of service providers that can help the potential self-publishing author for fees or for a much smaller percentage than a publisher would take. There’s mention of Smashwords, which is one, and of CreateSpace. But the self-publishing giant Author Solutions and lulu.com aren’t mentioned. Neither is BookMasters, a company we’ve worked with in Ashland, Ohio, which offers a range of self-publishing services, including access to all the editing requirements discussed by Konrath and Eisler along with some human-intermediary handholding that many authors will need. Perseus is building a similar set of services, extending its Constellation service, which began as the means to enable their roster of print distribution clients break into digital publishing. And Ingram has a suite of capabilities that could be extended, if they chose to make the investment, to be an author-service platform. The Scott Waxman Literary Agency is the first to have created a digital publishing arm that, with tweaking, could provide an author with the help they’d need. They won’t be the last.

The single greatest shortcoming of the Konrath-Eisler conversation, to me, was its Amazon-centricity, although there is one place in the conversation that begins to acknowledge that Barnes & Noble’s Nook sales are becoming significant. (Some publishers have told me that Kindle has declined from a share well north of 80% to one in the mid 50s while Nook is now accounting for 25% of their ebook sales in the US.) They don’t mention Kobo, which might have as much as a 7% share now. Sony is still a player. Apple’s iBookstore really shouldn’t be ignored. And Google ebooks is the lifeline for independent bookstores to sell ebooks. No author who wants to stay sweet with independents can afford to ignore putting their books into Google. In fact, Random House executives told us that the growing use of Google by indies was a factor in their decision to level the pricing playing field by moving to agency pricing last month.

And as the build-out of pathways for English-language books abroad continues, these non-Amazon, non-B&N players become even more important.

When Konrath started doing his self-publishing two or three years ago, working exclusively through Amazon made complete sense on an effort-to-reward basis. It is becoming increasingly important to cover more points of distribution, even digitally.

But that doesn’t change the calculation that much for Eisler’s decision. There are already helpers in the marketplace to extend beyond Amazon and there will, undoubtedly, be more. The conversation imagines this kind of service provision. And (if they’re competent) the ones now in the marketplace will be falling over themselves to introduce Eisler to what they can do for him.

4. OK, here’s what these guys really got wrong. They made a mistake about baseball. Their post is full of line drives off the wall, but their interpretation of baseball history is flawed.

I refer to Konrath’s observation about the Negro Leagues in baseball, suggesting that the reason the majors brought in black players was that Negro League baseball had become superior to Major League baseball. Actually, that wasn’t true at all. Although some integrated barnstorming over the years did result in black teams beating white ones from time to time, it was seldom suggested — and certainly no major league owners or fans thought — that the overall level of play was higher in the Negro Leagues. It wasn’t.

Beating a competitor that had somehow demonstrated its superiority was never the motivation for the major league teams to integrate. It was all about them competing with each other and not ignoring talent. The real history might contain a useful lesson for the legacy players in publishing today.

What drove Branch Rickey to sign Jackie Robinson was pure competitive zeal. He wanted to win. He wanted good ballplayers to help him win. If he was missing some good ballplayers by ignoring blacks, he’d stop ignoring blacks.

When he did that, other teams followed. And, in pretty short order, the Negro Leagues were destroyed because the best ballplayers they had were playing in the Major Leagues.

A similar effect has weakened, if not quite destroyed, Christian publishing in the US. A quarter century ago, Christian publishing and bookselling existed in a parallel universe to secular trade: different publishers, different stores, different commission rep groups. Just different. Then superstore expansion and some major Christian bestsellers led to the major chains starting to carry the best titles from the Christian publishers. That weakened the Christian booksellers, who were the ones that carried the wider range of titles from the Christian publishers which, in turn, weakened them.

Of course, Eisler hasn’t succeeded yet. He has a book to put out this Father’s Day that he turned down $250,000 to have come out next Father’s Day. If the over-under is whether he’ll have earned his $250,000 by then, which way would you bet? It would strike me as extremely ambitious, but if he can sell at $4.95, not entirely inconceivable. And, of course, you could set the bar at which you’d call it “success” a lot lower than that.

If the legacy publishing establishment can develop tools to deliver marketing at scale, adjust its contracts to pay higher digital royalties, and, perhaps, offer a “fee for service” model alongside its “advance against royalty” model, it might, like Major League Baseball did, weaken the infrastructure that is developing that will increasingly tempt authors (and readers) to abandon it. But it also could be that I was right four years ago when I said that the general trade publishing house was a dinosaur in the emerging world of 21st century publishing. Wasn’t it a natural disaster that was the catalyst for killing the original dinosaurs as well?

Konrath made the point that self-publishing just gives him more time to write. He and Eisler both expressed frustration about living with the long schedules and companion limitations of traditional publishing practices. From their perspective, it is wasteful to not start monetizing IP quickly after it is finished in the digital age and it is unnecessarily constraining sales and income to publish only one book a year, or even one per publishing season.

I’ve tried to recruit Joe to speak at conferences, with a total lack of success, because he thinks the best marketing he can do is just to keep writing. New stories help him market himself more than public appearances do. Since he also enjoys writing more than speaking and would rather be home than on the road, it’s a pretty tough sell to ask him to lose a day of editorial output to have a conversation with a bunch of strangers.

The portion of their conversation about staying focused on generating editorial output was one of the most persuasive elements of it. A publisher would help itself a lot if it focused on that question too and thought of a writer’s time as a valuable resource that should be devoted, as much as possible, to doing what that writer can do that nobody else can. And that’s “write.”

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The ebook revolution is really beginning to remind me of the mass-market papeback revolution.

The mass paperback was really “invented” by Sir Allan Lane when he created Penguin in Britain before World War II. (Wikipedia credits a German publisher with the first cheap paperbacks a few years earlier, but Lane was certainly the first in English and deserving of some extra credit because the company he started continues in the same business to the present day.) Pocket Books in the US was also born just before the war. During World War II, historian and polymath Philip Van Doren Stern (who wrote, among other things, the New Yorker short story on which the movie classic  “It’s A Wonderful Life” was based) ran a program for the US military by which inexpensive paperbacks were made available to the troops.

After the war ended, mass market publishing really grew. Many houses — Ballantine, Bantam, Signet, Avon — were launched immediately following the war. The key to mass-market publishing was that it achieved distribution through the network of wholesalers that put magazines on newsstands and in local stores (often drugstroes) nationwide. Unlike trade books, which required an agreement between publisher and bookseller to get a copy of any book on a retail shelf, mass markets were “allocated” by the publisher to the wholesaler and in turn pushed out by the wholesaler to the racks they controlled.

The advantage of this distribution technique was that it enabled lots of copies to be pushed out to lots of places with much lower sales and distribution costs. The disadvantage was that it really only worked if books were treated like magazines, with “on sale dates” when they went out and “off sale dates” when they were pulled back and, like magazines, had their guts pulped while only the covers were returned for credit.

The paperbacks were typically priced at 25 cents when hardcover books were $2 or $3. (Compare that 8-to-1 or 12-to-1 pricing ratio to what exists today. It doesn’t.) And mass-markets were available in tens of thousands of locations nationwide, perhaps more than a hundred thousand, when bookstores were few, department stores tended to have only one location, and trade books were typically available in hundreds of locations, or at most a couple of thousand.

The much more widespread availability of these titles combined with their much lower prices created legions of new readers. And, in the beginning, most mass-markets titles tended to fit into “genres”. Westerns were a really big one fifty years ago. Bantam’s perennial bestselling author of westerns, Louis L’Amour, may still be the biggest-selling author in unit sales in (what is now) Random House history. Crime and science fiction lines were also popular as were raunchy books. I’m not sure that romance lines existed in the way they do now (although I’ll bet that among the readers of this blog are people who will tell me that answer); at that time there were lots of magazines peddling romance stories (as there were for other genres.)

If this is ringing some bells for an observer of the ebook transition who didn’t know paperback history, it is entirely intended to. Let’s ring a few more.

The hardcover publishers were very snobby about the paperback houses. Over time it developed that the mass-marketers were able to create enormous additional revenues from books previously published as hardcovers. (This did require the mass-market publishers to keep some titles on sale for longer than a normal cycle, which was not simple, but worth the trouble for books that sold really well.)

The name recognition of successful books, along with the ability to put words which said “established bestseller” on the cover, could be converted into huge sales given the much lower prices and much wider distribution mass-market could achieve. Over time this led to rapidly rising paperback license payments from paperback publishers to hardcover publishers. These were, by traditional contract, shared 50-50 with the authors. They provided a substantial, if temporary, bonanza for the trade houses in the 1950s, 1960s, and 1970s.

But the new marketplace also led to the growth of genre authors whose audiences were established for low-priced paperbacks. It was often difficult for those authors to move “up” to more expensive hardcover publication. Their audiences didn’t want to pay the higher prices, but they also didn’t necessarily shop in the bookstores and book departments where those books were found; they were used to buying their books at newsstands and in drugstores.

When I was first coming into New York from the suburbs as a kid in the late 1950s and early 1960s, there was a fabulous selection of paperbacks at a drug store that occupied the corner location in the Grand Central building at 42nd Street and Vanderbilt Avenue. I found a series of baseball biographies there published by Sport Magazine. I remember a book about 1001 things you could get for free by writing away for them. And, of course, the public domain classics were all there. And I got some great trash like “I Sell Love” and a book about airline stewardesses whose title now escapes me but which was great naughty reading for an early teenager.

Then in the summer of 1962, when I was 15, I worked a 2-month stint at the very classy Brentano’s Bookstore on 5th Avenue and 47th Street. My assignment was downstairs in the brand new, just-opened, paperback department. The center of the basement contained the “trade” paperbacks, mostly academic, on shelves. Around the outside were the mass-markets in racks. The mass-markets were on racks arranged by publisher, because the publishers’ reps serviced them on a weekly basis.

Scribners Bookstore, across the street, didn’t deign to stock paperbacks for some years thereafter.

My dad, Leonard Shatzkin, told a story about the legendary Jason Epstein’s Anchor line of paperbacks at Doubleday (perhaps the first line of quality, or trade, paperbacks, but almost certainly the first such line to come from a mainstream trade house). Dad’s responsibilities as Director of Research extended to the sales force and he ran the sales conferences. At one such conference when Anchor Books (and Jason) were very young, Dad told me that Sid Gross, the head of merchandise for the company’s Doubleday Book Stores, tore into the whole concept of the cheap paperback. He hated them. From his perspective, it was bad for a book retailer to be selling 25 cent items instead of $3 items! Many other booksellers back then felt the same way.

My father’s reaction, pretty typical for him, was to support the contrarian and revolutionary view. He pushed the reps to make Anchor Books a success and, a few years later when Epstein had moved on to Random House, Dad created the Dolphin Books line of quality paperbacks to complement Anchor, whose title selection was pretty highbrow, with public domain and more popular current titles.

That anti-paperback snobbery was widespread and the separation between trade and mass-market publishing persisted for a long time. For at least a couple of decades, paperback houses didn’t do hardcovers and didn’t try to put their titles directly into bookstores (as bookstores started to carry mass-markets, at first they bought them from the wholesalers who racked them) and the trade publishers didn’t try to access the mass-market distribution system. This changed in the 1970s. First Peter Mayer and Bill Shinker pioneered the use of mass-market techniques for oversized trade paperbacks published by a mass-market house (Avon). Then a few years later, Bantam starting publishing hardcovers with distribution to mass accounts.

In the end, mass-market distribution was dismantled by a number of forces. The best retail accounts started buying direct from publishers rather than through the local wholesalers. The number of titles grew so that the “allocation” methods wouldn’t work anymore; there were too many publishers and too many titles for a diminishing number of pockets to handle, so the more expensive negotation method became required.

Patterns are being replicated now with inexpensive and widely-available ebooks. New authors are being spawned. Genre fiction works best. Books that were previously successful in more expensive formats can find new audiences as their prices come down and they go where new customers are shopping. And traditional publishers are sure that their “quality” protects them from low-brow competition, even while that competition is taking millions of customer dollars and countless hours of customer mindshare off the table.

But here’s how that old story ended. Mostly, the mass-market publishers won. Penguin bought Viking. Bantam bought Doubleday and then Random House. Simon & Schuster survived largely because they merged very early with Pocket Books. What is now Hachette is largely called Little, Brown, which was a hardcover house, but it really developed over the last two decades of the 20th century as Warner Books, a mass-market house. Really, only HarperCollins and Macmillan of the current Big Six are true descendents of the trade publishers that were dominant when mass-market publishing arose.

There are a slew of differences between the transitions; ebook publishing has a title glut to deal with just like mass-market did, but the challenges are not the same when you don’t have printed books to manufacture and ship around and your distribution isn’t limited by shelf space or pockets to display them. And authors couldn’t do it themselves in the mass-market era the way they can today. But there is a very basic lesson I think publishers better take on board from this history.

Much-less-expensive editions, combined with access to audiences for authors that couldn’t get past the gatekeepers in the established houses, can create millions of new readers that weren’t available to the legacy products at the legacy prices.

And that can lead to economic power that can ultimately swallow up large chunks of the legacy publishing establishment.

I posted more than six months ago that I had read my first self-published ebook, a history of the 1962 New York Mets called “A Year in Mudville”. Then I had an exchange in the comments string of my last post with Joe Konrath, who used to be published by NY publishers but is now finding it much more lucrative to do it himself, and a reader named Chris. They urged me to read a self-published ebook bestseller, “Wish List” by John Locke. It was fabulous, sort of a cross between contemporary bestselling author Carl Hiaasen and a relic of the early mass-market days, Jim Thompson: bold, caustic, and funny with characters you like who suddenly do outrageously anti-social things. Locke has apparently come out of nowhere with just his talent to help him and is selling shedloads of ebooks. (He’ll certainly sell another one or two to me!) I am not price-sensitive about my reading and I haven’t ever shopped the 99 cent pile, but Locke is certainly evidence that there is stuff in there that is the equal of anything the big publishers are doing at major multiples of that price point. It will be an interesting challenge to see if any major publisher can deliver enough added value to make a deal with Locke or Amanda Hocking, another writer who has found a huge market without any help from the establishment.

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