Supply-Chain

Readers who have been following publishing’s digital transition for two years or more will recall the situation in 2010 when five of publishing’s Big Six switched over from selling their ebooks on wholesale terms, by which the retailer sets the price to the consumer, to agency terms, by which the publisher sets a price that prevails across all retailers. Random House stayed out.

That decision seemed to puzzle many observers despite the realities for the publishers. Making the change required actually reducing per-unit revenues to the publisher (and author) while at the same time making each unit more expensive to the consumer, so it was done by what was then called the “Agency Five” at some sacrifice (in their view) for the greater good (in their view) of the industry. Agency protected weaker ebook retailers — Barnes & Noble, Kobo, and Google as well as independents — from having to compete with the deep-pocketed Amazon’s loss-leader pricing strategies. The immediate payoff was the opportunity to sell through Apple’s fledgling iBookstore.

As we explained at the time, Random House’s choice was transparently in their short-term self-interest. It was understandable that their competitive cohort, who saw themselves making a sacrifice on behalf of the industry’s long-term future, were unhappy that the biggest player among them was staying out. But it was a bit hard for me to understand what was so hard for everybody else to understand about why Random House did what they did. (Random House switched over to selling on the agency model in March, 2011.)

Those times are recalled for me by the recent round of indignation and analysis over the jockeying among the retailing competitors over the titles published by Amazon. Everybody is just acting in their own best interest. There really isn’t much mysterious about anybody’s behavior.

We could say the most recent set of events was begun by Amazon’s escalating efforts to capture titles for ebook rendering exclusively on the Kindle platform. They were apparently doing this two ways: by signing up authors directly for their own imprints and by offering self-published authors financial incentives — such as paid participation in their lending library program — for making their ebook a Kindle exclusive.

For the books they signed directly, Amazon recognized that it might not be the most comfortable sales call in the world for any rep to pitch these books to B&N’s buyers. Representing the books of every bookseller’s biggest competitor would be a challenge but it was one that Houghton Mifflin Harcourt decided to attempt. Last year it was announced that HMH had taken the opportunity to license the Amazon-originated titles in paperback. Major publishers had often expressed the view that publishing in print without ebook rights was a non-starter for them. HMH hoped that their efforts wouldn’t be viewed in that light since it is not considered unusual (although I’m not sure how often it has happened) for ebook rights to remain with the hardcover publisher when paperback rights are licensed.

More heat was generated when the Kindle Fire debuted with some graphic novel content delivered exclusively to it. When Barnes & Noble pulled the paper versions of those books off their store shelves, they explained that their policy would be to refuse to stock the print version of something not offered to them for sale “in all formats”.

The message at the time seemed clear. If Amazon wanted to sign up books directly and sell them broadly, they couldn’t maintain a Kindle monopoly on those titles. Undoubtedly, it was becoming clearer and clearer to Amazon that getting broader distribution for printed books was an important element if they wanted to sign up important books. Let’s remember that Larry Kirshbaum had been brought on board in June to sign up big titles. He was the first person to work at Amazon who had the relationships and the experience to tell them what it would take to succeed in those efforts.

But things were dynamic at B&N as well. With Borders gone, they have become the only player at scale able to offer print book merchandising. There is an increasing awareness of how important print display still is to “making” a book. It is very likely that inside B&N there has been increasing appreciation of the power of their position.

There is complementarity here. Amazon had a dominant position with Kindle before the Nook arrived that has been eroding since then due to increased competition. They’re still more than half the ebook sales in the US, but they want to shore up their position. Using their strength to get Kindle exclusives is a sensible way to do that.

At the same time, the leverage Barnes & Noble has from its print store dominance is perhaps at its peak. In their case this isn’t because competition in their channel is likely to erode their share. It is a continuation of the consumer trend of shifting to online buying and ebook reading that will dilute the importance of brick-and-mortar even if B&N’s share remains very high. So they too want to use the leverage of that position to strengthen themselves while they can.

Both Amazon and B&N demonstrate the power of their position by looking for an increased share of the book sales revenue from publishers.

Anyhow, Amazon continued to work on this problem of getting the books they acquired directly from authors into broader store distribution. In January, they expanded the first-look licensing deal they had with HMH and announced the New Harvest imprint there to deliver paperback editions of their books to broader distribution. And, proving they’d been listening to what Barnes & Noble said earlier, they announced that New Harvest books would have ebooks made available in formats that would enable their sale in all ebook channels.

It took Barnes & Noble less than a week to respond. Ignoring Amazon’s willingness to make the new imprint books available as ebooks, they instead focused on the continuing programs Amazon had that kept other titles as Kindle exclusives. B&N announced that they wouldn’t carry any Amazon-originated titles in their stores, although they would make them available online and as ebooks. Of course, that “offer” gave Amazon precisely what they didn’t care about (BN.com online sales) or didn’t really want (Nook availability) and denied them what they were really after (bookstore shelf and display space).

Pretty quickly, both Daily Finance and Time Business found fault with Barnes & Noble’s move. It was seen as boneheaded for a retailer in the declining brick-and-mortar space to decline to stock some books that might sell. It was even suggested by some that this was an “opening” for Barnes & Noble’s terrestrial competitors to carry attractive Amazon titles, with the implication that this could help them steal customers from B&N.

But Barnes & Noble’s competitors actually saw things the same way that B&N did. The independent store and publisher, Melville House, was quickly supportive. A few days later, the Canadian chain Indigo (which occupies the same dominant position there that B&N does in the US) and the second-ranked US chain, Books-A-Million, announced that their policies would mirror B&N’s.

The day that B&N announced they wouldn’t carry the Amazon books, a reporter called me for comment. This reporter clearly expected me to castigate B&N for shortsightedness. I think he was surprised when I told him I thought the policy made complete strategic sense for them.

The bottom line here is that as Amazon’s power to sign up books away from the major publishers grows, the retailers who depend on publishers for a flow of commercial product suffer along with the publishers. B&N saw — and Indigo and Melville House and Books-a-Million saw — that Amazon wanted bookstore distribution to enable them to sign up more titles directly. Even though those titles would be made available to them, they see themselves as strengthening their enemy when they stock those books.

B&N’s decision seems to me like the right move for them. Most very regular bookstore customers aren’t really surprised if any particular store doesn’t have any particular book. Indeed, the impossibility of stocking everything anybody might ask for in a store is part of the reason that online bookselling is such a useful service. In this day and age, most people who want a particular book don’t go to a bookstore to buy it; they just order it online. They go to bookstores to browse and shop and choose from what is within the store. So, yes, there may be some disappointed customers if B&N doesn’t have a high-profile Amazon title, but I don’t think that disappointment will be widespread.

On the other hand, authors and agents who might have considered an Amazon publishing deal will have to think twice if they know very few bookstores will carry it. Amazon can do some remarkable things to sell books to their mammoth online customer base and that won’t change. But there is both a practical and a vanity aspect to getting store display that will still be seen as indispensible by many authors and agents who otherwise might have taken the leap to sign with the newest big checkbook in town.

Amazon still has the biggest forces, and time, on its side. eBook reading will continue to grow and Kindle will remain the most powerful platform as it does. More and more print buying will shift from stores to online and nobody has mounted meaningful competition to Amazon in the online print channel. The Amazon online experience for search and selection and delivery remains — in this consumer’s opinion — far and away the best. Their reach beyond books to so many other product lines gives them further advantages in many ways, including fueling their Amazon Prime program, which is an unmatched tool to encourage customer loyalty. The shelf space for books at B&N will almost certainly continue to decline and the leverage that comes along with it will do the same.

This tactical decision will not change the overall course of history. Neither did Random House’s decision to postpone moving to agency for a year after everybody else did. But, just like Random House’s decision, everything Amazon and Barnes & Noble (and the retailers that followed them) have done is actually perfectly sensible when viewed from the perspective of their own self-interest. There are a lot of smart people engaged in a pitched battle here. Outside observers would be well-advised to keep that in mind as they evaluate the moves they make.

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I spoke last Thursday at the 2nd annual IfBookThen conference in Milan staged by the Italian ebook retailer Bookrepublic. On Friday, I teamed up with the UK literary agent David Miller and Penguin US’s Molly Barton, formerly an editor but now the company’s Global Digital Director at a “workshop” session staged by the same organizers. Molly is also the empresario of the new author services site from Penguin for genre fiction called Book Country.

We got a bit of a cultural education. The Thursday conference was attended by about 300 delegates from across Italian publishing. Judging by appearances, this seemed to be a pretty senior crowd; there were very few people there in their 20s. That makes sense. The same thing is true at Digital Book World and Tools of Change and for the Publishers Launch events Michael Cader and I deliver. These conferences cost a fair amount and require a lot of time away from the office (a full day for IBT and for most PLC events, two or three days for DBW and TOC.) Junior staff can’t afford the money and can’t get the time.

But there was one distinct difference between the Italian audience and the audiences I’ve seen at those other events or at others I recall speaking at in Canada, Brazil, the UK, and Denmark. The Italian audience hardly asked any questions! I got one on Thursday. Most of the speakers that day got none. I found this baffling.

At lunch, I was standing at a round “rest your plate of food” station with four local attendees. They all spoke English well. (Simultaneous translation in both directions was available for anybody who needed it.) I said, “you in the audience need to talk more! Where are the questions?” One woman theorized that the problem was that Italians were just too polite; they were reluctant to call attention to themselves by asking questions. (Milan is in the industrial North of Italy. Most of the time I’ve spent in Italy has been in the South — Rome and Capri — and I certainly wouldn’t have characterized the wonderful culture down there as overly polite. Maybe the North is very different.) I agreed that questions are sometimes used as a platform to make a speech and that wasn’t welcome when it happened. But, still…

The event on Friday being billed as a “workshop” had a smaller, and not quite so senior, audience. There were perhaps 80 people. The focus was the changes in the relationship between publishers and agents. Molly explained Book Country, what Penguin had in mind when they launched it, and how it was an acknowledgment of the change in circumstances and choices for authors. David had been provided a list of questions solicited from attendees in advance. My job was to provide “context”, a sense of the environment in which these publisher-and-agent negotiations were taking place.

We brainstormed with the organizers how to encourage more participation. An alternate explanation for the reticence we’d experienced came from an Italian agent, who thought that people weren’t asking questions because their bosses were in the room. Well, it’s another theory…

I followed a suggestion, starting my talk at the workshop by asking the audience to self-identify a bit. I asked editors, agents, those who worked with straight text, those who worked with illustrated books serially to raise their hands. I made the point that I was giving people practice at putting their hands up; we were all hoping that they’d continue to do so throughout the show. I actually got a few questions. So did Molly.

But David had a different technique that, coincidentally or not, appeared more effective. He waved a box of fine British chocolate-covered mints in front of the crowd and promised a wrapped piece of candy to each person who asked a question. (When I asked David a question myself from the seat alongside him on the dais, he even gave a piece of candy to me!) Whether it was to get the chocolates or because David’s presentation and expertise evoked more active interest than Molly’s or mine, or because participation begets participation, he had a successfully interactive two hours with the audience. It was impressive.

The one question I did get the first day actually led to a provocative exchange that I think opened some eyes in the audience. I was asked how big I expected the Italian ebook business to get and how fast. I asked what percentage of Italian book sales were ebooks now. I was told “2%.” I asked what it had been a year ago. I was told “about 0.7%.” If those numbers were right (they could well not be, but I’ll bet they’re right on the growth rate), the percentage tripled.

“Is there any reason you’d expect it to slow down in 2012 or 2013?” I asked the audience. The consensus was “no.” I pointed out that one more tripling would take them to 6% and another after that would be 18%, which is not far from what the US number is now. (If you believe the starting percentage was low, then add one more year to get to 18%.)

The next day, David Miller talked about an author he represents whose percentage of ebook sales had gone from 1% to 11% in one year! I made the point to the audience that this might be the single most important fact they’d have learned in two days to illustrate the rate at which things can change.

Last year at the same IBT event, there seemed to be very widespread skepticism that Italy had much to worry about from ebooks. Then Amazon introduced the Kindle this past December, about 60 days ago. Suddenly, the skeptics are in hibernation.

Apparently the same thing has happened in Brazil since I went there to speak 18 months ago and found a lot of resistance to the idea that ebooks would spread or that bookstores would suffer. The Brazilians I’ve talked to since, and the non-Brazilians who are planning expansion of book and ebook sales to new markets, all see that a robust growth of the ebook market in Brazil is around the corner.

It always seemed understandable to me why ebook takeup, and its companion disruptor, online transactions for print, first got traction in the US. You can’t beat a market of 300 million people with one language, one currency, and one set of commercial regulations as a place to launch a new delivery mechanism for media. We see the dampening effect in Europe of high taxes (VAT) on ebooks and the relatively small language silos that exist side by side. We see the challenges to online ordering of print as well as to ebooks in less affluent parts of some countries, including Italy and Brazil, presented by the lack of capital for investment in infrastructure. Many people can’t afford readers for ebooks. Many can’t conveniently get to the Internet to order hard goods and, even if they can, the ubiquitous parcel delivery infrastructure our Internet merchants depend on doesn’t exist the way we’re used to it. And many people don’t have credit cards. All these factors slow things down.

The hard goods delivery bottleneck is difficult to address, but the readers are getting cheaper and the mobile phone has proven to be an effective banking-and-credit mechanism where none had existed before. I find it hard to believe that highly differential rates of screen reading to overall reading between countries is a permanent condition. Cell phones are proliferating everywhere. Printing and distributing books is, ultimately, a lot more expensive than delivering them to a cell phone. Readers are getting much cheaper; the Kindle costs about 80% less than it was when it was introduced four-plus years ago.

I think in time we’ll all end up in pretty much the same place in our ratio of ebooks to printed ones for straight text reading. If that’s going to be the case in a few years, then the places that haven’t been experiencing rapid change so far are in for a roller-coaster ride in the years to come that will make what we’ve lived through in the US and UK seem very tame by comparison.

I suspect that at IfBookThen 2013, the audience will feel moved to ask a lot of questions and whatever cultural barriers there were this year will be overcome by the urgency of adjusting to an environment which signals that cultural barriers are made to be broken.

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I think just about everybody has fun at Digital Book World, but it is hard to have more fun there than I do. It’s damn near a year of work coming together over a couple of days with dozens of smart speakers making me personally look good for putting them on the program. So they work hard and satisfy the audience and I get congratulated. What could be better (for me) than that?

(OK, I did do a little bit of work. Besides emceeing the show and co-hosting the final panel, I delivered opening remarks trying to set the stage.)

There were a lot of great takeaways this year. Perhaps the biggest news was the final presentation before the wrap-up panel Michael Cader and I hosted. That was by Matteo Berlucchi, the CEO of Anobii, a UK-based ebook retailer that has substantial investment from Penguin, Random House, and HarperCollins. Matteo didn’t exactly “call for the end” of DRM, but he certainly described a better world without it. And the main point he made was, “I want to sell to Kindle customers and the only way I can do that is if we get rid of DRM.” The combination of the message and the messenger made this the most newsworthy presentation of the show, I thought.

But the factoid that most grabbed me was delivered on the previous day as part of the data developed by AllRomanceebooks.com about the romance readers market. Very superficially, the point being made was also about DRM, but that’s actually a distraction. There was a much larger point buried within.

All Romance is a specialized ebook retailer. To serve the romance reader community more effectively, they’ve built out the BISAC taxonomy for romance, adding more categories. And they’ve added a metadata element called “flames” which basically measure the frequency and explicitness of the sex scenes in any particular book.

The romance world, particularly among the cognescenti in it, is a very anti-DRM environment. And an outfit like All Romance, which has no “device lock-in” working for them — essentially everything they sell gets “side-loaded” somehow, and DRM can often make that more challenging — is right in step with their community sentiment. So the survey contained questions trying to get at the audience attitude about DRM.

There were two relevant stats that I recall. One is that only about 20% of even All Romance’s readers really resist books with DRM. That is to say: 80% don’t. But the factoid that grabbed me is that 96% (that’s not a typo: ninety-six percent) of the ebooks they sell do not have DRM.

All Romance also reports that 91% of the titles they have available are protected by DRM. That makes sense, since all the titles from all the Big Six publishers and all the titles from Harlequin except those from their new digital-first imprint, Carina, have DRM.

What this means is that the nine percent of All Romance’s offerings that do not have DRM are selling 96% of their units overall. And since only 20% of their customers find DRM as a strong deterrent to sales, that means those fledglings are outselling all the majors for other reasons.

This provokes two very important lines of inquiry to me, and neither of them have anything to do with DRM.

The first one would be top of mind to me if I were a major publisher. What are these books that are selling like hotcakes? Why are these books selling like hotcakes? Why can’t we publish these books that are selling like hotcakes?

It is a virtual certainty that a lot more romance ebooks are sold through the “traditional” channels like the Kindle and Nook and Kobo stores than through All Romance. But they have a market big enough to get 6,000 respondants to a survey in a couple of weeks so they’re definitely serving a big clientele. They’ve obviously aggregated an audience that is buying a lot of books that major publishers are missing. Some of this is due to price, undoubtedly, since the All Romance stats also showed robust sales at price points below where the majors are usually most comfortable. Some of it could be attributed to a raunchier title selection being compiled by the smaller upstart title selection (remember All Romance’s “flame” ratings.) Some of it might be loyalty to authors who could be signed up by majors with the right offers.

But if 24 out of every 25 books being sold by a pretty damn big specialist retailer to the biggest ebook genre that I competed in were outside of my immediate competitive set (which, for the Big Six, is basically each other and Harlequin), I’d want to know more about the details of that. And I’d also be asking All Romance what I could do to get more sales from their audience. I have a feeling they’d say that better metadata, more sex (within the pages of the books, that is), and lower prices are all more important than stripping off the DRM, but it’s s conversation the big publishers should be having with them.

The second question that the data provokes to me is whether this phenomenon — all these successful books outside the purview of the major houses — is a unique characteristic of romance books. I don’t know if there’s an All Mystery ebooks vendor or an All Thrillers ebook vendor or even an All Sci-Fi ebook vendor (I’ll bet we’ll find out from our comment string after this is posted!!!) but, if there is, it would be interesting to find out if this is true there too.

These are the immediate questions All Romance’s appearance put in the front of my mind. I think they show another aspect of verticalization. As a vertical retailer, they invent new metadata elements that really help them merchandise to their audience. What that suggests is an opportunity for an All History or All Politics retailer as well; enhancing metadata might be even more valuable for non-fiction subjects than it is for specialized fiction.

There was an article about Amazon by Brad Stone in this week’s issue of Bloomberg Business Week in which I was quoted about Larry Kirshbaum, the former head of Time Warner Book Group (now Hachette) and currently the head of a new Amazon imprint whose mission it is to recruit mainstream authors to be published by the retailer. Many of Larry’s former colleagues and counterparts at big publishers take this decision of his to join Amazon extremely personally and it is reflected in what they say they now feel about Larry himself. That was reflected in my quote which says that Larry “has gone from one of the most well-liked people in publishing to the one of the most reviled.”

I want to make clear that I was not expressing my personal opinion. I still very much like Larry Kirshbaum and I’m a bit embarrassed to be quoted (even accurately) characterizing the feeling about him in these terms. The people running big NY houses see Amazon as a bare-knuckled competitor. With their responsibility for the continued success and viability of their own enterprises and the threat Amazon poses in that regard, contentiousness is built into the interaction and competition between Amazon and the big publishers. I believe my quote accurately reflected the degree to which that is transferred to personal feelings, even for somebody whom so many people have known and liked for years. Although I well understand the feelings my quote described, this is one case where I wish I hadn’t been so candid.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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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This is the time of year for predictions. I’ve done mine in the spirit of the holiday season in years past, going back to the late 1980s when I did a “My Say” for Publishers Weekly. (I wasn’t able to find it — some sharp reader will — but I recall that one of my predictions was that publishers would strive to put out the audio of a title at the same time they released the printed book.)

In recent years, I’ve done the predictions for PW and I’ve done them right here. This year I contributed some thoughts to a nice roundup done by Jeremy Greenfield, the new editorial brain over at the Digital Book World site.

This year, I thought I’d try something different. Rather than predict the future for the industry’s biggest players, I am posing what I think are the biggest questions faced by each category of them. Some of the questions are within their power or responsibility to answer; some depend on outside circumstances; and some may never be answered at all. But any honest futurist (and I try to be one) has to admit that questions outnumber answers. (Note: there is a great Johnny Nash song called “There Are More Questions Than Answers” that’s about 50 years old and is just as correct today as it was then.) So this post focuses on the important questions we’ll be facing throughout the industry in 2012 and beyond.

The biggest publishers:

Can their use of tech at scale — SEO and pricing seem like top candidates — add demonstrable value, cost-effective for them and persuasive to authors?

How fast do sales of print in stores decline? And how efficiently can publishers de-scale to keep overheads under control?

Can they reorganize to take advantage of the opportunities offered to the quick and nimble in a digital world?

Can they extend the “protection” of agency pricing to distribution clients and, if so, can they charge a premium for that capability? (Could this be an unintended benefit to the Big Six of Amazon’s refusal, so far, to allow agency to any except the Big Six?)

What skills and capabilities does a publisher need now that they didn’t need a few years ago, and what’s the best way (acquiring a company, outsourcing, hiring in talent) to bring those talents into the fold?

Publishers bigger than small, but not Big Six:

Can these publishers fight their way out of the box that Amazon and Apple have them in, with Amazon insisting that ebooks be transacted on the wholesale model and Apple insisting on the agency model?

Can Amazon continue to be relied upon to discount from high publisher suggested retail prices (the basis of high wholesale prices for the retailer), or will Amazon sell more frequently at the publisher’s declared price to “encourage” publishers to cut their suggested retail priceas and therefore bring Amazon’s costs, and publishers margins, down?

Smaller publishers:

Can they keep up with the technological and contractual demands of digital publishing change?

Can they find niches that present opportunities they can seize to sell something other than “the book” (whether in print or digital)?

Can they create opportunities by being nimble, opportunistic, and vertical that make them more attractive than larger competitors as partners for knowledgeable agents, authors, and brands?

Amazon:

Can they marshall their considerable resources to sell individual titles so effectively within their network that they make up for what they miss outside their network?

Can they build any noticeable or sustainable advantage in having a repository of desireable content that is not available except through them?

Can they maintain their device and platform dominance as the competition moves far beyond the early adopter online book-reading audience?

Barnes & Noble:

Do books as gifts and objects deliver enough traffic to keep a bookstore chain successful as the sales of novels and biographies go away?

Can they create a profitable international strategy? They haven’t had one yet.

Like the publishers, can they manage down their physical plant and overhead base as the revenue it was built to serve diminishes? (We presume they can’t do it with Nook sales and services alone.)

Independent bookstores:

Will the lift they get from Borders closing and B&N cutting back on shelf space for books buy them time as print book sales in stores shift to ebooks and online purchasing?

Can they make something work with Google ebooks? Or will another solution arise that works to get indies into ebook commerce in a profitable way?

Will emphasizing the books-as-objects market (gifts and otherwise) work as the customers for narrative text find it less and less necessary to visit physical locations?

Authors:

How do they know that their agent understands the new range of publishing options and directs their business activity accordingly? (It’s as hard to be effective as your own agent as it is to be your own lawyer.)

How do they build their own online platform? (And every author who plans to make a living through writing and hasn’t yet built a platform has to think about having one.)

Will any author turn down a significant advance to self-publish in 2012? (So far, that behavior has been extraordinarily rare, with Tim Ferriss being the only one really close. Barry Eisler intended to, but he took an advance from Amazon instead.)

Will the number of successfully self-published mid-list authors continue to grow? Under what terms and royalty rates do these authors return to traditional publishers?

Agents:

How do they make sure the full range of knowledge about the digital publishing alternatives is within their grasp? (if not in their head…)

Do they know what they need to know to make a “profit-sharing” deal with a publisher?

Can they direct an author’s own online marketing efforts? And, if they do, is some adjustment to the standard practice of a 15% share of the author royalties going to be necessary, or possible?

Illustrated book publishers:

Is “fixed page layout” the answer? Or, more likely, is it the answer for some books and not for others? Which ones?

How do illustrated publishers cope with the plethora of native formats, file requirements, and screen sizes?

Do “illustrated books” delivered on good portable screens achieve the same consumer acceptance that straight text did making the same transition?

Are there new retail channels available to sell illustrated books as bookstores diminish?

Are new models, perhaps built on social or community but also possibly built on non-book commerce, possible to support and extend illustrated book publishing?

The industry:

As the global ebook infrastructure develops, does it show signs of staying diverse or does it tend to consolidate as Kindle?

Does the industry show signs it will trifurcate, with narrative text, adult illustrated, and children’s books becoming three largely different businesses?

With Amazon, B&N, Apple, and Kobo established as significant global ebook outlets, will any of the other players or fledglings — Google, Sony, Blio, Copia, Bookish, Anobii — start selling enough units to be an important contributor to ebook sales?

Will either white-label B2B or publisher-to-consumer sales grow markedly in significance as the time-honored sales, distribution, and monetization models atrophy?

This could well be the last Shatzkin Files post for 2011. It’s been a great year around here. We launched a new business, Publishers Launch Conferences, with our friend Michael Cader. We started the year with a great Digital Book World last January and are concluding this one putting the finishing touches on an even bigger and better one coming next month. An ebook and a print book edition of The Shatzkin Files, Volume One (the first two years, through last February) were published. We have some great new consulting clients about whom we think you’ll hear a lot in 2012. And, despite the reality that you can’t claim 50 years in the business (which I do) and remain a young person (which I’m not), good health and good cheer remain in abundance around here. Our view of publishing’s digital future seems to have been more confirmed than contradicted by the year’s events. So we’ll take a 2012 that largely resembles 2011 very happily if we can get it.

Best of the holiday season to all our readers. And may 2012 be as kind to you as 2011 was to us.

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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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Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 

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John Makinson, the global CEO of Penguin, was quoted in a Reuters article saying that the post-Christmas period in publishing coming up is “tougher to predict” than “any time that I can remember”. Asked what he sees in the immediate future, Makinson replied “dark clouds”.

Makinson’s concerns reflect one we have written about many times in this space: the rise of powerful ebook vendors who are tech behemoths essentially replacing the network of brick bookstores, many of which were free-standing independents. (This is true in the UK, where Makinson is based, as well as in the US, for which he is also responsible. It will also happen everywhere else.) He made a very cogent point when he said that publishing has been driven more by supply than demand. He was quoted as saying “consumer taste doesn’t actually change all that much but what does change is the availability of books in different channels.”

He’s completely correct. Up until 15 years ago (the dawn of Amazon), only books that were on store shelves had much chance at all to sell. The biggest and most successful publishers today are still the ones which ascended because of their power to put books on those shelves. It is not the publishers’ fault or doing that this is changing.

Longtime industry executive and consultant Joe Esposito wrote a post around the Borders bankruptcy that makes this general point: publishers are part of an ecosystem that is changing in ways they can’t control.

The growth in ebook sales is not an unbroken line pointing up. Industry stats suggest that sales may even have slowed a bit in September compared to August. But this is the time of year when we get the next step-increment change in the publishing reader-supply network. Starting in November, 2007, when Amazon put the Kindle on sale for the first time, the Christmas season has been when the huge leaps in device ebook reader distribution take place. That includes a huge ebook sales day on Christmas itself followed by a couple of months when ebook sales reach new peaks.

This is inevitably accompanied by bad news from the brick book trade. Last year’s first quarter included the bankruptcy filing of Borders. Stores fight hard to keep their doors open through the Christmas season but, with each passing year, if they’re not selling ebook reading devices, they find disappintment more often than salvation.

One bookstore owner I know has been doing a great job; the store held its own despite the overall slide in print. The bookseller told me that this year, through October, sales at the store were down 5%. Not bad. They were down 2% year-on-year last year. They were down 1% year-on-year in 2009. And they had a record year for sales in 2008.

There’s a pattern there. The percentage reduction is doubling each year. When I said, “so you’ll be down 10% next year and 20% the year after that, right?” Bookseller said, “probably.”

Almost no brick store can stand a sales loss of 20% and remain viable. Maybe one could make up the 20% by selling something else in addition to books. But maybe branching out into other lines of merchandise will cost more than it will generate.

Maybe they won’t be able to hold even that 5% reduction through Christmas. And maybe the 20% we see as two years away is even closer.

Anecdotal reports abound that stores that are near where there formerly was a Borders are seeing a lift in sales. One sales executive I know speculated that B&N would pick up half the Borders business. Since Borders sales were a high double-digit percentage of B&N’s sales, that should provide quite a lift. But because B&N’s store sales now include Nook devices, we aren’t able to analyze very readily from their announced results what the trend of their actual book sales in the stores (or online) is. According to Michael Cader’s report of their just-announced results, B&N tells us that “physical book sales declined”.

As the digital sales of straight text books — which are estimated by some to be 75% of bookstore sales — routinely climb past 30% of the total units, there’s just less and less print business to go around. Ebook sales seem to have doubled again in 2011 from what they were in 2010. There are high expectations this Christmas for ebook reader sales, newly fueled by color tablet-like devices from Kindle, Nook, and Kobo (all on sale at consumer electronics outlets as well as at bookstores and online). That suggests (to me) that 40% or 50% ebook sales shares might be common by early 2012.

Borders was somewhere around 10% of the print book business when they disappeared. More than 10% of the business will have shifted away from brick stores to ebooks and online sales in the year following their bankruptcy announcement.

So the lift from picking up Borders business is unlikely to replace what brick stores are losing to more customers switching to ebooks and online buying of print. And that squares with what B&N just told us about their most recent reporting.

We are seeing sales staff reorganizations all over town and in the UK as well. Fewer stores and less volume through them mandate smaller field sales organizations. One former high-ranking sales executive I know who is now a thriving consultant was telling me yesterday that finding an executive sales position in publishing today is a nearly impossible task.

If the ranks of sales reps and sales management are being thinned, how about the elaborate systems we have built to support them?

How much longer will we be publishing in “seasons”, which was a paradigm really built to serve a far-flung rep network that needed to gather to learn about new titles? It now seems like an anachronism, particularly when the biggest accounts buy from monthly lists. How much longer can that last? Sales conferences have been scaled back dramatically from what they were a decade or two ago. How long before they’re virtually defunct?

At least printing paper catalogs, which is a largely wasted expense these days has been retired by several companies. A bookseller I asked said Harper dispensed with paper catalogs already and she expects Random House and Macmillan to do so in 2012. I’ll bet the comment section of this post will attract others to say they have done so or are about to do so as well.

The old publishing sales-and-distribution ecosystem is disappearing but the new one is not built out yet. Publishers are, to greater and lesser degrees, converting to digital workflows, developing their metadata chops, collecting names, building vertical communities by genre and topic, collecting and analyzing ebook pricing data, building new models to work with authors and even self-publishers, and they’re still signing the books they want with royalty rates for ebooks of 25% of revenue.

These efforts have been financed by the margins being earned on sales of print and sales of digital that publishers were able to acquire because of their power to distribute print. In Esposito’s words, this cash provides “venture capital for the new all-digital businesses that all publishers are contemplating”. These annual step-increments of digital growth and brick store decline have so far been tolerable to most of the big players we’ve known for decades. (Borders was an exception, but we know Borders was not done in by digital change alone.)

The pace of the digital switchover is quickening. That will reduce the cash available to invest in building a new ecosystem at the same time the urgency of coming up with new answers is rising. It’s enough to make a sober executive, even at a very large, successful, smart, and innovative company, admit to serious concern for the industry’s future.

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