Supply-Chain

As a result of spending my college days at UCLA, I had a handful of contacts in the Hollywood community when I came back East to live in 1969. When I started becoming familiar with New York publishing in the 1970s, I found myself, on occasion, shopping movie or TV tie-in projects. Armed with a script and a release plan, one could make the rounds of editors at the mass-market houses that had been assigned specific responsibility for this kind of acquisition.

At the time I was doing this kind of thing 30 or 35 years ago and more, the book business was growing wary of tie-ins to TV movies. They didn’t have the same promotional life as theatrical releases, even in those days when about one-third of the country was watching any network broadcast. Films that ran in movie theaters were definitely preferred as desirable book properties.

In the decades since then, the link between Hollywood and New York publishing has not exactly been severed, but it certainly hasn’t strengthened. One agent I spoke to told me that interest from Hollywood can definitely help raise the profile of a book project being peddled in New York, but the same agent agreed that the tie-in sale, where a script is novelized to just take advantage of the exposure the title and story will get through the movie, is all but dead.

Another agent, one with strong Hollywood connections through his office, had a slightly different point of view. He says it is still “humbling” to see how much being tied to a movie or TV show (“or even radio”) can “move the needle” on a book sale.

To the extent that the agent who believes in the power of Hollywood exposure to move books is right, the relative reduction in interest by New York publishers only increases the opportunity for Hollywood entities who exploit publishing through ebooks (and judicious and selective use of print) on their own.

(I recall two specific deals from my past relevant to this post. In around 1977 or 1978 I sold the book tie-in rights to a TV movie called “Cotton Candy”, which was produced by Ron Howard. In 1985, I sold the rights to two books to tie into the third “Nightmare on Elm Street” movie: one was a novelization of the first three films and the other a heavily-illustrated “making of…” book. I’d say the “Cotton Candy” deal today couldn’t possibly happen and “Nightmare”, which went to a major publisher, would be a real long shot.)

New York’s interest in Hollywood-originated content was, of course, centered on big properties. Hollywood’s enthusiasm about getting a book deal was often not very great. It didn’t add a ton of revenue (big publishing money for a big movie was small money to the movie producer) and the “promotion” done by publishers was trivial compared to what the movie studios did for the film.

In fact, there were often rights issues that got in the way. Even if the screenwriter had conceded the tie-in rights to sell the script, the studio might still be required to get clearances on the novelization, which would be a nuisance for a book project that often had annoyingly tight deadlines and not much benefit. If the screenwriter had held the tie-in rights and was the one selling to the publisher, it could become a bureaucratic nightmare to get art and logos from the film, which would be controlled by the studio, to promote the book.

New York’s incentives were often too limited to interest Hollywood. Hollywood’s unpredictability on things as basic as release dates, as well as the diminishing likelihood over time that any particular movie property would enjoy enough theatrical success to give real legs to the tie-in book, made systematic efforts unproductive for publishers. There haven’t been dedicated tie-in editors for decades.

But digital publishing changes many things. The relationship between Hollywood and the book business, because of the changes brought on by ebooks, will almost certainly be one of them.

In the digital age, what it takes to succeed as a publisher are access to commercial properties to publish and an ability to let an audience know an ebook of interest to them is available. Those are the core requirements. Everything else can be put together from services, and they can be put together one project at a time (although most people in Hollywood aren’t really aware of that yet.)

A Big Six CEO told me last week that the two core skills and competencies that publishers require are “editorial”, picking the books and developing them, and “marketing”, letting the interested public know the book is there. This CEO would be happy to outsource just about everything else. Starting where this executive wants to end up — with commercial properties in hand and an ability to tell an audience about them but with no overhead or organization to support — is essentially where Hollywood entities get the chance to begin.

Things have changed in Hollywood too. Digital tools make it cheaper and easier to make a movie, just like it is now cheaper and easier to make a book. But, just like book publishers, producers of Hollywood content find the growth in competition mushrooming. The corrolary to the fact that making movies can be cheaper is that promoting them is that much harder and, much more than decades ago, every revenue stream counts, even pretty small ones.

The change in both industries means that Hollywood has enormous opportunities through the digital publishing world, as soon as they figure it out (which we plan to help them do).

There are some early signs that this is beginning to happen.

The most ambitious project we’ve become aware of so far comes from Warner Brothers Digital Distribution. They’ve announced their Inside the Script series that will issue 300 classic scripts (think “Casablanca”) as ebooks, starting with a release of four titles. Doing an entire program enables them to take a templated approach to creating the ebooks, which will cut their costs of making really good products. Whether classic scripts will sell robustly is an open question, of course. But the cost of the experiment is low in a Hollywood context, and they gain the additional benefit that their classic films get a shot of recognition and reader-adrenalin which can only increase Netflix views and DVD sales.

NBC has established NBC Publishing to begin to exploit this opportunity. Michael Fabiano, the NBC VP who is the General Manager of this operation, says that “In general, text will come from titles already published, direct relationships with authors and, in some cases, from the staff of NBC News. We will also utilize a network of professionals as needed.” They make it clear that NBC will continue to work with established publishers. (Left unsaid, but I’d assume: they’ll work with established publishers for projects that have a big print component or where they can get substantial advances.)

ABC has a venture called ABC Video Books. This is being done in conjunction with the publisher they own, Hyperion. They position the initiative as “a new storytelling experience, enhanced with ABC video.”

Thinking about this has led me to believe that every network, every studio, every producer, every agent, and every screenwriter in Hollywood needs to have a digital publishing strategy. If fledgling novelists with no Hollywood presence can blog and tweet their way to commercial success, and some do, certainly a Hollywood-developed story would have an even better chance. Novelizing a screenplay (which is just one of a number of ways to do a Hollywood tie-in as an ebook) isn’t a trivial job, but it isn’t a massive one either. And publication as an ebook can be done for less than the cost of a few lunches. Even cheap lunches.

Broadly speaking, there are two categories of opportunity here. One is for legacy brands: all the stories (like “Casablanca”) that have been made famous over a century of film-making. Publishing scripts or novelizations are the simplest things that can be done. Why not publish all the Seinfeld or All in the Family scripts as ebooks? How would they sell? We don’t know, but the cost to find out is low and the availability of the book constitutes additional promotion, even of a long-established film or TV show.

The other category of opportunity is to build interest in a developing property. This will work better for projects that are about something substantial: a historical event or person or an issue (divorce, alcoholism, etc.) that people would search under looking for reading matter. If you’ve written a screenplay about Babe Ruth and Lou Gehrig and you’re trying to develop interest, you could do worse than publish the script or a novelization as an ebook. People searching their favorite ebook retailer for Babe Ruth or Lou Gehrig will find it (and this happens every day) and some will buy it. You can develop fans and a following. You can get revenue.

Of course, you can also get more creative. Characters can “write books” (an approach that has already been tried.)  And successfully.

Discussing these ideas with players in Hollywood today, I have learned that there is a growing awareness of the ease of ebook publication with another motivation as the catalyst. It is apparently easier for the owner of a screenplay to keep ebook rights out of their movie deal if they’ve already published the ebook. There would seem to be very little risk in that strategy. As we’ve seen, movie studios don’t much care about book tie-ins so they’re not likely to walk away from a deal because these rights have already been exploited. And book publishers are increasingly aware of self-published ebooks as a farm system. No book publisher would decline to buy rights to a book becoming a movie because an ebook had already been issued. (The owner would almost certainly have to pull the self-published ebook off sale, but that would be painless if a publishing deal made it worth it. That precise strategy has been executed by indie publishing star Amanda Hocking and her new full-service publisher, St. Martin’s.)

The first step for networks and channels and producers in Hollywood is to learn how to utilize their new revenue and marketing tool: ebooks. We’re going to jumpstart that effort with a Publishers Launch Conference at the Hollywood Renaissance Hotel on Monday, October 22 called “FILM/TV-TO-BOOK: How Digital Publishing Creates New Revenue and Marketing Opportunities for Hollywood”. We’ll be co-located withF+W Media’s Story World Conference. We think this could be the start of a long-running conversation.

Publishers Launch Hollywood will emphasize what the Tinseltown players can do on their own, which is the big opportunity presented by digital change. But we’ll also present players from the publishing world: both new entrants from the “ebook first” world and established players. None of them want to do every pr0ject Hollywood should do, but when they want to be involved, they’re still almost always the best path to the biggest market.

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When we put on conferences, we sometimes book speakers because of who they are, or who their company is, but we also do our best to make sure the content of their presentation will be useful to our audience. So I had booked Matteo Berlucchi, the CEO of the British ebook startup Anobii, to speak at last January’s Digital Book World 2012 some months before the event for two reasons. For one, I had met Matteo at our Pub Launch London conference last June and he impressed me. And, in addition, his social-network-conscious ebook retailing operation has three major houses — Penguin, HarperCollins, and Random House — as investors.

A couple of weeks before DBW 2012, we got on the phone with Matteo to learn what he wanted to talk about. That’s when he told me he’d call for publishers to give up DRM because, as he saw it, their doing so was the only way he could compete for Kindle customers. As a conference organizer and promoter, I was instantly aware that he was handing us a major news break: a retailer partly owned by three Big Six publishers was calling for the end of DRM! There was some gallows humor on the call about how Matteo would bring his CV (curriculum vitae, which the Brits use more freqently than the American “resume”) along to New York.

But, of course, Matteo wouldn’t have been doing something like that without the knowledge of his owners. So it was not a stretch to draw the inference that three major publishers didn’t mind floating a trial balloon, or perhaps what they were thinking was that it would be good if Amazon knew they’d seriously consider this.

His presentation created a stir, as we knew it would.

But Pottermore created an even bigger stir when they demonstrated how to execute on the “no DRM” strategy, including how to position the big retailers in that context. As we all know now, the threat that Pottermore might be able to load Kindles with Potter books (by selling DRM-free; it would be hard if not impossible for an outside vendor to crack Kindle’s proprietary DRM to load “protected” content on it) persuaded Amazon to play ball. They send Potter ebook buyers over to Pottermore’s site to register and pay and then are willing to take the customer back to load a DRMd ebook file on their Kindle. (Meanwhile, Pottermore enables also loading a Nook file, an iBooks file, and even provides a non-DRMd epub file for more general use, all for the same single purchase.)

Back in the early days of ebooks, which was not a hundred years ago but actually about five, Brian Murray, the CEO of HarperCollins, invested in the company that became LibreDigital (now owned by Donnelley) because he had a vision that publishers should deliver their own ebook files. Murray’s concern at the time was about piracy and file control. Whatever it was, the ebook retailers (mostly Amazon back then) shot the idea down. No way were they going to trust a publisher, any publisher, to provide service at the level their consumers had been taught to expect from them. So the model we’ve lived with until Pottermore has been that each retailer has its own copy of the publishers’ ebooks, and they serve their customers and account to the publishers for what was sold.

Pottermore pointed the way back to Murray’s original vision.

A few weeks later, Macmillan announced that one segment of its company, tor.com, was going DRM-free, although not jumping into the full Pottermore model of serving the content themselves. (One Macmillan executive told me that they’ve been selling the books of anti-DRM crusader Cory Doctorow without protection for years, including through Amazon.)

Fritz Foy, the Macmillan EVP who oversees digital, is speaking about the DRM decision at our Publishers Launch BEA event on June 4.

Last Friday, the next round in this battle was fired. Berlucchi published a post calling on all the big publishers to copy the Pottermore model, and do it now.

How this will play out depends a bit on what happens with the DRM-free experiments now begun at Pottermore and about to start at Macmillan. If sales of their books collapse under the weight of ubiquitous piracy as a result, it would stop this kind of experimentation dead in its tracks.

It would also surprise a lot of people, including me.

If the net destructive impact on sales is too trivial to be measured compared with the DRMd status quo, then we are bound to see this practice spread, and quickly. And then all the biggest publishers could be compelled to return to Murray’s several-years-old vision with Pottermore’s execution template.

The question for the first publisher that wants to try this will be whether the power of a Big Six publisher to compel Amazon to play along is as great as J.K. Rowling’s Harry Potter franchise. It’s a really scary thing for them to do. After all, Rowling had zero digital revenue to protect and zero responsibility to anybody else for delivering it. All the major publishers have triple digit millions of dollars of Kindle revenue at stake and thousands of authors counting on them to deliver it.

But with Barnes & Noble now funded (by Microsoft) for battle for the next several years and Kobo and Apple committed to the fight as well, there’s a serious question as to whether Amazon would feel as comfortable going forward without one of the Big Six’s ebooks the way they have been willing to work without those from IPG.

In January 2010, John Sargent and Macmillan had a confrontation with Amazon and the retailing giant was forced to back down. The concessions that Charlie Redmayne of Pottermore (and he was, incidentally, recruited to that job from his position as Chief Digital Officer at HarperCollins) extracted from them are nothing short of stunning, but understandable if one considers what the impact of a Harry Potter ebook launch without the titles being available through Amazon would have been. (Oh, the headlines that would have generated!!!)

It’s easy for me to say, because I have nothing at stake, but I think Berlucchi is right. The big publishers can make this happen; it would change the game. I have trouble seeing any potential fly in the ointment for them except whatever would be the dangers of DRM-free. And that should be ascertained pretty well in the next few months.

There are still plenty of twists and turns to come in the evolving ebook marketplace.

It is important to remember that DRM isn’t Amazon’s only advantage or even their principal advantage. I’m not an Amazon fanboy (have you noticed?) and I read on an iPhone, but I buy most of my ebooks from the Kindle store because they offer the best shopping experience I’ve found.

However that (the shopping experience) isn’t a permanent advantage. The Kindle format and DRM are, as long as publishers feel DRM is essential.

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It is hard to believe that we’re starting to plan the fourth annual Digital Book World conference, which will be held January 16-17, 2013 at the Hilton in New York City. But we are.

The first DBW was held in 2010. Planning for it began the June before when David Nussbaum and Sara Domville of F+W Media called me to say “we think there can be a better conference than any we’ve been to about digital change in publishing.” They challenged me to come up with an approach and to take on programming the event.

What I hit upon then as a differentiating proposition was to make Digital Book World focus on the business issues created by digital change in trade book publishing. We wouldn’t focus on tech, per se. We wouldn’t focus on how digital change would affect publishers who didn’t rely primarily on bookstores to reach their customers. It has long been my belief that general trade publishers would be the most challenged by the digital transition because their core proposition, their key value-add, was putting books into bookstores.

That’s worked for us very well. Not only have we had three very successful DBWs, I believe we have really helped focus the conversation about the digital transition. When we booked agents to speak at DBW 2010, it was the first time they had been featured at an industry event on digital change. Of course, the agents’ role — and the nature of their organizations — has changed as much as publishers and booksellers have in recent years. We’ve looked at the globalizing impact of the digital transition, how bookstores are coping with it, how publishers’ relationships with libraries are changing, and, repeatedly, how digital change is affecting trade publishers’ organizations, staffing, and workflows.

Then in 2012, Michael Cader and I formed Publishers Launch Conferences because, as big and sprawling and complete as DBW is (and with 30 different breakout sessions plus a ton of plenary programming, 150 or more speakers, and about 2000 attendees, it is definitely the biggest conversation about digital change for trade publishers held anywhere on the planet), we can’t cover everything there and we need interim conversations throughout the year.

As it happens, PLC is letting us focus on subsets of the broader conversation — one might call them “verticals” — that require a deeper dive. Last year we used that capability to deliver “eBooks for Everyone Else”, the primer for ebook publishing without an IT department, in New York and San Francisco and a half-day show dedicated to children’s book publishing in Frankfurt. Both of these ultimately enriched DBW itself; we made “eBEE” a breakout track and did our own full day Pub Launch standalone on children’s book publishing as a co-located event at DBW 2012.

We have two exciting vertical shows lined up for Pub Launch 2013 that will definitely spawn programming for DBW tracks.

“Publishing in the Cloud”, which we’ll stage on July 26 at Baruch on 25th and Lexington in Manhattan, is about SaaS (“Software as a Service”) for publishing. We think SaaS is starting to change publishing practices, workflows, and the IT departments themselves. SaaS will mean a totally different deployment of technology resources for big publishers and enable capabilities that were previously out of reach for smaller publishers.

Although almost all the from-stage presentations at “Cloud” will be by publishers who are using SaaS services, the suppliers will be there too. They’ll meet the delegates at their sponsor tables during breaks and will also participate in “speed-dating” sessions, where the attendees meet sponsors and the speakers in small groups that enable exchanges about the very specific challenges attendees come to the conference to have addressed.

“Publishers Launch Hollywood”, which will take place on October 22 at the Hollywood Renaisssance, will be the first conference event specifically designed to introduce the movie and TV communities to the new opportunities created by digital publishing. Networks, studios, producers, screenwriters, and agents in LA all control properties that would make books that can sell and can now be delivered at a nominal cost. We know of one major studio about to announce a program to sell 300 “classic” scripts as ebooks. NBC, the one major network not already affiliated with a publisher (CBS has S&S, ABC has Hyperion, and Fox has HarperCollins) has started its own ebook publishing operation. These initiatives are the tip of an opportunity iceberg and we plan to bring that message to Hollywood and deliver the information about all the new ways that exist for film and TV properties to generate more fame and more revenue that are now readily available.

Both SaaS and publishing’s Hollywood connection will find their way to the DBW program for next January. They join a list of topics we think are moving up on the agenda for publishers and that we’ll want to cover pretty thoroughly at DBW 2013..

Digital is making the world smaller. That creates opportunity for US publishers to sell more abroad and opportunity for foreign publishers to sell more here. We will feature more on export, more on import, and more conversation with international publishers in general next January. (There’s quite a bit of this on our PLC BEA show, which will take place on June 4.)

Pretty clearly, DRM (digital rights management) is an element in transition in our dymanic ebook world. We’d say that conversation began in earnest at DBW 2012 when Matteo Berlucchi, the CEO of ebookseller Anobii, made his plea to eliminate DRM as a way to combat Kindle lock-in. Now Pottermore is selling DRM-free ebooks, getting heretofore inconceivable concessions from Amazon and other ebook retailers as a result, and Macmillan has just announced that their Tor.com division will make the same switch in the next two months. The future of DRM, and, more to the point for us, the impact on piracy and on the overall marketplace, will be front and center at DBW 2013.

Discovery is a topic that has been on our minds for some time, but it is getting increasingly crucial as bookstores decline. Discovery is about metadata, of course, and that’s a subject we’ve covered at DBW before (and will again.) Many social reading and sharing options are being developed. Whether these give publishers and authors the tools they need to propel a book to the level of awareness necessary to get sales and word-of-mouth rolling is something we’ll definitely be trying to learn more about at DBW 2013.

The importance of brand and community is increasingly obvious. I’ve been thinking about a whole conference on verticals (which we’ll probably do as a Publishers Launch event in 2013), but we’ll start that process at DBW 2013. The best example we know of a multi-niche publisher is F+W Media, the owners of DBW. I think 2013 may be their time for a more featured role in the programming. Under the same heading, we take note of name-gathering efforts at several major houses. How names get gathered, how they get segmented and used, and what difference it is making to increase sales and reduce marketing costs will be a prime topic at DBW 2013, particularly now that Pottermore has shown us a whole new way name-gathering efforts might work.

As the traditional paths to market (bookstores) atrophy and sales of books prove more difficult to get, alternate revenue opportunities are going to grow in importance. We know of some. For one thing, international markets are more accessible. There are also new business propositions like Semi-Linear “citia” apps for high-concept non-fiction and Yummly for recipes and food content that offer publishers licensing revenues. And publishers may learn that some of their future dollars will come to them in pennies. Micro-transactions enabled by Copyright Clearance Center (a Publishers Launch global sponsor, but also the purveyors of Rightslink, a capability we think publishers will increasingly find indispensable as a rights marketing tool) and AcademicPub, among others, will likely deserve a real airing by DBW 2013.

We’re also seeing new models developing inside and outside of publishing houses and we’ll be putting examinations of them on the program too. Late last year, Penguin launched Book Country (a portal to help fledgling writers improve their work and get to market) and Sourcebooks is pioneering an “agile” publishing model with futurist David Houle (a hit with our DBW 2012 audience whom we’ll probably bring back in 2013.) Sourcebooks and F+W are also trying subscriptions, a model pioneered by O’Reilly with Safari a decade ago. To the extent that DRM fades, experimentation is further enabled. New models will be an important topic by next January.

We’ll also be gathering data from any source we can and as we have at all DBWs past. Self-publishing is a subject that is bound to get coverage beyond Book Country; I’d love to assemble a panel of self-publishing authors that have turned down major deals (and have really done it themselves instead, not signed with Amazon as their publishers!) And, of course, ebook pricing will be a topic we’ll figure out a way to cover even though most of the retailer and publisher players feel highly constrained talking about it.

The digital transition won’t last forever. Transitions don’t. At some point, the transition is over and we’re into a new world. But if one prediction for eight months from now is safe, I think it would be that we’ll still be in a state of flux next January, with a year away as hard to predict then as it was last January. Digital Book World every January and Publishers Launch Conferences throughout the year still have a lot more value to deliver.

What I want from writing this piece are suggestions for what we should cover at DBW. What do you think the burning issues will be in publishing’s digital transition by next January? We’ll be convening the DBW Conference Council at the end of June to discuss this question, but we’d love to be further informed by your thoughts by then. Comments are fine; sending us emails (to [email protected]) is fine; making suggestions to us when you see us at other shows is also fine. But please tell us what you think.

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The DoJ lawsuit and settlement, Amazon’s next giant step of growth in sales,  the Business Week article on Amazon pushing publishers to allow them to print slow-movers on demand, and then this morning’s New York Times story about a book driven down to a price of zero on Amazon (presumably by an algorithm), combine to raise again the questions of whether the traditional legacy publishing model is worth saving and whether it can be saved.

It really isn’t hard to appreciate the modernist, digitalist, Amazonian point of view. Trade publishing has historically been one of the least efficient businesses in existence. Most books don’t sell well; most authors are frustrated; and getting into the game requires jumping numerous hurdles to even get to the starting line.

The ebook model and online print distribution really are much more efficient than store distribution of printed books has been in reaching the part of the market that buys online. Returns really can be eliminated. In many cases, perhaps most cases, you really can just print the book when it is ordered, not on a wing and a prayer weeks or months before it is ordered.

If you start from the point that the manuscript is completed, it is easy to see why many aspiring authors would choose self-publishing, primarly through Amazon (because they reach the most customers), rather than take weeks or months to find an agent who will take weeks or months to put a proposal in shape to then take weeks or months to find a publisher. And the publisher will then take months, at least, to put a book into distribution. And that’s if you succeed. Most attempts even to secure an agent — just the first step — fail.

Failures overwhelmingly outnumber successes at every step. But, of course, they do in self-publishing as well.

You look at what the publisher will contribute, which is often described as making the book better and more saleable by copy-editing, putting on a decent cover, listing it for sale in places the industry and public can find it, and — for a while longer — putting print copies into stores. All of those things can be purchased, so theoretically you don’t have to give them up just because you self-publish, if you think they’re worth paying for.

And, of course, the author who goes the self-publishing route keeps a lot more of the consumer dollar than the one going through a publisher.

If you’ve got the manuscript in hand and you have a choice between going that route and having books to show your friends within days at just about no cost, why wouldn’t you seriously consider it? Why wouldn’t you do it? It seems like a no-brainer. That explains the conviction with which writers who have succeeded through this means, even those who didn’t quite do it themselves but instead just agreed to be published by Amazon, are so unsympathetic to the concern that Amazon’s business practices could cripple the legacy publishing business.

Inefficiency gets its just desserts.

But it isn’t yet that simple and it may never be that simple.

There are (at least) four serious qualifiers to the logic advocating self- or Amazon-centric-publishing. One is in these words: “if you start from the point that the manuscript is completed.” A second is the assumption, never explicitly stated but tacit in the recurring arguments from Barry Eisler and Joe Konrath (who are the proud poster boys for Amazon-instead-of-a-publisher), that the print-in-store component already doesn’t matter.

Third is that legacy publishing delivers an integrated business model that bundles all the services an author needs together and also includes a shift in risk from the author to the publisher. Self-publishing shifts the risk back.

And fourth, and not trivial, is that legacy publishers sell ebooks for higher prices than the self-published authors do. Expressing things in percentages might elide realities in dollars.

Requiring the whole manuscript before you start doesn’t change things for most unpublished novelists because most publishers won’t buy a first novel on an outline. And it might change little for the most established novelists because they’ll presumably make money on whatever they do, so they just keep writing.

But most other books published by the existing publishing establishment are financed from a point long before completion, unlike the situation for every self-published author. And that financing model is a risk-shifter that any author who can get it should be reluctant to relinquish.

(Yes, I know that Amazon is now publishing books and paying advances, including a substantial one to Eisler. But, remember, when they do that the royalty differential isn’t four times the legacy publisher ebook royalty rate [70% to 17.5%], it’s double, because Amazon pays 35% to the authors they sign, not 70% as they do for self-published. And there’s still no store distribution, which reduces revenue and marketing. The Amazon retail price will be lower. That may drive up units, but it also confounds the straight percentage comparison of the author’s take. A meaningful comparison between the marketing Amazon can do that nobody else can to the publisher-like marketing Amazon might do but hasn’t demonstrated yet is simply not possible until they publish a lot more books.)

Publishers actually weaken their own case when they articulate their value as “curators”. That makes it sound like they’re squeezing our cantaloupes for us. Who needs that, right? We can be our own judge of what’s ripe and what’s not!

They’re doing much more than that. Publishers aren’t squeezing the cantaloupes. They’re deciding which cantaloupes to invest in before the seeds are in the ground. They’re deciding based on the farmer and the climate and the soil and the weather forecast which cantaloupe growers get to participate in the market. And, if they don’t invest, those cantaloupes don’t get grown and they don’t get squeezed by anybody.

And although I’ve been as Cassandra-like as anyone fearing the creeping trivialization of the bookstore channel, it is definitely not dead yet. In-store sales of printed books still constitute most of the sales for most of them (although, admittedly perhaps less than half for a lot of fiction.) And experts like Peter Hildick-Smith of Codex believe that in-store discovery is still a critical driver of online sales, print and digital.

There is no doubt that a lot of what legacy publishing spends its money on will no longer be necessary in a few years. If the stores are mostly gone, or aren’t critical to discovery or sales, then printing expertise, warehouse and distribution capabilities, and all the investments and workflows required to maintain them won’t be necessary either. However, that day certainly hasn’t come yet (even if the digerati think it has!)

But, even more important, and so frequently elided in the discussions of the value of legacy publishing and whether it is worth an effort to preserve it, are the investments publishers make in books that would simply not be written if they didn’t.

If legacy publishing had been run by modern business principles, much would have changed years ago. For example, the trade would get smaller discounts on the biggest titles. After all, if part of the margin given to retailers is for “marketing” (i.e. “discovery”), they need a lot less of it for Harry Potter or the latest Patterson than they do for a first novel. With today’s computers and business acumen to work with, it would seem silly to offer the same margin across all titles on a list, when some clearly need less than others to get placed and sold.

It is partly the standard treatment across all books that is coming back to bite publishers now. Amazon doesn’t discount all titles equally; nor does any other bookseller. They give back the margin on those where it benefits them to do that, selectively. The publishers could have pre-empted that opportunity, or at least made it much more difficult, by varying the margin they offered by the sales appeal of the book. They adjust margins on the royalty side of the equation by paying advances that don’t earn out to big established names, effectively delivering them a higher percentage of the take. But they give the same margin on every title, regardless of cost or appeal, to the trade.

Sharing media attenton with the accounts of Amazon and DoJ recently have been stories about Robert Caro, who wrote The Power Broker about master builder Robert Moses 40 years ago and leveraged that success into a life’s work series of books about Lyndon Johnson. Caro was working on negative cash flow — selling his house and with his family being fed on his wife’s paycheck — until Knopf took over supporting him. If they’re printing 300,000 copies of his next book (which they say they are), that’s probably five million in billing on the first printing, plus ebook revenue, in the immediate offing. They’ll get their money back.

But they had to decide to risk it. Publishers do that every day. Sometimes they don’t get that money back.

Yes, there is Kickstarter as the new spec funding source. But how many publishers would fund projects if they couldn’t manage the creative process or understand and control the marketing and distribution that would take place when the project is finished? Even “finished’ is a complicated concept in the world of publishing. It brings to mind the saying I heard once, but can’t attribute, that “works of art are never completed; they are only abandoned.” Deciding when a manuscript is “ready for publication” is a judgment call that is essentially commercial: when will more work no longer lead to more sales?

Since Kickstarter funders won’t have that kind of control, believers in a rational market would also have to believe that projects that many publishers would fund won’t attract the investment they require through Kickstarter. Perhaps a private equity fund tied to authors would work better, but that would require margins to pay authors and acquiring editors and repay the investors. Even then, you wouldn’t necessarily have the integration of services combined with assumption of risk that makes the current system, which is so beneficial to so many authors, also work for the publisher/investor.

Publishers may never have unbundled the big books from the others in how they treat them commercially, but an Amazon-led marketplace is now doing that for them. The less help an author needs from a publisher, the more appealing the fatter margins of self-publishing look. The less value there is in the retail channel for print, the less lost by giving up the retail distribution in favor of an online-only sales outlet.

Despite that, few big authors  have gone for Amazon’s money. Tell the truth: wouldn’t you have expected that with Amazon’s power, deep pockets, and an experienced book acquirer at the helm, they’d have attracted some bigger “gets” by now? I’ll admit that I did.

Besides delivering widespread print distribution and funding projects speculatively within a system that bundles services and accepts risk, there is one other thing that separates publishers from Amazon as a route to the marketplace for authors. It might be the most important thing.

Amazon ultimately only cares about sales made through Amazon and, if they were candid, would admit that any sale not made through them or an affiliate is a target for future growth. Publishers want as diverse a distribution network as possible; it maximizes sales and exposure for the books they’re charged with and, not at all incidentally, gives them a reason to exist.

This difference in perspective has big implications. USA Today, for example, considers the breadth of a title’s sales across retailers as a component of its bestseller calculations. A book that sells through only one retailer (and that would mean Amazon) doesn’t get the same consideration as one that sells the same number in multiple channels. Similarly, how would the New York Times feel about reviewing a book that isn’t available in stores or in all ebook formats? They might legitimately balk at reviewing something that many, if not most, of its readers won’t encounter commercially.

The divergence in point-of-view is illustrated in the conflict over print-on-demand that is discussed in the WSJ piece. From where Amazon sits, it is simply more efficient to print what they need of slow-movers when they need them. They can probably make an offer to publishers that looks “margin-neutral” or even more favorable. But publishers know they have to print for everybody else, and taking the Amazon demand out of the print equation — particularly for slow-movers — would really disrupt the overall economics for any title that weren’t already printing on demand. These overall marketplace economics aren’t Amazon’s concern.

So as Amazon continues, as any commercial entity would, to set prices, seek margins, and adjust practices and workflows in ways that work for its own business, it drives the industry to “efficiencies” that take the margin that finances all publishing activities — those that will fade away like print distribution and those that are indispensible like funding and developing new projects — out of the commercial equation.

That can only really improve things for authors that don’t need or want those functions. Since the most reliable big authors with savvy and competent agents are already getting 60 to 80 percent of the revenue their books produce guaranteed to them, it is not clear that even the notionally higher ebook royalties deliver a better deal than the publishers do now for that group. But  the scads of authors who can’t get, or don’t think it is worth the effort to find, an advance-against-royalties publishing deal will be happy with Amazon. Indeed, they’re probably happy now.

As bookstores continue to diminish, though, it will get harder for the publishers to continue to compete for the big authors, particularly if Amazon is the one picking up the share the bookstores relinquish. That could change the status quo and Amazon might start to get big authors then. If and when enough of the big authors move on, the legacy model will break and we’ll be in a different world.

When that day comes, I’m sure Amazon will recognize it and change their margins and practices to suit. Perhaps the Department of Justice will want to reconsider its thinking then as well.

Remember, the DoJ wants to hear from us about the settlement unfortunately (in my opinion) agreed to by three major publishers. We still have several weeks to get those in. I hope this post contains useful thoughts for some people formulating their response, which I am still doing. Whenever you’re ready, send your letter to:

John Read, Chief, Litigation III Section, Antitrust Division, U.S. Department of Justice, 450 5th Street, NW, Suite 4000, Washington, DC 20530

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This post contains a batch of observations from this year’s London Book Fair. Some of it recalled an experience from about 20 years ago. We’ll begin there.

In the early 1990s, Microsoft was on a mission to get computer hardware manufacturers to install CD-Rom drives in new machines. Microsoft had a very simple motivation. Software then was sold as hard goods. One CD-Rom could hold the data that required many, many diskettes. So if the storage and transfer medium were changed, the cost of goods for Microsoft would drop sharply. Since the value customers were buying was the code, not the package, Microsoft figured (correctly) that they’d be able to keep the price of software the same and simply make more profit if their customers could handle the CD-Roms. (Please note this logic applies very nicely to any discussion of what ebooks should cost in relation to print.)

But, of course, most people don’t load that much software, so the CD-Rom argument would be strengthened if content were also available on them. That inspired Microsoft to stage a half-day conference to “educate” the trade publishing community about the “opportunity.” (Of course, areas of technical and professional publishing, which had opportunities in delivering very large amounts of data, had already started to move in that direction; the value of CD-Roms was real and obvious to them. They also had vertical audiences of professionals that were perfectly able to hook up a CD-Rom drive to their existing machines, and did.)

At the conference, Microsoft basically showed all the “cool” things the computer could do: delivering sound and images (not video so much in those days) and hyperlinks. They basically said, “we don’t know how you’re going to make money on this; you’re the content experts. But we’re giving you this great new canvas to create on. Create!!!”

The excitement Microsoft and others were able to generate led to a burst of activity by publishers to create CD-Roms. Very few people found this new packaging of content particularly appealing at any price, and they actually were listed at very high prices. In other words, the techies had no clue about the content business and their advice to it was self-serving.
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Last Monday in London, Susan Danziger of Publishing Point hosted The Great Debate. The proposition being debated was that the new tech companies would ultimately deliver a “knockout blow” to the conventional publishing establishment. Michael Healy of Copyright Clearance Center moderated.

Speaking for the new tech companies were two stunningly successful new technology entrepreneurs: Bob Young of Lulu and Allen Lau of Wattpad, both of which take anybody’s content and put it into circulation. Lulu’s core mission is seamlessly turning content into printed books and Wattpad’s is about organizing it for crowd-sourced consumption and discussion.

Opposing them were two publishing veterans (and, I’m happy to reveal, good friends): Evan Schnittman and Fionnuala Duggan. Schnittman is about to move from a global sales and marketing position at Bloomsbury to become Hachette Book Group USA’s head of sales, marketing, and digital. Duggan came from the music business, spent several years heading up digital at Random House UK, and is now Managing Director for International Course Smart, the digital platform created by a consortium of college textbook companies.

There is no ambiguity about what happened in this “debate”. The format required each of the approximately 250 attendees to register their opinions as to which side they favored on the way in and then again after the speakers had presented. The “establishment” side — the Schittman and Duggan side — picked up about 100 votes with their arguments from where the audience was when it came in. The incoming audience favored the proposition that the knockout blow was coming by a wide margin. After the debate, the margin was as wide in the opposite direction. (Some were undecided; so don’t drive yourself nuts trying to work out the math.) It is hard to imagine a more decisive outcome.

Of course, Duggan and Schnittman know quite a bit about technology. But neither Young nor Lau seemed to know anything about the content business. That shouldn’t be a surprise. Both of them have gotten rich in businesses that are ostensibly content businesses, but they aren’t. Their financial success is not dependent on the quality of content, the skill in developing or marketing it, or its inherent appeal. In fact, Lau kept touting the volume of what he hosted and claiming that technology would handle the curation perfectly adequately in the future. This was “proof by assertion.” It was the ultimate declaration of faith. The audience didn’t buy it.
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On the day before, Schnittman had hosted the Digital Minds conference. One of the keynote speakers was an old friend of his, Andrew Steele, who is the creative director of the very successful web site, Funny or Die. Steele told us the story of that business, which is instructive.

The original concept of Funny or Die was to crowd-source user-generated content, like YouTube. They’d build up traffic and monetize it. But there was a problem. Most of the amateur stuff they got just wasn’t funny. As Steele points out, we go to YouTube when somebody sends us a link for something good. We don’t go to YouTube and browse all the amateur content. There’s a reason for that. Most of it is crap. And most of what Funny or Die was getting from the crowd was crap. They weren’t getting page views. They weren’t going to succeed.

So they tried something new. (That’s called pivoting, for those of you who don’t spend enough time talking to the tech-and-finance community.) They got professionals to create content. Things changed quickly. By allowing their professionally-produced content to go off the site while it maintained the “Funny or Die” branding, they soon built a large audience. It now keeps growing and growing. Success is assured. But the lesson Steele emphasized was that professionally-created and -curated content succeeds where amateurs fail. He sees no reason why it should be any different in our world.
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I got a chance to visit with Charlie Redmayne of Pottermore. He was a bit bleary-eyed at the Digital Minds event on Sunday because the site had opened to the public that weekend. When I saw him on the show floor during the week he had just benefited from a full seven hours of zzzs, and he was enjoying his status as a game-changer.

The key to Charlie’s disruption was his willingness to substitute watermarking for DRM. He said it definitely made him nervous to do it, but he couldn’t see any other way to achieve what he wanted for Pottermore. He had to be able to sell to any device; he wanted to be able to allow any purchaser complete interoperability. There was no way to do that and maintain DRM.

His technical infrastructure is awesome. It stood up even though the average length of engagement by each user was three or four times what they had projected and the traffic exceeded expectations as well. But the most startling early news was what he reported about piracy.

Apparently, Potter ebook files started showing up on file-sharing sites pretty much right away after they opened. But before they could serve any takedown notices, Charlie says the community of sharers reacted. They said “C’mon now. Here we have a publisher doing what we’ve been asking for: delivering content DRM-free, across devices, at a reasonable price. And, by the way, don’t you know your file up there on the sharing site is watermarked? They know who you are!” And then the pirated content started being taken down by the community, before Pottermore could react. And very quickly, there were fewer pirated copies out there than before.
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I heard a rumor from a very reliable source that two of the Big Six are considering going to DRM-free very soon. The rumor is from the UK side, but it is hard to see a global company doing this in a market silo. Another industry listener I know was hearing similar rumors from different sources.

Could we see another crack in this wall sometime soon, maybe this year?

This is one lecture the techies have been delivering to the content folks that might have been on the money. I’ve always been skeptical that DRM prevents piracy, but I’ll admit that I was more concerned in the past than I am now that it would cost sales.
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At the Digital Minds conference, there was a panel on children’s content publishing. Sara Lloyd, head of digital for Pan Macmillan, moderated a group that included Belinda Rasmussen from her own company, Eric Huang from Penguin, Jeff Gomez of Starlight Runner Entertainment, and Kate Wilson of Nosy Crow, which is a new children’s “book publisher” that seems much more focused on apps.

I have trouble seeing a future for book publishers in the kids’ content world. Everybody seemed to agree about what the apps of the future required (interactivity, game elements, animation) and that the parents of five years from now will be much more likely to hand their kids in the back seat an iPad than a book. So I asked them, as books diminish, what will publishers have to offer here? Wouldn’t this business belong to people who know gaming and animation, not books?

Kate seized the question from the stage and answered in a way that seemed to confirm my conjecture. “We don’t hire people with book experience,” she said. When I checked in with her later, she agreed that books were a revenue-generating convenience to get her company started. She sees the day when they won’t be part of her business anymore. What excited her (and well it should) was that they’d just made their fifth app and had created all the software tools they needed to build it while making the first four. The cost of creating their apps is plummeting because they’ve built the toolkit.

———————-

The news about the DoJ’s charges against five publishers and Apple and their settlement with three publishers broke just before LBF. It was a topic of much discussion, of course. Most people in the industry are horrified by the lawsuit and the settlement and there is really widespread fear about the consequences of ending the agency model. (The settlement doesn’t do that, but having three big publishers pushed to allow discounting for the next two years at least certainly cripples it.)

On Publishers Lunch, Michael Cader rounded up an impressive set of links to media around the country who are just as horrified as publishers, retailers, and agents at LBF were. Here are the stories from the New York Times, the Wall Street Journal (behind a pay wall, unfortunately), Slate, and the Los Angeles Times.

We understand that an amendment to the Tunney Act obliges the DoJ to take note and report to the court any opinions expressed in writing by the citizenry about a settlement that takes place in a case still being litigated. Cader notes that the law has usually been used to expand a judge’s ability to exercise oversight when the court believes DoJ hasn’t been tough enough. In this case, we’ll be asking them to pare back a settlement, which is apparently a less common use of the law. But the law allows us 60 days from the settlement to get those letters in and it is what we in the community can do to help fight this battle.

As I wrote in my summary of the impact of this settlement, it is one where Amazon and the cost-conscious ebook consumer win, but everybody else (and that means authors, publishers, retailers, and the public that wants good books, as I explained on NPR) lose. The low-price side of this is easy to understand. The publishing business side isn’t. (If this were a GOP DoJ, I’ll admit that I would have inserted a snide remark here about what this shows about their IQ.)

One point to note here, which didn’t occur to me at first, is that the three settling publishers are about to game the two fighting publishers (and, perhaps, Random House) the same way Random House gamed them when they stayed out of agency at first. Whether or not they stick with agency, they are now enabling discounting, so they might get the same benefit of the retailer discounting their goods while they retain their revenue that Random House got for the first year of agency.

In other words, more weight on the shoulders of the two companies, Macmillan and Penguin, who are carrying the fight for the whole industry. And that means more reason for the rest of us to try to help.

I am working on my letter to DoJ now, and I’ll publish it in a future post. I hope all my readers who understand what’s at stake here will also write to Justice. Address your letters to

John Read
Chief Litigation III Section
Antitrust Division
U.S. Department of Justice
450 5th Street, NW, Suite 4000
Washington, DC 20530

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Jane Litte at the DearAuthor blog has written a remarkably concise, clear, and cogent piece about the DoJ case. This whole paragraph is a link to it. That’s a signal.

In fact, if this is a subject of high interest to you and you are not a lawyer, I would encourage you to read Jane’s post before you read this. I am not in any way attempting to substitute for or contest anything in Jane’s piece, which explains the law and the issues in terms that really helped this layperson feel like a participant in the discussion. A number of things struck me as I read it, but there were three paragraphs Jane wrote that called for answers. I hope she and others will find this a useful addition to her mighty contribution to the discussion. Quotes from Jane’s piece are in italics.

There are two elements that stood out for me in reading the DOJ’s complaint. First, Apple set the pricing floor and ceiling for ebooks and every publisher accepted those terms. Did the publishers individually attempt to negotiate for differing floor and ceilings? Why was it the same for every publisher? No other app in the app store has a pricing floor or ceiling like the books in the iBooks store. Why were books treated differently?

No other app in the app store has a print equivalent. The pricing floors and ceilings are, as I understand them, all expressed in relation to the print retail prices. That logic cannot be extended to other apps in the app store. These restrictions, almost certainly sought and engineered by Apple, were to assure them that there would be an understood relationship between the print competitor and the ebook. Whatever that means, I find it hard to see how it constitutes publishers colluding with each other.

And the publishers chose their print prices, so, in effect, they chose their ebook prices as well. Without collusion. Publishers don’t talk to each other about what retail prices they’re setting.

Second, the David Shanks email to Barnes and Noble. In the email, Shanks urges Barnes & Noble to punish Random House for not hopping aboard the pricing agreements that the other publishers had agreed to with Apple. This type of email is evidence that the DOJ will point to as attempting to police or enforce a collusive agreement. In other words, if there is only conscious parallelism why would Shanks need Random House to engage in the same type of pricing. That is one piece of evidence that seems to rule out independent action.

There is absolutely nothing strange about this nor is there any reason to think Shanks wasn’t acting totally independently.

Remember that Barnes & Noble entered the ebook market with the Nook in November 2009. They were very explicit and clear with all their trading partners that the Amazon pricing was a big problem for them. You don’t need to have it spelled out to you or be a rocket scientist to see the unpleasant consequences of having to give away all that ebook margin: fewer brick stores, less resources to develop the Nook against the Kindle, and perhaps the need for more margin from the publishers on the print and store side. All the publishers were aware of that.

When Random House stayed out at first, some people were confused about that choice but the insiders understood that they had “gamed the system”. Now they’d sell their ebooks to Amazon at the old (higher) wholesale prices and get the benefit of the lower retail prices because they had the branded loss leader category to themselves. And perhaps they’d even get better treatment from Amazon on their print books too, because, after all, their titles were the ones Amazon could promote which would promote their ebook pricing policy at the same time.

I can tell you that this caused massive teeth-gnashing at all the other houses. But there was, actually, not a damn thing they could do about it. They had to swallow lower revenue per copy for their books as well as a price-disadvantage in the marketplace and they did it because they thought leveling the playing field on price was so critical to their futures. Meanwhile, from their perspective, the biggest player sat out the fight.

And from Random House’s perspective, they did the best thing for their owners and their authors.

At the time, all the other houses were aware that they had done all this partly for B&N and that B&N was presumably being hurt by Random House’s unwillingness to go to agency, and, dammit, why wasn’t Barnes & Noble doing something to push Random House in the right direction?

Executives from many of the other firms, although not David Shanks, asked me why Barnes & Noble wasn’t pushing Random House into line on this. In fact, I made the observation to people at Random House that the question got asked by their competitors. It would have been neither polite nor politic to push the conversation any further than that, but nobody registered any surprise.

My own read of the B&N-Random House relationship is that it has been strong for years on many levels and it therefore withstood this blow to it without disrupting most of what else was going on. I have no doubt that B&N expressed displeasure about it and that making them happy was one of several factors that motivated Random House to move to agency pricing a year later.

But David Shanks was representing a point of view that every informed executive at every major publishing company had. He didn’t need to talk to anybody else to come up with it and it is totally appropriate within the context of a frank and open relationship with a major trading partner for him to have said what he did to B&N.

The problem here is that Apple was not (and is not) a dominant player in the digital publishing market. I don’t know if iBooks has even a 1% market share. The hub in a hub and spoke conspiracy ordinarily has a dominant market share such as the two theatre houses that controlled the majority of the market in which they had first run theatres. The DOJ identified the relevant market in its petition as trade ebook market. I find that definition too narrow and wonder if it won’t spike the DOJ’s suit.

What I can tell you is that major publishers put Apple’s share of the ebook market to me at between 10 and 20 percent. Because they don’t have as wide a selection of titles as the others, it is likely that their overall share is something slightly less than that. Dominant? No. Third in the market in the US.

And these italics are me again, not Jane. I have another post just about ready that I was holding for tomorrow morning but now might hold another day.

I am going to do all I can in the next 6 weeks to encourage an understanding of the DoJ case (which I think Jane makes clear is not close to overwhelming) and the necessity of people in the industry registering their concerns with the settlement, which could be devastating if it became law. When I saw Jane’s post a couple of hours ago, I thought I could usefully add to the discussion and I want to encourage as much traffic to her as I can. I think she presents some foundational understanding here that is very important for people to have about the law. I was encouraged by her explanation and analysis that there is more hope for what we need as an industry to happen than I had previously thought.

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This post went up around midnight last night (Saturday, 4/14) in London, or between 6 and 7 NY time. I had been concerned about a part of it that has been edited below. If you read it before 5 pm today (Sunday, 4/15), you’ll not have seen this correction. And you’ll see some comments that obviously pre-date the update.

Well, we certainly have a confused book business on our hands following the announcement of the Department of Justice intervention last week.

According to my (admittedly tentative) understanding:

1. We have three Big Six publishers (Hachette, HarperCollins, and Simon & Schuster) that have agreed to a settlement with Justice that obliges them to modify their agency arrangements over the next 60 days in ways that will eliminate their ability to control discounting in the supply chain for the next two years.

2. We have two Big Six publishers (Macmillan and Penguin) that will contest the DoJ position that they acted illegally (in collusion). They can apparently continue to manage their business with agency pricing the way they have, at least until a court rules. And, as we know, that can take a while.

3. We have one Big Six publisher, the biggest of all (Random House), which can continue to sell under agency terms without restriction and without a lawsuit to defend. Why? Because they didn’t take simultaneous action with the other five and were, therefore, not implicated in the alleged collusion.

4. Agency terms, including even most favored nation clauses (which never really affected the Big Six anyway), have not been ruled illegal. (Cader said in his post on Friday, blocked by paywalls I think, that, as a result of this set of legal actions “agency itself is demonstrably considered legal.” If that is accurate, and he almost always is, that is certainly an unintended consequence.)

5. The DoJ delivered some convincing evidence, surfaced on the Melville House blog, that despite my conjecture to the contrary, big publishers did discuss agency among each other before they implemented it. That certainly doesn’t look good. But whether or not it was implemented legally does not affect my opinion about the value of agency or the damage from losing it.

Added later. But, aha!!! This is not convincing evidence of a conspiracy. It is most likely that this discussion, assuming the email quotes are all legitimate to begin with, was about Bookish, the book retailing initiative funded by Hachette, Simon & Schuster, and Penguin. If that’s true, it would suggest that HarperCollins was an early participant in the conversations about starting it. That makes sense. HarperCollins is a partner with Penguin in the financing of Anobii, an ebook retailing site in the UK. 

And hats off to my great friend and favorite consulting competitor, Lorraine Shanley of Market Partners, who made the penny drop for me in a conversation at the Digital Minds Conference today in London! I was only comforted when I spoke to one of the smartest guys in trans-Atlantic digital publishing who said, “of course” to this when I told him, just as I did when Lorraine told me. Like me, he didn’t get this right off the bat!

6. The publishers who settled appear to be on notice that the new arrangements they create to replace the status quo better not look too similar to each other’s when they’re done. (This seems extraordinarily difficult to me. The accounts actually limit the amount of variation that can exist…)

7. In a separate proceeding from DoJ, the settling publishers appear on the verge of refunding money to consumers who “overpaid” for ebooks. (This is a result of settling lawsuits arising from States, not DoJ.)

8. “Loss-leading” sales were addressed by Justice in a very creative way. They are banned, not on a “per-sale” basis, but rather on a “aggregate” basis. So retailers can give away ebooks. Heck, they can pay customers to take some ebooks, as long as they make back the margin they shed on other ebook sales from the same publisher. Since Amazon has never done anything else (they told me very clearly, and not under NDA, two years ago that they discount a small percentage of the total titles that constitute a big minority slice of total sales and their overall ebook sales deliver positive margin) and nobody else could afford to, that’s a restriction without any real meaning.

Looking back at the post I wrote six weeks ago when the possibility that agency would be ended or damaged first surfaced, I find nothing I want to take back or change.

I would summarize the situation this way. Amazon (which includes any other player largely dependent on Amazon) and the most price-conscious ebook consumers have won. Everybody else in the ecosystem: authors, publishers, and other vendors, have lost. The reaction from all quarters seems to confirm that analysis.

The biggest question going forward is how Amazon will react to this. Cader’s unique and invaluable analysis says that Amazon will have a “pool” of about $113 million for discounting and incentives in the coming year. B&N, with half their market share, would have about $57 million.

It will be fascinating to see how Bookish, owned by three Big Six publishers (two that settled, one that didn’t) navigates all this if it opens, as rumored, between now and BEA.

The Digital Book World website (a fine institution I have nothing to do with; we just program their annual NYC conference) reports that James McQuivey of Forrester expects Amazon to be very restrained in how they’ll employ discounting when the dust on this all settles (in about 60 days). I’d actually expect precisely the opposite. I think Amazon will do the splashiest discounting they possibly can, making the point as loudly as possible that they deliver the lowest prices to the consumer and daring their competiton to match them.

Every company in the industry is going back to the drawing board. Only one is not unhappy about it.

There’s a response from Dick Heffernan, President of Sales at Penguin buried in the comment string after my last post making the point that Penguin has also not cut its sales force in recent years. I congratulate them for that and I’m sorry that I jumped to the conclusion that because the major house senior executive who mused about Random House saw their behavior as unique that it must be so. I think the insights from Random House were useful — the comment string and traffic to the post seem to confirm that — but I’m also happy to also acknowledge Penguin’s persistence in maintaining service to the bookstore channel.

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I was brought up to believe in the virtues of a large field sales force. One of Dad’s early successes in his career as Director of Research at Doubleday was when he analyzed sales rep effectiveness to advise the company about the optimum number of reps to keep when they combined sales forces that had 10 and 14 members, respectively. The company expected him to come up with a number between 10 and 14, or, perhaps, between 14 and 24. His careful analysis of the impact of reps calling on stores led him to recommend that the new sales force consist of 35!

This decision was contrary to the contemporary practice and reasoning of all other publishers.

And very quickly thereafter, Doubleday concluded that taking orders was not the most important function for the rep. Influencing display, store merchandising, and sales clerk awareness of Doubleday titles were where they came to believe the big wins were.

A lot has changed since then, of course, including the ubiquity of computerized inventory management tools, very fast service nationwide from well-stocked wholesalers, and the growth, and then decline, of bookstore chains. But, most of all, we have gone from a country where the number of bookstores was organically increasing to one where it is, clearly, organically diminishing.

Is a large field sales force still a good idea? Dad died 10 years ago, but I am pretty sure he would think it was. He’d be very pleased to see what Random House is doing. They are maintaining a force of well over 100 reps in the field (among several different sales organizations with defined product or account specialties) while everybody else is cutting, usually from a much smaller base. They are, as he did, operating contrary to the contemporary practice and reasoning of all other publishers.

We’ve tried to get at the question of sales force deployment before but I had clearly not focused sufficiently on Random House. We had a session at Digital Book World in 2011 about it and Jaci Updike of Random House (who, as you will see, was a key actor in all this) was on the panel. But the Random House initiative we’ll be talking about below was only in development then. The story that was told at that session, and in industry news reports from time to time, was that the combination of field realities (fewer stores) and new capabilities (like electronic catalogs created by some houses and the industry electronic catalog Edelweiss) made it possible to cover the retailers with fewer reps. Not only that, sales conferences — a very expensive exercise that requires enormous travel expense to bring reps together — were sometimes being replaced by videos of editors pitching their books. The videos, unlike the reps, travel for free.

What made me want to learn more about what was going on at Random House was a conversation I had two weeks ago with another Big Six executive who wondered what they were doing. That person was aware of cuts at their own company and at others, but not at Random House. It seemed impossible that the biggest publisher in town could be cutting sales force and nobody else knew about it; those dismissed reps would be out looking for jobs and knocking on all the competitors’ doors. What was going on there?

I got the chance to ask the question of a friend on Random House’s corporate strat team a few days later. I was told that, indeed, Random House senior executive Madeline McIntosh and the adult sales director who had been on the DBW panel, Jaci Updike, had been redefining the role of the sales rep, broadening the responsibilities so that they remained productive and could be retained in large numbers even with fewer stores. Not only that, but they were proud of what they were doing and were happy to talk about it.

So last Friday I sat down with Updike for an hour and learned about the project that Random House calls “Rep 3.0″.

Whenever you learn about a company innovating, a recurring theme is “it requires support from the top” and that is true here. Jaci’s first reference, when asked “where does this come from?” was to the support the sales reorganization has gotten from CEO Markus Dohle. In his most recent end of year note, he specifically cited the work that Random House’s field reps do. (Updike also pointed out that she’s not the only sales executive leading this. She made it clear that Joan Demayo, leading the children’s sales organization, is doing the same thing.)

There is a belief in Random House, not necessarily documented and perhaps impossible to document, that half of sales come from word of mouth. They are also convinced that their field force is a primary tool to generate the dialogues that sell books. With Updike heading adult sales, they had a leader who had started out as a sales rep at Random House 22 years ago — after working in a bookstore before that — and who was their first Director of Independent Bookselling.

Jaci lived through many shrinkings of the Random House sales force in the 1990s and earlier in this century. But starting about three years ago, they started to disassociate the sales rep’s work from billings and look hard at what reps do “in the community”. Reps already did staff presentations in stores and connected to local media and to libraries. This was behavior that grew organically, but Jaci believes that Random House was unusual in that they encouraged it. If you’re stretched thin trying to cover all the accounts, it is harder to be supportive of what appear to be extra-curricular activities.

But three years ago, with Madeline McIntosh, Jaci’s predecessor in her current job, now running sales and all related operations, they embarked on their Rep 3.0 program. A core element of this was to reorganize the workflow of the rep’s job, using such tools as iPads and electronic catalogs, to make order-generation take less time and free up time for other activities. And those new activities, presenting to libraries and corporations as well as to bookstore staffs, became part of what the company expected their reps to do.

Implementing this strategy required that they make some changes in philosophy and approach that would seem counterintuitive to most sales executives.

They no longer compensate reps based on the sales they generate. Reps are compensated, as are many at Random House, on the overall company performance.

They encourage blogging and speaking engagements without corporate control of the messaging. In fact, they’re quite comfortable if the books their reps talk about aren’t all Random House books. This comes from their conviction that their community-building exercises won’t be taken seriously if they’re seen as shilling for their own stuff. On the other hand, they’re sure their own stuff benefits the most.

And they’ve invested in supply chain in general, seeing the connection between improving the tech in the reps’ hands, the speed of shipment from the warehouse, and the development of such capabilities as vendor-managed inventory, as worth the effort even in an era when the number of bookstores is getting smaller.

The community-building, non-bookstore efforts by the reps get very ambitious. There are Random House reps organizing “retreats” with authors where readers pay to join the group. These bring in attendeees from far afield, including from other countries who want to participate in the discussion about books. The attendees are not book sellers, primarily, although a bookseller is always involved. They are book readers, book lovers. But Random House doesn’t see this as a brand-building exercise. Updike believes that a part of what makes this all work is that the reps are “credible”; they’re not just pushing Random House books.

“We don’t touch what they do with their blogs,” Updike says. “We don’t influence. We don’t suggest.” It is the independent view the reps offer that “makes efforts like this work”, in her opinion.

With these new marketing practices largely arising from reps’ creativity and initiative and then being spread as “best practices” throughout the sales force, the company-wide sales meetings remain very important and Random House continues to run them twice a year.

So Random House sustains an investment in covering field accounts that none of their competitors appear to believe is sustainable, and they do it employing very unconventional techniques that are hard to measure. Is it working? Do they believe it is working?

Updike was convincing on this subject, even while she rejected as somewhat inflated a colleague’s report that independent store sales were measured as “up 40%” in February. (Like her reps increasing their credibility by not limiting their discussions to Random House books, Jaci’s willingness to discount what she thinks is an inflated measurement of their success reinforced her credbility with me!)

She figures some of that 40% increase was simply a shift of sales from wholesalers to direct because Random House had a few-month program of 2-day-shipment that ran through February. But she also knows that “POS was up” and she believes “our in-stock position was better than other publishers. We were in stock on a lot of hot titles when others were not; that was part of it.” And even with Borders closing, which we all know put wind in the backs of many independents, the 15% increase in indie store sales she thinks is the accurate number, is a very impressive feat in these times.

Random House figures that its “army of marketers”, which is how Updike now sees her sales organization, is helping them sell more books, build more titles from obscurity to success, and is thus giving them an edge winning over agents as well. This is a strategy not likely to be duplicated by any of their competitors. It will be interesting to see how clear a competitive advantage it can deliver them, and for how long.

Here’s another family anecdote that brings all this home. In 1975 I was working for my father, running sales at Two Continents. He had met a young sales director at Frederick Fell named Charlie Nurnberg. “Go meet him, Mike,” my father said. “You’ll learn things.”

I did, and I did, starting with the very first conversation we had when Charlie explained to me that if the permission line when somebody excerpted your book included a price and an address, you’d get orders.

In any era before the current one, the executive who got me started on this investigation by wondering aloud what was going on at Random House would have just picked up the phone and taken somebody there out to lunch to find out. “What are you guys doing about sales force deployment?” would not, in and of itself, have been seen as a “price-fixing” or “combination in restraint of trade” question.

But the reason why they don’t act that way today became very publicly evident yesterday, with the announcement of the DOJ suit against Apple and five publishers and the settlement agreed to by three of them. Publishers can’t talk to each other about the industry anymore. Aside from many other things, this means publishing just isn’t as much fun as it used to be anymore. (Even as I write this, I can hear the ridicule that statement will inspire in some quarters.)

I want to let the dust settle for a couple of days while people smarter about this than I am make clear what the legal papers actually say and what the timetables are for changes to become effective before I try to spell out some things it might mean.

This will certainly make for a lot of interesting conversation starting this weekend at the London Book Fair.

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Pottermore changed the game this morning. Congratulations to Charlie Redmayne, their CEO.

The “aha” moment for me was when somebody on a listserv mentioned they’d bought Kindle editions of the seven Harry Potter books which, it had been announced, were available only from the Pottermore site.

Penny drops. First thought: Hnh? How did that happen?

Then the news came that Amazon was referring people off its site to Pottermore to buy the Kindle editions of Harry Potter ebooks. (It turns out that Barnes & Noble is doing the same.) There they register themselves and then can buy the ebooks.

This is, by far, the biggest concession that has been wrested from Amazon since John Sargent faced them down over the buy buttons on Macmillan print books on that January weekend in 2010 following the Thursday when Sargent flew out to Seattle to tell them Macmillan was going to the agency model.

In January at Digital Book World, in what turned out to be a prescient presentation, Matteo Berlucchi of Anobii (an ebook retailer based in the UK that is partly owned by three major publishers) observed that only by eliminating DRM could he sell to Kindle customers. He pleaded with publishers to do that.

Now Redmayne, who until November was working for HarperCollins, has demonstrated the truth in what Berlucchi said.

Back in about 2007, HarperCollins was instrumental in turning LibreDigital into an ebook delivery platform. At the time, Brian Murray, Harper’s CEO, articulated the vision that the publisher would just serve all the ebooks to customers, with no need to entrust retailers with digital copies. I believe one of the stated motivations was to reduce piracy by reducing the number of points of distribution of files. The idea was shut down pretty quickly because Amazon and other retailers wouldn’t go along. They would have said, and it would have been a reasonable point, that they had to control the service levels to their customers.

Redmayne and Pottermore have now demonstrated that if you will live with the anti-piracy protection of watermarking, rather than insisting on a digital hammerlock through DRM, you can gain extraordinary leverage.

Without DRM, as Berlucchi explained, anybody can sell ebooks that can be read on a Kindle. Once Pottermore decided they could live without DRM, they faced Amazon with a very difficult choice. The ebooks were going to go on Kindle devices whether Amazon wanted them there or not. Either they could ignore them or they could play along. I am sure the “play along” deal includes compensation to Amazon for the sales they refer (as it does B&N and, according to a quote from Redmayne, other distribution relations and affiliations will be enabled going forward.)

In other words, in a refreshing change from recent history, the content owner was able to present Amazon with a “take it or leave it” proposition. They decided to “take it”. They were wise. The game was changing either way.

The $64 million question is how the Big Six executives and strategists are viewing these developments. There is no author in the world with the power of J.K. Rowling to do this; she’s the Beatles. But, how about a big publisher? What would happen if Random House or HarperCollins (or one or more of the other four) told Amazon, “we’re taking off the DRM and we’re going to serve all our ebooks ourselves; you’re welcome to continue to sell our books on a referral basis”?

Could this change the strategy for Bookish going forward?

Obviously, this tactic won’t work if it is done by a publisher without tons of bestsellers and must-have backlist. In fact, it could generate a huge advantage for big publishers, assuming they can pull it off and smaller ones can’t.

I’ve been posing two questions in recent posts. “When does Amazon’s share growth stop?” and “Who’s left standing when it does?”

I put a new one at the top of this post. If publishers can overcome their fear of piracy, they will have, as Matteo Berlucchi proposed and Charlie Redmayne has just demonstrated, an enormous weapon to fight Amazon.

One entity that will definitely be “left standing” is Pottermore. And they’ll have the names of the people that were referred over to them by Amazon.

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I’ll admit that I would have thought a few years ago that by the time we got to the point when more than a third of unit sales for major houses had gone digital — and perhaps more than half for fiction — that the future shape of the book business would be discernible. But, at least according to what I learned from one Big Six house last week, we have reached that level of ebook uptake and despite that, the business still looks very much as it has. It seems impossible to me that it will stay that way.

Here are a few bits of information that came onto my radar last week.

One Big Six executive told me that ebook sales in their shop had reached the mid-30s as a percentage of units sold. That broke down to about 50% of fiction units and 25% of non-fiction.

Nonetheless, that same executive noted a real slowdown in the rate of ebook growth. This is to be expected as the base of sales grows, of course, but it slowed down faster than this house expected. They had seen a 120% increase in ebook units in 2010 and figured they’d see an 80% growth in 2011; it came in at 60%. In short, the rate of increase was cut in half.

These numbers gave this particular executive reason to believe that print demand was begining to stabilize and that it was reasonable to assume that 50% print units might persist into the future, with commensurate new stability for brick-and-mortar stores. I have since been told that a leading executive at another of the Big Six houses shares the same expectation, or hope. Perhaps they all do.

On the other hand…

Another publisher, substantial but not Big Six, has seen much more explosive growth continuing in ebooks and, for that publisher, unit sales for fiction have already gone to well beyond 50% digital.

A paper by the accountants-consultants at Deloitte in the UK, reported in the Guardian, predicts a decline of 40% in all brick-and-mortar stores over the next five years. That’s because books are not the only item for which sales are migrating from brick stores to online. We’ve already learned that books are among the items most susceptible to online purchasing for a myriad of obvious and well-established reasons. We also know that buying public in the US is at least as receptive to online purchasing as the British.

I’ve written time after time after time about the diminishing retail network for books and its potential impact. I have always seen this as existential for big trade houses, whose distinguishing value proposition for authors remains their ability to put books on retail shelves. (There are other things that matter, but I’d argue that all of them put together don’t equal that.) Publishing printed books is a complex endeavor best done by a large organization that can perform its various functions — warehousing, shipping, billing, commissioning the manufacturing, sales representation, and contact with marketing megaphones — at scale.

A proliferation of online marketing channels with real influence could once again challenge the under-resourced (authors working alone or smaller publishers) or otherwise-preoccupied (Amazon) who are trying to substitute for what the big publishers do. So far, the platforms that matter (to the extent they do…more on that below) have been limited in number, Facebook being the most prominent one. (One sales executive said to me yesterday, “Facebook isn’t a platform. It’s a requirement.”) If Tumblr becomes really important and Pinterest really were the next Facebook and, over time,  online influencers become as dispersed as our 20th century media world was, it opens up opportunity for big organizations to add value that smaller ones can’t.

So even if the Big Six optimists are wrong that their business proposition will be preserved by a slowing switch from print to digital (and, with no more knowledge than they have, my intuition against their intuition, I wouldn’t bet a dime that they’re right), perhaps we’re heading for a world where any author in her right mind would want a publisher to cover all the digital marketing bases, with the help of technology and dedicated staff, rather than trying to do it herself.

Nobody’s predicted that yet that I’m aware of, but let me be the first on the block to acknowledge the possibility.

The future of bookstores and the future of publishers if the bookstores diminish much futher in importance should be one of the most important topics on the minds of all stakeholders in the book business. We’re going to try two different ways to explore it at our next Publishers Launch Conference, taking place at BookExpo on June 4. Both of them involve one of the distinguishing features of our events: delivering insightful data about our industry that is not delivered by other industry conferences.

All of the current industry data reporting, including the recent effort called BookStats put together by the AAP, BISG, and Bowker, are unable to isolate sales and inventory in stores by type of book. To plan future publishing programs (and to sign up books this month and next), publishers need to understand with some level of granularity whether it is true that stores are shifting their buying (and selling) from immersive reading to illustrated books and, if so, which illustrated books. Among the reasons that the industry stats fail to capture this properly is that they don’t look beyond the sales publishers make to wholesalers to find out what happened with the books the wholesalers bought.

But the wholesalers know whether the book they just sold went to a brick store, a library, an online store, or an individual. We’ve been fortunate to get Phil Ollila of the Ingram Content Group to examine his company’s records to give us a more detailed and granular understanding of what is really happening in the retail marketplace. Are bookstores really stocking fewer novels and more illustrated books? Is the proportion of sales made online versus in stores changing at different speeds for straight immersive books and illustrated books? Ingram is mining its data to come up with answers to those questions. Ollila will report some findings at our conference.

We will also have a data-rich and sobering presentation from Peter Hildick-Smith of the Codex Group. Hildick-Smith and his team have been surveying book consumers on a quarterly basis for nearly a decade. Their work is high-level and expensive and is normally only available to the big companies that can afford to subscribe. But Hildick-Smith sees a crisis ahead for the industry in his data, and he cares enough about our collective future to want to sound an alarm. He’ll be doing that our June 4 event.

And what he sees and documents is the critical role bookstores play in consumer discovery of new books and authors. He demonstrates with data and logic that SEO and social media are totally inadequate substitutes. Hildick-Smith thinks a future without bookstores will be very different than the present. He makes the case that author brands established in the bookstore era will be largely unchallenged when the bookstore ladder gets pulled up and future authors can’t climb it. And he believes that publishers don’t appreciate that all measures, even desperate measures, are called for to preserve the brick store base as long as possible.

When you start trying to figure out how publishers could do that, you appreciate very quickly that you’re tackling a very challenging problem.

Six decades ago, long before there was any bookstore crisis, my father, Leonard Shatzkin, then at Doubleday, recognized that bookstores were the publishers’ lifeblood. He didn’t see the logic in giving bigger discounts to wholesalers than to retailers. After all, wholesalers primarily put their books in warehouses waiting for orders that publishers’ marketing efforts and a book’s inherent appeal create while retailers put them on shelves in front of customers, stimulating demand. His solution, implemented ever-so-briefly, was to eliminate the wholesalers’ discount differential and offer them the same terms as retailers.

Unfortunately, this is a story about which I didn’t capture all the details while Dad was around to give them to me. I know that the wholesalers went ballistic and demanded meetings with Doubleday management (presumably including Dad, who implemented policies like this from the relative safety of the “Research Department”, not from the front lines of the Sales Department.) The policy was reversed and the wholesale discount was restored.

But I can personally attest to the enduring bad feelings this initiative engendered. In 1974, around two decades after the failed experiment, I was working for Dad selling books for Two Continents. As the top sales guy, it was my role to introduce the company to Bookazine, a wholesaler that then occupied a warehouse on West 10th Street in Greenwich Village. Bill Epstein was the owner of Bookazine and, when he met me, all of the anger from that Doubleday discount change came to the surface, as if he’d been waiting 20 years to complain about it again.

The day has perhaps come again when publishers will want to consider offering the highest discount incentive for placing a book on a retail store shelf. (The idea exists in the world of commerce: it is called a “retail display allowance”, although the concept would need to be extended to favor all retail display, not just favored positioning.) This would be a devilishly difficult policy to design and implement to avoid alienating the wholesalers the way my Dad did. (There is no way a policy like this would be well-received by Amazon.) But after publishers hear Peter Hildick-Smith at Pub Launch BEA, it is bound to strike some, at least, as an idea well worth considering.

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