Supply-Chain

One of the recurring characteristics of “change” is that the first iteration of something new looks a lot like what it is replacing. So it has been with ebooks and ebook retailing. The ebooks themselves have, for the most part, been the same as the print books except rendered on a screen instead of on paper. And when we say “the same”, we mean right down to duplicating meaningless blank pages and the legend often found in print books that tells you how many printings the book has had. (This still happens frequently; I’ve just experienced it on The Big Short which I’m now reading in B&N’s reader.)

And ebook retailing has also imitated print book retailing in that the emphasis has been on the assembling the largest possible aggregation of book title choices in one place. This is a paradigm that makes intuitive sense in the physical world; once I’ve driven to my local superstore, I don’t want to find the mysteries are here but the cookbooks are in a store down the block.

It has been a long-established “fact” (although I question if it is still true, as we’ll explain later) that the larger is the selection of books available in a single location, the more powerful is the magnet to attract customers. My father found this out when he was in charge of the Brentano’s chain in the 1960s. Their Short Hills, New Jersey store was the worse-performing store in the chain until they doubled its title selection. And then, like magic, it became the best-performing store in the chain.

Amazon dot com reproved the point when they went into business in the mid-1990s. Although they were not the first online bookstore, they were the first to really attempt to carry everything. In fact, they went beyond carrying everything by providing a database (obtained from Baker & Taylor, in which there is another story) that not only showed just about all the books in print but also books that were no longer in print! Conventional publishing and retailing theory at the time would have said it was a bad move to return suggestions in search results that were books not available for sale. But, of course, it built their competitive advantage. They rapidly became the best place to search because of the completeness of their database and, actually, confirming to a customer that “what you want is a book that was indeed published but is not now readily available” made it easier to sell the customer a substitute. Whereas the the store (online or off) that didn’t have the unavailable book but didn’t also provide that information found it harder to close the alternate sale.

The point about the importance of selection was proven again by Amazon when they launched the Kindle in November, 2007 and lit the fire for what is still a spreading conflagration of ebook reading. Before Kindle, there were perhaps 100,000 ebook titles available as PDFs that could be read on a full-function computer, but not nearly as many in formats that could work on smaller devices (Palm, Mobi, Dotlit). Amazon launched Kindle with about 150,000 titles and used their market power to get big publishers to put more and more of the newest, hottest books into their format closer and closer to publication date.

There were other features of the Kindle (the ability to load books wirelessly and instantly without going through an intermediary device; its easy-to-read e-ink; its built in dictionary; Amazon’s deep relationship with very large numbers of online book buyers; and, of course, eye-catching prices relative to the print edition prices of the hottest new books) that fueled its near instantaneous success, but the robust title selection was a critical element.

So to that point — one could say to this point — the largest possible selection in one place has been as important to the success of an ebook retailer (obviously: online) as it was historically to a print book retailer with a physical store.

Early in the decade, it occurred to me that the magnetic power of the large selection in one physical store had sharply diminished. When Dad doubled the inventory of the Short Hills Brentano’s, he delivered a selection that the consumer couldn’t match for many miles around. When Barnes & Noble and Borders got Wall Street money to replicate the Bookstop model of 100,000+ title superstores in the early 1990s, they were enabling consumers to find conveniently books which had previously been obtainable only with great effort. But the limitless shelf space of online bookselling undercut that advantage and by the early part of this decade, it seemed to me that the consumer was finding the unlimited availability of titles online which could be delivered in a day or two so powerful that the large selection in a store that might be available immediately had really diminished appeal.

But there’s another thread of bookselling history on- and offline that I believe will soon become the dominant paradigm for ebook retailing. And, of course (just so you are reminded what blog you’re reading), it fits into the concept of “verticality”.

Publishers have known for a long time that good deals can be made and large sales can be registered through what we call “specialty retailers”. (The label for these sales in a publishing house, and others such as sales to catalogers or premium sales, is “Special Sales.”) The store that sells the tools and materials to refinish your floors can sell you a book to explain how to do it. The store that sells computers and paper and ink can also effectively sell resume or how-to computer books. The garden supply store can sell books on how to make your roses bloom.

Amazon and other online merchants (and not just of books) have long operated “affiliate” programs by which a web site can earn a commission on sales made at the primary merchant by referring a customer. This generally works by having the affiliate site promote a particular book title; when the site visitor clicks on the link, s/he is delivered to Amazon or BN.com’s page for that title. If the customer buys, the referring site gets a commission. These revenues don’t often amount to big money for the referring sites (although they sometimes do), but it is believed (but as with All Things Amazon, we don’t have the critical data to confirm) that, cumulatively, referrals from perhaps millions of affiliates deliver significant volume and customers to Amazon (and others.)

This is as far as “special sales” have gone in the ebook world. But the guess from here is that this is about to change and that the change we’ll see in the next few years will obliterate the notion that “all subjects in one place” is a significant marketing advantage, online or in a store. Many book sales, and particularly ebook sales, will move to “contextual” resellers. Your accountant’s web site will sell you the book(s) that help you understand a new tax law or how to ready your business for sale. Your favorite sports web site will sell you the new biography of Alex Rodriguez. And your favorite “Literary Review” newsletter and website will take care of your needs to acquire fiction directly and without your having to shop the vaster stacks of an online superstore.

That is: curated ebook offerings (a click away from the ability to buy lots more content beyond the curated selection) will be featured on every web site with any significant traffic. Delivering purchaseable content — books right now, but ulimately magazines, shorter articles, and relevant audio- and video-content as well — will become a standard expectation of any site (or web community) that aspires to a true mutual embrace with its site visitors. “What I’ve read lately and liked, and why” is a legitimate offering to anticipate from every blogger or commentator with a following.

Last week, Barnes & Noble held its regular call to announce financial results and future expectations. In that call, B&N expressed the expectation that the ebook world would ultimately settle down to about five players and that they’d be one of them. With that perspective, they saw for themselves a reasonable proportion — say 20% — of the ebook market.

My first reaction to that was “what are they thinking? There won’t be five online booksellers; there will be five million.” A day or two later I had a conversation with one of my personal tech gurus who saw it the way B&N’s statement suggested they did  (”it will consolidate, just like the music business did…”) He also asked a lot of practical questions. On what devices will these ebooks be read? How will all these individual sites deal with the format issues, the DRM issues, the customer service? In other words, “great vision, Mike, but how can it possibly work?”

I think it will work like affiliate sites worked, but in a more sophisticated way. A strong central operator providing scale facilitates the commercial offering of the niche player. The harbinger of the future is the deal announced last week between F+W Media and Ingram Digital. Ingram is setting up all F+W specialist web sites (and they have them for many different vertical interest groups) with the ability to sell both ebooks and print of all publishers to their site traffic. (Although we have working relationships with both companies, we weren’t involved in that deal and don’t know any of the details.)

I believe that the Ingram-F+W deal is the start of something new and big. Both companies are going to find ways to improve on whatever is the starting point. F+W is going to have to learn how to merchandise what Ingram can give them into a unique shopping and content consumption experience for the consumer. And Ingram is going to have to learn how to deliver what they can offer to F+W in a way that enables F+W  to curate and enhance the selection to deliver something uniquely customized to its own community.

If that view of the future is right, the competition among the players who can provide the ebook selection and transaction services Ingram does — those in the game already like Amazon, B&N, iBooks, and Kobo and those saying they’re about to come in like Google, B&T’s Blio, and Copia — is going to take place in a whole new arena. B&N has announced deals like this, where they “power” somebody else’s bookstore. Kobo hasn’t yet, but I’d expect them to; it just seems to me like an opportunity they’d see. This is a bit odd; it puts “wholesaler” Ingram in competition with retailers to create the next round of niche retailers. Ingram obviously has the built-in capability to offer print and electronic book delivery but, of course, B&N has the internal resources to do that too, and  B&T can do it too. There are anomalies to rationalize about margin, but, in the end, customer acquisition through this strategy will be far cheaper than it is most other ways, even if a fixed margin from the publisher is shared with the niche player.

This business hasn’t really begun to happen yet; we’re just seeing the outlines of it. Initially, the competition appears to be about how each retailer delivers its vast set of content choices to the online consumer in a consolidated way. (And usually it has been the same for Ingram. Most of their business has come from large “sell everything” ebook stores.) But over time it will evolve into a competition for niche resellers. Winning is always about delivering the best consumer experience but the challenge will be to deliver the best consumer experience to somebody else’s consumers. White label is the key to the ebook (and book) retailing future.

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The following post is a collaboration with my friend Joe Esposito, the CEO of GiantChair. The post was Joe’s idea, but I contributed enough to its completion to justify a claim of shared authorship. Joe has kindly agreed to allow this received wisdom to be delivered to the world through The Shatzkin Files.

As thunder roared above the mountaintop, God sat on a throne of light. She stroked her braid and contemplated her new shoes.

“Who goes there?” God shouted.

“It is but a poor publisher,” the tiny figure said.  “I have come for guidance in the treacherous ways of publishing in the digital age.  I have oodles of Googles, but no money in my pocket.  What dost thou command?”

“A poor publisher, eh?” God snorted, shaking the trees around them.  “That’s what the angels call a redundancy.”

“Oh, please, Lord.  Help me navigate the shoals of the noble Barnes and the forest where dwell the Amazons.  Take me beyond my borders to a realm of growth and economic success.  My very soul depends on my making buckets of money.”

God looked at the puny publisher and took pity on him.

“Do as I say,” God thundered, “and you will save your heavenly soul and a place for yourself in the value chain.”  She thus proceeded to lay down these precepts–but as God is timeless, they came in no particular order.

1. Thou shalt regard thy former competitor as thy future collaborator.

2. Thou shalt let no intermediary stop you from knowing your customer, nor stop your customer from knowing you.

3. Thou shalt publish no book intended for an audience outside your spheres of direct influence.

4. Thou shalt read Dr. Faustus in all its editions–Amazon, Barnes & Noble, Apple, and Google–and know that Mephistopheles always appears first as a helpmate.

5. Thou shalt not forsake thine own brand.

6. Thou shalt create new brands and master the power and importance of brands.

7. Thou shalt respect and value thy communities with the same devotion thou hath always given to copyrights.

8. Thou shalt recognize that metadata is everywhere and associating it meaningfully is thy job.

9. Thou shalt not fail to test a new marketing channel in order to protect an old one.

10. Thou shalt deliver thy content in every imaginable form that thy customers request or might require.

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We had a very successful debut annual conference for Digital Book World last January, even though we didn’t conceive the idea until June, put together a group of helpers (which we now call our Conference Council) until July, or draft the initial program until August. This year we’re way ahead of that schedule. We’ve put together a fabulous Council to advise us this year and we’re having a meeting of many of them next week to discuss the agenda and to start getting suggestions for speakers.

The Council gives us wide exposure and connections to the trade publishing industry. That way we make sure we don’t miss any ideas and we don’t miss knowing about any talented people whom our audience would want to hear.

We have several publishing company presidents and CEOs (Sara Domville of F+W, Marcus Leaver of Sterling, Maureen McMahon of Kaplan, Brian Napack of Macmillan, Dominique Raccah of Sourcebooks) and some presidents and CEOs from other companies and support organizations in the industry (Kristen McLean of the Association of Booksellers for Children, Tracey Armstrong of Copyright Clearance Center, Peter Clifton of Filedby, David Cully of Baker & Taylor, Joe Esposito of GiantChair, John Ingram of Ingram Content Companies, Scott Lubeck of The Book Industry Study Group, and Steve Potash of Overdrive Systems.)

We have other senior level executives, many with specific digital responsibilities (Peter Balis of Wiley, Ken Brooks of Cengage, Mark Gompertz of Simon & Schuster, Madeline McIntosh of Random House, Thomas Minkus of the Frankfurt Book Fair, Larry Norton of Borders, Kate Rados of F+W Media, Charlie Redmayne of HarperCollins, Adam Salomone of Harvard Common Press, John Schline of Penguin, Evan Schnittman of Oxford University Press, Michael Tamblyn of Kobo, Maja Thomas of Hachette, and Tom Turvey of Google.)

We have agents (Sloan Harris of ICM, Simon Lipskar of Writer’s House, and Scott Waxman of the Waxman Agency) and industry consultants and commentators (Michael Cairns of Persona Non Data, Ted Hill of THA Consulting, and Lorraine Shanley of Market Partners International.) And because he is our media partner, we have help from Michael Cader of Publishers Marketplace as well. And we also get great input from others on the F+W team: David Nussbaum, David Blansfield, Cory Smith, Guy Gonzalez, and Matt Mullin.

So we have all the Big Six represented, as well as small publishers, industry-wide associations and service providers, wholesalers, digital distribution partners, retailers, and agents. All of these people have real input into the topic list and speakers. Many of them are joining us for a meeting next week to review our ideas for the program, which we previewed on this blog about a month ago.

Because Digital Book World tries to be at the cutting edge of trade publishing and digital change, we often face one or both of two challenges. Sometimes we believe something should be happening, or be about to happen, but we may not know where or whether the publishers leading the charge will talk about it. Several topics come to mind that fit that description: vertical efforts inside general trade houses; what houses are doing to adjust to reduced expectations for print sales in bookstores; how houses are gearing up or changing their sales efforts to compete in and serve a growing list of digital intermediaries; how enhanced ebook and ebook first creation change the traditional order of things in product development.

The other challenge we have to work around is when people can say things privately but not publicly. One topic that is very tough to talk about is ebook royalties, which is a major point of contention between publishers and leading agents at the moment. The big houses are pretty adamantly trying to hold the line (publicly) at a royalty of 25% of net receipts. But upstart publishers like Jane Friedman’s Open Road appear to be willing to pay 50%; publishing through Smashwords yields 85% (but sells the books without DRM, which would frequently scare the copyright owners of valuable properties); and self-publishing through a distributor would deliver a yield somewhere in between. (Remember: self-publishing ebooks carries no inventory risk.) In that environment, some agents are able to wring some concessions from some publishers. But the agent can’t talk about that without jeopardizing her ability to get concessions for her clients and no publisher will volunteer to reveal the isolated concession and start turning that into a policy.

Some things are just hard to discuss. Do booksellers, or even the publishers and wholesalers who supply them, want to talk about the possibility of their impending demise? But how can one plan for the future and ignore that elephant in the room? If a publisher suddenly sees the necessity of developing direct selling relationships with end users, after years of telling booksellers he was against it, does that publisher want to talk about those efforts in public?

When competitors participate in industry education initiatives, they must draw lines around what they will reveal and what they won’t. One ebook-responsible executive we know at a major house is persistently reluctant to reveal what he’s doing or what he’s thinking. But he has a boss, one who is proud of what he does and what their house does, who pushes him forward as a speaker.

Frankly, I think these challenges are greater for us than they are for other conferences on digital change that focus more on technology than they do on business practices. Very few publishers are masters of tech; usually they’re working with outside suppliers who are happy to share best practices. But business practices are different; they’re more sensitive. Sometimes the reluctance to share them is sound. Sometimes constraints are even legally required. Since our job is to focus on business practices, we’re glad to have relationships with very knowledgable players who will candidly engage with us on these challenges so we can figure out the best way to protect true proprietary knowledge but still disseminate valuable information.

We’re really proud of the illustrious group we have gotten to advise our efforts, and we get great value from them even though their first responsibility is to the company they work for. We feel confident that this group helps us cast a net that is wide and broad enough to assure us that any major development in the trade book world will hit our radar screen and that we’ll know if there are informed people willing to talk about it.

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As readers of this blog know, I’ve been on the “vertical” trail for a long time and I try to stay abreast of book publishers’ efforts to realize the advantages of subject specialization and community building. I wrote a whole post about the Sourcebooks initiative, Poetry Speaks, when it launched last Fall. I have often referred to the vertical efforts of Hay House and Harvard Common Press. And I’m proud to have had a small role in Sterling’s creation of Lark Crafts and their forthcoming Pixiq site for photography.

But of all the efforts I’ve seen so far, the book publisher who seems to have taken the vertical vision we espouse the furthest — one that elevates community-building above content-selling as the first priority — is Cool Springs Press in Nashville, Tennessee. We spent some time earlier this week talking to Roger Waynick, their founder and CEO, to learn more about what they do, looking for lessons that other publishers can apply.

The thing that was most striking about our conversation with Roger was the frequency with which he referred to “our industry”, by which he did not mean the book business! He meant the lawn and garden business, which is the vertical that Cool Springs Press serves. This is a nuanced but massive differentiator. If a company thinks of itself as a “book publisher”, it is already off on the wrong track. If it thinks of itself as a content- and information-provider for an industry or a community, its self-image will lead to it doing the right thing much more often. And the very first right thing a book publisher with community aspirations has to do is to create a site that has very little reference to books, which they have.

Waynick knew nothing at all about publishing when he started Cool Springs Press in 1994. He was looking for a book about gardening and he started from the highly logical presumption that what he needed was local information, since gardening has to match the geography. A visit to a large and well-stocked local bookstore yielded nothing except confirmation that what he wanted didn’t exist.

So he created it and he created a formula. He found a local gardening advisor with a media presence and created a “Tennessee Gardening” book. Waynick had intuitively done the right thing. Finding content knowledge and promotional capability combined meant that he had recruited what the smartest publisher with experience would have called the best possible author. Before long, he was extending his franchise, creating gardening books by state, one after another. (At this point, Cool Springs has state-specific gardening books for 48 states.)

In 2003, large Nashville publisher Thomas Nelson embarked on a strategy to expand out of their religious publishing niche. (They didn’t ask me…) They acquired a few smaller publishers with non-controversial publishing programs and Waynick took the opportunity to sell his business. For the next few years, until Nelson management changed and the strategy changed to re-focus on their core business, he consulted to them and stayed somewhat in touch with the business he’d created.

But when the strategy at Nelson changed, Waynick was ready to buy his company back and turn it into a real content vertical. In 2007, he regained control of Cool Springs Press, set up trade distribution through Ingram Publisher Services, and started to invest seriously in the capabilities he needed to be more than just a book publisher.

Waynick’s key insight was that the lawn and garden customer was looking for solutions. And solutions, to be practical, had to be local. So he constructed a taxonomy around plants (roses, gardenias) and around actions (planting, weeding) to tag the content in his state-specific books. Waynick estimates that, since reacquiring Cool Springs in 2007, he’s spent a dollar on upgrading, tagging, and curating old content for every four dollars he has spent creating new books. And he invested that money upgrading his content repository with faith, but no clear plan about how he’d get it back.

In a formulation that echoes what we’ve heard earlier from Harvard Common Press talking about cookbooks and recipes, Waynick said he needed to see his content as a database of information, not as a collection of books. And just like Harvard Common, he looks at his database for “what’s missing” to direct him about what new content he needs to acquire.

He continued to build on his special retailing network. (Ingram handles Cool Springs’s trade sales, but Waynick maintains the relationships with the lawn and garden trade directly.) He recalls that, when he started, it seemed wildly counterintuitive to a national chain to put a Tennessee book in only the Tennessee stores, and so forth. But his sales were so robust that the skepticism quickly melted away. He built closer relationships with those special retailers by custom publishing: putting together books especially for a particular retailer. His path was smoothed in all these things by his author relationships; many of them were, like his first author, local gardening experts with radio shows popular with the core audience.

This year, for the first time, substantial revenue has flowed to Cool Spring from content licensing. About 10% of Cool Springs’s revenue will come from licensing content to web sites and creating apps for other players in the lawn and garden space. About 25% will come from the book trade, 35% from home center book sales, 15% from individual lawn and garden centers, and the balance from other special outlets like hardware stores.

The way Waynick sees it, the licensing side of the business has just begun to work. Next year will be far larger than this. He expects licensing sales to surpass book sales for his company in 2012.

Cool Springs has an online bookstore at gardenbookstore.net. In his retailing capacity, he sells the books of all his competitors. The day we spoke, Waynick pointed out that only two of the 15 books on his retailing front page were his publications; the rest came from other publishers. Perhaps because he’s a “customer”, he says that more and more of his competitors seems receptive to collaboration, allowing him access to their material for his efforts to provide content to retailers and wholesalers in the lawn and garden industry.

Waynick is not terribly concerned about competitors. Having been the first to act on the insight that gardening is local and that content has to be developed with a highly local point of view, and then having invested to put his content into shape for re-use, he really sees no other player that can deliver the variety of relevant content that he can. And now he’s moving on to a new opportunity that he is uniquely positioned to exploit.

Reflecting the initiative by First Lady Michelle Obama, school gardens are springing up all over the country. Waynick says that over 3000 new ones were created last year. Working with school administrators, Waynick is developing curriculum for the schools from his content. This also puts him in a position to help his retailers and his authors find additional opportunities. And how convenient is it for him that education in this country is organized the same way his book program is: state-by-state!

Waynick also recognizes the value of his author base. He does his best to keep his authors working, and not just on books. They blog for him and create content for his licensing clients as well.

One point that Waynick made in our conversation is an important one for all publishers to take on board: the presentation of content needs to be sensitive to the audience. Too often, he says (and he’s right), publishers end up with catalog copy meant to sell a book to a store buyer being presented on a web site to an end user customer. The copy is wrong for the purpose. He credits his distributor, Ingram, with having a system that helps him deliver the right metadata to the right places.

The future for Cool Springs Press looks very bright. Waynick is already providing content for a number of national retailers, including one of the brand leaders, which is what has jump-started his licensing revenues. These players see good content as a critical competitive requirement. They represent a growth market for web content, apps, and custom books and the growth opportunities they will offer will far exceed the rate of shrinkage in the traditional book market.

What we think will be interesting to watch going forward is how much Cool Springs moves into the business of selling things other than content to the audiences they keep growing and nurturing. They’re certainly positioned to do that.

But the important thing is that they can readily withstand shrinkage in the book trade or even in the printed book business. They’re bound to become an increasingly important marketing mechanism for all their competitors, who will become increasingly dependent on them for exposure to the consumer audience. And they’re in that position because they’re vertical and because they were willing to invest in their long run value to their community.

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Big publishers have to be very happy about how things have been developing in the ebook world over the last six months or so. In that time, we have gone from a situation in which Kindle appeared to so totally dominate digital reading that Kindle-only publishing seemed an imminent threat to disintermediate publishers to one where it is not only Amazon’s hegemony that is threatened. Even their position as the ebook market leader isn’t safe.

Although one of the big factors in this change, the iPad, was unforseen at the time, we wrote around 16 months ago about the possibility that Amazon’s position leading the pack on ebooks would be hard to defend in one of the first posts on this blog.

As the ebook world has evolved (so far), we have the following “facts on the ground.” You will see from this recitation why so many people outside commercial publishing see eliminating DRM as a key to ebook marketplace efficiency. Our guess is that, regardless of the merits of the idea, going DRM-free is a non-starter for the big houses because it will be a non-starter with most big authors and most big agents.

1. If you buy an ebook from the Kindle store, you can read it on many devices within the Kindle reader software. That software is currently available for the iPhone, iPad, iPod Touch, PC, Mac, and Blackberry with Android reportedly on the verge. If the Kindle book has no DRM, though, you can read it on any reader that supports the Mobi format or you can use a program like Calibre to convert your Kindle book to epub, which can be read on just about all other devices.

2. But if you buy an ebook from Kobo or BN (through their “reader” software, not for the Nook), you can do the very same thing (and Kobo’s Android app is at least a bit ahead of Kindle’s; it was announced over the last weekend).

3. If you buy a book from iBooks, the iPad bookstore, you can only read it on an iPad and, soon, on an iPhone. That is, unless it were DRM-free which is, some are told, an option for publishers.

4. If you want to read on a Kindle device, you can only read books you buy from the Kindle store (unless you select from DRM-free mobi files, which leaves out the biggest books).

5. If you buy a Nook, you can theoretically read epub content obtained elsewhere by putting it through its DRM paces at Adobe Digital Editions, but it ain’t easy. My expert on these subjects, Kirk Biglione, points out that this is one of the big advantages of loading devices through wireless means (which sidestep having to deal with ADE) rather than computer synching. Because ADE is a challenge for most people, the interoperability across devices promised for epub files is, for protected files, more theoretical than real.

6. The Sony Reader is like the Nook: theoretically able to handle anything epub but made much more difficult by Adobe DRM. Sony is also suffering at the moment from having no apparent mobile strategy.

7. Bottom line: DRM creates hassles if you try to read on anything except the platform on which you bought. But Kindle, Kobo, and BN Reader (not Nook), provide a pretty seamless experience across devices.

8. The promise of the presumably-imminent Google Editions is that you will be able to read them on all systems that browse the web (except that Kindle’s browsing is not going to provide a terribly satisfying experience and Sony, which doesn’t provide a web browser, is probably left out of the Google Editions party).

So the e-ink devices generate the real lock-in, or, more often, lock-out, problem. It is your Kindle device that locks you into the Kindle store; your Kindle file can be ported to a non-Kindle device using the Kindle reader software.

This is a mixed, but probably mostly negative, blessing for future sales of Kindle devices. On the one hand, consumers who figure this out will be increasingly unwilling to chain themselves to a reader that makes them buy files they can’t use elsewhere. On the other hand, the spouse of a friend cracked her Kindle a few days ago and because of the hundreds of books she’d bought over the years from the Kindle store, couldn’t really consider purchasing any other reader as a replacement. So she bought a new Kindle.

So while the Kindle store almost certainly still has the most titles of any ebook retailer, Amazon is definitely facing some uphill battles selling devices to new customers. Even before the iPad hit in April, DigiTimes reported that Nook devices outsold Kindles in March. (Could this be the power of 700 retail locations talking after the cream of the online customer base had already been harvested by Amazon over the past 2+ years?) Then they reported yesterday that total e-ink monochrome ebook reader sales were 700,000+ for April and May, of which 37% were Nook and 16% were Kindle. In the same two months, of course, Apple reports selling 2 million iPads. So, in two months, iPads outsold Kindle devices about 20 to 1.

That means that even if 2 million new iPad owners, on average, buy 1/3 as many ebooks as 700,000 new single-purpose ebook device purchasers, the larger, full-color, web-ready screens sold in the last two months would be responsible for as much ebook consumption as the book-dedicated devices.

Meanwhile, the device prices are coming down sharply. Kobo announced a $159 device on sale at Borders a month ago. Since then Borders announced their own branded device for $119. Then Barnes & Noble cut the price of the Nook to $149 for the wifi model and $199 equipped with 3G. Many had been anticipating a price cut before year-end by Amazon from the $259 level they have maintained; but the B&N move forced their hand and Kindle just announced they were coming down to $189. Because aside from all the competition that Kindle faces on the device side, the Agency model has made it harder for them to keep customers loyal with a pricing advantage on the biggest books.

What this adds up to is that a much more diversified marketplace is developing for ebooks than publishers would have dared hope for a year ago. This, in turn, makes the customized ebook offering that Ingram is enabling (as they announced last week in a deal with F+W) even more powerful, because more and more devices — and therefore consumers — will be able to readily take advantage of ebook offers that aren’t served up from the Kindle store. Since one of the great unmet challenges of book sales on the web is merchandising — making it quick and easy for consumers to find what they want — curated offerings on specialized sites might really work better for a lot of people. And then Amazon will feel some of the pain that big publishers do, being horizontal in an increasingly vertical world.

On the other hand, big publishers have apparently lived past the danger of a massive problem: the possibility that authors could find most of their audience by setting up with Kindle alone. There is still more complexity to be added. Google will arrive shortly with a big splash. Newcomers Copia (a client of Idea Logical) and Blio are still planning market entries in 2010, and they each have some unique propositions the current players do not. The more different places an ebook might successfully be sold; the more variety in the way ebooks get merchandised; and the more benefit that can accrue from effective distribution of files and metadata; the more a publisher with some savvy will look like a sensible option to an author who might be thinking of a do-it-yourself effort.

There was a conference called Untethered last week. I didn’t go because it was an “all publishing” conference about technology, and I am skeptical about any horizontal approach. But there was a panel of publishing CEOs asked to estimate how much of book sales would be ebooks five years from now. The high guesses were 40-50%. I think they’re low. And if the question is what percentage of the books that are narrative writing are ebooks by five years from now, I think they are way low. (Apologies to the first batch of people to see this post and those who got it by subscription because I hadn’t quite finished this thought when I put it up. I saw it later and fixed it.)

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The publishing industry faces some mammoth challenges that it will be very hard for any one publisher, even the biggest, to address.

Costs have to be cut dramatically over the next few years. New technology is going to enable upstarts to compete in the marketplace with far less overhead and infrastructure than legacy publishers have built. The legacy cost structure will be competitively unsustainable and, at the same time, investments are needed to create whole new infrastructures for marketing and new processes for product creation. What the products themselves will turn out to be is something that will only become clear through experimentation, trial-and-error, and an iterative exchange between publishers and their markets.

There are some challenges that are simply awesome. The big publishers are sitting on rights they can’t exploit because they don’t know what they own. The typical “rights database” in a major house is an ocean of filing cabinets containing hard copy contracts that could be 20, 40, or 80 years old and still in effect. The biggest emerging market might be the use of publishers’ material on web sites that do, indeed, need to “buy licenses” to use the material, but the granularity of potentially millions of very low-value transactions would defeat any attempt in the current environment to make this business profitable.

In fact, transaction costs are going to be one of the closely-watched metrics distinguishing publishers in the 21st century from publishers in the 20th. Everybody is going to have to be paying attention to cutting them to enable those low-value transactions to be profitable.

We’re going to need concerted and focused efforts to enable today’s publishing companies, particularly in trade but really in all areas except a few professional niches that have already made the transition, to do what’s necessary to reconfigure and rebuild for new paradigms that are still being invented.

All of this leads me to introduce an organization I hadn’t heard of a month ago which could well be the White Knight riding to the rescue of publishing. I don’t know them well — I’m still in the process of getting introduced — but a publishing systems veteran who has been my client twice before has just taken an important position with them. We’ll be working with them to hone their approach to the publishing community, which I’m sure will have a profound impact over the next few years.

The company is the Tata Group, and more specifically, the unit within it called Tata Consulting Services, or TCS. The executive is John Wicker, with whom I worked in the 1990s when he was at Vista Computer Services (now Publishing Technology) and more recently when he was at Klopotek. (We did the Digital Asset Distribution project together three years ago.) Tata is extraordinary.

The company was founded in 1868 and today the Tata Group comprises 96 different companies with over $70 billion in annual revenues (not far off the annual revenues of the entire book publishing industry, worldwide.) The consulting group is about 10% of the company, with annual revenues of about $7 billion, growing at about 20% a year. TCS has 160,000 associates worldwide, with more than 14,000 in the United States. All of them, of course, have a technology background. Hundreds have experience with publishing and thousands have experience with other media.

Wicker’s new job is to head up the Publishing Segment for TCS’s Global Consulting Practice (GCP), but he is building on a substantial existing base. There’s a major media company of great importance to the publishing community that has been having TCS handle its back office functions for years. Another major publisher was halfway through an Oracle system implementation that was over budget and behind its schedule working with a big brand consulting firm. TCS took over the project and delivered the implementation within the original timetable and budget.

And a substantial portion of the apps on sale for the iPad were developed by TCS. They have dealt with publishing’s legacy challenges and they’ve got experience at the things publishers are just learning that are critical to our future.

In the 1990s, Wicker helped us pioneer a new fusion between envisioning publishing’s future and educating the industry by organizing Vista’s “Publishing in the 21st Century” program, which I co-chaired with Mark Bide of Rightscom in the UK. The White Papers and conferences we did then were really groundbreaking. We can read what we said was publishing’s future more than a decade ago with pride. (Most of the speeches on this web site that are from before the year 2001 were delivered at Vista conferences.) We tapped the thinking of a lot of smart people to develop our understanding of the challenges publishing faced and to feed our imaginations about where things were going.

But the degree to which we could address the challenges directly was limited. Vista was the biggest provider of ERP (that’s “enterprise resource planning”) systems to publishers, but they were a tiny company, far less than half a percent of the size of TCS. What we learned influenced Vista’s systems development but we really couldn’t help much with a lot of the challenges we saw.

We didn’t have the resources to boil the ocean. TCS does. TCS can’t stop change (nor would they want to try) but they really have the capabilities to help publishers do what’s necessary to adapt to it. From the perspective of guys like Wicker and me, who for years have been contemplating issues so large they were more frustrating than enlightening to consider, being able to help steer such a massive rescue flotilla into publishing waters looks like the opportunity of a lifetime.

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A year ago, before Agency was ever publicly discussed, I was grasping for what publishers could do to get control of ebook pricing and curtail, or at least manage, the degree to which ebooks undercut paper and, in turn, brick-and-mortar. At the time, people told me that it was possible for a manufacturer to control the pricing of their goods at retail and pointed to Apple’s success doing that and to other manufacturers like Bose that managed to do it. I believe the key was that they controlled the entire supply chain, right to the point of consumer purchase (although we know that other retailers do sell Apple products.)

I never got a grip on how this could be made to work, legally.

Then, along came Agency. The concept is that the publisher is the selling party in the retail transaction so the publisher sets the price. The intermediaries (the retailers) wouldn’t actually buy and sell the goods, as they always did. They would, instead, be “agents” for the publisher. That approach pushes the responsibility for sales tax back to the publisher, no trivial matter (although services are springing up to help with it). But it gives the publisher price control.

From Publishers Lunch, and then picked up by the Wall Street Journal, comes the news that the Attorney-General in Texas is investigating Apple and the publishers participating in Agency over the legality of the Agency arrangement. For publishers who had been struggling for years with the real market control exercised by Amazon, Apple’s arrival on the scene and willingness to accept unform pricing across outlets (to be followed shortly by Google doing the same) constituted liberation.

But one can see a logic to the Texas investigation. Amazon’s strategies required no cooperation with any other company. They bought the ebooks at the prices publishers charged them and sold them at the price they thought was best for them in the marketplace. But the Agency agreement with Apple (as I understand it; I’ve never seen one) allows (or maybe requires) that Apple meet any lower price for the same title offered by another retailer. So there is a “combination” and it is “restraining” trade. That’s a speaker-of-English talking here (which I am), not a lawyer (which I’m not.)

It would make many publishers very unhappy if the Agency model were deemed illegal. One major house CEO I spoke with two weeks ago was positively rhapsodic about the control the new paradigm gives the publisher. That CEO told me about one major bestseller at their publishing house which suffered no loss of unit sales when the price went up from the Amazon-set $9.99 to the Agency price of $12.99. Struck by that, the CEO further raised the price of that title to $14.99 and saw immediate sales erosion. So, two weeks later, the CEO took the price back down to $12.99 for that title, where it sits.

As this person said, “I can’t ever see going back. I have never had this ability to maximize revenue before or to experiment with pricing.”

I’m personally persuaded that universal set prices for ebooks are good for the industry and, ultimately, for consumers. They will definitely foster competition among retailers. My belief for a long time has been that the day will come when almost all web sites will offer their own curated selection of ebooks. (Why shouldn’t ESPN.com be selling the new Willie Mays or Steinbrenner biography?) That will work great in a price-set world. It would make the retailing opportunity about “location, location, location”, rather than “price.” It would boost sales for publishers and authors by putting ebooks a click away from interested consumers across the Web. But it isn’t going to happen if web sites figure that their curation efforts will just be triggers to send people to a deep-pocketed etailer that is pricing for market share.

It would appear that the Agency model is good for just about everybody except the etailers that would use price to drive others out of the market. But will it ultimately be ruled legal? I don’t think we know yet.

Late add: The vision of every-site-a-curated-bookstore got some confirmation a couple of hours after I posted this when Ingram and F+W Media announced a partnership by which Ingram will power sales of all publishers’ ebooks through the online stores F+W operates for their communities. I’d expect this to become increasingly common.

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I am finding an eerie similarity between the disastrous Gulf oil spill and the parlous state of America’s bookstores. In both cases, the forces are in place for a disaster that will play out over the coming months and years. And while the tragedy of what is happening in the Gulf is far more consequential to everybody on the planet than what is happening to our bookstores, we are appoximately as powerless to prevent an eco-system disaster of the first magnitude in both cases.

Of course, the causes of the problems are quite different. British Petroleum, it would seem from here, could have operated differently and the blowout might not have happened. If the US government had the same offshore drilling rules as the Canadian government, requiring the relief well to be dug at the same time as the main drilling well, the disaster might have been averted.

Just like the shrimpers on the Gulf Coast, we are entering the highly visible stages of what will be a painful and accelerating change in the circumstances for general trade publishing. In an exchange in the comments of a post here from last November called “Why are you for killing bookstores?”, I was told by a resident of Orange County, California, that he didn’t even know where his nearest bookstore was. Now there is news that Laredo, Texas, is aware of its status as the largest city in America without a bookstore because its local B. Dalton outlet has been closed. Unfortunately, I don’t think Laredo will retain that status for very long. Much larger cities will be joining Laredo. These are like ships not bothering to leave the harbor because there is nothing out there worth catching.

Bookstores in the US are being pushed aside by the forces of what in the larger sense is definitely progress. The four biggest villains are the switch by consumers to Internet shopping (which affects all brick-and-mortar retail; Walmart’s sales are down too) and three aspects of that switch that amplify the problem: the ubiquitous availability of used books sold alongside the new, competition from long tail books that would have disappeared from commercial view in years past, and the rise of ebooks. All three of these effects reduce print sales in terrestrial stores, crippling retailers and damaging publishers as well.

The trend is impossible to ignore. Borders, just rescued by the latest White Knight that believes the business can be saved, announced that same store sales were down over 11% in the first quarter compared to a year ago. Barnes & Noble’s reduction in same-store sales was put at “2 to 4 percent” in its most recent reporting. [Late add: B&N actually reported same store sales down 5.5% in the most recent quarter.] Borders is a financially challenged operation with an inadequate supply chain, which could have led to not having the books they need to get all the sales that might have been available to them. But, if that’s true, the well-financed and well-operated B&N would be benefiting from their rival’s problems. (They probably are; sales would have been down more if they weren’t.)

I first worked in a bookstore almost 50 years ago, in the summer of 1962 in Brentano’s flagship store on Fifth Avenue. I’m going to guess that there were about 25,000 titles in that store: 10,000 hardcovers upstairs on the main floor and about 15,000 paperbacks downstairs in the brand new paperback department where I worked. Maybe there were more, but not a lot more. And this was one of the best bookstores in America at that time.

There just weren’t a lot of bookstores in America in 1962. Mass-market paperbacks were on sale in many drugstores and on many newsstands, and were in somewhat limited supply in bookstores. Paperback distribution then was just about exclusively through rack-jobbing local wholesalers and offered lower margins than trade books. Even Brentano’s, which was one of the few stores served direct by mass-market publishers, displayed the mass-market paperbacks by publisher rather than by subject to make it easier for the publishers’ reps to check their stock and fill in empty pockets every week.

Department stores were critical outlets for publishers. They provided what amounted to local chains in each city which were, at that time, just beginning to expand into suburban locations through a nascent shopping center industry. Reps for Dolphin Books (Doubleday) and Collier Books (Crowell-Collier, later Macmillan), two trade paperback lines begun by my father, were putting racks of their books into barber shops and motel lobbies in many parts of the country which had virtually no bookstores at all.

Running a bookstore was very hard. Publishers were numerous, title acquisition was fragmented. The only national wholesaler, Baker & Taylor, was really a provider for the libraries, which were willing to wait for B&T to go get the book after they ordered it from them. Local wholesalers, sometimes the same operations that rack-jobbed the mass paperbacks, didn’t attempt to stock much more than the bestsellers, the resupply for which was their real profit center.

In the late 1960s, as shopping center construction heated up, this started to change. Two national chains, Waldenbooks and B. Dalton Booksellers, grew on the back of that expansion. Shopping center developers preferred a national chain to a local independent as a tenant; they were more “bankable” when the developer was borrowing money to build. So these two chains started to grow as fast as suburban mall development would let them, which was pretty damn fast. When I went into publishing sales in 1974, each of the chains had about 300 stores nationally.

Dalton revolutionized backlist sales. Before scanning technology existed, Dalton instituted unique SKU numbers for every title which the cashier would punch into the register when each sale was made. (The SKU number was on a sticker on the book.) That enabled an automated reordering system to bring core backlist (designated “model stock quantities”) back in as they sold it.

Dalton had a “hot list” and a “warm list” of titles. The “hot” titles sold 10 copies a week across the chain. The “warm” list sold 10 copies a month across the chain. That was in a chain of about 300 stores and gave me my first real understanding of how few titles sold very much in a bookstore! Those lists were very important. If your book wasn’t on the hot list, it wasn’t going to get noticed by a buyer for re-ordering. And if it wasn’t on the warm list, the title was likely to be returned.

At about the same time, the early 1970s, the Ingram Book Company introduced technology that changed life for the independent bookseller: the microfiche reader that allowed every retailer to know, before they ordered, what Ingram was carrying. All of a sudden, just as Dalton was demonstrating how important a broader selection and in-stock backlist could be to a store’s economics, independent stores could imitate that strategy by ordering regularly through Ingram. Although computerized inventory management help was still a few years in the future, just being able to get the books from a single reliable supplier enabled independents to begin to compete and grow. (Of course, independents still didn’t have the advantage of 300 locations providing data so they could detect a “hot” book or “warm” book that might not be evident in a single store.)

There were two newer operations spawning stores with robust backlists in the 1970s: Paperback Booksmith and Little Professor. Both jump-started new independent stores with their branding, their inventory, and systems to support both new title buying and keeping key backlist alive. The Doubleday and Brentano’s chains had fewer stores, but bigger and richer ones.

From the publishers’ perspective, this was all providing more and more opportunity: more stores, more efficient stores, more backlist-conscious stores. So general trade publishers grew. Title outputs grew. Dalton and Walden grew. Independents and various smaller chains grew. Ingram grew. Baker & Taylor grew.

In the 1980s, the growth continued, fueled by increased efficiencies. Machine-readable fonts enabled Walden to imitate Dalton’s point-of-sale monitoring without having to sticker every book. Computerized inventory tracking systems improved efficiency at stores far and wide and at the wholesalers as well. New retailer Crown Books pioneered a new idea: a more limited selection of new books, combined with a lot of remainders and bargain books, and aggressive discounting of bestsellers. Even while the chains grew, the independents grew and became more powerful. A newly-energized American Booksellers Association became an aggressive advocate. They sued major publishers, ultimately forcing changes in sales policies that were deemed too chain-friendly.

Throughout the 1980s, the independents were the ones building the big category-killer stores. Good independents were confident that they beat the chain stores on title selection. They were even competing pretty much at full price against Crown’s deep discounting simply by being the place you could find the books you wanted. In the late 1980s, Borders and Barnes & Noble, along with Wall Street, saw the opportunity. Borders acquired Waldenbooks and B&N acquired B. Dalton to give them operational scale, and then they started to open very large 100,000+ title stores (under their own brands, not the acquired ones) in a model that had been developed by a Texas operation called BookStop (which was acquired by Barnes & Noble.) This just meant more growth for publishers; more backlist being stocked in more places. This might have been when the big indies first started feeling a pinch; I recall Andy Ross of Cody’s expressing concern about a big Barnes & Noble opening in Berkeley about that time. But the indies and the chains had a much bigger problem just over the horizon.

In the summer of 1995, Amazon.com opened for business. And, probably since Day One, but certainly increasingly and increasingly obviously, Amazon has been damaging the ecosystem which spawned a robust bookstore network and, which, in turn, fostered large and powerful general trade publishers. That was when the wall protecting the water that fed bookstores and trade publishers was breeched by the oil of digital distribution.

The analogy is not precise. Amazon is not a villain like BP. They aren’t just destroying an old eco-system; they are building a new one. To the consumer that is finding shopping easier than it ever was before, finding books they could never find before, being presented with cheaper choices of used books and electronic books that were not available before, there is no crisis here. In fact, there is no problem.

But to bookstores that depended on customers that had little other choice but to come to them for the books they wanted, shop from what was available under the store’s roof or wait for something to be brought in from outside, and who were effectively restrained by geography from shopping around for price or selection, the waters have become toxic. And to publishers that built a business whose principal competitive advantage is their ability to take intellectual property and put it onto bookstore shelves, the imminent prospect of reduced revenue, increased costs, more difficult title acquisition, and competition from old IP long-sold or long-dead, are now fouling the drink for them as well.

All of the eco-destroying forces that have so far hit the  bookstores, like the oil coming onshore in the Gulf, are just harbingers of much bigger waves of challenge to come. More and more people buy ereaders and cut print consumption drastically; more and more books get digitized; the long tail only gets longer as more and the more digitized stuff meets increasingly efficient print-on-demand. And more and more competitive material enters the supply chain with some appeal to the public but with no participation in the structure that makes bookstore stocking easy. The bookstores’ problem is not just about demand, it is also about supply. That’s competitive advantage for trade publishers in getting their books on bookstore shelves, but it is competitive disadvantage for bookstores competing against a universe of content a click away from more and more eyeballs and mindshare.

In an exchange in front of a large audience at BookExpo last week, one prominent publishing executive took relative comfort in the fact that “more than 90% of our business is still print.” That’s (still barely) true, but only about 70% of the business is still occurring through brick-and-mortar outlets. That number will be under 50% in 12 to 18 months, and the slide will still be accelerating. Big publishing grew in an eco-system of expanding retail shelf space. It has been challenged in the past 15 years as all that growth was stopped by the new forces unleashed online. Now that shelf space is going to start to shrink faster and faster, it is hard to see how big trade publishing can avoid doing the same.

Another aspect of this problem was raised this morning on a mailing list I’m on. Public libraries are losing the funding they need to stay open. Public libraries buy a lot of books from trade publishers, although most of those sales go through wholesalers and not all publishers are managing library sales discretely the way they should. Library purchases have tended to act like ballast in previous recessions; public funding wasn’t usually as volatile as consumer spending. Unfortunately and somewhat coincidentally, the erosion of the bookstore infrastructure is occurring when we’re also facing what is likely to be a longterm crisis in public funding as well.

Two Australian booksellers were in my office last week. The trauma they face is even worse than it will be here. Geography has protected Australia from competition so books are priced 50-to-100 percent higher than they are here. That’s been great for bookshops. Their trade looks like ours did 15 or 20 years ago.  With the arrival of ebooks and POD, they’re probably facing the changes we’ve seen since then in the next two or three years.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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