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Daniel Menaker was not long ago the Executive Editor-in-Chief at Random House and writes knowledgeably about the state of play and state of mind inside Big Publishing today. His piece Redactor Agonistes is a psychological snapshot of a declining industry, a catalog of the frustrations that are increasingly common in an environment where, as hard as everybody tries, the numbers just keep getting harder and harder to hit.

The first point to make about Menaker’s article is that is published by review, barnesandnoble.com’s online magazine. I knew that B&N was working hard on online content, but (not being much of a book review reader) I hadn’t actually looked at it until this article. Of course, it shows the magic of the web; I was directed to the Menaker piece by a number of online referrals and now I’ve discovered a whole new source of interesting content. This kind of intellectual article is not what I previously would have expected to see in a free publication created by a retailer! And it shows that BN.com is thinking about the value of a community of readers who think about the book business.

Menaker makes the overall point — familiar to anyone in the business — that publishing is about saying “no” far more often than it is about saying “yes.” Most submissions don’t get an offer. Most of the books that are published don’t get much attention. Most of the books that are published don’t earn out their advance (although that is not saying the same thing as “most books don’t make money”, which Menaker comes dangerously close to conflating. And if you use the benchmark of “make money”, you get drawn into a conversation about how charges for overheads are handled, which is a conversation we love having but we’ll save it for another day.)

I have said for years that “publishing a book presents the temptation to make an infinite number of decisions, which must be resisted.” Menaker notes this aspect too when he points that out that editors have to deal with nitpicking about the jacket, the design, the flap copy, all of which can be labored over forever if every thoughtful comment is responded to.

Menaker also notes the disconnect between the editors, who acquire the product, and the sales team that has to turn the investment back into revenue. Despite some years in the business at a reasonably senior level, Menaker admits “you don’t know what sales reps say about [the] book when they make sales calls.” He admits to a suspicion “that salespeople’s and buyer’s biases and preferences play a greater part in a book’s fortunes than most editorial people want to allow themselves to understand”. While I can quantify his benchmark about the editorial people, I can tell him from years of experience with sales that rep and buyer prejudices — which they would call either “tastes” or “instincts” — are, indeed, a significant component of the success of all books below the very top echelon.

Menaker notes that success in frontlist publishing is “very often random.” This is a level of humility and honesty that probably would be very hard for top management to accept from anything but a former executive editor-in-chief.

Of course, all these things — and many other things Menaker says in this piece — not only are true of trade publishing, they have always been true! In fact, with the consolidation of accounts, it is probably easier today for an editor to talk to buyers constituting a significant portion of a book’s potential than it was 20 or 40 years ago. (The sales department would hate the idea, but three or four conversations could cover more than 50% of the potential for most books.) The randomness he notes in frontlist success was probably greater when the account base was more decentralized. Publishers have always turned a lot of books down. Publishers have always done very little for most of the books on their list (besides putting them in a catalog, printing them rightside up, and sending them on their way.)

But I think Menaker is right when he suggests that publishing houses aren’t as happy places to be as they used to be. I just don’t think he has put his finger on the reason why.

He comes closest at the end when he talks about the creative acquirers’ need to feel that they have the “knack” of recognizing raw intellectual property that ends up making a lot of money. That’s really the problem; it is getting so hard to make money.

But that’s not because of the time-honored problems; it is because of the changes in the environment around publishing.

Each new book today is competing with millions of other book choices quite accessible to the consumer; 20 years ago it competed with about 100,000 other books. Forty years ago it competed with fewer than 50,000. Used books are offered right alongside the new ones online — a development of the past 10 years — and will increasingly be in the stores over the next 10 years. The amount of shelf space available for books at retail is shrinking for the first time in our lifetimes, while the number of titles competing for space is mushrooming. Menaker says 150,000 titles are being published annually; counting by the new ISBNs each year, the number is actually two or three times that large. Industry output was about 10,000 titles annually in the 1960s.

And all of that is before we take into account the information you would have gone to a book for 20 years ago that you go to the Internet for today: to choose a hotel in Paris, to figure out how to tend to a sick geranium, to find a great recipe to turn leftover ham hocks into soup.

It’s not just in people’s imagination that the business is getting harder and it is also becoming more depressed. People in books are not as happy as they used to be, because success, as measured by dollars in over dollars out, is not as ubiquitous as it used to be. The change Menaker takes note of is not attributable to the changes in the way we do business; the changes in the way we do business are a response to a changing environment all around us. It is characteristic of an industry that is getting smaller after several hundred years of only getting bigger.

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The Wall Street Journal was the first to announce, on Monday, (behind a pay wall, but Google “Publisher Delays E-book Amid Debate On Pricing” and you’ll get it) that Sourcebooks CEO Dominique Raccah was holding back the ebook publication of a new hardcover YA novel, Bran Hambric, scheduled for release this September. Raccah’s explanation to the Journal was that she was trying to preserve the perception that the $27 hardcover price was reasonable. Since she knew that any ebook would hit the street at just under $10 (the Kindle promotional price is $9.99 and B&N has suggested that their promotional price will be $9.95), Raccah felt that sales of the hardcover would be undermined.

What was left unsaid in the Journal piece was that Raccah might have been leaving money on the table with this decision. After all, the publisher still sells ebooks on roughly equivalent terms to printed books and has lower costs. So, depending on the royalties Raccah is paying the author, she is (most likely) realizing more margin for Sourcebooks on the ebook sale than on the printed book sale, regardless of how the retailer prices it.

Even more startling (in this day and age) is the possibility that the author’s royalty is higher per copy on the hardcover, so Raccah might be protecting author royalties, to the extent that withholding the ebook restrained cannibalization and resulted in more hardcover sales. I mention that possibility because the agent for author Kaleb Nation is Richard Curtis, one of the most ebook-friendly agents in town (and, indeed, the owner of an ebook publisher called EReads), who was quoted in the Journal supporting Raccah’s decision.

On Wednesday, Motoko Rich and Brad Stone published a piece in the Times on the same story (in which I was very briefly quoted.) Rich and Stone added some nuance to the story. The Journal said that agent Robert Gottlieb resisted simultaneous ebook publication “when he can prevent it.” In the same graf, they said that only one book of the Times’s Top 15 fiction bestsellers was not available in the Kindle store. Of course, that doesn’t mean that the Kindle editions were available at any particular time in relation to the first release of the hardcover, just that they are available now.

The Times reporting went further than the Journal, speaking to several publishers of upcoming major books about their ebook timing plans. Doubleday hasn’t decided yet about Dan Brown’s book but acknowledges that the impact of ebook sales on the hardcover was a consideration. S&S won’t reveal their ebook release plan for Stephen King’s November novel, Under the Dome. Ditto from Hachette imprint “Twelve” on the Ted Kennedy autobiography, True Compass, coming on October 6.

So the fact that everybody is thinking hard about this is confirmed by the Times’s reporting.

But Cader, who as an industry expert and blogger has more scope and credibility to report unattributed information than reporters at WSJ or the Times, went further in Publishers Lunch on Thursday. He ridiculed the notion that Doubleday was (according to a spokesperson)  ”[more] worried about…security…than particular vendors” and he sees the motivation from publishers being to control the behemoth, Amazon. As Cader reports it, Kindle sales surged when the new device(s) came out, becoming as much as 50% or even 70% of Amazon’s sales of many important books.

Everybody (in the industry, but maybe not outside of it) knows that Amazon pays a standard discount for ebooks, which is about 50% off publisher suggested retail, and that Amazon actually takes a loss on a $25 or $27 hardcover book it sells through Kindle at $9.99 (as B&N will do if they follow through to sell books like this as ebooks for $9.95.) Nobody expects Amazon to do this forever although, as Cader points out, they are temporarily subsidized by the profit they make selling the Kindle devices. The widespread fear among the big publishers is that Amazon will soon demand lower prices for the books they put on Kindle so they can keep the $9.99 price point profitably.  As the Kindle unit sales grow, of course, the muscle behind such a potential demand would grow right along with it.

Cader makes the very important point that sales migrating to ebooks, and particularly to Kindle, weaken the brick-and-mortar channel that publishers depend on for most of their sales and profits. The Times reported that publishers could well be making bigger unit profits on each Kindle sale than on each printed book sale (a fact that I explained to them when I was interviewed and which appeared not to be clear to them before I did). Cader (who of course knew that without needing to be told by me or by the Times) makes the point that publishers do this because they are “looking out for what they believe to be their long-term interests — and are trying to protect the entire system of physical book retailing which supports the whole industry.”

While this was happening, Dominique Raccah posted her thoughts to Peter Brantley’s Amazing List and Kassia Krozser, on that list and proprietor of the Booksquare blog, turned her space over to Dominique for a version of that post. Dominique made it clear that she considered what she was doing with Bran Hambric to be an experiment. Her focus was on a “sustainable author/publisher model”. She made the point (again, clear to most people in publishing but perhaps not to those outside) that the music business continues to present inapplicable analogies, but one of the most egregious is that authors should give it away like musicians to get performance bookings: in publishing, there are no performance bookings (and few t-shirt sales…)

Raccah made it clear that she supports early ebook releases and her house is going to a workflow that will enable that. But then she gets to what is really the heart of the matter. “Etailers are suggesting that the ‘right’ price point for an ebook is maximally $9.99.  And they are proselytizing the price $9.99.  We can’t control what retailers charge for books or ebooks.” The publisher’s choices are whether and when to make it available and whether to sell to any particular retailer.

From there she explains that exploiting formats with “windows” is an old book business strategy (hardcover, trade paperback, mass-market paperback) and a common film strategy (theatrical precedes DVD release, with TV licensing once part of that picture as well, but not anymore.) And she concludes by saying that publishers need to make these decisions on a book-by-book basis (”strategically”, she says, although I’d call that “tactically.”)

My quote, by the way, was to the effect that ebook readers and print book readers are increasingly separate markets, which I believe to be true but cannot prove. A C-level friend at a large house disagrees with me, as I’m sure many others do, and my evidence on this is highly anecdotal (including myself: I have read one printed book of the 50 or so I’ve read in the past 18 months.) But my friend would have no more evidence than I to support his contrary position, so publishers will have to make decisions without really knowing, for now, whether they can push a Kindle or Shortcovers or Ereader consumer back to paper by denying or delaying a book.

That concludes the summary. I have a few thoughts of my own to add on this. I’ll be posting those shortly, probably over the weekend. I hate going much over 1000 words on any single day, and I’m already past 1200.

An  earlier version of this post had a couple of errors misconneting agents and authors which have been repaired. So if somebody tells you about a mistake they saw that you can’t find, that’s what it’s all about. Thanks to Michael Cader for setting me straight.

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The debate about the Google settlement, like most of any consequence or intellectual interest (what the government should do about health care or energy, for example) actually engages a wider range of knowledge than most of us have. But we feel comfortable having an opinion about what we should do about health care or energy without necessarily knowing much about the logistics, requirements, actual state of affairs, or cost-value relationships of what we favor or oppose.

We each start with a general position. For example, mine on health care is that government intervention is required to make sure everybody has a minimum reasonable standard of care. On energy I believe government policy should encourage energy development and consumption that is efficient and unwasteful while increasingly substituting renewable energy for resource-consuming energy.

My personal political positions are directional, not very specific. Others, perhaps because they’re better informed, have more aggressive and articulated views. I know people who think health care isn’t worth fighting for unless it is single payer; that anything else could make matters worse. I am sure there people that hold similar positions on energy that I would deem “perhaps desirable, but not politically achieveable at this time”. They’re my allies unless their idea of “perfect” blocks my idea of “better”.

And then there are others, of course, who aren’t allies at all: people who believe that market forces can be trusted with social challenges or simply resist the idea of any expansion of government or increase in taxes.

But when it comes to the details of legislation, most of us just plain citizens are pretty helpless even to have an informed opinion, let alone to have any influence. The staffs of our legislators are hearing about the details from the experts representing doctors, hospitals, insurance companies, drug companies, left- and right-wing lobbyists. If Charlie Rangel says that a very modest tax increase on people making over $350,000 or $500,000 a year will bring the costs into line with the parameters President Obama says are economically necessary. Assuming there is no chorus of objections from sources I trust (Krugman), I’ll just accept that as fact. It advances my philosophical position and I tend to trust him. I mean, who really “does the math” for themselves on things like this? Without being a professional, how could you?

The Google settlement might not be as complicated as health care or energy, but the debate about it also revolves around a lot of unknowns. Although the argument between those who say “approve it” and those who say “reject it” or even, “reject it if you can’t change it” is superficially waged on the “merits” and on the words in the settlement, I believe most of us come to this extraordinarily complicated question with a position and then put each new piece of information (or argument) into a “context” that won’t require us to change that position. And since we’re dealing with a lot of unknowns, that’s not really very hard to do.

My dominant prejudice I bring to this conversation is a belief that copyright laws have been extended so that they are abusive to the public interest and result in a lot of intellectual property being walled off from use for no good commercial reason. With that as a background belief, I saw what Google did (scanning all the work) as cutting a Gordian knot. Others come to this discussion with a dominant concern of respect for copyright or a dominant concern of bullying monopolies. Their prejudice might lead them to be against the settlement while mine pushes me to favor it.

Today’s post is not to argue that the settlement should be approved, but to consider what the situation will be if the settlement is rejected. The proponents and opponents of the settlement certainly seem to differ on what the world will look like if the settlement is approved; might there be somewhat greater agreement between the sides about what the world will look like if the settlement is rejected?

To me, it looks a short story.

The consequences of the settlement being rejected seem catastrophic to settlement opponents if it is turned down because the litigants are deemed not to fairly represent the classes (that is: the judge buys into the the idea that foreign authors, contributors, and orphans and perhaps others are “left out”). If the class representation is overturned or curtailed, it would be somewhere between difficult and impossible for these lawsuits to go on (and there are two lawsuits, even though there is one settlement.) If the settlement is rejected for some other reason (perhaps: the judge agrees that it can’t be allowed because it grants Google what would be a monopoly), then presumably the litigation could go on.

If rejection of the settlement is because the AAP and/or AAR don’t represent the class, Google would be in a stronger position than they were before the suit. There would be no database of orphan works to sell litigation-risk free, but the scans for search and returning of snippets would just continue. Authors could individually sue for copyright infringement if they wanted to try. Nobody would be any more tempted to “compete” with Google by scanning in-copyright works than they are now. And Google would have the benefit of having smoked out a lot of potential litigants because the faux settlement got a lot of copyright holders to come forward.

A little-known fact is that most of the value of the database Google was going to sell was in the in-copyright works that would have been ceded to the database. (This came up obliquely because these are the copyright holders who are going to get bonus revenue from the money earned by the page views on orphans, a fact settlement opponents have raised.)

That being the case, somebody will want to distribute that database, even without the orphans. That somebody will have to negotiate with Google to get the digital files and then with each of the publishers for their rights, without a BRR to help them. A pain in the neck, but in a few years it would probably happen.

If the settlement is rejected for some other reason, all of the above (except the part about still selling that database, since the copyright owners would still be in litigation with Google over this scanning and their lawyers would advise them against it; they can’t license a use for the scans they want to say Google shouldn’t have!) remains true and the AAP and the AAR get to decide whether to continue to fund the suit for the next several years while they and Google keep talking, presumably, about something that would satisfy the court (a bit odd, since they already satisfied each other!) If that were to happen, would the opponents of the settlement somehow help them carry on? Or step in to litigate in their stead?

If this analysis is right (and I float it with all humility: IANAL), then the opponents of the settlement walk a fine line. They want it rejected, or remanded to the litigants with some instructions they can actually follow. But they don’t want the plaintiffs discredited as representatives of the class. It would be the height of irony if Google, which probably had foregone challenging the standing of the AAR and AAP at the beginning to avoid antagonizing two organizations they ultimately need to work with, gets a court victory they didn’t seek handed to them by people motivated to make their lives more difficult. This could end up being a textbook demonstration of “unintended consequences.”

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Motoko Rich was on the front page of Tuesday’s NY Times business section with a story headlined “Print Books Are Target of Pirates on the Web”. She documented growth in piracy at the front (a quote from David Young about increased vigilance from Hachette’s lawyers and from Wiley’s lawyer with stats about a 5-fold increase in takedown notices.) And after an explanation of why the increase might be (people can read ripped files on devices now), she closes with a quote from DRM’s most savage opponent, author Cory Doctorow, repeating the line (which I believe originated with Tim O’Reilly) that he preferred piracy to obscurity.

But what was missing from this piece was any evidence that piracy is negatively affecting sales.

But in the past 24 hours, two reporting efforts have surfaced that seriously looked at that problem.

One is by doctoral student John Hilton and reported on Bloggasm. Hilton tried to track sales before and after an ebook giveaway. He found a lift in sales on books Random House had given away but a decline in sales for books given away by the science-fiction publisher, Tor.

The other study was done by my colleague Brian O’Leary in conjunction with O’Reilly Media and Random House. The methodology was similar to what Hilton employed and was reported by O’Leary and Mac Slocum of O’Reilly at Tools of Change last February. Now they have published a Research Paper with O’Leary’s findings which is available from O’Reilly.

What O’Leary found, using Random House data on ebook giveaways and O’Reilly Media data on books found on pirate sites, was that there was a correlation between free distribution and a sales lift for the books in question. But O’Leary cautions, “correlation is not causality”; the fact that sales rose after piracy and giveaway doesn’t mean sales rose because of piracy and giveaway. Both O’Leary and Hilton say more data is needed to come to any definitive conclusions.

Whatever we find out about the link between free ebooks and the sale of printed books and ebooks will:

1. not necessarily be true for all titles or genres.

2. not necessarily be true for all time.

Although O’Reilly also has a very tech-sophisticated audience and O’Leary found no evidence that piracy damaged sales, one has to wonder whether the difference Hilton saw between a general audience (Random House) and a sci-fi audience (Tor) is tech-sophisticate-specific. Or could it reflect wider use of Kindles or Sony Readers or iPhones among the sci-fi audience?

Cory Doctorow has made a name for himself giving content away and, not incidentally, skewering people who don’t see the virtue to that approach. I share Cory’s opinion that — up to about this moment — sharing of content from narrative books would almost always result in a sales increase. I have always expected that effect to decline when ereading became ubiquitous. When people just don’t want to read on screens, giving them a screen sample could provoke a print-book sale. When people get comfortable reading on screens, then giving them an ebook satisfies their demand.

So the Rich story failed to deliver any analytical data which two other “reporters” managed to construct. But there was another failure in the story and it is really a more serious one.

Rich points to two web sites where pirated material might reside: Scribd and Wattpad. I don’t know Wattpad, but Scribd has been in the news quite a bit lately. Several publishers have made deals to post material with them? Why? Because Scribd is aggressively anti-piracy! If they have cached a copy of a copyrighted text, it will not show up as a pirated edition on their site. So the very best way for publishers to prevent unauthorized posting of their copyrighted material to Scribd is to give them a digital copy. Since several major publishers in New York have made deals with them, which have been reported in the trade press, it is a bit mystifying that this mistaken reporting, potentially quite damaging to Scribd, could have appeared in the Times. 

On a mailing list discussion of this topic, Allen Noren of O’Reilly cited a Norwegian study that indicated that the most frequent downloaders of pirated songs were also the biggest customers for legitimate downloads. In the same list, Jane Litte made the point that pirated ebooks might be available when a legitimate edition is not and, in additon, some of the pirate sites make downloading — acquiring the content — easier than the legitimate vendors do.

The modern thinking about DRM, piracy, and sharing is that lower prices and greater ease of acquisition and use will keep honest people honest without technical barriers. Unfortunately for book publishers, the so-cheap-it-hardly-matters 99 cent unit doesn’t work for us. Record companies are selling albums as digital downloads for a mere 25-30% less than they would cost as CDs, which conveniently translates to 99 cents a song. Selling books for 99 cents a chapter, or 50 cents a chapter, would not produce a similar result because the unit of music appreciation is the song; the unit of book appreciation is not the chapter.

So the fair comparison to music would be books to albums, not to songs. That puts the price at about $9.99, which is exactly where Amazon decided bestseller pricing should be. And that’s a price that could work for publishers too, if they weren’t giving retailers half of it.

The pricing and distribution of ebooks is a complex and moving target, which I’ve discussed in prior posts on several different occasions.  Clearly Amazon, which creates and sells a proprietary reader through a closed system is a different animal than everybody else. They start out with a stronger hold on their customers which could provide leverage to demand  more margin than everybody selling epubs and pdfs that can come from a variety of retailers and play on multiple platforms. That’s perverse from the standpoint of people who believe in industry standards, but it’s probably not an enduring advantage. To exploit it, you have to be willing to pass up titles that don’t meet your margin requirements.

But people who read their Kindle books on an iPhone (and Michael Cader’s recent analysis suggests that the recent Kindle sales spike might be due to that being a large number of people) can readily access other ebook platforms as well. If they have the title and Kindle doesn’t, it loosens Kindle’s grip on that audience. 

Sorry, I’ve strayed a far bit from the piracy question. But you can’t contemplate piracy and what to do about it without analyzing ebook pricing. And you can’t discuss pricing without discussing the mushrooming complexity of the ebook supply chain.

Defending the margins from ebook sales is a big current challenge f or publishers, but getting to a point where they monetize eyeballs rather than IP is the long-run challenge. I’ll be discussing that one in a talk called “Stay Ahead of the Shift” at BEA at Javits Center, 11 am on Thursday, May 28.

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Here is the lineup for this year’s Making Information Pay session on “Shifting Sales Channels”, to take place at McGraw-Hill on May 7. 

The first half of the show is about “the state of the market.” The second half is about “what publishers are doing about it.”

We’ll start off with a report on the state of publishing from Leigh Watson Healy, Chief Analyst of  Outsell, based on conversations she has had with many leading publishing CEOs in the past several months. Leigh is the lead for Outsell on the BISG Publishing Trends report, which will be coming a couple of weeks.

Then I’ll do a review of what we learned from our industry survey and interviews Ted Hill and I did preparing for this conference.

The highlight of the first half of the show will be a coordinated presentation from Jim King of BookScan and Kelly Gallagher of Bowker, showing how BookScan’s POS data and Bowker’s consumer data can be used in tandem for greater analytical insight. This is, we believe, the first coordinated presentation ever by these two companies, which in many spheres are competitors.

The second half of the show will kick off with BISG co-chair Dominique Raccah, CEO of Sourcebooks, talking about the many changes that have taken place in her company over the past couple of years. Dominique herself has become a dedicated online marketer (which anybody following her in Twitter knows very well), but she has installed a digital workflow, changed her company’s title mix, and, in general, tried to react quickly to changes in trthe digital age.

One of the trends we’ve found is a de-emphasizing of printed trade catalogs. Leaders in this effort are HarperCollins, and the President of Harper’s sales division, Josh Marwell, will describe his company’s moves toward their own e-catalog as well as their participation in an industry effort called Edelweiss. Harper will not be issuing a printed catalog this Fall.

We have also observed big changes in how publishers are spending their marketing dollars, but none are changing more than Sterling. CEO Marcus Leaver will describe those changes: where he has put additional spending and where he found the dollars to cut to pay for the growth he saw was necessary.

The program will conclude with a lesson from Random House’s VP, Sales Analysis Dave Thompson, who will pick up where King and Gallagher left off. Thompson’s focus will be on using the available data — and he sees great value in the combination of POS and consumer data — to educate buyers in accounts that are notsteeped in the book business, like mass merchants. This is one of the growth areas some publishers have identified for the years to come.

All in all, a jam-packed program that should be of value to any publisher trying to improve its sales in difficult times. I’m proud of what we’ve put together and I hope any of you who haven’t signed up yet will grab one of the remaining tickets.

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I love the London Book Fair. It is my favorite of the three book fairs I visit every year (BEA and Frankfurt being the other two) and I have even more fun there than at Tools of Change. Book Fairs, for me, are about seeing publishing people from all over the world, catching up with their thoughts, and, most important from a selfish point of view, having them vet mine.

Getting some work done for clients and finding new ones is what justifies the expense, of course, and there was plenty of both of those.

I spoke at two events at this year’s LBF. On the Sunday before the Monday morning that LBF actually opened, there was an all-afternoon session which was a “report from America” on digital change put together by Michael Healy of BISG and (as we now know, revealed publicly in that very event, the likely new head of the Book Rights Registry, if the proposed settlement of the Google lawsuit is accepted next month.) It was a beautiful Sunday in London — bright and sunny — and apparently good weather has been in short supply (although you couldn’t prove it by me: was there from Saturday to Thursday and it was lovely every single day.) 

Despite the attractions of the weather, about 100 people came to the Sunday session. It was supposed to run from 1:30 to 6. It started a bit early and ended a bit late (last speaker off the stage at about 6:20) and the crowd at the end swarmed the speakers afterwards with individual questions.

On Wednesday, I spoke at the Supply Chain meeting (my presentation being about this year’s BISG effort for Making Information Pay: “Shifting Sales Channels.”) That session had been moved from its customary spot on the last afternoon (Wednesday) to the morning. Michael Holdsworth, one of the organizers, expressed just a bit of concern about whether the change would affect attendance. It didn’t. The room was packed.

I tried to go to one other session. Our StartWithXML effort has a London partner to stage a full-day Forum on September 1. That’s the Publishers Licensing Society. So when their Executive Director, Dr. Alicia Wise, asked me to attend their session on ebooks for the visually impaired, I said I’d do it. Despite being a two-senses handicapped guy myself (glasses and hearing aids), this was not something high on my interest list and I figured it wouldn’t be on other people’s either. Wrong! I got to the session 10 minutes late and couldn’t get in because the room was jammed. But I didn’t feel too badly because I found my longtime colleague, Mark Bide, also waiting outside. He couldn’t get in and he was on the organizing committee for the event!

So even though there were fewer people in the hall than in prior years — I don’t know the official count but I do know what I saw and what everybody else saw and said — there was a real appetite for future-oriented programming. There was a session featuring four UK CEOs which I read about in the show daily. That one was also well-attended and attempted to be future-oriented, although from the account in The Bookseller show daily, it would appear not particularly successfully.

What I kept thinking about as I walked around the Fair was “who won’t be here next year?” My top nominee would be Publishers Weekly; it is hard to understand how they manage to keep the doors open except by burning through the parent company’s money. Right behind them would be BookExpo America, another longstanding operation which is exemplifies what happens to the horizontal publishing infrastructure as we build an increasingly vertical world. Although it is a popular pastime to “blame” PW editors or management for their predicament, I wouldn’t be inclined to do that. I don’t have a formula to suggest that would have saved them, nor do I for BEA. (Although if BEA goes down, an idea Michael Cader came up with that I joined him to put forward a few years ago called “Frankfurt in New York” might be something old that will suddenly become new again!)

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Michael Tamblyn of Booknet Canada made a series of provocative proposals for publishing, some of which he and his organization are involved in. I commented on 5 of them in a prior post; today I want to explore the one nearest to my personal interest: Michael’s suggestion that an intelligent data-connected electronic catalog would enable reps and stores to make better decisions about advance orders.

Michael has identified a promising area for industry improvement, since it is certainly true that advance order creation is among the least scientific components of book inventory management. But I’d frame the challenge a little differently than he has.

Michael’s presentation of the problem is to show how few books — of all those put on offer — achieve an ultimate sale of any particular number of copies. So the concept — similar to a sort-of rotisserie baseball game that Booknet Canada has organized — is to pick the eventual winners. The implied logic is that if you know the number of copies a book will sell in its lifetime, you know (or at least know better) what a store’s initial order should be. Michael also envisions pulling data on what a comparable title had sold in that store over its initial stocking period, which is a big step in the right direction. Trying to get to the right number by predicting the ultimate sale is not.

There are three critical factors a store should consider when determining its intial order for a title:

1. How many copies are needed to present the book properly at retail? Does it need to be faced out? Does it need to be displayed in more than one place in the store? Does it need a “presence” in windows or table displays? This is what I call “platform inventory” and what some publishers and retailers refer to as “minimum display quantity.” This is the most component of a new title stocking decision most likely to create returns. It is also properly looked at as a promotion expense (by the store and/or by the publisher.)

2. How many copies is the store likely to need right out of the box on the title? How many are needed to cover the first week or two or three (or six) of sales (depending on the answer to the third point below.) This separates the books on which there might be high anticipation from customers, such as a follow-on Rowling or Meyer title, or one that might create a large newsbreak, such as last summer’s book by George Bush’s press secretary.

3. How fast can the store get replenishment inventory? This combines two factors: the speed of the fastest-possible resupplier (wholesaler or direct from publisher) and the danger that the publisher will be caught out of stock (generally speaking: a bigger problem in Canada than in the US and a bigger problem with smaller publishers than larger ones.) If you can’t get replenishment inventory fast, you might have to gamble on a larger initial buy. (This is a bit unfair because it would appear to “reward” a publisher for lousy service, but things even out when that publisher gets the inevitably higher returns this tendency to over-ordering will produce.)

Michael’s suggestions for how the electronic catalog might work contains a lot of ideas already incorporated in a tool being developed by Above the Treeline called Edelweiss. Edelweiss, which will launch a beta version for the Fall 2009 season including most of America’s top publishers, is an electronic catalog with many of the features Michael suggests. Because Edelweiss is not offered by a BookScan equivalent (which Booknet is), it does not contain global POS data for the market. But it does have data from Treeline’s roster of stores (which includes Borders and many independents) and it does have the store’s own data. One large independent we spoke to was particularly happy about Treeline’s ability to populate the store’s own title database, relieving them of many hours of tedious, expensive (and error-creating) data input.

The overall message from here is that prompt and sensible reordering is actually much more important than guessing right on the initial order quantity to make sure any store gets its fair share of most big titles. If Booknet (or Edelweiss) reported the recently-published titles with the most widespread reorder activity as a flagged item every week (or every day), that would be the most valuable frontlist tool any store could have.

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Two examples of the shift from horizontal media to vertical have caught my attention in the last week, although both of them have been around for a while.

Monday’s “Online Media Daily” has a story about AOL hiring laid-off journalists for its new(ish) cluster of vertical channels. There are 70 such vertical channels already launched, with 30 more being planned. They’re going for the biggest verticals (duh…) and some, like TMZ, have already become major success stories.

This is an example of what horizontal book publishers have to do. AOL as it was originally became a dinosaur. They built a huge audience by making Internet 1.0 simple and accessible to most people. When Internet 2.0 came along,. the big opportunity would have been to become Facebook, but they missed it. However, they still had a huge audience, a legacy audience. They’ve been able to use the human bandwidth they have from that to build these verticals.

This is analogous to what big trade publishers have to do. They are still placing millions of hard copy books each year in people’s hands. They can drive people to URLs, just like AOL could. Their power to do that will wane, just like AOL’s has. How many of them will have a TMZ when their main franchise is no longer powerful?

The second example is from an agency called Verso Advertising. Verso recognized that what is true of web content — that it works best organized by market niche — is also true for advertising. So they invested the effort to build vertical “channels”: aggregations of web sites that serve a particular interest.

Verso reports that they have 13 channels “built” with more to come. Pop Culture, Teen, and Parenting are the three biggest. Pop Culture includes 650 web sites and touches 21.4 million unique visitors a month. The Teens channel of 300 sites is sub-niche customizable by gender, subject matter, and age range. The Parenting channel includes 120 sites. 

Verso started thinking about these niche aggregations two years ago. They saw the haphazard way Internet advertising was being purchased and the big opportunities in targeting. They worked out a partnership with ad aggregator Burst Media (they have as clients the sites that receive the ads; we use them — among others — for our BaseballLibrary.com site) and planned to start the service in early 2009.

Talking to their clients, though, resulted in their just starting faster. Farrar Straus used them for a new Thomas Friedman book last September. And they’ve had notable successes already for Vanguard Press (”Bad Dogs Have More Fun” in the “pop music” chanel) and Berkley Books (using Military History and the Science Fiction and Fantasy channels to put their author Jim Butcher on the hardcover bestseller list for the first time.) Altogether, Verso reports having conducted 40 campaigns for 20 publishers, delivering 55 million highly targeted impressions in the process.

One aspect of Verso’s targeting is that it gets more refined as each campaign progresses. The response loop from Internet advertising allows Verso to shift spending within the vertical collection of sites for each book they’re promoting as they go. So, presumably, the last quarter of the money is spent more efficiently than the first quarter. That kind of refinement, of course, is impossible with print space advertising.

We see the Verso niche site aggregation as a smart strategy, but using it for advertising is only the start. Many of the sites on which they’re placing ads are also potential hosts for content (which should be linked to a “buy” button, of course) and they are home to blogs that take comment posts that open up all kinds of other possibilities. Verso is putting publishers on the right track, but using the same strategy for PR might yield even bigger results than it does with advertising.

It is worth making a distinction here. Neither the AOL nor Verso examples are about “community”. They are about “vertical”. Community right now, oddly enough, is still mostly a horizontal exercise (Facebook, Twitter, YouTube). But that’s temporary; communities require network effects and tools, and the two have not been in place in verticals yet. But that’s temporary. The right vertical strategy today will lead to the right community strategy tomorrow, and both AOL and Verso are putting themselves into a good position for the next turn of the Internet wheel.

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OK, so what I thought I had figured out earlier isn’t so simple.

In a prior post, I “discovered” (for everybody) that it is likely that the biggest revenue opportunity in the pile of books being scanned by Google would be the republishing possibilities among the orphans. I posited that with all those books about subjects still of interest from Babe Ruth to Eisenhower, there must be (to paraphrase an old joke Ronald Reagan loved to tell) “a pony in there somewhere.” MANY ponies, actually.

But, here’s the problem. It is not clear that anybody can publish those books without substantial risk.

There is, as I understand it, a potential liability under the copyright act (perhaps unlikely to be assessed, but possible) for publishing a book one doesn’t have rights to, even if one is diligent about looking for the copyright owner. Apparently, holding a normal royalty payment “in escrow” doesn’t eliminate that liability. 

The big win for Google in this settlement is that all parties are agreeing that Google is excused from any liability for the uses specified in the agreement. Those uses explicitly include “streamed” ebooks; but not “downloaded” ebooks.

There are also, in section 4.7 of the agreement, contemplated “new revenue models” that the BRR and Google can agree to, which include: 1) print-on-demand; 2) custom publishing (”helpfully” defined as “per page pricing for the educational and professional markets”); 3) downloadable PDFs; 4) consumer subscriptions, which are defined as individual sales of the databases intended to be sold to institutions; 5) summaries, abstracts, or compilations.

Apparently nothing else is “protected.” The liberation of the stranded — orphan — IP is not accomplished for any uses not contemplated here.  My colleague Michael Cairns suggests that the Registry itself could create a presumption of diligent search for a copyright holder and mitigate the chances that a court would find statutory damages applied, but it might take legal cases playing out to determine that.

Let’s say there are 5 million orphan works and 1/2 of 1% of them are worthy of a press run of 5,000 or more. With a few bigger winners in there, let’s say that’s an average of 6,000 press run across the 25,000 estimated titles. That’s 150 million units. Average retail of $15, average discount of 50%, conservative royalty of 5% of retail calculates to $1.125 billion in revenue to publishers and $112.5 million in royalties.

Cairns says that maybe these numbers are too high by a factor of ten. If he’s right, we’re still talking about $112.5 million in revenues to publishers and $11.25 million in royalties to authors. I have to believe those numbers are still larger than licensing revenues will be, although Cairns and I have not explored that more complicated question seriously yet. And the truth of the press run potential probably lies north of Cairns’s number (although perhaps south of mine.)

Why was that element left out of the settlement? Did the negotiating parties even contemplate it? And exactly how useful is the “orphan” relief if this huge portion of the potential revenue (and public value) is omitted? Were the parties so fixated on electronic exploitation that they just didn’t notice this? 

It looks like the need for Congress to act is about as urgent as it was before. The Copyright Office has long noted the need for Orphan Works legislation in a host of contexts and has been unable to goad our legislators to take the necessary steps. It had been my hope that the Google settlement cut the Gordian knot, but it would appear that the problem of true public access is a long way from being solved.

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Adam Hodgkin at the Exact Editions blog posted a piece that explains the ebook strategies of Apple, Amazon, and Google in simple terms. Hodgkin’s piece really helps think things through, but I think his analysis is a bit oversimplified (which is part of why it helps think things through.)

Hodgkin sees brilliance in Apple’s move not to enter the proprietary ebook wars, but simply to be a facilitator of sales to iPhone users (iPhones being, at least currently, the most widely-distributed handheld device deemed suitable for ebook reading.) He takes special note of Amazon’s 30% “market maker” fee, which he posits might help drive down the accepted price for middle services in the ebook supply chain.

And, as Hodgkin sees it, Google and Apple are pursuing directly opposite strategies to bring the ebook business to themselves. Google is betting that the future is licensing whole libraries in the cloud and Amazon is betting that it is buying ebooks one at a time to download to your device.

Hodgkin also notes that Apple’s 30% fee makes the 37% share Google will take before paying Book Rights Registry and the 55-65% discounts Amazon takes on Kindle ebooks (I actually doubt the discounts are quite that high on the vast majority of the Kindle books sold and Amazon discounting practices sharply reduce the percentage they are taking of actual selling price, which is, presumably, what Apple’s 30% would be based on) look very aggressive.  By this move, he says,  ”Apple will thus appear to most publishers and authors as a reasonable partner, a less monopolistic partner, than either of the other West coast web giants.”

Hodgkin concludes the piece by seeing ebooks as a 3-company race (these three) and says he is “tempted to call it for Apple” although “there are quite a few laps to go.”

That last sentence is the absolute truth.

This piece took no note of Sony, Stanza, or the potential impact of broadly-distributed epub files. Perhaps Sony is considered part of the Google strategy, except that the 500,000 public domain books Google has made available for the Sony reader are free (aren’t they? I am happy to be corrected if I have that wrong) and they are downloaded, not left in the cloud (unlike the PD books that can be read directly on the iPhone, with the toggling between the OCRd version and the original print, which Google announced two weeks ago, and which do remain in the cloud.)

It also took no note of Barnes & Noble’s recent purchase of Fictionwise or the fact that Waterstone’s has teamed with Sony Reader for distribution in the UK.

And if Apple’s strategy is to capture 30% of the ebook revenue for everything that goes to an iPhone, they have a big hole in it already. One buys Kindle ebooks from the Amazon store, not the App Store. They download directly into the iPhone from the net (no intermediating PC necessary). I don’t see how Apple gets any of that revenue. (I am not sure about the “why” of this from Apple’s POV, except that some smarter people have told me that it will be much harder for Kindle to repeat this trick on other phones, so it could be a competitive move by Apple against Nokia and RIM.)

But I think, most of all, this analysis omits full consideration of the discrete functions served by the retailer in the supply chain. 

The online book retailer needs to do these things: 1) secure a customer’s attention 2) aggregate titles to choose from, 3) merchandise, which is enabling discovery through “shopping” 4) provide search, which is enabling discovery through “asking”,  5) transact, which includes delivering the file and accepting the money, and 6) provide customer service.

If a publisher or retailer or ebook platform provider sets up to sell through the App Store, Apple gives them a head start on number 1, nothing on number 2, nothing on number 3, nothing on number 4, presumably all of number 5, and probably nothing on number 6.

Amazon provides it all. I am still trying to understand what Google provides; I don’t think we have all the answers on that yet, except that we know they’re providing a ton of free econtent that will make selling other ebooks at substantial retail prices that much more difficult for everybody. This should not surprise anybody and it is not a knock on Google. They are primarily in the free content business. They are not in the “merchandising” business. And they don’t have the most saleable titles to sell; they actually, title for title, have the least saleable titles. The value of what Google has is in the aggregate and was always intended to be. 

It is also critical to keep in mind that the ebook market for consumers has not happened yet! Publishers are seeing sales of about 1% of their revenue. I am a bit abashed about how over-optimistic I have been about ebooks for the past ten years (a by-product of having personally read more books on devices than on paper, by a factor of about 4 to 1, in the 21st century, and about 40 to 1 since I got my Kindle.) I can see ebooks getting to 7-10% of the units sold for consumer books in the next 3-to-5 years and I’m the optimist.

And with 85% of even that incipient market having not happened yet, most of which will be read on devices that haven’t been delivered yet (including future versions of Kindle, Sony Reader, iPhone, etc.) and, further with whole business models (subscriptions, book-of-the-month plans, bundling of titles together, offers by publishers to give ebooks away with print or audio books) which have hardly surfaced yet, we can only imagine what more changes we might see between now and then.

When there is a real ebook market, there will have to be real ebook merchandising. That means complete metadata on the titles, including reader reviews and information about the printed book publication. (Amazon, because they have it for their regular store, has it for Kindle books. Nobody else comes close, although one presumes Fictionwise will get that printed book metadata once they’re integrated with Barnes & Noble.)

Michael Tamblyn pointed out in his widely-circulated “6 things” address that book merchandising on the web hasn’t really made much progress since Amazon invented it in the mid 1990s. What Kindle has got, what Stanza has built for the iPhone, and even what Fictionwise has,which might be the best presentation of ebooks even before being enhanced by B&N (and even without the book information as mentioned above), are not really well suited for presentation on the smaller screen of a device.

Apple is not providing the full suite of retail services. If you assume that somebody has to be the bookseller here: pull the titles together, curate them, group them, put the right stuff out “in the window” or on the virtual “front table” on a daily basis (or, on the web, a more sophisticated basis than “daily” suggests) and handhold the customer through any further questions (I’ve gotten great customer service attention for ebook problems in the past from both Powell’s and Diesel Ebooks), then there will be a lot of costs to pile on top of Apple’s 30% take for providing the venue and ringing up the sale. Apple is providing the real-world equivalents of “rent” and “shipping”. Looked at that way, 30% doesn’t seem so cheap, even if it is a very high-traffic location.

This is going to get a lot more complicated before it gets simpler. I didn’t mention Scrollmotion, another ebook format that can handle illustrated material better than any of the others so far. I didn’t mention publishers selling direct, which they are definitely going to be doing more and more. I didn’t mention that every phone manufacturer and cell phone network is going to go all out to compete with Apple and AT&T and their devices will handle ebooks too and they’ll have app stores too. I didn’t mention that directing you to your choice of format — any ebook or a printed book which could be in different formats — is (one of) the real end game(s) here. Neither of us mentioned Adobe Reader format, which is still the market leader in ebook units sold.

It isn’t just too early to predict a winner; it is too early to declare the finalists.

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