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Publisher margins today may be enviable, but it will be a big challenge to keep them that way


The major publishers have apparently worked themselves into a very strong commercial position at the moment with the transition to ebooks. I say “apparently” because the data that gives the most recent rise to that understanding — a presentation by HarperCollins of the current economics — is somewhat incomplete.

What Michael Cader reported in Publishers Lunch on June 4 — about which agent Brian Defiore commented on the Aardvark blog the same day — is that HarperCollins CEO Brian Murray had laid out the standard revenue and cost structure for hardcovers versus ebooks for shareholders. What it showed very starkly is that:

1. (Even though) revenues (the top line) for ebooks are lower on a unit basis than they are for hardcovers;

2. (And) royalties for ebooks are also lower on a unit basis than they are for hardcovers;

3. (Still) unit margins for publishers net of manufacturing, distribution, returns, and royalty costs are considerably higher for ebooks than for hardcovers.

So the authors working on the contractual rates make less per unit on the ebooks than they do on hardcovers and the publishers make more. The joker in that last sentence is “working on the contractual rates”.

The biggest authors don’t, and that’s how this situation has been allowed to happen.

The savviest agents for the biggest authors don’t negotiate contracts in the same way the rest of the world does. They figure out in concert with the publisher how many copies they think the book should sell (big authors with long track records are somewhat more predictable than the rest of the universe, which is one more reason their books are so desirable to the publishers) and get an advance that is equal to a startlingly high percentage of the revenue that sales level would produce.

The advance is not expected to earn out (and, believe me, with advances calculated this way, they almost never do). That means the royalty rates are irrelevant. So they can have their star authors sign the boilerplate contract, permitting the publisher to say — almost truthfully — that they don’t pay more than 15% of cover price royalty on print or more than 25% of net royalty on ebooks (among other things).

So Murray’s chart is accurate, except that it doesn’t cover the commercial reality — even though it reflects the actual contracts — for all the biggest books.

But that doesn’t change the fact that, the chart being out in the open, there’s an adverse reaction from beyond the agent community to what looks very much like big publishers improving their financial position at the expense of authors. What other reaction could there possibly be? The Authors Guild is upset and blogger-reporter Porter Anderson catches some additional commentary from Defiore.

At the same time, publishers are doing battle on the other side of their business, with retailers looking to increase their margins as well. This is not just about Amazon. They dominate online sales and are indispensable for that reason. But Barnes & Noble is nearly as dominant in terrestrial retail and have apparently been engaged in a dispute with Simon & Schuster for months which has reduced the presence of S&S’s books in their stores. The just-announced financial results for B&N make it very clear that they’d be motivated to be extremely covetous of any additional margin they can squeeze out of their trading partners.

When ebooks started to become commercially important, which we date to the launch of the Amazon Kindle in the fourth quarter of 2007, publishers faced the challenge of reducing overheads required for print publishing as the demand for print declined. Quite aside from what was (and is) the unpredictability of the rate of the change, this is not an easy challenge. The printing you’re ordering may be smaller, but you still need to set type, design a book, and order a printing. The number of copies you’re shipping and processing as returns might be smaller, but most big publishers owned their own warehouses so it wasn’t a simple matter to reduce the cost of that component either.

In fact, it would appear that returns may have declined more than print sales have, and even more drastically as a percentage of overall sales since ebooks don’t get returned at all. All of this has been good for publisher profitability. In fact, seeing the data we see now, one might wonder whether the publishers were being self-destructive when they went through great gyrations (including everything that landed them in the lawsuit Apple just finished for them all alone and which was expensive for them to settle) to preserve print sales at the expense of ebooks. They tried windowing — withholding the ebook from the market for a while — and then, famously since the DoJ involvement, maintaining somewhat higher prices on ebooks at retail.

But, of course, they weren’t being self-destructive. As I’ve written repeatedly, putting books on shelves is the publisher’s primary value proposition; as the need for that declines in importance, so do they. The bigger margins of the current environment will be extremely difficult to maintain. Agents for the big authors will be looking for an even higher percentage of the projected revenue as it shifts to digital. Since advances from publishers for other-than-the-biggest titles are also declining, those next-tier authors will find self-publishing or publishing with smaller houses that pay lower advances but higher ebook royalties an increasingly tempting alternative. Most of all, the biggest retailers will keep pushing for more margin. And most publishers won’t have the stomach for the lengthy fight S&S has undertaken (particularly since there is no evidence, yet, that S&S will prevail in the argument).

The big publishers who are reinvesting their current margins to develop the value proposition that will be important in the future — and that’s “digital marketing at scale” — might still be able to prosper as the transition progresses. But their trading partners on both sides — authors and retailers — will be relentless at chipping away at any “excess” margin they perceive. Michael Cader has pointed out that Amazon, making a margin of less than 1% of sales, has little reason to be sympathetic to publishers complaining about how hard it is to achieve double-digit margins. Barnes & Noble will need more margin from publishers every year to keep stores open in the face of declining sales.

Authors will be tempted to try something other than the old-style deal in direct proportion to two factors: how much the sales move online and how effective they can be at getting the word out on their books on their own digital backs. The first factor is out of the publishers’ control (and difficult to predict); the second means that the most desirable authors below the very top tier will become the hardest to retain.

I offered the advice some time ago that publishers should raise their author royalties as insulation against being hit up for margin by the retailers. At the time, one major publisher CEO said to me that there was merit in the advice I was giving, but it was “pretty hard to make changes like that with the DoJ in your shorts”. So perhaps we’ll see some overt moves to raise that 25% ebook royalty rate sometime soon since the DoJ problem seems to be in the past.

I’ve felt for a long time that what authors (agents) should work toward is a fixed amount-per-copy-sold as an ebook royalty and just get out of the percentages business on ebooks, which, as we know, can have their prices change on a frequent basis. I know that would be resisted by the publishers, but it makes a lot of sense.

But the current state of affairs says pretty emphatically what I’ve felt all along: the incumbent management of the big publishers is damn smart and has managed a very tricky transition extremely effectively. Where they’ve brought things as of today is an impressive feat, even if it will be almost impossible to sustain.

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Just because the author does a lot of marketing doesn’t mean the publisher can’t help


The growing (but still tiny) group of very successful self-published authors and those who believe that they are a harbinger of the future have a big stake in the notion that “social network marketing” will replace the “legacy” techniques established over many decades and still employed by many houses. In fact, the houses themselves are increasingly committed to the various avenues that, unlike the megaphones they have historically relied upon, are available to the authors directly without their help.

But for the self-published authors, they’re the whole ball of wax. And when it is argued that self-publishing is the better course for authors, two assumptions seem to become tacit: 1) that the print-in-store sale doesn’t matter and 2) that if the marketing to be done is mainly in social networks, the publisher can’t or doesn’t add much value.

Since both the self-published community and the established author community lack any really useful data on the rates of success of any one marketing technique versus another or what an author’s chances of success are publishing on their own or with a publisher, we have a battle of anecdata.

It grew hotter this past week with the publication in the Guardian of an articulate and snarky attack on the idea that an author can Twitter and Facebook her way to success and an equally articulate (and snarky) response from a defender of the new way.

The debate around whether author efforts with social media provide an adequate substitute for the marketing done over the years by publishers (a big component of which, of course, is exposure of the printed book in brick bookstores and we all know that’s declining even though it is still more than half the sale for most books) is really a proxy for a larger question: does the publisher add value commensurate with their share of revenues? Some bloggers frame the question artfully but one is too-often left with the feeling that they feel think the author and reader really don’t need much help from anybody else.

I’m pretty sure that’s rarely true.

How effectively social network marketing can replace display in stores and reviews in newspapers is an open question that won’t really be answered for a long time. The social networks are growing and there are already more possible outlets to work (Facebook, Twitter, Amazon, YouTube, Pinterest, GoodReads, and the comments section of every relevant blog are just the starting point) than most authors would have time to handle effectively (even assuming they have the skills and interest).

It’s going to take technology and scale to do this effectively. For example. , Hachette announced last week a new tool called “Chapter Share” to enable easy posting of a chunk of a book on Facebook. They’ve chosen to make the capability available to other publishers as a SaaS (software as a service) offering. Some publishers will have it; some won’t. Authors will be hard-pressed to do something like this on their own (unless Hachette decides to enable them).

And with the number of influential blogs and sites and apps where relevant posts or author appearances could find a useful audience rising every day, it is hard to imagine one author alone possibly staying on top of all the possibilities that are important for them and their book.

So, long story short, we don’t know how effective social network marketing can be yet. And we can be pretty sure that nobody has all the answers about how to use it best. (Even if they did, the answers would be different six months from now.) But however things change, I’ll bet there will be a role for a publisher — an aggregator looking across the work of many authors — to be helpful with all the marketing, including the social network marketing. Managing metadata properly and search engine optimization, critical to online sales, are much more likely to be done well by a publisher than by an author.

All the big publishers are regularly really working on figuring out how to be helpful with systems and tools and collecting names to email and have been for a while.

And the print-in-store piece does still matter.

Without denigrating self-publishing as a serious alternative for many people, I think the odds are that most authors will be better off with publishers than without them for a long time to come.

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Publishing in the Cloud is the next big important subject


Much of the change we are living through in publishing is plain as day to see. The shift from print to digital, like the shift from stores to online purchasing, is evident to all of us, inside the industry and out.

But there’s another aspect of the change that is not nearly as visible and that’s around systems and workflows. Publishing, even in the pre-digital age, was a systems-driven business. The big companies are producing 3,000 to 5,000 titles a year: each one with its own unique contract, metadata, editing requirements, and (in most cases) market. I like to observe that “each book published presents the opportunity to make an unlimited number of decisions, which must be resisted.” Most of the time the systems don’t help so much in making the decisions, but it takes a lot of support just to keep track of them all and report them to each person who needs to know!

Over the years, the companies with stronger systems have tended to acquire the companies with weaker ones. It doesn’t always work out that way, but it has most of the time. And over the years there have been stories about when publishers almost lost their business because systems broke down. The original Macmillan (now a division of Simon & Schuster) almost died in the 1960s when they fell so far behind on returns processing that they couldn’t properly dun bookstores to pay their bills. In the late 1980s or early 90s, Penguin had a warehouse crisis that was a similar existential threat. A friend of mine with a process-oriented consulting practice really made his year working on that problem.

In the digital age, systems are once again front and center. Every publisher is facing new requirements and seeing the parameters change for the old ones. Most of a trade publisher’s revenue, for at least a while longer, comes from print but the digital side is where the growth is. Systems have to support both.

Until recently, publishers ran on systems that were, primarily, housed on their own computers, either created or heavily customized by their own IT departments, and the operators in the publishing house (editors, production people, marketers, salespeople) were at the mercy of their IT department queues. If they wanted something done, they had to get on line for tech support.

And smaller publishers doing 50 titles or 100 titles or 200 titles a year had to make do with less robust, less customized, and often less capable systems even though their outputs also required thousands of decisions to be tracked and they are no less affected by the shift from print to digital.

But this is changing. Or maybe we should say it has changed. The new systems in publishing are Cloud-based. They are frequently referred to as SaaS: software as a service. They don’t live on a company’s own computers but are hosted by the service provider. They often don’t require an IT department to customize them and they certainly don’t require an IT department to keep them up to date. And the best news of all is that they are cheaper to acquire and faster to install in a company’s workflow than the systems of the past.

Within this change, there is enormous opportunity. Big publishers can sidestep the tricky question of scaling down their print-based systems and scaling up their digital ones. Small publishers can now use systems and workflows that give them capabilities equivalent to their much larger competitors.

But nothing comes pain- or hassle-free and neither do Cloud systems. Executives in big companies find their IT-led systems configuration challenged. When an operator in the production department decides they need a Cloud service like Dropbox to move files around, they don’t need to get IT support to put it in. But IT departments are still responsible for providing support and integrating all of a house’s technology. So “unsanctioned technology” starts to abound and IT departments don’t like that.

They might also not like the fact that Cloud systems could result in cuts to their budget and headcount. Can non-technical executives feel comfortable that their IT departments will look at cost-reducing Cloud systems the same way the CEO or CFO would?

In smaller companies, Cloud systems are a much less ambiguous benefit providing, as they often do, capabilities a smaller house would never be able to afford as a stand-alone system. But without an IT department, how do you know which Cloud offering is best? And how does a company without much in the way of inside tech knowledge and almost no surplus labor cope with implementation?

It was these questions that moved us to stage our first technology-centric Publishers Launch Conference. It is called “Publishing in the Cloud” and it will take place at Baruch College on 25th Street and Lexington Avenue on July 26.

Our conference really has three groups of resources for attendees: big publishers, smaller publishers, and suppliers of Cloud services. For the most part, the publishers will speak from the stage and the suppliers will be available at breaks and during a 2-hour “conversations with the experts” session when both the suppliers and the speakers will be available to talk in small enough groups so that all the conference attendees can get their own specific questions answered.

Some context and stage-setting will come from my Publishers Launch Conferences partner Michael Cader, whose Publishers Lunch and Publishers Marketplace enterprise has been a heavy user of Cloud services, which he will explain. Ted Hill of THA Consulting, who was the one who first clued me to this topic, will sketch out the landscape, segmenting the service offerings, spelling out the suppliers in the various niches, and providing a “checklist” for publishers looking into these services. And our Platinum sponsor TCS, Tata Consulting Services, did a survey of hundreds of companies using Cloud services from which they will deliver useful insights.

Looking at this from the perspective of big publishers, we have Ken Michaels of Hachette and Yuvi Kochar of The Washington Post. Michaels will kick off the day with his take on why Cloud services are critical to publishers at this time. Michaels is the Chair of Book Industry Study Group, so he speaks from an industry-wide perspective. In fact, he was instrumental in persuading us that the overall topic of Cloud services for publishing was worthy of an all-day conference, which it never had before.

Michaels will also talk about tools that Hachette developed because they needed them and they didn’t exist which they are now able to offer to other publishers on a Cloud model.

Kochar is the CTO of The Washington Post companies. He uses a Cloud model to distribute both internally-developed and outside services to his constituent companies, which include the newspaper and Kaplan Publishing. Kochar will talk about his company’s service model and the organizational structure it takes to make sure things will all work a level removed from the solution provider.

Another presentation from a large company discussing an implementation will be from Alfredo Santana of John Wiley. They have just put in the RightsLink capability offered by our global sponsor, Copyright Clearance Center, to automate the licensing of permission requests directly from the publisher’s website. RightsLink, which is used by many top publishers, can be a big labor-saver and revenue-producer, but it takes planning and work to do a proper implementation, particularly at a company like Wiley that has such a range of markets to serve.

And we’ll have a panel of big publishers, including Ralph Munsen of Hachette, Rick Schwartz of HarperCollins, Bruce Marcus of McGraw-Hill, and Chris Hart of Random House discussing “The Changing Role of the IT Department”, addressing the many issues I referred to earlier in this piece.

We have two speakers who have a broad view of the challenges smaller publishers face. Rick Joyce of our global sponsor Constellation serves the needs of more than 300 publishers who use their services and, among other things, rely on them to vet Cloud offerings for them.

Michael Covington will call on his previous role with the Evangelical Christian Publishers Association where he was responsible for vetting and inking partnerships with various cloud-based service companies such as Firebrand Technologies, Metacomet, and Bowker.  Now serving as the Director of Digital Content for David C Cook, an international non-profit which publishes trade books, music and curriculum for the Christian church worldwide, Covington will also discuss the opportunities and challenges publishers face in moving from legacy systems and “tribal knowledge” to a “Service Oriented Architecture”.

Andrea Fleck-Nesbit of Workman has an interesting case history to talk about. Workman is taking the Title Management capabilities developed as an in-house system by its Canadian distributor and helping turn it into a hosted offering so they can use it too.

Covington and Fleck-Nesbit will be joined by Patricia Gallagher of Liberty Fund and Bonnie Russell of Wayne State University Press, both of which have just completed their own switchover to a Cloud service for core functions. As a panel they will extend the discussion about smaller publishers finding and implementing Cloud services.

For two hours in the afternoon, our attendees will be able to meet with our expert speakers and our sponsors in small groups to facilitate more focused discussions, In addition to CCC, Constellation, and TCS, event sponsors for “Publishing in the Cloud” include Firebrand Technologies, IBM, Klopotek, and Virtusales.

Cloud computing for publishing is a big subject and an important one that has gotten no focused attention before now. We think our conference will give our attendees, and the industry, a quick start getting a handle on the opportunities and how to take advantage of them.

On this coming Wednesday, July 11, we will have a FREE 1-hour webinar on this subject. Michael Cader and I will be joined by conference speakers Ken Michaels of Hachette, Rick Joyce of Perseus, and Ted Hill of THA Consulting as well as by John Wicker of TCS. The webinar will touch the high spots of this very important topic. And, as I said, the webinar is free!

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Shocking news from the UK: Waterstones selling the Kindle


The announcement that Waterstones, the nearest UK equivalent to Barnes & Noble as a bookselling chain, will be selling the Kindle in their stores came as somewhat of a shock.

There had been rumors that B&N was closing in on a deal to partner with Waterstones on the Nook.

The difficulty in making deals around a reading device and supporting ecosystem is that the sales of content subsidize the sale of the devices. It’s all part of a total equation around the “lifetime value” of the customer. The device-supplier really requires the ebook sales to make the device sale profitable.

So when Kobo did their deal with WH Smith in the UK (and FNAC in France) last Fall, it made sense to me why they’d do it rather than Waterstones. At that time, Waterstones was saying they’d deliver their own device.

Knowing what B&N has had to spend in development to make the Nook work across a store and revenue base several times as large as Waterstones, that always seemed like a very heavy lift. It wasn’t a surprise when Waterstones kept missing delivery dates for its device nor when the rumors shifted to them doing a device deal with somebody else. Since Kobo already was working with their biggest competitor, the logic said it had to be Nook.

I don’t know anybody who predicted it would be Kindle.

Michael Cader in Publishers Lunch reads the press releases the same way I do and we both get the message that the only ebooks Waterstones will share revenue on are those that are purchased over Waterstones’ in-store wifi network. (That network doesn’t exist yet; it’s being built now which is why they won’t start selling Kindles for a few months yet.)

Cader quotes Tim Hely Hutchinson of Hachette as being “fully supportive” of the deal. Since his two biggest customers have just joined forces, I can imagine that his private thoughts might be a bit more troubled than his public pronouncements. (When presented with lemons, make lemonade.) But I wouldn’t pick a public fight with my biggest sources of revenue, either.

How will Waterstone’s benefit from this deal? Well, they’ll make some margin on the Kindles they sell. They won’t make much selling ebooks if the only ones they’re paid for are the ones transacted in their stores. I’ve seen some speculation on an email list that they’ll use the Amazon connection to get more promotional money from publishers, but since they’ve already kicked up discounts considerably, I’m not sure how much blood is left in that stone.

It would be bad practice to criticize a deal when one has no idea about the details. And it could be that Amazon made Waterstones an offer that it would have been crazy for Barnes & Noble to try to match or for Waterstones to turn down.

But it is hard to escape the conclusion that this arrangement will accelerate the British public’s move to ebook reading and, at the same time, strengthen what is already the strongest book retailing platform. Amazon’s commanding share of the online print market and their share of ebooks can only rise from the commanding levels (often referred to as 90%, but I don’t know if that’s accurate) they now hold.

Waterstones’ claims that they will both be growing their online print business and delivering their own ebook store might indeed be sincere, but they are almost impossible to take seriously.

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The most important problem for publishers to solve over the next ten years


On Thursday, our clients at the Book Industry Study Group are running a “NEXT” conference which is tackling the question of what publishers (and publishing) should be doing now to be prepared for the world that we’ll be living in 10 years from now. (I love this subject and actually believe Mark Bide and I invented this idea for modern times in 2000 when we staged our Publishing 2010 conference in London on the day after that year’s London Book Fair.)

As it happens, I’m speaking in Ljubljana that day at the World Book Summit in the beautiful Slovenian capital, but I couldn’t resist trying to answer the question posed in Publishing Perspectives in its promotional piece on Monday for the event, which is: “What is the Key Problem for Publishing to Solve by 2020?”

And the reason I can’t resist is that The Idea Logical Company (that’s my team!) and Copyright Clearance Center (our client) are hard at work on it right now…in conjunction with BISG!

I see that my occasional collaborator and office-mate, Brian O’Leary, is delivering the opening remarks. Brian has been introducing a paradigm with some success to publishers: that they should think of content in a larger context than the “container” (Brian’s word: a good one) they generally sell it in, which for us is “the book.” Brian makes a whole host of points — his is a big thought — and I won’t attempt to summarize because he goes in many directions I’m not addressing here. But there is a point central to his (I’m sure evolving) presentation that is central to this post and to what we’re doing with CCC and BISG.

The hard fact is that it has been, is, and will be, progressively more difficult to monetize content as “a book”. And there also has been, is, and will be proliferating opportunity to monetize content that is in a book in bits and pieces within other projects that follow. Publishers have so far addressed the reality of the increasingly difficult book market by cutting. They cut lists; they cut staff; they cut warehouse space; and, more cheerfully, they improve processes to eliminate waste. This addresses the fact in the first sentence of this graf. It does nothing and, in fact sometimes undercuts, the fact in the second sentence.

I’ve heard Brian express the insight for many years that publishers need to learn how to grow revenue sources for their content. And the thrust of the particular “container” presentation I heard was around how publishers have to think differently and act differently so that their efforts to create and sell content enable unforseen opportunities, both in terms of control of costs and so the publisher knows what they have (and other people can too).

That’s precisely right. And that leads to the answer to Publishing Perspective’s question and to the project we’re working on, which we will report on more fully at Making Information Pay, another BISG conference, on May 5.

What publishers are seeing writ large, as enhanced ebook, new media, and app developers suddenly hit their licensing radar trying to make deals to put some of that old book wine in some new bottles, will be even more powerful writ small, if we let it. The number of web sites and apps and enhanced ebooks that could and would make use of a reservoir of book content, if there were one large enough and if the bits and pieces they needed were priced sensibly and didn’t require bureaucracy and negotiation, will, over time, be in the millions.

But the business that I believe will one day catch fire: a repository of content for just about any purpose which can be subscribed to for a fee based on use and scope (fill in the blanks in the online form) without rights ambiguity and requiring no negotiation, is several steps away. In fact, CCC is on the road to it. But what they can see from the steps they’ve already taken, which are all about aggregating and simplifying rights and permissions transactions in multiple ways, is that too many publishers can’t take full advantage of the services they offer already.

Because the publishers have a huge problem. With very few exceptions, they don’t have the rights they control in a relational database.

In the best situations we’re aware of (except one, frankly), which are rare, publishers have just about all the rights from their most recent contracts in a database and they’re putting all the rights they acquire to new contracts in a database. But even those publishers have research to do to respond to rights requests. And in many companies the function of responding to requests for pieces of books, let alone fragments, is not seen as strategic. It is often seen as a nuisance.

But CCC knows that pre-clearing rights makes content sell better. They also knew, and our research working with BISG confirmed, that simply responding to requests more quickly can make rights sales grow dramatically.

But CCC, or anybody else who might try, is handicapped opening up the mother lode of revenue that a collective licensing solution to meeting the market opportunity in content for web sites (and apps and enhanced mash-ups yet to be invented) could enable. Publishers simply do not have the metadata to put the rights they own and control on sale. I personally see this as an enormous opportunity for big publishers, because it is one of the descriptions and visions of the future that shows a role for the scale that publishers can provide.

Having rights databases that can support the emerging business opportunities is each publisher’s and the industry’s most important challenge. It is definitely the “key problem to solve between now and 2020.” I hope the NEXT conference makes progress on this (and other) issues, but I know the work we’ve done has, and I think we’ll be able to propose some great follow-up steps at MIP.

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As Europe’s ebook market develops, US publishers may find some sales growth


Week before last I was in Frankfurt observing that the rest of the world, including our close cultural neighbors in Europe, was going to start catching up to us in ebook uptake. A companion observation was that many book consumers in Europe are quite comfortable reading English.

It is also true that many US publishers own rights that have been pretty much unexploited outside the United States. Although agents do their best to prevent it, sometimes publishers have enough leverage with the advance they’re paying to control global rights to English and even foreign language rights as well. Since those rights are more easily acquired in situations where the author has less leverage, either because the book’s potential is deemed small or because the author sold — with or without an agent — to a smaller publisher, they are often unexploited. Every publisher (and agent) knows that they fail to sell rights offshore in circumstances where they wanted to, tried to, and failed to.

Export of print books has traditionally been a weakness of US publishers, relative to their counterparts in the UK, particularly. This stands to reason. The biggest export markets for English have been in Europe and the UK has a lot less water separating it from Europe than we do. Servicing European accounts with sales reps and with shipments has long been a core component of British publishing. They are often weaker at exploiting unsold rights in the US, which has provided an important chunk of the customer base for US distributors like Perseus, Ingram Publisher Services, National Book Network, and IPG.

But servicing an export market with print is a lot more difficult and a lot less profitable than providing an export market with ebooks. Eliminating both the costs and risks of inventory has an even greater impact on margins (and/or, potentially, on selling price) than it does in the domestic market. So far, the non-US markets for ebooks have been tiny, less than 10% of the US market on a per-capita or per-print-unit-sold basis. But as that changes, and it will, the cumulative opportunity for US publishers to develop incremental revenues from what have been very quiet parts of their list will surely grow.

What we’re watching for, just as we saw it happen in the US, is the development of a marketing and consumption infrastructure (what has historically been called a “supply chain”.) Amazon demonstrated with the Kindle that a device that works well for reading, a wide title selection, and a sales and download process that is simple can very suddenly ignite the market.

Unlike the US before November 2007 (BK: Before Kindle), the device issue is no issue. There is a plethora of proven devices we didn’t have then: Kindle, iPhone, iPad, Nook, Kobo Reader, Android phones, and many other imitators on the market and to come. The downloading process, directly to many devices through their own store connections (Kindle and Nook and iPad) or through apps, is light years better than what we used for reading on the Palm Pilot, or even on the Sony Reader, in the BK era.

That leaves title selection as the biggest barrier for other countries to imitate the US ebook experience. As we observed in our Frankfurt post and previously when we posted from Brazil in August, the lack of epub files in other-than-English is a real barrier. PDFs, which do exist for all books, are a poor substitute. As a confirmed ebook reader for more than ten years, I can tell you I never would have become one without reflowed content (which worked for me in the Palm proprietary format before Kindle and before epub.)

This provides a large advantage for English. I believe we’re going to see in the months ahead rapidly-developing ebook marketplaces in English in non-English-speaking countries. Because of local variations in pricing and taxation and forces of habit, the markets will develop country by country unless and until some pan-European solution develops, which, because it would have to be English-based, seems unlikely to be a near-term development (although it is bound to happen someday if English-language consumption grows the way we expect.)

Although the big US publishers have been both digitizing and putting rights metadata into their files for some time, there could still be backlist titles for which ebook opportunities could be exploited in Europe (and elsewhere) that haven’t made the “cut” for conversion. There has been no reliable data compiled that I’m aware of as to how much of the backlist in big houses has been digitized, but it isn’t 100% anywhere. The anecdotal evidence about how thoroughly the big publishers have researched and recorded their digital rights is conflicting — many have certainly put resources against the challenge — but there are certainly mid-sized, smaller, and acquired publishers who might now have an additional justification to do the same.

Beyond the big publishers it is probable that the opportunities are proportionately larger. Because smaller publishers acquire more books from authors with less leverage (and often authors without agents) and because they have less developed foreign rights contacts, they are even more likely to control unexploited rights. For smaller publishers, it is possible that figuring out how to let the British, French, Italians, and Germans “discover” and purchase their ebook content will constitute an important opportunity pretty soon.

Admittedly, a lot of this is almost long-tail stuff. But not all of it. We’re entering times when publishers are going to have to scrap for every dollar of revenue, both to replace what they’ll lose as bookstore shelf space declines and what they’ll lose meeting price competition from all the new titles enabled by lower barriers to entry. To capitalize on this opportunity, publishers need to watch the development of offshore ebook markets and review all their old contracts to find the rights they own that there has been little prior motivation to think about.

O’Reilly has repeatedly reported that ebook marketing has opened up sales opportunities for them in places where print books were never practical to sell. Their experience is not a typical one; O’Reilly serves a global niche market that comes directly to them for mission-critical information and is now able to purchase it for immediate delivery as ebooks. But their experience is, in this case, a leading indicator of what all publishers who control offshore rights, in English or in foreign languages, will experience for rights which were previously uneconomic to monetize.

Of course, there are global ebook providers that US publishers already do lots of business with: Amazon and Kobo both have global reach and Google and Copia promise to. But it is not yet clear how powerful these channels will be in the emerging ebook markets relative to local entrants which will develop.

We’re trying to provide information that will be useful in this regard at Digital Book World. The opportunity to sell print abroad will increasingly oblige US publishers to know about Book Depository, an online book retailer that is a David challenging the Amazon Goliath globally. Our conference in January will introduce them personally to the US publishing community. That’s print and that’s right now.

On the ebook side, we’re delivering a country-by-country marketplace assessment for Europe from Cristina Mussinelli, the voice of European publishing on the Board of the IDPF (International Digital Publishing Forum.) Both of these should represent new sales opportunities for US publishers, many from nooks and crannies of their backlist. We will also have a panel on ebook distribution for small and medium-sized publishers that will provide further insight on how hard, or easy, it might be to act on this opportunity.

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Serious thoughts about the business (published by Barnes & Noble)


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 his 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 os 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 anybody’s imagination that the business is getting harder and that 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.

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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An ebook experiment stirs up conversation


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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Google settlement opponents need to be careful how they win


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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Is piracy something the book business needs to fear?


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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