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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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One of the great thinkers about digital change is NYU professor Clay Shirky. I have been reading posts and articles from him for years and he is always cogent and sensible. He has just posted a very insightful piece about the challenges faced by newspapers.

Shirky doesn’t explictly say that he’s exploring the “vertical/horizontal” dichotomy (that is at the core of my own analysis of media and digital change), but he is. This piece explains that “Wal-Mart was willing to subsidize the Baghdad bureau” within the context of horizontal newspapers. Wal-Mart is actually a bad example in this case, because they don’t advertise with many publications that have a Baghdad bureau. But if he said Bloomingdale’s or General Motors, he could accurately be talking about the Times. They want the Times’s overall audience, and they trust the Times to create the balance of content that attracts it. They’re choosing from aggregations because that’s all there is to choose from. So, as Shirkey compresses it:

The expense of printing created an environment where Wal-Mart was willing to subsidize the Baghdad bureau. This wasn’t because of any deep link between advertising and reporting, nor was it about any real desire on the part of Wal-Mart to have their marketing budget go to international correspondents. It was just an accident. Advertisers had little choice other than to have their money used that way, since they didn’t really have any other vehicle for display ads.

Thre is analogous with paying our taxes and what happens with the government. Your taxes go to fund some things you like and some things you don’t. You don’t get “line item veto.” You take the package. As Shirky points out, it was the cost of printing (and, he might have added, distributing what is printed) that kept the number of choices for Wal-Mart and other advertisers limited. Until digital disruption, that is.

It is the in the nature of  horizontal media that they make their own decisions about the basket of content that constitutes their offering. Most newspapers attract readers with a comics page; the New York Times established its brand for seriousness by not having them. CBS News may have been subsidized by Gunsmoke or All in the Family, but the network made the decisions “on balance.” The idea really was to appeal to almost everybody over time, if not all at one time.

It has been widely observed that Internet advertising revenue is not replacing print revenue for newspapers. One reason for that is that the paper can’t sell advertising for what an online “reader” might look at, only for what they do actually look at. Purchasers of ads in print do so based on some notional number of readers, even though many of them will not ever see the page on  which the ad appears. It isn’t that way on the Internet.

When I talk about the rise of verticality, I am referring to sites like Politico.com or 538.com replacing (or at least challenging) the political pages of the Times, WaPo, or Newsweek as a trusted source  for the interested. But the natural verticality of audience plays out differently in print than it does on the horizontal sites themselves. What percentage of a newspaper’s print readers will actually turn many of the pages of the paper, “looking through it”? Answer: a lot more than the number of site visitors that will load each page of the site to see what’s on it!

Web sites have two kinds of visitors: those that come to the site and those that come to a single story or post. That latter group may be sent by a link from elsewhere, like their My Yahoo home page, and not even be particularly aware of where they went to read the story even after they click the back button or close the tab in their browser to leave after they’ve read it. The Times, WaPo, and Newsweek need to understand that distinction because for the first group, their brand counts and for the second only the story counts!

One thing to really like about Shirky is that he doesn’t mind saying “I don’t know.” This is sometimes hard for those of us who like to express ourselves about what we think will happen in the future. It is often easier to see what can’t work going forward than it is to know what will replace it. As Shirky said:

When someone demands to know how we are going to replace newspapers, they are really demanding to be told that we are not living through a revolution. They are demanding to be told that old systems won’t break before new systems are in place. They are demanding to be told that ancient social bargains aren’t in peril, that core institutions will be spared, that new methods of spreading information will improve previous practice rather than upending it. They are demanding to be lied to.

Department stores went through a similar process of destruction. In the 1960s and before, they sold everything. Then, when shopping malls began, department stores became their “anchors”, but the rest of the mall was populated by specialty stores that, product category after product category, became national chains competing with the department stores for their business and ultimately driving them out of it. So department stores don’t much sell shoes, books, recorded music, and many other things they once did. There are such things called department stores today, but there are far fewer and they are shadows of their former selves.

Some observations unrelated to the substance of today’s discussion:

As brilliant as is Shirky’s writing, his blog structure is shockingly bad. He uses block justification, which, along with a pretty wide line, makes reading his text pretty damn challenging. Justification (making everything line up evenly on the right as well as on the left) is accomplished either by varying the space between letters or the space between words, or both. That’s inherently unfriendly to the eye and brain trying to take in the material. In addition, Shirky has no tags for his post, so he is really handicapping discovery, making Google’s job of getting him “found” a lot harder. Clay, if you see this post and I haven’t insulted you beyond conversation, let me know and I’ll refer you to the mighty SEO team of Tess and Hamid who, I guarantee, will make your blog look better and bring you much more audience!

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Amazon made a huge leap to the front of the iPhone line.

Putting a Kindle reader on the iPhone for free through the App Store enables shopping at Amazon’s Kindle store and then a direct download into the iPhone (or into the Kindle, or both!) This means reasonably good book merchandising and one-click.

The reader is not as good as Stanza’s. You’re stuck with ragged right; you have five discrete type size choices (six on the Kindle itself) rather than a slide bar;  you have no choice of page-turning mechanism or type face or the color of things (all of which you do in Stanza.) 

But I think we’ve learned from the original Kindle launch how powerful is the combination of a) the community of heavy book readers Amazon has, b) the vast title selection, and c) a quick and seamless shopping experience. 

Now we can add to that the ability to read the same book on the Kindle and the iPhone, with bookmarks and your place in the book ported from one to the other.

It is still true, as I wrote last week, that Amazon’s hegemony will be much harder to maintain in a large ebook world than it has been in the world of selling printed books online. But they just took a big step toward solidifying their hold on the book-reading market. The creators of readers like Stanza and Scrollmotion may soon understand the frustration that Betamax and Apple must have felt in the 1980s when they were getting their clocks cleaned by inferior technology from VHS and Microsoft. The best technology doesn’t necessarily win. And, measured purely on the basis of the “reading experience”, Kindle isn’t as good as Stanza. (Scrollmotion can “do illustrated” very well; that gives them a potential market position for the books that benefit from an integrated text-and-graphics presentation.)

But if selection and shopping experience trump, and they have so far, Amazon is going to make it tough for these newcomers to survive. There are going to be lots of complaints about Amazon’s not using epub and therefore preventing interoperability across devices. But that gets to be a harder argument to make because they have used their format to enable interoperability between the iPhone and the Kindle.

And this is one Kindle-and-iPhone user that believes this will stimulate sales of Kindle devices, not hurt them. It is a lot easier to read for a long time on a Kindle than on an iPhone, where the advantage is portability. People building up a library of Kindle books through their iPhone become better candidates to buy the device on which the reading experience is better.

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