The Shatzkin Files

Perhaps the revolution has reached an evolutionary stage

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The dizzying pace at which US consumers were switching from print to digital couldn’t last forever. Based on the numbers being published by the AAP, with a huge assist in interpretation by Michael Cader at Publishers Lunch, it seems that the slowdown has become very noticeable in the past 12 months.

Between late 2007 when the Kindle came out and late 2011, ebook sales doubled or more every year. Since September 2011, during which Cader reckoned sales were double the year before, the monthly numbers are showing much lower (and declining) year-on-year growth. The April numbers showed only a 37% increase from the year before.

I’ve been pondering this question about when ebooks uptake would slow down for a long time. In March of 2010, 17 months ago, I wrote that my hunch was that the switchover “won’t start slowing down until ebook sales are 20-25% of what a publisher expects on a new title.” And I guessed that would occur before the presidential election of 2012. That feels reasonably consistent with what appears to have happened.

Cader also cites reports from Penguin and Simon & Schuster to document the slowdown. Penguin says ebook sales growth was about 33% in the first half of 2012. And Lunch reports that Carolyn Reidy, CEO of Simon & Schuster, told them she expects about 30% growth in ebook sales during 2012. That would almost certainly constitute their (or anybody else’s) fastest-growing sales channel, but it sure isn’t the annual doubling and tripling (or more) we had seen for several years.

A couple of weeks earlier, Cader dissected the BookStats reporting of publisher sales numbers. As longtime readers of this blog know, what I think is the important metric to watch is “store sales versus online sales”, rather than “print versus electronic”. Store sales are all print, but online sales are not all electronic. The reason I think the channel distinction is more important than the format distinction is because scale is far more useful to deal with retail stores than it is to deal with any online account. The reasons are two: inventory and logistics.

BookStats reports that publisher-direct sales to online retailers — this includes both print and digital, but does not include sales that went through the wholesalers — were about 35% of the total of sales to store and online retailers combined. Online is said to have risen about 35% in the past year and brick stores have declined about 12.6%. My rough math says that the combined total of the two was pretty close to equivalent — down about one percent. Since ebook sales are rising and ebooks are generally cheaper than print books, this passes for “flat”.

The other thing to pay attention to is the difference in ebook sales by type of book. Based on anecdotal evidence, I believe that genre and commercial fiction sales might be approaching half ebook already. (BookStats reports that unit sales of all fiction are currently 64% print and 34% digital.) Narrative non-fiction is about half that. Illustrated books of all kinds are slivers of that.

There are many things we don’t know.

We don’t know how much of the sales growth decline in the past year is due to the publishers’ success at driving up ebook prices. To the extent that’s the cause, we might see the pattern change again when (as I expect) the DoJ settlement is approved and the shackles come off Amazon’s pricing policies.

We don’t know how much of the sales growth decline in the past year might be due to the consumer switchover from dedicated ereaders to multi-function devices that offer them other media and games — and email for that matter — to compete with books. To the extent that’s the cause, the slowdown trend might well be extended because it is likely that a lot of people will switch from eink readers to multi-function devices as those devices continue to get cheaper.

We don’t know to what extent store traffic is affected by the continuing shift of bestsellers, particularly in fiction, to digital consumption. In the short run, there is probably a positive impact on the display space and sales opportunities for illustrated books and children’s books. But, in the longer run, how many stores can survive if the bestseller business continues to move away from them?

We don’t know whether mass merchants will continue to see books as worthy of their shelf space. They sell a lot of genre fiction, which is the most challenged by inexpensive independently-published (and not all of those are self-published) ebooks. And they can switch square footage from one thing to another at great speed and with no sentimentality at all.

But, all in all, the slowdown we’ve seen is good news for the legacy publishing establishment and it will be better news if the trend continues. Anything that slows the decline in brick store market share and the rise in Amazon’s buys time for big publishers and competing retailers to adjust their infrastructures and build new business models that are more effective for the future.

Unfortunately for them, the denouement of this round of DoJ activity is about to give things a sharp shove in the other direction.

If understanding new business models and other new ways for publishers to do their business is important to you, our Publishers Launch Frankfurt event on October 8 should be on your calendar. We are featuring a number of Publishing Innovators from around the world: executives who are inventing those new business models that will enable publishers to thrive in our new digitally-influenced publishing environment.

This conference is worth a post of its own, and it will get it very shortly. But the bottom of this post felt like a good place to point that we are going to feature many outstanding industry- leading publishing executives (and not just from the English-speaking world) who are doing things almost nobody else is. Yet.

And we’ve changed our event time from the normal 9 to 5 to 10:30 to 6:30 to allow people to arrive in Frankfurt on that Monday morning and not miss any of what will be one of the most illuminating events we’ve done.

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  • Hi Mike:
    I couldn’t quite parse what you mean here:
    “The reason I think the channel distinction is more important than the format distinction is because scale is far more useful to deal with retail stores than it is to deal with any online account. The reasons are two: inventory and logistics.”

    Can you clarify?


    • OK. Put it this way.

      If an author or a small publisher without scale wants to cover the retail stores on their own, how hard is it?

      If an author or a small publisher without scale needs to hit the online accounts, how hard is it?

      Publishers at scale are needed in direct proportion to the number of retail accounts that have to be covered.


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  • ECW0647

    Statistically, as I’m sure you know but isn’t clear from your essay, that it’s impossible for any growth curve that starts close to zero to continue to grow exponentially. So let’s say for example that the first year one sells 10 ebooks and the 2nd year 100 and the third year 500, and the 4th year 1000, etc. The first year’s percentage growth is 900% and the growth from the 2nd to third year is 400% and the increase from the third to the fourth is only 100% is so it appears that growth has slowed drastically even though, in actually numbers, the increase has been huge. So using the rate of growth to indicate a trend can be quite misleading. I would be more interested in actual numbers sold compared to the previous year. Only after many years of data can the rate of growth (or lack thereof) become significant.

    I would be interested in knowing what the concomitant percentage increase/decrease in print books might have been over the same period of time. It’s my feeling that publishers’ bottom lines will be helped rather than hindered by the presence of ebook alternatives for their offerings, so it would also be nice to know what the increase/decrease there is in revenue over the past couple of years for so-called legacy publishers who sell ebooks.

    • Of course, you’re right about how numbers and growth curves behave. Things had to slow down at some point. And the 30% growth we’ll see in the next year (if we do) will constitute more absolute growth than the doubling did four years ago.

      The short answer to the question you pose about print-and-digital is that units seem to be being replaced (lost print sales are turning into new digital sales) although I don’t think anybody is claiming any big upsurge. That means that revenue is less (because ebook revenues are less per unit) but unit margins aren’t so much, and might even be improved, and overhead costs and inventory investments go down. So, so far, revenues are about flat but profits are up at the major houses.


      • I’m not sure I totally grokked all of this post but am I correct that this analysis is of ebook sales only from print publishers and leaves out ebook-only types, particularly the cheapie, self-published ebooks? Seems like B&N’s data in its court filings implies very strong growth of market share for the cheap ebooks, which don’t exist as print books. Thus some of the ‘slowing’ may not be an ebooks vs print books phenomenon but rather reflects the declining market share of ebooks published by print publishers.

      • Yes, a shift to cheaper ebooks could be part of it.

        The self-published authors of those cheaper books are about to have their lives upset by the DoJ action, assuming the settlement is approved. Aggressive discounting of the publishers’ lists will reduce the price advantage of the self-published.


      • EricWelch

        Isn’t that something to be desired as then the decision will be made on quality rather than price? Especially, since it would appear from your numbers that publisher profit has increased even though revenue is down?

      • Desired by whom?

        Not desired by the fledgling authors who will lose their opportunity for discovery and competitive advantage.

        And not desired by established authors or their publishers because it devalues their copyrights and weakens sales in print.

        It will certainly be desired by the consumers who pay less for IP with high value.


      • EricWelch

        Seems like you’re making the case for the DOJ suit since, as they pointed out in their brief, their role is to protect the consumer, not established authors or publishers or any other special interest group including fledgling authors.

      • Amazon will do their level best to make the DoJ look good from the moment the shackles are off until, at least, the moment the trial is over. What happens after that will call for different predictions.

        And what I wrote ignores, just as the DoJ does, the “total cost” of ebook reading, including devices. You saw the news this morning that B&N is reducing the price of its devices in response to the Nexus 7. The previous run of price cuts by Kindle, Nook, and Kobo were all motivated by their competition with each other. And that competition would have been stopped in its tracks two years ago if it hadn’t been for agency.


  • My comment is purely anecdotal, based upon observing myself and number of friends, but I think there’s another factor accounting for the slowing of e-growth, and I haven’t seen it addressed anywhere: that avid readers and early adopters have already repurchased their most critical keeper-books in e-format, and that the less critical backlist can be obtained for free or very low cost as its become promo for frontlist.

    How much of the past years’ ebook sales were due to frontlist, and how much about obtaining backlist in a new format? Does anyone know?

    I’d love to see you address this in a blog post, or if you already have, to point me to the url!

    • I never addressed the point but I think you’re onto something. And there’s a companion point.

      While I’m not sure how many people load up old books on their devices (undoubtedly, *some* do) it is definitely clear from history that people getting their *first* device put lots of books on it right away (which I always presumed was a wish list of unread books, but which you point out might be their old favorites.) When you get a second device, you don’t repeat the experience. That definitely is a factor here.

      In general, new titles sell better than backlist in digital but that doesn’t invalidate your theory.


      • Mike, as an author, I have seen a tremendous impact of free ebooks on ebook sales. When Amazon was working indies to create Pavlov’s dogs (ie: beneficial algorithms to heighten the after-free sales) sales were stronger. After Amazon changed the algorithms (several times), free no longer has the same benefit, but now readers are accustomed to freebies, so they often wait for books to go free rather than purchasing. Amazon knew how to gain a lock on the marketplace and many indie authors are afraid to leave KDP Select because B&N appears to be separating books uploaded through PubIt (segregating indies, perhaps), making sales there slower.

        Ripe landscape for a strong and researched article.

        Thanks for the great post.

      • This is a constantly shiftng landscape, as you have made clear. My beat is what affects publishers more than what affects indie authors. I agree there’s a piece there worth doing, but I’m not the guy to do the research.

  • JoeBob
    • I take it the comment is that if all these books are available from pirates, it could explain the decline in sales?

      I doubt it. But I take the point.


  • EricWelch

    I’m sure you’ve seen this analysis and wondered what you thought of the economics he develops, especially on the last 3 pages.

    • Eric, I would have had a lot more faith in it all if it hadn’t started with this:

      *A simple example can show why. According to Olen Steinhauer, the production cost of an average hardcover printed in a lot of 50,000 and including distribution is around $2.00. If a hardcover by unknown novelist X sells 5,000 copies at $27, the publisher makes $125,000 in marginal profit. If that same novel sells 50,000 copies at $7, the publisher makes $250,000. *

      That’s just wrong, wrong, wrong. It is confusing the RETAIL dollars with the marginal profit. And the idea that there is a fixed marginal cost of production is also wrong, wrong, wrong. In the earlier example, did he assume that they printed 50,000 and sold 5,000 but didn’t have any costs for the 45,000 they didn’t sell?

      Frankly, this paragraph is so starkly incompetent that I not only question the writer, I question the editors. Nobody with a passing knowledge of publishing economics who was awake at the time they were reviewing this should have let it through.

      Will self-published material drag down prices and hurt established publisher margins? Absolutely. No rocket science in that; been saying it for years and publishers all know it.


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