The Shatzkin Files


Print book retailing economics and ebook retailing economics have almost nothing in common


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There has been a lot of conversation lately about the differences between wholesale pricing and agency pricing for ebooks and about what constitutes a “fair” division of revenue between publishers and retailers. Since the economics of bookstores have been generally misunderstood for years, it is not surprising that the understanding of what changes make sense as we switch to digital have also been misunderstood. A better grounding in the print book economic realities might enable a more informed discussion of what makes sense for digital.

Here are a couple of points about book economics that I learned at my Daddy’s knee.

1. The investment in inventory is the single biggest capital requirement for a bookstore.

2. Given that the ability to invest in inventory is limited, the speed at which inventory “turns” (a measurement of how long a retailer has to hold stock before it sells) is a much more powerful determinant of a store’s total gross margin, and therefore its profit, than the margin it earns on each sale (the difference between what it pays for the inventory and what it is sold for).

In simple shorthand, that means that a retail store selling books can improve its profit more easily by more closely matching what it buys to what it sells than it can by squeezing more margin out of its suppliers. It also means that a publisher can do more for a store’s profitability by shipping quickly and allowing smaller orders at workable discounts (which make it easier to match supply to demand) and offering delayed billing than it can by offering extra points of discount (which is what added margin is called in the book business). The additional benefit of employing this understanding is that margin division is a zero-sum game, but increased inventory efficiency is actually synergistic: both the publisher and the retailer benefit from it.

This reality about bookstore economics explains the value to the supply chain of wholesalers like Ingram and Baker & Taylor. By offering the ability to combine orders across publishers and giving rapid, often next-day, delivery, the wholesalers enable stores to gain much more inventory efficiency at a relatively trivial reduction in margin. (Where the publishers’ “deal” is sometimes better than the wholesalers’ in a meaningful way is that publishers will often allow a longer period before demanding payment. Inventory “investment” only really begins when the books the store received are paid for.)

So, in fact, there is very little similarity between the economics of retailing print and retailing ebooks. The tech infrastructure for selling is not a trivial investment, and DRM — including customer service — is a significant expense that ebook retailers deal with that bookstores do not. The print retailer has to build a customer-friendly location and invest in (presumably knowledgeable) clerks. How those costs of doing business compare is a complicated question that changes over time as the tech gets cheaper and the cost of physical locations — driven by ever-higher real estate values in the attractive neighborhoods where bookstores tend to thrive — goes up.

But the things that change aren’t nearly as important as the things that don’t.

The stock turn of an ebook retailer is infinity. There is zero inventory investment.

Publishers first had to deal with the question of what the bookstore’s margin should be on ebooks back in the late 1990s when Palm Digital and Microsoft created the first reflowable ebook platforms. Prior to that we had PDFs, which delivered — in the current jargon — “fixed page layout” ebooks which didn’t adjust the number of words per screen to the screen size. At that time, the ebook retailers were inclined to sell at publishers’ “list prices” and publishers tended to price ebooks at about the same level as print.

But nobody paid a lot of attention because the sales and revenue were de minimus. Since Palm had the most hand-held digital assistants (Palm Pilots) in circulation back at the turn of the century and because (as we have clearly learned since) portability is one of the big drivers of ereading, Palm’s ebooks were the best-selling format. But Palm decided not to enable widespread distribution of their ebook format; they sold the ebooks themselves through a controlled vendor (originally called Peanut Press and then Palm Digital).

In fact, the mobi format that Kindle uses today was developed at the time as a bridging format, able to be read on both Microsoft and Palm devices. This was before the creation of the epub format used by everybody except Kindle today. When Amazon bought Mobi, it was apparently to prevent any other retailer from building a real ebook business selling to what was then the “entire” ebook market. B&N’s one-time exit from ebooks was because they could sell only to Microsoft and not to Palm devices, which meant they had the smaller piece of what was a very small market. Amazon apparently figured then that they’d enter the market when they were ready, but they wanted to prevent B&N from building a foothold in it before then.

I’d argue that the biggest mistake B&N made in the history of ebook evolution was not buying Mobi before Amazon did.

So it became “established” that ebooks would be sold on a similar basis to print books with discounts of 40 percent or 50 percent off publisher-set retail. It should have been no surprise to anybody that once “real” retailers — not software companies like Microsoft and Palm — took the reins, they’d give away a lot of that margin to go after market share. That’s what real retailers do; it’s in their DNA.

In fact, the first wave of discounting of print in the 1980s by the Crown Bookstores chain followed very quickly behind increases in publishers’ discounts to stores from the low 40s to 46 percent and up. Most people never noticed that; others think there’s no connection. It always seemed to me that the increased publisher discounts and the discounting to consumers were linked.

In the early days of ebooks, the volumes were so low and the tech was still under development, so the significant margin the publishers offered — and the retailers employed — might have been necessary to have any ebook retailing at all. As time passes, the fixed retailing costs get lower and the customer service costs also tend to get lower.

Once a real retailer, Amazon, got into the ebook business, deep discounts off publisher prices had to follow, and they did. The move to agency pricing had purposes beyond the principal one, which was to remove pricing as a weapon from the retail competition arsenal. It also put publishers on a path to set realistic retail prices for consumers and to reduce the notional share given to the sales intermediary from around 50 percent to 30 percent.

There’s reason to believe that even 30 percent is too high, given the plunging cost structure for retail and the economic reality of infinite turn on inventory investment. A senior Random House executive told me during the period they were not in agency (the first year it existed) that part of the reason they stayed out is that the 30 percent figure Apple wanted and the other publishers agreed to seemed “too high”. As it turned out, Random House came in a year later and accepted the 30 percent. They said at the time it was because indie bookstores were attracted to ebook retailing by the assured 30 percent margin and fixed retail prices, and Random House always wants to support independent retailers.

It was always curious to me that the preference of all the other retailers except those who can use the book business as a loss leader — Amazon, for sure, and perhaps Google —  for publisher-set retail prices never made its way into the discussion of the publisher motivation at the time, nor to Judge Cote’s reasoning, nor to the arguments which have taken place about it since.

Ebook pricing today is very confused. Apparently, many of the retailers will accept wholesale terms at a lot less than 50 percent, although this is not widely known and, indeed, isn’t even really confirmable. Discounts of print to bookstores were published, standard terms. That’s not the case with ebooks (because they’re not really sales, they’re licenses, no matter what anybody says, and they are individually negotiated contracts, the terms of which are kept private). Nobody outside Amazon really knows what margin Amazon actually takes from ebook sales; it is certainly true that most of the ebooks are discounted from whatever prices publishers “suggest”. (And sometimes those publisher-set prices may be inflated, particularly if the publisher is selling at a bookstore-like 50 percent discount.) Perhaps they only really take the 30 percent that they get from agency publishers and that they take from individual authors in KDP and that they have said in their arguments with Hachette is the “right” share for a retailer.

We actually still don’t know what the “right” or “fair” margin is for retailers of ebooks. Random House had some idea of that in 2010 when they were holding out and they seemed to think “less than 30 percent”. Comparing ebook retailing economics to print book retailing economics only tells us that physical retailers of print need a lot more to have a viable business. Dad also taught me is that the reason publishers give stores a discount off the publishers’ retail price — which should be the price a publisher would sell the book at if a member of the public came directly to them — is to give stores the margin they need to operate. Because publishers want there to be stores. First purposes may have been forgotten in course of the digital transition.

There is programming relevant to this post at Digital Book World 2015 in addition to the main-stage appearance of Amazon’s Russ Grandinetti main-with Michael Cader and me. We have a great panel discussion on “price promotion” with Josh Schanker of BookBub, Rachel Chou of Open Road, and Matt Cavner of Vook. And “Blue Sky in the Ebook World” where a panel of visionaries will talk about what is over the horizon for ebook retailing, rethinking simple ebooks, making complex ebooks, and creating ebooks with soundtracks. Jonathan Nowell of Nielsen Book’s talk about how the profile of what sells in print has changed will enlighten around this topic as well.

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  • Rebecca Springer

    One interesting piece of history is that Random House actually “invented” the $9.99 ebook. I was at Palm Digital Media back in the day, and they came to us with promo pricing on select “hardcover” new releases. And those titles sold like gangbusters, so we were happy to do it. But the pricing was with standard discount; the markdown didn’t come out of the retailer’s end — proto Agency, if you will — and was time limited; after a month or so they bumped back up to print-level pricing and any discount was on us. We did 10% across-the-board, if I recall.

  • rickchapman

    +++ Because publishers want there to be stores. First purposes may have been forgotten in course of the digital transition. +++

    But there won’t be stores, at least not stores filled with paper books. Paper is dying and nothing can save it, nor would you want to. It’s a pretty dirty technology and offers no advantages over what’s replacing it except in specialized circumstances.

    New technologies such as graphene displays, which can be folded and cut to different form factors and home-based 3D printers that allow a bound book to be created if desired are just a couple of the coming nails in the print model coffin. Publishers need to be preparing to transition out of print. Not an easy thing to do, but they have no choice.

    Bookstores will have to reinvent themselves into entertainment and social centers. Not sure exactly how they do that though I have some ideas. But within a decade we’re not going to be hauling millions of pounds of paper around so we can read books.

    • My hunch is that print will still be here 10 years from now. A quarter the number of stores and half the number of units, but still around. And the erosion will speed up over time. Not so much this year or next. One man’s guess…

      • rickchapman

        We’ll see. Either of us can be off by a few years, but that’s all. Print is doomed. It will survive no more than vinyl, land lines, tape, CRTs, film,etc. Every major analog technology I grew up with has been supplanted by digital. Print is the last to hold out and it’s already dying.

        For a publisher, print is a trap. Digital allows AMZ to capture data about customers and reach markets the print model locks out inherently. To engage and create communities.

        I saw this happen in the software industry and it strongly resembled the book world in many respects. Much the same cycle is now repeating itself in printed books.

        rick

      • Print is not entirely comparable to any other digital media or software. The print book offers — in some cases — real advantages over other presentation forms. In fact, its persistence has already been much greater than other digital forms. There are a lot of reasons for this, which could be a post and which I don’t have the time to enumerate right now. But the current stat I was just given is that 96 percent of people use both print and ebooks. I doubt there was EVER a time when 96 percent split between digital and hard copy music or digital and hard copy videos. There are good reasons for that. For *straight text*, what you say is very much true. But digital hasn’t “worked” yet for any other kind of book in a repeated or scaleable way.

      • rickchapman

        +++ Print is not entirely comparable to any other digital media or software.
        The print book offers — in some cases — real advantages over other
        presentation forms.+++

        Hmmm. I was recently on a plane to Denver and on the flight looked up and down the aisles. Everyone in their 30s and under was reading on tablets, laptops, Kindles. Some of the people over 40 were reading paper.

        Ditto when I flew to Austin in May.

        My daughter is in her twenties. Grew up with books all her life. Now, doesn’t buy them. Reads them on her iPad. Same with her husband. Same with her friends. Their siblings.

        For special circumstances, you will be able to personally print. And you will have a wider variety of choices on how and what to print. A stripped down, basic book or one heavily illustrated. Print on special braille production systems, if you’re blind. Of course, large print books are pointless on a scalable font device. Every book is now large print for those with vision problems. And as flexible displays enter the market, large formats such as children books will fall to digital.

        And once the greenies point their guns at print, it will be over. Massive mills that mulch and pulp trees using various scary sounding chemicals? Colored print pages loaded with metals you probably don’t want concentrating near you home? Less clogged landfills?

        Already in my town some of the high schools teachers have begun talking to the kids about how green digital is. I heard a librarian talking about it to a patron the other day. Our town landfill is not very beloved. Anything that slows its fill rate is highly favored.

        +++ But digital hasn’t “worked” yet for any other kind of book in a repeated or scaleable way. +++

        It’s working for me. I still have some paperbacks from the 60s, but I don’t buy books anymore. Why? On an airplane, I have less weight to carry. In bed, I can read a book and not keep my wife up. Screen resolution is the equal of paper on my tablet. I can easily access any book I store digitally as opposed to pawing through shelves loaded with dust topped tomes. There are thousands of classics I can read for free at any time.

        From the publisher standpoint, only digital enables me to measure and learn at a very granular degree how people interact with my book.

        (Or, to put it bluntly, read over my shoulder and take notes.)

        I have lots of records to play on my Pioneer PL-41 and Technics 1300 and Denon DP-65 tables, but I just don’t see that as the future. Even though there are audiophiles who will argue that that long groove cut in in the vinyl provides a better listening experience than a downloaded MP3. But I can’t take a B&O 4000 to the gym.

        But, we’ll see in about a decade what’s going on.

        rick

      • A lot of interesting but ultimately irrelevant anecdata here. A lot of surveys have suggested that young people are NOT gravitating to digital reading a lot faster than adults. As you say, we shall see, but I notice you didn’t try to address any of the substantive points about how print books differ from their shrink-wrapped counterparts in other media, or software. There are real differences which shouldn’t be so casually elided. And you’re not talking to one who resists this change. I have read one printed book since 2007 and since 1999 I’m probably about 5 to 1 ebooks.

      • JCR_Harris

        Mike and Rick,

        I go with the “print books are her to stay” faction. But so are ebooks :-). The point to remember is that print books serve many markets and many needs. As Mike points out, straight text is easy on screen; but even with html5, and readers and apps that can cope with it, it is not a tool that helps concentration. The general feel I get from research and comments on use of education material is that students at all levels prefer paper, though not exclusively.

        It is also worth remembering that, when we talk of print on paper, the increase in purchase, over say 50 years, has been immense. And it was a big industry before. It can certainly shed a good few percentage points without being in any danger of collapse or of being sidelined.

        Remember also that most of these discussions tend to be about the US market. There is a whole world outside that has very different experiences, perspectives and routes that may be possible. Though Amazon may be even more dominant now in the UK that in the US – at least online!

      • rickchapman

        +++ A lot of interesting but ultimately irrelevant anecdata here.+++

        It depends how you divide the market, I work primarily in high tech. From 2007 to 2014, I hosted 14 SaaS University conferences and have written two self publishers books focused on the software industry. High tech won’t consume paper anymore. Not a pdf or Kindle, don’t want it. In the industry, with the exception of Wired, the paper magazines are all gone. In the Valley, books are already quaint to many.

        I don’t think we need to discuss what’s happening with newspapers regardless of industry sector. From 2008 to today, e-books grabbed about 25% revenue share of the overall market? That’s pretty rapid, though not as fast as what occurred in the software industry, where the dynamics of how you interact with software and why are different. But our society has a strong emotional connection to books.

        Here is my prediction. By 2024, E-books will comprise 80+ of book revenue. Print books will be relegated to special niches and form factors. By 2029, it’s effectively over for books. While the stock lasts, used book stores will provide a well of titles to browse through.

        Through 3D printer technology, paper will survive as a promotional tool. Obtain a rare, printed and signed copy of a book you store and keep as a memento. Maybe for special medical situations or perhaps for field instructions when electronics aren’t available.

        That’s my guess. Let’s hope everyone’s around to see how smart I was.

        rick

      • I wouldn’t resist the idea that by 10 years from now print might only be 20 percent of “book” revenue, depending on how we define it, particularly if we say “in the wealthiest parts of the English-speaking world”. That’s still a LOT of print books *ten years from now*. That probably means print constitutes more than half book revenue *over the next ten years*. And, as you say, it is different across niches.

        But let’s not get too carried away by what “high tech” will consume. High tech is a much higher share of the earned dollars than it is of the population. Not quite as insular (and disproportionate) as the financial industry, but close. Leaves lots of ordinary folks out there who could be doing something different.

      • rickchapman

        +++ I wouldn’t resist the idea that by 10 years from now print might only be 20 percent of “book” revenue, depending on how we define it, particularly if we say “in the wealthiest parts of the English-speaking world”. +++

        I now officially precede all my pontificating and prognosticating with an official “In the First World” proviso!

        +++ High tech is a much higher share of the earned dollars than it is of the population. Not quite as insular (and disproportionate) as the financial industry, but close. +++

        Yeah, but us geeks and nerds tend to lead the way.

        The countdown has already begun.

        rick

      • Yeah. I think geeks and nurds led publishers to lots of experiments with enhanced ebooks and book apps too. It doesn’t always work out.

      • rickchapman

        No, not immediately. Smartphones were initially not very successful up through the last iteration of Windows Mobile, uh, 6.0? in 2007. Maybe 5.0? I owned a Samsung BlackJack and they were really annoyed they might not receive the latest upgrade.

        Then S. Jobs rethought the approach with iOS and things changed.

        Millions of pounds of paper being shipped point to point vs digital delivery?

        I think I know what’s going to happen, though I wouldn’t provide a year by year predictor.

        rick

      • Heywood Jablowme

        Jackass

      • SPAM.

      • rickchapman

        +++ I notice you didn’t try to address any of the substantive points about
        how print books differ from their shrink-wrapped counterparts in other
        media, or software.+++

        Sheesh, Mike, I have to do some real work around here!

        OK, let me take a crack at two industries, first software. In 2004 I released the fourth edition of The Product Marketing Handbook for Software. This is a self published book for software product managers and companies looking to, well, market and sell software. There was an extensive chapter in it on software channels and how they worked. Discussions of the two tier model, MDF programs, costs and ranks if aforesaid, etc.

        By 2010 that chapter was obsolete. It took about six years for digital deliver and the rise of SaaS to disrupt and destroy what was once a vibrant sector. Except for the game consoles, there just a handful of software titles on the shelves and soon there will be none.

        Let’s focus on SaaS, Software as a Service. SaaS was highly significant as it transformed software in thousands of sectors into a platform a service, where the software provide could precisely monitor and understand their customers. The model also opened up new markets unreachable to conventional software. There were other important effects, but those are the most important to book publishing. And these effects can be generated only through being online.

        There are still channels in SaaS software and I write about them in SaaS Entrepreneur. But how and the way they work are very different from the old retail model.

        How about music? From a technical standpoint, the first generation of CD was sonically inferior to vinyl. The bit sampling was too low and in a clean acoustic room, you could often hear, though the superiority of CDs in terms of dynamic expansion usually masked the slight graininess of the music. And album covers were great! CD covers were never as impressive.

        MP3 were usually far inferior to both vinyl and CD but sounded good through an iPod.

        I think we all know that physically based music is not the future.

        When it comes to books, I can’t see many reasons for their continued existence as a mass technology. Technically dirty. Waste paper stresses the environment. Expensive to produce and ship. Can’t be transformed into a service platform. As far as I’m concerned, an inferior reading experience to my tablet. Difficult to manage. Books deteriorate over time. They cost more.

        I can see no compelling reason for their continued existence.

        rick

      • Big5anon

        So because you find physical books an inferior reading experience(very much the minority) you make the leap to books will be over in ten years? ebooks are actually losing ground to print now for my company year to date. It surely may be a pause before some new technology invigorates the format, but it looks like physical books are here to stay.

      • rickchapman

        +++ So because you find physical books an inferior reading experience(very much the minority) +++

        I don’t agree very much a minority. Retina screens are sharp, clear, new generations of screens can be read in the sun without glare, fonts sizes can readjusted, bookmarks are easy to place and traverse, etc.

        I find reading on a tablet a more enjoyable experience than a book.

        +++ you make the leap to books will be over in ten years? +++

        Yes, I do. Every other analog technology is over or fading. I see no reasons why books will survive. For those who find paper an experience they can’t forgo, home 3D printers will fill in the gap.

        +++ ebooks are actually losing ground to print now for my company year to date +++

        I don’t know about your specific company. Corporations are typically early adopters of digital literature for obvious reasons. Software companies no longer print manuals; mostly PDF and some mobi.

        I can’t see a single indicator that points to print surviving on any mass scale.

        But, we’ll see in ten years how smart I am.

        rick

      • The compelling reason is consumer demand. There is no other reason that will matter. For art books and many how-tos they will remain a dominant form for at least several more years. Art books will actually never really be replaced by screen stuff; perhaps they’ll be replaced by something else (prints?) or just disappear (Iess likely).

        I checked with an agent since this dialogue started. What s/he told me was that although ebooks are almost always more than half the sale of fiction during its hardcover life, the number falls off pretty sharply when the trade paperback comes out and then ebooks become more like a third of the total sale. Of course, it is *unagented *fiction that is 98 percent ebook, but those books are worth a lot fewer dollars.

        Just a reality check on where things are today. Still anecdata, but an agent has a much more useful data set than one of us would, no matter how “far back” our publishing history goes. (My first book was published in 1970.)

      • rickchapman

        +++ For art books and many how-tos they will remain a dominant form for at least several more years. +++

        Probably right, and I was thinking about that during this conversation. But long term, I think art books will go digital and say this from a personal perspective.

        A few years ago I stopped by a local tag sale in town and bough, for eight bucks, a book called History of Italian Renaissance Art. New, it’s about $120 bucks and used, about $75. Perhaps as beautiful as an example of the printer’s art I’ve ever seen. Many magnificent color plates.

        But you know what? Most of the interior art is STILL black and white. And, of course, that’s to keep production costs within reason.

        But with a digital title, everything can be in color. Inherent in the form factor.

        rick

      • Elliot1234

        With today’s eReaders, it’s mighty hard to match the utility of paper when a book has charts, tables, and graphs.

      • rickchapman

        NAAAHHH! Just got a look at the proof of my niche book, “SaaS Entrepreneur: The Definitive Guide to Building Your Cloud Applications Business.” Took it to mobi. Loads of charts and graphs! Here’s a link to some of them. You don’t read links, so attempt to visualize what you’re not seeing:

        http://www.saasentrepreneur.com

        Looks just fine. Good thing, too, because high tech won’t buy print anymore.

      • Elliot1234

        That’s unfortunate.

      • rickchapman

        Life is essentially tragic, Elliott.

        rick

      • Matthew Williams

        My daughter is 19 and vastly prefers printed books. I’m not sure anecdotal evidence means much.

  • Amazon doesn’t run its book business, either print or ebook, at a loss. The DOJ and Judge Cote covered this in the price fixing trial — not to mention it is not possible under either the price-fixed agency contracts or Judge Cote’s court-mandated terms (which said total discounting could not exceed the total cost of ebooks from each publisher on an annual basis). In fact, Amazon maintains P&L statements internally at a level much more granular than even the “book business,” as Brad Stone detailed at length in his book about the company.

    The confusion often arises because Amazon as a whole reports quarterly losses. That’s because operating profits from the retailing side are used to enter new businesses like cloud services and streaming video.

    • They don’t run on negative MARGIN. But that doesn’t account for marketing spend, like buying keywords. In any case, they can live on less margin than a books-only operation. That’s really the point.

      • Elliot1234

        Sure they can. That’s why books-only operations will continue to lose market share. The same thing happened to other specialty retail stores when department stores and big box stores took their market share.

  • Anonymous

    I don’t think you give enough weight to how much Amazon must spend to offer the level of customer service it does, and to maintain and constantly improve it’s (amazing) website.

    A customer who needs assistance can get a call in five seconds. No kidding. I tried it when I had trouble buying a book for my son’s ereader. I’ve tried to buy from other sites, and it’s much more difficult.

    I think a blanket 30% for all retailers is the same as saying ALL books should be worth XX. Amazon offers more, so should be entitled to more.

    You used the word “squeezing.” One way to view the situation is that Amazon has so much market share it can squeeze suppliers.

    Another way to view the situation is that Amazon is entitled to a more because it has managed to build and maintain a website which makes it so much easier for customers to buy books, and because the service so far surpasses other sites.

    By the way, I agree print will be around, probably forever, although it may become a niche for certain kinds of books. An ebook for the coffee table just won’t work.

    • rickchapman

      +++ I don’t think you give enough weight to how much Amazon must spend to offer the level of customer service it does, and to maintain and constantly improve it’s (amazing) website. +++

      Sure I do! I have friends who code up warehouse inventory management software and used to code that stuff up myself. In dBase II. On CPM!

      If we’re talking digital books, and we are, it costs Amazon WAY less than a buck per book to add, maintain, and deliver an uploaded book. To the end of time. Cost per book keeps going down as their infrastructure scales up. And a lot of Amazon’s infrastructure costs drop because that’s what hardware does!

      Programmers cost too much money?

      Gosh, isn’t that what India is for?

      Cost of power is one variable that’s hard to control.

      +++ By the way, I agree print will be around, probably forever, although it may become a niche for certain kinds of books +++

      And that’s maybe why you’ll buy a 3D printer that can accept a purchased digital file that will enable you to print up that book if you want to impress your friends when they come over.

      Or throw a flexible graphene display strip on the coffee table that will cycle through covers of the latest books out there designed to display your taste and erudition to the world. The Brits, by the way, displayed the first generation graphene prototype about a month ago. All the display guys are working on flexible display tech furiously.

      Paper = vinyl. (I collect vintage turntables and think it’s cool that a small number of millennials buy some LPs. But that’s not the future).

      rick

      • Anonymous

        That’s not what I’m talking about. The programming is a small fraction.

        I’m also talking about the customer service they maintain. The example I gave is that you can get a call back in 5 seconds to any problem. You can get help with ANYTHING. Instantly. It costs money to maintain that. Compare to the service on the BN website.

        Obviously it doesn’t cost much to sell each book. But they are constantly innovating, constantly looking for ways to sell more books to more customers. Filling the order is the least of it. Sorry.

        They have much more to offer, which is why they sell so many books.

      • anonymous

        By the way, Rick — the idea that all you have to do is hire a few programers and you can compete with Amazon is why there have been a few spectacular online ebook retailer failures.

        Amazon is a retailing genius. People want to think they have so much market share because they’re ruthless. How about they have so much more market share because they have created a website that makes shoppers WANT to come and make purchases, and more purchases.

        Retailing genius is what Amazon has to offer — not their ability to hire programmers.

      • rickchapman

        Amazon is a retailing genius.

        Well, they’re going to lose a $1b this year. But their model is very powerful and you have to give them a lot of credit! I certainly shop there, though I’m more of an E-bay kind of guy.

        +++People want to think they have so much market share because they’re ruthless. +++

        They are ruthless. At least to their suppliers. Just as WalMart is. Pretty tough on a lot of their warehouse workers, as well.

        +++ Retailing genius is what Amazon has to offer +++

        I’m not sure about that. I’m not sure it’s genius to implement a lowest price promise. After all, WalMart did it first! But you can argue that’s it’s very smart.

        I would say that Amazon’s operational model is what truly sets the company apart and it s ongoing attempts to innovate in delivery. I think Amazon, or another company, will eventually change the way we perceive shopping and stores as delivery mechanisms stop being periodic and become continual and automated.

        rick

      • rickchapman

        +++ That’s not what I’m talking about. The programming is a small fraction. +++

        Not so sure about that!

        +++ The example I gave is that you can get a call back in 5 seconds to any problem. You can get help with ANYTHING. Instantly. It costs money to maintain that. Compare to the service on the BN website. +++

        Well, lot’s of third world call centers as well! I don’t think supporting a download book service would be that complex. The number of variables you’d have to deal with is fairly simple when compared with, say, the software industry.

        But you would want to plan for it, or course. Smashwords seems to have a decent download site and they’re a lot smaller than Amazon.

        rick

      • Steven Zacharius

        I have to be one of Amazon’s biggest customers and I’ve had to return many products over the years but I have to tell you….they don’t make finding that customer service number very easy. Eventually you find it but just about every other retailer has their phone number in big bold numbers right on the home page of the website.

      • Elliot1234

        Look in Order History under your account. Click the Return/Replace button next to the subject item, then enter your phone number under contact options. They call you. It’s a different system than the other big retailers use.

      • No, paper does *not *equal vinyl. You need machinery to listen to vinyl, which you have to own and maintain. It gives you no real advantages (except if your ears are so good and your ego so large that you think you hear a meaningful difference worth the trouble). These are the first to substantial differences. There are others. There is no music equivalent of an art book that doesn’t translate well to the digital form (unless you are one of the egotists referred to in the first sentence).

      • rickchapman

        +++ You need machinery to listen to vinyl, which you have to own and maintain. +++

        True! But, you need a digital player to listen to an MP3.

        Which, in most cases, is inferior to a new vinyl record playing on a turntable with a moving coil cartridge spec’d at 65+ rumble and a wow rate under 3%. Let’s not forget tracking error! Which the linear arm addresses. But then factor in mass! And so on. (I really love turntables.)

        Vinyl really is better, most times.MP3 is a lossy compression system and if you listen to a typical MP3 next to a vinyl record in a good acoustic room, you can usually hear the difference. On non compressed CDs, I think the CDs usually win. But there are audiophiles who’d crucify me for that claim.

        But, I can take the MP3 on the airplane, to the gym, carry thousands of them with me, access services that play them for me (and track and learn what I like), group them, manage them, do FX with them, etc. And most of the time, they sound good!

        Which is why no one buys records, (except at specialty stores). And CDs are dying as well. And they will completely expire once you have enough memory on your devices to not have to use lossy compression to listen to them.

        If you love paper, 3D printers will soon provide you a customized printing experience not possible with mass print. And while you’re printing out that book, here’s a poster you can also print out of that hot undead vampire zombie chick in the book (the one on page 143). You know you want it.

        Digital opens new markets and experiences that mass print simply can’t.

        Well, I take that back. But bookstores, to survive, will have to rethink themselves. Because, IMHO, a base model of hauling around millions of tons of paper from point to point is not the future.

        rick

      • You *end up *in a place I agree with. Bookstores are going to have increasingly tough sledding. My own hunch is that they all have to become used and new bookstores, which is a complicated ask. But, as we do agree, there will be a lot of evolution over the next decade. I just don’t think the printed book will be anything like “dead” by then; it will just be nichier.

      • rickchapman

        When I wrote my novel “Rule-Set: A Novel of a Quantum Future” as part of my world building exercise, I spent some time thinking through how retail stores and resellers would work and interact with each other. I decided the model would be that stores would serve as entertainment, not selling centers. Their goal would be to incent you via games, shows, contests, etc. to come down to the mall or whatever and enjoy an exciting communal experience. See the merchandise. Talk to experts and celebrities. Take home sample. Watch shows. Et al. Maybe buy at special prices at a limited time from limited stock.

        The goal would be to persuade you to add an item to a purchasing manifest, a subscribe-to-buy system serviced by an 24/7/52 delivery system run with drones and auto-piloted vehicles and some aerial craft. Supplementing this system would be a distributed network of commercial 3D printers that could manufacture many items locally on an on demand basis.

        Much of this is speculative, but I do think elements of this could apply to future bookstores. But I believe mass shipping of paper is not going to make sense for much longer.

        rick

      • Good imagination. Conceivable. We’re repeating ourselves, so I’ll say again: the “reason” will be consumer demand. There is no other reason that matters.

        Have you noticed that my comments here are considerably shorter than yours? That’s a hint.

      • rickchapman

        OK. I’ll leave the thread alone.

        rick

      • Heywood Jablowme

        Jackass. You blather about books but hate reading.

      • Spam.

      • Heywood Jablowme

        Jack ass.

    • I don’t disagree with your arguments about value or fairness. But that’s not what concerns me. What concerns me is centralizing the book recommendations in one set of hands. Doesn’t have to be a nefarious intent for there to be a problem with that. See the DC Post story about the ebola books written by indie authors and surfaced by Amazon algorithms. Those books would NOT be surfaced by Google, because they know something about “authority”, which Amazon doesn’t. And never could as well as Google. That matters. Books matter. And Amazon’s market share for books poses real problems for society and for book readers. Not just for publishers…

      Of course, you read the piece carefully enough to have seen the two grafs — one near the top and one near the end — where I made Amazon’s case pretty effectively, I thought. I don’t fail to appreciate what they’ve accomplished.

  • Way back in 1997, Navarre, the Ingram of wholesalers for the very lucrative packaged goods’ software business of the time (as well as music CDs), required software publishers to accept new consignment terms for selling into Best Buy, Staples, CompUSA, etc. This was the best thing that happened to physical store selling models, removing the retailer from inventory risk so they bought more, even though eventually those types of goods all shifted online and are now mostly gone at retail. Consignment helped delay the inevitable at least. I am surprised the book industry never went to consignment as it would have helped stop the foolish quick returns/declare out-of-print way of doing business, which in turn has hurt so many authors over the years who never got enough time on shelf to prove anything. All that has to happen is for B&N to demand it and it will happen.

    • rickchapman

      Interesting thought. I used to work in software and as a product manager, have been to Navarre. But I don’t think that would have worked with books. At least not with the premium authors.

      Publisher

      “Hi, we want you to buy X numbers of copies of X book by exciting new author X.”

      Reseller

      Fine. We’ll buy 10K on consignment. You’ll get paid, maybe, after 90 or 120 days. After we wring another 10 points out of you via MDF.

      Publisher

      “Hi, we want you to buy X numbers of copies of X book by exciting horror author Stephen King.”

      Reseller

      Fine. We’ll buy 100K on consignment. You’ll get paid, maybe, after 90 or 120 days.

      Publisher

      Screw you.

      Besides, even today, the channel can only get away with that with little guys. They don’t buy those retail units of Windows from Microsoft on consignment.

      Avantgate, yes.

      (Not that it really matters anymore.)

      Besides, publishers take books from the resellers all the time and always did. In theory, they then clawback the author advance, but that never happens. Blood from stone economics.

      rick

      • Consignment can only work hand-in-hand with vendor managed inventory. The party that takes the inventory risk has to determine the shipments. When stores buy, they can order. When publishers distribute on VMI, they consign what they think is right. You’ve pointed out the holes in trying to do it any other way.

    • I agree on the substance and also agree that B&N could accelerate it. The publishers would face two big problems. One is figuring out how to offer the same terms to other book retailers, which they’d have to. And the other is taking the hit to their balance sheets it would require.

  • John Andrews

    Very interesting post thank you, and a good discussion. Personally, I regard eBooks with print counterparts as seriously over-priced and if possible buy second-hand books instead. They are cheaper and I can give them to friends.

    • That’s a solution for many, I’m sure. Amazon controls the used book business and hasn’t told anybody much about how big it is for many years. We’re all in the dark. Except them.

  • GalleryP

    I always find the notion of a fixed percentage discount/commission in ebooks odd. 30% of a $1 ebook is very different than 30% of a $29.99 or $59.99 ebook and yet the sellers’ costs – absent the content costs – in each instance is nearly the same (unless someone can correct me here.) And, of course, this is decidedly not how retail otherwise works, discounts on greeting cards, for example, are much higher than discounts on cars or computers, no? Wouldn’t a more rational system have the commission be a fixed amount per sale?

    • A fixed amount per sale would be more *logical*. Not sure I’d say more *rational*. Not sure how we’d get from here to there, though.

      • GalleryP

        No quarrel with the language choice. Getting from here to there would involve innovative thinking or proposals either from content producers or the distribution channels, or both. “30%” is arbitrary, and unrelated to costs. It surely seems there would be room for negotiation. Nothing about the terms of trade in digital distribution should be taken as “given.” This is still early days, no?

      • Early was really 10 years ago. Or five. But things can still change, certainly.
        Mike Shatzkin
        iPhone keyboard
        Mandates brevity

  • Elliot1234

    It was always curious to me that the preference of all the other retailers except those who can use the book business as a loss leader — Amazon, for sure, and perhaps Google — for publisher-set retail prices never made its way into the discussion of the publisher motivation at the time, nor to Judge Cote’s reasoning, nor to the arguments which have taken place about it since

    Probably because the case was about collusion, not preference.

  • Steven Zacharius

    I’d just like to add my two cents. Whether you’re on Agency or Wholesale with ebooks the key factor is your cost to the seller. With the original Agency model the retail price of the books were tied to a matrix with print pricing, with maximum prices being set for ebooks. The Agency price of the $25.00 hardcover is $11.99 and the publisher would receive 70% or $8.40. The Wholesale model would allow you to set the print price of the hardcover at some price much closer to the list price of the print book….let’s say $20.00 but then the publisher would only get $10.00 or 50%. So it’s not the model that makes the difference, it’s the setting of the cost basis. Agency did make it so that all retailers competed on an equal basis and stopped them from discounting the books before the DOJ case.
    One other point, just as B&N missed the opportunity to buy Mobi, many other online retailers missed the opportunity to buy Goodreads because people didn’t know it was for sale. I have to give Amazon a lot of credit for that move.
    Very informative piece Mike.

    • Elliot1234

      Agency did make it so that all retailers competed on an equal basis and stopped them from discounting the books before the DOJ case.

      God Bless the DOJ. What good is equality in commerce? Price competition has been a pretty important factor in retail competition. Removing it inhibits competition.

  • Tony Sanfilippo

    Great post, Mike. Though one aspect of physical bookselling that you didn’t touch upon is the inefficient practice of returns. Books are one of the few products that isn’t perceived to have lost value after sitting on a retailer’s shelves, and to ease the fluidity of a store’s initial investment in inventory, almost all publishers have allowed retailers to return unsold product at almost no loss in store’s original investment in that product. I was under the impression that this was why, compared to other retail products, the discount the retailer received—that 40%—was so low compared to other categories (80% to 90% on most clothes, for example). That said, the practice of returns did have a significant cost to retailers in the form of their employee’s time, and in shipping costs when the bookseller eventually needed to return unsold books to the publisher. Returns used to be a quasi-consignment program to potentially provide booksellers with fresh inventory, while offering a little breathing room on turns, but it had a cost. But when competing with Amazon’s catalog, even returns can compensate for the finite amount of shelf space a bookstore has to contend with.

    Of course returns expenses are almost non-existent for Amazon, thanks to the implementation of POD and ebooks, not to mention a logistics platform second-to-none. Yet in spite of that, so many small publishers are being forced by Amazon to give them a significantly higher discount than that traditional 40%, and to do it for BOTH p and e, or they’ll lose their buy buttons on Amazon’s site.

    Amazon shouldn’t be getting 40% or even 30% on ebooks. At this point, now that most of their investment on the Kindle platform has long been paid for, they should probably be getting 10% or less, but that won’t happen as long as they have a monopsony over publishers that they are willing to ruthlessly exploit.

    • I have a different feeling about returns: they’re necessary. If you were the publisher selling on consignment, you’d also have to have vendor managed inventory, or VMI, so that stores didn’t load up on books that wouldn’t sell. You’d figure out pretty quickly then that there are books you placed three months ago or six months ago that are getting in the way of something you now know would sell faster. It would not look inefficient *then
      *to pull them and send them back. In fact (and this is based on real experience), the problem is to get the *store *to give you the labor to pull and ship back the returns, even if you’re paying the return freight. But it’s worth doing.

      I like your logic about what Amazon or other retailers should get on ebooks. Now the question is how to get there. There is SOOO much focus on why ebooks should be cheaper focused on *publisher *cost, and none based on retailer cost!

  • rickchapman

    Mike, while I don’t want to dig too deep into the topic at this point, E-book reselling offers you, in my opinion, a much richer environment to up and cross sell than is possible with printed matter.