The Shatzkin Files


Serious disruption just over the near horizon


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The monthly release of ebook sales figures by the IDPF provides a regular reminder about how fast this market is growing and it always provokes me to project the curve into the future and think about the implications. It was an IDPF data release that triggered the thought that we needed a “Tipping Points” panel at Digital Book World last January which turned out to be one of the highest-rated presentations by the attendees of the conference. And it was another release of that data that made me say on this blog on March 22 that I thought ebook sales would reach 20-25 percent of the sales for new works of narrative writing by the time of Obama’s reelection in November 2012.

Then last week, The Economist had a story quoting Carolyn Reidy, the CEO of Simon & Schuster, forecasting S&S ebook sales in that range in “3 to 5 years.” This is the first time that I’m aware of that a Big Six CEO has been willing to put their name on a forecast that is just about as aggressive as my own. Another conversation with the head of another one of the Big Six companies captured a forecast that is in the same ballpark.

So I think it is worth a few moments to contemplate what it means if this forecast is accurate, or even close to accurate.

If by the end of 2012, 25% of sales for a new book are digital, then about half of new book sales will be made through online purchases if we count the print book sales made through online retailers (mostly Amazon.)

Online print sales can be served through inventory generated on demand. So, if these estimates are right, we are less than three years away from a publisher (or author) being able to reach half the market for a book without inventory risk!

Having half the market reachable without print-run risk or inventory storage; having half the customers connecting with their reading through online paths that make them at least theoretically identifiable; and having a quarter of those customers reading through a medium that enables interactivity will make all the changes we’ve seen so far in trade publishing appear trivial. And if the very perspicacious Carolyn Reidy, her unnamed counterpart, and I are right, that disruption is going to take place before many books now under contract reach their publication date.

The immediately disruptive effects of this, for which every major publisher should be preparing right now, include:

1. Publishers are going to really have to rethink the development process for their ebooks. Right now, publishers put their creative energy into optimizing print books; ebooks are an afterthought.  The most forward-thinking houses are going to XML workflows which will reduce the costs of conversion to ebook formats. But are any of them fundamentally rethinking how the editor and author shape the project to optimize the ebook experience? That working relationship is going to have to undergo fundamental change.

2. It will be eminently sensible to launch books with a no-inventory strategy and move to press runs with returns allowable when reviews or sales have proven that it makes sense. Of course, publishers will be happy to sell anytime on a no-returns basis and for some books launched “digital first” there could be enough no-returns demand to generate a printing, but the idea of printing and distributing speculatively will make less and less sense as the potential market to be reached by that tactic diminishes as a share of the whole. By the way, this reality would give B&N, the only retailer with its own DC resupply infrastructure, an additional competitive advantage.

3. A non-US publisher will be able to reach half the US market without needing an operation of any kind in the States. This is a sea-change that could even encourage our UK counterparts to reconsider their staunch defense of territorial rights. We already know that the greatest part of marketing value beyond the display and positioning in a bookstore is generated online. That means it can be done from anywhere without a local nexus. By the end of 2012, we’re saying half of all the sales potential can also be reached with the product without a local nexus: no requirement of local inventory or any shipping or revenue collection facility beyond your digital distribution and print-on-demand partner.

4. Because books or ebooks will be purchased by half of their customers electronically, the potential exists to know exactly who those are and to establish interaction with them. Obviously, the intermediaries have both selfish and customer-oriented reasons not to share data, but for ebooks, at least, publishers will find hooks to get readers to check in with the publisher and establish contact. (Of course, they will also be selling more and more units direct to consumers, without any intermediary at all.) This opportunity presents a new battleground for competitive advantage that publishers will have to pursue both for marketing and for author relations.

5. Publishers will have to start devoting the bandwidth and resources to direct sales that they devote to intermediary sales today. The notional 50-50 split of sales between terrestrial and online means that half the sales are actually direct sales. Publishers will increasingly find ways to influence those sales decisions, but the companies that devote management attention and resources to the challenge will find those ways faster, to their competitive advantage.

6. There’s an inevitable concurrent downward spiral of brick-and-mortar retail inherent in this forecast that sales are moving online. The nearly-limitless online selection has been an increasingly powerful magnet since the day Amazon opened and in the new paradigm there will be a growing body of talked-about content not visible on store shelves. It is beyond the scope of today’s speculation to consider what this means for the strategy and survival of bookstores and wholesalers and for publishers’ expectations for them, but it’s not likely to be pretty.

7. Self-publishing strategies for entities that can do the marketing become much more compelling. It is no secret that an author can make more money on each copy sold managing her own publication through Lulu or Author Solutions or Bookmasters. If half the market is directly available without regard to the effectiveness of a field sales force then we can be sure, at the very least, new title acquisition will be more challenging for established publishers. The big players will still be the only big bankrolls in town, but that’s a two-edged sword that can lead to overspending and losses as well as to securing desirable projects.

8. If the infrastructure for direct sales management at most publishers will be woefully lacking, the infrastructure for print warehousing and delivering print orders at most houses is likely to be heavily underutilized. That should lead to a reduction in the charges for distribution services, adding pressure to a business that will already suffer from the growing viability of no-inventory publishing. And publishers with volume-related pricing contracts with their printers will find they don’t need as much capacity as they contracted for a year or two before.

For the past three years, Ted Hill and I have conceived and organized the program for the Book Industry Study Group’s Making Information Pay conference, coming up on May 6. Our theme this year — Points of No Return — addresses precisely this issue from the perspective of how functions will be organized, what the changing skill sets will be, and how secure people doing jobs today can feel about having a job they can do tomorrow. If you found that this post gave you something to think about, you’ll find MIP a morning very well spent.

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  • davidsucher

    An outstanding post. Thanks.

    And one other disruption, I surmise, will be a dramatic drop in margins for on-line retailers.

    Think about it this way: Apple's iTune store is profitable (it is) by selling 99 cents items with a gross profit of some 30 cents. So then why can't (besides desire, which never made anyone a penny) other on-line retailers make money by selling a $10 ebook also for 30 cents mark-up?

    We can state that no one wants to etc etc but Apple can do it at iTunes, other on-line ebook retailers can also cut their margins to the same level.

    Publishers won't and shouldn't care — they just want their share. Apple and Amazon (and the smaller reading device manufacturers and retailers of course) will be forced to an open system in which “any book on any device” will be the practice. So the market wil be open to the host of other retailers who are or will be able to sell ebooks for far less than Apple and Amazon are both forecasting.

    It turns out so far as I am able to see, the 'network costs' — servers, high-capacity lines, staff to take care of complex web pages — should be about the same. I didn't realize it but the file size of War and Peace compared to a typical rock song –is much smaller (War and Peace is 1.2 MB — Sgt. Pepper's Lonely Hearts Club Band is a 2 minute song and 4.4 MB. Go figure.)

    So for to the extent that storage and transmission is even a small cost factor, it is larger than with books.

    So all the palaver about Amazon and Apple and publishers and the discussion of retailers' margin has not even started to emerge.

    • David, I won't say what you're speculating about *couldn't* happen, but
      that's not the direction things are headed at the moment.

      Most of the major publishers and most of the major agents are trying to keep
      the ebook prices to consumers up for a number of reasons.,One is to keep the
      print alive. Another is to force the channel to accept their margin, which
      will enable a larger number of retailers. And that goes hand in hand with
      stopping the big guys from using price as a tool to eliminate competitors.

      Of course, the “unbranded” content will predominantly be cheaper both
      because those publishers will be more flexible about prices (in the world
      where there are few agents!) and because the retailers will be able to bully
      on terms and will resist agency arrangements. (This ultimately causes
      conflict with the agency relationships at Apple.)

      This will lead to pricing experiments with the branded authors and, overall,
      the price of books is, indeed, going to go down over time. But I think the
      scenario you're painting is not around the corner, if it arises at all
      during the time we have left when a lot of book content is sold “by the
      drink.”

      Mike

  • warrencassell

    Hi Mike,
    I enjoy your blog immensely and look forward to your posts.
    I had just sent an email to PW commenting on their article by an Indie who wants more from publishers. I thought this was relevant to your point number 6. It appears that Armageddon for bricks and mortar is closer than we think. Following is my letter:

    Cheers,

    Warren Cassell

    As a former independent that got out when the getting was good, I couldn’t help but agree with every one of the points made in Jon Platt’s thoughtful April 5 article: Value Your Assets.

    However, the reality is that Indies are only five per cent (and sinking) of market share for publishers. If 95% of your business is coming from other sources, you will be giving those sources their due and not be overly concerned about a fairly insignificant part of your sales.

    The conundrum for publishers is that they need Indies and don’t know what to do about them. Indies continue to be community hubs, if you like your hub to be real rather than virtual. Indies can create events, both in and out of the store, that attract book buyers, get local (and virtual) press attention and create buzz. When was the last time Amazon had an author read or discuss a book in the real world? Word of mouth from Indies is gold for mid list authors and they are willing to promote those B list authors who are the future of publishing as we’ve known it.

    I’m not sure what the answers will be for the publishing community, but if it continues to give short shrift to Indies, it will be a brave new world for Google, Apple and Amazon—who will eventually represent the new publishing paradigm.

    Warren Cassell
    Portland, Oregon

    Warren Cassell is the former owner of Just Books in Greenwich. He retired from bookselling in 2001.

    • Warren,

      Thanks for sending along your letter. I normally discourage sub-blogposts as
      comments, but yours is appreciated.

      On the other hand, I don't think there's much trade publishers can do one
      way or the other that will “save” independents. The forces that are
      destroying them are larger than any of publishers' making. I really think
      the “short shrift” you mention is a *result* of the overall situation indies
      find themselves in, not a *cause.*

      Mike

  • anonymousie

    You always make me think…which is mostly a good thing!

    I am interested in all of this, but primarily in #7. I see everyone say that author branding will become more important, and that authors will be self-publishing everything, etc, but I think that ignores one point: consumers need a way to separate wheat from chaff. Since the demise of the wonderful POD-dy Mouth Blog (http://girlondemand.blogspot.com/), where I could find out about *good* POD books, I simply refuse to read anything that's self-published. Several micro-presses have also been cut from my list of acceptable publishers.

    I know other genre fiction readers who feel the same way. (Ask a fantasy geek about the differences in imprints, or better yet ask a romance reader!) It's not that everything produced by, say, Berkley Prime Crime is going to be to my taste (or even particularly well-written), but I have a better chance with them than I do with a self-pub.

    That's an area where publishers could really make their mark, but they'd have to stop taking everything and throwing it at the wall, rehire editors, and not accept every book their authors turn in without careful scrutiny. It's a lot of work (and expense), but it's a way for the big publishers to keep themselves relevant, even vital. Harlequin has managed this for years–understanding their market, creating separate lines for each set of readers, and eliminating entire imprints when the people who were reading them move on to something else.

    • I tried to make the point that it is authors who can really do their own
      marketing who can benefit soonest and best from self-publishing. I agree
      that unknown-author fiction will be hard for readers to discern, and
      therefore hard for authors to sell, in an unbranded fashion.

      Mike

  • All this is fascinating but if publisher's don't get a handle on the piracy issue involving ebooks it could lead to serious problems for the entire publishing industry world-wide.

    Also the 25% royalty has to be rethought as it does not take into the account the enormous savings publishers will have in the ebook business. Right know the 25% of the ebook royalties when calculated against what the publisher makes is lower than the hardcover royalty would give the author.

    On the mass market side it is a wash (based on paperback royalties today), with the author not getting anything more and the publisher doing very well in the ebook format.

    My next prediction is that publisher are going to try to control or prohibit use of the text in other products that are not ebooks. Many publishers I believe will attempt to say that as long as the book is on their server the book will be in print so there goes the copyright. All this has to be carefully thought out and it looks like it is going to fall to the literary agent in the industry to battle through the new landscaped.

    All of Trident embraces ebooks. It is a very exciting time.

    Robert Gottlieb
    Chairman
    Trident Media Group

    • Thanks for your thoughts, Robert.

      I am not as concerned about piracy as you appear to be, partly because I
      don't think it has been proven that it cuts into sales (nearly as much as
      used books do, for example, and lower-priced ebooks are a great antidote to
      that!), but also because I'm not sure what — beyond vigilance and take-down
      notices — publishers (or authors) can do about it.

      I agree completely that the 25% of net royalty is only a marker along the
      way. As the ebook market share grows, the higher royalties paid by services
      (Smashwords gives the c/r owner *85 percent*) or by smaller publishers are
      going to be tempting, leaving only the big advance as leverage for the major
      publishers to encourage acceptance of the royalty rate. I'd say that as
      ebook sales go up, so will the standard ebook royalty.

      Mike

      • robertgottlieb

        Hello Mike,

        I suggest you sit down with John Sargent of Macmillan or David Young of Hachette and hear what they have to say on the matter. They view the piracy as critical and are now seeing it cut into book sales and they are in the think of it. There are strategies that publishers can begin to employ including getting the federal government involved as they did in China with intellectual property.

        The piracy issue is also connected to every's wish to rush ebooks out at initial publication. I warned publishers about this issue.

        My concern as an agent is for the author.

        The key is not only going after the sites but also working with the government in developing laws that make website who pirate pay heavily in fines.

        Robert Gottlieb
        Trident Media Group
        http://www.tridentmediagroup.com

      • Robert,

        If the “solution” to the problem is getting laws passed and having the
        government strongarm people on the net, then I fear a) you have a long wait
        and b) you have no solution.

        I am fully aware of Sargent's and Young's position and, much as I respect
        them both as great publishing leaders, I still disagree with them on this
        question. Piracy is definitely an issue for the biggest authors (the ones
        that concern you and them the most.) It is not a problem — it might even be
        helpful — to authors further down the food chain. And although you don't
        have stats and I don't have stats that can prove either of us right or
        wrong, I am pretty certain that used books are a bigger corrosive factor for
        big authors than ebook piracy and it is likely to stay that way for a while.

        Why not get Congress to pass laws giving authors a share of the “secondary”
        book market? *That* would actually do more good than legislating against
        piracy. (And it has an equal chance of passage: very, very slim.)

        Mike

      • robertgottlieb

        Hello Again Mike,

        The secondary book market (used books) is a small one by comparison. Most hardcover sales take place soon after publication then the work goes into another format. Hardcover is where the margins are for authors and publishers. Once a book is in the cheaper formats than it is more a matter of taste. Often times a used book costs more than a paper format.

        The two heads of major publishing companies I mentioned above whose experience with pirating is shared with all the major houses. There is unity among all the major publishing houses on this issue. It is not a “bestseller” issue. It is a macro publishing issue.

        The one of the major differences between the used book market and piracy is that an ebook is simply a “click” away. I know how strongly you feel about ebook world but as I have said many times copyright has to be honored and respected. Intellectual Property is a major part of the economy of the U.S. and it's exports. We are the leader in creating intellectual property around the world. Piracy is no different then walking into Barnes and Noble and picking the book you like up and walking out of the store without paying for it.

        As I have said many times Trident embraces the ebook format. It is good authors, publishers and for book buyers.

        Robert Gottlieb
        Trident Media Group
        http://www.tridentmediagroup.com

      • Robert,

        With all due respect, we (and you) have no clear idea how big the used book
        market is, unless Amazon is telling you things that they're not telling
        anybody else that I know of in the industry. I don't know anybody who does.

        And I fully understand the major publishers' position on piracy (although
        two C-level execs at Big Six companies have told me that they think a) it
        isn't that big a problem and b) there isn't anything practical they can do
        about it, which is my position.) I just don't agree with it. Data on what
        sales this is actually costing is paltry, just about non-existant. We know
        how many files are available for download, but we have no measured impact on
        what it's costing. None.

        Mike

      • robertgottlieb

        Hello again Mike,

        In the beginning the cost to the music industry was also “paltry”. The facts of what occured are clear for all businesses involved with IP.

        The second hand book market is a small one as I said above. The front list consists of as much as 70% of a publishers revenue. That is where the ebook piracy will cut deep as time goes on. Piracy, not used books will also eventually cut deep into the back list as well as it did in the music business. The vast marjority of book buyers do not purchase used books (Amazon believes it is more a service than a business generator. As I said piracy strikes at the heart of American economic interests both at home and around the world in an every competitive market place.

        Robert Gottlieb
        Chairman
        Trident Media Group
        http://www.tridentmediagroup.com

      • What killed the music business was two things, one of which plays into
        piracy, but not precisely. The main thing was that the record companies
        insisted on selling albums when people's unit of appreciation was the song.
        And the second thing was that iPods came out when most people had full
        libraries of “gold masters” — CDs that could be instantly ripped into their
        iPods. That's piracy, sort of, and it was facilitated by the record
        companies not thinking ahead when they didn't put DRM on their CDs starting
        in the 1980s. But comparisons to the book business, frankly, are beyond
        tenuous.

        I don't know how you know what Amazon's sales numbers or attitude toward
        used book sales is. I know that they participated in an industry study of
        this with BISG a few years ago but refused to do so again. They pretty
        clearly don't want publishers and authors to really know what those used
        book numbers are. Maybe you do, but I've never met anybody else who doesn't
        work for Amazon who claims that they do. And I know at least one major Big
        Six CEO who thinks this is a big, if unquantified problem.

        But the sales erosion from ebooks is also unquantified and, frankly, no
        matter how many times you or Sargent or Young say it is killing us, for me
        it's no substitute for serious study of pirating and what the sales impact
        of piracy is. There has been some work in this area (mainly done by Brian
        O'Leary), but none of it has been done by major publishers that I'm aware
        of.

        Mike

      • robertgottlieb

        Hi Mike,

        You and I can agree to disagree. What tanked the music business is free music that people no longer wanted to pay for.

        As I said before Amazon's sales of used books has very little impact on the publishing industry. Take it from some one who has been in the business for 35 years and knows interacts with the top players year after year. Including players on the retail side of the matter.

        I trust what I am hearing from the heads of all the publishing and media companies around the world. Major players have set in motion substantial efforts to fight piracy. They are not boxing at shadows.

        When I was a member of the Board of Directors of the William Morris Agency I and my colleagues were witness to what piracy was doing to the music industry along with the economic impact it had our the agency's music clients.

        Every act of piracy is money taken away from authors and publishers. I know I am on the right side of history on this one.

        Robert Gottlieb
        Chairman
        Trident Media Group
        http://www.tridentmediagroup.com

      • Hey Robert, I agree with your first sentence! But, just so you know, I have
        been in the book business for even more than 35 years (could be almost 50,
        depending on how you measure it!); I have had retailers and wholesalers as
        clients, as well as most of the industry standards bodies and sales
        measurement operations and major and minor publishers, and I talk to a few
        key decision-makers every once in a while myself. So whatever the merits or
        truth to either of our positions, somebody will have to choose between them
        on some basis other than years of experience or access to information
        because both of us have plenty of both of them.

        Unfortunately, I don't think there's any data available to support either of
        us on ebooks and the data on used books is closely held by a party with a
        very clear interest in keeping it that way, *particularly* if the data were
        to show it wasn't good for authors and publishers!

        Mike

      • brian03

        So-called piracy in the music industry is now proven to be a non-issue. Some statistics:

        — music files make up only 10% of peer-sharing

        — peer-sharers spend £77 per annum on average on retail music

        — non-peer-sharers spend only £44 pa on average on retail music

        — self-published music podcasts attract millions of listeners

        For example, Above & Beyond and their freemium Trance Around The World podcast attracts over 21 million listeners EACH WEEK. They then make very useful and large income from on-demand CD sales, on-demand merchandise and hugely successful live tours and concert/festival appearances.

      • Don't know where your stats come from but I do know there a many reasons
        why, whatever the level of piracy is for music, it is bound to be much lower
        for books. A friend of mine at a UK publisher involved with digital issues
        used to work in the music business. She told me, “I don't worry about pirate
        sites in the book business. In the music business, my market was kids and
        they were find going to pirate sites to get music free. Most of my customers
        now are 53-year old ladies. They wouldn't go to a pirate site; they'd be
        afraid to get a virus!”

        Mike

      • brian03

        Hi Mike, here are a couple of useful references for the various follies of the music labels, which I hope the major book publishers do not adopt:

        http://news.cnet.com/8301-31001_3-20002175-261….

        http://www.p2pnet.net/story/37993

        http://blog.seattlepi.com/people/archives/20131

        The last is astonishing – a multi-million-dollar musician walking away from music because of record label bureaucracy:

        “I just feel like the industry is so contrived and political right now. If people stepped away and said, 'We're not going to work like this, it's more about our art than the politics …”

      • Thanks for this, Brian, although I personally wouldn't read too much into
        the conclusions of a 17-year old who is rich and successful enough to eschew
        revenue streams that aspiring musicians couldn't afford to pass up.

        Mike

      • brian03

        I would advise reading A LOT into those conclusions. Her father is a very successful musician, as is her brother. And, don't forget, she has 12 years of very intense involvement in the music/tv/movie industries.

      • Point taken.

        Mike

      • robertgottlieb

        People who steel are not going to tell everyone they do it.

        If file sharing is as low as you say the big music companies would not have made a major attemp to stop it over ten years ago. Now as far as today goes the damage has been done and the valuations of music companies relfect that fact.

        Live tours and such are once source of income. The CD's that are sold through normal retail outlets have been badly hurt. Major music companies such as EMI and other have been damaged badly. These record companies historically have supported new acts. That is not to say they are the only means for new acts to emerage but they were a major source from Motown to EMI.

        My suggestion is that you look at the over all industry and where it is today as a result of piracy and file sharing which began over a decade ago.

        RG

      • We can all choose our evidence and conclusions, but you seem to want it both
        ways. On the one hand, you cite all the efforts the music business made to
        halt piracy as evidence of the damage that it caused. But you don't see the
        same thing as evidence of the futility of such efforts.

        In any case, I (and others) have written repeatedly on the great
        dissimilarities between the book business and the music business. Any
        argument that cites the music business without taking account of the vast
        differences between the challenges of the two industries is not very
        persuasive to me. As I said pretty emphatically on this blog over a year
        ago:

        http://www.idealog.com/blog/the-book-business-a

        But there may be other people reading this exchange that have a different
        opinion. I am looking forward to somebody else taking your side of this
        discussion; that is, is there anybody else out there that think that piracy
        is a big threat to publishers and that publishers should be working harder
        and more aggressively to combat it?

        Mike

      • brian03

        Sorry Robert but the real causes of music decline are financial. The labels chose supermarkets and maximising the top 40. The process meant:

        — overloading the charts with endless catchy soundalikes

        — flooding the advertising with non-stop exposure of the top 40 only

        — marginalizing and squeezing indie musicians and indie record shops into dark corners

        Now, of course, the major music earners are split between TV reality show winners and runners-up, plus whoever the labels are pushing.

        But, and it's a big BUT, the music industry as a whole is MAKING BIG PROFITS. The difference is that much more money goes to the musicians, not the labels.

        Second, and it's also a huge second, Apple iTunes and Amazon have made such an impact because the selection process is CUSTOMER LED. You cannot compare Motown and EMI of 20 years ago with the labels of today.

        50 years ago, 40, 30 20 years ago, we ALL shared music. We went to each other's houses with our vinyl or cassettes or CDs and shared the listening. We shared the listening at parties, at school, in cars. Millions of us copied our LPs to cassettes so we could listen in the car or on a Walkman. So ALL the others in the car or room or event could hear each other's music faves and raves.

        Which is no different to buying a book and lending it to family and friends. Would you like to outlaw that practice too?

        MySpace, Facebook and Twitter have enabled thousands of musicians, worldwide, to receive recognition and income, well away from the major labels. Orianthi, Florence & The Machine, 50 percent of metal bands, 90 percent of dance and trance. All are making good money, some are making stellar money.

      • For my part, thanks for the education, Brian. My post didn't entertain any
        of this.

        But it misses one big point that book publishers better take on board. The
        biggest value that record companies gave artists pre-2000 was that they
        could take their music and make it really available to customers by putting
        it on store shelves. When availability no longer depended on that, it also
        no longer depended on CD manufacture, sales forces, and capital-intensive
        distribution. That meant that paying the “overhead” for record companies
        wasn't attractive to artists or consumers anymore. Or necessary.

        And really, I think that's the key.

        Mike

      • jerryhalberstadt

        Mike, Hi!

        Can you at some point clarify what the various new schemes for compensating authors really mean? When a publisher offers to pay an author say, a 50:50 split of the profits, how is that computed? Do they really mean net income=profits? Do they compute all their costs, then there are no profits until they reach breakeven. I confess to confusion!

      • Income and profit are synonyms in accounting, and in most contracts. Net receipts or net revenue is the way to describe the money coming in, before expenses are paid.

        Whatever words you use in your contract, it's critical, in my experience that they should be carefully defined.

      • Seeing Marion Gropen's response, with which I basically agree (particularly:
        define your terms!), made me realize I had never answered this, Jerry.

        A split of “profits” has to be defined for each instance. What will be an
        allowable expense deduction is not self-evident or standard. This is not the
        same kind of “dodge” that it is in the movie business, where “net profits”
        have long been part of compensation and long been trickily accounted in the
        favor of the producers. Profit-sharing is relatively new to publishing and,
        in the cases where it has been done (notably, HarperStudio under Bob
        Miller), the chargeable expenses have, as far as I know (not having seen the
        contracts) been stipulated very clearly.

        Mike

    • brian03

      We now find that virtually all the alleged figures about piracy and loss of revenue are false! Including FBI figures and various other Govt bodies.

      US government finally admits most piracy estimates are bogus, By Nate Anderson |Ars Technica

      Full story here: http://bit.ly/bq29W6

      • But not to overstate the evidence or conclusions contained in this link, the
        article ends with this:

        *None of this is to say that piracy and counterfeiting aren't real problems.
        The GAO accepts that the problem is “sizeable,” but it also points out just
        how much bad data is used to produce these studies. Actual dollar figures
        and job loss numbers should be handled with extreme care and a good bit of
        skepticism; the GAO also noted that numerous experts told it that “there
        were positive effects [from piracy on the economy] and they should be
        assessed as well.”**
        *
        What this article demonstrates is that the true impact of piracy is very
        hard to measure on the overall economy. I'd say it is even harder to measure
        the effect on a particular piece of intellectual property. I would still
        maintain that it hurts the most popular property and probably helps others
        that are less popular by helping spread the word. But that's a guess. I just
        wish everybody else opining on this subject would admit that they're
        guessing too.

        Mike

  • Andrew Malkin

    Mike,

    It is as enjoyable to read your post as it is to see who is vocal and participating in the comments stream! Nice to see those from my old Knopf account in CT, Just Books, as well as Robert Gottlieb from Trident (Vook-like partnership certainly could work for my employer, Zinio, as well).

    I think your #1 point is appropriately at the top of the heap. As for #4, I'd like to point out that publishers who work with Zinio get all consumer data for their sales and readership reporting to track readership and engagement (external links clicked, zoom, send to a friend, etc) which makes us unique as an intermediary and one that can sell (now) globally and restrict/honor territoriality across platforms/devices.

    And that issue of The Economist you reference citing Carolyn Reidy(excellent article–thanks for sharing) is available digitally through us in partnership with Pearson.

    Best,

    Andrew

    • Thanks, Andrew. Useful info.

      I guess I should say here that our client, Copia, will also be sharing data
      with publishers as completely as they can. I can see this becoming a more
      and more important and sometimes contentious point as we all go forward.

      Mike

  • Marty Ingles

    Mike, in the same article, PricewaterhouseCoopers says ebook only 6% in 2013 (three years). Who's right?

    • Partly they're wrong. Partly it's apples and oranges. Let me explain what
      they are.

      The apple, which is my number, is “what percentage of the sales of a new
      novel I publish after Election Day, 2012 would I expect to be electronic.”
      I'm saying that number is 20-25%.

      The orange, which actually was both Carolyn Reidy's original number and what
      Pricewaterhouse Coopers is forecasting,is “what percentage of a publisher's
      revenue will be electronic in 2013.” And since my number only applies to a
      subset of the books — although the biggest and more important subset in
      revenue, public attention, and bookstore sales — you would expect the
      house's revenue number to be lower than 20-25% because a) some books aren't
      made into ebooks; b) others may be but don't work as well on as many devices
      because they require print or color; c) ebooks tend to be cheaper which
      matters when you're talking dollar revenue (orange), not when you're talking
      units sold (apple.)

      That difference means that Reidy's 20-25% in 3-to-5 years (orange) is even
      closer to my 20-25% in 2-1/2 years (apple) than it might initially appear.
      The other executive I talked to was saying “no more than 15%”, but he was
      talking “orange.”

      I feel even more confident of this prediction having had my iPad for two
      days. A lot of people are going to discover books through the iPad. It isn't
      the best thing if what you want is an eReader — it's too heavy. But in a
      way that's better because it means that a LOT of people who buy it aren't
      book readers now and there will be lots of ways to promote to them through
      other content in the device now that there's a point to doing that.

      Mike

  • I found the blog somewhat instructive, but as a self-published author who does pay attention to quality and tries to make my books available to everyone I take umbrage with those who “won't buy a self-published or small press book, ever just on general principles”. The fact is that these people are in the minority, since most readers don't care where the book comes from as long as it is affordable, and many of us authors who chose to self-publish in the first place did so because we recognized the series of barriers placed in our way, we are concerned about the number of dead trees consumed, and do pay attention to the growing demand for ebooks in the marketplace. The little to no inventory model has been a long time coming, since print on demand drastically lowers the costs associated with book publishing and marketing. But those who belittle us do so through ignorance. The law of supply and demand still holds sway no matter what kind of book it is; therefore the chaff will be safely removed and the better books will rise to the top. I have already been at the forefront of the new market and issue both printed and electronic books simultabeously. I also sell directly from my own site and Amazon. Since you won't find my books anywhere but online, I join the thousands of others trying to make a living from my work with my head held high after being ignored by the publishing houses for years.

    • Theresa, I am sure there will always be people who prefer brands they know.
      It's just the nature of things. But I'm sure there are also people who
      prefer to experiment with new things they didn't know. Over time, there will
      be crowd-sourced ways to move things from one to the other whereas today all
      the brands are based on legacy.

      Mike

  • Mike,

    As always an excellent thinking through of the issues here.

    To my mind you overplay 3 and I'd actually worry that the less mature digital market in the UK might actually create problems for UK based publishers, something I've been thinking about recently.

    Also I think you underplay 7 which I thing has a very strong potential to reshape publishing companies significantly and force radical and unpleasant change on them. But perhaps I'm too negative in those view, perhaps publishers can retool as suppliers of editorial and design services to self-publishers, somehow I don't think so though.

    Lastly, love your comment exchange with Robert Gottlieb. Most enjoyable exchange in a while. And to my mind, I'm with your view.

    All the best,
    Eoin

    • Eoin; always nice to hear from you.

      I don't think it will matter how mature or immature the UK market is in
      2013. Any UK (or Irish or Australian or French, for that matter) publisher
      with a book that can appeal in the US market and the ability to reach it
      through online promotion (which will be the lion's share of the promotion
      potential) won't need to sell US rights or make a substantial investment to
      sell at half the market without leaving their office. How much advantage
      will be taken of this opportunity will vary, but it will become a very
      consequential fact.

      And I agree that publishers will find it hard to sell editorial and design
      services to smaller publishers. Those things don't scale. You don't hire a
      company to get a job done by one person when lots of fully qualified people
      are available freelance.

      Thanks for the observation on the dialogue with Robert Gottlieb. He speaks
      from the pinnacle, truly. I think his perspective is much more valid from
      the point of view of the very top half-of-one percent of the authors than it
      is for everybody else. And that is his perspective.

      Mike

  • chris

    Great post as usual, Mike. You’re always on the money with this stuff.

    As an overseas-based wannabe fiction self-publisher I think the new publishing paradigm is a godsend. I’ve played in the traditional print/distributor/retailer sand-pit with a magazine title several years ago and it was akin to drowning in financial quick sand. I don’t want to repeat it.

    Thankfully, this new model changes the game dramatically. What do I need to succeed in this landscape?

    1. A killer book (the biggest problem)
    2. A low-cost distribution network … without needing an actual distributor! (Oh, what joy!)
    3. Access to global buyers instantly (US, UK etc)
    4. Marketing and publicity (social media word-of-mouth will rule.)
    5. No returns!!! (More joy)
    6. Immediate payment (I’m ecstatic now)
    7. Some analytics: sales figures, geo-location

    After all this I can now assess whether my title warrants a print run. The ebook play should have provided the perfect proving ground for the big game. You know the one, apparently it will account for 75% of sales in 2012 🙂

    Any downside here with this ebook stuff?

    Piracy?

    Nope. Forget piracy. It’s a non issue. You can’t stop it, so don’t try. Just monetize it. If publishers are going to persist with discussing this piracy issue then … well, whatever.

    How about being tied to Apple, Amazon, Smashwords, Lulu or whoever the hell else wants to skim percentages to recreate the urban retail arena online? You know what, fellas, I don’t want to give up 30% to you?! No one does. Surprise, surprise!

    Personally, I’d happily sacrifice half of what would have been my traditional print run costs to build a dedicated web app so I can back door the iPad. I’ll also happily include the PDF, epub and kindle extensions in the sale bundle so I can access all the other reading devices.

    To succeed I need an editor, a designer, and some serious writing chops.

    I need direct contact with the consumer. I need lower prices on titles but 100% of that price.

    I don’t need the agency model.

    And guess what? There’s hundreds of thousands of other writers who are in need of the same thing.

    • I actually don't buy the idea that aggregators aren't worth anything. Even
      James Patterson would lose sales if he weren't available on Amazon or in
      Barnes & Noble. Every place you're on sale adds value. I won't argue one
      percentage versus another; the configuration of “ideal” ebook distribution
      isn't clear yet. But except for that, I think you express a pretty cogent
      view of what can be done in the pretty near future. I'd just say you need
      “contact with the consumer”; don't worry about whether it is “direct” or
      not. But put something in your ebook (and in your print version, for that
      matter) that encourages it to be direct in the future, whether it started
      that way or not.

      Mike

      • chris

        Don't get me wrong, Mike, the problem is that the aggregators ARE in fact worth everything. I’m obviously meaning Amazon and, of course, now Apple. They have the eyeballs, they also have the ‘Bestseller’ trigger lists, not to mention the trusted sales platforms… and and and, the benefits go on.

        Authors need that exposure and, as you suggested, many other outlets of exposure to succeed. But we’re now heading back into the old school publishing model again with this talk – powerful distributors, dominant retailers.

        In the long term, maybe it will be the ‘push’ of social media that drives the new distribution model. Anyone who uses twitter to follow their peers will surely be aware of the decline of Google search in their lives.

        Currently authors can sense a collapsing structure: publisher + author = self-pub, distributor + retailer = online retailer.

        The smart players with the best work, tallest platforms and biggest social network will collapse it still further.

        Sure, such authors would be wise to cough up the commission on an initial sale from the retailers in an attempt to lure outside consumers to the source but the faithful will come from their own sub-culture.

        Perhaps, outside of the bestseller lists, it will all simply become a case of micro-marketing.

        I dunno, I’m just spit-balling here.

        At any rate, please feel free to forward me the road map to future publishing success. Or, write an ebook and I’ll buy it off you … that is, if I can’t download the pirated version anywhere!

        Cheers
        Chris

      • It's a hybrid, Chris. The answer for many things Internet — including this
        — is *all* of the above.

        Mike

      • paulstory

        I've been reading your blog for some time, Mike. It is good to see someone with your experience in the traditional publishing world mix that experience with acumen to tell it how it is.

        There are a lot of motivated writers out there, by their nature creative – and they are thinking hard about what they can do to affect change. While large corporations hold the keys for now, their drivers should not be suckered into thinking that the systems, channels and devices coming online at the moment are the same ones that will be there in five years time. Progression is unlikely to be linear. There are people out there who think different. The mix of technology and those people will blindside us with something new and unexpected. I can think of one way at least, that a coalition of authors could cut the legs from all the arguments to date and produce an industry vastly different to the one we think is heading our way. I doubt it will happen (it needs a leader) but I do believe that something unexpected and big will. This is how publishers should be thinking and years ago, before the LIBRIé was born, they should have united to build the digital channels that now hold them to ransom.

        As an author, I have an appreciation for what they can do (I once did not). I want to write and for someone else to take care of business. I want a healthy industry and hope that the powers are listening to voices like yours and that they are also bringing in people with fresh ideas – not just smart people able to make hay now, but quirky innovators, radical thinkers, able to build new industries from scratch. All this before another bolt hits them hard as it's fired from under the floorboards.

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  • I agree with you that there will be significant disruption. Another thing that may come out of this: less access for smaller presses to the bookstores (that survive) because of the demise of many of the remaining distributors.

    As more and more of the market shifts on-line, and away from print, there may not be enough volume remaining to yield the economies of scale that the distributors must have in order to remain viable.

    Or maybe not. I can think of a couple of strategies that might let them cope, and if I can, I'm sure that they have done so, too.

    Regardless, this was a post that improved my ability to help my clients, and that's one reason I like to read your blog. Thanks for sharing your wisdom.

    • Marion, I think the distribution business just consolidates. We'll have
      fewer warehouses and fewer sales reps to call on fewer bookstores, with each
      of the warehouses and reps responsible for more titles. I guess each
      bookstore will be responsible for more “skips”.

      I'm glad you find the blog helpful. Helping is what we try to do here…

      Mike

      • That has been the pattern to date, but I suspect that there's a limit to that strategy. (At some point, we run out of distributors!)

        Already, the economics demand that distributors exclude the vast majority of the 100,000 micro presses around. When I first started in this business (in the 80s), most of the small presses could do trade books, and could get some kind of distribution, as long as they put out quality books. That's not necessarily true in these days, and may become less so when the next consolidation happens.

        Obviously, many (most?) of the current micro-presses aren't producing books that would work well in bookstores. But some are.

        As the marketplace barriers to entry drop here, that number should be able to reach more readers, which may produce an opportunity for the threatened distributors. They will be able to cherry pick those publishers, and that may be another strategy that could help the distribution network keep its volume up. We can hope, anyway.

      • Ultimately, the distributors depend on accounts, not publishers. As there
        are fewer of them, the situation gets tougher. It is much harder for the
        distributors to add value for digital distribution. Or so it looks from
        here.

        Mike

      • I agree with that, as well. But, if you don't have product, you can't sell to what customers you have. And distributors now are making a lot of their sales to chains and Ingram, because they don't want to deal with the smaller presses. That won't disappear, and may actually increase, to the extent that there are any bookstores still around.

        I also agree that there's not nearly as much value to add to digital distribution. Although, come to think of it, look at the iBookstore. They don't want to deal with anyone except an aggregator. And the aggregators are being given the responsibility of seeing that the ebook files meet formatting standards.

      • Marion, my own hunch is that the iBook store is going to have to reconsider
        their policy or they're going to just get blown away by Kindle, Kobo, and
        newcomers like Copia that will put forth the effort and staff necessary to
        pile on titles. As my post showed, Kindle is still leading the pack on title
        selection by a mammoth margin. That's the most important metric to track to
        predict consumer satisfaction with the shopping experience. iBookstore can
        get away with this for a little while because they're new, but since anybody
        with an iPhone or iPad can shop Kindle, it isn't going to work for them for
        very long.

        Mike

  • John wicker

    Hi Mike…

    I agree with your premise that once eBook sales hit 20% the publishing system(s) as we know it will break down but I think you and Michael Stackpole are a bit aggressive on timing to assume this point will be reached by 2012.
    An enormous amount of evidence both quantitative and anecdotal plus personal experience suggests that people are very bad at forecasting. This is largely because as a species we all tend to be massively overconfident about the future even though we know it is uncertain. This is particularly true in relation to technological change which happens much faster than we can imagine but slower than we expect. The distinction being that when technology is theoretical (imagined) no one seriously predicts it impacting our lives (e.g. cell phones aka communicators on Star Trek) but once the technology becomes real we assume(expect) that it will be immediately adopted and deployed.
    Prognosticators of technological change frequently fail however to take account of the time and costs required to practically (profitably) implement (deploy) these new technologies and the natural resistance to change in buyer behavior.
    Of course our view of other people’s forecasts is usually that anyone predicting a slower rate of change is an uninformed idiot and anyone predicting a faster rate of change than you is a maniac.
    So instead of attempting to predict using my personal Ouija board I will provide some simple math to help identify the digital tipping point i.e. the point at which over 20% of a publisher’s revenue will be from digital sales. My personal recommendation is that each publisher decides their own “math” because the larger market questions are less important than the personal survival questions.
    So if it’s true that the digital tipping point is coming then deciding when that will be for your organization and how you will manage through it is the single most important thing you can do.
    Statistics in publishing are freely available but notoriously weak with regard to auditability and “currency”. I will for the purposes of this analysis use what is perhaps the most reliable (which should not be confused with accurate) source available provided by the BISG (Book Industry Study Group) and specifically their latest report 2009 edition of Book Industry TRENDS which states “Total U.S. book publishers' net revenues reached $40.32 billion in 2008…while unit sales reached nearly 3.1 billion”. I appreciate that these statistics beg a number of questions such as what makes up the sales (domestic versus international, fiction versus non fiction etc) and what outlets are included and what the ultimate price of the books are (since the BISG numbers are NET publisher revenues) but my thesis is not materially impacted by the specifics so I will ignore the details for now.
    I think it’s fair to assume that these numbers haven’t changed much in the last 2 years and lets assume that eBook sale will constitute 2% of this number or $800,000,000 by the end of 2010 (this would be about a 100% increase from 2009).
    Lets also assume that most (90+%) of people have some sort of device on which they could read an ebook (computer, phone,e-reader) and that 10% of the population (3,000,000) will have a dedicated e-reader (Kindle, Nook, iPad, Sony etc.) by the end of this year (2010) and that that market will grow by 100 % per year for the next 5 years ( I find it hard to imagine higher compound growth rates when units are typically $300+ or the price of say 20 average books before you buy the eBook version but if you disagree then make the change in your personal calculation).
    This would say that by 2015 10% of the US population will have a dedicated eBook reader and by 2020 half the US population will have one which by then will probably cost under $100.00. This could mean that 20%+ of the books sold were for e-readers by 2015 since the buyers of e-readers are more likely to be heavy buyers of books and only about half the population (according to Bowker) buy books .
    So if I were a publisher I would be focusing a lot of attention on how the math might work for my business and how I was going to transform by business to a digital workflow producing digital first books in less than five years i.e. before 2015 since if I don’t I could be in very serious trouble. I would respectfully suggest that publishers identify NOW how they will remove 10% from their cost base every year for the next 5 years so that they have some ability to finance the transition. Hint: Step 1 get out of physical distribution unless you are really good at it which most publishers are not and give the problem to Ingram or some other reliable distributor.

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  • I read ebooks and review them for Booktaste but still enjoy treating myself to a $40 print book if it is by a favourite author. Print-on-demand is the future for physical bookshops. There is massive cost saving (and profit) available to publishers who circulate digital files ready for the bookseller to print on demand.

    • There are a handful of bookshops trying print-on-demand with the Espresso
      machine; others, of course, use it on a day's delay by order books from
      Lightning.

      But it is a long way from a magic bullet. The delivery cost of a POD book is
      somewhat higher than a press run edition. Working out the economics is
      complicated. And printing in store has real logistical challenges for
      surges. If it takes five minutes to make the book, that's fine — if there
      aren't six people ahead of you on line during your lunch hour!

      But, all in all, I think POD, instore and not, will be part of what forces a
      big change in publishing economics, away from press runs and away from
      returns, in the next few years.

      Mike

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  • Cecilie N

    Hi Mike

    Speaking for myself, I like to order my books direct from the publisher and have done so many times over the last couple of years. Perhaps it gives me a feeling of a more direct relationship with the publisher. The books always arrive sooner than they would if I ordered them through a retailer and I appreciate that too.

    • Of course, you don't actually *know* if the books arrive sooner than they
      would from a retailer because you always order from the publisher and, in
      any case, wouldn't order the same book both ways just to see how fast each
      delivered. I suspect your experience is unusual in many respects. Most
      people prefer ordering from retailers for many reasons, not the least of
      which being that they don't usually know who the publisher is even if they
      already know what book they want.

      Genre readers are different. People who order a lot of romance books might
      have direct relationships with a number of publishers in that space. That's
      one of the advantages of being a genre (niche) publisher.

      Mike

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  • Jonathan Littman

    Love your thoughts about increasing momentum as all things e-books. Thanks for your great work. As an author of several books I find that you are one of the guiding lights in this new world. I recently discovered that I fortunately control e-rights to two books published with major publishers (my father is an an attorney and we always struck out clauses when we could).

    Question is who do you see as good in e-publishing? Who are the upstarts. Are any majors publishers any good. Curious as to your thoughts.

    Thanks and keep up the good work!

    • Jonathan, if I were you I'd check in with Bookmasters (who are a client.)
      You might also investigate O'Reilly Media. I doubt any of the major
      publishers will want to handle ebook distribution alone for you, but you
      might check the distributors Perseus and National Book Network as well.

      I don't have any opinions about quality of ebook distribution. I actually
      think it is a bit early to make that determination.

      Mike

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