The Shatzkin Files


Some brief comment on news items from this week


Wiley announced a few months ago that they wanted to sell some of their most consumer-oriented lines of books (although, as Cader makes clear, what they announced they wanted to sell constituted only about 20% of the sales volume of the division that houses these titles.) The first sale under that initiative was announced this week: Google bought the Frommer’s travel books for a price apparently somewhere between $23 million and $25 million.

Google had previously purchased the Zagat’s guide business, and the Frommer’s acquisition was (properly) seen as part of Google’s effort to ratchet up its content for travel and for local searches. Attention has been focused on whether they would continue to publish the books (they say they will for now, but plan to reassess) and whether this means publishers should now worry that Google will become a competitor.

Another common, and accurate, observation is that this transfer signals a shift to a different monetization model for content, from selling packaged bundles like books (or ebooks) to delivering nuggets of information at the point of need.

But there’s one relevant observation I haven’t seen, at least so far. Wiley’s Frommer’s travel line is one of two, to my knowledge, that has created a real B2B content-selling business. (The other one is Random House’s Fodor’s travel line.) Indeed, the New York Times, in their story about the transaction concluded with this:

Google also declined to comment on what will happen with companies that have worked with Frommer’s to show its reviews, including Kayak and The New York Times, which licenses destination-related content from Frommer’s for its Web site on an annual basis.

There are two possibilities here and I don’t know Google well enough to predict with confidence which one is right. One is that they like the model of licensing content to websites, will continue it with Frommer’s, and will learn from it to extend it to other businesses somehow. The other — which intuitively seems less likely — is that they are happy with their already-developed model of being the key aggregator of dispersed content and would prefer that this content be found through general search or through the many tools they provide sites to provide customized Google search on their sites. If that’s the case, perhaps they’d unplug those deals as contracts allow.

If the former is true, Google might create opportunities for other companies to syndicate content without building the infrastructure to do it. If the latter is the strategy, then an opening just got created for one or more of the other travel brands to pitch Kayak and The New York Times and all other Frommer’s customers on replacement content. So there will be a few players watching developments here very closely (or maybe they already know the answer).

************

Also this week, Royalty Share CEO (and attorney) Bob Kohn filed an additional brief for Judge Cote to consider before she rules on the DoJ settlement with Hachette, Harper, and Simon & Schuster. Kohn’s brief is full of new information for those of us who aren’t lawyers (and perhaps for many who are who haven’t done as much homework as he has!)

New to me from reading Kohn’s paper:

1. Apparently, the law, as defined by the same court where this case is now (the 2d Circuit) in a ruling in 1981, defines pricing below marginal cost as “predatory pricing”, which is “presumptively illegal”.

2. Kohn interprets the Sherman Act to allow conduct that results in raising “illegally-low” prices.

3. The DoJ’s finding that Amazon’s pricing wasn’t predatory because the ebook unit was “consistently profitable” was inconsistent with the Court’s ruling in 1981.

And, for good measure, Kohn wants DoJ to turn over to the court (the linked article contains the whole Kohn brief) the evidence that led them to that conclusion. (I’m sure the whole industry would like to see that!)

Kohn is also urging the Judge to hold a hearing before ruling. He argues that to determine if the settlement “is in the public interest, it would be perverse if this decision were made without a public hearing.”

I find it hard to quarrel with his logic. I leave it to the lawyers to argue about his legal citations.

************

OK, this one isn’t really from this week. But here is a survey of published authors from the UK, which I discovered this week and found to be very interesting. Seems like they got something over 300 responses (as of these results) with most coming from authors who were published by big houses.

Most seemed quite happy with the development of their book: the editing, the cover, the presentation. They were less enthusiastic about the marketing efforts they saw on their behalf. But, all in all, I thought it spoke to pretty high satisfaction with the publishers, particularly when you consider the highly disproportionate effort the big publishers put into a very small number of books whose authors are mostly getting very large advances and whom I doubt would take time for a survey like this.

What I found really interesting, and counterintuitive, is that of those authors who expressed an opinion about whether they’d have a publisher in 5-10 years, they thought by about 4-to-1 that they would. But asked if they’d have an agent in that time span, the margin was only 2-to-1 that they would.

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  • http://www.facebook.com/harry.bingham1 Harry Bingham

    Interesting last comment. I was the guy who organized that survey, and I read the results a little differently from you.

    Publishers do very well on editorial / copyediting type issues – which is good, but not so comforting when you think that these are the pieces most easily outsourced to freelancers. When it comes to talent-management (that is, communicating with authors, asking for feedback, involving authors in decision-making), publishers seem to do very badly.

    Likewise, authors are deeply skeptical about publishers’ marketing efforts, even when the question deliberately draws attention to the inevitable cost constraints. Because I can filter the data to isolate, for example, high-advance type authors only, I can confirm that while those authors are less skeptical than the rest, they’re still hardly persuaded.

    What’s really weird to me is that no publisher has expressed any interest in looking at this data. 300+ authors who have published 1000+ books giving their view on the industry that sustains them? Why wouldn’t you want that info? Why wouldn’t it seem important, especially at this time of radical change?

    But it shouldn’t be a surprise. I’ve been an author for 12 years and 10+ books. Not once has a publisher asked me for feedback or comments on their performance. Something similar would be true of virtually every other author I know. And that is, when you think about it, a little odd, no?

    • http://idealog.com/blog Mike Shatzkin

      Of course, we can have different subjective evaluations of what the data actually mean(s), and you have the advantage of being able to filter it. But since I know how little individualized marketing attention most books get (whether from large houses or small), I was impressed with how relatively happy the authors were. And how many of them expected they’d continue to want a publisher 5 or 10 years from now.

      And while I’m not sure what any individual publisher could glean for themselves from the survey (so the fact that they haven’t come to you for more isn’t that surprising to me), I agree that — in this new era — publishers *should* be asking authors for feedback and responding to it. I think you’ll see that. I know at least one big house is developing an “author bill of rights”, which creates guidelines for the editors for how authors should be treated. I think we’ll see more of that too.

      Let’s remember just how new this new world is. And how hard it is to turn around a battleship, which these big companies are.

      Mike

  • http://twitter.com/WilliamOckhamTx William Ockham

    Kohn would be more convincing if he stopped making false claims in his briefs. For example:
    —This is important, because it is rarely true that an e-book, once sold to a consumer, can be read on “a variety of devices”; an e-book can only be read on the particular kind of device with which it was designed to interoperate…
    To read the Kindle-formatted e-book, the consumer would have to purchase a Kindle-compatible device——
    Kindle e-books are available only via the internet. Is there anyone in the U.S. who has internet access and doesn’t already own a device compatible with a free Kindle app? For all practical purposes, the answer is no. Kohn’s statement is egregiously false. All the major ebook vendors (Amazon, B&N, Kobo) make free apps for PCs and other devices.

    • http://idealog.com/blog Mike Shatzkin

      Splitting hairs. A Kindle ebook can’t be read on a Nook. Or vice-versa.
      I’m much more interested in whether it is indeed the court’s holding that selling below marginal cost is illegal.

      Aren’t you? Shouldn’t everybody?

      Mike

      • http://twitter.com/WilliamOckhamTx William Ockham

        The only thing that prevents you from reading a Kindle ebook on a Nook is DRM and that is a choice made by the publisher. The DRM also prevents you from reading a Kindle ebook on your Kindle if I bought it, so it isn’t about file formats

        Kindle files are easily converted to epub and vice versa. Or, if you want to handle it the hard way, you can convert you device to read the other format. For the Android devices, it is trivial to make them capable of reading both formats at the same time.

        This isn’t splitting hairs. Kohn based a major part of his argument on a falsehood. He knows or should have known that the judge in the case knows it is false. Kohn has been involved in the tech industry for a long time and I am not sure how something as basic as this has escaped his notice.

      • http://idealog.com/blog Mike Shatzkin

        You are missing Kohn’s point but you are determined not to get it. And you’re not interested in the predatory pricing part of his argument at all. Apparently.

        Ordinary citizens do not convert Mobi to epub or epub to Mobi, any more than they crack DRM. Although, of course, both can be done.

        Mike

      • Jared

        I don’t think he’s missing Kohn’s point about predatory pricing at all, Mike. What William is saying is that the predatory pricing argument is built upon a disingenuous foundation.

        Section 2b says:
        “Nor can it necessarily be read, as stated in the proposed Final Judgment, on “other electronic devices capable of visually displaying E-books.” For example, an e-book designed to operate on a Kindle has no use or value to a consumer who owns only a Nook device. To read the Kindle-formatted e-book, the consumer would have to purchase a Kindle-compatible device…”

        William’s point (and he can correct me if I’m wrong here) is that there is nothing inherent in the Kindle ebook format or structure that makes it unreadable by other devices (such as a record is unreadable by a tape player). A Kindle ebook is an HTML/CSS file. Those files are readable by all modern computers.

        There is nothing in the the file’s natural format (like a record’s) that makes it unable to be read by other devices. It is rather non-essential programming that disables the ability to make it readable elsewhere.

        Here’s another thing to consider: would this argument still be invoke-able if it had been Barnes & Noble instead of Amazon? When he starts off Section 2, he does say “Of all of the government decisions relevant to determining whether its conclusions are reasonable, clearly the most important concerns the
        definition and nature of the product at issue—e-books.” Not “Kindle ebooks,” but the general “ebooks.”
        ePubs are readable by basically every electronic device except for a Kindle. And that’s only because Amazon does not allow it to be read on their device.

        The argument in Sec. 2b assumes that it is the inherent nature of an ebook that it is locked into one platform. That is untrue. It is by the producer’s deliberate intent that it is locked into one platform. The switching costs invoked at the end are artificial.

        That’s what William was disagreeing with. (Again, correct me if I’m wrong, William.)

      • http://idealog.com/blog Mike Shatzkin

        The point of Kohn’s I’m arguing is being missed is that a Kindle device owner can’t readily read any ebook not bought from Amazon. And, Mobi-epub issues aside, I’d say that’s pretty much equally true for the owners of Nooks and Kobo devices. The argument that there are workarounds and exceptions for multi-format devices is an indication to me that the point is being missed.

        That aside, it is an entirely separate point and argument that Amazon has engaged in predatory pricing. There’s a lot going on here and there are a lot of points made by Kohn. Arguing about the definition of the terms for interoperability manages to ignore the central point Kohn made: this Court has prior holding that pricing below marginal cost (the price they’re paying the publisher for the book) is de facto predatory.

        If that’s true, it is NEWS which should be taken on board because nobody knew that before Kohn’s latest. Just trying to bring the focus back to what I think is most relevant and important.

        Mike

      • Jared

        “The point of Kohn’s I’m arguing is being missed is that a Kindle device owner can’t readily read any ebook not bought from Amazon. And, Mobi-epub issues aside, I’d say that’s pretty much equally true for the owners of Nooks and Kobo devices. The argument that there are workarounds and exceptions for multi-format devices is an indication to me that the point is being missed. ”

        This saddens me a little to read.

        You’re putting all of the blame on William. But, to me at least, it doesn’t seem like you’re actually acknowledging what he’s saying.

        “An ebook that has not been artificially restricted can be read on any modern computer, either natively or via freely available software.”

        That is what William is saying. The brief is implying that it is not true.

        For my own piece of mind, would you please state whether or not that you agree that the above quote is a true statement?

        Once you agree to that (and I’m going to assume that you will), then you have a problem in that Amazon does not alone control the DRM.

        http://bit.ly/OKitxu

        Publishers can force the removal of ebook DRM (a la Tor). But they don’t want to. Publishers have non-pricing power to end the platform lock-in. But they don’t.

        That strikes me as an “unclean hands” issue: Publishers encourage a situation that forces platform lock-in, then use said lock-in’s anti-competitive consequences to justify their later actions.

        Further, once you accept that it is artificial restrictions, then the entire system goods argument seems to be a bit off to me. Yes, you can not read an ebook without having had access to a computer (including tablets, ereaders, etc) at some point. But you can not have /purchased/ an ebook without a computer, either. So those that can purchase an ebook have demonstrated the ability to consume it.

        Yes, someone could buy an ebook for someone that doesn’t have a computer. But I can also buy you a book written in a language that you don’t understand. So, not sure where I stand on that part.

        Last thing is about competition: The Big Six could have gone the route of Baen and its associated publishers. They were not obligated to sell their ebooks on Amazon. This works in with the DRM. The publishers could have sold the ebooks on their own site (or with Baen) for their list price for a larger share and to work against the Amazon.com ebook market share.

        “Arguing about the definition of the terms for interoperability manages to ignore the central point Kohn made: this Court has prior holding that pricing below marginal cost (the price they’re paying the publisher for the book) is de facto predatory.”

        What William said is that the central point relies upon Sec. 2b, which is flawed. If the foundation is flawed, then you can not logically accept the reasoning that depends on it.

        Simple example: If A, then B. If B, then C.

        William is saying “A’s not true.” and you’re saying “Don’t look at A, C is the important part.”

        But, logically, if A, then C. You can’t separate them.

        “this Court has prior holding that pricing below marginal cost (the price they’re paying the publisher for the book) is de facto predatory”

        De facto? Not even Kohn is willing to say that, and he leaves out the qualifiers that were in the original decision (which bother me, but could be a legal brief tradition).

        The Northeastern case says “We agree with Areeda and Turner that in the general case at least, the relationship between a firm’s prices and its marginal costs provides the best single determinant of predatory pricing. Thus, prices below reasonably anticipated marginal cost will be presumed predatory, while prices above reasonably anticipated marginal cost will be presumed non-predatory.”

        What that’s saying is “We need a general rule and this is our best shot at one.” It is NOT saying “This is the threshold that will always be true,” which is what you said. There is a huge difference there.

        The section before that also says “Predatory pricing is difficult to distinguish from vigorous price competition. Inadvertently condemning such competition as an instance of predation will undoubtedly chill the very behavior the antitrust laws seek to promote.”

        The reason that I didn’t address the marginal cost issue is because I didn’t feel myself well-versed enough to.

        Things I don’t know:

        What was the relationship between ebook marginal loss and hardcover marginal loss? Were there ebooks sold at a loss while the paper copies were not? [These two are key to Kohn’s rebuttal that the mark-downs were legal loss leaders.]

        What is the relationship between total book sales and discounted ebook sales? Predatory pricing implies that it can drive one’s competitors out of business.

        How much of Amazon’s (total) book income is through KDP? Did a lack of similar self-publishing routes give Amazon a competitive edge? If they had had that, would they have been more resilient to the alleged predatory pricing?

        How were competitors’ revenue streams damaged by the mark-downs? Were they at all?

        Were 70% royalties through KDP common before the onset of the agency model. [Factual issue. Kohn compares wholesale to KDP, but I thought the 70% royalties were a response to agency.]

        Agency pricing was pushed two months after the 3G Nook came out. When did agency pricing discussions start? What kind of competition was there (normalize by ebook share year after agency pricing? today?) to Amazon? [Kohn says monopoly was maintained by illegal pricing, but today’s competitors weren’t around when agency pricing was discussed? The Broadcast Music reference kind of reads like requiring ]

        Related to previous, how much was the Sony ebook store selling when Kindle launched. There’s an issue here as to whether supply of goods drove the growth of the market. I don’t know if that’s a legal consideration, but it kind of bothers me.

        KDP not affected: Is that true? Amazon’s current policy is that they will knock down a KDP price to match the lowest price that their web crawlers find. How is that markedly different than knocking down the price to maintain a pricing advantage?

        Counter-factual: No proof given that agency model directly lead to the erosion of Amazon’s ebook market share. Correlation does not imply causation. Nook, iPad, all came out concurrently with agency pricing.

        “If that’s true, it is NEWS which should be taken on board because nobody knew that before Kohn’s latest. Just trying to bring the focus back to what I think is most relevant and important.”

        Two things about this.

        1) If no one knew about this before Kohn’s latest, I have trouble believing that it was discussed by publishers as justification for agency pricing. Guilt is, by my understanding of common law tradition, determined by illegal action and intent to commit the known-illegal action. Having a legal justification would mitigate the intent would have made it illegal and so it should have been the first thing they pulled out in their own defense.

        2) See previous comment about flawed foundation.

      • http://idealog.com/blog Mike Shatzkin

        I write these posts once for a much larger audience than read this deep into any comment string. I don’t have the time to respond to your thoughtful and informed response in the point-by-point fashion in which you made it. Some of what you say sharpens my statements about the law — like the use of the words de facto — which is always dangerous territory for me to stray into.

        I haven’t read all the briefs. I certainly haven’t participated in the discussions by the publishers discussing agency or this lawsuit about how to respond. But I have read a lot. The legal presumption and precedent about what selling below marginal cost means was entirely new to me. Maybe it wasn’t to a lot of people. It was to me.

        And marginal cost is very simple to understand. In this case, it means the price the retailer is paying is paying the publisher for the file.

        Maybe it would have been more effective and more useful to have left everything else out of the conversation. But if it is true that this IS the “general rule” because it was the Court’s “best shot at one”, then why are we changing it? And is this a reasonable case to change it for?

        I did myself a disservice by not restricting the original post to that simple point. That predatory pricing behavior, if that is what it was, precedes every other action by every other party in response to it. So it seems to me that *addressing* that behavior, and explaining *why* it is not predatory, is an essential pre-requisite to all the allegations that follow.
        I must say that your response is much stronger on every point than it is on this one. But it isn’t one of many. It is first and foremost.

        As for the statement that it would pain you for me not to subscribe to, I once again refer you to my prior response. Of course what he says is true. In fact, it is true even IF there is DRM applied. It’s all on a contiuum of technical complexity. Perhaps Kohn would also have been better of to be more focused in his arguments.

        Mike

  • Shaker

    The reported (though unconfirmed) value of the Google-Frommers deal was $25 million. Doesn’t that sound like an incredibly low number? Frommers is one of the top two or three guidebook imprints in the US, in terms of print sales. I believe it has a strong Spanish-language business as well. And it has been, like Lonely Planet, one of the earliest and biggest investors in digital media and, as Mike says, has a strong B2B business. By contrast, Google paid $151 million for Zagat (according to Google’s SEC filing), which is a much smaller business than Frommers. Could Wiley really have dumped Frommers for a token sum?

    • http://idealog.com/blog Mike Shatzkin

      There are a large number of good and complete travel book lines. It’s a shrinking business in print. I don’t watch this stuff carefully, but I think that the BBC is sorry about what they paid for Lonely Planet — a very good travel book line — a couple of years ago. I don’t know how many buyers there are out there for travel lines, but it would be a buyer’s market even if there’s another one or two. The seller has very little leverage.

      Mike

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