Apple

Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 

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The division of the consumer’s dollar across the publishing value chain has a history of change. When I came into the business 50 years ago, discounts from publishers to retailers often topped out at 44% and even wholesalers seldom got more than 48% off the retail price on hardcover books. Today discounts into the mid-50s for big retailers and for wholesalers are common.

The top royalty for authors was, as it is now, 15% of the retail price, but there were fewer exceptions allowing the royalty to be cut, contractually or in practice. Today “high discount” clauses, calling for a royalty of something less that 15% of retail (and sometimes a lot less than 15% of retail) will often apply to more than half of the sales the publisher makes. (It is also true that in those days the agent’s standard cut was 10%. The 50% increase they’ve achieved to 15% is the single biggest change in share in the past 50 years.)

Lower royalties subsidize higher discounts and higher discounts have subsidized price cuts to the consumer. Discounting off the publishers’ suggested price by the retailer was rare until the Crown Books chain, which had a meteoric tenure as a major retailer from the mid-1980s until the mid-1990s, made it a core component of their offering. The Barnes & Noble and Borders chains, which rose to prominence during the Crown decade, used the tactic, although less aggressively than Crown.

All of these numbers: the discount determining what the retailer will pay; the royalty calculated either as a percentage of the stated retail price (usually printed on the book) or of the net paid by the retailer on a high-discount sale; and the ultimate consumer price (whether what the publisher printed or lower if the retailer wants it lower) are based on the price the publisher sets and prints on the book in the first place. The informal internal formulas for setting the price have changed over the years too and, although it is a bit hard to really compare, it would appear that the markup over manufacturing cost has also risen steadily over the past 50 years.

So we had reached a point, somewhat before we had the Internet and Amazon.com, where, on big books at least, the publisher would charge a price higher than they expected the consumer to be charged, give the retailer a discount larger than many retailers would keep as margin, and state a percentage as the per-copy royalty in the main body of the contract that didn’t apply to most of the sales. One could say there was a “virtual” world in trade book publishing’s value chain before the term was applied to our new digital reality.

The core underlying point here — obvious but often ignored — is that the division of revenue across the value chain is never fixed. That’s important to remember as we consider how the ebook chain is shaping up. One hears authors and publishers arguing about what is the “fair” division of the ebook consumer’s dollar (as if “fair” had anything to do with it, which it doesn’t) and we have a very unsettled picture of what the retailer’s share of that dollar will be (even though Apple is doing its best to be definitive about it.)

Right now for ebooks we have two “standards” for the publisher-retailer division of revenue. For agency publishers across all retailers and for all publishers selling to (or perhaps we should, with respect for the agency logic, say “through”) Apple, the retailer share is 30% of the purchasing customer’s payment for the ebook, or the publisher’s “digital retail price”. For non-agency publishers selling to everybody else but Apple, the normal offer is 50% off the publishers “suggested retail price”. The DRP is set within boundaries basically set by Apple, primarily based on the price marked on the print version of the book. The SRP is the publisher’s own creation and has been at or close to the lowest-priced print version. The non-agency publishers who sell to Apple are obliged to have both: their DRP is the price Apple will charge (until and unless they’re undercut) and the SRP is the price that forms the basis of discounts to wholesale customers. I haven’t studied this but I think most publishers set SRPs higher than the break-even point because they want wholesale customers to go agency and would trade less revenue to achieve that, as they did when they switched over in the first place. (The publishers could set the SRP at a point where 50% of it equals 70% of the DRP, so their take is the same either way.) Theoretically, the publisher can count on the wholesale-purchasing retailer to discount the book to match the DRP, reducing their own margin and being competitive with the DRP in the consumer’s eyes.

This pricing strategy depends on the retailer discounting from the SRP to keep the pricing of the ebook from looking ridiculous. Not discounting is a way for the retailer to push the publisher to lower the SRP, which could start a cascade of price-cutting. That discounting has usually started with Amazon; others then follow suit. There are anecdotal claims that Amazon is starting to foil this strategy by letting publishers who set high prices live with the prices they set more often than they once did, but nobody but Amazon knows that for sure.

During the period when Random House stayed out of agency pricing, one thing they said was they thought the 30% agency standard was high and they didn’t want to memorialize a retailer cut that rich. Either other considerations prevailed or Random came to the conclusion that they couldn’t singlehandedly change that standard cut.

But if we maintain a competitive landscape of retailers, there is a way it could come down. What if one retailer (B&N? Kobo? Google?) were to offer publishers a deal where a discounted version of an ebook were offered through them on a temporary exclusive — say, the first 60 days the ebook was out — during which they would help subsidize the discount by taking a smaller percentage themselves during the promotion. Would publishers find it tempting to accept such an arrangement to poke a hole in the 30% standard? I think they might. (They would certanly enjoy the conversation with a competing retailer inquiring about how that happened, in which the publisher could offer a “matching” deal for some other equally appealing book and leave that retailer to think about whether to hold the line on the 30%.)

Another value chain segment the industry is still trying to value and price is the percentage a distributor can charge in the digital world. There’s wide variation here already, as there is in the print world, where the same bundle of services (sales, warehousing, shipping and returns processing, collecting receivables) can cost anywhere from around 20% to around 33% (fully loaded.) In ebook distribution, we see BookBaby willing to set up for a fixed fee (with no percentage deducted), BookMasters and Smashwords and some agent services like Knight charging about 15% of the revenue, and then offers from various publishers, distributors, and literary agents that go as high as 30% of the revenue.

Usually those offers are framed as “we pay 70% of revenue” which, I think, some hope will be confused with the 70% the agency retailer pays of the consumer dollar. Of course, if they are paying 70% of the revenue on a wholesale account buying at 50% off and the account doesn’t discount to the consumer, the distributor is actually paying 35% of the consumer dollar to its client.

The challenge for distributors is to offer services which don’t commoditize. Many authors already manage their own digital publishing affairs and sneer at the idea that a distributor or publisher has anything to offer that is worth even a token payment, let alone a substantial share. Over time, one can imagine information dashboards, metadata enhancement, dynamic pricing, and marketing assistance capabilities that will give ample justification for a distributor’s presence in the value chain for many authors and small publishers. It would be premature to predict how much value can be added and how much margin it could command. Most of these roads aren’t paved yet. What the distributors are offering at the moment is their ability to navigate unpaved roads and constant marketplace change which, despite the skeptics, is service many of us can see the need for.

What gets perhaps the most attention in the industry’s conversation about dividing the digital swag, but which is dependent on the upstream divisions of revenue, is the author’s royalty from the publisher. The majors have held the line for a year or two at 25% royalty, which means 25% of the 70% they get from the retailer, or 17.5% of the consumer’s dollar. That’s a quarter of what the author can get from Amazon or Kobo, and just a bit more than a quarter of what they can get from Barnes & Noble. Aside from publishers’ significant efforts to build marketing capabilities that will grow sales and their ability to charge a retail price often four times higher than an author would on his/her own, the publishers are offering guaranteed payments (advances against royalties) and a print revenue stream to sugar-coat the 25% digital royalty. Still, as the percentage of books sold digitally rises, it is likely to pull up the percentage of the sale authors will get along with it.

Everything happens faster with digital than it did with physical. And so it will be with changes in the revenue distribution along the value chain. My hunch (all hunch, no data) is that in the long run (5 or 10 years?) retailers will find it hard to keep 30% of the consumer’s dollar, publishers will find it nearly impossible to keep 75% of what the retailers pay, and that any author who wants to compete seriously will have a cost structure that will often make a royalty rate taking even as much as half of it away worth considering. Right now putting an ebook into Amazon and having them sell it on autopilot can get a lot more of the total market than will be the case over time as a more fully articulated and global ebook infrastructure builds out.

If I’m right, retailers should want longer contracts than publishers in their agreements; publishers should want longer contracts than authors, or at least longer terms for the stipulated ebook payout percentages; every author or publisher wants as short a contract as they can get with their distributor; and every author giving an ebook exclusive to a retail channel for longer than an introductory period should think twice about what that might cost in years to come.

Michael Cader did an absolutely fabulous reporting job on the distribution alternatives available today for our eBooks for Everyone Else conference in San Francisco. We’re doing an eBEE track at Digital Book World in January, and Michael’s doing a reprise of that presentation, with time for q&a, at a breakout session there. The distribution piece is by far the most complex of the three moving parts (the retail function and the royalty rate being much more straightforward components that don’t vary much in their definition) and a lot of DBW attendees will benefit from Michael’s reporting.

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I want to make clear at the outset that this post is not about “enhanced ebooks”, making something multiple-media out of a book that started as straight text. That’s a “want to do” problem that I’ve always been skeptical about and which I believe many, if not most, publishers are abandoning as “not commercially viable at this time”. Today’s ruminations are about moving illustrated books from print to digital, which many of today’s book publishers will find a “must solve” problem as the channels to reach consumers effectively with illustrated books — the bookstores — are diminished in number and power by digital change.

Amazon and Barnes & Noble are trading boasts about whose iPad-lite is better than the other guy’s. Kobo’s Vox is joining the party with Kobo now owned by Rakuten, a massive Japanese company that gives the former upstart the means to really compete with all the other players. We can be pretty sure that tablets that can deliver color-illustrated book pages will be in many hands very soon. (That’s in addition to the tens of millions of iPads and many millions of Nook Color devices that have been sold already.)

This is presenting publishers with illustrated books on their list with what seems like an enormous opportunity. But it also presents some equally enormous challenges.

It has been estimated by many that 25% of the print books sold are illustrated books. (I last saw this number in a slide from Michael Tamblyn of Kobo at our eBooks for Everyone Else conference in San Francisco on November 2d.) I am not sure what that means. Trade books only?

And even if I did know what it means, I wouldn’t know enough. Books that are primarily pretty pictures, which don’t require much integration of the pictures and text (the minority of the 25%, one would assume) are a considerably simpler proposition to port to digital than a book with pictures and captions that have to stay with them or text that needs to be on the same page with a picture or a chart.

A lot of work is being done to create new standards called HTML5 and Epub3 that will permit more faithful rendering of a publisher’s intentions through a web browser or an ebook than our current capabilities do. But there are two very big flies in the ointment that persist regardless of the technology.

One: illustrated books are considerably more complex and expensive to deliver to digital devices than straight text books. (Even if HTML5 and Epub3 accomplish everything their creators want and they’re fed by XML-workflows, converting the backlists will cost a multiple on a per-title basis of what straight text costs. And I suspect we’re many years away from relieving publishers of the need to make the decisions necessary to execute multiple versions of each book, new or backlist, as will be made clear further on in this post.)

Two: we really don’t know whether consumers with tablets or tablet-lites will choose to consume illustrated books on those devices. (I’d say we do know that people will happily read straight text on devices; what seems to be true in my experience these days is that most of the people who say they “prefer printed books” have not tried an ereader yet.)

So while many publishers are largely seeing eroding print sales for straight text more than compensated for by ebook sales, there is no guarantee that the same will be true of illustrated books.

The retailers selling the tablets and the publishers of illustrated books are excited about the possibilities. The development of HTML5 and its close cousin, Epub 3, promise to enable features and capabilities that heretofore were only available in apps to be delivered as ebooks. That’s a big deal because the app marketplace has two huge shortcomings: it doesn’t enable book discovery very well and it is loaded with very inexpensive products. Many publishers have come to the conclusion that selling apps isn’t a commercially-viable strategy going forward. They’d much rather have their IP on sale in an ebookstore.

To be fair, others (like Callaway Digital Media) think apps work just fine commercially (although I’d add that Callaway does children’s content primarily, and that’s different…) and there are more and more tools being delivered to make app-building cheaper and more economical than it was before. But I still agree with the doubters.

Getting ready for Digital Book World, we had a conversation in the past couple of weeks with a publisher that does illustrated books almost exclusively. He volunteered what we believe: nobody knows if the customer will buy these yet. And then he pointed to his enormous pain point: screen sizes.

The currently-touted solution for illustrated books on devices is “fixed page layout.” You don’t “reflow” the text, which is the technique used for straight text. Reflowing changes the number of words on the page to suit the screen size and type size. That means you are changing the amount of content that appears on the screen. If you did that for illustrated books, pictures and captions wouldn’t stay together and things you planned to be on the same page might very well not be. So you deliver a “fixed page” to the device, just like you do to a printer.

The dominant color tablet device has been the iPad, which has a 10-inch screen (this is a diagonal measurement). But the new tablet-lites have seven-inch screens. This cuts the viewing area by about 50%. There is really no way to present a “page” that combines text and pictures that works on both screen sizes. If you go from 10-inch to seven, the type will be too small to read. If you go from 7-inch to ten, the white space surrounding the page will be ridiculous, or the type will be ludicrously large.

And I haven’t mentioned the fact that the iPhone has a 3-1/2 inch screen. Imagine the fixed page for a 10-inch iPad on that!

Although tools exist that make it relatively quick and easy for a designer to see the page on the right screen size and move things around a bit, that doesn’t really solve the problem. An illustrated book publisher would really have to design and lay out each book at least twice (for the 10-inch and 7-inch screens) and possibly three times (to get the iPhone screen too.) Then those would be three different files, so you couldn’t actually move across your devices and have them auto-synch the way Kindle, Nook, Kobo, and Apple enable you to do now for straight text.

Would you get the files for all three sizes when you made the purchase?

There is a way to create the book for different sized screens with the same number of pages, which would be to use more area for the page than will fit on the screen vertically, and then scroll down to get more. Scrollmotion introduced this technique when they were making simple ebooks as a way to make ebook pages match printed book pages. But even employing that technique wouldn’t really save the illustrated book publisher any work. You’d still have to redesign each page for the particular device, and, anyway, I’m one reader who found I didn’t like ebooks that make you both scroll and turn.

One prominent ebook executive I know told me that there have been about 1000 illustrated ebooks available until a month or two ago but that the conversion houses in India have recently been working overtime to deliver more for the plethora of new tablet and tablet-lite devices hitting the market . Now they’re cranking out approximately 1000 illustrated ebooks a week so that by the end of the year, we might have 10,000 illustrated ebooks to choose from on many of the platforms.

That’s still paltry, compared to a million or more straight text ebooks, but the sudden leap in illustrated ebook titles available and screens to read them on must, one assumes, generate a real sales increase. Maybe we’ll start finding out what works and what doesn’t. This same executive, working for one of the major ecosystems, is trying to help publishers set their priorities for what books to convert. (Much of the conversion expense right now is being borne by the device-maker-retailers, so they get to call some shots.) But meaningful data points are so scarce that they offer very little guidance.

As bookstore shelf space disappears, the urgency of solving this problem grows. The sales of illustrated books have reportedly been going up in the bookstores, which is good news for as long as it lasts. It makes complete sense that retailers would emphasize the things that seeing and touching make you more likely to buy. But I’d be concerned that even the sales of illustrated books will suffer as more and more of the straight text consumers find what they want without visiting a bookstore. And a closed bookstore doesn’t sell any illustrated books at all.

I learned something interesting lately from a travel book publisher with a robust web presence that might be a useful clue. I was told that photo albums are a big new moneymaker for them. People who are traveling to Paris love the opportunity to look through a series of photos of Paris. Each photo is a new screen with new ads on it. That is creating some really easy additional revenue for this publisher’s web sites.

I think that a “500 photographs” series of ebooks could also do very well, particularly with the digital ability to present them in sequences determined by metadata. If 500 Paris pictures were properly tagged, I could see “Eiffel Tower”, “churches”, “19th century architecture”, and “Champs Elysee” pictures grouped together by clicking on a menu.

And that kind of a book, with no associated text necessary (“captions” could be on a jump screen), could be designed once for all size devices.

Of course, whether it would have a commercially-viable print counterpart is yet another question.

I have concerns that converting how-to books to digital success is going to be a very frustrating experience. The ebook will not deliver the printed material well, unless the same care is exercised optimizing the content to each different digital screen as is put into designing a book. And there will be so much more the ebook could do with video and audio and animation and interactivity that would make sense for most subjects that “converting” a book will just leave too much opportunity behind.

But publishers have to try. With millions of devices in consumer hands, some illustrated ebooks are going to sell impressive numbers. We saw what happened with “The Elements” when the iPad came out (even if comparable success hasn’t seemed to happen for any other content-based app product since).

Creating a truly interactive book-type digital experience has been the objective of countless thousands of high-quality person-hours for two decades, since even before the CD-Rom era. Nobody has cracked the code yet, by which I mean nobody has come up with a formula which will repeatedly satisfy consumers so that a publisher can approach the marketplace for digital content with something approximating the confidence that it does with straight text books. As an industry, we’re about to throw a lot more time and money at the problem. Maybe we’ll find an answer. Or maybe there isn’t one.

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The week I spend each year at the Frankfurt Book Fair is always the most stimulating week of my professional year. The concentration of the best thinkers and most powerful people in publishing always seems to lead me to a new burst of understanding about our global publishing world, particularly in these times of rapid change.

I saw one Big Six CEO who noted that I had said last week that I expected the US publishers to be living in an 80% ebook world pretty soon although the global head of another of the Big Six companies had just stated the belief that the switchover to digital would stop, or slow down significantly, at 40%. I respectfully disagree, but will save that argument for another post. The one I talked to, who chuckled about the wide disparity in these two predictions, didn’t express an opinion about which of us was right, but the implications of the two predictions are so different that it behooves the people running the biggest companies to at least consider mine, even if they believe his.

I also talked to a business development executive for one of the tech companies that has been converting backlists from print and pdf to epub. He made the point that his business remains robust but moves around the world as new markets discover serially that they need to get their intellectual property into digital form. We agreed that those of us who make a living on the digital transition — and that certainly includes me at the moment (what are you reading this blog for?) — have a few more years ahead of us before we’ll have to figure out how to make a living on the new reality (if we need to keep making a living when it arrives…)

With the deals announced at Frankfurt by Kobo with the English retailer WHSmith and the French retailer Fnac along with the quickening pace of store openings by Apple and Amazon, the future shape of the ebook retailing landscape has been more clearly defined. It looks to me like we’ll have three principal global players that will be active in every market — they being Amazon, Apple, and Kobo — plus perhaps a local contender in each market as well. Barnes & Noble has played the latter role extremely successfully so far in the United States; Waterstone’s will attempt the same in the UK starting next Spring; there is local competition in Germany; and certainly there will be in many other countries as the ebook revolution laps at their shores. Google, being Google, will not go away, but they will remain a relatively marginal player unless and until they put considerably more energy into their solution and into promoting what they have.

The Kobo deals are the game-clarifiers, if not game-changers. A sage observer of the digital scene stopped at my stand here in Frankfurt to discuss the WHSmith-Kobo arrangement with me and he wondered whether this was the best deal for both sides. Should Kobo have been trying harder to make a deal with Waterstone’s? Is it wise for WHSmith to be making a deal where they sell the devices but connect them to a Kobo-branded store?

But that, of course, is the key to the deal. The economics of the devices don’t work unless you also can sell the ebooks to go into them. (That’s the answer to all the geniuses who think Barnes & Noble is being thick not implementing an international rollout of the Nook!) Neither WHSmith nor Fnac is principally a book retailer: books are just another product line in stores that sell other things and have a broader identity. By selling a reader attached to an ebook store that serves customers well, they buy themselves relevance to the book consumer during the transition and extend their lives as booksellers. They demonstrate recognition that building and maintaining a ebook store is not a trivial undertaking and, in the face of several global competitors, not something they want to undertake from their position as a country-specific, and more general, retailer.

By tying up with Kobo, both WHSmith and Fnac can get into the market with ereading devices at about the same time as Amazon brings in the Kindle. And WHSmith launching for Christmas 2011 should be terrifying Waterstone’s, which will be months behind with devices and almost certainly delivering a less consumer-friendly store off the bat than the experienced Kobo offering will be.

Barnes & Noble has achieved startling success at establishing a strong second-place position in the US ebook market, but their situation may prove to be unique. First of all, they’re in the biggest single ebook market (by value, even though poorer markets may pass them sometime sooner in units) we’re likely to see for a decade or more. Second, they are a very serious book retailer that has built strong relationships among book publishers worldwide over many years. And third, their execution was nearly flawless. Even with their precedent as an example, there is no guarantee that Waterstone’s, or anybody else, can pull off what they did in another market.

So if it is a global game and you have to be a global player to be competitive, as well as a “whole ecosystem” game that requires devices attached to a well-stocked and well-presented econtent retailing environment to succeed, we can see the steep uphill fight to be waged by the other players trying to compete with Amazon, Apple, and Kobo, whether they be Google, Copia, Sony, Baker & Taylor’s Blio, or the new entrants financed by publisher collaboration: Anobii in the UK and Bookish in the US.

All other things being equal, I can see a global ebook marketplace that some years from now is 90-95% controlled by Amazon, Apple, Kobo, and a local player in each country, with Google getting most of the rest. Google may punch above its weight on the long tail because discovery of the obscure or highly niched content might be their forte; one scholarly publisher told me at Frankfurt that he is already seeing some real growth in his Google sales, which no trade publisher has said in my earshot yet.

But all other things may not remain equal. One informed member of the European digerati told me he believes that the European Competition Commission may outlaw the agency model in the European Union. Were that to happen, that would tilt the playing field substantially toward Amazon. It is ironic that the biggest, strongest, and most deep-pocketed competitor for global ebook sales could be handed an enormous competitive advantage by bureaucrats ostensibly trying to foster a competitive marketplace. Publishers may have deficiencies in their understanding of the digital transition, but it would appear that the government bureaucracies the world over might be far more confused than the publishers are.

I’m posting this before I leave the Frankfurt Book Fair on Sunday afternoon, European time. I won’t have the opportunity to respond to any comments until at least Monday night London time. I drive with a friend and the charming little hotel we stay at in Monschau doesn’t have wifi and I don’t have the digital dexterity (with “digital” in this case referring to “fingers”) to do lengthy replies on my iPhone.

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Almost two years ago, I wrote a post which continues to be one of the most-read in the history of this blog, the point of which was that the business model disruption (called “agency”) prompted by the iPad would have more impact on the ebook ecosystem than the device itself. I’m happy to repeat that statement today because I think events have proven that hunch to be correct.

This week Amazon announced their new tablet, the Kindle Fire. (Mine’s on order. I gave the original Kindle I had to my wife, who still uses it. I also own an iPad but never read books on it. As everybody who reads this blog regularly knows, my ebook consumption is all iPhone, largely purchased through the Kindle store, sometimes through Nook, Kobo, or Google, but never through iBookstore.)

The Kindle Fire announcement has unleashed a spate of stories in the tech press about the battle between Apple and Amazon. Who knows what Apple’s rejoinder will be, but it would seem that Fire offers much more than half of what an iPad delivers to a media consumer for much less than half the price and about two-thirds the weight. It appears it will fit in the hip pocket of a man’s suit jacket. That sounds like a competitive formula. It already was for Nook Color, and Amazon seems, at least for the moment, to have done them one better.

Books are not the central focus of this Amazon-Apple battle even from Amazon’s point of view and they are certainly are not from Apple’s. Apple is a device company and their content offerings, and their control of their content offerings, are intended to reinforce the unique experience their devices deliver. Amazon certainly knows from their Kindle experience that offering the right device can propel content sales and secure the content customers’ business (a lesson B&N has both learned and demonstrated quite successfully with Nook as well). The Fire is as much about video content as it is about books.

But in the book business, we look at these two titans in a different way because they force publishing into managing two completely different commercial models simultaneously. That’s not something most of the tech community has paid any attention to in the prolific “Amazon versus Apple” commentary following the Kindle Fire announcement. But it reinforces the point made in the post from two years ago: the fact that Amazon and Apple have different approaches to acquiring and pricing content offerngs is the most important aspect of the battle between them to the book publishing community. Who “wins”, as in “who sells the most devices?” (or even “who sells the most ebooks?”), is really quite secondary since both are significant and neither is going away.

Amazon wants to acquire its book content with the ability to control the selling price so they can continue to burnish their reputation as the lowest-cost provider and exploit other advantages that their huge customer base and extraordinarily deep pockets provide them. Apple wants a margin-guaranteed commercial model that also assures them that they won’t be embarrassed by having their customers see the same content for a lower price elsewhere.

Apple assumed they’d be able to move the most devices and, with price neutrality, create enough advantages to their device owners to shop in the device’s “home” store to satisfy their competitive requirements. That is, Apple’s content-selling strategy was to maximize their market share among their own device owners. They do nothing to move the content onto other companies’ devices.

But Amazon is a store first; the devices are in service to the store, not the other way around. Price competition is a key component of their competitive toolkit. And they are relentless at using their tools to take market share and margin away from their retailing competitors.

Publishers see their interests more closerly aligned with Apple’s strategy than with Amazon’s. After all, Apple is perfectly comfortable with the idea that others will need to provide content to whatever non-Apple devices are out there. Amazon wants to dominate content sales to all devices. Publishers want an ecosystem with as many contact points for consumers as possible to protect them from being disintermediated by somebody downstream (namely Amazon). And they like the necessity of managing a lot of resellers because it protects them from being disintermediated by somebody upstream (the agents or authors).

Amazon found out in a battle with Macmillan very shortly after I wrote the piece cited at the top that they couldn’t bully the Big Six publishers into abandoning agency pricing. So they gave up the effort to do that, and the Big Six now apply agency across the ebook supply chain, creating uniform prices through all outlets for most of the biggest commercial titles on offer.

But Amazon did not find it necessary to back down from their insistence on wholesale for everybody else. And that means that, except for the Big Six, all publishers that want to offer their ebooks through both Amazon and Apple are forced into the “hybrid” model: agency with Apple, wholesale with Amazon, and a choice between the two for everybody else.*

The models are ultimately incompatible and create anomalies (an example of which with a high-profile title not published by one of the Big Six we reported on recently.)

And that, not the device war itself, is the most important component of the Amazon versus Apple battle to the book publishing community. With the recent move by Apple to end direct-linking to their proprietary stores out of the apps of other ebook sellers, they are undoubtedly increasing the market share of iBookstore (even though their title selection still lags way behind their competitors.) There’s a price in lost sales to pay if an ebook isn’t available in all the places customers might shop for their next read.

But to make an ebook available through both Amazon and Apple, a publisher must set two retail prices: one to sell to consumers at through Apple and one to base a discount on for sales through Amazon. Publishers will continue to see titles flagged by Apple on a weekly basis because they were on sale somewhere (presumably Amazon) at a lower price than the publisher set for Apple, allowing Apple to lower the price (and to proportionately decrease their payment to publishers for sale of that ebook.)

The advantages of agency, including the ability to raise and lower prices to generate promotion or to take advantage of stronger demand, will continue to be reserved to the Big Six. So will the potential advantage (not yet realized, to our knowledge) for the Big Six of being able to sell from within apps or off their own web sites because they have the ability to do that without competing with their retailers on price. And so is the protection against the possibility that an agency reseller will lower the price to meet a wholesale reseller’s competition, thus cutting the revenue delivered to the publisher and, ultimately, to the author.

I have not yet explored the ramifications of agency versus wholesale or hybrid with an agent from the author’s commercial point of view, but it would seem to be an advantage for the Big Six publishers in signing up major authors that they alone can enforce agency. And with the device battle now joined and bound to be going on for many years to come, it would appear that the division between Apple and Amazon will perpetuate a division between the Big Six and all other publishers which will last for the foreseeable future.

* Writing that asterisked sentence (several grafs above) made me realize what I didn’t know. How do publishers set their two different retail prices, one of which is the basis fo 50 off and a retailer-set customer price and one of which is the basis of 30 off and that is the price? Who decides on which basis the other ebook retailers — B&N, Kobo, and the rest — do their purchasing? (I know they all benefit from agency, so presumably they buy agency with the same assurances of price-protection Apple takes, but do they have a choice?) And how many publishers just refuse to sell to Apple so they can put all publishers on wholesale and let the discounting occur as it will?

I know people to ask about all this, but not on a baseball playoff weekend. It will likely be the subject of a future post.

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As the shift from a print-centric book world to a digital one accelerates, more and more digital publishers are creating themselves.

The biggest publishers, with the resources of sophisticated IT departments to guide them, have been in the game for years now and paying serious attention since the Kindle was launched by Amazon late in 2007. But as the market has grown, so has the ecosystem. And while three years ago it was possible to reach the lion’s share of the ebook market through one retailer, Amazon, on a device that really could only handle books of straight narrative text, we now have a dizzying array of options to reach the consumer on a variety of devices and with product packages that are as complicated as you want to make them.

Free or very inexpensive service offerings through web interfaces suggest to every publisher of any size, every literary agent, and every aspiring author “you can do this” and, the implication is, “effectively and without too much help”. Indeed, services like Amazon’s KDP (Kindle Direct Publishing) service, Barnes & Noble’s PubIt!, and service providers Smashwords and BookBaby, offer the possibility of creating an ebook from your document and distributing it through most ebook retailers, enabled for almost all devices, for almost no cash commitment.

Is it really that simple? One suspects not, since literary agencies are creating ebook publishers (for example: The Scott Waxman Agency’s Diversion) and baskets of services (for example: The Knight Agency in Atlanta) and consulting to help their authors. And a bit further upstream, ebook distribution companies (for example: MintRight) and ebook-first publishers (for examples: Open Road, Rosetta, and the granddaddy of them all, Richard Curtis’s e-Reads) are creating more alternatives, sometimes propositions explicitly addressed to the agents. If publishing ebooks to all channels were really a simple matter of uploading a file, it would hardly seem necessary to build all this infrastructure.

We know that small publishers, literary agents, and authors are becoming publishers at an astounding rate. Two years ago when I was trying to organize a panel of literary agents to talk about working with authors on a charge-for-services basis instead of a share-the-royalties basis, it was hard to get volunteers to discuss new models. Two weeks ago, a major agent outside New York said to me, “we all have to think about it now; we have no choice.”

In short, it isn’t just the big publishers who are compelled to develop a digital strategy to adjust their businesses to changing times. Their smaller competitors, the agents they depend on to deliver their content, and even the authors that have always just depended on the publishers to handle the business of getting a book from a manuscript to a purchase, are all assessing the new landscape. They are considering what new approaches might reduce or eliminate their need for a publisher, or at least reduce the publisher’s share of the take.

Although the correct strategy for any entity would depend on the factors that prevail in each case, there are things it would seem that everybody entering this arena needs to know and understand.

First of all, what are all the things publishers do to get from manuscript to sale, are all the steps necessary, and what do they cost? Developmental editing, copy-editing, mark-up for design, creating metadata: these are all things publishers do routinely. Are they critical for every book? Would a purchaser-reader notice if a publishing newbie left any of them out? Will the services that promise to make and distribute an ebook without a cash investment do these things well?

The ebooks themselves have gotten increasingly complicated. The ebook standard epub (used for just about every ebook not intended for the Kindle ecosystem) has risen to the challenge posed by apps to be able to accommodate color and video and audio and software elements. Everybody who knows that “you get what you pay for” expects complicated ebooks to take more effort and money to create than ebooks of straight narrative text. But what constitutes “complex”? And how much more money does that additional effort cost the publisher that wants to deliver an ebook more complicated than just simple text?

Marketing ebooks also requires a whole new set of knowledge and skills. The key to all ebook marketing is the accompanying metadata: coding that travels along with the file specifying its core bibliographic information and price, but which can also tell a retailer or a search engine much more than that. Search engine optimization (SEO) is the art of delivering metadata that makes the book more likely to be found in response to various searches and queries; that’s yet another set of understandings new ebook publishers have to acquire.

That is just the beginning of what is possible (and therefore necessary) in ebook marketing. Sample chapters can be given away. Web sites can be invoked as partners.

And authors and publishers can, and therefore must, engage in “social network marketing”: using Twitter and Facebook and commenting in high-profile streams to catch attention and gain credibility with core audiences for the books. This is more knowledge to acquire.

Any new publisher will need to understand the paths to market. Yes, Amazon gets more than half of the US ebook sales and Barnes & Noble gets half of the rest. But it isn’t that way on every book, ignoring the others leaves a big chunk of the market unexploited, and things are changing quickly. Amazon’s market share has dropped by a huge percentage in the past two years.) OverDrive is the primary path to libraries. Ingram aggregates many independent stores. Baker & Taylor is opening up markets among mass merchants. Kobo is as important in Canada as B&N is in the US and works in markets all over the world. Google has the ebook ecosystem making the most serious penetration of independent book retailers. Sony is about to introduce new devices that could increase their importance. And Apple is doing its best to dominate sales to its own device holders, who constitute a large wedge of the ebook customer pie.

One can go to all of these channels directly but there are also a slew of services to handle what is the increasingly complex job of delivering to and administering the multiple channels. Perseus Constellation, Ingram Digital, INscribe Digital, LibreDigital (just bought by Donnelley), and Bookmasters as well as the automated services like Smashwords, BookBaby, and MintRight we mentioned above, and others offer service packages to do that and to help with the creation and marketing needs as well.

As we said at the top, nowhere is the change in publishing greater than in the agent community. What has been a stable business model for generations is now, suddenly, changing. There seem to be as many new models and approaches as there are literary agencies. That adds another thing that all of the fledging epublishers — some of which are agents, others being small publishers and authors — need to know about and understand. The relationships among authors, agents, and publishers are getting much more complicated and everybody needs to spend some time thinking that through and discussing what it means.

If all this strikes you as a set of topics worthy of a day’s discussion, we’re in agreement. We think it is too. And that’s why our new Publishers Launch Conferences partnership with Michael Cader is delivering a day-long event called “eBooks for Everyone Else” in New York (in conjunction with The Center for Publishing at New York University’s School of Continuing and Professional Studies) on Monday, September 26 and in San Francisco (co-located with F+W Media’s new StoryWorld conference) on Wednesday, November 2.

Not only do we have an expert-packed lineup to deliver the information, we’ve carved out time for our attendees to get their own specific questions answered by the experts and by the providers of many of the services that are part of the new ecosystem. If the business of ebook publishing is part of your future strategy, you’re bound to get the knowledge and make the connections you need at eBooks for Everyone Else.

Among the leading service providers who will participate in eBooks for Everyone Else in New York and be available for “speed-dating” conversations with attendees are our global sponsors Copyright Clearance Center, Constellation, and Bowker, as well as supporting sponsors Ingram Content Group, INscribe Digital, B&N’s PubIt!, Kobo, and BookBaby. (Kobo and PubIt! will be speaking from the main stage as well.)

Our New York show features an all-star lineup of literary agents including Jane Dystel, Robert Gottlieb, Sloan Harris, and Scott Waxman. We have a distinguished group of publishing veterans — including Jack Perry and David Wilk, Smashwords founder Mark Coker, Renee Register, Iris Blasi, Rich Fahle, Ron Martinez, and Joshua Tallent — who will present advice and insight to help you develop a comprehensive ebook strategy. Most of them will be available at the breaks and alongside the speed-dating sessions to lead small group discussions and answer your questions about creating, marketing, and distributing your ebooks. (The San Francisco roster is slightly different, but just as powerful.)

Michael Cader and I will be moderating all the day’s activities, asking questions, and helping to put an enormous volume of facts into a strategic context for an audience with a staggering array of choices as to how to proceed with ebook publishing.

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Anybody who doesn’t find the publishing business interesting in its time of digital change is simply not paying close enough attention. No matter what story we’re focused on, scratch the surface (or scratch your head) and you find you are pondering something else. This was a week for the press to be asking me (and many others) about the lawsuit against Apple and the publishers surrounding the implementation of agency. I have little expertise to comment on the suit’s legal merits, but a week of thinking about agency has made me (and others) realize implications that hadn’t been evident to us previously.

As I was reviewing my last blog post before publishing it, I had the new thought (referred to in a brief postscript) that Amazon was actually doing the Big Six publishers a favor by denying agency terms to everybody else. Since big authors have a common interest with big publishers in maintaining retail prices for ebooks that don’t undercut print and which deliver a per-copy revenue flow comparable to print, there is reason for a big author to prefer a publisher that has the power to maintain the ebook price across the retail network. Full-fledged agency publishers have that capability; the others do not.

A moment of explanation might be required for any readers who might be lost in the details of the agency, wholesale, and hybrid models of ebook-selling. Agency is the term for “the publisher actually sells the ebooks to the consumer, not the retailer; the retailer gets a cut but cannot change the price from what the publisher has set.” Wholesale is the term for “the publisher sells the ebooks to the retailer, based on the notional retail price set by the publisher; the retailer can then set the consumer price keeping all, part, none, or less than none — selling as a loss-leader — of the margin that the publisher’s discount provided.” And hybrid is the term for “the publisher has to agree to giving Apple a fixed percentage of the selling price; Amazon insists on a wholesale arrangement by which they set the price; therefore, Apple’s standard arrangement by which it can lower prices (and the publisher’s share) to match any other retailer on the web makes the publisher vulnerable to having its revenue from Apple readjusted downwards based on discounts offered by somebody else.”

The short story is that only under a total agency model does the publisher control price. In any other case, the price is effectively controlled by the retailer willing to offer the lowest price. That would be the retailer willing to live with the least margin and, as was amply demonstrated by the discounting that took place before agency came to publishing, that might be a negative margin. Retailers in the US (although not in all countries) can sell below cost if they think it is to their advantage to do so.

All the actors are rational here. Amazon extends agency terms to the Big Six publishers because, after the Macmillan dust-up of January 2010, Amazon has been persuaded that they could lose the ebooks of those publishers from their shop if they don’t. Losing the ebooks from one of the major houses would damage what has been one of Amazon’s main strategic advantages since the Kindle was launched: the widest selection of commercially-attractive ebooks in the marketplace. They take the gamble, which appears to be a winner, that publishers smaller than the Big Six will not want to withhold product from the world’s biggest ebook retailer, the one that still accounts for substantially more than 50% of the ebook sales for many titles.

And, in some cases, publishers have avoided the discomfort of the hybrid model — which requires them to commit to Apple that Apple will have the lowest price on the Web when they can’t actually control everybody else’s price  – by not selling to the iBookstore because Apple won’t buy on wholesale terms. So Amazon yields where they think they must (to the Big Six) and continues to enjoy the advantages of price control with the rest, while at the same time discouraging some publishers from making their titles available through a competitor. This all makes sense to me as I understand their point of view.

What I noticed while writing the last piece is that there is an unintended consequence here for Amazon way upstream from the ebooks sale: the policy is strengthening the Big Six’s already powerful grip on the biggest titles from the biggest authors. Amazon wants to compete for those authors and can offer a better royalty on Amazon sales to entice them (when Amazon pays 70% to the author, the author keeps it all; when they pay 70% to the publisher, the author does not get it all, even if s/he succeeds in negotiating something better than the industry standard of a 25% ebook royalty share.) But Amazon reportedly wants ebook exclusivity, which cuts out a big chunk of the ebook market, and they are seriously handicapped getting a print sale through brick retailers.

(If you want a more thorough explanation of the way ebook revenues get split up, I wrote in detail about ebook royalties under the agency and wholesale models here and here.)

Because print sales in stores still matter (and for as long as they do) there is a risk and a sacrifice for any author giving exclusivity to Amazon, although there are also clearly compensating considerations as well.

At about the same time I was noticing this, my friend Eoin Purcell in Ireland was noticing something else. Apple’s new policy on apps, by which you can’t sell through an app without giving Apple its standard 30% cut, also offers up a sparkling new opportunity to agency publishers that would be accessible only at some risk to any but the Big Six.

The immediate consequence of Apple enforcing this policy of theirs was to drive the direct-to-our-store connection from the Kindle, Nook, Kobo, and Google apps. Because those retailers only get 30% margin from the publishers, they can’t afford to give 30% to Apple for the privilege of in-app selling.

But publishers don’t have that margin problem. They already pay 30% for their sales, and if they put their own apps up with sales enabled through them, they’d only be paying what they already are to a retailer for the privilege. So apps for authors or genres or series of any kind could be offered as free downloads through the App Store with direct-purchase buttons inside. These could send you to the iBookstore, if the right kind of landing environment could be created, or to the publisher’s own landing page where sales commissionable to Apple could be made.

Of course, the same thing could be done as a Nook app in the B&N ecosystem, and it would be smart for the publisher to offer one, as well as a web app that constituted an Amazon version (which wouldn’t be offered through the Apple App Store but would have to get to you another way), to keep relative peace among its customers. But a publisher can only do this if it is sure its prices won’t be undercut, which would force a further margin reduction under Apple’s rules.

Like Eoin, I have no idea whether any of the Big Six publishers are working on this idea or whether any of the major agents have suggested the possibility. But we’re talking about literally hundreds of smart people here, so it would be surprising if nobody’s exploring this possibility (except if Eoin and I are both missing something that makes it a non-starter.)

The transformation of publishing is rich with circumstances to amuse anybody who appreciates irony. Cheaper ebooks, which consumers love, are making bookstores, which consumers also love, gasp for the breath to survive. The closest thing to a monopoly threat in the business, Amazon and Kindle, work to drive consumer prices down. Apple’s great success with new devices coupled with their very slow start at retailing, generates agency pricing and sales opportunities for other retailers that probably benefited Barnes & Noble the most. B&N, the brick retailer most skilled at logistics but only newly-minted as any sort of tech company, finds not one but two unoccupied niches in the eink product suite: color and touch-screen.

And now, Amazon’s policy limiting the publishers that can fully implement agency, designed to isolate the Big Six and enable discounting of everybody else’s ebooks, may be spawning a new opportunity for big authors and big publishers to work together that other publishers can’t compete with. Perhaps denying this capability to other publishers actually helps Amazon be alone as a 7th competitor, but it certainly has its ironic aspects at a moment when Amazon is putting on a full-court press to persuade big authors to work directly with them!

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One very lucky thing for those of us who are in the habit of predicting the future is that very few people keep score on us. We mostly keep score on ourselves. When I want to remind readers of something I said previously, I link back to it and call it forward it again.

But there is one belief I had and stated repeatedly early in the ebook era that was wildly wrong, hopelessly wrong, and then proven clearly to be wrong. I bring it up now because it belongs in this post identifying a more current error, one which hasn’t been proven yet but about which I’ve learned enough to want to walk back.

When I started reading ebooks in about 1999, there were a couple of dedicated ereaders just becoming available: the Rocket Book and the Softbook. Neither of them interested me or very many other people either. Both failed pretty quickly.

Just about simultaneously, ebooks were first being delivered to hand-held devices. I discovered the magic of putting books on my Palm Pilot, a device I had in my pocket all the time. I had started carrying a personal digital assistant in 1986; that was a Psion Organiser with a 2-, then a 4-line screen, which would not have worked for ebooks. But the Palm, which could carry a chunk not so different in extent from what I see now on my iPhone, worked fine.

The original dedicated devices came and went without much notice from anybody. Meanwhile, I continued to read on my Palm and its successors. The shopping experience at Palm Digital was terrible, the choice of titles was extremely limited, and the ebooks cost just about as much as the print books. But I shifted over, as much as I could, because I was hooked both on the utter convenience of always having books in my pocket and because I genuinely found it preferable to read on something so small and light and have book reading, for the first time, totally manageable with one hand.

When the Sony Reader arrived and didn’t do much, I wasn’t surprised. Sometime before it debuted, I wrote or said somewhere that if you carried a personal digital assistant, nobody should have to explain the value of ebooks to you. And if you didn’t carry a personal digital assistant, they might not actually have any value for you. At that point, most ebooks purchased were read on laptop and desktop computers.

That’s why I was pretty sure the Kindle wouldn’t work. Who wanted another device to carry around just to read books, I figured? What’s the advantage in that?

I neglected to think through that people do things for lots of different reasons. And I really underestimated the degree to which the book-sized page is a requirement for a lot of people, even though it might be a transitional one. Anyhow, I was really, really, really wrong. And even though I switched back from Kindle to iPhone reading the minute the vast selection available through Kindle (and now through Nook, Kobo, Google, and Apple) was available to me on the device I was always carrying, I fully accept that most people are willing to carry something around to do their reading on a regular-sized page. Lesson learned.

It is now clear to me that another concept that was an important part of my future view is in pretty desperate need of reassessment. It also appears to be being proved wrong.

It was evident pretty early that the Net facilitated the formation of communities around interests. Putting that together with my thinking about the distinction between the unit of sale and the unit of appreciation (shortcut to understanding: the former is the album and the latter is the song; the former is the cookbook and the latter is the recipe) made me think that the big online aggregation of content for sale would also ultimately be challenged. If you went to a web community to get advice about how to build a deck or plant a vegetable garden, I figured, you’d just pick up whatever were your content purchases — books or whatever else, physical or virtual — from that same site. You wouldn’t need a separate site to go buy content from.

In other words, I expected one of the ways to monetize a community would be that you could sell it stuff, particularly content.

Although I know that O’Reilly operates in a special marketplace, I saw the success they have had selling directly to their community — both their own publications and their subscription aggregation Safari — as a sign of what we could expect to develop in other verticals.

I don’t think so anymore.

The first rude awakening for me was when OpenSky changed its business model. OpenSky began with the proposition that they would facilitate just about any web site to sell just about anything. As I understood it, if you had a blog about cooking, you could arrange to sell your favorite pots and pans right off your own site. OpenSky would source the product and operate the back end. You’d just have to pick out what you wanted and decide how much margin you could demand.

Well, apparently that business model just didn’t work. They’ve switched OpenSky from a commerce platform for bloggers to a “social network for shopping” with celebrity, expert, and author curators. I’m not much of a shopper, online or offline, so I’m not one to judge how appealing it might be compared to competition. There is some evidence that the new model works and OpenSky feels like they are now taking off. But it isn’t any longer the perfect match for the vision that I had when I first saw it, and it probably didn’t work because my vision was wrong.

By extension, I had been figuring that publishers needed to sell direct as well. Big publishers had good reasons to resist that idea which I understood, but which in themselves make me question the idea. Big trade houses are highly dependent on the goodwill of Amazon and Barnes & Noble as well as other retailers, and going into competition with your key channels is risky and problematical. And my vision of the future wasn’t really built around general publishers, anyway.

This month, J.K. Rowling opened her Pottermore site, which is intended to be the exclusive vendor of Harry Potter ebooks. Now, there’s a vertical. It appears you won’t be able to get them at Amazon, B&N, or Google (although Google checkout is “the preferred third party payment platform”); if you want them, you’ll buy them from the Pottermore site (or, as some would point out, get them from a pirate source if that’s easier.) In a ‘d’uh” moment, I read this piece making it clear that this kind of fragmentation didn’t work for musicians and ultimately wouldn’t work for authors. (The book business isn’t the music business, but some lessons do carry over.)

So mark me much less bullish on publishers selling direct than I used to be. It can add value and margin to a vertical site if the costs of running the store can be tightly managed, but it is not likely to produce much in sales very quickly.

In fact, I’m quite sure that fewer Harry Potter ebooks will be sold by the Pottermore strategy than if they were just made available through the standing ebook retail network. The margins might be higher with no retailer to pay, assuming that advantage isn’t completely swallowed up by their own costs of infrastructure (and it probably won’t be.) But not everybody who buys a Harry Potter book from Amazon or B&N (or a Nora Roberts book or a Janet Evanovich book or a James Patterson book) is a devoted fan. Some of them are just choosing their next read and if Roberts or Evanovich or Patterson wasn’t shown to them, they would have bought something else on offer.

There is evidence out there to contravene this post and confirm my original thesis. Our friends at F+W Media, with whom we deliver the annual Digital Book World conference, report success building their retailing business through their communities. A senior executive there tells me they are selling “tens of millions” in content, product, and services through 25 stores attached to the community sites they have developed over the past few years. They achieve an average order value of $40 — not too shabby — and credit a combination of true community focus which builds them large and powerful databases of names, unique curation that includes offering things that aren’t available elsewhere, selling content in multiple forms (book-like, video, webcasts), delivery of “online learning”, and special bundled packages for their success.

F+W is not unique. A smaller company that is their competitor in some spaces, Interweave, also has a community focus and sells direct. Both companies have the content to build a number of different verticals to amortize the cost of a common merchandising and retailing platform.I don’t doubt F+W when they say they’re making it work, and apparently Interweave is too, but that still leaves the question of whether they, like O’Reilly, are sufficiently unusual cases that it would be very hard for other publishers to follow their lead.

I still have my fingers crossed that the Google ebooks program could spawn some unique shopping experiences that will make a difference to the ecosystem in the long run. (This is taking powerful faith at the moment because Google has only barely detectable sales in their first half-year of operation.) By offering the opportunity for curation with personality to be done by a large number of different entities (about 300 bookstores have already started with the program in the US), the Google initiative still offers the possibility of a wide variety of curation choices, or bookstore front ends.

Of course, none of these individual Google ebook stores will have the resources of the big retail players to apply technology to their merchandising. But perhaps they can provide selection and positioning that will create its own following. Whether they apply what they know and their own unique intellectual resource base (because every bookstore has one) to highly local subjects or other verticals with global appeal, they have the opportunity to create online stores that at least some people will prefer to shop. Thousands of such entrepreneurs around the globe might produce hundreds — or dozens — of survivors with large enough customer bases to create the kind of diversity in the ebook retail network that would offer publishers the kind of opportunity they need to add value for a long time. And to do it the way they always have, by managing intermediary opportunities, not by selling direct.

This is not to suggest that publishers don’t need to be building direct contact with as many consumers as they can. Just as authors should do. But forget the idea of a huge number of vertical purchase points for ebooks all over the net. I will.

Google also announced an affiliate program for Google ebooks. That will enable any web site to sell their ebooks and get paid, extending a concept that both Amazon and Barnes & Noble have employed successfully for print books. It looks to us like Google pays more. An affiliate can earn 6-10% from Google, 6% from B&N, and 4-8.5% from Amazon.

This isn’t the original OpenSky vision, however, because that was about all kinds of products, not particularly (or even necessarily including) books or ebooks. Of course sourcing could always have been done through Amazon, but there were differences in the merchandising and pricing opportunities in the original OpenSky model.

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The first Publishers Launch Conferences show outside the United States, “A Global Perspective on Digital Change”, will be at the Congress Centre in central London on June 21, with the Publishers Association serving as our partners in putting on the event. We also owe special thanks to the PA’s group of Digital Directors, who were extremely generous with their time and insight. If you can be in London that day, you couldn’t find a better way to spend it than with us.

We’re still putting the finishing touches on what will be a one-day conference packed with illuminating conversation, but we can tell you quite a bit about it already. We aim to deliver strategic, practical, and focused discussion of near-term issues and opportunities. This won’t be a showcase for cool products or a venue to debate what the future might look like some day. We’re examining essential issues — ebook “export” opportunities; what happens to territorial rights; hiring and retraining to meet today’s challenges; revamping publishing systems for a dual print and digital paradigm; getting “found” on digital shelves — that publishing professionals should focus on now to thrive in the days to come.

The UK market is in between the US and the rest of the world in its migration from print to digital reading. Kindle and iPad sales really took off last Christmas and, while ebook penetration may be a fourth or less of what it is in the US, it has grown enough to be disruptive and to generate a consensus acceptance that very substantial change in the industry is inevitable.

On the one hand, my PLC partner Michael Cader and I have followed the developments in the US very closely so we have some firsthand experience with some aspects of what the UK trade is going through. On the other hand, we know history won’t repeat itself precisely. There are important differences in the markets and there is a substantial group of companies with experience and capabilities developed in the North American market that can hit the ground running in Britain or anywhere else in the world. That alone will make everybody else’s experience different than what happened in the US.

In order to be sure we were talking with the UK industry, not at it, we took some preparatory steps. In February, we put a large number of ideas for panels and topics up on Survey Monkey and invited 70 players in the UK book trade to express their opinions on them. In five days, 40 of the people responded.

Then we followed up by spending three days in London meeting with about 50 people to discuss our ideas and theirs. Our partners at the PA provided invaluable assistance, hosting our conversations and inviting us to join a regular meeting of the Digital Directors to get the insights of the most knowledgable people in the UK market. Those conversations were crucial in helping us focus properly on topics and in locating some key sources of insight. Frankly, despite our long experience working with the British publishing community (I have visited London on business three or four times a year for 35 years), putting this conference together would have been impossible without the help we got.

But because of that help, I think we’ll be presenting the UK publishing community with a lot of very useful discussion that hasn’t taken place at the many prior gatherings that have discussed book publishers and digital change.

One topic that we identified very early is the opportunity we see for publishers in Britain and Ireland to sell into the US market now without payng for a distributor infrastructure or taking an inventory risk. When we started to explore this topic, we learned that, of course, people are definitely starting to plan for it. Some are starting to exploit it. This was something we thought should be happening below the radar, and it is.

This is a peculiar opportunity, because it might be more important for independent UK publishers large and small than it is for the biggest global players. We’re still filling out the panel for this one, but we have Helen Kogan of Kogan Page, an independent whose company was already working in the US market (and therefore has some helpful experience to pass along) but who is seeing the expanded opportunity presented by digital, and Jean Harrington of Maverick House Publishers in Dublin. Jean is also President of Publishing Ireland and we invited her to join this particular conversation for a reason. The Irish diaspora in the US has a particularly strong identity with the old country and we expect books of Irish history and Irish fiction will find a substantial additional market through ebook sales in America.

We’re working on adding another British publisher and an agent to that dialogue.

Another topic arose out of a conversation that longtime UK consultant Mark Bide and I had while we were at Tools of Change in New York in February. How long will it be, I wondered, before half of UK sales are digital? Mark said he wasn’t sure about the timing, but he was sure that the publishers’ systems, overhead allocations, staffing, and infrastructure would require a lot of adjustment to be ready for that day. That’s a good conference topic, we thought.

Then, in our conversations at the PA 10 weeks ago, Anthony Forbes Watson, the MD of Pan Macmillan, told us he had charged his team with thinking through the question exactly as we had defined it. Anthony wants to know “what does 50% ebooks look like? What do we have to do to be ready for it?” The next day we talked to James Long of Pan Mac who told us that, yes, he was actually the person in the company with the primary responsibility for thinking this question through.

We decided the best frame for this conversation was “thinking about the future.” James, as he will tell us on June 21, is largely focused on what Pan Mac needs to do in systems development and integration, workflow changes, and skills development to be ready for a 50% digital world.

But there are two other aspects of preparing for the future we felt could be illuminated by other panelists we recruited.

Perseus, a US company whose Constellation division that provides digital services to smaller publishers is a global sponsor of Publishers Launch Conferences, is one of several companies in the world (Ingram in the US is another; so might Random House be in the US and the UK) that are investing in warehouses and print book distribution capabilities at precisely the time many publishers are disinvesting in them, precisely because they know that most publishers will have to disinvest in them. They’re trying to be there for publishers who want to dispose of fixed cost overheads for the shrinking print book market. We put Rick Joyce of Perseus into this conversation to cover the sensitive topic of consolidation on the physical side (a subject that Dominic Myers, the MD of Waterstone’s, famously put on the UK publishing community’s agenda a couple of months ago.)

Copyright Clearance Center, the US RRO which is also a global sponsor of Publishers Launch Conferences, has steadily called our attention to another industry-wide challenge: the need to manage rights more effectively and on a more granular level to take advantage of emerging opportunities to license chunks and fragments for apps, ebooks, and web sites. We thought that the voice for this topic in London should be local, and we were pleased that Sara Faulder, head of the Publishers Licensing Society, agreed to join this conversation.

Mark Bide has agreed to moderate this group in what I think will be a dialogue about publishers and the digital future unlike any the audience will have heard before. (Except, that is, if they are at our Publishers Launch BEA show on May 25, where we’ll have a different version of this conversation, one more focused on export and rights sales than infrastructure, but also covering the change we’ll see to selling more and more fragments.)

We’re not above stealing our own ideas and giving them a local spin. One panel that was extraordinarily successful at Digital Book World last January was one we describe in shorthand as “new skill sets”. It’s about capabilities publishers need to get that they don’t have and it is about process and workflow changes and the use of cross-functional teams as well as hiring in or training people with new skills. Charlie Redmayne of HarperCollins did that panel for us in New York in January and is reprising it at our BEA show. In London, he’ll be joined by Juan Lopez-Valcarel of Pearson and Jacks Thomas, the CEO of Midas Public Relations, on a panel moderated by Jo Howard of Mosaic Search & Selection Ltd. One of the key elements in the New York discussion of this, which we expect will arise again in London, is “when is it best to hire in the skills and when is it better to retrain the people I already have?” This is a subject every publisher needs to be thinking about that isn’t discussed in public very often.

We’ll have three of the top digital leaders of UK houses — George Walkley of Hachette, David Roth-ey of HarperCollins, and Sara Lloyd of Pan Macmillan — joining Michael and me for a dialogue about the big companies who have cut their teeth on the US market and are now taking their capabilities worldwide, starting in the UK. We’ll be talking about Amazon, Apple, Google, Kobo, Ingram, and Overdrive (the six clearly-declared and clearly-capable global ebook players) as well as Sony, aspirants like Copia and Blio, and US titan Barnes & Noble (which has shown no clear signs of global interest yet.) It looks to us like there is only one UK player with a global perspective, still-tiny cell phone provider Mobcast, but we’ll be learning from our panelists whether there are others we should be considering. And our audience will learn more about the North American companies which are bound to be a big part of the local market’s ebook life in the years to come.

We’ve reached a time when “metadata” is an important subject to discuss, no matter how dry or back room it has seemed. We were fortunate to get Graham Bell of EDItEUR to moderate a dialogue about this for us. He’s recruited Jon Windus of Nielsen and Karina Luke of Penguin to discuss it with him. We’re now looking for a retailer to join them. The condition of metadata in the marketplace is not good enough in enough places yet. This is costing publishers sales. This panel will explain why that is and what every publisher should do to make sure this isn’t a huge hole in the side of their boat as online sales, print and digital, grow and the impact of metadata grows right along with them.

We are also going to have a discussion of the future of territorial rights. Richard Charkin of Bloomsbury, a well-known skeptic about them, and David Miller, an agent with Rogers, Coleridge and White Ltd., have agreed to participate. We’re looking for a full-throated defender of the current territorial regime to join them in what will be more of a conversation than a debate. We wonder whether territorial rights make as much sense in a 50% ebook world as they do in the 5% ebook world we might now be in. The agent’s voice in this conversation might be the most important one because, after all, they decide whether the deals are acceptable or not.

One thing that the territorial rights dialogue will certainly entertain is what we should expect to see in terms of author initiatives. That topic is bound to come up in two other discussions as well. There’s one we’re now calling “experiments, best practices, and out of the box thinking” which is really about innovation. But we are going to focus on innovation in business models and practices and innovation in marketing, not on product innovation. We are still working on putting this group together, but we were very impressed with our preliminary conversations with two of the panelists.

Marc Gascoigne is at Angry Robot, a sci-fi imprint started by HarperCollins and then bought by Osprey. Angry Robot’s better mousetrap is its community focus; Gascoigne will make the case that doing that right (which many publishers say they want to do) requires that everybody, and that means every editor and everybody else, communicate directly with the audience. It is hard to see putting that across in many established trade houses.

Richard Mollet of the PA will moderate the conversation with the innovators.

Also on that panel will be Peter Cox, an agent with Redhammer. Cox is changing his own business model (providing more in the way of services to his authors, but charging them more for it and looking to represent fewer authors, not more) but he’s effectively changing the author-publisher relationship as well by making the author an active marketer and community gatherer. He’ll have examples and he’ll have ideas that will challenge the thinking of many publishers and agents in the audience.

The last panel of our day is intended as a Grand Finale. Michael Cader and I will sit with Stephen Page of Faber, Rebecca Smart of Osprey, John Makinson of Penguin, and agent Jonny Geller of Curtis Brown. We’ll get their take on the speed of the ebook takeup and its consequences.

How will British publishers cope in a market that may soon have no full-line bookstore chain? How will the industry cope with the rise of self-publishing? Is there any real danger of a consolidated English-language world in which London becomes subsidiary to New York? Or, in some companies, might it be vice-versa? Will both agents and publishers be changing the core business models which have prevailed for the past century over the next few years?

What excites me about the last panel — aside from the sheer smarts and savvy of the people we got to join us — is the diversity of their perspectives. The publishers run companies of different sizes and with very different approaches to building their publishing lists. The agent joining us has gained a reputation as one of the most digitally savvy players in the UK market. Michael and I thrive on spirited conversations with very smart people; we think we’re going to finish the day very stimulated and with big smiles on our faces.

And we think our audience will too.

Of course, before we get to London, we’ll be running our “eBooks Go Global” show aimed at international visitors and their trading partners at BEA. At that show, we’re particularly excited about two panels we won’t be doing in London. One is with a few booksellers already working with the new Google Ebooks capability reporting on how it is functioning for them. The other takes a slightly different approach to the “selling in the US” opportunity. Patricia Arancibia of Barnes & Noble, which has aggregated about ten times as many ebooks in Spanish as most people in Spanish markets will tell you exists, will open a lot of foreign publishers’ eyes to the possibilities that exist for them in the US market. We’ll also have a chat with Barry Eisler, the author who turned down half-a-million bucks to self-publish. And that’s not all. Tickets still available… And tickets still available for London as well.

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This is an unusually brief post today, but some worthy observations don’t require long explanations.

I wrote nearly 18 months ago about my concern that publishers’ interest in enhanced ebooks would bring on a repeat of the commercially disastrous CD-Rom era of the mid-1990s. Of course, since the CD-Rom era, a lot has changed.

* The opportunities in linking and multiple media have been explored every conceivable way through the web.

* The number of devices on which people can readily consume enhanced content has exploded.

* A number of tools have been announced that can enable one person working alone, even without much technical expertise, to put an enhanced product together, if they have the digital assets and the rights to use them.

The tools are really in the news lately. Vook, the start-up that has been pioneering video integration into ebooks, has a tool kit being trialed called Mother Vook. Packager Charlie Melcher has a new initiative called Push Pop which promises transmedia authoring tools for Apple’s iOS. And I see on the web a new company called Yapper, for “your app maker”, that looks like Smashwords on steroids.

There are also tool sets operating at a more sophisticated level, but still making development more efficient. Touch Press has just applied its capabilities — which, among other things, enable them to make objects “spin” to be viewed from all sides — to a third iPad app called “Gems and Jewels”. (They had previously done “The Elements” and “The Solar System”.) We’re working with a developer in New York on some sports encyclopedia apps that make use of their proprietary system development to convert large databases to app presentations very efficiently.

A question that will probably rise in importance is whether the system that enables you to make an app for the iOS operating system will also get you to epub or HTML5. That’s one the “do-it-yourself” system developers will also have to answer.

(It might be worth observing parenthetically — which is why I’m doing it that way — that we see Apple developing the huge monopoly position on apps that Amazon has selling independently-published ebooks through the Kindle platform. While it almost always makes sense to distribute content as broadly as you can to amortize the investment in intellectual creativity, Kindle gets you so much of the ebook market and Apple so much of the app market that the effort-reward ratio to doing the rest can only make sense if there’s very little effort required.

(A companion parenthetical observation is that iPad apps with no iPhone-size counterpart are another sign that the creation tools aren’t powerful enough. I know you can’t recreate “The Elements” as it is done for the iPad on an iPhone screen, but you certainly have, within what was done, the makings of a terrific alternative fitted to the form.)

I don’t know how good the enhanced ebook and app creation tools are…yet. (Other people will judge that and tell me.) There have been announcements like what we’re hearing from Vook and Push Pop before that didn’t deliver or haven’t yet, going back to the beginning of ebook time in the early 1990s. There was fairly recent buzz that disappeared about Zinio Fusion. There was a Google App Inventor for Android ballyhooed last year, but that hasn’t been heard from lately. In fact, robust tools were part of the early promise of Blio, which got us very excited 18 months ago, but they have failed to gain traction along with the rest of the Blio platform. The “so easy anybody can do it” promise hasn’t been really fulfilled yet.

But I know the tools will get great eventually. And that might be soon.

When they do it will mean that anybody can make a media- and link-rich ebook; just add intellect.

That’s a trend I’m not sure works in favor of big publishers who are looking for opportunities to apply scale. These tools, if they work, undermine scale by reducing the need for tech wizardry in product creation. Of course, editorial wizardry is still required.

There’s one more trend I expect to see over the next couple of years: a marked increase in the number of ebooks created from what was originally illustrated book content. Some of those books integrated visual images for practical purposes, to illustrate how to tie a tie or cut a piece of wood, or as the images do in the print version of “The Elements”. For some books, “coffee table books”, the illustrations are the featured content.

In either case, the ebooks of 2007-2011 weren’t really suitable for them; in the next couple of years, publishers will be learning how to make appealing digital products with intellectual property like that.

This will be a process of trial, feedback, and improvement on an industry-wide level as we all learn what people actually like, do, and value. But there will be skill development on a highly individualized basis as people develop and express their editorial “touch” for integrating the elements, managing them through Mother Vook, Push Pop, Yapper, Blio, or one of the next dozen competitors that arise.

Will small entrepreneurial publishers develop and relate to these resources best, or big ones? In the next couple of years, I think we’ll find out.

We have one segment of our “eBooks Go Global” show at BEA that will explore the strategy and approach to investing in enhancement, another that looks at what skill sets publishers need to find or get, and yet another featuring publishers managing their digital publishing without much in the way of internal tech resources. And we’ve just added a short demo from Charlie Melcher to show us the tools he’s about to deliver. Here’s the registration link.

On this Thursday, May 5, we’ll be taking part in BISG’s annual Making Information Pay conference. We worked closely with BISG’s Scott Lubeck in putting together this year’s show, which is called “Constructing the 21st Century Publishing Enterprise.” There will be a keynote by Hachette COO Ken Michaels and important presentations on discovery within the context of the semantic web. We’re delivering a presentation jointly with Heather Reid of CCC and David Marlin of Metacomet about what we’ve learned from talking to publishers and service providers about rights databases. Rights databases, like the other topics at MIP and like the topics discussed in the body of this post, will be moving from a peripheral position to center stage in the very near future.

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