Apple

A simple and perfectly sensible suggestion emerged on the Brantley email list yesterday but the conversation around it showed that some stark realities about the book world have not yet been taken on board, even in very sophisticated circles (which this list is.)

The list discussed a suggestion from librarian Josh Greenberg  that publishers take note of the “rental” model built into the iTunes store as an alternative way to collect money from readers for ebooks.

Greenberg’s piece calls out a fact that many people in publishing have a great deal of difficulty with: that all ebook sales must be licensing deals. They can’t be anything else. Greenberg says:

“When we think about iTunes, we think about a basic fee-for-purchase model. We’ll just leave aside the fact that you never truly “own” a digital file, you’re just buying a particularly-structured license to use it…”

He’s right. When you deal in printed books, you have a tangible object. When you deal in ebooks, you only have “code”. The first sale doctrine says you can re-sell the book or lend it or share it. But copyright law says you can’t re-sell, lend, or share copyrighted “code.” Many digerati (and many librarians not named Josh Greenberg) refuse to acknowledge this distinction.

But that’s a legal point, one that can be debated until a court or a Congress makes a ruling (and then beyond, actually, since we continue to fight battles even after courts or Congress have rendered their conclusion.) The challenge to Greenberg’s idea of switching to a rental model is not so debatable. It’s practical.

Implementing new models for book sales requires herding cats. It can never be done fast and many business ideas relating to content have foundered because it couldn’t be done at all.

What should be clear to anybody who has been following developments since the days a decade or more ago whenRocketbook and Softbook and Sprout were trying to get publishers to give them rights for their content propositions is that it takes a very persuasive sales pitch to get publishers to do so. That sales pitch must be delivered publisher by publisher, and then the impressive ability of publishers to discuss a problem to death takes over, and the new proposition might itself die before its owner gets an answer. Or certainly before its owner gets enough answers to get the new idea off the ground.

What was further made clear by the participation of agents at Digital Book World, and particularly by the opinions expressed by superagent Robert Gottlieb on the ebook “timing” panel, is that the publishers don’t make this decision without consulting with their upstream gatekeepers. Gottlieb made clear that a) it takes a very small number of lost hardcover sales to make an author’s book slip notches on the New York Times Bestseller list, b) he and his authors believe that a much cheaper ebook, or perhaps any ebook at all not reported as a hardcover sale, can make that critical difference between being Number 1 or being much further down the list, and c) the difference in several places on that list is worth losing some sales over.

So just imagine how Gottlieb and his star clients (and all the other agents and star clients) would react to a rental model!

Let’s add one more point before the next great suggestion is made. The same thing will be true of an even better model than rental (which also has plenty of precedent in media even closer to publishers, audio books): subscription sales.

The switch that Apple has made to the “agency model” is not of equivalent complexity from a business perspective. There we’re still “selling the book” (although we’re really licensing access to a file) and the amount of money flowing to the publisher is comparable. But, even there, the switch will not be simple. Publishers have signed contracts governing almost all their ebook sales (which is a further demonstration that this is different from selling physical books, for which signed contracts between publishers and vendors is by far the exception, not the hard and fast rule) which one could imagine the purchasing party (Amazon, Ingram, Content Reserve, Barnes & Noble, Kobo) believes prevents the publisher from changing the rules in the middle of the game.

What Michael Cader reported last week which we expanded on in a blog post and a CNN interview is that publishers can use the new agency model to hold back books from channels where they can’t control the pricing. This very much underreported exchange between Steve Jobs and Walter Mossberg of the Wall Street Journal makes it very clear that Apple expects vendors who would undercut the pricing publishers set for them will be denied access to the content.

We can look forward to continued battles over pricing and over the terms of sale between publishers and the downstream players in the ebook supply chain. But I think it will be a while before real alternative distribution schemes to the public make any appearances. In fact, they’re likely to occur in vertical niches first, where the big agents are less involved and the number of publishers one needs to get on board is something less than “just about all of them.”

A quick thanks to everybody who attended Digital Book World (and there were a lot of you.) I am hoping that the fact that all I’ve heard is praise and enthusiasm for the two day event is not just a result of people being kind to the guy who put the program together. I think we really did generate discussion on some issues that had previously been neglected. But most of all I’m proud of the job we did selecting panelists; everyone I saw presenting was smart, well-prepared and entertaining. Some we had seen in front of audiences before; some we only knew through our interviews in person or on the phone. But picking them carefully and one by one certainly seemed to work and it is the same formula we’ll use putting together Digital Book World 2011. I hope we’ll see everybody again there next year.

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It is customary for those of us who do crystal-ball gazing to make some calls about the year ahead at around the time the celebrants head for Times Square. I am not a man to flout custom. Here are some of the things I expect we’ll see in 2010.

1. At least one major book will have several different enhanced ebook editions. This will result from a combination of circumstances: the different capabilities of ebook hardware and reader platforms, the desire of publishers and authors to justify print-like prices for ebooks, the sheer ability of authors and their fans to do new things electronically, and the dawning awareness that there are at least two distinctly different ebook markets: one just wants to read the print book on an electronic screen and the other wants links and videos and other enhancements that really change the print book experience. (Corrolary prediction: the idea of an enhanced ebook that is only sold “temporarily” in the first window when the book comes out, which has been floated by at least one publisher, will be short-lived. Whatever is made for sale in electronic form will remain available approximately forever. Or, put another way, if you have a product that requires no inventory investment that has a market, you’ll keep satisfying it.)

2. Here come some new retail book outlets, but can publishers afford the risk of selling to them? The growing incidence of bookstore-less cities will provoke the mass merchants to explore a greatly increased title selection inside their stores as a magnet to attract disenfranchised bookstore customers. The early emphasis will be on children’s books and illustrated how-to: books for which there is high value to seeing them before buying them. They might even see this expansion as a margin-booster because if they’re responding to scarcity (as they would be), then discounting might not be as necessary as it is with their bestseller-only strategy now. Publishers will be wary of this new initiative, knowing that it could fail and lead to large returns but it will be on the drawing boards by the end of 2010.

3. Thanks to digital, there is no minimum length for a book anymore. Ebooks that are too short to be print books will become a real factor in ebook sales, opening up new opportunities for publishers but even more for authors. Short fiction is already well established in the romance genre and some major publishers have broken out stories from anthologies as separate items to be sold on Kindle. In 2010, authors and agents will discover that shorter-than-a-book works can be the subject of useful experimentation and learning through electronic publishing and, by the end of the year, it will become a frequently-employed device. Periodical media (newspapers and magazines) will also see this paid delivery mechanism as an alternative worth experimentation for them as well. After all, if a big publisher can unbundle a short story anthology to sell the individual stories as Kindle editons, why couldn’t The New Yorker sell the short fiction it publishes that way as well? This concept has been tipped by the announcement in 2009 than the web site Daily Beast will be delivering shorter books in a timely manner through electronic distribution.

4. Ebooks will require a new industry directory (and it won’t be printed.) Driven by new entrants in the field, self-publishing, and unbundled aggregations of print books, the gap between the items listed in “Books in Print” and the items that should be listed in a directory of “Ebooks Available” will continue to grow. There has been a robust conversation in a corner of the book community about whether all ebook editions need ISBNs, but that’s really only one part of a much larger metadata problem. In 2010 we are likely to see at least one serious effort to deliver a new online directory for ebooks.

5. Big publishers start to match their offerings to their marketing capability. The rearrangement of the big publishers’ IP portfolios will begin in 2010 as they emphasize what they do best: deliver narrative-writing and children’s books to multiple outlets in large quantities. This reshuffle will only begin to be evident in 2010, but we will see small slices of big publishers’ lists sold or licensed to specialist small publishers and we will see the beginnings of genre consolidation among the big publishers, with some publishers beefing up and others exiting romance, science fiction, and mystery. In 2010 the latter will take the form of list growth or cutbacks, not the sale of whole lists to a competitor. We’ll see that in 2011 or 2012.

6. Ebooks become significant revenue contributors for many titles. By the end of 2010, ebook sales will routinely constitute at least 20% of the units moved for midlist and the lower tier of bestsellers and at least 10% of the units for really big bestsellers. (These are predictions for narrative writing; illustrated books and kids’ picture books will lag considerably.)

7. Circumstances will outrun the ebook “windowing” strategy. By the end of 2010, the experiment with “windowing” ebooks — withholding them from release when the hardcover comes out — will end as increasing evidence persuades publishers and agents that ebook sales (at any price) spur print book sales (at any price), not cannibalize or discourage them and, furthermore, that this withholding effort does nothing to restrain Amazon’s proclivity for discounting. (Amazon can’t quit with so many competitors joining them; see number 11 below.) There will also be steadily increasing evidence that most readers distinctly prefer either digital books or paper for their narrative reading and the real minority is the people who routinely read both.

8. In the digital world, geographical territories will be found not to make much sense. The problem of managing territorial rights for ebooks will be a growing problem the industry will have to deal with. As ebook platforms are increasingly separated from dedicated readers (a move even Amazon encourages with its Kindle software working on PCs and iPhones by the beginning of 2010 with more to come throughout the year), people all over the world express their frustration about books they are blocked from obtaining by obsolete rights regimes. With the number of ebook platforms and outlets increasing, it becomes almost impossible to police these rights effectively. Authors with global audiences become increasingly sensitive to the frustration of their fans and, through their agents, lobby for “open markets” for ebooks to solve the problem. US publishers back the idea and smaller market publishers hate it, but by the end of 2010 it is obvious that territorial rights will be relegated to print books only, meaning the end could be in sight for the entire concept of territoriality (but, because of old contracts and lots of national laws, it will be a very long sunset.) Pushing back against this concept might be publishers in countries with large English-language populations (Israel comes to mind, but I know publishers getting offers from Nigeria) who want to carve out a national monopoly for their own local editions in English. But that would be print-only.

9. Authors with clout start looking more like publishers. Some authors who have developed huge followings on Facebook and Twitter and their own blogs start to demonstrate that they can have a serious positive impact on the books of other authors they favor. This leads to a variation on the time-honored practice of getting blurbs and jacket quote-lines as savvy editors and agents suss who the new author-megaphones are and line up to get their support. The prediction for 2010 is that this will start to become obvious. The likely prediction for 2011 will be that this leads to authors becoming quasi-publishers or, perhaps, getting “imprint” deals from established houses to select and promote other people’s writing.

10. The “shakeout” in ebook delivery mechanisms won’t start this year; proliferation rules in 2010. With the arrival of Google Editions in the first or second quarter of 2010, there will be multiple channels to the ebook market through a variety of players: Google, Amazon, Apple, Baker & Taylor’s Blio, Kobo (formerly Shortcovers, the ebook operation begun by Indigo of Canada), and Sony will not be alone! During the course of 2010, the industry will become aware that there are three moving parts here: the device ebooks are viewed on, the ebook “reader” software the device employs, and the retailing and merchandising experience for the consumer shopping (or searching) for a particular book. As it becomes clear that ebook readers employ multiple devices and can accept a variety of platforms, the shopping experience will become appreciated as the most important determinant of consumer loyalty for most books. This is a moving target; everybody will be working on it. But as we enter 2010, it looks like Kobo has figured this out better (so far) than anybody else.

11. Retailers will demonstrate that they have more at stake with each file they sell than the revenue from that sale. Because there are so many players fighting for a foothold in ebooks, discounting them deeply will be the “new normal.” This will enable publishers to keep their “established” retail price (and their revenue per unit sold) high, but consumers will increasingly see ebooks as the less expensive alternative.

12. We will see greater integration of ebook offerings with other products and services. The merchandising challenge for ebooks will ultimately be met web page by web page over the entire Internet. This future paradigm will be tipped in 2010 when we start to see ebook stores on more and more non-book web sites, each trying to deliver some sort of value-add with curation or follow-on products.

13. Book publishers will have to admit to real confusion about what the product is that they produce. The big meme coming out of 2010 will be “what is a book?” Publishers will increasingly be releasing productions that contain video, audio, animation, slide shows, and interactive game elements. Movie, TV, and game producers will see an alternate marketing and revenue channel available through “ebookifying” content they have and moving it through book channels like a “tie-in.” Where one stops and the other begins will become increasingly difficult to see (and increasingly irrelevant).

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This post is part of a growing set initiated by the Sourcebooks experiment holding back an ebook from simultaneous publication with an upcoming hardcover. It is the second (link to the first below) and will be followed by at least one more, as the conclusion of this post makes clear.

To talk sensibly about the Sourcebooks experiment with Bran Hambric, we need to sketch out some context. Trying to provide it will be the objective of this post. A couple of caveats before we begin:

We are talking here about narrative fiction and non-fiction: books that don’t need illustration or design-intensity to get their content across.

And we are talking about books intended for general audiences: trade books.

The first caveat matters because it describes the technical challenges of presenting the content and the second because it defines the commercial parameters for all the players (and the players will be the subject of a subsequent post.) Content that is delivered to more structured and organized markets, such as we see in academia or corporations, has a very different set of commercial realities.

There will eventually prove to be four distinct stages of ebook adoption, and what makes sense for all the players will change as we move from one to another. The four stages are vision, establishment, transition, and the new marketplace.

The first stage, vision, which started in the late 1990s, will be seen to have ended when the Kindle was launched in November of 2007. This was when ebooks attained a minimal market, substantially less than 1% of total trade sales. In that stage, we had the development of the ePub standard, which could be a permanently useful efficiency for the market. We also had the establishment of basic terms of trade, giving intermediaries approximately the same margins based on the publishers’ suggested retail price that they have had in the physical print-book world. (In my opinion, that will not prove to be so helpful.) Author royalties in publishing’s Big Leagues seem to have settled at either 15% of the publisher’s suggested retail or 25% of the publisher’s revenue, another formula that will be challenged by market forces. We have learned a lot about the futility and frustration surrounding DRM. And publishers have tried to establish ebook pricing that tracks the printed book availability at any time, generally listing the ebook at about the same or a buck or two cheaper than the lowest-priced print edition available.

The second stage, establishment, started with the Kindle. This is when ebooks are much more obviously headed for their ultimate central position in consumer trade book publishing. Ebooks are moving from making a negligible commercial contribution to each book to measureable value, a shift which could be said to have occurred. Many major books are now getting nearly half their Amazon sales from Kindle and other ebook sales are growing as well. Publishers are seeing ebook sales that have tripled as a percentage of their total sales in the past 12-to-18 months. In this stage we are also seeing — and will see more — new players enter the game. Amazon’s device play was followed by software launches from Apple (more than one, including Amazon, from the App Store) and Indigo (a smartphone application called Shortcovers which is part of the iPhone expansion). The Kindle device was preceeded by the Sony Reader; there have been UK-based launches of an independent competitor (Cool-er Reader) and one from Borders UK called Elonex; and strong rumors suggest that both Barnes & Noble and Indigo will deliver their own devices very soon. There are others as well. In this establishment stage, ebook revenues are growing, though they are not yet sufficient to change the overall power relationships in the publishing value chain. But because so many devices and channels are competing to get established and because of the high physical-world discounts, publishers have completely lost control of consumer-facing pricing at the title level.

The third stage, the beginning of which I reckon is about 1-to-3 years off, will be the transition stage. Since I’m inventing this paradigm, I’ll declare arbitrarily that the transition stage will begin when it becomes common for ebook sales to be as much as half the sales of ebookable titles (see the caveats above) and trade houses are seeing their overall unit sales (including the many books, still most juveniles and other highly illustrated titles they all publish that are not “ebookable”) grow steadily from 10% of total sales with no end in sight. In the transition stage, we will start to see real shifts in the value chain. Devices that can only import from a single source (such as the Kindle is today) will fade in importance (if, indeed, there are any left by then.) The number of potential purchase points will explode, as many web sites offer some sort of ebook-readable content, a great deal of it free, but lots of it based on the prices set by publishers. Large horizontal aggregators (Amazon, B&N, and the full-line bookstores that build their offerings from wholesalers) will struggle to hold onto a large and loyal customer base as the vertical web increasingly takes hold. Almost all publishers will be among the zillions of sites offering direct downloads to consumers, many through explicit verticals that sell the books of their competitors (as Macmillan’s tor.com sci-fi site, presciently, is doing today.) DRM will gradually disappear but policing commercial-level piracy will become much more effective because the entire industry will be fighting it. What Scribd is doing to fight piracy — using their archived content to locate pirated material posted by site visitors — will be more widespread and collaborative. There’s a real opportunity for a search engine to offer a service here that somebody will take, and then all will follow.

And the fourth stage, the new marketplace, will have arrived when ebook sales dominate and printed book sales shift primarily to short-run and print-on-demand, except for the very biggest titles. This will happen with accelerating speed when sales pass the point of being 40 or 50 percent digital overall, possibly within a decade. When ebooks become the “norm”, prominent authors will have less need for publishers and ebooks will be routinely updated and enhanced and linked to other content in ways that printed books simply cannot match. In the new marketplace, printed books will have very specific uses: tokens and souvenirs, delivery of certain material that makes great use of large presentation surfaces, and, of course, enabling those who are too old, too poor, or just too stubbornly luddite to make the shift to screen-reading that will have become ubiquitous by then.

In the next post on this subject we will really address the Bran Hambric experiment. We’ll tackle how the various stages of ebook development affect each of the stakeholders: authors, publishers, retailers, wholesalers, and, of course, readers. The context of the stages allows us to make sense of the issues of 1) timing, 2) pricing, 3) DRM, and 4) the content itself, and the marketplace impact of each of the four from the standpoint of each stakeholder. And we’ll see that the challenges Sourcebooks is responding to are symptomatic of what publishers face in the early establishment stage.

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For those of you who missed the “Stay Ahead of the Shift” speech at BEA, we posted a link to the slides, but over this coming weekend we’ll do even better. From Friday morning, June 12 until Monday morning, June 15, we will post a link to a video of the entire speech! It is available now on PublishersMarketplace to subscribers only; we are able to offer this link through the generosity of Michael Cader to allow non-subscribers to Marketplace to see the speech. If you weren’t there, I hope you’ll take advantage of the opportunity.

Although there is more mystery than information about ScrollMotion’s new “million book title” offering through Apple’s App store (what are these titles? where are they coming from?), two things are clear.

1. By offering a catalog that sits in the ebooks they’re selling you, they are making shopping considerably easier than any other ebook vendor besides Amazon, and maybe even easier than Amazon does for Kindle.

2. Their prices are going to be high, not attempting anything like the deep discounting of Amazon that others are striving to match but, instead, often pricing the ebook higher than the print version.

I don’t take too seriously one oft-raised objection to ScrollMotion. Because each book carries the application, each book you buy for your iPhone will appear as an icon on your screen and take up a bit more of your capacity than the other books (Kindle, Stanza) that have a resident application and only deliver the content itself each time you acquire a new title. Most people will have no problem with the idea that after they read a book, they should delete it from their screen to avoid visual and digital clutter.

What has not been mentioned in the press I’ve seen following this week’s announcement is that Scroll Motion also has some significant advantages in presentation and functionality. They have a split screen capability to enable illustration or graphics on the top while text continues to appear in the bottom. They can synchronize it so that the pictures change in synch with the text movement. So they can do illustrated books better than anybody else. And they have copy-and-paste, notes and extracts, and emailing ability straight from the app.

These capabilities open up the world of textbooks to Scrollmotion, which may be part of the secret to getting such a huge cache of titles. If they actually get anywhere near a million titles (and the first question I was asked by an executive at a competing ebook platform is “what’s the trick behind that claim?”), they will have the most robust offering in ebooks. That’s huge and it is a big component of what propelled Kindle to the front of the ebook parade when it came out. But Kindle also had two other strong gales at their back: a huge book-buying audience at Amazon and very enticing pricing.

What actually concerns me most about Scroll Motion is margin, and I think the pricing reflects the challenges to margin. With Apple taking a 30% brokerage fee off the top of all sales, the publishers have to split the remaining 70% with Scroll Motion. I don’t know what the deal is, but let’s assume it is “50-50″: Scroll Motion and the publisher split the post-Apple swag in half. That would leave the publisher working on 35% of the actual selling price. 

Readers of this blog know that I have been advocating that publishers seize control and move things in precisely the opposite direction by reducing the “discount off retail” they offer to virtual intermediaries. Doing that is a critical if publishers are going to offer the public attractive (and, increasingly, expected) ebook pricing and maintain some semblance of adequate margin going forward.

If I’m right about that, then publishers may be taking a huge step in the wrong direction with Scroll Motion, advertising to other intermediaries that they can afford to live on a miniscule percentage of the consumer’s ebook dollar.

Many of the digerati I know would predict that Scroll Motion’s offering will fall on its face. The app thing is not digitally elegant and the prices are insane. I am not so sure they won’t succeed because I’ve always thought choice of titles, quality of merchandising, and ease of purchase were the most important components of an ebook offering and they are promising to be stellar on all those fronts.

Another book and ebook merchandising topic I’ve been discussing lately on a listserv is whether the retailers are missing a bet not enabling “affiliate” fees to be paid for email referrals in addition to web clicks. We did some research here and of the many online booksellers we check found that only Abe Books (owned by Amazon) overtlyt extends an offer of this kind: if you put one of their widgets in an email, they’ll capture the clickthrus and pay a 7% commission on sales. (Perhaps that can be done with some other widget at some other retailer, but nobody else we checked suggests it.)

It seemed like a slam dunk to us that a retailer offering to spiff customers for an email recommendation that results in a sale would be a winner. It would produce incremental sales and increase customer loyalty. I was, frankly, surprised by pushback on a listserv that suggested that it would result in too much unwanted spam. I am holding fast to my opinion that this is a good idea (nothing can be proven without somebody with reach and scale trying it, of course) but I’m also interested in yours.

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I love and value The New York Times. But I have to admit that every time they write about something I know a lot about, it makes me wonder whether they’re complete and accurate when they write about the things I don’t know a lot about.

There’s nothing wildly inaccurate in Motoko Rich’s “Week in Review” article of May 17 headlined “Steal This Book (for $9.99)”, but there sure is a lot left out. And more that is misinterpreted.

We start out with an eye-catching but pretty phony premise: that author David Baldacci took it on the chin from his reading public because Amazon briefly priced his new $27.99 list hardcover for $15 instead of $9.99. In sadly typical fashion, a few posts from protesting readers become an undocumented “hundreds more” who have joined an “informal boycott” of “digital books priced at more than $9.99.”

Most customers for most products understand that the retailer sets the price they pay. For those who think they know more about the publishing business and think beyond the retailer, they would know the publisher sets the suggested retail price (which is one reason it is to the bookseller’s advantage that publishers have traditionally printed that price on the book itself so the publisher can take some of the blame.) I won’t say there is nobody in the world that wouldn’t blame Baldacci (or any author) for his book’s price, but that would be an ignorant and relatively rare reaction that shouldn’t be suggested as a widespread fact in any story’s lead, particularly not in The Times.

Rich does a superficial analysis of the economics. She is accurate in saying that Amazon is taking a per-unit loss on many titles in the Kindle store because doing so a)  helps them sell more devices and b) helps them “lock in” their Kindle audience. And she accurately reports the publisher’s fear — and the common-sense likelihood — that Amazon will, at some point, insist that publishers bring the prices they charge Amazon into line with what Amazon is charging the consumer. The choice for publishers then would be painful: either give up a growing army of Kindle owners as customers for a book or lower prices to a point that would make ebook margins a fraction of the print book margins they are replacing.

From that point on, we need to add facts and nuance that the article didn’t cover, and we have to discourage one pretty peculiar suggestion that is floated as though serious from a professor of economics.

What the article misses is that, because of the iPhone and App Store — and similar environments that will soon surround the Google Android phones and Blackberries, as well as just about all smart phones from just about all carriers — Amazon has already had to adjust its strategy in ways that will wean people off of their devices! A month or two ago, Amazon distributed a Kindle reader for the iPhone. That meant that Kindle owners could immediately access their entire Kindle library through their iPhone as well as their Kindle. There are two serious consequences of that action:

1. It exposes people who had formed the Kindle habit to reading on a different device, the iPhone. And, if they get an iPhone reading habit, then Kindle is no longer the only game in town. There are at least three other formats (Stanza, Scrollmotion, and eReader) that work just fine on the iPhone and we can be sure there will be more, just as we can be sure that what works on the iPhone will soon have to work on most, if not all, other smart phones.

2. It “unlocks” the content from being chained to a single device. That means that one “copy” of an electronic book can now be read by two people simultaneously: one on a Kindle and one on an iPhone. 

How does this work in practice? Here’s one man’s true story. I bought a Kindle in December 2007. I read on it almost exclusively until Kindle released their iPhone app. Then I started reading on the iPhone because I was reading the same book on two devices. That was in February. Last week I gave my Kindle to my wife and I am reading on the iPhone exclusively. But I’m not reading Kindle exclusively anymore. I have four books open in the four different readers I referred to above. And my wife is working her way through many of the 40 or 50 books I had purchased on the Kindle for myself over the past year. And when she buys a book (I just introduced her, ironically, to David Baldacci), I can read it too.

So this article misses the importance of the iPhone, and its strategic importance particularly in relation to Amazon and Kindle.

The second big thing the article misses is the sheer complexity of the ebook supply chain. There is this proliferation of formats and points of distribution. There is the fact, that Rich mentioned, that Barnes & Noble has bought Fictionwise (a big ebook retailer) and therefore now owns eReader, Fictionwise’s ebook platform. B&N has been the Sleeping Giant of the ebook space: the biggest brick-and-mortar book retailer, probably still the biggest player in the consumer book business, but not a participant in ebooks. The purchases they made were mentioned, but the strategic implications were not. B&N is rumored to be launching their own reader this Fall. Whether or not they do that, they are certainly going to be doing something to compete in the ebook space. That’s potentially a signficant counterweight to Amazon, but it isn’t mentioned in this article.

And if the looming problem for publishers with ebooks is their margins (and I think we can agree on that), then why not mention the ultimate solutions: publishers selling digital downloads directly to consumers and, at the same time, reducing the discounts off retail (the margins) offered to intermediaries? Rich does a nice job of enumerating how the publishers’ cost structure changes with ebooks; she neglects to mention that the costs for retailers evaporate as well when they don’t have to invest in inventory or handle physical goods (and handle many physical goods twice — purchase and return — without any revenue to show for it!)

The proliferation of ereading delivery options is not only not spelled out in this piece, its absence is magnified in importance by the article’s close. Some anecdotal evidence is introduced to suggest that lower prices might increase book purchases. Brian Murray, CEO of HarperCollins, is quoted as saying “if the overall market is bigger, then we should be O.K.”

Then Rich concludes with the punch line that sales might rise not just because of lower prices but also because of the ease of purchase. So we conclude with a former book editor who, after buying the first of Stephenie Meyer’s “Twilight” series and finishing it at 1 am, bought “the next installment on her Kindle from her bedroom”. Well, here’s my conclusion. She could have done the same thing from many different online locations and in many different formats using her phone. I think the Times should tell you that.

Oh, yes, the professor. Professor Fiona Scott Morton of Yale did entertain a market coming from Apple, based on the new Kindle-sized tablet they are reputed to be about to introduce. Morton says: “then the book publisher of Obama’s next book can say, ‘O.K., which of you is going to offer us the best deal?’”

Uh, probably not. That’s not how publishing works. Publishers don’t put their books up for bid between Barnes & Noble and Borders, and they won’t between Amazon and Apple, either. But what is true is that B&N and Borders are aware of their “market share” on major books, and neither wants to be without a book the other is successfully selling. That, ultimately, is the publishers’ protection against pressure from Amazon. Kindle got where it is largely by offering the best selection of any ereading platform. It is in the retailer’s DNA to try to get some exclusive product, but it is in the publisher’s DNA to put everything they have in front of the consumer in every way they can.

May 28 at 11 am: “Stay Ahead of the Shift”, at the Javits Center. A 20-years out view provides a context for viewing the changes we are likely to see along the way, and what publishers should do about it. 

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Just had a very busy day at the London Book Fair. It is hard to post from here; I don’t have my normal 12 or more hours a day at the keyboard of my laptop. But what Book Fairs are all about is the compressed opportunity to encounter smart and knowledgeable people and I had the chance to check out and validate some thoughts I’ve been having about ebooks.

1. The proliferation of formats, devices, screen sizes, and delivery channels means that the idea of “output one epub file and let the intermediaries take it from there” is an unworkable strategy. Here are two simple reasons for that (I’m sure there are many others):

*Epub can “reflow” text, making adjustments for screen size. But there is no way to do for that for illustrations or many charts or graphs without human intervention (for a long while, at least.) Even if you could program so that art would automatically resize for the screen size, you wouldn’t know whether the art would look any good or be legible in the different size. A human would have to look and be sure.

*The link between text and footnotes, and the easy ability to jump back, is a huge variable among ebooks in different formats. There is apparently some sort of manual work and quality control here that isn’t necessarily done by a downstream converter.

Publishers will find that they must do a QC check on every version of their ebooks which is offered, and a “version” can occur every time a component of the supply chain changes.

2. The branding of ebooks is a mess. The publisher brand is being obliterated. You are buying a Kindle ebook or a Stanza ebook or an Iceberg ebook or an eReader ebook and not Random House, HarperCollins, or Hachette. Publishers are apparently just allowing this to happen. This is pretty ironic because most of the same publishers are mistakenly trying to imbue their brands with consumer significance. For the general trade publisher, that’s not actually possible (since they are not distinguished by their content or their audiences). But if it were possible, the quality of their ebooks should be a big part of it going forward and they’re relinquishing the role of “owning” that voluntarily.

In some ways, they’re also relinquishing their primary responsibility as a publisher, which is to control the quality of the product they deliver for their authors to the authors’ readers.

3. The evolving discount structure for ebooks can’t possibly be sustained. Retailers always use margin to gain share. If publishers sell ebooks to eretailers for 50% off, consumers will soon be buying them at 40% off.  On the one hand, we are ten years into a paradigm of imitating brick-and-mortar pricing and terms and it is difficult to change it. On the other hand, ebooks are still only 1% or so of most publishers’ sales, so any change made now will be “early” in the overall scheme of the ebook business.

Somebody’s got to start building a glide path to a sensible structure. This will be complicated, because publishers in the long run will be much more likely to sell digital downloads direct to consumers than physical books. That means that just going to net pricing wouldn’t be much of a solution. With the publisher selling the books online, any intermediary would be able to calculate what percentage of the retail-to-consumer they were being asked to pay.

The conversation about the prices of ebooks have centered around the costs that publishers don’t incur: printing, binding, cash tied up in inventory, warehouse, returns. But publishers say the manufacturing cost of a book is only about 10% of the retail price and we still have to maintain the operation to do all the printed book stuff and we are still investing to build the infrastructure to do the estuff.

Everybody’s right, but we’re ignoring the retailer side of it.

Retailers also avoid a lot of cost: rent, clerks, cash tied up in stock, shelving, returns. They also have front end investing to do to build an infrastructure to process a digital download business.

I think if I were a big publisher, I would make it clear that the era of 40, 50, 55, 60% off retail for digital downloads is one that must come to an end. I’d lean to a phased reduction and, in the short run, all kinds of support (including additional margin) to help “retailers” (Stanza, B&N Fictionwise, Apple’s and RIM’s App Stores, and every store served by Ingram and Content Reserve) build their offering and their capability. 

The big publishers will have extraordinary leverage to recreate the paradigm. When there’s an ebook market of a size that matters (getting close), people will search Google for their favorite title if the search at their favorite ebook retailer doesn’t deliver the title. There will definitely be retailers that will take the business at lower margins, as can the publisher itself. Boycotting high profile books will be a very dangerous strategy for a retailer.

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Adam Hodgkin at the Exact Editions blog posted a piece that explains the ebook strategies of Apple, Amazon, and Google in simple terms. Hodgkin’s piece really helps think things through, but I think his analysis is a bit oversimplified (which is part of why it helps think things through.)

Hodgkin sees brilliance in Apple’s move not to enter the proprietary ebook wars, but simply to be a facilitator of sales to iPhone users (iPhones being, at least currently, the most widely-distributed handheld device deemed suitable for ebook reading.) He takes special note of Amazon’s 30% “market maker” fee, which he posits might help drive down the accepted price for middle services in the ebook supply chain.

And, as Hodgkin sees it, Google and Apple are pursuing directly opposite strategies to bring the ebook business to themselves. Google is betting that the future is licensing whole libraries in the cloud and Amazon is betting that it is buying ebooks one at a time to download to your device.

Hodgkin also notes that Apple’s 30% fee makes the 37% share Google will take before paying Book Rights Registry and the 55-65% discounts Amazon takes on Kindle ebooks (I actually doubt the discounts are quite that high on the vast majority of the Kindle books sold and Amazon discounting practices sharply reduce the percentage they are taking of actual selling price, which is, presumably, what Apple’s 30% would be based on) look very aggressive.  By this move, he says,  ”Apple will thus appear to most publishers and authors as a reasonable partner, a less monopolistic partner, than either of the other West coast web giants.”

Hodgkin concludes the piece by seeing ebooks as a 3-company race (these three) and says he is “tempted to call it for Apple” although “there are quite a few laps to go.”

That last sentence is the absolute truth.

This piece took no note of Sony, Stanza, or the potential impact of broadly-distributed epub files. Perhaps Sony is considered part of the Google strategy, except that the 500,000 public domain books Google has made available for the Sony reader are free (aren’t they? I am happy to be corrected if I have that wrong) and they are downloaded, not left in the cloud (unlike the PD books that can be read directly on the iPhone, with the toggling between the OCRd version and the original print, which Google announced two weeks ago, and which do remain in the cloud.)

It also took no note of Barnes & Noble’s recent purchase of Fictionwise or the fact that Waterstone’s has teamed with Sony Reader for distribution in the UK.

And if Apple’s strategy is to capture 30% of the ebook revenue for everything that goes to an iPhone, they have a big hole in it already. One buys Kindle ebooks from the Amazon store, not the App Store. They download directly into the iPhone from the net (no intermediating PC necessary). I don’t see how Apple gets any of that revenue. (I am not sure about the “why” of this from Apple’s POV, except that some smarter people have told me that it will be much harder for Kindle to repeat this trick on other phones, so it could be a competitive move by Apple against Nokia and RIM.)

But I think, most of all, this analysis omits full consideration of the discrete functions served by the retailer in the supply chain. 

The online book retailer needs to do these things: 1) secure a customer’s attention 2) aggregate titles to choose from, 3) merchandise, which is enabling discovery through “shopping” 4) provide search, which is enabling discovery through “asking”,  5) transact, which includes delivering the file and accepting the money, and 6) provide customer service.

If a publisher or retailer or ebook platform provider sets up to sell through the App Store, Apple gives them a head start on number 1, nothing on number 2, nothing on number 3, nothing on number 4, presumably all of number 5, and probably nothing on number 6.

Amazon provides it all. I am still trying to understand what Google provides; I don’t think we have all the answers on that yet, except that we know they’re providing a ton of free econtent that will make selling other ebooks at substantial retail prices that much more difficult for everybody. This should not surprise anybody and it is not a knock on Google. They are primarily in the free content business. They are not in the “merchandising” business. And they don’t have the most saleable titles to sell; they actually, title for title, have the least saleable titles. The value of what Google has is in the aggregate and was always intended to be. 

It is also critical to keep in mind that the ebook market for consumers has not happened yet! Publishers are seeing sales of about 1% of their revenue. I am a bit abashed about how over-optimistic I have been about ebooks for the past ten years (a by-product of having personally read more books on devices than on paper, by a factor of about 4 to 1, in the 21st century, and about 40 to 1 since I got my Kindle.) I can see ebooks getting to 7-10% of the units sold for consumer books in the next 3-to-5 years and I’m the optimist.

And with 85% of even that incipient market having not happened yet, most of which will be read on devices that haven’t been delivered yet (including future versions of Kindle, Sony Reader, iPhone, etc.) and, further with whole business models (subscriptions, book-of-the-month plans, bundling of titles together, offers by publishers to give ebooks away with print or audio books) which have hardly surfaced yet, we can only imagine what more changes we might see between now and then.

When there is a real ebook market, there will have to be real ebook merchandising. That means complete metadata on the titles, including reader reviews and information about the printed book publication. (Amazon, because they have it for their regular store, has it for Kindle books. Nobody else comes close, although one presumes Fictionwise will get that printed book metadata once they’re integrated with Barnes & Noble.)

Michael Tamblyn pointed out in his widely-circulated “6 things” address that book merchandising on the web hasn’t really made much progress since Amazon invented it in the mid 1990s. What Kindle has got, what Stanza has built for the iPhone, and even what Fictionwise has,which might be the best presentation of ebooks even before being enhanced by B&N (and even without the book information as mentioned above), are not really well suited for presentation on the smaller screen of a device.

Apple is not providing the full suite of retail services. If you assume that somebody has to be the bookseller here: pull the titles together, curate them, group them, put the right stuff out “in the window” or on the virtual “front table” on a daily basis (or, on the web, a more sophisticated basis than “daily” suggests) and handhold the customer through any further questions (I’ve gotten great customer service attention for ebook problems in the past from both Powell’s and Diesel Ebooks), then there will be a lot of costs to pile on top of Apple’s 30% take for providing the venue and ringing up the sale. Apple is providing the real-world equivalents of “rent” and “shipping”. Looked at that way, 30% doesn’t seem so cheap, even if it is a very high-traffic location.

This is going to get a lot more complicated before it gets simpler. I didn’t mention Scrollmotion, another ebook format that can handle illustrated material better than any of the others so far. I didn’t mention publishers selling direct, which they are definitely going to be doing more and more. I didn’t mention that every phone manufacturer and cell phone network is going to go all out to compete with Apple and AT&T and their devices will handle ebooks too and they’ll have app stores too. I didn’t mention that directing you to your choice of format — any ebook or a printed book which could be in different formats — is (one of) the real end game(s) here. Neither of us mentioned Adobe Reader format, which is still the market leader in ebook units sold.

It isn’t just too early to predict a winner; it is too early to declare the finalists.

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