BISG

There are two questions about the impact of digital change on publishing that are just about impossible to answer.

One is: how much of the sale of ebooks is incremental business and how much of it is cannibalization of prior print sales?

The other is: what will be the fate of independent bookstores?

The two are connected.

As we watch the (long-term) inexorable but (short- and medium-term) unpredictable growth in ebook sales, it is really not possible to tell to what extent we’re just selling established customers the same purchases in a different form (certainly some of it and my personal guess would be the lion’s share of it) and to what extent we’re finding new customers (also certainly some of it and, to my way of thinking, more likely to the user of a multi-function device than a dedicated book reader like Kindle or Nook) or making incremental sales to established customers.

(We plan to address the whether the multi-function device users have a different consumption profile at the Digital Book World conference in January. It’s a knotty question but we think we have a way to get at it.)

The measurements of industry sales have been far too imprecise and muddied to address a sophisticated question like that. (The AAP and BISG are making a serious joint effort to remedy that situation; I have seen some of the great work in building a new data model that has been led by Tina Jordan of AAP and Scott Lubeck of BISG. More on that very promising initiative some other day.) The aggregate industry numbers that we’re used to probably won’t be sufficient to change any closely-held opinions any time soon.

Individual publishers might see data worth intepreting in the total unit sales of major authors that  have established clear sales patterns over time, if they can analyze their way past the fluctuations that must inevitably occur in the sales of each new major release by an established bestseller writer. One place one might expect to see an uptick is in the prior titles in a series (but, even then, you don’t know if the extra sales of four prior Carl Hiaasson titles weren’t instead of sales of four other books, do you?)

My own analysis has been simplistic, assuming pretty much flat sales into the digital future because that has been the case in our overwhelmingly non-digital recent past. When I do the calculations that lead me to think that the sales available to brick-and-mortar stores will decline drastically over the next five years, I’m assuming that the rise of digital sales results in a pretty much equivalent decline in print sales. I also assume that the increase in ebook sales and the reduction in retail shelf space allocated to books accelerates the movement of print book sales to online. If ebook sales aren’t largely cannibalizing, and they don’t themselves reduce the sales available to be made in stores as much as their growth would suggest, then shelf space might not disappear as fast.

My back-of-the-envelope calculations (which have been endorsed in a series of private conversations with publishers, booksellers, and analysts but also strongly resisted in a private conversation by at least one person whose judgment I really trust and also apparently contradicted by the expectations expressed by Random House CEO Markus Dohle in his recent interview) are that brick-and-mortar’s share of total trade book sales will reduce from around 80% today (some say it is higher) to about 30% five years from now. That would be a reduction of more than 60%. Let’s say the share is still 50% in five years (which I speculated might be the number in 2-1/2 years). That would still constitute a 35-40% reduction from where we are today. That’s drastic.

But it still doesn’t tell us “who fails?” Shelf space reductions can come in a variety of ways. Stores can be closed, chain and independent. Dedicated bookstores of all kinds can become less dedicated and turn over shelf space to other items. And mass merchants can decide to reduce the space they gave books or to eliminate them. All three things will happen to varying degrees.

This is a bit like trying to do a weather forecast based on one’s confident knowledge of climate change. The two are related but there are local factors in addition to global ones. Each time a store closes or reduces its shelf space (or, for that matter, in the rarer cases where a new store opens or one increases its shelf space), it affects the fate of the other stores in its vicinity.

On Tuesday night, I came home from a late meeting with a former Cabinet official who was thinking about buying an independent bookstore and seeking my advice, which, based on no specific knowledge, was “don’t.” I walked in to receive a call from a reporter who asked me for my comment on the Barnes & Noble “news.” “What was that?” I asked. “They’re putting themselves up for sale,” he said. “What has happened recently that would motivate that?”

Without having read the press release, which would have signaled to me that they weren’t actually putting themselves up for sale so much as beginning the process of taking themselves private, I strived to answer the question. I thought the acceleration of ebook uptake, some of it fueled by B&N’s Nook device, was recent news that didn’t bode well for physical bookstores. I thought the recent rescue of Borders, which could postpone their demise or shrinking, wasn’t happy news for Barnes & Noble. And I wondered whether the Ron Burkle lawsuit might make the Riggios less interested in owning the business.

Of course, all of those things are true but none of them apply because the premise was wrong. The Riggios are probably not trying to sell the business; they’re more likely trying to buy the business.

Then I checked with a commission rep friend of mine about the bookstore the former politician I met earlier that evening wanted to buy. It turns out to be an independent with a relatively solid future, with knowledgeable staff underneath its owners and a great reputation with the publishers which assures a continuing flow of traffic-building author appearances. In other words, “don’t” might not be the right advice in this particular case.

Whether the brick-and-mortar share of the business falls by 25%, 50%, or 75% over the next five years from what it is now (and all are possible), the reduction in shelf space depends on whether that reduction is against a rising base of total sales or a stable one. And how it affects any one particular store depends on what has happened to the shelf space allocations by others in that store’s immediate vicinity. That will be very hard for anybody to track.

I am still extremely skeptical of recent celebrations of the successes of independent stores, which we’ve seen coming out of New York City and Pittsburgh in the past couple of weeks. Anecdotal information is not projectable data; it is often misleading data. Nobody seems to be making the claim that bookstore shelf space is increasing in New York or Pittsburgh or anyplace else. Any one bookstore might still, for a while, be a reasonable bet. But this is a case where the usual laws of investment (diversify as much as you can) would likely not apply. It is hard to imagine bets on five or ten or twenty independent stores paying off in the aggregate in the years to come. Unless you were making those bets with knowledge about exactly where Barnes & Noble, Borders, Books-a-Million,Walmart, Target, and Costco were reducing their shelf space the odds will be against you, and I’m pretty sure there won’t be anybody who knows all those facts in a timely way.

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Upton Sinclair famously said that “it is difficult to get a man to understand something when his salary depends upon his not understanding it.”

I keep putting facts about publishing’s commercial realities that I think most of the smart people running things accept together with forecasts for the future that I think most of the smart people running things accept and coming up with a view of where we’ll be sometime pretty soon that I find very few people will accept.

We have definitely passed what Michael Cader has dubbed “peak bookstores” in the US. Shelf space for books is probably dropping faster than the number of stores as book retailers look for other items to keep their customers more satisfied and give those items space previously devoted to books. And shelf space available for publishers who don’t own bookstores is dropping faster than that because Barnes & Noble, the leading provider of bookshelf display space, is aggressively sourcing their own product both to improve their margins and to develop proprietary product not available to their competitors.

The fate of bookstores is an existential question for today’s book publishers (not to mention today’s booksellers!) Although it isn’t often stated this starkly, the core value proposition for the biggest trade book publishers is that they can put books on shelves. All of the rest of what they do (and often do quite well) — selection, editing, development, packaging, and marketing — is fungible. And usually not scaleable.

A big publisher and an agent would add to this list the “banking” function: putting up the money in advance for the author to write the book. But I’d argue that is also fungible (there’s lots of money out there looking for investment opportunities) so the publisher’s opportunity to be that banker is also dependent on the publisher’s ability to put books on retail shelves.

So, whether they know it or not (and, at the highest levels of the biggest publishing houses, they certainly do know it) the competitive advantage of the trade publisher is inextricably dependent on the survival of brick-and-mortar shelf space for books, which is distinct from total sales of books or even total sales of print books. You don’t need an organization of the scale and capabilities of a major publisher to reach customers through online channels. And, in fact, because the biggest trade publishers are horizontal in their subject matter, their size is more of a handicap than an advantage in competing for markets online.

We consume a lot of industry bandwidth considering whether the Nook and Kindle will survive the iPad and other tablets. I’d argue that it doesn’t really matter much to us. What’s important is that more and more people are reading on screens, that those who do reduce their purchases of books on paper (a fact recently documented in the BISG-Bowker study of ebook consumption), and that the digital book business is transacted online with very little potential role for a brick-and-mortar player (notwithstanding a wonderful 4-year old French fantasy video and a burst of naive optimism from an ABA executive at a BEA roundtable.)

(Digression graf: a much more realistic view of what ebooks and online shopping mean for independent bookstores today is a pessimistic one from the blog of one of the country’s leading independents, Northshire Bookstore in Manchester Center, Vermont. We know Google harbors the hope that they can provide meaningful inclusion for independents in the ebook marketplace. But even if Google’s efforts are successful, they don’t support the independent store, they support the store owner. There is a difference.)

So the race between single-function e-ink and more full-function tablets accelerates the movement from print to digital book consumption; and the move from print to digital book consumption accelerates the shift from store-based purchasing to online purchasing; and the shift to online book purchasing, whether print or digital, accelerates the reduction of brick-and-mortar shelf space.

And the reduction of brick-and-mortar shelf space increasingly challenges the core proposition of all of today’s largest book publishers.

A panel of publishing CEOs in June suggested a consensus view that 40 to 50 percent of book sales five years from now will be ebooks. Last week, another leading publishing executive, Gina Centrello of Random House, made the same prediction. I think, if anything, these predictions are conservative, but if we accept them as made, the implications are profound.

Half of sales being digital means that half is transacted online. That begs the next question, which is how much of the other half is online and how much is brick-and-mortar? The answer to that depends on two variables: the purchasing preferences of consumers and the ability of retailers to keep stores open in the face of declining sales. The two variables are connected: the further away from you is the closest decent store, the more likely you are to increase your purchasing online. And the more you purchase online, the more likely the store nearest to you is to close.

It is a conservative guess that 20% of print book sales today are made online and that ebooks are about 5-to-8% of total sales. That means that consensus estimates are that the ebook share will grow from 5-to-10 times over the next five years. That’s not unreasonable since ebook sales have more than doubled annually in recent years and 10 times would be somewhere between 2-1/2 and just over 3 doublings in five years. (Centrello said they went from 3% to 10% in the past year and, without knowing precisely what dates are meant by “the past year”, we can certainly expect more of an iPad effect in whatever is the “next” year.”)

That kind of ebook sales growth suggests an increasingly digitally-ept and digitally-comfortable reading public. That makes them more likely to buy print online too. So what’s a conservative estimate of the online share of print in five years. It can’t go up 5-to-10 times and leave any sales at brick-and-mortar at all. So let’s say (I’d say very conservatively), that print sales in 2015 are half online and that enough shelf space has survived to deliver half of print sales through brick-and-mortar. (I have to say as I write this that I have trouble believing it, but most people would have even more trouble believing me if I went with my gut on this!)

That math leaves print sales through stores at 25% of the total book sales. Today, if the stores’ share is 80% of print and we assume print is 90% of total book sales (using Centrello’s 10% number as a baseline in an attempt to be more conservative for this particular calculation), then we’re talking about a brick-and-mortar decline from 72% of the market today to 25% in 5 years! That’s a loss of about two-thirds from today’s sales levels! And that’s across all stores: chain bookstores, independent bookstores, and mass merchants.

I am not hearing anything in the statements of publishing or bookstore executives to suggest that anybody’s preparing for change that drastic. And I don’t see anything in the trend lines that suggest that we can avoid it.

Tell the truth. If I had headlined this piece, “Industry executives predictions mean sales of books through brick-and-mortar will decline by 65% over the next five years”, wouldn’t you have started out reading it assuming I was nuts?

I did a post three months ago called Why Are You For Killing Bookstores? which was on a similar topic, focusing on the see-saw relationship between ebook growth and bookstore survival. (When one goes up, the other goes down.) It was one of the most commented-upon posts in 17 months I’ve been writing the blog. I think that was a result of what could be a corrollary to Sinclair’s maxim which would go something like this: “it is very hard to get somebody to understand something when understanding it would highlight the conflict between two propositions that appeal to them.”

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We had a very successful debut annual conference for Digital Book World last January, even though we didn’t conceive the idea until June, put together a group of helpers (which we now call our Conference Council) until July, or draft the initial program until August. This year we’re way ahead of that schedule. We’ve put together a fabulous Council to advise us this year and we’re having a meeting of many of them next week to discuss the agenda and to start getting suggestions for speakers.

The Council gives us wide exposure and connections to the trade publishing industry. That way we make sure we don’t miss any ideas and we don’t miss knowing about any talented people whom our audience would want to hear.

We have several publishing company presidents and CEOs (Sara Domville of F+W, Marcus Leaver of Sterling, Maureen McMahon of Kaplan, Brian Napack of Macmillan, Dominique Raccah of Sourcebooks) and some presidents and CEOs from other companies and support organizations in the industry (Kristen McLean of the Association of Booksellers for Children, Tracey Armstrong of Copyright Clearance Center, Peter Clifton of Filedby, David Cully of Baker & Taylor, Joe Esposito of GiantChair, John Ingram of Ingram Content Companies, Scott Lubeck of The Book Industry Study Group, and Steve Potash of Overdrive Systems.)

We have other senior level executives, many with specific digital responsibilities (Peter Balis of Wiley, Ken Brooks of Cengage, Mark Gompertz of Simon & Schuster, Madeline McIntosh of Random House, Thomas Minkus of the Frankfurt Book Fair, Larry Norton of Borders, Kate Rados of F+W Media, Charlie Redmayne of HarperCollins, Adam Salomone of Harvard Common Press, John Schline of Penguin, Evan Schnittman of Oxford University Press, Michael Tamblyn of Kobo, Maja Thomas of Hachette, and Tom Turvey of Google.)

We have agents (Sloan Harris of ICM, Simon Lipskar of Writer’s House, and Scott Waxman of the Waxman Agency) and industry consultants and commentators (Michael Cairns of Persona Non Data, Ted Hill of THA Consulting, and Lorraine Shanley of Market Partners International.) And because he is our media partner, we have help from Michael Cader of Publishers Marketplace as well. And we also get great input from others on the F+W team: David Nussbaum, David Blansfield, Cory Smith, Guy Gonzalez, and Matt Mullin.

So we have all the Big Six represented, as well as small publishers, industry-wide associations and service providers, wholesalers, digital distribution partners, retailers, and agents. All of these people have real input into the topic list and speakers. Many of them are joining us for a meeting next week to review our ideas for the program, which we previewed on this blog about a month ago.

Because Digital Book World tries to be at the cutting edge of trade publishing and digital change, we often face one or both of two challenges. Sometimes we believe something should be happening, or be about to happen, but we may not know where or whether the publishers leading the charge will talk about it. Several topics come to mind that fit that description: vertical efforts inside general trade houses; what houses are doing to adjust to reduced expectations for print sales in bookstores; how houses are gearing up or changing their sales efforts to compete in and serve a growing list of digital intermediaries; how enhanced ebook and ebook first creation change the traditional order of things in product development.

The other challenge we have to work around is when people can say things privately but not publicly. One topic that is very tough to talk about is ebook royalties, which is a major point of contention between publishers and leading agents at the moment. The big houses are pretty adamantly trying to hold the line (publicly) at a royalty of 25% of net receipts. But upstart publishers like Jane Friedman’s Open Road appear to be willing to pay 50%; publishing through Smashwords yields 85% (but sells the books without DRM, which would frequently scare the copyright owners of valuable properties); and self-publishing through a distributor would deliver a yield somewhere in between. (Remember: self-publishing ebooks carries no inventory risk.) In that environment, some agents are able to wring some concessions from some publishers. But the agent can’t talk about that without jeopardizing her ability to get concessions for her clients and no publisher will volunteer to reveal the isolated concession and start turning that into a policy.

Some things are just hard to discuss. Do booksellers, or even the publishers and wholesalers who supply them, want to talk about the possibility of their impending demise? But how can one plan for the future and ignore that elephant in the room? If a publisher suddenly sees the necessity of developing direct selling relationships with end users, after years of telling booksellers he was against it, does that publisher want to talk about those efforts in public?

When competitors participate in industry education initiatives, they must draw lines around what they will reveal and what they won’t. One ebook-responsible executive we know at a major house is persistently reluctant to reveal what he’s doing or what he’s thinking. But he has a boss, one who is proud of what he does and what their house does, who pushes him forward as a speaker.

Frankly, I think these challenges are greater for us than they are for other conferences on digital change that focus more on technology than they do on business practices. Very few publishers are masters of tech; usually they’re working with outside suppliers who are happy to share best practices. But business practices are different; they’re more sensitive. Sometimes the reluctance to share them is sound. Sometimes constraints are even legally required. Since our job is to focus on business practices, we’re glad to have relationships with very knowledgable players who will candidly engage with us on these challenges so we can figure out the best way to protect true proprietary knowledge but still disseminate valuable information.

We’re really proud of the illustrious group we have gotten to advise our efforts, and we get great value from them even though their first responsibility is to the company they work for. We feel confident that this group helps us cast a net that is wide and broad enough to assure us that any major development in the trade book world will hit our radar screen and that we’ll know if there are informed people willing to talk about it.

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I don’t think too many future predictors are .300 hitters, and one ground ball I tapped out to shortstop was my hunch that the iPad wouldn’t have an immediate significant impact on ebook sales (although I thought it would be important over time.) According to data and analysis uniquely developed and provided by Michael Cader, published last Wednesday (which you need to subscribe to Publishers Marketplace to get and, if you don’t yet, what are you waiting for?), I was proved wrong in less than a month. Apparently if we get slightly larger and portable screens into people’s hands, they want to read books on them. And they don’t need to be e-ink and be lightweight (like Kindle and Nook and Sony Reader and the new Kobo Reader and a slew of forthcoming devices) to have that impact.

All we know from Apple is that they sold about a million iPads in the month of April, with 3G sales beginning only at month end. (Virtually everything sold in April was wifi-only.) We got download numbers, but no real guidance about what they meant in terms of sales. We can figure out that any sales numbers we can gather are for an average installed base of 500,000 iPads.

We wouldn’t expect the monthly sales rate of a million units to be sustained; there were a lot of pre-orders and launch-hype sales in April’s numbers. But with May being launch month for the 3G version and both the wifi and 3G models available going forward, and the 3G model apparently much more popular than the wifi-only, a sale of 500,000 in May which is 3G launch month and a “run rate” of 300,000 a month going forward would seem a modest expectation. If that’s right, then the average installed base in May will be 1.25 million, in June 1.55 million. So the installed base for June will be triple what it was in April.

Cader got anonymized information from an unknown number of large Agency publishers for the April sales. He says that for most of the companies he surveyed, iBooks sales were 12 to 15 percent of their ebook total before the 3G models landed! And then two companies reported sales jumps of 300 and 400 percent on the weekend that they did. And one publisher who showed Cader figures by title revealed that there were already books on which the iPad sales exceeded Kindle sales.

Cader’s analysis pointed out two nuances that need to be considered when interpreting these numbers. The Agency Five impact is overstated because of relatively restricted competition. They have far fewer titles competing with them in the iBooks environment than they do in the Kindle store, the Kobo store, the Sony store, or from the ebook independents. Giant Random House and lots of smaller publishers just weren’t there. So even if the sales of all five publishers were 12 percent of their total ebook sales in April, it wouldn’t suggest that iBooks constitute that portion of overall ebook sales. Yet.

But, at the same time, these numbers also understate the impact of the iPad because iPad owners also buy and consume books on the device from the Kindle and Kobo and B&N readers which wouldn’t be reflected in Cader’s survey numbers. One ebook retailer who shares information told me that sales for his company were very strong in April. I had asked that question to probe whether sales were adversely affected by the price increases mandated by the Agency model. Were they reducing business? No, definitely not. (This is a very big sub-point, but we’ll leave it for another day.) So while one must assume that some of the sales being made from iBooks would otherwise have been made by Kindle or Kobo or another existing retailer, the market is apparently growing fast enough to mask the impact of any cannibalization.

With five of the Big Six and most of the big titles in the iBooks store, it would seem reasonable to assume that 65% of the sales potential is reflected in those books. Applying that assumption to the average of the reported 12-to-15 percent market share (13.5%) would suggest that the overall share of iBooks sales is just a tad under nine percent.

But it would seem to me that number will more than double in May. The installed base will be more than twice as high and the 3G model, from which publishers are reporting much more activity, will constitute a significant portion of the May base after having been non-existent in April. In fact, it seems at least as likely that the number could triple! So by June, we could well be seeing a quarter or more of all ebook sales occurring through iBooks. The rise will probably be slower after that (May sales will reflect the huge installed base increases generated by initial sales in April of the wifi model and in May of the 3G) but Apple climbing into a solid second place behind Kindle in 60 days is pretty dramatic.

Even more exciting for publishers is the evidence that the iBooks sales are expanding the ebook market. Cader reported that many strong titles skewed to a younger and male demographic and that iBooks sales boosted the performance of some nonfiction titles. Most people figured that the iPad would appeal to an audience of not-as-heavy book buyers compared to Kindle, which was part of the reasoning behind my own flawed expectation that sales would be modest at first. But what we may be seeing is that people who get a decent reader in their hands might consume more books digitally than they had in print. If that proves to be true, it would be very good for publishers and authors.

Meanwhile, even before this analysis was delivered, we got news last week from two publishers that increased ebook sales were their best financial news. Both Simon & Schuster and Harlequin reported that print results were disappointing, but digital sales were stronger than expected.

It was only about six weeks ago that I looked at the IDPF’s most recent numbers, applied them to what I’d heard in my own anecdotal conversations with major publishers and agents, and had an epiphanic moment realizing how close we were to what we called at BISG’s Making Information Pay conference last week a “point of no return.” I wrote in my London posts and then repeated at the conference last week that I saw ebook sales to be 25% of a narrative book’s unit sales expectation by the end of 2012. With print book sales made online thrown in, I saw virtual cash registers ringing up half the units for narrative books by then. Two Big Six CEOs privately agreed with me as did a retailer knowledgable about both print and ebook sales. Then I spoke to a Big Six digital strategist who said I was being conservative.

This view is not universally accepted. An executive at a trade book distributor last week told me (nicely, he’s a nice person) that he thought I was nuts. He still sees ebook sales as trivial and not likely to reach the levels I expect by the end of 2012 by even the end of 2016.

Well, I intended to be conservative because I was so surprised at my own realization at the beginning of April. But I remind myself (and all of you) that things happen “gradually, then suddenly.” It now looks to me like the iPad — joined as it will be by a flood of new ereaders and tablets and even whole new platforms like Blio and Copia — may be the catalyst for the transition encapsuled in those three words.

When I examined the Random House tactic of staying out of the iBook store initially, I said it made sense but that it constituted a bet that iBooks sales wouldn’t be robust right out of the box. Now that sales results seem to have proven that conjecture (which I shared) wrong, I’d expect that Random House will join the other big publishers in moving to the Agency model to enable them to join the iBook offering. The numbers we discuss in this piece would suggest they’re losing sales and the agents representing the authors not in the iBooks store are bound to be pointing that out. In the meantime, Random House has gained some benefits from having less expensive ebooks in the marketplace in other storefronts, but it would be surprising if that compensated for not having an outlet selling 12% or more of the ebook units.

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This is the third year in a row that we’ve put together the Making Information Pay conference for the Book Industry Study Group, in conjunction with Ted Hill of THA Consulting. We’ve repeated the formula we’ve applied for the past two years, doing an industry survey on the conference theme to provide some additional insight.

This year’s conference is called “Points of No Return.” It looks at things from the perspective of publishing’s employees and seeks to discover when the markets, technologies, and process changes make things so different that old skills don’t map, old organizational structures have to be completely revamped, and people really have to develop new capabilities, accept new roles, or be forced to move on.

Our survey this year tried to gauge the feelings of publishing’s labor force about the changes they’re seeing in their company and throughout the industry. We also asked for a reaction to a number of industry “buzzwords” (like “Twitter” and “vertical”.) A report on the survey results will be distributed at the conference, but here are three little nuggets:

1. The preponderant majority of workers in all parts of publishing — editorial, marketing, sales, IT, distribution — believe that significant changes caused by technology either have occurred or are occurring now. No surprise there, but the surprise will be that there is one function people think is changing much less than everything else. And wouldn’t you know it is one that I think will likely change more than any other over the next few years?

2. Half of our respondents think publishing will become a more profitable business in the future, but they split down the middle as to whether the business will be smaller and more profitable or larger and more profitable. There’s a similar split on expectations about whether there will be more jobs or fewer. (Half of those expressing an opinion think there will be more jobs! Stop the presses!!)

3. What I found to be a startling percentage of our respondents think Twitter is a fad, soon to fade away.

Making Information Pay delivers a concise program: two 90-minute sessions surrounding a 30-minute networking break that starts at 9 and concludes at 12:30. We designed the program so that the first 90 minutes delivers facts and insights about the industry and the second half features reports from the front lines of change.

After BISG Executive Director Scott Lubeck opens the program and I deliver a very short keynote, Kelly Gallagher of Bowker will begin the morning segment talking about what Bowker PubTrack Consumer has discovered consumers are saying that is relevant to publishers thinking about points of no return. PubTrack has delivered some great insights over the past year, from demonstrating how important in-store display is to book sales to quantifying consumer attitudes about ebooks in a special study done jointly with BISG. He will highlight the Bowker findings most relevant to our program’s theme.

The Gilbane Group is also working with BISG, doing research on the seven “essential processes” (which I still call “systems”) that publishers need to keep up to date in order to stay viable as their businesses change. Do your production processes support tagging chunks of content that you might want to sell separately from the whole book? If not, you will lose revenue as the market for fragments develops. Does your royalty accounting process enable you to report to authors on sales of this kind and divide revenues appropriately? If not, then you’ll have a different set of problems exploiting those new opportunities. David Guenette of Gilbane will tell the MIP audience what the seven essential processes are, why they’re critical, and what pitfalls await if they are not ready for what’s coming.

George Lossius of Publishing Technology will tackle one of the paralyzing challenges of our current environment: how can publishers make substantial investments in technology when the business climate is changing so quickly around them? Lossius maintains that there are things we do know that can guide us; he’ll be helping publishers see what truths are stable and reliable to guide their investment decisions, even when a lot is not.

Jabin White of Wolters Kluwer has worked through some major process changes within his own company. We’ve asked him to focus on the people-centered challenges of those changes. How do you bring people along when change might be making them uncomfortable or unhappy? And how does an organization deal with the changes in job skills required, which could mean changes in the particular people required, in the least disruptive way?

The second half of the program will start with Bruce Shaw and Adam Salamone of Harvard Common Press who will present an eye-opening view of how the strategy for new title acquisition changes when a publisher becomes sensitive to its role as a vertical player. They demonstrate convincingly that decisions change when an editor sees they are acquiring content for a database rather than simply publishing a book.

Phil Madans is deeply involved in Hachette’s move to a digital workflow for book development. This requires a shift from an “assembly line” way of working to a “collaborative” one. Editors no longer finish their work before they engage with design and production; there’s a lot more being done simultaneously rather than consecutively. Hachette is well along in building this new process; Madans will offer insights that will be very useful to other publishers still contemplating this switch

Matt Baldacci of Macmillan, who oversees all the marketing spending at his company, is covering the challenge of changes in where marketing dollars are allocated, and the processes and skill sets necessary to do successful marketing in today’s marketplace.

Maureen McMahon of Kaplan draws on her prior experience directing sales at Random House to analyze the changes in sales, which she sees as having moved from requring “closing” to requiring “connecting”, all of which leads to different hiring criteria than she would have applied only a few years ago.

And on top of that, BISG has two sponsors with useful messages. Steve Walker of SBS Worldwide offers his Electronic Distribution Center, which gives publishers completely new supply chain capabilities and a web-based tracking mechanism that cuts administration and communication costs at the same time. And John Konczal of Sterling Commerce has tools to enable new business models, such as those that the Gilbane analysis points out as requirements earlier in the conference.

We’re very excited about this program; we think people at every publishing house will have something to take home and apply that very afternoon, which is always our objective. As readers of this blog well know, I’ve been speaking at, running, and going to digital change conferences for almost two full decades. To my knowledge, there has never been one before that focused on people in their jobs. How will mine change? Will I still be able to do it? Will it still be here for me? And what do I have to do to make sure I can stay employed in publishing?

We think these are questions a lot of people are thinking about. If you’re one of them, join us at Making Information Pay on May 6!

I am interrupting the “What I Would Have Said in London” series to bring you this time-sensitive post. We’ll resume WIWHSIL with Part 2 tomorrow.

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I spent a chunk of yesterday working on this post while, with one eye, I was watching the news about the volcanic eruption in Iceland that shut UK air traffic. As I post this on Friday morning with a flight scheduled to leave tomorrow night near midnight, I’d guess the chances of actually getting there might be as low as 50-50. In fact, the post has already been edited because two people from one client I was going to work with there — Copyright Clearance Center — already had to cancel because of the air travel disruption. I hope the post will be of interest no matter how this turns out.

It’s been a running joke between me and my oldest friends (none of whom are in the book business or digital space or anywhere near it, having chosen careers long ago as teachers, lawyers, engineers, TV directors, and other “normal” comprehensible things) that all of them wonder “what the hell does Mike do?”

It has occurred to me that readers of The Shatzkin Files might wonder very much the same thing. So while I’m thinking through my planning for what promises to be a very busy time next week at the London Book Fair, it seemed to me that writing about it would both help me think and spell out a bit about how a book business consultant adds some value and earns a living. And hey, maybe we’ll promote some clients and some of these activities of mine at the same time!

My principal mission next week is to talk to UK publishers, mostly to the digital strategists but also to some senior management, about the following initiatives:

1. I am just starting to organize the program for the second annual Digital Book World conference, which will take place in New York in January, 2011. I’ll be doing a post here sometime after London to enlist the help of all my readers in brainstorming and planning this, but what I’m going to do next week is tell publishers what I have in mind and get feedback and suggestions. It is an article of faith among the US publishing community that we’re “way ahead of them” and, indeed, I am not aware of conferences dedicated to publishers in the UK that are comparable to Digital Book World, O’Reilly’s Tools of Change, or the Book Business Conference and Expo. (There is London Online, but that is not a conference focused on book publishing.) Since it would seem that the world of digital would bring publishers of different nationalities closer together, not further apart, I’ll be looking for possible speakers as well as ideas, and probing whether it makes sense for our partners at F+W to really market our conference in the UK to look for paid attendees as well.

2. We’re also on the verge of formally announcing a new program in partnership with F+W Media: E2BU, Enhanced Ebook University. The White Paper, being written by Pete Meyers, is expected to go out for “peer review” next week. Kirk Biglione of Oxford Media Works, our CTO, has been leading our effort to craft a multi-track webinar program that will also be part of the initial E2BU offering. Since this effort is all virtual, we’ll definitely want to market it in the UK. I’m expecting UK participants in our webinar sessions (as “faculty”) and we’re recruiting peer reviewers from the UK for the White Paper as well.

3. As readers of this blog know, we’ve been working with Copia, a new ebook platform with social networking integrated in (and six ebook reader hardware offerings as well). Copia offers some unique marketing opportunities to publishers that are simply not a part of any competitive platform. So we’ll be using the London Book Fair to meet with the digital heads of UK houses to jump-start the awareness of this new platform and sales channel among non-US publishers. The response to the Copia presentation among publishers and agents in New York has been unanimously enthusiastic. Meanwhile, from the Copia side, we’ve been seeing that we need to engage with publishers well beyond their ebook departments; really taking advantage of Copia will require the involvement and creativity of editors and marketers. I’m looking forward to seeing how the UK publishers react to the opportunity.

4. London Book Fair ends this coming Wednesday, April 21. Exactly one week later, I’ll be addressing the AGM of the PA (which everybody in the UK knows is the “annual general meeting of the Publishers Association.”) My remarks are already thoroughly planned, of course. I’ll be talking about where the world of content and publishing will be in 20 years, predicting a world where owning IP won’t be of nearly as much commercial value as owning eyeballs. And I’ll be talking about a couple of publishers who are already getting ahead of that change. Then I’ll discuss where the US book marketplace is going in the next three years, which I think has very significant implications for UK publishers thinking about territoriality and global markets. But I’ll be using the book fair to get somewhat more acquainted with how UK publishers see their market today, hoping to find additional bits of relevant information to sprinkle into the talk.

The London Book Fair is not just about meeting publishers and publishing operatives from “across the pond” or around the world. Sometimes it is presenting an opportunity for us to work in person with US clients who are not based in New York, or to introduce clients to US publishers who are not based in New York, as with these:

5. I have also written on the blog about our “freight forwarder” client, SBS Worldwide and their eDC supply chain solution. Steve Walker, the Chairman of SBS, is speaking at the BIC (that’s Britain’s Book Industry Communication, their rough equivalent to our BISG) Supply Chain Meeting, an annual London Book Fair event. So, of course I’ll go see that. In addition, we’re using the London Book Fair to introduce Steve and eDC to a couple of US publishers from outside NYC.

6. In the same vein, we’ll use London Book Fair to meet with our clients at Bookmasters. They have a very broad suite of author- and publisher-support services, which have grown organically from their roots as a short-run printer. The range of their services really extends across the entire publishing value chain: literally from getting the book written (if necessary), getting it set up for printing or digital distribution with an XML workflow, content conversion, printing (POD, short run digital, or offset), and all sales and distribution services up to and including a toll-free number to take orders. And, unlike others that approach that range of services, they’re a willing on-ramp to publishing for individual authors and tiny publishers. Bookmasters is based in Ashland, OH and they’ve just created a new position called Business Development Manager for Integrated Solutions and put a new executive named Bob Kasher in place who is making their very complex set of solutions accessible to potential customers. LBF gives us a chance to meet and refine the way the propositions are being presented in light of real customer reactions and responses.

Oh, that’s not all, of course. I’ve been invited to speak in Ljubljana at a digital publishing event next year and the person who invited me will be available for a chat in London. I’m having dinner with the head of one of the big DADs (digital asset distributors) that I hadn’t yet had the opportunity to know personally. I’m seeing a Boston-based publisher with which I’ve had some conversations about digital change to see if there’s a potential engagement. I’m meeting with an Irish publisher to be interviewed for a thesis he’s writing. And I’m seeing lots of old friends before my wife comes in and we head off with two of those old friends (and their dog) to spend a weekend seeing Scotland from our base at The Pineapple in Dunmore.

I certainly won’t be bored at the London Book Fair and now you know why new posts from me might be sparse until I get back to the States on April 29.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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This post contains a reference to our next conference effort: this year’s Making Information Pay for the Book Industry Study Group. There is a survey associated with this conference about how processes and job descriptions are changing that we really hope everybody employed in a publishing house — particularly those people involved in editorial, production, marketing, and sales — will take. If you’re employed by a publisher, please respond to the survey!

Even though I personally have concerns about the precious money that could be wasted on “enhanced ebooks”, I know that we’re going to see an explosion of interest in them and a huge escalation of investment in them in the next couple of years. That’s why I’m working on a new project called Enhanced Ebook University (EEBU) about which there will be much more to say in the next few weeks.

The idea behind EEBU is, to twist a quote from Mark Twain, “everybody’s talking about enhanced ebooks but nobody is quite sure what they are.” The first task of EEBU will be to survey the possibilities of what can be done and how it can be done. The process of building the outline for the White Paper that will be part of this project has uncovered a lot of great ideas that give me some renewed hope that enhanced ebooks can be more useful, and more supportive of the immersive reading experience, than were the CD-Roms we created 15 years ago.

One thing we’re hearing often enough now so that it is becoming a new cliche is that making enhanced ebooks is “like producing a movie.” The point is that there are many creative efforts that need to be integrated. This all makes me nervous for publishers. This is not their skill set. This is CD-Rom land. This is an invitation to spend enormous sums of money creating products that will never earn back their costs.

Now what I’m wondering is whether the enhanced ebook could lead to the resurgence of a diminishing breed: the (enhanced e)book packager. It may be already happening.

Starting in the 1960s and famously led by Paul Hamlyn, who consecutively created and then sold packagers Hamlyn and then Octopus, the UK-based packagers of heavily-illustrated books intended to be delivered in multiple languages became a critical component of commercial book production worldwide. The “packaged” book had a number of requirements that challenged publishers. They were illustration- and design-intensive; they required large amounts of subject and photo research that then needed to be rendered in a consistent and (for each title) formulaic way; and they required an understanding of design and language requirements so that they could be printed for different language markets with just a black plate change. (Some languages consistently take more characters to express the same thought than others and knowledge of those details was a component of the packagers’ expertise.)

Packaging evolved over the years. Some packagers, like Dorling Kindersley and Octopus, went for the greater margins of being publishers. With the greater margins, of course, also came greater risk as they invested in books, rather than being hired hands creating them on the back of a publisher’s firm order for copies. (One major packager — Quarto — evolved into a bifurcated company that is half-packager and half-publisher.) As the bookstore chains and other large customers like the mass merchants grew, they sometimes went directly to the packagers at Frankfurt, rather than waiting for a publisher to buy the book and offer it to them. That disintermediation reduced cover prices for the packaged books in those outlets which put further pressure on any attempts by publishers to sell the books in the remaining parts of the market.

Packagers existed for a reason: they added value. They organized themselves differently from publishers, focusing on complex project management challenges that publishers didn’t want. They set up important relationships, with Asian printers and with photo stock houses, and developed skill sets, for templated design and efficient assembly of books from multiple component parts, that publishers didn’t have.

So today we have ScrollMotion (which acts, in many ways, like a publisher), Brad Inman’s Vook in the United States and Peter Collingridge’s Enhanced Editions in the UK and, according to Peter Meyers — a veritable font of knowledge on this subject that I just tapped for EEBU — literally hundreds of others that now call themselves “app developers” offering up the equivalent of book packaging services for enhanced ebooks. These entities probably have a bright immediate future; they can do things that publishers will find themselves highly challenged to do for themselves.

In these still early days of developing the EEBU idea, it had already occurred to me that agents were going to be playing in this sandbox. When I first looked at Blio, it seemed immediately to me that authors had a key role to play and Blio’s very intuitive toolkit made it possible for them to do that. I included an agent in my initial round of readers for the EEBU White Paper outline because I believe that  before very long big agents will be hiring staff to help their authors execute enhanced ebooks. Meyers, who seems seems to have done more thinking about this subject than anybody else I’ve met (I’m meeting Collingridge next week at Tools of Change), also posited that agents could become the new packagers in the emerging enhanced ebook landscape.

One other point has arisen repeatedly in our early research for EEBU and also touches on another upcoming project of ours: the next BISG Making Information Pay conference that we’re organizing which, this year, is on “Points of No Return.” (That’s the one I want publishing company employees to take the survey on.) PONR is trying to assess how much the workflows and jobs will change in editorial, production, marketing, and sales as the digital revolution takes hold. That project intersects this discussion: when we make ebooks first or enhanced ebooks often, will the required skill sets change so much for editorial and production people that the current incumbents will be unqualified?

At least one expert I’ve talked to thinks they will be. A friend who has worked in trade publishing but who is now oveseeing vast programs that create college textbooks says that the editorial skill sets that work for print alone don’t seem to port to multi-media. I have heard this before. When we were doing research for the BISG conference in 2008, a digital operator at Wiley made a very similar observation.

The use of outside packagers for ebooks might not work as well as it did for illustrated books twenty and thirty years ago. Packaged books, generally, did not have single authors or, if they did, the author was secondary to the idea and to the package. In fact, the author was usually hired by the packager that had the idea rather than the author developing and pitching the idea, which is how the agented-author book usually works with publishers. That argues for the agent-as-packager model.

Or it argues that some kinds of enhanced ebooks — the movie-like ones — won’t be the purview of publishers at all. I saw somebody suggesting an enhanced ebook of Avatar. Good idea. I had the same idea. But the way I’ve been thinking about it is that it will come from the film producer. It would be a lot easier for somebody working for James Cameron to pull five minutes of movie clips and 100 stills and hire somebody to turn the script into a ten thousand word narrative than it would be for somebody working for a book publisher to do this. Why would anybody think a book publisher would be needed for a tie-in of this kind in an app and enhanced ebook world? The publisher was needed for thebook tie-in because the publisher put the product on store shelves. Publishers have no advantage over movie studios for access to the App or Kindle stores.

On the other hand, there are a lot of enhancements to ebooks that aren’t so movie-like and which would be more like what an author or publisher could provide expertise to do better: character description capsules; background material about a person, place or thing; back story narratives that would interrupt the flow for most people; links to sources or further information. It could be that the Baker & Taylor Blio tool, and other things like it that are coming along, will enable an author and editor to accomplish a lot of that. They can even mix in the video. But it wouldn’t make them qualified to shoot it or even curate it, let alone negotiate for any rights.

That’s the kind of thing we’ll be exploring in the EEBU project.

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While the AAP reports that US book sales are definitely down and my friends in major houses report a decline of 10% or more across the board, that’s not what we’re hearing from Canada and it’s not what we hard from small and midsize publishers responding to our BISG “Shifting Sales Channels” survey.

BookNet Canada reports 665 “same stores” in Canada reported units up 6.7% and dollar volume up 5% year on year in the first quarter! Michael Tamblyn tries to fish for reasons on the BNC blog, but there is no cause immediately apparent. Michael decides that it isn’t a Stephenie Meyer effect because there something like the Meyer effect happens just about every year.

The BISG and Idea Logical survey for “Sales Channels” was nowhere near as scientific, but we did get 245 responses which suggests the results are worthy of serious consideration.

One response in particular blew me away. We asked whether “overall sales for the past 12 months have been considerably weaker than for the two years prior?” Every large publisher we talked to said “yes” to that. Three significant smaller publishers we talked to said emphatically “no”, they just had record years. In the survey, 73% of large publishers said “yes” (sales had been much weaker) and 65% of smaller and midsize publishers said “no”!

We got a similar split on the question “have sales of your books fallen substantially any specific channels or accounts over the past three years?” Only 44.9% of the medium and small publishers said “yes” to that but 63% of the large publishers did!

So sales seem to be stronger for smaller publishers and smaller countries.

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The subject of eliminating returns seems to come up more and more frequently these days. Last week we were interviewing a major independent bookseller for our BISG “Shifting Sales Channels” project and they brought it up. In this case, they were complaining about the new “no returns” policy from HarperStudio. As I understand what the store said, the high discount (61%) only applied to the initial order but the no-returns option, if elected, would apply to the reorders too.

“So you’ll do all your reordering from Ingram, right” I asked.

Of course they will. But they’re happy with 61%. They’d much rather buy everything non-returnable at 61%.

Returns were invented, some say by Viking and others say not, in the 1930s as a proactive response to the stores’ reluctance to take risks during the Depression. It became a widespread practice pretty quickly. Since I came into the business in the mid-1970s, there have been two big changes in returns:

They didn’t have returns as a routine matter in the UK when I began my career; they do now.

Publishers have chipped away at returns credits, so that it is not uncommon that returns result in a small margin for the publisher. The most common device is that all returns credits are calculated at maximum discount, even though some books may have been purchased at lower discounts. 

The commercial logic for returns is that offering them helps the publisher persuade the retailer to buy more aggressively: both more titles and bigger quantities of some titles. The ethical justification is that the publisher knows all about the book and the store only knows what the publisher tells them until it comes out. Such things as a marketing plan, and follow-through on a projected marketing plan, are entirely in the hands of the publisher.

In my experience, the flawed, misleading, or downright erroneous analysis of returns is common. A longtime publishing sales director at three of the biggest houses (now long retired) had the practice of computing returns percentages for his biggest accounts every month. It was amazing how high the returns percentage was every February, when few big new books had initial shipments and the returns from Christmas hit the warehouse.

In fact, the returns in any time period are not from the sales in that time period but result from sales made at some earlier time. So when you think the returns percentage for any period is too high, you might just be saying that the sales in that period were too low. Any time you have a year when sales are low relative to the year before, odds are the returns that year will also be computed to be high. Let’s hope nobody makes a strategic choice on that basis.

Shrinking shelf space at retail would result in higher returns percentages. Two ways. The books on those shelves come back. And no new books head out to replace them. Bigger numerator, smaller denominator, higher returns percentage.

Here’s another instance where more refined thinking about returns is needed. When a title has sold for a very long time (at any level of sales), its overall returns percentage will be very low. After a while, the overall returns percentage for a title is a meaningless number. What a publisher should be measuring is their success in bringing a title’s inventory down in the supply chain without excessive returns. But you’d measure your success against that objective by measuring returns against what was in the supply chain when you start retiring the title, not against all the copies that have sold in 12, 18, or 24 months when the book was being constantly reordered with almost no returns.

These examples make a central point: returns percentages are the inverse of reorder activity. If you have a lot of reorder activity, you will ultimately have low returns. If you don’t, you will almost certainly have high returns.

Returns are also not uniform across any publisher’s list. Frontlist has a higher returns percentage than backlist. Heavily promoted titles risk huge returns, both as a percentage and in absolute numbers. When booksellers ask publishers to sell the backlist at a higher discount non-returnable, they’re asking publishers to give away margin for little gain because solving returns on the backlist doesn’t solve the returns problem for most publishers.

The biggest experiment with no-returns selling by a large commercial house was by Harcourt Brace Jovanovich around 1980-81. They offered discounts up to 58% (if memory serves) when the standard most indies bought at was in the low 40s. There were a lot more independents back then and they rejected the experiment emphatically. It lasted only one season.

Today, independents are not enough of the market to make the call, but many of them would actually support no-returns buying at high discounts. I think the chains might too, but most big publishers would probably be nervous about selling the chains that way. They’d be afraid they wouldn’t be able to get the big promotional advances that drive the top end of their business. They’re right, or at least the non-returnability — or some shared markdown concessions — would get negotiated away on a title-by-title basis. And that creates the complication of having to offer the same deal to everybody.

Some publishers who offer a non-returnable option feel it is successful, but they don’t really know how important it is that returnability is still available for their customers: through the wholesalers (and those non-returnable publishers still take returns from the wholesalers themselves!)

Managing returns rather than eliminating them also has the payoff to publishers of making it easier to keep backlist titles alive at full price. If retailers started marking titles down when they got impatient about their sale (and if higher no-return discounts gave them the margins to do it relatively painlessly), then the stores successfully selling those titles at full price would be hurt. Or at least they’d look bad.

The most effective way to cut way back on returns is to increase the frequency of replenishment. If you restock every day, then very few titles need to be carried in a quantity larger than one to avoid losing sales to out of stocks. That focuses the problem on building and then selling down platform quantities, which is where the “problem” really is.

The returns from books you put out and just don’t sell are an inevitable cost of doing business for publishers and for booksellers. There will be a failure rate. The trick is to make failure cheap, and you do when you put books out in small quantities to find they don’t sell.

That strategy works when you get reorders, keep a book going (and growing). 

But the big returns come from putting out the numbers you need to give a book retail “presence”. If you isolate those and calculate them, maybe it would be more accurate accounting to treat them as a marketing cost?

Ingram has offered the fast-turnover daily-replenishment stocking model to retailers for years and even at the expense of the middleplayer’s cut of the sale, it has been a good practice for many retailers. Almost all independents order from Ingram and/or Baker & Taylor every day and most have relatively low returns rates.

Another thing that has changed about returns in my time — and which argues for eliminating them — is the percentage that are actually ultimately recycled and resold. Many things mitigate against putting a return back in stock, including that it probably takes a human review to certify that the book is in condition to be sold as new. And these practices all began when the ratio of hardcover sales to trade paperback was much greater than it is now. If the book is not going to be recycled, it makes a lot more sense to accept either a shared markdown or affadavit that the book was destroyed than to require the return for credit.

It is hard to debate the green logic that shipping the same book around several times in 2009 is idiotic. (Green logic also should tout used books, but we’ll leave that inconvenient truth aside.) Returns restrictions and no-returns offers will likely become more widespread. As they do, there will be a complicated commercial problem to work out with Ingram and other wholesalers (who ultimately can’t take returns from stores if publishers don’t and who can’t be the back-up on a conservatively ordered “big” book if they can’t return to publishers). And it will put increased pressure on publishers to routinely process all orders within 24 hours.

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