Brian Murray

It took me a couple of days of pondering this to come to my current understanding of it, but I now think that Carolyn Reidy of Simon & Schuster and David Young of Hachette Book Group, since joined by Brian Murray of HarperCollins, are not really fighting a battle to rescue hardcover books from price perception issues caused by inexpensive ebooks. What this is really about is wresting control of their ebook destinies back from Amazon.

I first — mistakenly — focused on the economics of the decision announced by Reidy and Young through the Wall Street Journal to withhold ebook editions from the market for a few months on major new releases. I was not the only blogger or analyst to see it that way. The purpose stated explicitly by Reidy to the Wall Street Journal was to protect the hardcover sales from being cannibalized by very inexpensive ebooks. This sounded like a very dubious calculation to me; I just couldn’t see very many people saying to themselves, “I’d have bought the ebook right now if it were available right now, particularly for those cheap ebook prices, but I just can’t wait to read this new book, so I’ll pay extra to read it sooner in a format which isn’t the one I prefer.”

But, reflecting on this, I realized: “I know Carolyn and David are smart people. They wouldn’t flub this math!”

So I thought a little harder. The subtext should have been more obvious.

The penny dropped for me when HarperCollins announced a similar policy. That’s three of the Big Six, three of the publishers that deliver all the high-profile big books to the industry. Publishers Lunch reports today that Macmillan has delayed some books and will continue to look at that strategy, that Penguin might do it from time to time but “not systematically” and, so far, no word from Random House. Random House is particularly interesting since their new key executive decision-maker, Madeline McIntosh, just returned to them from Amazon.

We know something else that matters: agents must, for the most part, be supporting this. The three houses that already announced are (like the others) agent-sensitive and in touch with them all the time. And no agent has stood up yet and protested. There’s an easy answer for any that do; no publisher has announced this as a policy covering all their books. “You don’t want a delay on your author, Ms Agent? If it’s what you’d like, we’ll put that ebook out simultaneously.”

In fact, Reidy hinted at this. She said there was one S&S author who asked to not be included in the list of withheld titles. She didn’t say how they handled it, but big houses don’t generally fight with big authors.

If all of the Big Six, or even just those who have announced this delay policy, stick to their guns then the ebook world may have lost a driver of converts from print. It may be that Amazon has, at least temporarily, lost an important sales tool to move Kindle devices. And, regardless of how this plays out from here, the power of the major author brands — through their publishers today and through their agents forever — to influence the course of development of the ebook market has been so clearly established that I (and other analysts as well) are not likely to miss the point again anytime soon.

So this is really about the agents and publishers trying to take control of ebook pricing, and value perception, back from Amazon. Some further evidence of that comes from the reaction of Len Riggio, Chairman of Amazon competitor Barnes & Noble (vendors of Kindle competitor Nook) who is reported in the Journal piece to be quite comfortable with this tactic, which the Journal characterizes as “in keeping with the long-held practice of issuing paperback editions after the initial hardcover.”

If the other biggest bookseller, which also has a dedicated ereader and an aggressive attitude toward consumer pricing, seems okay with this idea, it strengthens my belief that it is about controlling Amazon, not about controlling ebook pricing. The desirability of restraining Amazon is certainly something the big publishers and Barnes & Noble can agree on.

If the big houses can do this, they can do much more than this. They can sell ebooks direct off their own web sites. (That’s not doable for Kindle at the moment, but they’re eschewing Kindle sales for a time with this strategy anyway.) They can put ebooks into some channels (let’s say ScrollMotion, or the new Baker & Taylor Blio platform) and not others. They can’t tell a retailer what to charge for what they sell them (until somebody figures out how Apple and Bose manage to enforce price maintenance, apparently legally, but without the added complication of a wholesale-supply network), but they can deny a retailer whose policies about anything they don’t like direct access to their content.

How will Amazon respond to this? That is the big question. Their first reaction is to cut the price of the Sarah Palin book, which had been withheld, from their $9.99 point to $7.99. That’s not a conciliatory gesture, but it is a costly one!

Therein lies the irony that is scaring the hell out of the publishers. Amazon pays (approximately, I am not privy to the actual deals) half of the publisher’s suggested retail for these ebooks and then is selling the $9.99 or cheaper ones at a loss on every unit. From Amazon’s perspective, that makes complete sense. They build market share for the Kindle and they build a lot of customer loyalty. And they could even be doing this and still be making a positive margin contribution across all the content they sell for Kindle, even with the losses on the biggest books selling the most units.

So the publishers (and authors) actually benefit from Amazon’s policy; they sell more units and have more margin to share between them on each than they do on the print book.

But publishers don’t trust Amazon to keep things that way. From their perspective, Amazon is building a consumer expectation of an under-$10 price point while they are building up their audience of captive Kindle consumers. How long can it be, publishers figure, before Amazon says “sorry, now you have to sell me these for under ten dollars”?

The most-frequently ridiculed quote in the Journal article from Reidy points to that irony. The Journal quotes her saying, “with new [electronic] readers coming and sales booming, we need to do this now, before the installed base of e-book reading devices gets to a size where doing it would be impossible.” Taken literally, this remark leads to the ridicule that she’s shafting a market where sales are booming. But the subtext is that if publishers can slow down the growth of the Kindle installed base, it will give time for other technologies to catch up and create a more diverse marketplace, which is better for publishers.

There are two important aspects of this that will play out later. One is that what the publishers can do to Amazon today, the authors can do to the publishers tomorrow. If the publishers could sell the ebooks of big books successfully from their sites, then the big authors could also sell them directly without a publisher. The other is that this is a “last gasp” of a “static product” publishing economy. Big moneymakers ten years from now won’t often come from just selling the same content over and over again, but will more often come from content that triggers a more extended interaction. The most future-oriented thinkers are already past this battle, although there’s still a lot of fighting left to be done.

Does the war escalate from here? Do the publishers take their displeasure at Kindle pricing policies and Amazon’s apparent determination to promulgate cheap books to the next level, putting ebooks out in other formats and not Kindle?

And does Amazon, which has shown its willingness in the past to suppress the sale of print books, using its power to control the “buy” button”  to retaliate against policies it doesn’t like, fight back even harder than the Palin pricing decision indicates?

And if Amazon does fight back, do the publishers who aren’t executing this policy (Penguin is tentative and Random House is silent) benefit at the expense of those who are creating this window?

Will authors and agents (and let’s recall that a dozen agents were guests of Amazon out in Seattle a couple of weeks ago; one wonders that have been in any way a prelude to all of this) support the publishers in this policy which, after all, is costing both publishers and authors sales in the short run?

It is hard to imagine this battle ending peacefully anytime soon.

I am so glad that we have some panels at Digital Book World with agents on them and two panels on ebooks — one on pricing and one on windowing — that have both agents and publishers on them. This is one of those conversations about publishing’s future that makes no sense if you don’t include agents in the conversation and DBW is the first major conference on digital change in publishing to do that.

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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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