GoodReads

Although the value chain in trade publishing for the last century has, for the most part, kept retailers between publishers and consumers and kept publishers between retailers and authors, that has never been 100% true. Doubleday covered the whole value chain in the 1950s, when it not only owned the Doubleday Book Shops and the Literary Guild book clubs, it also owned printing plants. In the early 1960s, the Crowell-Collier Publishing Company bought (and eventually renamed itself) Macmillan (and that’s the old Macmillan that became part of Simon & Schuster in the 1980s, not the new Macmillan which was what the renamed Holtzbrinck group became a few years ago) and they also bought the Brentano’s bookstore chain.

I sold books to both Brentano’s and Doubleday in the 1970s and I don’t recall it ever being an issue that they had publisher ownership. Of course, that was before trade publishing consolidated into anything remotely resembling a Big Six.

After those two chains were sold in the 1980s (and I’m going to admit that I forget whether Walden which became Borders or Dalton which became Barnes & Noble bought each of them), in a period of two decades when publishers and book retailers grew enormously, the neatness of the division between the publisher’s role and the retailer’s was mostly respected. A number of retailers — notably B&N and Borders, but suppliers to the mass merchants as well — bought bargain books directly from packagers during that period, but joint ownership of significant publishing and retailing capabilities was, temporarily, suspended.

But Barnes & Noble was particularly aggressive at direct sourcing of book content and around the turn of the century announced the goal that 10% of their volume should come from directly-sourced product. To further that objective, in late 2002, B&N outbid several other companies (including at least one very large publisher) for the independent niche publisher, Sterling. Immediately, Borders stopped buying Sterling books and Barnes & Noble started stocking a lot more of them than they had in the past.

Meanwhile, the Internet was forcing everybody to rethink the paradigm. Even before the Kindle was launched in November, 2007, Amazon was encouraging authors to “publish” with them directly. All they could offer was the connection to the vast majority of online consumers — no print runs, no presence in any brick stores — but this could still be attractive and productive for some authors. My friend and client, David Houle, a futurist who blogs at Evolution Shift, published his “Shift Age” book with Amazon before Kindle and has sold thousands of copies, many of them at his own speeches. He’s very happy earning about $7 on every sale of a $17 book. No publisher was going to offer him as much as a third of that per copy.

As online sales grew, and then were further fueled by ebook sales starting in late 2007, it became increasingly obvious to many that publishers would have to start selling direct themselves. Some did. Harlequin has done so for years. F+W Media, one of the most aggressive publishers employing a vertical community strategy, announced a year ago that they would use Ingram to sell their books as well as those of their competitors to their direct audiences. Macmillan announced a similar plan for science fiction through Tor.com, although that idea has apparently never been implemented.

Part of what has discouraged the big publishers from selling direct is the threat of retaliation by Amazon and Barnes & Noble, both of which are much happier if the customer contact for big books is through them, thank you very much. Since both companies really exercise direct influence on many consumers, big publishers are inclined to respect their concerns.

To a certain extent.

And then we had the events of last week.

Amazon, which had previously established imprints for author-direct publishing and for translations of foreign works and had created a relationship with Houghton Harcourt to address their prior inability to get brick store distribution for books they owned, announced a new romance imprint called Montlake Romances. (Personally, I thought it was a bit strange that they announced it with just one book coming this Fall, rather than 10 books coming next week!) That put them squarely into the publishing business in a new way, and one could only imagine that the mystery shoe and thriller shoe and sci-fi shoe will be soon to drop.

In the same vein, Barnes & Noble has a program called Pub It! to enable authors to by-pass publishers and earn bigger royalties. They also still own Sterling, which gives them in-house the distribution capabilities that Amazon had to team with Houghton Harcourt to get. And with Sterling they also have the entire infrastructure in place to deal with authors and their care and feeding which could constitute competitive advantage when the gloves come off chasing brand-name authors.

So both of the giant retailers are looking more and more like publishers.

But it turns out the publishers were cooking something up too. On Friday, we learned about a new business called Bookish, which will be the “new digital destination for readers.” In its announcement release, Bookish promises to use content and software tools to promote discussion and discovery around books and to answer the reader’s question: “what book should I read next?”

What was most eye-catching about Bookish was its backing by three of the Big Six: Hachette, Penguin, and Simon & Schuster, who have apparently been planning this move for quite some time.

What was downplayed, but perhaps most significant, is that Bookish is trying to straddle the same fence that Google, and, to a lesser extent, Kobo are: being an ally of existing retailers while selling direct to consumers itself.

It really is impossible to speculate intelligently about Bookish’s potential for success. What they’re suggesting they’ll do is reminiscent of Copia and Goodreads and Library Thing, and none of them have yet replaced the marketing power of the brick store, a fact which is front and center in the minds of the trade publishers who depend on that merchandising.

But it will certainly accomplish one thing: giving the big publishers a direct path to the consumer. The hunch here is that if any one of these three big publishers had gone aggressively into direct sales, they would have risked serious retaliation from both of their two biggest customers: Amazon and Barnes & Noble. But it will be hard for them to retaliate against three publishers who, among them, deliver about half the biggest commercial books in the marketplace.

Let’s remember a year ago January when Amazon briefly sought to block agency terms for ebooks by removing buy buttons from Macmillan books when they briefly thought they could stop the plan from being implemented. As quickly as it became clear that the five publishers determined to implement agency would not be deterred from doing so, Amazon retreated. (In fact, they graciously joined Macmillan in compensating authors who might have lost sales during the brief period the buy buttons were inactive.)

And that brings up another important point about Bookish: what it says about the common interests among fierce adversaries, which the trade publishers certainly are. The times call for collaboration among competitors in trade publishing. It is a little bit nuts that several of them are building competing romance, mystery, and science-fiction “communities”, which only leaves the field wide open for a third party to be the biggest aggregator in each of the verticals and also allows much smaller competitors to look comparable on the web. But collaboration models have to withstand anti-trust concerns. Presumably three of the biggest publishers jointly investing in this web venture will.

Whether or not the Bookish team can invent the general book marketing future, or, through competition, spur Amazon and BN.com to be more creative about online merchandising, remains to be seen. But this past week certainly gave us further indications that the publishing value chain is being drastically reshaped and that the neat roles we’ve been used to for 100 years have less and less applicability to publishing’s future.

I chuckle when I think about a very smart person from a major house who was telling me just about a year ago, right after agency was implemented, “whew, now I think things can settle down for a while.” Actually, “things” are just getting moved over to the fast track so they can really change. Montlake and Bookish within a day of each other; Barry Eisler (who’s speaking at our “eBooks Go Global” show at BEA on May 25) and Amanda Hocking going in opposite directions within a week or so of each other a couple of months ago; these are significant events but they’re also signs of accelerating change.

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It’s a pre-holiday week and a busy one following a busy one last week. So time for blogging is limited and, besides, all you readers have presents to wrap.

But there is one subject to ruminate on just a little bit that came up repeatedly during last week’s business. Constance Sayre of Market Partners and I are doing a joint exploration of ebook royalty rates for a presentation at the Digital Book World conference in January. We created a survey to allow agents to tell us anonymously what kind of deals they were striking and we got about 130 responses. (Market Partners’ newsletter, Publishing Trends, has a report in their current issue, released today, on what the agents said and the full data will be released for our attendees at Digital Book World on January 26.) We decided to balance our presentation by giving publishers an opportunity to give their side of the story, also anonymously (except, since we interviewed them, we know who they are. The agents, having responded online and in privacy, can’t be tied back to their answers. Connie and I are good at keeping confidences.)

We spoke to seven CEOs last week, a couple of whom were joined by colleagues who actually do the contract negotiating. What they told us about ebook contracts is what we’ll talk about at Digital Book World.

But just about all of them made an ancillary point and that’s our subject today. The point they made is that the main task ahead of them in the next few years is to completely reinvent book marketing. There was clear acknowledgment across the board of something that has concerned us for some time: that inevitably declining retail shelf space means a commensurate decline in critical merchandising capability.

Changes are definitely occurring. The big publishers are undeniably SEO-conscious, investing real effort thinking about what search terms apply to each book they publish. They’re all experimenting with Facebook and Twitter and other social networking sites as well. Various community-building tools, including the very ambitious Copia platform that launched a few weeks ago and the John Ingram-funded start-up Rethink Books and its new Social Book capability, are now being tried out. The established ebook vendors, notably Kobo and Kindle (on my radar screen; I’m sure Nook and Google too), are building social capabilities into their platforms. And the established book discussion networks like Goodreads and LibraryThing are continuing to add participants, books, metadata, and conversation that constitute raw material for marketing the next book from any publisher.

There are two questions big publishers need to be asking about all of this. One is “does it scale?” The other is “does it adequately replace the stack on the front table of a highly-trafficked bookstore as a way to generate attention for a new publication?”

If marketing efforts don’t scale, then a newcomer or a smaller press isn’t handicapped competing against a major. And if the new techniques don’t compensate for the lost front table spaces, then publishers are going to need something more. And effort that doesn’t scale takes time, which costs money. Publishing margins have never been robust enough to allow publishers to increase the percentage of revenue allocated to marketing and remain profitable.

Of course, book retailers share in the difficulty. As much as publishers have depended on retailers to sort the books out into sections and featured areas and to bring the customers into contact with them, the retailers have depended on the publishers to make the public aware that a book exists.

This is a big problem with many aspects to it and this is supposed to be a relatively short pre-holiday post, so I want to drop just two conceptual thoughts on it: one a principle and one a suggestion.

The principle is that “investment marketing” must replace “expensed marketing”. “Expensed marketing” is what publishers have always done: promotion for a single title that has no lasting payoff or value. That’s an ad in the paper or online, a press release that gets picked up and run immediately and has no value next week, or a free copy of the book that might result in a review of that book or, most of the time, result in nothing at all. (Thank goodness that, at least, those review copies can be far less costly to distribute in digital form and for that it is worth mentioning another relatively new service called NetGalley that facilitates distribution of electronic copies for promotional purposes.)

What I’d call “investment marketing” is an effort that yields a result of ongoing value: a batch of email addresses that can be pinged at no cost to promote a future book or a relationship with a web site or a blogger that adds to the promotional arsenal available in the future. This concept is particulary important on the social marketing side, which is labor-intensive.

I was glad to have the concept validated in a conversation with a leading digital marketer that we recruited as a speaker for Digital Book World. She agreed that in order for digital campaigns to make sense, they should be on behalf of a block of books — by an author or on a subject — rather than pushing one title.

This is a sea change for publishers who have always marketed one title at a time. It is particularly important to implement as the distinction between backlist and frontlist for promotion — which was always partly rooted in the reality that backlist might not be available at retail months or years after its initial publication — makes less and less sense.

The suggestion is to attack the search and discovery problem, the browsing problem, the serendipity problem, the substitute for the stack of books problem. Or, maybe we’re better off envisioning this as the “replacing the marketing clout of the book clubs” problem.

Introducing a simple concept: the book shopping or book marketing app.

I would happily pay a subscription fee to somebody who would put into app or ebook form a periodically curated catalog of recently published books on baseball history. I want to see the title, author, precis, table of contents, sample material, publisher selling copy of all kinds, and reviews. I don’t care if the purchase is “in app” or if I can click my way to the landing page for the book at my favorite ebook retailer (and I’m easy: I have four of them!)

I am sure regular fans of romance, sci-fi, historical fiction, business books, popular science, and many other subjects share the same frustrations I do with shopping for ebooks now. Any search you do returns more dirt than diamonds, more chaff than wheat, more noise than signal and, for the subjects nearest and dearest to me, far more books I have either already read or already rejected than that are new and of interest. It would be ever so much easier to have all this information presented in an app or an ebook that I could peruse at my leisure, online or off, and which would have proper navigation rather than a constant struggle with pointless links and back buttons.

I think we’ll see publishers and retailers delivering this, or something like it, before the end of 2011.

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Amazon announced on Friday that the Kindle will make a “lending” feature available, allowing “owners” of a Kindle file to enable somebody else to read the book or magazine or newspaper for 14 days. Each purchaser of each ebook will be allowed to make only one such loan one time. They will not have access to the file themselves during the time it is “on loan.”

When Barnes & Noble announced exactly the same feature with the same limitations for their ereader about a year ago, in advance of the Nook’s arrival, many ridiculed the limitations. Among those who thought the offering was laughable was Jeff Bezos of Amazon.

I think this decision by Amazon makes some key points.

1. Whatever we call it, the “purchase” of an ebook is not a purchase in the way we buy a print book or a light bulb or a box of chocolates. It is a “license” more akin to what we buy when we purchase software online.

2. The corollary to the first point is to reinforce, once again, that publishing is a rights business and that all the thinking publishers do about commercial reality needs to take that point into account.

3. It is more difficult to introduce innovation successfully from a secondary market position. In this case, that’s true for two important reasons.

4. Behavior that has its analog in the non-connected world we used to live in will have entirely different applications with the capabilities that exist in a connected world.

Buying an ebook is a license, not a purchase

There has been high dudgeon in parts of the digerati world over the fact that people don’t “own” their ebooks the way they own print books. This often takes the form of opposition to DRM and pleas for open and standard formats that will allow anybody who acquires an ebook to treat it the way they treat a print book (sharing and lending and re-selling) with the exception, of course, that the person making the original purchase gets to do all these things without giving up possession of the item they bought.

That’s a pretty substantial exception.

Many publishers and many authors have seen allowing just about the same first use rights as ultimately untenable, although there are major exceptions concerning the application of DRM. O’Reilly Media and the new Harlequin imprint, Carina Press, for example, offer all their books DRM-free. They believe, and they are not alone, that enabling some open sharing induces far more sales than it cannibalizes.

Neither of these publishers put software barriers up to prevent behavior that would be commercially damaging, but you can bet if a marketplace developed for the files they sold for an individual user, they would find ways to at least attempt to prevent it. I asked, and Carina has told me explicitly that they still insist on protecting copyright, even though they don’t do so with software barriers.

We’re vending rights

The fact that publishers in the ebook realm are actually vending rights rather than making an outright sale has enormous implications. It means that the relationship with the end user is never done, quite a change from the 20th century paradigm where the end user is never even known! (Of course, publishers’ end users are often not known now because the retailers don’t share that information, but over time, despite some enormous complications because of regulations and entrenched positions, I still believe that is bound to change.)

Publishers run up against the rights question all the time. Enthusiasts for the emerging practice of “social reading”, which is built on the sharing of annotations of various readers, may not be thinking through all of the rights implications. If I write a book advocating gun control, for example, do I have the right to insist that my work not be “sold” with annotations by a member of the NRA taking issue with everything I write? Or, turning the question around, am I happy to have my account of the 1963 World Series turned into a more robust piece of IP with thoughts added by three old sportswriters, assuming I got a royalty on the new product they create?

Agents and authors are going to have to get into this to decide what works for them and what doesn’t. And, no doubt, they will come to a variety of different opinions, which will mean that different books will come with different rights offers. This increases the complexity of managing rights metadata across the supply chain and beyond the supply chain to the consumption chain.

Kindle’s move will increase the uptake for lending on the Nook, but will introduce some competitive disadvantage

The “lending” question was a pretty easy one for publishers to ignore when only B&N offered it. It could require going back to the agent in some cases and, in any case, it seemed to offer no real competitive advantage for any particular book title. I am told (I don’t have a Nook so I’m not sure there is any way for me to check) that B&N had something over 100,000 titles available for sharing, but they offer over a million titles on their site.

Now Amazon will bring their muscle to bear — the same muscle that enabled them to deliver more than twice as many titles on Kindle as had been available on Palm and an even higher multiple of what had been available on Sony when they introduced the Kindle device — to get publishers to agree to license the lending. And publishers will see no reason to discriminate against B&N in this case, so Kindle’s efforts will result in Nook having far more titles available for lending in a pretty short time.

An ebook market share for Kindle that I’d guess is at minimum between three and six times Nook’s will make publishers more likely to enable sharing. But a universe of device holders that much larger also means the sharing feature has that much more actual value. So Kindle’s participation makes the B&N feature more useful, on the one hand, by putting more books into it but disadvantages it competitively, on the other hand, by the same capability being enabled in an ecosystem with so many more participants. Overall, this isn’t necessarily helpful to the Nook, but I think headlines suggesting it will kill the B&N device like this one are, to say the least, a bit overwrought.

Lending isn’t just between you and your friends anymore!

Googling doesn’t eliminate serendipity! While doing some research for this post I was directed to this post on GoodReads where somebody is organizing around the Nook lending feature to enable sharing among complete strangers. This isn’t surprising but it demonstrates the creation of crowd-sourced infrastructure that converts the replication of the physical ownership experience into something that will systematically, without question, convert paid readers into free readers.

Of course, the current offerings from Kindle and Nook where each purchase can, at most, turn into one free rider, is controlled and manageable. But this demonstration of the ability of people to communicate and collaborate in networks should give some credibility to the notion that absolutely free and unfettered sharing, such as would occur in a world totally without DRM, will result in an acceleration of free-riding (or freeloading) replacing purchases.

I do believe we’re going there in the long run. I’ve said repeatedly that the price of content will be pushed inexorably downward and that over the coming decade or two it will be harder and harder to have a business built on selling content alone. But authors, publishers, and all those profiting by today’s content-selling paradigm need as much time as they can get to convert to completely different models. Some may manage to get there through my notion of “verticals” and garnering and then monetizing eyeballs. Others see a path through enhanced content and social sharing that could lead to different monetization opportunities (and social sharing, of course, is a component of verticalization as well.) But almost nobody is “there” (wherever “there” is) yet, and very few people even have an idea of what a future profitable world looks like.

I have mentioned more than once that I haven’t read a print book in three years. And although there are fewer doubters than I used to have, my expectation that the world of books becomes predominantly screen-based over the next decade still raises a lot of eyebrows. But I want to report that we’ve found a book that can not be replicated on a screen or in any app. It’s a great kids book from Workman called “Beautiful Oops” by Barney Saltzberg. The use of die cuts and foldouts and telescoping paper to change what you first see into someting else just wouldn’t have the same impact in an app. Congratulations to Peter Workman and his team for demonstrating that, sometimes, you can’t do better than you can do with print!

We bought “Beautiful Oops” for our 5-year old niece and I will admit that I read it (16 pages, maybe?) before we sent it off. I will continue to say I haven’t read a print book in three years; I’m admitting here that I’ll claim a short kids’ book doesn’t count. But everybody who read to the end of this particular post will know the truth.

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The acquisition of Lexcycle by Amazon sure got all the digerati’s creative juices flowing. What is becoming increasingly clear is that general trade publishers have a card to play here that the niche publishers can only join in on: creating a collectively-owned ebook “store” that can provide an economic baseline for the emerging ebook marketplace.

Michael Cairns suggests this possibility in his piece this morning. But his focus is on epub and interoperability standards. Mine is, and I believe the publishers’ will be, on pricing throughout the supply chain.

Through laziness, thoughtlessness, carelessness, or inertia (or whatever combination thereof), the ebook supply chain has adopted discount structures that imitate the physical book supply chain. This is daft. There is no comparison between the retailers’ costs and risks associated with physical books and those associated with ebooks. There is no economic justification to providing the same level of discounts. But that’s where we are. Amazon may be arm-twisting to enforce this discount equivalence, but they didn’t think it up. It’s pretty much universal and it came from the publishers in the first place.

As I suggested in my ebook post from London last week, now is the time to change this, before ebook revenues become too great. The college publishers with CourseSmart have mapped out the way to do something about this legally, but the play is pretty obvious. The publishers need to jointly fund and substantially own a virtual retailer whose mission would be to deliver all conceivable ebook formats (whether epub or not!) The store should be competitive with other offerings as to interoperability, lightness of DRM (I favor social only), and customer service.

Establishing such a business would force publishers to figure out how much discount off retail is required to enable the retailer to be profitable. I suspect that number is about 20% and, at that level, would allow modest discounting (5% or 10%) on some titles to the consumer. To stay on the right side of the law, publishers would sell to the new entity on the same terms they sold to everybody else. But the objective here is to limit the ability of retailers to force higher discounts through boycotting publishers or titles with impunity. That is what his happening now. Sometimes the book you’re looking for now on Kindle isn’t there because the publisher won’t agree to Amazon’s discount schedule. I know specifically of one medium-sized trade house for which that is true and, if there’s one, there are probably more.

If publishers don’t do this, the excessive discounts they offer retailers will turn into high standard discounts for consumers that will create inexorable downward price pressure. Amazon may be subsidizing that $9.99 price point they like, but the publishers are subsidizing it too.

This idea can work because six publishers control the lion’s share of bestsellers, which is a big chunk of ebook sales in the short run. Bestsellers is the one “niche” in which the general trade houses have critical mass.

And if this idea can work, another one waits in the wings.

It has been bemoaned that Google and Amazon are on a path to control both discovery and delivery of books in the future. This isn’t even a particularly competitive situation between the two of them, since Google is much more interested in discovery and Amazon is much more interested in delivery.

Because Google is more interested in discovery, they are also not particularly interested in books. They are about “all the world’s information”, not “all the world’s books.” So as robust as Google Book Search is, the company is not focused on making it a competitive book discovery tool compared to Amazon. They are about incorporating the book information to make a superior information discoverytool.

That leaves another opening for publishers where the Big Six have a strong collective position: the metadataassociated with the biggest books.

What if the Big Six also jointly owned a book discovery site: Allaboutthebookyouwant.com. The play there would definitely not be to act as a retailer, but rather to help consumers find the book and the retailer that is best for them. All retailers that “play” would have their inventory and pricing made transparent on the site which would contain a publisher-assisted best possible aggregate of enriched metadata (excerpts, stories behind the book, video support, etc.) 

This initiative could solve a number of problems for the big publishers. It would create a “Switzerland” for enriched metadata: a place to make it available which would help all the online booksellers. To the extent that it grew in consumer acceptance, it would reduce the danger of being being buried or victimized by bad data on a retailer site (think of the recent brouhaha about the “adult” books on Amazon). It would enable the consumer to shop across many book retailers at the same time. And the referral fees the site could earn would reduce the degree to which it needed to be subsidized as a marketing expense.

The current effort by several general trade publishers to drive traffic to their own house-branded web sites is misguided and doomed. But Amazon (and Shelfari, GoodReads, LibraryThing, and our new entrant, Filedby.com) have demonstrated that sites with information across the trade book spectrum have real consumer appeal. With the support of the big publishers from the earliest possible moment to make the high-profile general trade books visible, at least a large portion of the discovery traffic could be liberated from being captive to Amazon, Google, or anybody else. And the consumer could be assured that the information she is getting on purchasing was being offered in her best interest, not based on what a retailer is trying to push.

Worth noting: the ebook site Smashwords already sells ebooks at 15% margin, returning 85% of the publisher- or author-set retail price to the content owner. Up until now, Smashwords has been about author-generated ebooks; it has not pushed out an offer to publishers. And there are elements of Smashwords’s solution — DRM free, working from PDFs and doc files — that might not be exactly what publishers would want . But they might be the ebook solution, and it might be close to being in place. Smashwords may be the game-changer but the publishers and public haven’t discovered it yet.

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