Ingram

A year ago — even six months ago — it seemed like Amazon and its Kindle device had an insurmountable advantage in the ebook device and platform competition. Despite our admonition that Amazon’s dominance of ebooks was much more fragile than their dominance in online print bookselling, even we were impressed and sometimes daunted by the enormous percentage of ebook sales that were being made through the Kindle ecosystem.

Then Barnes & Noble introduced the Nook through their 700 stores last December and Apple brought the iPad to market in April. Nearly overnight, it seems, Amazon has gone from the dominant player to the leading player with a share that was often in the 80s for many titles having fallen to the 50s.

Three entirely new ebook platforms are now poised to make their debut. Each of them has an angle, or a USP, that the others don’t and that the vendors, devices, and platforms that preceded them — notably Kindle, iBooks, Kobo, and Sony — don’t. The three new platforms are Google Editions, Blio, and Copia.

Google’s special proposition is ubiquity; Blio’s special proposition is enhanced feature sets; and Copia’s special proposition is building social networking right into the content consumption platform.

The new entrant that is subject to the greatest anticipation, of course, is Google Editions. Whenever they go live (which they say they “hope” will be sometime this summer, which has another 6 weeks or so to run), they are likely to be offering the largest selection of ebooks from any single source. Google has a staggering number — millions — of public domain books but they will also have professional and scientific books not published on most of the prior ebook platforms. Their well-promoted proposition is their cloud model, which will allow their ebooks to be read on any device that can support a browser.

Google is also offering a wholesaling service to enable any bookstore or any web site to sell their ebooks. (What that means, of course, is that their “largest single source” claim could be usurped by their own resellers, who might have added other titles from other places.) Their arrival adds another option for potential ebook sellers who had previously been served by Ingram’s wholesaling operation or their competitor, Content Reserve, which has also reached the book trade through Baker & Taylor.

Google is working the OEM channel as well and not limiting themselves to Android-powered devices in doing so. They’ll have apps available in multiple marketplaces, including Apple. And they are offering to power sales on publishers’ own sites. We’ve seen no announcement of publishers who have accepted this proposition, but it would seem likely that some, particularly smaller ones, will find it attractive.

Baker & Taylor has been developing its own ebook platform, Blio, in concert with futurist Ray Kurzweil and the National Federation of the Blind. We were first shown Blio last December and were really impressed with its crisp presentation of integrated text-and-pictures pages. They showed us a tool kit that made it pretty easy for publishers to enhance their print books for electronic delivery with sound and video, and even to fiddle with the design in the Blio platform. Because of Blio’s roots as a tool to bring reading to the sight-impaired, the ability to adjust font sizes, a capability which all ebooks offer, had to be integrated into their delivery of complex page layouts.

We have been expecting Blio’s debut in the market for some time, and we’ve been expecting to see many highly-illustrated books, like college texts, that have not previously been in the offerings of Kindle, Nook, and Kobo. Highly illustrated books would work fine on the iPad, of course, but they were not a priority for initial inclusion for iBooks (the dedicated Apple ebookstore) and they were not what publishers would put into the eink-reader platforms that didn’t handle that material well.

Blio has announced that it will power the store Toshiba is creating to support its tablet release. Since that is expected in the next month or so, Toshiba’s offering of Blio titles will probably be their debut in the marketplace.

The tool set for Blio was what really captivated us when we saw it last December. When we saw it at the time, Blio was delivering a Blio-ready ebook from the publishers’ print PDF, and then, within Blio, the publisher could enhance the ebook. At the Untethered conference in June, Blio announced a partnership with Quark by which Blio files could be created directly from Quark. Blio says they expect the Quark release to be in beta later this Fall. Blio plans to integrate its tools into other creation software in the months to follow.

Blio introduces another format into the ebook world: rather than epub or PDF, they are using Microsoft’s XPS platform. Right now, Blio itself is handling the conversion of titles from either PDF or epub into XPS, but the Quark arrangement and the others that will take place will allow publishers to deliver XPS-ready files to Blio, cutting past the conversion queue that now exists.

The open questions have been: when will Blio arrive and what will be the retailing environment for it when it arrives? They say they have 200,000 titles committed to their platform. (They can’t just pick up the ebooks of others; they’re not vanilla epub.) The Toshiba store won’t contain them all because titles are coming in faster than the conversion process can ramp up. Blio, like Google and Copia, expects lots of OEM installation. They project that Blio could be on more than 50 million devices by the end of 2011 and that they will be working with “traditional retail partners” in 2011 as well.

Copia made a splash last week when they announced their line of ereaders, including a larger-than-a-phone-screen color model which will be $99 when it comes out in September. Since Copia is a creation of DMC, and DMC is historically a hardware company, using their own hardware to launch the platform makes great sense. But OEM relationships, and an ability to deliver their platform to any device through client apps as well as through web browsers, are part of the strategy too.

The Copia platform’s unique proposition is that they combine social networking right into the platform in which content purchasing and consumption take place. Amazon’s announcement of an integration with Facebook moves them in a similar direction, but Copia would seem to be going much further than Amazon: enabling the sharing of the content consumption experience itself among friends or a personal network. This could be critical for reading groups, areas of common (vertical) interest, or for educational applications. Inside the Copia network, users can readily share their notes and annotations. And to make it easy for people to get started on their platform, Copia enables the import of existing contacts from Facebook, Twitter, and LinkedIn.

Other ebook platforms have demonstrated the power of syncing the reading experience across platforms; you can pick up your book on one device and it will tell you where you left off on the last device. Copia takes that a step further, syncing the social experience, including the sharing of notes and recommendations as well as the reading itself, across all the devices you want: smartphones, tablets, computers, or ereaders. We saw this demonstrated on their forthcoming iPad app.

What also impressed us about the last Copia demo we saw is that they have apparently licked the problem of allowing an epub file using Adobe DRM to move painlessly into their platform, regardless of from what ebook store it was purchased.

In addition to the hardware plans they revealed last week, Copia has also announced that they will be a launch partner for Windows Phone 7, the mobile operating system Microsoft is putting forth to compete with iPhone and Android. [Maybe we know a bit more about Copia than others do because they are our client, but like all the players in this very competitive market, they're not tipping their cards before they play their hand any more than their competitors. Even to us.]

All three of these operating systems come from substantial players. Blio is being delivered by one of the two book wholesalers in America with true national and international reach and relationships with every publisher in the country. Copia is being delivered by a company with long hardware development experience and a long history of partnership with consumer electronics retailers and phone companies. And Google Editions, of course, is coming from a tech company that has had deep involvement with virtually every book publisher in the world as it has developed Google Book Search over the last seven years.

Of all the current players, Sony would seem to be the most challenged. They have the weakest device, the weakest store, and the weakest strategic position with the industry and with the public. All of the rest either have something important and unique for the developing ebook marketplace and, in many cases, they also have an outside proposition that will keep them in the ebook game regardless of how well they do in it. Whether Google’s ebooks sell 10% of their projections or 10 times their projections, they won’t be going away. Same with Apple. Same with Amazon. So I think we can expect a multi-player ebook market, with some incompatible formats and a lot of incompatible DRM for some years to come. And the players currently in the game can expect their sales to go up but their market share to go down when the three new entrants join the fray this fall. That much seems certain, but very little else does.

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The last post I did got more attention than anything on the blog in quite some time, but for somewhat different reasons than I intended. My central point about what increasingly common ebook growth predictions would mean for brick-and-mortar sales (that they’d decline sharply over the next five years) was that it diluted the core value proposition of the major publishers. Most of my comment traffic wanted to talk about the fate of bookstores, not the fate of general trade publishers.

Then yesterday, my friend Michael Cairns had on Persona Non Data a post which really delves into the point I was concerned about: what are the competitive advantages of big publishers? As Cairns points out, it is those things that can scale; the aspects of the operation where size presents a big advantage.

I learned long ago in a talk by industry legend Martin Levin that an acquiring publishing company looks primarily at an acquisition target’s revenue, not its cost structure. The cost structure that counts is the acquirer’s own cost structure; the revenues from the target would be ported over, but the costs would mostly be left behind. True marginal costs, like the cost of picking a title off a warehouse shelf, might remain. But the costs of collecting the order, processing the order, and shipping the box out the door with another book in it (not including actual postage) would not rise at all. Nor would the costs of accounting or negotiating the printing contract or (unless there was a step increment that required a warehouse addition) the cost of storage.

So, as Cairns demonstrates in his piece, most of the scaleable overheads and operational costs publishers have are related to print book operations. It is very difficult to scale the parts of the operation publishers can focus on in a digital delivery world, which would be title acquisition, development, and marketing. Those functions require person-power, and if you want to do more of it you have to hire more people. That’s the definition of something that doesn’t scale. And what doesn’t scale is what doesn’t offer advantage to a large player.

The only way we can think of to apply scale to marketing is to market repeatedly to the same audience. That implies “vertical.” Have you read that anywhere before?

A friend from Amazon was in the office this morning making a different point, which, on reflection, is also about scale. Amazon uses algorithms that have been 15 years in the making to set prices for their books. Publishers under the agency model are setting their own prices but without those years of experience, without algorithms, and without adding expertise — or even personpower — to their staffs. Pricing knowledge is also scalable (what you learn pricing the first ten books makes you more effective on the 11th). If publishers believe in the future of the agency model, perhaps pricing expertise would be a tool they could use to persuade authors to stick with them five years from now if brick-and-mortar sales go the way I fear they will (dragging the publishers’ main value proposition down along with them.) But pricing expertise won’t happen by accident; it will have to be developed rigorously and iteratively over time.

In one more post-script, I dug up an old post from back in the early days of the blog when it had far fewer readers than it does now. It tells the story of Ingram’s creation of the microfiche reader and their subsequent growth, which I called the first big supply chain tech disruption. If you like these posts and never read this one, it may be worth the click.

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One of the recurring characteristics of “change” is that the first iteration of something new looks a lot like what it is replacing. So it has been with ebooks and ebook retailing. The ebooks themselves have, for the most part, been the same as the print books except rendered on a screen instead of on paper. And when we say “the same”, we mean right down to duplicating meaningless blank pages and the legend often found in print books that tells you how many printings the book has had. (This still happens frequently; I’ve just experienced it on The Big Short which I’m now reading in B&N’s reader.)

And ebook retailing has also imitated print book retailing in that the emphasis has been on the assembling the largest possible aggregation of book title choices in one place. This is a paradigm that makes intuitive sense in the physical world; once I’ve driven to my local superstore, I don’t want to find the mysteries are here but the cookbooks are in a store down the block.

It has been a long-established “fact” (although I question if it is still true, as we’ll explain later) that the larger is the selection of books available in a single location, the more powerful is the magnet to attract customers. My father found this out when he was in charge of the Brentano’s chain in the 1960s. Their Short Hills, New Jersey store was the worse-performing store in the chain until they doubled its title selection. And then, like magic, it became the best-performing store in the chain.

Amazon dot com reproved the point when they went into business in the mid-1990s. Although they were not the first online bookstore, they were the first to really attempt to carry everything. In fact, they went beyond carrying everything by providing a database (obtained from Baker & Taylor, in which there is another story) that not only showed just about all the books in print but also books that were no longer in print! Conventional publishing and retailing theory at the time would have said it was a bad move to return suggestions in search results that were books not available for sale. But, of course, it built their competitive advantage. They rapidly became the best place to search because of the completeness of their database and, actually, confirming to a customer that “what you want is a book that was indeed published but is not now readily available” made it easier to sell the customer a substitute. Whereas the the store (online or off) that didn’t have the unavailable book but didn’t also provide that information found it harder to close the alternate sale.

The point about the importance of selection was proven again by Amazon when they launched the Kindle in November, 2007 and lit the fire for what is still a spreading conflagration of ebook reading. Before Kindle, there were perhaps 100,000 ebook titles available as PDFs that could be read on a full-function computer, but not nearly as many in formats that could work on smaller devices (Palm, Mobi, Dotlit). Amazon launched Kindle with about 150,000 titles and used their market power to get big publishers to put more and more of the newest, hottest books into their format closer and closer to publication date.

There were other features of the Kindle (the ability to load books wirelessly and instantly without going through an intermediary device; its easy-to-read e-ink; its built in dictionary; Amazon’s deep relationship with very large numbers of online book buyers; and, of course, eye-catching prices relative to the print edition prices of the hottest new books) that fueled its near instantaneous success, but the robust title selection was a critical element.

So to that point — one could say to this point — the largest possible selection in one place has been as important to the success of an ebook retailer (obviously: online) as it was historically to a print book retailer with a physical store.

Early in the decade, it occurred to me that the magnetic power of the large selection in one physical store had sharply diminished. When Dad doubled the inventory of the Short Hills Brentano’s, he delivered a selection that the consumer couldn’t match for many miles around. When Barnes & Noble and Borders got Wall Street money to replicate the Bookstop model of 100,000+ title superstores in the early 1990s, they were enabling consumers to find conveniently books which had previously been obtainable only with great effort. But the limitless shelf space of online bookselling undercut that advantage and by the early part of this decade, it seemed to me that the consumer was finding the unlimited availability of titles online which could be delivered in a day or two so powerful that the large selection in a store that might be available immediately had really diminished appeal.

But there’s another thread of bookselling history on- and offline that I believe will soon become the dominant paradigm for ebook retailing. And, of course (just so you are reminded what blog you’re reading), it fits into the concept of “verticality”.

Publishers have known for a long time that good deals can be made and large sales can be registered through what we call “specialty retailers”. (The label for these sales in a publishing house, and others such as sales to catalogers or premium sales, is “Special Sales.”) The store that sells the tools and materials to refinish your floors can sell you a book to explain how to do it. The store that sells computers and paper and ink can also effectively sell resume or how-to computer books. The garden supply store can sell books on how to make your roses bloom.

Amazon and other online merchants (and not just of books) have long operated “affiliate” programs by which a web site can earn a commission on sales made at the primary merchant by referring a customer. This generally works by having the affiliate site promote a particular book title; when the site visitor clicks on the link, s/he is delivered to Amazon or BN.com’s page for that title. If the customer buys, the referring site gets a commission. These revenues don’t often amount to big money for the referring sites (although they sometimes do), but it is believed (but as with All Things Amazon, we don’t have the critical data to confirm) that, cumulatively, referrals from perhaps millions of affiliates deliver significant volume and customers to Amazon (and others.)

This is as far as “special sales” have gone in the ebook world. But the guess from here is that this is about to change and that the change we’ll see in the next few years will obliterate the notion that “all subjects in one place” is a significant marketing advantage, online or in a store. Many book sales, and particularly ebook sales, will move to “contextual” resellers. Your accountant’s web site will sell you the book(s) that help you understand a new tax law or how to ready your business for sale. Your favorite sports web site will sell you the new biography of Alex Rodriguez. And your favorite “Literary Review” newsletter and website will take care of your needs to acquire fiction directly and without your having to shop the vaster stacks of an online superstore.

That is: curated ebook offerings (a click away from the ability to buy lots more content beyond the curated selection) will be featured on every web site with any significant traffic. Delivering purchaseable content — books right now, but ulimately magazines, shorter articles, and relevant audio- and video-content as well — will become a standard expectation of any site (or web community) that aspires to a true mutual embrace with its site visitors. “What I’ve read lately and liked, and why” is a legitimate offering to anticipate from every blogger or commentator with a following.

Last week, Barnes & Noble held its regular call to announce financial results and future expectations. In that call, B&N expressed the expectation that the ebook world would ultimately settle down to about five players and that they’d be one of them. With that perspective, they saw for themselves a reasonable proportion — say 20% — of the ebook market.

My first reaction to that was “what are they thinking? There won’t be five online booksellers; there will be five million.” A day or two later I had a conversation with one of my personal tech gurus who saw it the way B&N’s statement suggested they did  (”it will consolidate, just like the music business did…”) He also asked a lot of practical questions. On what devices will these ebooks be read? How will all these individual sites deal with the format issues, the DRM issues, the customer service? In other words, “great vision, Mike, but how can it possibly work?”

I think it will work like affiliate sites worked, but in a more sophisticated way. A strong central operator providing scale facilitates the commercial offering of the niche player. The harbinger of the future is the deal announced last week between F+W Media and Ingram Digital. Ingram is setting up all F+W specialist web sites (and they have them for many different vertical interest groups) with the ability to sell both ebooks and print of all publishers to their site traffic. (Although we have working relationships with both companies, we weren’t involved in that deal and don’t know any of the details.)

I believe that the Ingram-F+W deal is the start of something new and big. Both companies are going to find ways to improve on whatever is the starting point. F+W is going to have to learn how to merchandise what Ingram can give them into a unique shopping and content consumption experience for the consumer. And Ingram is going to have to learn how to deliver what they can offer to F+W in a way that enables F+W  to curate and enhance the selection to deliver something uniquely customized to its own community.

If that view of the future is right, the competition among the players who can provide the ebook selection and transaction services Ingram does — those in the game already like Amazon, B&N, iBooks, and Kobo and those saying they’re about to come in like Google, B&T’s Blio, and Copia — is going to take place in a whole new arena. B&N has announced deals like this, where they “power” somebody else’s bookstore. Kobo hasn’t yet, but I’d expect them to; it just seems to me like an opportunity they’d see. This is a bit odd; it puts “wholesaler” Ingram in competition with retailers to create the next round of niche retailers. Ingram obviously has the built-in capability to offer print and electronic book delivery but, of course, B&N has the internal resources to do that too, and  B&T can do it too. There are anomalies to rationalize about margin, but, in the end, customer acquisition through this strategy will be far cheaper than it is most other ways, even if a fixed margin from the publisher is shared with the niche player.

This business hasn’t really begun to happen yet; we’re just seeing the outlines of it. Initially, the competition appears to be about how each retailer delivers its vast set of content choices to the online consumer in a consolidated way. (And usually it has been the same for Ingram. Most of their business has come from large “sell everything” ebook stores.) But over time it will evolve into a competition for niche resellers. Winning is always about delivering the best consumer experience but the challenge will be to deliver the best consumer experience to somebody else’s consumers. White label is the key to the ebook (and book) retailing future.

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I had occasion during this past week to speak at the global strategic meeting of Harlequin. Often when I am asked to speak, even internally to publishers, I am explicit told “we want you to scare the hell out of them.” Since I think of myself as a pretty unthreatening guy, I’m always a bit disconcerted by the reality that I’m doing that. But, of course, my core message is not very comforting to most people in the legacy publishing business. (And, I hasten to say, Harlequin never made that suggestion, nor, as this post should make clear, is it really relevant in their case.)

The message is scary for most because the essence of what I’m saying is that publishers over the next decade or two will have to change the way they think about how they deliver value. Their core asset base will shift from being the intellectual property they own or develop to the audiences they command. Publishers with vertical content offerings have a big head start to making that adjustment and general trade publishers hardly know what to make of the message at all.

I think my argument is pretty simple. It has two principal components.

I posit that the price of content must go down because of the laws of supply and demand. Even though digital delivery does actually increase “demand” (because people can consume more media if they have the means to do so always at hand), it increases supply much more. You used to need a publisher to spend some money and to commit an organization to get content into “supply”. Now you just need an internet connection. So I see downward pressure on the selling price of content going far into the future. This does not mean that eventually all content will be free, but it does mean that everybody will consume more and more free content and, therefore, be generally less willing to pay money for content to augment what is free.

The second component of my argument is that audiences for content will be (mostly)  aligned around interests. I call that “vertical”. The most successful legacy consumer media, including all of the biggest book publishers, tried to satisfy a wide range of interests, which I call “horizontal”.

I put those two things together and I say that getting from today (selling content) to tomorrow (selling audiences) depends on using today’s asset to build tomorrow’s. This might sound like something close to insanity if you’re Random House or Simon & Schuster or Penguin. It can make a lot of sense to you if you’re F+W Media or Hay House or Chelsea Green or Cool Springs Press. It seemed to make total sense to the people at Harlequin.

To prepare for the Harlequin conversation, I made a list of “most important things to think about” for them going forward. Here it is. If you’re really a vertical publisher, it should be a useful road map. To the extent that makes no sense at all, it indicates that your company is locked into competition for a pool of revenue and sales opportunity that will shrink, slowly for a while, but only for a while.

1. Use content as bait. When you make the leap that the eyeballs you own are the key to future monetization, not the copyrights you own, then you readily see the value of exploiting the content to attract eyeballs. This means many different things in different contexts, and, of course, the content-selling model still provides most of the cash and will for quite a while, but this is a key principle to apply. The free and freemium strategies you use will be different if your objective is to build a loyal community than if  you have the more immediate objective of selling something on the back of the giveaway.

2. Be sensitive to low-overhead competition and be prepared to imitate their new models. We’re heading for the day — actually we’re already in it — when it won’t take a big organization to reach a lot of book readers. (We’ll be transacting half our book purchases online in the next couple of years.) When companies smaller than yours are offering cheaper products with different delivery models — subscription, print-on-demand, whatever — watch them closely and try what they’re doing so you understand it. (Of course, Harlequin was already very much onto this idea. They just launched their own low-price imprint, Carina Press.)

3. Grow! Acquire competitors, or coopt them. Once you’ve defined the audiences you are going after, you have defined the way in which you will seek “scale”. If somebody else is going for the same audience you are, you want first to hope they don’t see it as an audience-acquisition play (and most publishers don’t yet.) While you’re fortunate enough to have competitors who are still focused primarily on monetizing IP, they’ll want to work with you if you have access to an audience that might buy their IP. Then you can use their content as bait to attract eyeballs for your community.

4. Find multiple ways to engage your audience. For community-building, it is not nearly sufficient to deliver product offers online. You have to figure out ways to make your community come to you; you have to figure out ways that members of the community can create value for each other. A key metric for you is how frequently you touch each member of your audience (or, even better, how frequently they touch you). The number of people absolutely guaranteed to open an email you send them will be an important measure of the health of your asset base.

5. Sell everybody else’s ebooks (the recent F+W and Ingram proposition). Almost nobody in your community gives a damn about which books are yours and which are somebody else’s. They want entertainment or information or to solve a problem; if you’re serving them as a community you don’t win by cutting them off from what they want because somebody else published it. A complete (but curated) ebook offering is a first step in the right direction. Ultimately, of course, you want to offer all the print books and all the other “stuff” that is relevant to the community, information-based or just plain products. That’s part of your monetization potential.

6. Build multiple brands with meaning. There are a very small number of companies whose name itself has true consumer meaning as a brand. (In fact, Harlequin is the leading one.) But if you can appeal to a community, you have an oppotunity to build a brand. Brands are shortcuts for consumers; they orient us as to what to expect in products or services, including social cred, quality, and  price. For as long as we have robust print delivery (and I think that might be as little as another five years), we have an opportunity to deliver URLs to people offline. That’s not as “efficient” as delivering them online (where the recipient can immediately click through) but it offers the chance to reach a lot of people who might not be online explorers. (I don’t want to give away Harlequin’s trade secrets here, but I was taken aback to hear how many senior citizens are in their audience; people who might well not be available to be pinged online.) But don’t use a book to push people to promote a generic web site where they’ll arrive and say “why am I here?” Deliver them to something relevant, something that will entice them to come back; a site you can, in good faith, urge the reader of a book to visit with the expectation that it will extend the engagement between you and your reader, to your mutual benefit.

When I deliver this message to the general trade community: publishers, authors, agents, retailers, the reaction is often a blank stare. That’s understandable; getting from a horizontal trade publisher to becoming one that “owns audiences” is a long and winding road. It is a totally rational decision to say, “that’s not the business I’m in; I’ll stick with what I’m doing until I’m the last one standing.” But there were no blank stares from the people at Harlequin. They know they have a large and loyal audience that cares about their brand. Even if the game changes from IP to eyeballs, they can readily see how they can still play.

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Several very recent conversations have come together for me.

1. Joe Esposito, the new CEO of GiantChair, says metadata is the key to publishing in the future; he describes metadata as the modern equivalent of Allen Lane’s discovery that cheaper paperback books sold in mass merchant locations could boost book sales. Of course, Giant Chair is very much involved in metadata as a way to help publishers find marketers and customers.

2. F+W and Ingram have come together to make a deal enabling niche web sites to sell the full range of applicable ebooks to their community. Of course, finding “applicable” ebooks will be dependent on the quality of the metadata that publishers provide to Ingram. I really liked seeing this happen, because it is the first significant example of something I’ve predicted and advocated: that publishers who want to go after communities should sell the books of their competitors and that all web sites should deliver curated ebook stores of the titles of interest to their site visitors.

3. A list discusses whether the publisher has a role in the future, what it is, and how the spoils in a new world should be divided between the publisher and the author. One observer points to the nuances in royalty rates: the royalty implications of the wholesale model versus the agency model, whether or not the commission paid to the agent is or isn’t deducted from “receipts” for purposes of calculating royalties, and what the competitive implications are for publishers going after authors. This gives rise to the next question: are publishers differentiated on royalty rates alone, as though each publisher would sell the same number of books? And that gives rise to the next point: understanding, quality, and richness of metadata can determine how successfully publishers can sell a book.

4. One of the biggest issues for publishers in managing and providing quality metadata is associating all the works and editions of them for each author with that author, and while that challenge intensifies when they look at the author’s books published by others, the fact is that most current royalty systems have plenty of problems keeping track of the multiple titles and editions of any author that they themselves have published.

5. Filedby, the directory of author web sites I co-founded with Peter Clifton, has a new metadata clean-up service called Author Data Advantage that makes it simple and economical for publishers to organize their works and edition data properly tied to each author and to keep it that way as new works and editions are created. Filedby’s service, which any publisher can avail themselves of, can tie all the editions of a work together, relate them accurately to each author or other contributor, and provide each of the authors with a unique ID. That allows the publisher to tie the marketing, reviews, conversation, community, rights, and digital promotions back to the right work and the right author.

Metadata work for publishers is, really, a bottomless pit, since it is, in effect, “information about the book” and there is no limit to that. There will be no end to the categories of quality, interest, and association each book can have attached to it. How many books published in years past, for example, should now be associated with “Gulf oil spill?” If you published one discussing whether using chemical dispersants is a good idea or not, I think you’d probably want somebody googling “Gulf oil spill” to find it, wouldn’t you?

The list conversation referred to above was really about the difference in royalty rates offered by publishers and how the authors cents-per-copy is affected by the agency versus wholesale model. My own hunch is that this won’t matter much in the short run because dollars offered in the advance will still be far more important to the authors’ and agents’ decision than selling policies that can change between signing and publication. In the longer run, differences in the ways publishers handle metadata might be relatively more important because it will affect how many copies they sell.

In an earlier post, I made the point that we’re approaching the day that half the sales of new books will be made online. All the sales of books online are highly dependent on metadata. Very robust metadata can enable a book and author to get discovered when more minimal, even though correct, metadata would omit it from the conversation. Incorrect metadata can prevent a book from being found even if the customer knows pretty much what they’re looking for.

Metadata, what it is and how it affects discovery and sales, is a subject that every book professional will find increasingly important to understand and master in the days to come.

Last year I wrote a post suggesting that one way publishers might deal with piracy is by posting sabotaged files on offending sites, rather than just playing whack-a-mole. This triggered more than a few hostile reactions. I found it ironic to see yesterday that the new Stephanie Meyer ebook could be the occasion for software mischief-makers to come into conflict with copyright mischief-makers, using infected PDFs of a book many people want as a way to gain entree into people’s computers with malware. So now the hackers who want to attack your operating system are the allies of the publishers who want to discourage people from downloading ebooks from anything but clearly-authorized sites.

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I am finding an eerie similarity between the disastrous Gulf oil spill and the parlous state of America’s bookstores. In both cases, the forces are in place for a disaster that will play out over the coming months and years. And while the tragedy of what is happening in the Gulf is far more consequential to everybody on the planet than what is happening to our bookstores, we are appoximately as powerless to prevent an eco-system disaster of the first magnitude in both cases.

Of course, the causes of the problems are quite different. British Petroleum, it would seem from here, could have operated differently and the blowout might not have happened. If the US government had the same offshore drilling rules as the Canadian government, requiring the relief well to be dug at the same time as the main drilling well, the disaster might have been averted.

Just like the shrimpers on the Gulf Coast, we are entering the highly visible stages of what will be a painful and accelerating change in the circumstances for general trade publishing. In an exchange in the comments of a post here from last November called “Why are you for killing bookstores?”, I was told by a resident of Orange County, California, that he didn’t even know where his nearest bookstore was. Now there is news that Laredo, Texas, is aware of its status as the largest city in America without a bookstore because its local B. Dalton outlet has been closed. Unfortunately, I don’t think Laredo will retain that status for very long. Much larger cities will be joining Laredo. These are like ships not bothering to leave the harbor because there is nothing out there worth catching.

Bookstores in the US are being pushed aside by the forces of what in the larger sense is definitely progress. The four biggest villains are the switch by consumers to Internet shopping (which affects all brick-and-mortar retail; Walmart’s sales are down too) and three aspects of that switch that amplify the problem: the ubiquitous availability of used books sold alongside the new, competition from long tail books that would have disappeared from commercial view in years past, and the rise of ebooks. All three of these effects reduce print sales in terrestrial stores, crippling retailers and damaging publishers as well.

The trend is impossible to ignore. Borders, just rescued by the latest White Knight that believes the business can be saved, announced that same store sales were down over 11% in the first quarter compared to a year ago. Barnes & Noble’s reduction in same-store sales was put at “2 to 4 percent” in its most recent reporting. [Late add: B&N actually reported same store sales down 5.5% in the most recent quarter.] Borders is a financially challenged operation with an inadequate supply chain, which could have led to not having the books they need to get all the sales that might have been available to them. But, if that’s true, the well-financed and well-operated B&N would be benefiting from their rival’s problems. (They probably are; sales would have been down more if they weren’t.)

I first worked in a bookstore almost 50 years ago, in the summer of 1962 in Brentano’s flagship store on Fifth Avenue. I’m going to guess that there were about 25,000 titles in that store: 10,000 hardcovers upstairs on the main floor and about 15,000 paperbacks downstairs in the brand new paperback department where I worked. Maybe there were more, but not a lot more. And this was one of the best bookstores in America at that time.

There just weren’t a lot of bookstores in America in 1962. Mass-market paperbacks were on sale in many drugstores and on many newsstands, and were in somewhat limited supply in bookstores. Paperback distribution then was just about exclusively through rack-jobbing local wholesalers and offered lower margins than trade books. Even Brentano’s, which was one of the few stores served direct by mass-market publishers, displayed the mass-market paperbacks by publisher rather than by subject to make it easier for the publishers’ reps to check their stock and fill in empty pockets every week.

Department stores were critical outlets for publishers. They provided what amounted to local chains in each city which were, at that time, just beginning to expand into suburban locations through a nascent shopping center industry. Reps for Dolphin Books (Doubleday) and Collier Books (Crowell-Collier, later Macmillan), two trade paperback lines begun by my father, were putting racks of their books into barber shops and motel lobbies in many parts of the country which had virtually no bookstores at all.

Running a bookstore was very hard. Publishers were numerous, title acquisition was fragmented. The only national wholesaler, Baker & Taylor, was really a provider for the libraries, which were willing to wait for B&T to go get the book after they ordered it from them. Local wholesalers, sometimes the same operations that rack-jobbed the mass paperbacks, didn’t attempt to stock much more than the bestsellers, the resupply for which was their real profit center.

In the late 1960s, as shopping center construction heated up, this started to change. Two national chains, Waldenbooks and B. Dalton Booksellers, grew on the back of that expansion. Shopping center developers preferred a national chain to a local independent as a tenant; they were more “bankable” when the developer was borrowing money to build. So these two chains started to grow as fast as suburban mall development would let them, which was pretty damn fast. When I went into publishing sales in 1974, each of the chains had about 300 stores nationally.

Dalton revolutionized backlist sales. Before scanning technology existed, Dalton instituted unique SKU numbers for every title which the cashier would punch into the register when each sale was made. (The SKU number was on a sticker on the book.) That enabled an automated reordering system to bring core backlist (designated “model stock quantities”) back in as they sold it.

Dalton had a “hot list” and a “warm list” of titles. The “hot” titles sold 10 copies a week across the chain. The “warm” list sold 10 copies a month across the chain. That was in a chain of about 300 stores and gave me my first real understanding of how few titles sold very much in a bookstore! Those lists were very important. If your book wasn’t on the hot list, it wasn’t going to get noticed by a buyer for re-ordering. And if it wasn’t on the warm list, the title was likely to be returned.

At about the same time, the early 1970s, the Ingram Book Company introduced technology that changed life for the independent bookseller: the microfiche reader that allowed every retailer to know, before they ordered, what Ingram was carrying. All of a sudden, just as Dalton was demonstrating how important a broader selection and in-stock backlist could be to a store’s economics, independent stores could imitate that strategy by ordering regularly through Ingram. Although computerized inventory management help was still a few years in the future, just being able to get the books from a single reliable supplier enabled independents to begin to compete and grow. (Of course, independents still didn’t have the advantage of 300 locations providing data so they could detect a “hot” book or “warm” book that might not be evident in a single store.)

There were two newer operations spawning stores with robust backlists in the 1970s: Paperback Booksmith and Little Professor. Both jump-started new independent stores with their branding, their inventory, and systems to support both new title buying and keeping key backlist alive. The Doubleday and Brentano’s chains had fewer stores, but bigger and richer ones.

From the publishers’ perspective, this was all providing more and more opportunity: more stores, more efficient stores, more backlist-conscious stores. So general trade publishers grew. Title outputs grew. Dalton and Walden grew. Independents and various smaller chains grew. Ingram grew. Baker & Taylor grew.

In the 1980s, the growth continued, fueled by increased efficiencies. Machine-readable fonts enabled Walden to imitate Dalton’s point-of-sale monitoring without having to sticker every book. Computerized inventory tracking systems improved efficiency at stores far and wide and at the wholesalers as well. New retailer Crown Books pioneered a new idea: a more limited selection of new books, combined with a lot of remainders and bargain books, and aggressive discounting of bestsellers. Even while the chains grew, the independents grew and became more powerful. A newly-energized American Booksellers Association became an aggressive advocate. They sued major publishers, ultimately forcing changes in sales policies that were deemed too chain-friendly.

Throughout the 1980s, the independents were the ones building the big category-killer stores. Good independents were confident that they beat the chain stores on title selection. They were even competing pretty much at full price against Crown’s deep discounting simply by being the place you could find the books you wanted. In the late 1980s, Borders and Barnes & Noble, along with Wall Street, saw the opportunity. Borders acquired Waldenbooks and B&N acquired B. Dalton to give them operational scale, and then they started to open very large 100,000+ title stores (under their own brands, not the acquired ones) in a model that had been developed by a Texas operation called BookStop (which was acquired by Barnes & Noble.) This just meant more growth for publishers; more backlist being stocked in more places. This might have been when the big indies first started feeling a pinch; I recall Andy Ross of Cody’s expressing concern about a big Barnes & Noble opening in Berkeley about that time. But the indies and the chains had a much bigger problem just over the horizon.

In the summer of 1995, Amazon.com opened for business. And, probably since Day One, but certainly increasingly and increasingly obviously, Amazon has been damaging the ecosystem which spawned a robust bookstore network and, which, in turn, fostered large and powerful general trade publishers. That was when the wall protecting the water that fed bookstores and trade publishers was breeched by the oil of digital distribution.

The analogy is not precise. Amazon is not a villain like BP. They aren’t just destroying an old eco-system; they are building a new one. To the consumer that is finding shopping easier than it ever was before, finding books they could never find before, being presented with cheaper choices of used books and electronic books that were not available before, there is no crisis here. In fact, there is no problem.

But to bookstores that depended on customers that had little other choice but to come to them for the books they wanted, shop from what was available under the store’s roof or wait for something to be brought in from outside, and who were effectively restrained by geography from shopping around for price or selection, the waters have become toxic. And to publishers that built a business whose principal competitive advantage is their ability to take intellectual property and put it onto bookstore shelves, the imminent prospect of reduced revenue, increased costs, more difficult title acquisition, and competition from old IP long-sold or long-dead, are now fouling the drink for them as well.

All of the eco-destroying forces that have so far hit the  bookstores, like the oil coming onshore in the Gulf, are just harbingers of much bigger waves of challenge to come. More and more people buy ereaders and cut print consumption drastically; more and more books get digitized; the long tail only gets longer as more and the more digitized stuff meets increasingly efficient print-on-demand. And more and more competitive material enters the supply chain with some appeal to the public but with no participation in the structure that makes bookstore stocking easy. The bookstores’ problem is not just about demand, it is also about supply. That’s competitive advantage for trade publishers in getting their books on bookstore shelves, but it is competitive disadvantage for bookstores competing against a universe of content a click away from more and more eyeballs and mindshare.

In an exchange in front of a large audience at BookExpo last week, one prominent publishing executive took relative comfort in the fact that “more than 90% of our business is still print.” That’s (still barely) true, but only about 70% of the business is still occurring through brick-and-mortar outlets. That number will be under 50% in 12 to 18 months, and the slide will still be accelerating. Big publishing grew in an eco-system of expanding retail shelf space. It has been challenged in the past 15 years as all that growth was stopped by the new forces unleashed online. Now that shelf space is going to start to shrink faster and faster, it is hard to see how big trade publishing can avoid doing the same.

Another aspect of this problem was raised this morning on a mailing list I’m on. Public libraries are losing the funding they need to stay open. Public libraries buy a lot of books from trade publishers, although most of those sales go through wholesalers and not all publishers are managing library sales discretely the way they should. Library purchases have tended to act like ballast in previous recessions; public funding wasn’t usually as volatile as consumer spending. Unfortunately and somewhat coincidentally, the erosion of the bookstore infrastructure is occurring when we’re also facing what is likely to be a longterm crisis in public funding as well.

Two Australian booksellers were in my office last week. The trauma they face is even worse than it will be here. Geography has protected Australia from competition so books are priced 50-to-100 percent higher than they are here. That’s been great for bookshops. Their trade looks like ours did 15 or 20 years ago.  With the arrival of ebooks and POD, they’re probably facing the changes we’ve seen since then in the next two or three years.

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Although there are some very good minds working on the next publishing model — Jane Friedman with Open Road and Richard Nash with Cursor being the first two that leap to mind — I have developed a couple of thoughts that might be helpful to them or to others planning to avail themselves of the new opportunities which are bound to be arising.

What I think both Jane and Richard have spotted is that “scale” is diminishing in its ability to provide a publisher with competitive advantage. Certainly, it is still true that the surest-fire big successes still require substantial advances to authors and aggressive laydowns of inventory that do require scale. If you want to publish Patterson or Evanovich or any author with a proven track record of bestsellers, guaranteed to move hundreds of thousands of copies, you have to take a cash risk for advance and inventory commensurate with their guaranteed minimum sales level and you have to go after the entire market, which takes money and organization, to recoup that investment.

But that covers no more than one percent of, let’s say, 100,000 titles a year published by established publishers and an even tinier percentage of the total number of new books if one includes those issued through self-publishing operations. (I am staying away from real numbers here because I haven’t done the analysis needed to discern them. The million-plus number of new ISBNs reported by Bowker contains hundreds of thousands of titles that are neither new nor self-published, but which are reissues of out-of-copyright books set up by companies that use technology to process the files into a print-ready state.)

Nash is explicitly expecting the collapse of the overall trade publishing model. Friedman has never expressed that expectation, but she’s exploiting the combination of old contracts that are ambiguous about ebook rights and the big trade houses’ reluctance to go beyond a 25% of net receipts royalty on ebook sales to make high-profile ebook captures. Her company professes to be “marketing-focused” and she has hired two of trade publishing’s most expert digital marketers, Rachel Chou from HarperCollins and Pablo Defendini from Tor. She has a partner, Jeffrey Sharp, with a filmmaking background. So there appears to be a clear emphasis on ebooks, new publishing forms, and digital marketing, not on “scale.”

A month ago I wrote that I expected 50% of the market for narrative books (words, not pictures; simple design, nothing complex like a cookbook) to be delivered through online purchases by the end of 2012. That was based on an expectation that 25% of the sales of those books would be ebooks.

Since then, I’ve decided that prediction is too conservative. Now I think narrative books might pass that benchmark six months or a year sooner than that. Hachette’s most recent financial results attributed 8% of US book revenue to electronic in the first quarter of this year. In a speech delivered last week in Australia, Carolyn Reidy of Simon & Schuster gave the same number — eight percent — as her company’s current share of revenue attributable to digital. Eight percent of revenue is something more than 8% of units (because ebooks are cheaper), and the number would be higher on their narrative books (because the 8% is across a list that includes a lot of books not available as ebooks.) If they were at 12% of units on narrative books in the first quarter of this year, they could be at 25% of units on narrative books by the first quarter of next year, which would be about two years ahead of what I was expecting just a month ago.

And what is true of both Hachette and Simon & Schuster must be a pretty reasonable approximation of what we’d see at any of the other Big Six companies.

The portion of the market that buys online doesn’t require pre-printed inventory. Setting up with Lightning and Amazon and perhaps Baker & Taylor would enable all online purchasers to get their print copies on demand. Today I am offering what I think is the solution for distributing  inventory more broadly into brick-and-mortar stores without a publisher risk. If Nash or Friedman have thought of this already, they haven’t announced it.

The brick-and-mortar world has three main components: chains, mass merchants, and independents. Here’s a deal structure that I think can be appealing to the big customers and, which, with a bit of tweaking,  can work to the benefit of the smaller ones as well.

When publishers sell to the trade channel, they collect approximately half of the retail price of the book for each one sold. They bill their channel partner that full amount when the books are shipped to the store, and credit their channel partner that full amount (with some relatively minor exceptions) when returns come back. Of that half they collect from the channel, about 20% (10% of retail) is the publisher’s cost of printing the book, 20-30% (10-15% of retail on hardcovers; actually less on paperbacks) is the author’s royalty, and the balance (about 50-60% of the money received) covers the publisher’s cost of doing business, including paying for books printed and not sold, and profit.

In a print-on-demand scenario, the manufacturing cost doubles (or more), so 20 or 30 points of the 50 or 60 remaining to the publisher are chewed up. Some contracts allow the publisher to get back some of the author royalty in that scenario, but absent that the publisher’s margin is definitely reduced so that they only “clear” 20 to 30 percent of the cash received. On the other hand, they shed the costs of unsold inventory (which can be substantial), they lose the requirement to capitalize inventory, and they can diminish or eliminate all sorts of operational costs for warehousing and inventory management. Sellers of print-on-demand services, including Lightning, have been laying out this reality to publishers for years.

In the present scenario, the channel partners — retailers or wholesalers —  are at cash risk for the return freight (and sometimes the inbound freight). And they have the full cost of the book tied up until they sell it or return it.

Here’s the new solution for a no-returns, no-inventory-risk-for-publishers world.

Publishers say: we are doing an initial press run which you can be part of. There will be no inventory maintained at the publisher. If the channel demands a subsequent run and will support it, we’ll do it. But otherwise, everything beyond the press run is available only from the wholesalers providing POD services.

The press run offer to channel partners works like this: you pay the cost of printing and delivering the book. And that payment is firm. You buy that inventory at its cost and you own it; no returns. That’s going to be about 10% of the established retail price.

But the payment above that, the rest of the purchase price by the channel, is paid on sale (or, to use the term of art, “pay on scan.”) To provide some incentive for the retailer to support a book with inventory and push up that first (and often only) press run, and then later to give them the margin for markdowns, I’d suggest that the second payment diminishes over time. The total “cost” to the retailer should be 55% of the retail price for the first 60 days after inventory is delivered, dropping to 50% for the next 60 days, and 40% thereafter. That would leave the publisher 30% of the retail price in margin on the slowest-selling books, of which the author, under the best contracts that exist today, would get half. The publisher would get half, but would have no inventory cost (that was paid up front) and no returns processing.

This formula should work fine for Barnes & Noble, Borders, Books-a-Million, and the mass merchants, who can buy 1000 or 2000 copies of a book they want to carry and get that press run price. Serving the independents is more difficult.

We stipulated at the top that all books are set up for print-on-demand at Amazon and Ingram; perhaps at Baker & Taylor too. If those books are ultimately sold to the wholesaler on normal discounts (about 50%), the relatively higher POD cost would chew up most of the publishers’ margin. We’re positing that POD could be 25% of retail (rather than about 10% for press run), which would leave only 25% for royalty and publisher’s margin. By today’s standard contracts, that might only leave 10% for publisher’s margin. There are two possible ways to claw back margin and both of them could work.

One is to negotiate lower author royalties for sales made through print-on-demand. Let’s remember I’m formulating how a new publisher ought to operate; they don’t have any legacy contracts yet. And, I might add, both Open Road and Cursor have aspects of their model that are more advantageous to authors than today’s standard. That’s how Open Road is getting those ebooks, paying 50% instead of 25%. And Cursor offers a short-term deal that nobody else does. So, on balance, the author might see herself as better off even though the royalty on some trade sales would be reduced.

Another possibility is that Ingram or Baker & Taylor (and you only need one to say yes to more or less oblige the other) can be persuaded to accept a lower discount on these POD books. For one thing, they make a bit of margin on the POD. For another, these books will not be available at all direct from the publisher (which has moved to a no-inventory model), so the wholesaler can offer a lower discount to their customers as well and still be “competitive.” And the wholesaler has no inventory risk or carrying cost either and no cost of sending returns back to the publisher. A slightly reduced margin structure still ought to work out profitably for them.

Of course, many devils are in the details. Publishers would need retailers working this way to report sales to the publisher on a daily basis and pay promptly, perhaps weekly (after all, the retailer is only paying after they’ve collected the customer’s money.) There is “shrink”, books stolen or which otherwise disappear without going through the cash register. That cost is entirely borne by the retailer today and the publisher will need some check and balance to assure that it doesn’t become a payment dodge under this arrangement.

But as the publishers move to a world where inventory risk can be substantially reduced, it just makes good sense to look for a way for the brick-and-mortar sales channel to gain some benefit from that idea as well. Working this way can enable a 21st century publisher to cut operations costs dramatically and even, perhaps, improve their cash flow.

When I first recognized that we’re in sight of the day when half the sales can be achieved without inventory, it looked like an obvious game-changer for publishing. Now I’m seeing the way to change the other half of the game as well.

And having walked through this door of perception, I close with a message for all the no-returns advocates out there among publishers. You want to eliminate returns to reduce your risk. That’s reasonable. But your risk is really the cost of printing the books; it wouldn’t be royalty on books not sold and it shouldn’t be profit on books not sold. So shouldn’t any no-returns policy also relieve the store of those elements of the risk as well?

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One of the most significant pieces of news to come out of Tools of Change is that O’Reilly is going into the distribution business for ebooks. This is indeed, a “tool” of change. It is also a harbinger of times to come that threaten a lot of big companies: major publishers; the big distributors like Perseus, NBN, and IPG; the digital asset distributors including Ingram, LibreDigital, North Point codeMantra, and the fledgling operation at Bookmasters; as well as the digital wholesaling operations at Ingram, Content Reserve, and Baker & Taylor.

The O’Reilly offer is to do whatever conversion is necessary to deliver files to a wide range of ebook channels for free and then to make the ebooks available through that retailing network for a charge of 25% of the dollars received. One prospective client told me that O’Reilly is willing to do a one-year contract.

This both an object lesson and a serious shot across the bow of the legacy giants of the print book business.

We’ve made the point here before that big publishers have a competitive advantage built on print-world capabilities, among them being the ability to get fast printings and reprints; the ability to quickly move books in and out of a distribution center; the ability to ship books according to the receiving requirements of many intermediaries, large and small; and a strong sales network with accounts, mostly brick-and-mortar, that sell printed books. All of these things require pretty massive scale. You couldn’t consider doing them well yourself for a $1 million (in sales) company or a $10 million company and it would be challenging to be competitive doing them with a $50 million company.

The scale required to do effective print book distribution affects both the supply and the demand in the distribution business. It means there are a lot of companies too small to do it well for themselves (creating lots of demand) and very few companies with the scale to do it well (creating a limited supply of providers.) Even so, as the need for scale along with declining overall sales have driven the big publishers deeper and deeper into the distribution business (pushing up the supply of distributors), prices for distribution have fallen steadily for at least the past decade.

Of course, anything that requires expertise benefits from some scale to develop it. And that’s what O’Reilly has in digital distribution. Partly because of the nature of the company’s audience, but largely because they have been aggressive and innovative about exploring every conceivable avenue for ebook distribution and developing a tool set that makes it possible for them to try new channels and opportunities quickly, O’Reilly has more scale, and therefore more expertise, than anybody else in consumer ebook distribution (except, arguably, some publishers in the romance space.) It is quite believeable that they can put ebooks into more channels with more efficiency than anybody else. And that’s an expertise that is largely (but not completely) topic-agnostic.

So we have a real Man Bites Dog story here. In the print world, O’Reilly is distributed by Ingram, which has invested heavily in ebook distribution. But not only does Ingram not get to be the distributor of their client’s ebooks, O’Reilly is issuing what amounts to an open invitation for all other publishers, including their fellow distributees at Ingram, to use them for ebook distribution.

(In his wrap-up talk at Tools of Change, Tim O’Reilly referenced a remark John Ingram had made to him at dinner the night before. On reflection, one wonders how the part of the the dinner conversation about ebook distribution went.)

This new challenge is playing itself out all across the distribution landscape. In the past week I have had two conversations with smaller publishers who have distributors on the print side. One is repped by one of the big independent distributors and the other by one of the Big Six. Both are planning their ebook distribution strategies, and neither of them intends to use their print distributor to help in any way.

The one distributed by an indie distributor is seriously tempted by the O’Reilly offer. This well-established company is quite comfortable taking responsibility for its own sales if they don’t need scale to handle it, so they have already pulled Amazon out of their print distribution deal. They planned to do digital on their own. They’ve had a digital workflow for a while, so their current books are in XML documents that make ebook conversion pretty straightforward. (If the offer of totally free content conversion is correct, then O’Reilly may have developed some tools helping them automate the way to from PDF or epub to XML. And they solve the problem of getting from XML to anything else that comes along for all their books.) But this publisher still have an extensive backlist that needs conversion to XML. This company sees a 1-year contract with O’Reilly as a possible way to get the conversion done and to get a line on a large number of points of ebook merchandising that they might otherwise not have known. In any case, the big print book distributor — with all its sunk costs and infrastructure and years of performance and relationship — isn’t even getting consideration.

The other company, distributed by a Big Six publisher, has also decided that digital distribution through its print distributor is a non-starter. They have been looking at the many Digital Asset Distributors to handle their conversion and distribution and have been close to settling on one. This company also has a legacy conversion challenge. Might they now want to put the deal they’re close to on hold and explore O’Reilly?

I would if I were in their shoes.

Cader wrote Wednesday (behind his pay wall) about the smaller trade publishers who have been slow to enter the ebook marketplace. He springboards from the results of a survey Perseus did of its clients and which formed the basis of a presentation they did at Tools of Change. Cader observes that 2/3 of Perseus’s 300 clients don’t use their Constellation service, their digital publishing assistance program (book distributor as DAD), at all. And, of those that do, he says:

Making ebooks available at all though looks to remain the biggest challenge for the survey group. The largest segment, 33 percent, said that fewer than 10 percent of their titles would be available as ebooks in 2010. Another 26 percent said half or fewer would be available, with just 30 percent expecting to have 75 percent to 100 percent of their titles available.

As ebook sales climb to very desireable levels, publishers of all sizes will pursue the revenue opportunities they represent. Trade book distributors have always lived on the reality that they provide the necessary scale to enable publishers to do what they do well that needs no scale: pick, develop, and deliver books people want. What requires a bit more scale but less to the publisher that specializes, and most small publishers do, is marketing. Distributors have never been much help there, frankly.

This perspective of the distributor was made very clear by the best-delivered presentation at Tools of Change, the one from Skip Prichard, the CEO of the Ingram Content Group. Skip was basically saying to the publishers: you do the content, we’ll do the rest. I know that Ingram’s perspective on a problem I’ve written about before — that publishers will have increasing trouble supporting the big infrastructures they have built for print — is that the publishers’ challenge creates opportunity for them.

And on the print side — the diminishing side — that is definitely true. What is not nearly as clear is whether on the ebook side — the growing side — they will face new, smaller competitors who have built a strongly competitive infrastructure without needing to be nearly as big. If that’s also true, then, one suspects, O’Reilly is not the only relative upstart that will be taking real business away from established players in the very near future.

There is actually a nice extension to this post that ties in nicely with my prior one on title P&Ls and the Motoko Rich piece in the Times about ebook pricing, but I’m going to leave that as a teaser for another one I may write someday because I’ve gone on long enough for now.

While I’m in Florida watching baseball games, as I am now and will be for the next few days, take a few minutes to respond the BISG survey supporting the “Points of No Return” Making Information Pay conference we’re organizing for May 6.

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Now I swear all this is true. As everybody knows, a very serious food fight broke out between Amazon and Macmillan late Friday night. All weekend Michael Cader led the way in ferreting out additional useful information and I spent most of today (Sunday) trying to write an analytical blogpost. I got it just about finished in the early afternoon, and the bottom line to what I’d written was “Amazon will not be able to sustain this.”

I decided to hold the post until after going to see Crazy Heart this afternoon and, when I came home, Amazon had already folded. But I had written a post that provided a lot of useful information, even if events had stolen my punchline.

So I’m giving it the once-over to edit it for the reality that Amazon has already announced that they will not continue to boycott Macmillan books.

It is received wisdom in Washington that when you have news you have to release but would prefer to have minimum impact, you release it on Friday afternoon. The latest tiff in the Amazon versus Big Publisher brouhaha went that idea one better; it appears to have broken in the middle of the Friday-to-Saturday night.

About midnight that evening, David Wilk alerted the Brantley list to a VentureBeat post that indicated that Macmillan titles were no longer available at Amazon.

By noon the following day, Brad Stone had posted a further explanation to the NY Times blog.

The VentureBeat post had no clue as to what was going on and even carried a link to a post from author John Scalzi suspecting a “glitch.” But Stone pinned down that the disappearance of the Macmillan titles was, indeed, retaliation for Macmillan’s move to the agency pricing model, first revealed by Michael Cader in Publishers Lunch and discussed on this blog last week.

Sometime late Saturday afternoon, Lunch posted a narrative explaining what was going on and including a paid insertion from Macmillan: a letter from Chairman and CEO John Sargent giving Macmillan’s account of what had transpired.

Which, as many people who care know by now (as I write this on Sunday morning and afternoon) is that Macmillan told Amazon about the new agency model, by which Amazon would actually get ebooks at lower prices than now but also by which Macmillan would set the prices to consumers. Amazon retaliated with what is, more or less, a “nuclear option.” Macmillan books are no longer on sale except through third party vendors (extending the ban to those dealers would open up yet another big can of worms for Amazon and they hardly need any more) and that includes Kindle. Most of the third party vendors are selling used books and no Macmillan books are being transacted directly by Amazon at all.

We have said on this blog, repeatedly, that publishers’ discounts to retailers would have to come down and that the windowing tactic (delaying ebooks from being available when the hardcover first comes out) was all about pricing control and nothing else.

What I want to accomplish in this post is to lay out clearly what is happening and then enumerate some key points about what’s going on: paradoxes and prospects.

Before the Agency Model (like “now”), publishers sell ebooks at about 50 off an often ridiculously high established price (”parity” is common; same price as a hardcover on a new book) to retailers who were setting the prices to the consumer themselves and, following Amazon’s lead, always discounting. The publishers are paying the authors royalties that are frequently 25% of net, which amounts to 12.5% of publisher declared retail. Some publishers pay 15% of retail; Sargent, in a previous letter to agents, indicated a desire to move from 25% of net to 20% of net, which would be 10% of retail.

The proposed Agency Model will have publishers setting a price lower than the established retail they had before but higher than the deep discounts Amazon led retailers to sell at. The publisher intends to  pay 30% of that established price to the retailer and 25% of either the full consumer price or of the 70% “net” (still to be determined) to the author. This means that the retailer will get a higher price from the consumer and a better margin than they realize now (even though a lower percentage of the “established” price). The author’s cut per copy could actually be reduced!

The wholesalers, Ingram and Content Reserve, often get the same discount as publishers. They handle the stores and libraries publishers serve don’t want to deal with directly. So those stores and libraries get less margin than the big ones publishers handle without an intermediary. One thing that was new to me that came out on the Ebook Supply Chain panel at Digital Book World is that publishers insisted on vetting the accounts that would be selling their books to make sure they didn’t violate territorial restrictions. So Ingram (and presumably Content Reserve) has to manage a granular control by title by publisher by account.

It is not at all clear how the Agency and price maintenance protocols get applied through wholesalers. Perhaps this means that smaller accounts and libraries just won’t have the newer titles that will only be released on the Agency basis (assuming that the scenario Sargent describes is what is also followed by other big publishers.)

This is a bizarre paradox, really. Macmillan actually proposed to sell Amazon the ebooks at what is, in effect, a lower wholesale price than Amazon gets now and their enforcement of a retail price puts more margin into Amazon’s pocket on every sale made than they earn now! And Amazon is fighting it.

Sargent’s note makes clear that the discount-off-retail pricing that has existed all along will still be offered, but that newer books wouldn’t be included in that offering. Those would be available only on Agency terms. What is not clear is whether Macmillan intends to continue the Agency terms past the nine-month “window” for new books. We’d guess they will for some accounts.

But that leads to another paradox because publishers unambiguously benefit if retailers sacrifice their own margin and discount when hardcover price maintenance and NY Times Bestseller list rankings are not at stake. Lower prices to consumers sell more copies. Presumably retailers will continue to want to compete on price and will do so when sales terms allow. But what does that do to the publishers’ challenge of “setting” prices for those accounts that want that done across the entire list?

Yet another paradox is the position of the agents. On the one hand, we have seen that many of those representing big authors see the same danger the big publishers do of inexpensive ebooks undercutting valuable hardcover sales and Times Bestseller rankings. On the other hand, publishers lowering established ebook prices and reducing their take from their intermediaries could often mean lower royalties for authors. But not necessarily.

If publishers are paying on “net receipts” (and many are) and if a) retail prices aren’t cut by as much as half (which they often won’t be) and b) if the publisher doesn’t deduct the Agency “commission” from its computation of net (sure to be debated), then the basis of the author’s royalty wouldn’t go down.

Quick summary: if you have a $25 list price ebook on which the author’s royalty is 25% of net, the author is now getting 25% of $12.50, or $3.125. If that book becomes a $15 ebook with a 30% commission, the author would get $3.75 (a nice increase) if the commission is not deducted first and $2.625 if it is (a sharp cut.) Of course, the $25 and $15 prices described here are notional and with different prices (as they say) “your results will vary.” If that notional book had been priced at $30 in hardcover, the author’s share would have been $4.50 and the ebook price change would clearly cost them something on every copy.

Author Charles Stross had a very insightful post on his blog, speaking from the perspective a gored ox (he has books published by Macmillan which have been taken down.) Stross makes clear that Amazon is miffed because their competitive strategy of driving away ebook competition through aggressive discounting will be foiled by publisher price-setting. Stross says:

Amazon are going to fight this one ruthlessly because if the publishers win, it destroys the profitability of their business and pushes prices down.

I’m not sure it “pushes prices down”; I think it actually pushes (ebook) prices up, at least temporarily. But the points Stross makes about Amazon wanting to achieve ebook hegemony and the Agency model being part of the publishers’ plan to beat that back and strengthen other players seem right to me.

We had a lot of this conversation last Spring before Sourcebooks’s windowing move with Bran Hambric, followed by Hachette with True Compass and HarperCollins with Going Rogue, pushed this tussle between Amazon and publishers to the forefront. In his analysis at that time, Cader made the point that publishers were actually helping Amazon undercut other retailers with their “parity” pricing; making the ebook retail the same price as the hardcover print retail. His logic was that the high prices increased Amazon’s advantage over other retailers because they could better afford to sell high-profile titles at a loss than their competition. Meanwhile, the publishers (and authors working on “net”) continue to get higher ebook revenues than the consumer spending would really entitle them to.

My first question when all this arose overnight on Friday was “why Macmillan?” Sargent’s note may have answered that question: because John was in Seattle on Thursday officially delivering Amazon the Agency Model news that we only assume is going to come to them from other publishers as well. One presumes that Amazon thinks that taking such drastic action as this might discourage the other publishers thinking about doing the same thing (and the iPad announcement on Wednesday would lead us to think that four of the remaining five Big Six players are indeed working out the details of a similar consumer-price-controlling sales model.)

And Amazon apparently figured out, as I was writing these words, that the only brand blown to smithereens by the nuclear option would be theirs. It is hard to imagine how extensive the brand damage could have been if Amazon delisted even one more major publisher along with Macmillan for even a couple of weeks. For a brand whose principal attributes are dependability and dedication to the consumer, it would have been catastrophic.

Amazon says now that the boycott is temporary and they were candid about the fact that they have no choice but to yield. They take a swipe at the publishers’ copyright-based “monopoly” on titles. But this was a really bungled response on every level. Amazon deserves credit for being smart enough to walk this thing back within 48 hours. Amazon may have to learn something new for them in the ebook space: how to be one of a number of players, not the only game in town.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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