Ingram

One of the key building blocks of my career was the six years I spent working on a program called “Publishing in the 21st Century” with Mark Bide and a team at Vista Computer Services (now Publishing Technologies) led by then-Chairman Denis Bennett, John Wicker (now at Tata Consulting Services), and Martyn Daniels (now at Value-Chain International). Every year we picked a digital change theme: organizational structure, content to context, etc., and did some research around it. Then we’d present our findings in a White Paper and conferences.

I think it was Martyn who observed that our exercise was like “looking into the same house through different windows.” That is, the subject was really always the same — digital change in publishing — but taking a different slant on it each time would deliver different observations and insights.

And so it continues. The subject of digital change in publishing continues to prove an endlessly fascinating one for observation, analysis, and speculation. And each time you think about it from a different point of view, you learn something new seeing what you have seen before.

This entire experience was critical to my own intellectual development for two reasons: it gave me subsidized (paid-for) time explicitly devoted to thinking about the future and it gave me a lot of smart people, inside Vista and among publishers and other stakeholders whom we interviewed in our research, to discuss with and learn from.

The topic of digital change outside the English-speaking world was placed on my radar in 2008 when I was invited to speak in Copenhagen to Danish booksellers and publishers. It was already the case that a large percentage of the books sold in Denmark were in English. (I have recently heard it said anecdotally that sales of English-language books in Denmark have climbed to 25% of the total!) I observed at the time that digital disruption, which would make books more ubiquitously available outside their home territories, would result in increased intrusion by books in English. It seemed to me, at first, that booksellers would be better able to adapt to this change than publishers because booksellers are not nearly as tethered to their language as publishers are.

I got another chance to focus on how things look outside the US and the English-speaking world when I spoke at the Sao Paolo Book Fair last August. What slapped me in the face there (a sort of “d’uh, I shoulda known that” moment) was the paucity of titles available in epub format in Portuguese. That meant that Portuguese-language ebooks were PDFs, which are not reflowable and very clumsy to read on a device. What is obvious immediately is that holds back the ebook market in Brazil. What is obvious on second thought is that those Brazilians who want to read on devices and who can read in English will find much more of what they want to read in our language than in their own.

Now, with the US having reached a point that ebook sales are substantial, providing meaningful revenue, threatening mortal damage to the print book distribution infrastructure, and upsetting the publishing value chain we’ve known for a century, more or less, the rest of the world knows it is going to follow suit. The UK, frankly as much because they operate in English as for any other reason, is beginning to catch up noticeably. The rest of the world isn’t so noticeably yet, but we all expect they will begin to very soon. And that means disruptive change is coming to the book businesses of the world and they’re looking to the US experience to understand the nature of that change and what to do to prepare for it.

It is clear already that 2011 is going to be a year for me to be discussing the US experience and trying to discern its global implications with publishers and booksellers and agents all over the world. Some of the plans in that regard aren’t quite ready to be announced (although they will be very shortly) but the first such opportunity will be at the IfBookThen conference in Milan where I’ll be speaking on February 3.

I got an insight (another “d’uh” moment) talking to a French sales executive about the local French ebook market a couple of months ago. He said he’d be urging French ebook retailers to make sure to carry titles in English. Why? Because Amazon, Apple, and Google (and he didn’t mention Kobo, but he could have) would all be serving titles in all languages to French consumers. If the local retailers don’t compete that way, they’ll quickly be bypassed by consumers.

So the reality that everybody in the world has to deal with is that English-language title availability in epub dwarfs that of all other languages and that we’re also exporting a developed infrastructure that can make those titles available everywhere and very quickly.

All of these players (and Kobo, Canada-based with a worldwide base of investors) are sourcing titles in all languages, have multi-device platforms, and are each developing a separate and siloed content-focused app market. Standing on the sidelines (internationally; they’re a US-only play at the moment) with many of the same capabilities is Barnes & Noble, who could decide at any moment to be a global player and would have a big infrastructure and title base from which to do it. Copia, which has been our client, Baker & Taylor’s Blio, and Sony also have many of the necessary components in place.

And all of them have designs on getting some content exclusively if they can.

What I’ll tell the conference-goers at IfBookThen in Milan is what the local booksellers and publishers should be thinking about as digital change in their neck of the woods accelerates.

The local retailers must, as the French sales executive said, endeavor to carry titles in all languages, particularly English. (There are tools from the US infrastructure available to enable that too, particularly from our clients at Ingram and our longtime friends at Overdrive.) They have to deliver multi-device functionality: an easy ability to shop and consume ebook product on all of the most popular devices. They have to keep up with features like lending and notes and internal dictionaries. They have to deliver impeccable customer service. And for those retailers that have brick-and-mortar stores, they should learn the lesson from Barnes & Noble’s delivery of Nook that retail locations are very effective places to introduce readers to ereading devices.

Retailers based locally have some other advantages to employ against the global players. They can provide local propositions for content and marketing of use to libraries and institutions. They can be better partners for local authors and local brands. They can maximize their knowledge of local content silos, such as IP that is developed by governments and local corporations and not-for-profits. And, presuming they are more successful than the global players at harvesting content in their local language, they can garner important revenue by selling to their own-language customers globally.

The challenges and opportunites are somewhat different for publishers. I am looking forward to discussing those, as well as going into more detail about the American experience and what lessons can be drawn from it, when I get to Milan in ten days.

In the meantime, next Tuesday and Wednesday we’ll be looking at this from the other end of the telescope at Digital Book World. We’ll have a conversation with a European member of the IDPF board, Cristina Mussinelli, about the emerging market for English-language ebooks in Europe. We’ll have a session moderated by agent Cullen Stanley with an American, a French, and a British publisher talking about how rights carve-ups might be changing going forward. We’ll have presentations from both Amazon and Google. And, perhaps most important of all, we’ll have separate sessions on core and enhanced metadata moderated by Scott Lubeck of BISG, along with a conversation between Lubeck and consultant Michael Cairns about ebook identifiers. Metadata that is accurate and robust is the key foundation for publishers with digital ambitions anywhere in the world.

All publishers are global now. All book retailers are global now. The publishers and retailers who embrace that reality soonest will have the best chance to be around the longest.

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The necessity for publishers to reduce their hard-copy operating costs, the reality that smaller as well as fewer bookstores are inevitable, and the overall question of shrinking shelf space are topics we have explored before.  But it is intrinsically difficult for those of us who have been in the book business for decades to envision life without a robust bookstore channel. The current unfortunate news about Borders suggests that it won’t require a great imagination for very much longer.

One thing that has changed considerably in the last 20 years is the huge increase in information available to publishers about what is going on in the supply chain: that is, they can track the books between their own warehouse and the end consumer purchase. The Big Kahuna of information, of course, is provided by BookScan, based on cash register capture of data as books are sold at outlets all over the country. BookScan not only lets its subscribers see the activity on their own books; it gives everybody a view of every book in the industry.

But as valuable as the BookScan data can be to discern trends and the performance of competiton and potential competion in the marketplace, it has real limitations as well. Knowing the sales without knowing the inventory is like knowing the number of hits a batter had without knowing how many times the batter came to the plate or knowing how many games a team won but not knowing how many games they played. Some books that are scoring low in BookScan’s data never had a chance: there weren’t enough copies in stores to enable a robust sale. And some books that are scoring high in Bookscan’s data are not going to be profitable because the number of distributed copies that won’t sell (and which will end up back in the publisher’s possession) is higher than the number that do.

Over a decade ago, pioneered by Barnes & Noble and Ingram, the biggest retailers and wholesalers started to provide publishers with data about how their inventory was performing for that trading partner. This data had the advantage of being far more complete and analyzable, but a publisher could only look at their own books’ performance. Because BookScan presented summary global sales numbers and everybody’s books, the BookScan reporting was what tended to be of interest across a company: to editors and marketers and top executives. But the more granular view of a company’s own inventory provided by the individual account reports was pure gold for the sales department and for the then-emerging supply chain management function.

When we first started helping publishers mine these reports in the early part of the decade, the practice at most publishing houses was for somebody in the sales department to look at the weekly spreadsheets, extract whatever insight they could, and then throw them out when the next week’s reports arrived. We were handed an assignment by our friend Charlie Nurnberg, then VP and Director of Sales at then-independent publisher Sterling. (It is a pure coincidence that Charlie’s name never appeared in the blog until my last post and now he’s in two consecutive ones!)

Charlie said, “for years we had 1000 titles on our backlist. I got the B&N green bar report (there was a time when all computer reports were green bar reports) each week and went over it with a fine-tooth comb and I knew everything that was going on. Now we have 5000 titles on the backlist, I have delegated the coverage of B&N to two people, and I know things are falling between cracks. Can you help me get a handle on it?”

To respond to this request, we did two simple things. First we databased the reports, so we could look at data across a longer period than one week at a time. (For fast-moving titles, a week in a chain can tell you a lot, although it certainly can’t give you trending insight that multiple weeks give. For slower-moving titles, a week’s sales might tell you almost nothing at all.)

The second thing we did was to contruct some simple metrics, so we could sort the reports by something other than the total inventory and total sales for stores and distribution centers that B&N provided. There were two key things we looked at right off the bat: the percentage of the week’s store-on-sale inventory that had sold and the percentage of the book’s stock that was kept in the distribution center. The first trick was to look for books that had a high percentage sellthrough but a relatively low number of copies on sale in stores. Presumably putting more copies out in stores would increase sales to everybody’s advantage. The second trick was to find the books which had a high percentage of inventory in the distribution center. Those books, we felt, were in greater danger of being returned. In general, publishers prefer to keep excess inventory in their warehouse.

These weekly Flash Reports quickly proved to be very valuable. The first day I showed them to Charlie and his team, we sorted the warehouse percentage in descending order. The two books at the top had 5000 copies each in stock, all of them in the warehouse! It turns out those books had been there for three months. There was a flaw in the B&N system — repaired almost immediately as a result of this discovery — that allowed a bulk purchase to be made by a buyer but didn’t require a distribution plan for the books. Sales management at the publishers, focused on looking at books in descending order of sales (which is what Sterling and just about everybody else did with those reports), might never notice that books sitting in the warehouse and not distributed to stores were also reported in the same spreadsheet.

This tool for discovery was well-received by Sterling, but it was also well-received by B&N. Their very enlightened inventory management team understood that having publishers doing sound analysis of the data they provided could be helpful to them. After all, the books sitting in the warehouse were painful to B&N as well to Sterling; that inventory investment was on their balance sheet (and, as it turned out, these particular books had been purchased on a “no returns” basis!)

In time, the business of doing sales data analysis grew for us. In addition to the weekly Flash Reports, we designed Stock Turn Reports to enable meaningful analysis of slower-moving backlist. We started computing the overall stock turn for a publishers’ books by store section, which was necessary to really decide whether a title’s stock turn was good or bad. Turning 1.3 might be nowhere good enough in fiction, but it might be heroic in philosophy or poetry. All of this analysis began to demonstrate the realities of bookstore economics to the sales reps and it got them thinking the way the store buyers do, where stock turn is a critical metric.

It wasn’t long before other publishers were using what we called the Supply Chain Tracker service and asking us to provide the same insight from the data provided by other accounts. Soon we were doing similar analysis for data from Borders, Books-A-Million, Ingram, Baker & Taylor, and Amazon. For publishers using us across accounts, we were also able to provide a much wider view of how their inventory was performing. We built spreadsheets showing what the percentage sellthrough was across retailers and across wholesalers and distribution centers. This information helped our clients match the growth and shrinkage of inventory across all accounts to respond to rising, and then usually declining, sales of a title.

We discovered a great opportunity in cross-account exception reporting. We’d look for the books that sold well in Borders but were under-represented at B&N and, of course, the larger number of titles that were the opposite: selling well in B&N but not well represented at Borders. That, and the stark differences in stock turn and percentage sellthrough between the two chains, would have told a perceptive sales director many years ago to expect the problems the Borders chain faces today.

At its peak, about four or five years ago, we were delivering Supply Chain Tracker reports to quite a few publishers, including Hachette, Harcourt, Chronicle, and Motorbooks. We did tutorials on our techniques for several major publishers, among them S&S, HarperCollins, Penguin, Perseus, and Scholastic. And B&N supported our efforts to teach the analytical techniques to university presses, including Harvard, Yale, California, and Chicago.

David Young learned what we were doing when he was running Little Brown UK and soon we found ourselves applying our techniques to data provided to them by Waterstone’s. When TimeWarner was sold to Hachette, our efforts were spread further around the Hachette UK companies and, at one time, we were doing Waterstone’s reports for four different Hachette divisions in London.

But, over time, big companies saw the importance of this kind of supply chain analysis and they brought it inhouse and, in many cases, extended it. That wasn’t good for Supply Chain Tracker, but it was the right thing for those companies to do for themselves. We stopped doing this work for US clients two years ago; we’ve just had our last two British clients take the function in-house. So for the first time in eight years, sales data analysis is no longer part of what we do.

The level of sophistication of inventory management in the supply chain by big publishers has taken a huge leap in the time since we started doing this work. I think we provided some impetus for that leap. This analysis will, paradoxically, be of increasing commercial value as brick-and-mortar sales decline in the years to come. Getting inventory levels right in years of relatively stable print sales was a key to profitability. Getting inventories and printings right in the period of print sales decline we face for the forseeable future will be a key to survival.

I wear with pride the fact that nobody else programming a conference on “digital change in publishing” has chosen to feature agents — both their challenges and their opinions —  the way we do on the program at Digital Book World. But we’re also covering the topic of this post. We’ve put together a panel of very experienced sales executives (Jaci Updike from Random House, Michael Selleck from Simon & Schuster, Alison Lazarus from Macmillan, and Rich Freese from National Book Network and moderated by David Wilk, who has years of trade sales experience) to talk about the evolution of the sales department. Find that on somebody else’s digital change program! And good luck to the trade publisher who rides into the future without agents and managing down the print and physical supply chain top of mind.

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One of the functions of this blog is to predict important changes in the business just a bit before they happen. We think we were a bit ahead of the curve in seeing the ebook acceleration and in seeing the likely pressure on bookstore shelf space. Today it would seem that the next great pressure point in publishing houses is going to be the sales departments. In the next couple of years they will probably change more than they have in the last half-century.

When I first became aware of how the publishing business worked in the 1960s, the field reps (referred to frequently then as “the men”) were the key connection between the publishers and the market. The closest thing there were to national chains in the early 1960s were department store buying groups who seemed to all be clustered in tiny little offices on 42nd Street in the block just west of 5th Avenue. The local department stores — Marshall Fields in Chicago, Rich’s in Atlanta, Halle Brothers in Cleveland, were big and important accounts.

Because the reps were the key to getting books into the hands of readers, everything revolved around passing information and excitement to them and through them. Thus were publishing “seasons” necessary to group the books, organize them into catalogs, and to prepare sales materials (tip sheets, jackets, blads for illustrated books) in an orderly way. This pretty much required that publishing lists be frozen some weeks before the sales conferences which themselves were a couple of months before the first books on the list would ship.

Today the field reps are probably responsible for anywhere from 5-to-15 percent of a house’s sales. The major accounts: Amazon, Baker & Taylor, Barnes & Noble, Borders, and Ingram for everybody (and the mass merchants like Costco, Target, and Wal-mart for the biggest players) are now at least 70% of the business, often more. These customers are almost always covered by national account staffs, not by field reps.

National account sales almost never work with catalogs or seasons; they work by months. Each national account has its own rules and regulations governing when they need to know about a particular month’s books. Whether sales calls occur monthly or less frequently, the structure of the presentation is around each month’s deliveries, not around seasonal catalogs.

It seems transparent that the shift in sales resources has not kept pace with the shift in sales channels. The ratio of national account business versus field business has gone from what was probably about 50-50 20 years ago to 80-20 now. But field forces haven’t shrunk by anything like that proportion. The fact that 80% of the business is now season- and catalog-free hasn’t changed the procedure in most houses of building marketing around seasons and catalogs.

I checked in with a couple of veteran salespeople to confirm my notion that the structure of publishers’ sales organizations hasn’t changed as much as the structure of the account base. One of them made a couple of important points. He posited that field sales force reductions had been slow to happen because the field reps are highly visible in the industry. Outspoken independent stores, which have a public profile larger than their sales, want to be called on and complain if they’re not. Publishers in the houses who are fighting for attention for their books don’t like to see fewer reps selling more and more titles.

This same sales veteran also underscored that both marketing and publicity are living in a similarly restructured world and haven’t changed as much as they should either. He points out that Amazon coverage really calls for marketing talent and thinking, not sales talent and thinking. Sales, as this person sees it, is often about talking an account into taking a chance on stocking a book. Amazon works by algorithms and you can’t talk them into anything. (Furthermore, it doesn’t really cost you any sales if Amazon is out of stock; they’ll source the book from a wholesaler to satisfy the customer. If you’re not on the bookstore shelf, on the other hand, you aren’t going to make a sale.) So the Amazon coverage needs to be about keywords, marketing programs, and metadata. It isn’t about salesmanship, as it is in an independent account, or about navigating a complex supply chain, as it is at a chain or mass merchant.

Experiments have been tried. Ten years ago, Random House tried putting reps into the field specifically to call on the branches of bookstore chains. That has always seemed like a good idea to me: store managers and clerks affect sales; being faced out affects sales; and there’s a lot of display opportunity that is locally controlled. Only a rep calling on a chain branch can affect those things and good merchandising of the books in the store will mean fewer returns. Different chain managements (and some chains have changed their managements the way some people change their shoes) have different attitudes about those calls. Very few actually see the benefit and encourage it. Some quietly discourage it; some try to forbid it. Whether or not Random House continued that effort, it certainly didn’t become widespread.

But as independent bookstores continue to diminish in size and number, publishers need to come up with other things for reps to do to keep them in the field. Calling on chain stores would be one productive thing. Calling on local newspapers to push books or calling on special market (non-bookstore) accounts would be two others. We know of one major publisher that was trying things like that three or four years ago but it apparently didn’t work for them. That same publisher fired a bunch of reps a couple of years ago and shifted a lot of sales coverage to telemarketers.

Catalogs are slowly moving to electronic. Harper started the movement with their own initiative a couple of years ago; now Edelweiss from Above the Treeline is providing an industry solution. But seasonal list planning is still the predominant go-to-market mechanism in our industry.

I just don’t believe the status quo can hold a lot longer. Selling by seasons in the digital age is nutty. Preparing printed catalogs that are out of date before the ink on them dries in the digital age is nutty. And making the entire publishing house’s marketing staff work around sales conferences and list preparation when most of its customers don’t buy that way is beyond nutty. There needs to be a complete re-think of how publishers put books into the marketplace. The divisions of responsibility among national account reps, field reps, telesales reps, marketers, and publicists need to be rethought.

With a new step-increment drop in print book sales almost certain following what we all expect to be an ereader Christmas (and our new biggest sales day: December 25), I think we can expect some very hard thinking around this subject at many publishing houses in the first six months of 2011.

I belatedly realized that this was a very important topic that hadn’t been covered at Digital Book World. It is now. We have a great panel: Rich Freese of National Book Network, Alison Lazarus of Macmillan, and Michael Selleck of Simon & Schuster will discuss the changing role of the publishers’ sales department on a panel moderated by David Wilk, a veteran of trade book sales and distribution. I consider this a prime example of what I’ve tried to make DBW’s distinguishing proposition: discussion of business challenges caused by technology even if the topic itself isn’t primarily about technology.

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In a conversation earlier this week I learned that the big Hollywood talent agencies have come to the recognition that “audience aggregation”, a component of what I have been calling a “vertical” strategy, needs to be incorporated into their thinking going forward. This was signaled very strongly recently when longtime publisher Steve Ross took his fledgling business offering self-publishing advice to authors with him to the Abrams Artists Agency where he set up a new department for them to represent authors rights to publishers.

What does that mean? It means that the celebrities will start increasingly try to “own” their audiences: to gather them in networks, bind them with various content offers like newsletters or other material from the person they “know”, and sell them stuff. The people managing the careers of movie stars are seeing the writing on the wall. The intermediary structure that connected the stars to their public — studios, producers, theatrical distribution — is suffering the pain of all media: declining prices for content because of the increase in supply and consumption habits changing because of more and more quality screens and digital delivery.

Many authors, of course, are trying to do the same thing. They have web pages; they collect the names of those who want to keep in touch with them; and they are, increasingly, selling them stuff. Sometimes the stuff is content (with a way blazed by Joe Konrath and his successful conversion from published author to self-publishing author, so far almost exclusively through Amazon) and now, thanks to Open Sky, they could be selling anything at all.

So the authors and the movie stars are getting ready for the day when they have to bring real live customer contact to the party if they want to be invited. But the big publishers are lagging behind here. Why? One reason is that the big accounts appear to have intimidated them from selling direct to consumers.

This is the kind of thing you don’t know for sure from the outside. Conversations between publishers and their top accounts, like conversations between publishers and the agents for their top authors, are private and closely guarded. But it has been anecdotally reported in the past that Barnes & Noble is not happy if publishers sell to consumers. And I’ve also heard that Amazon has told publishers that if they charge any price lower than the suggested retail in a direct sale, Amazon will consider that lower price to be the basis of their discounts, not the suggested retail.

That threat effectively prevents any publisher from selling direct unless they operate on the agency model and have eliminated price competition in the marketplace. (Of course, under the agency model, all sales are considered sales by the publisher, except, of course, that they don’t have the names or the customer relationship!)

In a business that is built on the leverage of intermediary trading partners who aggregate customers, which trade publishing is, very few are in a position to gratuitously annoy the two most powerful levers they have.

So the publishers have been reluctant to be seen to be selling direct. This concern also applies, for the same reason, to the wholesalers Ingram and Baker & Taylor. Both depend on bookstore business for their survival and it is, perhaps, an enlightened position not to compete with their core customers so neither company sells directly. But it is very constraining. Baker & Taylor really needs a full-line store to sell their BLIO ebook platform, but they can’t do it themselves. And Ingram — our client but we have not discussed this question with them at all — serves publisher clients as a DAD and as an ebook wholesaler who could use a retailing capability; but it is a very longstanding Ingram policy not to compete with their bookseller customers.

That’s the context in which LibreDigital announced their new SkyShelf service last week. SkyShelf is a direct-to-consumer ebook sales capability for the publishers LibreDigital serves as a digital distributor, but it gives them a certain amount of “deniability” or distance from it.

In my opinion, the big publishers must face some very critical questions fraught with customer relationship management challenges.

On the one hand, publishers — all publishers — must start forming direct relationships with end users. They have no choice. Authors are doing it. The retailers are doing it. The Hollywood stars and politicians and ballplayers they want to write books for them are doing it. Part of what the publisher wants to get paid for is marketing. When the most important marketing asset for any book is the number of likely-interested people who can be emailed about its publication, publishers without any names to offer will have a harder time selling their value.

Publishers who do have names on file — from Digital Book World owners F+W Media to Hay House to Harlequin and including others that grow in number every day — are already benefiting. They’re selling more copies expending less marketing money and they’ve got something important to offer authors looking for a publisher.

But it is hard to collect names and build a relationship with an audience if you don’t sell things to them. That’s one place that big publishers are really stuck at the moment. That’s why LibreDigital built SkyShelf to help them out. At the same time they put their competitor Ingram in a ticklish spot because it is hard for them to offer a similar service for the same reason that publishers need the help!

At the same time, the big retailers are pushing their way up the value chain into the publishers’ territory. Amazon has had self-publishing capability that is aimed at authors for a long time. Barnes & Noble invested in iUniverse, one of the first self-publishing start-ups (now part of Author Solutions), over a decade ago. Now B&N has delivered a suite of services called “PubIt” to compete with Amazon’s offering for authors.

Amazon has such a large share of the online print and ebook businesses that, with the publisher disintermediated and the author able to take a much larger share, they can credibly make the argument that a branded author — or one that otherwise does her own promotion and marketing — can make as much money through them alone as through a publisher serving the entire market.

It is more difficult and expensive for Barnes & Noble to leverage their store shelves for self-published authors but, to the extent they can, it will be a very attractive lure. I’d be very surprised if they’re not thinking about how to do that. Borders did a deal with self-publisher Lulu a couple of years and a couple of management changes ago. How long will it be before they revitalize that arrangement and add more competition for the authors’ attention?

The names of people potentially interested in a book who can be contacted for free will be the most important coin of the publishing realm in a short time; in some cases, it is already. There are publishers who are emailing to millions of names every month right now, but none of them are the biggest publishers. If gathering names is not a major priority at any publishing house, it surely should be. It’s mission-critical; it’s about survival. Seen in that light, it must certainly be worth some tough negotiating with major accounts if that’s what publishers have to do to make it happen.

This post was provoked by new information, about what the Hollywood agents are doing and about the launch of SkyShelf. But we’ve been pounding this drum of direct contact for some time. We did a pair of posts (here and here) with the help of direct response expert Neal Goff a few weeks ago trying to push publishers in this same direction. Those posts were about how. This one is about why.

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A dispute broke out on Brantley’s list this morning and I’m in a distinct minority. Maybe a minority of only a bit more than one.

The brouhaha started with observations about ebook pricing, with some very disdainful remarks about Agency pricing in principle and the big publishers’ execution of it in particular. The complaint was “ebook prices are too high” and there was support for Amazon’s protest to the ebook consumers in the UK and even a statement that one should choose what to read based on whether it was priced by Agency rather than wholesale.

Of course, I’m in the camp that believes Agency pricing has, at least (and probably) temporarily, slowed the (still) inexorable downward spiral of ebook prices for branded (big author) books. It has also contributed to breaking Kindle’s hegemony over the ebook market which is not solely a function of deep discounting (it is a great device and a great shopping experience!) As of the last time I checked (two months ago), two Big Six publishers reported to me that the Kindle share for their titles had dropped from the mid-80s to the mid-50s. They no longer dread “the call”, which is the metaphor for the message they feared would come one day from their biggest account saying “I can’t pay $15 for what I sell for $10 anymore; I’m going to give you $5.”

Now, it is possible that the Nook and the iPad would have created a lot of this market erosion under any pricing regimen, but I doubt it. I have heard that Barnes & Noble told publishers last year that Amazon’s ebook pricing was going to kill them and reduce their ability to keep bookstores open if they had to compete with loss leaders in the ebook arena. And Apple still gives a good imitation of an outlet that won’t play except on their Agency terms.

But what really caused the thinkers on the list to take issue was me was my contention that it is logical for the major trade houses to try to keep ebook prices higher in defense of print. From my perspective, the core value proposition of the major houses is “putting books on shelves.” That is the function that requires scale, capital, and a legacy organization with a lot of know-how. If that’s right, the fate of the big publishers is inextricably linked to the fate of brick-and-mortar stores. So of course, they would try to preserve them.

Not all publishers are in the same boat. O’Reilly Media, for example, has told the world that its second largest account is its own aggregated ebook platform, Safari. Print is still important to them, but they’re not nearly as dependent on bookstores as the major trade houses are; they probably sell a higher percentage of even their print online than the big houses do. (They say that Amazon is the one account bigger for them than Safari.) Perhaps it will even be to O’Reilly’s competitive advantage as bookstores diminish, raising the relative value of the customers they can reach directly. O’Reilly is an outstanding example, but not a unique one.

But without bookstore shelves to fill, I fear the major publishers have very little to offer. In their own defense, they tend to fall back on “curation” as their strong suit, but I’m afraid their curation is B2B and the B they curate for is the book trade! They have very little curation “brand” with consumers. I know there are efforts to build marketing capabilities that benefit from scale, but nobody has ever made a convincing case to me that they can do that. Generating robust metadata could benefit from scale if there were real verticality — tagging around the same subject matter again and again — but big trade houses don’t have that.

Another digital head at a big house, responding to my quest for power in scale, pointed out that they’ve been spending scads of money on tax compliance and lawyers. Of course, part of the reason they spend that money is because they have a lot to lose. But it is also true that the tax compliance issues can be offered at scale by third parties. In the US, at least, an outfit called RoyaltyShare is doing just that for publishers trying to live up to the requirements of Agency selling.

We really have at least two trade publishing businesses at the moment, the big houses and everybody else. The big houses pay almost all the substantial advances; they pay the highest royalty rates (which is actually, when you think about it, more than a little bit odd); and they generally get the best terms from their intermediaries. Their executives probably put their pants on one leg at a time (to quote an old baseball line) but, otherwise, they don’t have much in common with everybody else.

When one studies the industry and tries to analyze behavior, it is critical to keep that distinction in mind. It is appropriate that Random House and HarperCollins have a different strategy than O’Reilly or F+W Media for ebook and print pricing and for marketing. They really have different businesses.

All of this recalls the old cliche: where you stand depends on where you sit. If you’re a big publisher, every move you make should consider the fate of brick-and-mortar bookstores and you should be doing everything you can to preserve them for as long as possible. That’s the first element of a survival strategy. The second element could be to try to be “last one standing”. Our client Ingram has demonstrated with two recent deals (with Macmillan and with Springer) how publishers can pull back from their massive bookstore-supporting infrastructures but, even so, a diminution in bookstore shelf space is going to force consolidation. Maybe big houses will merge their back offices (which is, in effect, what Ingram is offering as a third party) but I think it is more likely that we’ll see a lot of mergers in the next ten years.

The most important metric for big publishers to watch over the next few years is “total shelf space available for books in retail stores.” (I’ve even come up with a pretty simple way to track that and suggested it to one of the companies that could provide it.) That’s almost certainly not the most important metric for upstart and vertical publishers.

It is often said that the big mistake railroads made was not realizing they were in the transportation business, or they wouldn’t have let airlines pass them by. I don’t buy that; running a railroad in no way qualifies you to run an airline, let alone to invent one. One listmember in the discussion in which I appeared to convince nobody suggested that the big publishers should focus on how to be more upstart and more vertical. I am afraid that trying to be something that you’ve never been is a very hard path to follow.

All this means that you need to think about which publishers you’re talking to and about when you frame conversations. At Digital Book World, for example, we’ll have a panel on ebook distribution for small and midsized publishers. But we’ll also have some unique research about the ebook royalty deals being made which focuses on agents and big publishers. The experience of smaller publishers, who almost always pay higher royalties, would almost certainly just confuse the issue. Any “industry data” that doesn’t separate the bigs from the smalls has to be parsed very carefully or it could lead to wildly erroneous conclusions.

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At the conclusion of another Frankfurt Book Fair — my thirty-somethingth — here is something I actually knew before but have taken on board in a whole new way: there is an enormous gap between the US and everyplace else in the Western world (at least) in consumer ebook takeup and acceptance.

Here is what I think: it can’t stay that way forever.

Here is what I deduce: the rest of the world is in for what will be, for many, a vertigo-inducing ride while they catch up.

It seems pretty obvious why the US is so far ahead: 300 million people in a single developed economy with a single currency and a single language. Those same factors also largely explain why the US is also so far ahead in Internet print book purchasing. (There is another big cause at play there: the service infrastructure provided by our national wholesalers, Ingram and Baker & Taylor, without which it would have taken a multiple of the initial investment to get Amazon.com off the ground 15 years ago.)

One thing leads to another. Because Amazon had, by the end of 2007 when it introduced the Kindle, built a loyal customer base of tens of millions of book buyers, they had the pillars in place to roll out an ereading device. That really required two things nobody else in any other country has even today: a big enough customer base to reach a critical mass of consumers without any assistance or partnerships and enough leverage with the publishers to get them to put their books into the ecosystem that supported their device.

One thing leads to another. Amazon’s Kindle, with a much larger selection of titles and a smoother path from file server to device than had previously been offered by other ereading platforms (which were, before Kindle, the Sony Reader device for some and reading on PCs or handhelds such as Palm Pilots for others, with me in the handhelds group), gained pretty rapid uptake. That led Barnes & Noble, which also had leverage with the publishers to get titles into their store and access to and brand credibility with millions of book readers, to follow on with their Kindle-like device, the Nook, almost exactly two years after the Kindle. As most of us know, the iPad followed the Nook shortly thereafter, coming onto the US market in April 2010.

All of this has resulted in getting the US to the point as of Frankfurt 2010 where a US publisher launching a book of straight text can expect ebook sales to be a mid-teens percentage of the book’s total sale, with occasional reports that are even more dramatic (such as the anecdote that the first wave of Jonathan Franzen’s “Freedom” was one-third ebooks!)

One thing leads to another. As has been written on this blog many times, all these Internet-based sales put enormous pressure on brick-and-mortar stores. We see shelf space diminishing and there are those among us who believe that over the next ten years it could pretty much disappear.

The Kindle hasn’t had nearly as dramatic an impact abroad as it has in the US for a host of reasons. Amazon doesn’t have the same audience share. They don’t have the same huge number of titles available as they do in the US. And they haven’t had two other big and influential companies (B&N and Apple) pushing the device-reading experience into the public consciousness. It seems Nook and iPad’s arrival have only served as catalysts for Amazon to sell even more Kindles and for the ebook uptake in the whole US market to accelerate further.

So we find ourselves today with this massive gap between the penetration of ebooks in the American market and the penetration in any other country’s market outside of Asia (I didn’t talk to any Asian publishers at the Fair, and I don’t know the situation there.) Certainly (assumption alert: a priori argument not based on any data) this is a situation that cannot last forever. In five or ten or fifteen years the percentage of book sales that are digital and the percentage of print book sales that are transacted online will be pretty much the same in all developed countries.

If that assumption is right, then other countries — starting with the English-speaking ones and then moving on from there — are going to experience the changes we’ve felt in America in a much more compressed period of time.

There are legal and institutional barriers to change which have already been “effective.” The world’s largest natural moat has protected the Australian book market, keeping print book prices high and the retail book trade healthy. It was evident from conversations I had with some Australian booksellers at last May’s BookExpo that they are feeling the winds of change beginning to blow a gale, fanned by the arrival of Kobo ebooks in the market. (Kobo is a sleeper from the US perspective: a small almost-an-afterthought ebook platform in our country but painstakingly building a presence around the globe and some impressive OEM relationships everywhere, including in the US.) Ingram’s POD setup in Australia will surely introduce a lot more titles into the print marketplace. That’s important because POD drives consumers to online purchasing by offering more titles than any bookstore could ever stock.

All of this is frightening to any sentient Australian bookseller.

Retail price maintenance, territorial and language rights restrictions, and variable rules about applying VAT (sales tax to us Americans) to books seriously complicate the development of the ebook marketplaces in Europe.

But the biggest complication of all, in the short run, will be the paucity of titles available in the epub format in languages other than English. Epub enables reflowing of text, which is essential to deliver a reader-friendly ebook experience to a multiplicity of screen sizes. We have hundreds of thousands of titles in epub in English; no other Western language is close. This is a subject that first surfaced for me in Brazil when I was there in August.

One thing leads to another. The epub gap spawns another serious issue for the European book trade as it catches up with the US. Most educated people in most European countries are comfortable reading English. A publisher in tiny Slovenia (formerly part of Yugoslavia) told me that one-sixth of the books sold through the largest chain of bookstores and the largest online bookseller are already in English. Somebody else told me that 25% of the books sold in Denmark are in English. In Holland, I was told, there has been recent legislation requiring “windowing” of English ebooks on titles that have a Dutch edition, holding back the English edition until the Dutch edition has had a minimum time of availability.

The biggest adjustments even for the players in the US book trade are still ahead of them. As far as I can tell, big publishers have not really taken on board that bookstores are pretty much going away in the next ten years and, one thing leading to another, taking the big publishers’ major value proposition with them. There is almost no visible acknowledgment of the shift from IP to eyeballs that I believe is coming. But the change we’ve had and the change we’re facing in the US publishing world is dwarfed by what will be seen and felt by our friends and trading partners in Europe and elsewhere in the next decade.

Some of what this post is about had already been anticipated as we prepared the program for the Digital Book World conference taking place January 25-26. We had already planned a panel on how territorial and language rights trading will be affected as ebook uptake spreads. Now I think I’ve found somebody who can lay out the European landscape as US publishers and agents should be thinking about it. I’m working with her to prepare what I think will be a significant addition to our program covering a topic that is, as it should be, increasingly important to American rightsholders.

Another topic for another day is that the world is getting smaller and publishers in every country will need to understand what’s going on in their foreign markets better. We’ll be delivering just one compressed seminar and a panel or two at Digital Book World because that’s what bandwidth we think conference attendees this January will be comfortable investing in the topic, relative to a lot of other things that need to be discussed. By a year from January, I think understanding how the ebook markets work in countries around the world will be a top-of-mind concern for every publisher and agent in America.

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Sometimes you hear of an idea or a new business that seems so right-on-the-money that you wish you had invested in it and figure it is just a matter of time before it grows into something very powerful and important.

Here are three of those — all of which should be of interest to publishers  and which everybody who is interested in the content on this blog should know about — that are unrelated and similar only in one way. If they execute and deliver on their promise, which in the last of these three cases is really beyond question, they should have very bright futures.

One is a new business that was dreamed up without publishing as we know it in mind at all. It’s called Open Sky, and it enables any web site to sell any thing. Open Sky aggregates wholesale pricing arrangements from suppliers of anything at all and enables any website (or blog) to sell the goods at a profit. And they provide the web site with whatever technology or functionality they need plus a social commerce platform to enable harvesting and use of customer information.

So from the manufacturer’s perspective, they are the front end to a lot of distributed eyeballs and resellers. From the website or blogger’s perspective, they provide both the commercial relationship and the web tools necessary to “stock” and sell items relevant to the site’s audience. They’re brokering business arrangements that are useful on both ends and enabling sales that would simply not exist if they did not exist.

Former book editor and agent Mary Ann Naples saw the potential for Open Sky with clients of hers who were book authors and bloggers. Imagine being a blogger who writes about cooking and wants to tout and sell her favorite pots and pans. Mary Ann represented people like that and she’s been taking Open Sky into the book business.

From the perspective of a guy who has been telling publishers to use their content as bait to attract and aggregate eyeballs because they’re bound to have remunerative value, Open Sky provides an answer to the question I face the most when I lay out my thinking. (“Great, Mike, but how am I going to make money?”)

The second is a publishing business you’ve probably heard of (or should have) called Flat World Knowledge. Flat World creates college textbooks, doing the creation more-or less the old-fashioned way, although somewhat faster and cheaper than the big players. What’s different about Flat World is their commercial model. All their content is available free on the web in HTML, but you can buy it (printed or digitally-delivered) if you need to possess it or mark it up.

Wrapped into the Flat World model is the capability for professors to add other material, theirs or somebody else’s, to the Flat World text. That material becomes part of the offering to the student and soon Flat World will add the optional capability to make the material available to professors in other schools to offer to their students (with a royalty, of course). Flat World has had books in the marketplace for about 18 months; they’ve learned enough to know about how much the free HTML exposure drives profitable sales. And “how much” is apparently “enough.”

In a world where the price-and-margin pressure on the textbook model just gets increasingly difficult for publishers and students, Flat World’s new approach looks very likely to succeed. It is worth noting that Macmillan is now delivering the professor customization part of the Flat World model, but it is extremely difficult for an established publisher with a legacy cost structure to compete with their free-on-the-web commercial model. This will becoming a growing threat to the established players in the college textbook space.

The third initiative comes from two giants in the trade world: Macmillan and Ingram. (I always tell you when this is the case: Ingram is, at the moment, our client.) They have just signed a deal by which Ingram’s print-on-demand, warehouse space, and shipping capability becomes an extension of Macmillan’s own operation. Books can be seamlessly shifted from a pressrun model to POD (and back). Macmillan is alleviating warehouse space pressure, keeping books generating revenue past when they would otherwise have been out of print, and anticipating the inevitable future reduction of infrastructure that will be mandated by the shift from print to digital.

In a recent blogosphere conversation sparked by Evan Schnittman’s observation that the impact of the ebook shift could be an expansion of the market, Eoin Purcell wrote about the commercial impact of readers shifting from ebooks to print. Purcell fears that publishers might be forced to give up the print book revenues if printings were eroded too much by ebook uptake. What he sees is that as press runs go down, printing costs go up, and if that forces book prices up, it will exacerbate the decline of print and could diminish it to the extent that it just isn’t worth doing.

Certainly that’s a challenge publishers face, and they know it. The Sales Director of a Big Six house with a lot of bestsellers, anticipating that his ebook sales could pass 20% of the total for most of his books as soon as next year, said “I hope we’ll be smart enought to manage down our printings and distributions.” Hitching Ingram’s capabilities to the publisher in the way Macmillan just did helps ameliorate that problem and a myriad of others. It’s a way for publishers to reduce overheads and increase operational capabilities at the same time. I’d be surprised if we don’t see many, if not most, other publishers going for this solution in the months to come.

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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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