Michael Cader

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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This is the third of four posts covering the subject matter of an address I had hoped to make to the Publishers Association in London on April 28 but which was cancelled by the Iceland volcano. In the first post, we explored the nature of change in publishing and I tried to underscore how much disruption technology can cause in media in a 20-year period. In the second post, I sketched a vision of what I thought the communication ecosystem will look like 20 years from now. In this post, I outline what I expect the new prevailing model will become and look for some current efforts that point to it. And the last post in this group will take a more short-term view and discuss some changes we might expect to see in the next three years.

Over the next 20 years, the power to put books on store shelves — or, for non-trade publishers: the power to put “books” into people’s hands by other means — will lose its leverage. It won’t provide marketplace advantage anymore. And furthermore, the channels of remuneration for content won’t be book-specific, so there will be no particular efficiency and probably some competitive disadvantage to being a specialist delivering books, or content in book-length and book-form.

At the same time, and not necessarily connected, content-and-community worlds will become increasingly evident on the Web. An advertising agency in New York called Verso has already seen the opportunity in creating vertical “channels”: collections of 100 or 150 web sites that are topic-specific. Their first thought was to sell publishers on targeted advertising campaigns working those channels. I am sure many more opportunities to market through those logical and topic-selected collections of sites will become evident over time.

What I’m imagining is that web “front ends” will develop to all these subjects. Google is one way to search for Paris, France, and find double-digit millions of possible pieces of content. But the concept of a thoughtful and organized AllParis.com (instead of the ad-driven uncurated link farm you get from that URL now) seems inevitable. Imagine that everything that today has a Wikipedia entry had organized and crowd-enhanced access to bloggers, references, lists of books, related travel information, and, most of all, connections to the people who were thinking, writing, researching, and living out that thing. I believe that’s will we’ll see develop over time, organically and driven by commercial awareness as people how to make money by fostering it.

There are a handful of signposts to what I’m thinking about in our experience already. The most fully developed version of this vision is the Publishers Marketplace community built, from scratch and with no outside capital at all, by Michael Cader. Starting with one of the earliest, and still one of the best-executed, versions of a daily newsletter built on links to the most relevant posted content of the last 24 hours, Cader has built a community of thousands of members paying substantial fees for the benefit of being part of it. I could do a whole series of blogposts on the Marketplace site alone; I won’t. But if you’re a publisher seriously trying to envision a future, you should spend some time with it. And keep two things in mind:

1. He did it with no money.

2. He did it by using content as bait, to attract eyeballs, and he monetized the community.

Michael Cader has a very unique set of personal skills that enabled him to do it with no money. But the process of content as bait to attract the eyeballs and then providing tools, features, and databaes to monetize the community is one we will see replicated many times in the next 20 years to build many brands that will, in effect, be the publishing community of the 21st century.

Another example of doing this right that has recently debuted is from Sourcebooks and it’s called Poetry Speaks. Dominique Raccah, the Publisher (and owner) at Sourcebooks, has published poetry successfully for many years. She’s also navigated the world of sound, selling CD-and-book packages for well over a decade. Maybe that helped, or maybe it was just “vision”, but in Poetry Speaks she’s created a site that is “open” to all poets and poetry publishers. It provides tools and it provides reasons for the poets and the fans of poets and poetry to gather and interact. Yes, the site sells poems and books and audios, but “buy this book” doesn’t hit you in the face. Poetry does.

Our client Sterling Publishing is moving ahead with a web community initiative based on their publishing assets in photography. Joe Craven, who spearheads new business initiatives, looked ahead to the sales decline of their key lists in that subjects. He figured it was worth a shot to put lots of content on the web for free, attract a community, and then try to monetize the community. As a result, there will be a major web effort launching this Fall. Pixiq will use an editorial team already in place to build out a web presence, using legacy content, acquriing content through relationships they had developed from long experience, and leveraging professional and semi-professional connections built over many years of publishing to the audiences of professional, semi-professional, and amateur photographers.

Oxford University Press has just launched a new initiative which represents another way to develop a vertical called Oxford Bibliographies Online. They’re using their considerable academic expertise to delivered curated and constantly updated bibliographies by subject as a subscription product. This is brand new and just announced, but the idea has promise as one that will give them a unique position in each discipline for which they implement it and which can be a component of a vertical strategy in less academically-intense areas. Although the OUP initiative will garner subscribers mostly from institutional library customers, one would think Sourcebooks and Sterling will watch OBO with some interest. Surely, the function of curation being served here will be applicable to Poetry Speaks and Pixaq as well.

Both Sourcebooks and Sterling are aware of the fact that the web activity they are generating to create these communities can also be useful to sell books. But in the forefront of their thinking is  ”the community”: what people they are trying to attract and what they can give those people that will make them come, stay, create value, and perceive value. The fact that any thought of immediate book merchandising is secondary is what makes these initiatives stand out to me. And both of these sites will, in time, develop real business models that are hardly dependent on content sales at all. That’s already true of Publishers Marketplace.

By creating a brand and a community for their sites which is really independent of the parochial interests of their own publishing programs, it makes it much more likely that Poetry Speaks and Pixiq can, in time, become important components of their competitor’s marketing efforts. Which side of that fence do you want to be on for the most important subjects you publish?

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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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Michael Cader did a brilliant analysis of Thursday’s New York Times piece on ebook pricing, published exclusively for paid subscribers to Publishers Lunch. The Times piece’s shortcoming was that it tended to sensationalize the news that the prices the public will pay for current brand-name ebooks will be going up. If you observe the book business for fun, you can perhaps afford not to have access to content like Michael’s analysis. But if you’re in it for a living and you want to seriously keep up with what’s going on, I suggest you save $20 somehow on other publications each month and reinvest it in a Publishers Marketplace membership. I am not the only blogger moved to make this suggestion by this piece.

I am working under the rash assumption that Cader will not sue me for quoting his remarks without regard to fair use limitations (particularly after the commercial in that first paragraph.) Of course, I do my best to add some Shatzkin Files value to my quotes and paraphrases as well.

Michael’s overall point, as I read it (and these are my words, not his): “we in the business know what’s going on with ebook pricing; apparently reporters outside the business do not. And therefore a great deal of misunderstanding is circulated among the book-buying public and it behooves the trade publishing community to get the word out to make sure that the public understands what’s really behind what they pay for ebooks.”

His device to illustrate this point is to describe some common misunderstandings fostered by the Times piece — all of which are real misunderstandings and none of which are just convenient straw horses — and knock them down.

Frankly, it is only the overall point on which I’m not sure I agree. I am not convinced it makes much difference whether we push the “truth” out or not. Amazon’s recent “concession” statement over the Macmillan dust-up tried to channel potential consumer anger at Macmillan and away from them. That’s an effort that is bound to fail. Everybody who buys from Amazon knows that they’re buying from Amazon. On the other hand, “Macmillan” is not an active book imprint at the moment in the United States. The books the corporation called Macmillan puts out are under the imprints St. Martin’s, Farrar Straus, and Holt, and their subsidiary imprints. My wife found the Macmillan Dictionary for Children online and that book is published by Simon & Schuster! So good luck to Amazon trying to get the consumer to punish a corporate entity whose name isn’t on the cover of its books.

But the myths Cader describes are ubiquitous misunderstandings and they were clearly promoted in the Times piece. As Michael describes them (in italics):

* $9.99 never was the top e-book price; people pay more than that every day.

The Times piece makes a big deal out of consumer expectations of the $9.99 price. Cader points out that recent data from the ebook retailer Kobo described at Digital Book World — which shows that at Kobo they sell as many books for more than $9.99 as they do for exactly $9.99 — and Amazon’s own data undercut that notion. Cader says surveys of Amazon data have shown that 30% of the SKUs are priced higher than $9.99.

I have been told directly by a responsible person at Amazon that 4% of the titles they sell are deep-discounted to $9.99 and those represent 25% of the total sales. Of the other 75% of the sales, many (most) are less than $9.99 without necessarily deep-discounting, according to Cader, 30% are more. I have personally bought many Kindle books for more than $9.99 and some for more than $14.99.

But what I’d see as the biggest fallacy in this whole “customer expectations” meme was not mentioned by Cader. So far we have a relatively small percentage of book readers who have ever purchased an ebook at all! General consumer expectations can not be set by a sliver of the group who are early adapters. In fact, publishers are being smart precisely because they are tackling this consumer pricing problem before the market really does become general and a large population of book readers do have experience with the current price structure.

* The implicit, false promise of cheap e-books was made by the people who profit, at very nice margins, from selling the devices, not from publishers.

This is true for the $9.99 books offered by Amazon and Sony and, now, Barnes & Noble. Other etailers, like Kobo or B&N before the Nook, were offering that same price to keep up with (keep down with?) Amazon. But the central point is right. Amazon created the expectation of $9.99 pricing to sell readers; publishers didn’t create it to sell books!

The two companies most likely to save publishers from an Amazon stranglehold on their future general readership, Apple and Google, would also place “margin from ebook sales” very low on their list of objectives for participation in the ebook supply chain.

If the market really could stabilize with three or more reliable paths to the general ebook consumer, with price competition among the content,  but not price-competition driven by external forces, it would be one of the most important strategic accomplishments of the current generation of publishing management, to whatever degree their policies enabled it to happen.

* Brand-new ebooks sold at $9.99 are generally sold at a loss by the retailer.

And, as Cader goes on to point out, this is led by a retailer with a $50 billion market cap with an implicit expectation that it will drive smaller retailers out of the game. Publishers are taking the steps they are explicitly to encourage a more diverse marketplace. So, Mr. and Ms. Consumer, whose side are you on?

* People who can afford an ereading device can afford all proposed ebook prices.

Cader is making the point that conscientious reporters should make put price complaints into context. I’d personally dwell more on the “dog bites man” aspect of reporting that people favor lower prices. Has anybody ever found a consumer who favored higher prices? Has anybody ever found anybody who would prefer to pay more for anything they buy? From here it would seem that all reports of what people say they want to pay or say they would pay in some hypothetical circumstances are pretty much meaningless. Michael says “put them in context.” I really wonder whether this kind of senselessly speculative commentary ought to be reported at all!

* Publishers are lowering [my emphasis] their ebook prices.

Cader captures the massive irony of what is going on here with this one. From reading this piece or from reading Amazon’s note to Macmillan, you’d get the impression that “greedy” publishers are “raising” ebook prices. That’s not actually the case. The publishers going to the Agency model are actually reducing their price per unit sold; they’re just insisting that booksellers not sell those books as loss leaders. As Cader put it, “we in the trade know that publishers are preparing to lower their ebook prices by 50 percent or more, and reduce their own profit margins. But customers don’t; they hear that publishers are raising prices.”

* The new “top price” is going to be $12.99 more often than not.

The public reporting is that the Agency-priced books from Apple will be $12.99 and $14.99, with no additional detail. Cader seems to know that most, or at least a large number, of those books will be at the lower of those two prices. Undoubtedly, some people will refuse a book they want to read on a device they paid over $200 for because of a $5 difference in price ($14.99) from their prior expectation ($9.99). But somewhat fewer will be reluctant at $12.99, which is where the price will apparently be a great deal of the time. Certainly, nobody writing for a newspaper knows the future balance between those two price points.

* Surveys show many people will pay more than $9.99 for ebooks.

Cader points out (and my personal repeated experience confirms) that people often do pay more than $9.99 now, even according to the stats we’ve seen. But what he doesn’t point out, so I will, is that those stats are stacked!  Amazon prices all the hottest and most desireable books at $9.99, and therefore so does Kobo and other Amazon competitors. So the clustering of consumer purchasing around that price is largely driven by the appeal of the product at that price point.

That is: people bought the book, not the price!

* Goldman Sachs says ebook prices are not the biggest factor in purchasing a device–but expensive devices are an obstacle.

This is from a survey that Cader has seen and I have not. But the point is that portability is the main benefit consumers see in ebook devices, with price running second and ease of purchase nearly even with price as a perceived benefit. Ebook purchase decisions are not made on price alone.

What this data also would tell us is that ebook reading is going to spread because the price of devices is coming down and the circulation of ebook-able devices, smartphones and iPads, is increasing regardless of dedicated reader prices.

* Publishers have rewarded and honored early ereader adopters with a lot of free book giveaways, and some very inexpensive price promotions.

Much has been made in other places (not in the Times piece and not in Cader’s report) of the fact that the Kindle “bestseller list” contains a lot of free or almost-free books. Some of those are public domain titles, but many are not. Those that aren’t are provided by publishers as promotions, usually an offer of an older book by a multi-title author who has a new one just out. Does any retailer billboard the publishers who “have made books available for you for free?” Not that I’ve ever seen.

I do believe that the price of content will be driven down over time because of the laws of supply and demand. The amount of content being made available every day is staggering. However, the established publishing companies still have pretty much a monopoly position on curating and branding it. Curating and branding save consumers an enormous amount of time and effort; that’s why they are willing to pay for them. Publishers and the authors whose brands they are enhancing and maxmizing are operating in an increasingly competitive world, but they are both totally sensible and totally unremarkable in trying to maximize the rewards for their efforts.

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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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The idea of an “Ebook Tipping Point” panel for Digital Book World arose when I wrote a blogpost last August on the occasion of the regular monthly release of the IDPF’s ebook sales figures. It was clear then that very substantial percentages of the sale of new narrative fiction and non-fiction were going to move through ebook channels and this post raised the point that this would be disruptive right after Dominque Raccah and Sourcebooks started last Fall’s cascade of strategic moves by publishers to try to slow things down, at least for Kindle.

In October, really writing about the same situation I predicted that major publishers would be challenged to cope with the problem of de-scaling.

When I wrote the August post, I was in the early stages of organizing the program for Digital Book World and I decided to put together the “Ebook Tipping Point” panel. I knew that current C-level executives, focused as they must be on making numbers for this quarter and this year, not to mention always having to be aware of the impact their statements could have on their companies, wouldn’t be the right panelists. So I just decided to recruit the four savviest people I knew — about ebook publishing, about the finances of publishing houses, and about the ecosystem publishers live in — to discuss the topic with me on stage.

Yesterday that panel — Ken Brooks of Cengage; Michael Cader of Publishers Lunch; Larry Kirshbaum, ex-TimeWarner Books CEO and currently a literary agent; and Evan Schnittman of Oxford University Press — met in my office for a preliminary conversation to help me formulate the questions that will trigger the discussions.

Ken Brooks is my go-to person for all things related to ebooks and digital production. He the SVP, Global Production & Manufacturing Services at Cengage Learning. Before that, Ken created and sold a company called Publishing Dimensions that did digital format conversions in the early ebook days. He’s run warehouses and other operations for Bantam and Simon & Schuster and he even had a brief stint setting up an early attempt at ebook distribution for BN.com ten years ago.

Michael Cader is the creator Publishers Lunch and Publishers Marketplace, the new nexus for conversation and information about the publishing business, which he developed from scratch starting with a free email newsletter less than ten years ago. Before that, he was a book packager. Cader is the single person who knows more about book publishing — the people, the deals, the business practices, the view of the business from the standpoint of the investment community — than anybody else I’ve ever met.

Larry Kirshbaum turned over the reins at TimeWarner Publishing to David Young three years ago, just before the company was sold to Hachette. He was known for his eye for bestsellers and his ability to make them work. Since then, he’s been a literary agent. Kirshbaum knows exactly what it is like to run a big publishing company; he did it for more than two decades.

Evan Schnittman is Vice President, Business Development & Rights at Oxford University Press. In that role, Evan combines the zeal and focus of a sales executive with targets to hit with the vision of a strategic digital thinker, a very unusual combination. Oxford is a university press, of course, not a trade house, but they have a trade list big enough to make them real players in that sandbox. Evan knows and understands trade, but he has the objectivity and vision of somebody who is not entirely dependent on that business. He’s also a really entertaining and insightful blogger.

One scorecard worth keeping is this: Brooks, Kirshbaum, and I were all sure ten years ago that ebooks would happen much faster than they did. Cader was sure they wouldn’t. Michael has been the hardest among us to persuade that ebooks would substantially displace print anytime soon.

We had a rollicking two hour conversation that would have entertained anybody who could have heard it. I am not going to steal the panel’s thunder by revealing much about it except to say that there was a strong consensus that big publisher overheads are going to have to shrink dramatically, and soon. Michael Cader is particularly articulate — and particularly experienced — about the point that legacy businesses carry legacy cost structures that handicap them making a transition to a new paradigm. He lived that advantage as the David that slew the Goliath of PW.

So I awoke this morning to get the news in my mailbox that Simon & Schuster has redesigned its sales coverage to be “more phone”. Cheaper. Less overhead. But also (likely) less effective and (certainly) less differentiated from what any small publisher based anywhere can do.

So what distinguishes the big publishers from their competition are the capabilities of “scale.” And the albatross for big publishers going forward is the cost of “scale.” This is a tough box to get out of.

I think some eyes are going to be opened when this panel takes the stage on Wednesday, January 27.

I am getting increasingly excited about the 2-day Digital Book World conference coming up January 26-27. Now that the work of recruiting nearly 100 speakers and moderators (and, boy, do we have GREAT moderators!) is done, I am able to take some satisfaction from the body of work. (Take a look.) I am also really appreciative of the great marketing job that has been done by our partners in this endeavor, F+W Media. Just about everybody really is going to be there. Are you?

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The rapid series of developments in the digital book space and my rising profile mean that I seem to be in an interview with a journalist just about every day. As I was yesterday. The focus of yesterday’s conversation was the Baker & Taylor“Blio” platform that I wrote about last week. How widespread did I think its uptake would be?

The interviewer and I covered a lot of ground, including ebook pricing and timing and whether publishers would be able to make enhanced ebooks work. Those are the topics of the moment (and they are all panel topics at Digital Book World.)

At one point we had a robust discussion about ebook pricing. My interviewer asked me about a pundit’s observation that hardcover books were just wildly overpriced. The implication is that publishers should consider themselves damn lucky that people would pay $9.99 for an ebook, which, after all, has far fewer bytes than a movie they can get for $1.99.

That’s an easy one to answer. What’s a “right” price? Well, from the publisher’s perspective, that’s a question with a clear mathematical answer. (The math wouldn’t yield the same answer for an author.) The right price is the one at which the total gross margin — revenues after all costs — is maximized. We all know more will buy if it is cheaper and fewer will buy if it is more expensive, but the “right” price is the one where customers times margin (margin being revenue minus costs) is the highest it can be.

There is no way in the world that a publisher would maximize margin cutting $28 print book prices to $9.99. So the author of this blogpost being quoted to me might be looking at the “right price” from a consumer perspective or a high-level industry observer perspective, but they sure aren’t looking at it from the perspective of the one who sets the price: the publisher.

At the conclusion of the interview, the journalist on the other end of the phone asked me whether, in effect, publishers would be able to save themselves. “Is there a model,” she said, “which assures that a publisher will profit selling their books in the future?”

Now, I must say before you read my answer, this expresses a long view, not an immediate one. But it sure isn’t comforting to people who sell content for a living.

Is there a model for success selling content? I think the answer to that question is “no.” I’ve spent my lifetime in book publishing and so did my Dad; I don’t like coming to this conclusion. But what I think I see is that selling content as a publisher is a business that is going to just get harder and harder until it won’t really be much of a business anymore.

This has nothing to do with piracy or DRM or Amazon’s promotional ebook pricing. It has to do with the most basic of economic laws: supply and demand.

Until the digital age, content was scarce. It wasn’t scarce because people didn’t create it; it was scarce because it required an investment to distribute it. That’s no longer true. Anybody with an Internet connection can make anything they write (or snap or video or sing) available to anybody else with an Internet connection. For just about free. That’s just one reason — among many — why the amount of content choices available to everybody has mushroomed in the past 15 years.

When the supply of something goes up faster than demand, the price of the something drops. Or, put another way, money flows to scarcity. And content is anything but scarce. That, in a nutshell, is the inexorable problem publishers face. And every day it gets worse. More backlist and out of print and public domain and orphan books get digitized and made available. More bloggers blog. More commercial operations put content online to satisfy their own stakeholders. More videos are uploaded to YouTube and more documents are uploaded to Scribd. All of it is processed and made discoverable by Google and other search engines. And the cumulative effect of all this content being created as something other than new publications for sale is cutting into the market for content that is being created with the expectation of sale.

What is the new scarce item that will attract the dollars if IP is so common that it becomes hard to sell? The answer is the attention of people: eyeballs. And the winning trick for publishers will be to use the content they control — which today does have value — as “bait” to attract the attention of people and then to keep that attention and build a business around it.

Note to some publishers who think they’re doing this: it is not the right answer to simply grab email names and web site registrations as a way to offer the same product catalog over and over again by email blasts. That doesn’t create value for a community and, before long, the community will lose interest and move on. You will lower your marketing costs temporarily with that strategy, but you’re still building a business of selling content and you’ll still, ultimately, deal with the problem that something roughly equivalent to much of what you want to sell will be available elsewhere for free.

I’m far enough ahead of the wave with this insight (if, indeed, time proves it to be an insight) that I can’t really point you to any examples yet from established publishers who followed Shatzkin’s formula to success (although I’m working on a couple that might be worthy of mention by a year from now.) So far, all that is clear is that publishers that stick to an audience fare better in the digital world than the ones who don’t. Their marketing costs are lower and their reach to the audience is both more effective and less dependent on intermediaries.

A stark illustration of this hit my radar screen last month.  A major agent told me that he sold a Mind, Body, Spirit author’s book to Random House, which sold 12,000 copies.  He sold the next book by the same author to niche publisher Hay House, which sold 200,000 copies! And Hay House, with over a million email addresses of people all interested in the same type of book, probably spent less on marketing to sell eight times as many.

There is one example that points the way for all of us in this business right under our noses every day. It is Publishers Marketplace, the creation of Michael Cader. He didn’t have book content to use as bait for the publishing community, so he created a free daily newsletter, Publishers Lunch about ten years ago. The formula he used — which was novel then and is now a commonplace — was to find the stories of interest to his community every morning and deliver the links to those stories, along with a little commentary, for free. That created an enormous number of sign-ups very quickly and a corresponding amount of grumbling from the established trade press, which would have a) never wanted to show anybody else’s story rather than their own and b) would have expected to sell any content they generated rather than giving it away as Cader did. After all, selling content was the model! (Sound familiar?)

I don’t think it took a year before Cader established his community, Publishers Marketplace, built from the eyeballs that were attracted by the free content in Lunch. Soon he made the “free Lunch” an abridged version, so the “full Lunch” became one of many benefits of “membership” in the community, which comes at a monthly subscription price for the unaffiliated and at site license prices for big companies. It is important to note that the full Lunch content alone wouldn’t keep and hold a community. Rather it is databases of information, many of them created by the contributions of the audience and additional tools and services (such as a free web page for every member) that keep people signing up and paying each month without dropping out.

Publishers have always focused primarily on the content. Survival in the future will require focusing on the market.

Publishers Marketplace and Hay House (and Harlequin and F+W and Interweave and Chelsea Green and all publishers who are dedicated to serving the same community over and over again) are on the right path, one that is very difficult for general publishers to tread. Taking steps to preserve the current marketplace for content — tinkering with DRM and fighting piracy; grappling with the timing and pricing of the content in various formats; even building out from the book as we’ve known it to take advantage of new ways to deliver information and entertainment — are, at best, holding actions. They don’t attack the fundamental problem that is developing for publishers which is this: if you don’t own the audience, the cost of reaching it for one book at a time will be prohibitive.

In the digital age it will make much more economic sense for the owner of the audience to find the content rather than the way we’ve always done it, which is the other way around.

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