Michael Cader

Here’s a prediction that has almost no chance of being wrong. Every major player in the trade book industry is about to develop a new obsession: how must our business model change when we reach a level of ebook sales that is dynamically disruptive to the print book ecosystem?

This might not be exactly a “tipping point”, since that implies a point at which growth accelerates from some people to most people, or nearly all people. But print publishing will be seriously disrupted long before ebooks are used by “most people.” That’s because print publishing is a “critical mass” business: we need to sell enough to make a sensible print run, to keep the bookstore open, to support the sales organization and the warehouse. Our bestseller lists (with one exception) capture exclusively print sales, our author-publisher contracts and sales terms with accounts are based on the notion that we’re selling a physical object, and the biggest publishers in the land use their scale to perform capital-intensive functions that are, as much as any editorial or marketing expertise, what the authors need them for.

This presents a problem to all the incumbent players. Every powerful company in the print book supply chain: the big publishers, the big retailers (including Amazon!), the wholesalers, and certainly the independent retailers have a huge investment in competencies that revolve around print books. They can design them, jacket them, price them, print them, ship them hither and yon and keep track of each separate ISBN in the package, put them on shelves so customers will find them when they arrive and calculate when to take them off the shelves to send them back. Although there are other skills that these companies have that might port to an all-ebook or ebook-dominant world, none of these do.

Whether the challenges get acute when 20% of the sales of a narrative title are predictably e, or whether the number is 25% or 30%, the day is coming faster and faster. Growth in sales of the simplest kind of ebook — a direct lift of what is published in print — are exceeding the most aggressive predictions. The IDPF just announced that year-over-year ebook sales for August are triple what they were a year ago! Michael Pietsch, Publisher of Little, Brown, reports that 15% of total sales is the level many of their top authors are reaching now.

(Ruminative interlude: it has been my surmise that big authors will have their ebook sales “capped” at a lower level than smaller authors, just because their print books are on sale in so many more places. However, ebook sales are also very sensitive to “brand”; you don’t and can’t “browse” as many titles when you shop electronically, particularly on a device. I know that smaller publishers with less effective total distribution report Amazon sales of 60% and 80% of sales, so their ebook sales proportions are also bound to be much higher. But how the midlist authors of big publishers fare on overall ebook sales relative to the big ones is a question I haven’t asked. I will. Or, I am…)

Meanwhile, ereaders keep improving and proliferating; there have been several announcements of new devices in the past week, including the forthcoming “Nook” from B&N, which will really raise the stakes for Kindle. It will “see” Kindle’s e-ink screen and “raise” one LCD panel for link viewing, plus a 3G connection and Wifi use in B&N stores, all at the same price. B&N has the same power Amazon does to amass a robust list of titles (they have deep contacts with all the publishers) and they have at least as good a skill set for curation and merchandising to make a great shopping experience. And they’re putting their reader front and center in their bookstores (with the free wifi and some special in-store content features) which will expose the concept of the device to many people who don’t shop at Amazon and did not get blasted with a sales pitch every time they bought books.

Barnes & Noble had entertained being the ebook market leader a decade ago, losing interest when the Palm format became the early format frontrunner and wasn’t made available for intermediary distribution (one of the first in a string of futile attempts to install an iTunes device-capture model for book content, and before the iPod, at that.) Then B&N let Amazon get the jump on them in the ebook world with the Kindle; their Nook will be following more than two years later. In the meantime, B&N may have realized what all the big publishers know: that when the customer shifts to ebooks, it threatens all their business models, sunk investments, and longtime marketplace advantages. That, along with the sour experience of trying to lead on ebooks and being frustrated by what was actually a self-destructive policy by Palm, may have fed their apparent disinterest in ebooks until recently.

But it was clear to everybody that the first round of ebook growth shifted power dramatically to Amazon. Publishers have been frustrated and humbled by the Kindle’s rock-bottom, loss-leading pricing of the hottest new titles. And Barnes & Noble had to figure that, recession aside, some of those same-store sales they were missing were from shoppers who stopped coming to them because they had bought a Kindle and were now locked into the Kindle store for their purchasing to use the device.

Incidentally, the sales levels that the IDPF and Michael Pietsch are revealing are for legitimate ebook sales. Nobody knows the size of the pirate ebook market. There are some who guess it is rather small despite the robust number of files available in various hard-to-quell locations on the Internet, but if it includes any significant number of current or recent print-book customers, it only magnifies the impact on the legacy businesses.

There are a multitude of questions facing the industry about the expanding ebook market: how (some, including some highly credible voices, would say “whether”) to use digital rights management (DRM), how to price ebooks, what enhancements or updating can make commercial sense and how to manage them in the marketplace, when they should be made available, and, most important of all in the long run, what the “deal” is for the consumer (and then, based on that, for the author) who is actually licensing something rather than taking possession of something. But the questions about the declining print side are just as acute.

The brick-and-mortar bookstores, led by Barnes & Noble, are going to have to figure out how to keep their stores enticing with might be a smaller selection of print books. Nothing can grow the market for print books in the years to come, but keeping the number of points of purchase as high as possible and the traffic as high as possible are in the industry’s interests. It will require some real creativity to figure out what other activities or product offerings are compatible to keep people coming and how to drive traffic with online activity.

Amazon is not unaffected by this shift, either. Their big early lead in the ebook world was really built on the back of their superior print-book supply chain. From the very beginning, when they put out a database that had out-of-print books in it and then gave the customer a reliable delivery date for what they could sell, they created an unmatched print book shopping experience, provided a) you knew pretty much what you wanted and b) you didn’t have to have it right this minute. Their logistical capabilities are nonpareil but don’t do them nearly as much good with an electronic customer as a physical one. Their grasp on the ebook market really depends on the Kindle remaining a favored device and I think you could get good odds if you wanted to bet on that. Making hardware is not a core competency for them.

As the print business declines, Amazon continues to win if real print book demand falls more slowly than brick-and-mortar availability. But their hammerlock on the ebook market will probably not last; there will be too many better devices and they have to make a concessionary shift to selling the epub format before they can even begin to compete for those customers. They’ll do it someday, and probably soon, but they loosen the grip they have on the Kindle owners the day they do.

Publishers have an interest in continuing to support bookstore survival because the display they get there is great promotion and because being seen by a browser who put themselves at a bookstore section is still a great way to be discovered and bought. And there will still be, for some time, books which are not narrative reading which are simply better in print than in any electronic rendition. Publishers still sell a lot of these books (many of them juveniles) and bookstores, or some appropriate retail setting, are essential to them.

But publishers are going to have to rethink their operations. Sales staffs will probably contract; warehouse space will become redundant; investments in IT systems for the print operation will have to be more rigorously controlled. Publishers will likely combine, of course; the big houses now all gladly take competing publishers into their back office operations to help support them. But downward shifts in scale are not only inevitable, they will probably happen in more dramatic lurches than we’ve known in the past.

Wholesalers and distributors will both win and lose in this shift, but the shape of their business will certainly change. On the one hand, they, like everybody else, will lose sales that they have today because accounts go under and publishers they distribute cease operating. On the other hand, they are in the business of converting fixed operating costs to variable ones, and the number of customers for that proposition will grow as the apparent costs of operations (as a percentage of sales) get out of control at many companies.

Agents and the top 500 authors (an arbitrary number) are most likely to be the biggest beneficiaries of these changes in the short term. Because they themselves are powerful, searchable brands, they could actually sell ebooks themselves off their own websites, keep all the money, and make considerably more than their contracts would give them for ebook sales today even with sales of a quarter or less than the publisher and retailer get for them. (And the sales might not be that low.) I have talked to big publishers about the threat that top authors might just make their ebook deals first (you can cover the market in 4 or 5 stops and branded authors would have their own websites to sell from as well) and offer publishers print-only. Without exception, the big publishers tell me “no way we do the deal on that basis.” But if what is contended in this post is true — that keeping the print business viable is going to depend on amassing volume for it any way you can — they might not actually feel that way when presented with the problem. I think they will be getting the opportunity to make the choice.

I’ve posted on variations of this thought before. I had already decided it needed to be the topic of a keynote panel at Digital Book World. I’ve recruited Ken Brooks, Michael Cader, Larry Kirshbaum, and Evan Schnittman to join me on stage there to discuss it. Continually rebalancing the business between print and electronic, and maintaining the scale to run still-vital print operations, will be a topic of interest for just about all of us in the months and years to come.

Apologies for the paucity of posts lately. I’ve had a lot of work, been traveling, and had a bout of food poisoning. The food poisoning’s about gone, but the work and travel schedule remain robust for the rest of the month. I should become a more reliable correspondent again in a couple of weeks.

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The story in today’s New York Times about the new Daily Beast publishing imprint created by Perseus obviously didn’t hit everybody else the way it hit me. I think it is really important news. It is also a smart approach. And I think it is a harbinger of many things to come.

The two things that struck Michael Cader about this initiative were not the things that struck me. What he said in Lunch:

The Daily Beast is the latest entrant in the shouldn’t books be written shorter and issued faster sweepstakes, launching Beast Books and focusing on current events. They plan to publish ebook editions first, followed by traditional print editions. The site has partnered with Perseus for sales, distribution and other services, represented in the deal by Larry Kirshbaum and Ed Victor.

Aiming to publish just three to five titles a year, the line begins with John Avlon’s ATTACK OF THE WINGNUTS: How the Lunatic Fringe is Hijacking America, with a foreword by Tina Brown. The ebook will be available in December 2009; the trade paperback in January 2010.

“Written shorter” and “issued faster” are definitely part of the offer here, but I don’t think they’re the most significant news and, as Michael reminded me when I asked, people have been talking about shorter and faster for a long time. I share Michael’s interest in noting that the ebook will come out first and the print book will follow, which only follows the reality of what is available when! But even that isn’t the most noteworthy aspect of this announcement; as The Times’s story makes clear, publishers have issued ebooks ahead of print before.

What struck me about this initiative is that it shows the publishing power moving from the book publishers whose model is to own content to the website entrepreneurs whose model is to own eyeballs. It shows that online brands with regular around-the-clock followings can do books more efficiently and effectively than publishers with a big apparatus.

The reason that publishers have not shortened publishing schedules in general (they all know that it would be better to accelerate the recovery of the cash invested in author advances and title origination) is because of the marketing requirements that have become standard and part of the landscape. Publishers Weekly, perhaps still the single most powerful pre-publication review (but declining), wants to see galleys for a book four months before publication. Some major accounts want books presented to them as far as six months before publication. If you ask most experienced publishing marketers, I believe they would still tell you that anything less than six months’ lead time to market a book means marketing will both cost more and be less effective.

But The Daily Beast has announced that they will routinely go from a concept to an ebook in the marketplace in six months or less.

This kind of publishing is not primarily made possible by short books, or even ebooks, as much as it is because The Daily Beast has a big online audience and, in addition, serious chops at the practice of getting a story they publish going round and round on the Web. They can get the core audience aware of and talking about a book with their own proprietary engine, so if PW wants to skip reviewing the book they don’t care. And the retailers will know that there’s going to be demand for a book they’re hearing about less than six months in advance, so they’ll break their own rules and stock it on shorter notice.

Now, that is power. How much power? The Times reports (suggesting, but not explicitly saying, that this comes from Brown) that Daily Beast has 3 million unique users a month!

The financial model aspects of this are interesting. The report says that Perseus is financing the publication, signing the author and paying Daily Beast for editing and design. Then Perseus splits profits robustly enough so that their CEO, David Steinberger, can say that authors will get “meaningfully more” than traditional book contracts pay. Obviously, Perseus believes that the marketing that Daily Beast can provide is worth giving away margin for, and that surely seems sensible to me.

The takeaway from this for the industry is that owners of eyeballs are moving into the driver’s seat. The world isn’t completely upside down yet; the owner of the copyright is still paying the owner of the eyeballs for the content and, ostensibly, dictating the terms of the deal. But as more and more web brands develop this kind of audience, publishers are going to get some hard lessons about where the power really will lie as the shift continues to take hold. Remember that what Perseus is bringing to deal is a commodity: lots of other publishers can offer the same suite of capabilities. What the Daily Beast brings is unique. Dollars flow to scarcity.

The one comment worth making on the substance of this is a relatively minor one. Why not enable a print-0n-demand edition to be offered simultaneously with the ebook, at a higher price, of course, which is pulled off the market when the print book’s pressrun arrives? There’s no reason to make somebody wait to read timely information just because they haven’t switched over to ebooks yet. A bit complicated and messy for the retailers; probably have to go to a separate ISBN that isn’t returnable. I’ll bet they’ll get there; this whole idea reflects people who are making total sense and thinking about their community!

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In a post last week we reviewed what Sourcebook CEO Dominque Raccah did — announcing she was holding back the ebook publication of a new hardcover YA novel coming this September — and why she said she did it. Over the weekend, we posted about what we see as the four stages of ebook adoption. Today we will examine how one ebook stakeholder — the publisher — is affected by the change from a no-ebook world 10 years ago to what will be a largely- (if not mostly-) ebook world 10 years from now.

The first stage of ebook adoption, which we called “vision”, ended with the appearance of the Kindle. In that period of roughly 10 years, ebooks found early adopters who read them on PCs and handheld PDAs. The dedicated ebook devices introduced early in the vision period (Rocketbook and Softbook) went nowhere. The Sony Reader came along at the end of the vision period. It is an e-ink device quite similar in size to the Kindle 1 and 2, but without two critical components that gave Kindle an edge: a much larger body of titles to choose from and direct connectivity from the device to the source of the titles. There were other advantages Kindle had (the massive Amazon online book-buying audience) and that they presented (the built-in dictionary), but the title selection and connectivity were key.

Amazon quickly added a third advantage: the price of the books in the Kindle store went way lower than anybody expected because Amazon was willing to sell the individual titles at a loss to grow the market for the devices. The net effect was to propel ebook adoption from the vision stage to the establishment stage, which is where we are now.

Ebooks were not a priority concern to publishers at the time the Kindle came out. There had been too many false alarms. In 2000, both Arthur Andersen and Forrester Research offered projections for a multi-billion dollar ebook market which was to appear by 2005. Nothing close to that happened. In the vision stage, only the visionaries cared, inside the publishing houses and among the readers. Sales grew in fits and starts but when the Kindle came out were still well under 1% of units or dollars for every major trade publisher.

Because the dollars weren’t big, business decisions were not hard-fought and probably not well thought out. Publishers used the retail price of the prevailing print edition as their benchmark, with most setting the ebook price at nearly that level. After some turn-of-the-century feelgood talk about 50-50 splits with authors, royalties settled at about 25% of net or 15% of publisher suggested retail. Agents accepted it, at least partly because, whatever the percentage, there wasn’t enough ebook revenue at stake to be worth fighting a publisher offering an attractive print book deal.

It should be noted that the big accomplishment of the vision stage was the creation of the International Digital Publishing Forum (IDPF) and the creation of the epub standard, which drives most ebooks today with the exception of Kindle, which Amazon keeps in their own special flavor of mobipocket format, and ScrollMotion, where the content comes embedded in the company’s proprietary app.

There was very little thinking necessary about the ebook’s impact on the sales of the printed book because ebook uptake was so limited. In fact, there became a growing body of evidence that giving away the ebook would stimulate sales of the printed book. Lost in the thrill of that discovery was the likely underlying reason: people didn’t want to read ebooks so when they were given something digitally that they started reading and liked, they’d buy the printed version to finish it. Now that we’ve moved from the “vision” stage where most people don’t read on screens to the “establishment” stage when many do, we’re likely to find the stimulative effect of ebook giveaways will be diluted, if not eliminated.

Another fact that made little difference in the vision stage but matters more and more now is that ebook sales are not reported to the bestseller list. So even if ebook availability (at Amazon’s much lower price) only cannibalizes a fraction of printed book sales, it could affect a book’s bestseller chances or placement.

Since the actual profits from ebook units are higher than they are for print books if the publisher price is the same (unless the publisher has cut an unusually generous deal with the author for royalties), this decision by Sourcebooks — which is being watched and contemplated by other publishers — must be motivated by something more complex than the publisher’s profit per unit sold.

In PublishersLunch, Michael Cader reviewed this decision and seemed to suggest that it was largely about taming the Amazon beast. I seldom disagree with Cader, but I don’t buy that argument in this particular case. It would take a very foolish publisher to publicly stick their thumb in Amazon’s eye (and Dominique Raccah is not foolish). And a one-off experiment of this kind does not seem like an approach that would affect Amazon much one way or the other.

What Dominique said in her post was that she didn’t want aggressive ebook pricing to devalue the high-priced hardcover. She believes that higher-priced editions are critical for the publisher and the author to maximize revenues so she prefers to slot ebooks into a “staged release” strategy resembling what publishing has done (hardcover, trade paperback, mass-market paperback) and what Hollywood has done (theatrical release then DVD.)

Before we evaluate that idea, let’s look ahead to the further stages of ebook adoption. In the current establishment stage, we can expect the number of ebook channels and vendors to proliferate. In that environment, the resellers will do everything they can to keep prices down. They will subsidize individual product sales from device margins or anticipated longtime customer value. If Amazon is willing to swallow a hit of two or three bucks a unit with virtually no competion, what will they do now that B&N and soon Indigo also have devices? B&N has announced that they will match Amazon’s $9.99 flagship price and they are clearly charting a course of appealing to all devices (insofar as they can) with their ebook store. And B&N content will power another device competitor, Plastic Logic, in early 2010.

This period of loss-creating discounting by retailers won’t last forever, but it will last until the market stablizes, which will take several years. While that happens, the number of ebook points of purchase for the consumer will mushroom, which is good news for publishers. At the same time, propositions like Scribd and Smashwords will disrupt the in-supply-chain pricing; Scribd offers publishers 80% of retail and Smashwords pays 85%. As the devices proliferate, so will the tools to make it easy to put ebooks from those sources on the devices. If Amazon has disrupted the publishers’ hopes of controlling ebook pricing, might not Scribd and Smashwords disrupt the retailers who took away that control?

Evan Schnittman makes the point that holding back the ebook has consequences. It dilutes the impact of the publisher’s marketing efforts. It could encourage piracy. Evan’s solution is an introductory promotional price that is raised when initial demand has ebbed and he has a notion (which I don’t quite understand) of how publishers can get retailers to collaborate on that. I don’t think that’s the answer. First of all: it strikes me as backwards. The ebook price should be a dollar more than the print book for the 3 weeks or so before the print book comes out when an ebook could be available. Then it should be the same as the print book for the first couple of months so that it doesn’t disturb the bestseller list possibilities. Then it should drop sharply to reflect the lower cost (to publisher and retailer) of providing ebooks.

Now that’s a great theory I just posited; unfortunately there is no way to implement it. All retailers will try to beat each other on price and ebooks constitute a much less expensive place for them to subidize a low-price perception than print.

Sourcebooks — any publisher — wants to maximize revenue for themselves and for their author. To the extent that Sourcebooks can preserve hardcover bestseller status by holding back the ebook, it makes sense to do it. But beyond that, it doesn’t. Retailers selling at a loss are good for the revenue of publishers; it is their margin they are giving away to increase sales for everybody. Would Sourcebooks, or any publisher, refuse to make a book available to a price club or mass merchant because they’d sell at a deep discount? I’m not aware of one that ever did.

If I were Amazon, I’d enlist 10 publishers to try selling their ebook 10 days before the printed book was on sale and use the data to prove (most likely) that the digital head start propels early print sales. Seems at least as likely to me than that early or simultaneous release of the digital version reduces them.

Aside from the new ebook device and retailing entrants we can expect in the next few months, another flashpoint will arrive when publishers start to sell digital downloads themselves, which all of them will by a year or two from now. The discounts publishers offer and the price war among retailers will put publishers in an extremely difficult position. When publishers sell their books at a discount (which they will absolutely have to do), retailers will be knocking at their virtual door saying “I thought my discount was off your price. I want my discount off the price you really sell at, not the price you made up that nobody sells at!” And that’s when the publishers who hadn’t seen it earlier will know that the discount structure has to change.

In the next post on this subject, we’ll look at what other stakeholders have to look forward to as ebook adoption continues. And we’ll see another reason why the publisher-to-retailer discounts will come under pressure: authors will be demanding, and getting, a bigger piece of the ebook pie.

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The Wall Street Journal was the first to announce, on Monday, (behind a pay wall, but Google “Publisher Delays E-book Amid Debate On Pricing” and you’ll get it) that Sourcebooks CEO Dominique Raccah was holding back the ebook publication of a new hardcover YA novel, Bran Hambric, scheduled for release this September. Raccah’s explanation to the Journal was that she was trying to preserve the perception that the $27 hardcover price was reasonable. Since she knew that any ebook would hit the street at just under $10 (the Kindle promotional price is $9.99 and B&N has suggested that their promotional price will be $9.95), Raccah felt that sales of the hardcover would be undermined.

What was left unsaid in the Journal piece was that Raccah might have been leaving money on the table with this decision. After all, the publisher still sells ebooks on roughly equivalent terms to printed books and has lower costs. So, depending on the royalties Raccah is paying the author, she is (most likely) realizing more margin for Sourcebooks on the ebook sale than on the printed book sale, regardless of how the retailer prices it.

Even more startling (in this day and age) is the possibility that the author’s royalty is higher per copy on the hardcover, so Raccah might be protecting author royalties, to the extent that withholding the ebook restrained cannibalization and resulted in more hardcover sales. I mention that possibility because the agent for author Kaleb Nation is Richard Curtis, one of the most ebook-friendly agents in town (and, indeed, the owner of an ebook publisher called EReads), who was quoted in the Journal supporting Raccah’s decision.

On Wednesday, Motoko Rich and Brad Stone published a piece in the Times on the same story (in which I was very briefly quoted.) Rich and Stone added some nuance to the story. The Journal said that agent Robert Gottlieb resisted simultaneous ebook publication “when he can prevent it.” In the same graf, they said that only one book of the Times’s Top 15 fiction bestsellers was not available in the Kindle store. Of course, that doesn’t mean that the Kindle editions were available at any particular time in relation to the first release of the hardcover, just that they are available now.

The Times reporting went further than the Journal, speaking to several publishers of upcoming major books about their ebook timing plans. Doubleday hasn’t decided yet about Dan Brown’s book but acknowledges that the impact of ebook sales on the hardcover was a consideration. S&S won’t reveal their ebook release plan for Stephen King’s November novel, Under the Dome. Ditto from Hachette imprint “Twelve” on the Ted Kennedy autobiography, True Compass, coming on October 6.

So the fact that everybody is thinking hard about this is confirmed by the Times’s reporting.

But Cader, who as an industry expert and blogger has more scope and credibility to report unattributed information than reporters at WSJ or the Times, went further in Publishers Lunch on Thursday. He ridiculed the notion that Doubleday was (according to a spokesperson)  ”[more] worried about…security…than particular vendors” and he sees the motivation from publishers being to control the behemoth, Amazon. As Cader reports it, Kindle sales surged when the new device(s) came out, becoming as much as 50% or even 70% of Amazon’s sales of many important books.

Everybody (in the industry, but maybe not outside of it) knows that Amazon pays a standard discount for ebooks, which is about 50% off publisher suggested retail, and that Amazon actually takes a loss on a $25 or $27 hardcover book it sells through Kindle at $9.99 (as B&N will do if they follow through to sell books like this as ebooks for $9.95.) Nobody expects Amazon to do this forever although, as Cader points out, they are temporarily subsidized by the profit they make selling the Kindle devices. The widespread fear among the big publishers is that Amazon will soon demand lower prices for the books they put on Kindle so they can keep the $9.99 price point profitably.  As the Kindle unit sales grow, of course, the muscle behind such a potential demand would grow right along with it.

Cader makes the very important point that sales migrating to ebooks, and particularly to Kindle, weaken the brick-and-mortar channel that publishers depend on for most of their sales and profits. The Times reported that publishers could well be making bigger unit profits on each Kindle sale than on each printed book sale (a fact that I explained to them when I was interviewed and which appeared not to be clear to them before I did). Cader (who of course knew that without needing to be told by me or by the Times) makes the point that publishers do this because they are “looking out for what they believe to be their long-term interests — and are trying to protect the entire system of physical book retailing which supports the whole industry.”

While this was happening, Dominique Raccah posted her thoughts to Peter Brantley’s Amazing List and Kassia Krozser, on that list and proprietor of the Booksquare blog, turned her space over to Dominique for a version of that post. Dominique made it clear that she considered what she was doing with Bran Hambric to be an experiment. Her focus was on a “sustainable author/publisher model”. She made the point (again, clear to most people in publishing but perhaps not to those outside) that the music business continues to present inapplicable analogies, but one of the most egregious is that authors should give it away like musicians to get performance bookings: in publishing, there are no performance bookings (and few t-shirt sales…)

Raccah made it clear that she supports early ebook releases and her house is going to a workflow that will enable that. But then she gets to what is really the heart of the matter. “Etailers are suggesting that the ‘right’ price point for an ebook is maximally $9.99.  And they are proselytizing the price $9.99.  We can’t control what retailers charge for books or ebooks.” The publisher’s choices are whether and when to make it available and whether to sell to any particular retailer.

From there she explains that exploiting formats with “windows” is an old book business strategy (hardcover, trade paperback, mass-market paperback) and a common film strategy (theatrical precedes DVD release, with TV licensing once part of that picture as well, but not anymore.) And she concludes by saying that publishers need to make these decisions on a book-by-book basis (”strategically”, she says, although I’d call that “tactically.”)

My quote, by the way, was to the effect that ebook readers and print book readers are increasingly separate markets, which I believe to be true but cannot prove. A C-level friend at a large house disagrees with me, as I’m sure many others do, and my evidence on this is highly anecdotal (including myself: I have read one printed book of the 50 or so I’ve read in the past 18 months.) But my friend would have no more evidence than I to support his contrary position, so publishers will have to make decisions without really knowing, for now, whether they can push a Kindle or Shortcovers or Ereader consumer back to paper by denying or delaying a book.

That concludes the summary. I have a few thoughts of my own to add on this. I’ll be posting those shortly, probably over the weekend. I hate going much over 1000 words on any single day, and I’m already past 1200.

An  earlier version of this post had a couple of errors misconneting agents and authors which have been repaired. So if somebody tells you about a mistake they saw that you can’t find, that’s what it’s all about. Thanks to Michael Cader for setting me straight.

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There has been a lot of discussion about ebook pricing lately. I did a post following Motoko Rich writing about this in the Times, but Rich’s post itself was a sign of the discussion taking place, not the catalyst for it. Today in Publishers Lunch, Michael Cader runs through some calculations to demonstrate that when publishers shed the costs of printing the books they sell as well as the costs of warehousing them, printing books they don’t sell, and handling returns on books they thought they’d sold, they can reduce retail prices by 40-50% and still be taking in the same number of margin dollars.

Cader points out that there is a different problem of unintended consequences: if a lot of business shifts to ebooks, then the critical mass requirement for many brick-and-mortar stores might not be met and we’ll develop a downward spiral of printed book exposure and sales. That’s an accurate point, but I can’t see too many people trying to slow down the growth of ebook sales to address it.

We have suggested here that publishers should be reducing the discounts offered to retailers because, as much as publishers’ costs go down moving from print to digital, so do retailers’. And because retailers have a (sensible) penchant for turning excess margin into consumer discounts, the discounts being offered lead to a very tenuous situation for publishers. Many retailers are living with just the margin they probably need, but they’re doing it voluntarily.  The low price the consumer is getting is because of retailer policy, not publisher policy. If the publisher sells downloads directly at the same price, the retailer is (justifiably) going to say “hey, the discount you offer me is supposed to be off the publisher’s price, so if you sell at discount, don’t you owe me some money?

The widely-remarked on Amazon Kindle pricing underscores this point. Amazon is buying ebooks (for the most part) at 50% of the publisher’s suggested retail. But then they’re giving away much of, all of, or even more than that margin to give the consumer a lower price (often the billboard price of $9.99.) Nobody expects Amazon to sustain this sell-at-a-loss strategy forever. And few expect Amazon to raise prices to the consumer. That leaves one alternative: use the leverage of all those Kindle owners to get reduced prices from the publisher.

And that’s why, in their own interests, publishers have to reduce retail discounts across the board.

Authors are facing a different margin pressure. Publishers generally find it easier to reduce the author’s take than the retailer’s so, even before putting pressure on retail discounts, they have been reducing author royalties. Just a few years ago, there was bold talk from the author side that a 50-50 split of ebook revenues between publisher and author made sense. But it seems that the “standard” for ebook royalties has settled in at 25%, or even 15%, of publishers’ receipts. Since discounts are about 50%, that amounts to 7.5% to 12.5% of retail, which is hardly a bonanza for the authors. And remember, many informed voices are clamoring for that suggested retail price for ebooks to come down!

It is because the market is young and the flux is still great that I suggest that publishers should be rethinking intermediary discounts. For the same reason, it is also time for authors and their agents to be rethinking the royalty rules. Expressing royalty as a percentage of either retail price or net receipts is a concept that makes a certain amount of sense in the physical world, where the cost of manufacturing creates an anchor for pricing. There is a certain minimum price below which publishers won’t go when they have to pay to print books. And bigger, fatter books, which cost more to print and would drive up both retail price and royalty, also imply a greater contribution of IP by the author. 

But in the virtual world, perhaps it would work better for everybody if authors negotiated to get a flat number of dollars (or cents) per unit sold. Publishers should really have no problem handling this: they’ve been working with pricing with a known cost-of-goods higher than zero for a very long time. And, for authors, it would eliminate the possibility that diminishing ebook prices will lead to royalties which by historical standards are laughable and for an author trying to make a living are unsustainable.

This practice will probably arise when agents see the need to negotiate a mimimum dollars or cents royalty per ebook sold to protect against overly-aggressive promotional pricing, which is already proving to be a temptation for publishers with no physical cost of goods and with author royalties that decline with price. With Scribd offering 80% of the retail price and Smashwords offering 85%, authors will calculate very quickly how low their prices could be to yield the same return (or maybe, twice as much return) for each copy sold than what is the standard offering now. When Scribd and Smashwords files are as easily secured for the iPhone as anybody else’s, the agents will have a very hard time convincing their authors to accept things as they are.

Posted this originally without a reminder about Thursday, May 28 at BEA: “Stay Ahead of the Shift.” AND there are two panels I’m moderating you’ll want to see. On Thursday at 3, Brian O’Leary, Laura Dawson and I are doing “XML for Editors.” And on Friday morning at 9:30, I’ll moderate “Digital Debuts Tool Time” with the leaders of at least three great new propositions on the stage with me: Hugh McGuire of BookOven, Mark Coker of Smashwords, and Peter Clifton of Filedby.

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Michael Cader responded to my post on returns yesterday (Tuesday, 4/7) with some ruminations of his own. All of them were thoughtful and useful and triggered some additional thoughts from me. Here is Michael’s commentary with thoughts of my own interspersed. I will remain in italics throughout this post. I have posted Michael’s entire response here, even though I won’t say much about some of it (except to say that I agree.)

Thanks for putting this on the table. I agree that most discussions of returns–and most fantasies of eliminating them–are unrealistically simplistic on many levels. In the spirit of your offering, some questions and other associated ruminations:

* On the biggest books, hasn’t wider implementation of remaindering in place addressed a good portion of the “problem”? And isn’t some form of expansion of remaindering in place/shared markdowns or similar initiatives the logical, efficient solution without harming orders/placements?

Remaindering in place is certainly a solution that has reduced a lot of the waste and cost associated with returns. It works particularly well with trade chains. It is much more cumbersome to manage with independents and that much more difficult with outlets reached through wholesalers. Scale matters here. A big publisher and a big account can employ this technique pretty efficiently and it gets less effective as you go down the line in size. And, despite the “effectiveness” of the technique, almost all publishers still see rising returns.

There’s also remaindering, which diminishes a significant portion of the physical cost of the excess inventory.

Remaindering requires a lot of additional handling so even if the “physical cost of the excess inventory” is recovered, other costs are created. And both remaindering and remaindering-in-place have a negative impact on full-price book sales which is not good for publishers and authors (although I take the point you raise later that it may be essential for stores!)

* By implication most your piece talks about conventional trade accounts, but they now (indies plus chains) comprise a minority percentage of the business at large. For other accounts, publishers are stuck following the practices and needs of those vendors–in more specialized markets, they’re actually fine with nonreturnable (say, an Urban Outfitters buy).

Some non-trade accounts find returns a real chore because they are not a routine part of their business the way they are a routine part of ours. In fact, some non-trade accounts can be sold with returns privileges and will still not return books because they don’t return anything else. I am speaking here of specialty (niche) retail; not of mass merchants who buy and return large quantities per title, as you say here:

But in the big boxes, where most publishers probably now experience their biggest (and fastest) returns when the books don’t work to plan, nonreturnable is likely a nonstarter. And if you can’t change things there, you’re still going to experience significant returns.

Bingo.

Of course to file under Unintended Consequences 1, it’s probably a good thing. Can you imagine the retail selling prices if Costco et al did buy at significantly deeper nonreturnable discounts? (And the even steeper price drops on merchandise they would later dump because it wouldn’t move?) This would accelerate the destruction of full-line bookstores (and the book publishers that need them) even faster.

This provokes two thoughts from me.

1. I wrote in a speech some years ago that the most dangerous and destructive thing that could possibly happen to publishers would be if Wal-mart decided to expand their selection to 50,000 or 75,000 titles per store. The orders would feel great to publishers as they come in and the printers would be in hog heaven with all the reprints of old titles which would result. And publishers would go out of business when the experiment failed and Wal-mart returned everything six or nine months later.

2. There is a huge hidden cost to the book business that the majority of units of our bestselling product is purchased in non-book accounts. What that means is that the add-on purchase to a Rowling or Meyer or Patterson title is a sweater or a cocktail shaker instead of another book! The bestselling authors definitely benefit hugely from the mass merchants carrying their books. As your point suggests, the publishers not as much because they bear the costs of huge returns (which the authors don’t.) But the publishers and all the authors below the top tier lose because the full-line bookstore is being undercut by a non-bookstore. The bookstore loses the Rowling-Meyer-Patterson sale and we ALL lose the add-on book sales.

* As you imply, if not state outright, physical shelf space is in decline. But new product continues to grow–exponentially. This is a hostile mix. Think of how many “skips” you get already on a fully returnable list. Given these factors, it will in any event remain tempting, if not an outright requirement, for many publishers to continue to offer returnability in the hopes of getting in to stores at all.

Bingo. And worth mentioning that the title explosion is not mostly caused by big publishers. They are mostly cutting title counts. But they are still suffering from the explosion of titles available from smaller publishers.

* Online sales, both physical and now electronic, are by nature low-return or non-return. As this segment grows, it naturally mutes some of the returns issue.

True. The downside of online sales is less opportunity to grab additional sales through impulse. We lose less when a sale moves from a brick-and-mortar bookstore to an online bookstore than we do when the sale moves to a mass merchant or specialty store, but I do believe we still lose.

* As you suggest, real analysis of returns needs to occur on a title-by-title basis. One significant problem is that there are a lot of book for which there is little or no discernible commercial market, so even a “low” first printing can wind up producing a whopping return percentage.

Book buyers are not supposed to buy books with “little or no discernible market.” Of course, they rely partly on the publisher’s assessment. But, over time, they will (or should) stop buying from a publisher who pushes too many of these books on them. They all keep track of returns percentages by publisher. There’s no other way to sort it out, and no publisher or bookseller can get this right every time.

Problemmatically, this occurs across the list: small books (first novels, etc.) but also projects that are supposed to be big (see The Kindly Ones, or The Mighty Queens of Freeville.)

* To file under Unintended Consequences 2, a world without returns is a world without most remainders/bargain books. That, too, is potentially devastating for retailers.

I am so used to seeing remaindering as a Tragedy of the Commons problem for publishers that I don’t take enough cognizance of this point, which is, under present circumstances, a true one. But I often wonder how many sales a big author loses because his/her prior book is on the remainder table at a quarter of its original price competing with it. And how many readers have learned that if you wait a few months, you can get that $25 book for $4.98? 

I see this as analogous to how many people see returns. They may not be a good idea, but the publisher who tries to do something about it all alone will only hurt themselves. I got a note this morning from a publisher who has moved toward “no returns” saying that they see that trying to go to a total no-returns policy on their own would be suicidal.

As Borders has struggled, bargain books have consistently been identified as one of the prime growth areas in their stores. We know it’s big for BN by just looking at where they put the section in the stores, and for many indies smart remainder/bargain buys help drive the stores’ profitability.

Again, take away the remainder market and you could well be putting another nail in the coffin of physical retail. As much as there are complaints about publishers’ margins, retailers make but a fraction of what publishers do.

But retailers make a LOT MORE on remainders than publishers do, and they also make a lot more than authors do. If remainders keep more retailers in business (and I won’t quarrel with the contention that they do), that is the main benefit 0f them to publishers and authors.

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This is a post about “no post today”. Or maybe this is a Seinfeld post. Its about nothing.

A particular number of years ago that my friend Lorraine Shanley of Market Partners could tell you and I can’t — but I would say about 15 — she confided that she thought it would be smart for her company to start a newsletter. And I said, “what do you want to do THAT for? A monthly deadline? To go along with all the other deadlines?”

Lorraine was smart enough not to take my advice and she and her partner (and also my friend), Connie Sayre, are still putting out Publishing Trends monthly and it has been a success, financially and otherwise, from about Day One.

So, 15 (or whatever) years later, totally voluntarily — with nobody forcing me, nobody even suggesting it was a good idea! (and the few that were asked actually telling me it was a bad idea) — I gave myself a daily deadline for this self-publishing effort (to go along with all the other deadlines, which rather inconveniently have refused to diminish to make way for the blog.) And I don’t think anybody noticed when I cut back from the six days I posted the first two weeks to the five I have maintained since.

This “no post today” post is the signal that I now consider four a full week. And I might not make a full week every week.

Richard Charkin (also a friend) wrote a daily blog when he was MD at Macmillan in the UK. I told him it blew me away that he could come up with something every day. He saw as his advantage that he could “always talk about a book” they were publishing. Those stories were always there to tell. Charkin stopped blogging when he moved over to Bloomsbury a couple of years ago; I suspect he’s relieved not to have the daily burden any more (even though at Bloomsbury he’s still got plenty of books to talk about.)

The indefatigable Mr. Cader (uh, yeah, we also know each other) was smart enough to build “except when not” into his promise of a daily newsletter when he started Publishers Lunch. My dad (yup, knew him pretty well too) used to get a newsletter called Winners and Sinners that was “published occasionally from the southeast corner of the New York Times newsroom” by a managing editor named Theodore Bernstein (whom I never met).

So, I’m making a very unconventional move when I say that any implied promise of a daily post is now officially withdrawn.

Which isn’t to say I don’t have a list of things I’m working on. It’s just that I am planning ahead to not work on any of them this weekend. (Baseball pool draft all day Saturday and hanging out with friends not in any way connected with publishing — I have some of those too — all day Sunday and I might not be doing any writing…)

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I have read and listened to a lot of dialogue about the Google settlement. I’m not a lawyer and I’m not a librarian or archivist and I’m not a scholar who would be interested in those “non-consumptive uses” I didn’t know about before this all happened. To the extent that I had a horse in the race, it was about liberating orphan books. I worked with a current executive who was inside a different big company 10 years ago. We were analyzing the whole world of out of print and the opportunities therein. We figured out pretty quickly that a lot of the good stuff we’d find would present devilish problems trying to locate somebody to pay royalties to, and determining definitively that something post-1923 was not under copyright was not an airtight propositon either. 

A few years ago, at the Frankfurt Book Fair before the Google Library project was announced, Michael Holdsworth, then at Cambridge University Press, related an observation from somebody he’d talked to who said “when we come back 30 or 50 years from now, most of the IP from the 20th century will have vanished. We’ll reach a point where if Google doesn’t report it, it doesn’t exist. Everything from before 1923 will have been scanned by somebody and everything post 2000 was born digital. Just about everything in between will be missing.”

That was very fresh in my mind when Google began to scan all those orphan works, breaking a logjam (one way or another; it now appears by this settlement) that the Congress had not resolved. In fact, legislation since the 1970s extending terms of copyright had actually made the problem worse. Under the laws I grew up under, I believe anything older than 56 years would have been in the public domain. That law today would liberate anything born before 1953. I would personally be out of copyright.

As a responsible member of the community, and a consultant who wants to help clients think through the implications of change, of course the Google settlement becomes a tennis tournament where I have to attend every match.

The part that interests me most is the potential revenue beyond the settlement. Where is the revenue for this going to come from? Who will buy what from the material Google has digitized and what will the revenue opportunities really be for those who “opt in”? And what will Google really have to sell?

I went to Michael Cairns, former CEO of Bowker with this question and he and I are starting to think it through.

All the focus on revenues in the conversations I’ve heard, including a very stimulating seminar at Columbia ten days ago, has been about digital revenue. And that’s what Cairns and I were thinking about too. What, besides the pre-1923 PD stuff do they have in the databases they can license to libraries? So how much can they charge? We saw Google’s pricing idea for ebooks. What will copyright owners do about pricing? And will copyright owners give Google books under this program, or under the Google Partnership Program? These are complicated questions.

Distracting, even.

Because that’s not where the money is. (This next part is purely a hunch; we haven’t done any numbers yet.)

Let’s remember that 99% of the consumer book business is still in print.

Think about how many orphan books would be worth a printing of 5000 copies or more. Start with this as a list from which to find probable candidates:

Any book that was made into a significant Hollywood movie.

Any book about FDR, Babe Ruth, Dwight Eisenhower, John Kennedy, Winston Churchill, etc.

Books about movie stars, TV stars, TV shows, pop musicians.

The number 1 fiction or non-fiction bestseller of any year (this could be a set used as birthday presents for special birthdays: 60, 65, 70, etc.)

My hunch is that the biggest revenue generator across the entire load of copyrights that the settlement will liberate for at least the next ten years will be books printed in press-run quantities. Who ever thought that the biggest beneficiaries of the Google settlement in the medium term could be agents and packagers? If somebody has previously mentioned the possibility, I hadn’t noticed. It only occurred to me day before yesterday.

Cairns reminds me that our friend (and fellow Michael) Cader thinks that the chances of any real “gems” being found in this orphan pile are remote. Of course, things that are remote possibilities happen from time to time over enough occurrences, and there will be a lot of books liberated. Surely there are many, in the categories mentioned above and others, that will warrant a first printing of  3,000 or 5,000 or 10,000, or with the right packaging and promotion, even more than that. Even in these troubled times, there might be some additions to staff at packagers or publishers to sift through these opportunities. Assuming these deals are to be made by the Book Rights Registry, let’s hope they have an agent on the staff along with the database sales manager.

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When Joe Esposito first told me about blogs in about 2001 or so, there were very few. Michael Cader had PublishersLunch, but if Michael knew that it was an emailed blog, he didn’t tell me. And then blogs “happened”, as things do: gradually, then suddenly. And now I’m late to have one of my own. Really late.

I’ll admit that I fiddled with this a couple of times before. I started up at least twice, maybe it was three times. I decided I’d try it for a while, see if I could get into the pattern of writing regularly, and then reveal it to the world when I’d piled up a month or two of posts. But I never GOT to a month or two of posts. And because I was keeping what I was doing a secret, I had no traffic, no comments, and none of the rewards of interaction which provide the motivation to keep going. So I didn’t keep going.

I admired my friends Gwyn Headley and Michael Cairns for starting their blogs and sticking with them. Gwyn started by making a list of 365 things he could blog about, so he could refer to his list every morning if he needed to. It would take me five years to make a list of 365 things I could blog about.

But I’ve been getting some signs that “now’s the time.”

One follows from having been on Peter Brantley’s mailing list for a couple of years. Twenty, thirty times a week, Peter sends us a link to something he’s found about publishing and digital change and invites comment. The posts and comments have increasingly sparked a response from me that amounts to a blog post. Once in a while Peter would ask me to extend a comment as a post to one of his blogs, PubFrontier. Then last week David Rothman flattered me by turning another Brantley list comment into a post on his Teleread.

Then, thanks to my friend Laura Dawson, I hired a really smart woman named Tess Strand Alipour and her partner Hamid Alipour to help me optimize traffic to idealog.com. They rebuilt the site so the speeches can accept comments, which was never the case before. They did other things that have boosted our traffic by a gazillion percent in the past two months. And they’ve told me that traffic will get even better if I post whatever I have to say to my OWN site rather than always to other people’s.

And then two weeks ago I started using Twitter. I was a bit slow to get it, but Tools of Change accelerated the process for me. The complementarity of Twitter and a blog seem pretty apparent.

On top of that, I’m involved with a large number of exciting new initiatives even in these troubling times. Filedbyauthor, a new venture I’m co-founder of being headed by my longtime friend and colleague, Peter Clifton, will be live with a web page for every author with an active ISBN in another month or so. FotoLibra, an open-source photo stock agency based in the UK that I’ve been involved with since its founding a few years ago, has achieved orbital velocity. We’re working out details, to be announced shortly, to take our StartWithXML project to London soon. We’re doing a research project on “Shifting Sales Channels” with BISG that has an online survey component and will culminate with the Making Information Pay conference on May 9.

So there should be plenty to write about.

Please write back.

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