Penguin

I think just about everybody has fun at Digital Book World, but it is hard to have more fun there than I do. It’s damn near a year of work coming together over a couple of days with dozens of smart speakers making me personally look good for putting them on the program. So they work hard and satisfy the audience and I get congratulated. What could be better (for me) than that?

(OK, I did do a little bit of work. Besides emceeing the show and co-hosting the final panel, I delivered opening remarks trying to set the stage.)

There were a lot of great takeaways this year. Perhaps the biggest news was the final presentation before the wrap-up panel Michael Cader and I hosted. That was by Matteo Berlucchi, the CEO of Anobii, a UK-based ebook retailer that has substantial investment from Penguin, Random House, and HarperCollins. Matteo didn’t exactly “call for the end” of DRM, but he certainly described a better world without it. And the main point he made was, “I want to sell to Kindle customers and the only way I can do that is if we get rid of DRM.” The combination of the message and the messenger made this the most newsworthy presentation of the show, I thought.

But the factoid that most grabbed me was delivered on the previous day as part of the data developed by AllRomanceebooks.com about the romance readers market. Very superficially, the point being made was also about DRM, but that’s actually a distraction. There was a much larger point buried within.

All Romance is a specialized ebook retailer. To serve the romance reader community more effectively, they’ve built out the BISAC taxonomy for romance, adding more categories. And they’ve added a metadata element called “flames” which basically measure the frequency and explicitness of the sex scenes in any particular book.

The romance world, particularly among the cognescenti in it, is a very anti-DRM environment. And an outfit like All Romance, which has no “device lock-in” working for them — essentially everything they sell gets “side-loaded” somehow, and DRM can often make that more challenging — is right in step with their community sentiment. So the survey contained questions trying to get at the audience attitude about DRM.

There were two relevant stats that I recall. One is that only about 20% of even All Romance’s readers really resist books with DRM. That is to say: 80% don’t. But the factoid that grabbed me is that 96% (that’s not a typo: ninety-six percent) of the ebooks they sell do not have DRM.

All Romance also reports that 91% of the titles they have available are protected by DRM. That makes sense, since all the titles from all the Big Six publishers and all the titles from Harlequin except those from their new digital-first imprint, Carina, have DRM.

What this means is that the nine percent of All Romance’s offerings that do not have DRM are selling 96% of their units overall. And since only 20% of their customers find DRM as a strong deterrent to sales, that means those fledglings are outselling all the majors for other reasons.

This provokes two very important lines of inquiry to me, and neither of them have anything to do with DRM.

The first one would be top of mind to me if I were a major publisher. What are these books that are selling like hotcakes? Why are these books selling like hotcakes? Why can’t we publish these books that are selling like hotcakes?

It is a virtual certainty that a lot more romance ebooks are sold through the “traditional” channels like the Kindle and Nook and Kobo stores than through All Romance. But they have a market big enough to get 6,000 respondants to a survey in a couple of weeks so they’re definitely serving a big clientele. They’ve obviously aggregated an audience that is buying a lot of books that major publishers are missing. Some of this is due to price, undoubtedly, since the All Romance stats also showed robust sales at price points below where the majors are usually most comfortable. Some of it could be attributed to a raunchier title selection being compiled by the smaller upstart title selection (remember All Romance’s “flame” ratings.) Some of it might be loyalty to authors who could be signed up by majors with the right offers.

But if 24 out of every 25 books being sold by a pretty damn big specialist retailer to the biggest ebook genre that I competed in were outside of my immediate competitive set (which, for the Big Six, is basically each other and Harlequin), I’d want to know more about the details of that. And I’d also be asking All Romance what I could do to get more sales from their audience. I have a feeling they’d say that better metadata, more sex (within the pages of the books, that is), and lower prices are all more important than stripping off the DRM, but it’s s conversation the big publishers should be having with them.

The second question that the data provokes to me is whether this phenomenon — all these successful books outside the purview of the major houses — is a unique characteristic of romance books. I don’t know if there’s an All Mystery ebooks vendor or an All Thrillers ebook vendor or even an All Sci-Fi ebook vendor (I’ll bet we’ll find out from our comment string after this is posted!!!) but, if there is, it would be interesting to find out if this is true there too.

These are the immediate questions All Romance’s appearance put in the front of my mind. I think they show another aspect of verticalization. As a vertical retailer, they invent new metadata elements that really help them merchandise to their audience. What that suggests is an opportunity for an All History or All Politics retailer as well; enhancing metadata might be even more valuable for non-fiction subjects than it is for specialized fiction.

There was an article about Amazon by Brad Stone in this week’s issue of Bloomberg Business Week in which I was quoted about Larry Kirshbaum, the former head of Time Warner Book Group (now Hachette) and currently the head of a new Amazon imprint whose mission it is to recruit mainstream authors to be published by the retailer. Many of Larry’s former colleagues and counterparts at big publishers take this decision of his to join Amazon extremely personally and it is reflected in what they say they now feel about Larry himself. That was reflected in my quote which says that Larry “has gone from one of the most well-liked people in publishing to the one of the most reviled.”

I want to make clear that I was not expressing my personal opinion. I still very much like Larry Kirshbaum and I’m a bit embarrassed to be quoted (even accurately) characterizing the feeling about him in these terms. The people running big NY houses see Amazon as a bare-knuckled competitor. With their responsibility for the continued success and viability of their own enterprises and the threat Amazon poses in that regard, contentiousness is built into the interaction and competition between Amazon and the big publishers. I believe my quote accurately reflected the degree to which that is transferred to personal feelings, even for somebody whom so many people have known and liked for years. Although I well understand the feelings my quote described, this is one case where I wish I hadn’t been so candid.

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John Makinson, the global CEO of Penguin, was quoted in a Reuters article saying that the post-Christmas period in publishing coming up is “tougher to predict” than “any time that I can remember”. Asked what he sees in the immediate future, Makinson replied “dark clouds”.

Makinson’s concerns reflect one we have written about many times in this space: the rise of powerful ebook vendors who are tech behemoths essentially replacing the network of brick bookstores, many of which were free-standing independents. (This is true in the UK, where Makinson is based, as well as in the US, for which he is also responsible. It will also happen everywhere else.) He made a very cogent point when he said that publishing has been driven more by supply than demand. He was quoted as saying “consumer taste doesn’t actually change all that much but what does change is the availability of books in different channels.”

He’s completely correct. Up until 15 years ago (the dawn of Amazon), only books that were on store shelves had much chance at all to sell. The biggest and most successful publishers today are still the ones which ascended because of their power to put books on those shelves. It is not the publishers’ fault or doing that this is changing.

Longtime industry executive and consultant Joe Esposito wrote a post around the Borders bankruptcy that makes this general point: publishers are part of an ecosystem that is changing in ways they can’t control.

The growth in ebook sales is not an unbroken line pointing up. Industry stats suggest that sales may even have slowed a bit in September compared to August. But this is the time of year when we get the next step-increment change in the publishing reader-supply network. Starting in November, 2007, when Amazon put the Kindle on sale for the first time, the Christmas season has been when the huge leaps in device ebook reader distribution take place. That includes a huge ebook sales day on Christmas itself followed by a couple of months when ebook sales reach new peaks.

This is inevitably accompanied by bad news from the brick book trade. Last year’s first quarter included the bankruptcy filing of Borders. Stores fight hard to keep their doors open through the Christmas season but, with each passing year, if they’re not selling ebook reading devices, they find disappintment more often than salvation.

One bookstore owner I know has been doing a great job; the store held its own despite the overall slide in print. The bookseller told me that this year, through October, sales at the store were down 5%. Not bad. They were down 2% year-on-year last year. They were down 1% year-on-year in 2009. And they had a record year for sales in 2008.

There’s a pattern there. The percentage reduction is doubling each year. When I said, “so you’ll be down 10% next year and 20% the year after that, right?” Bookseller said, “probably.”

Almost no brick store can stand a sales loss of 20% and remain viable. Maybe one could make up the 20% by selling something else in addition to books. But maybe branching out into other lines of merchandise will cost more than it will generate.

Maybe they won’t be able to hold even that 5% reduction through Christmas. And maybe the 20% we see as two years away is even closer.

Anecdotal reports abound that stores that are near where there formerly was a Borders are seeing a lift in sales. One sales executive I know speculated that B&N would pick up half the Borders business. Since Borders sales were a high double-digit percentage of B&N’s sales, that should provide quite a lift. But because B&N’s store sales now include Nook devices, we aren’t able to analyze very readily from their announced results what the trend of their actual book sales in the stores (or online) is. According to Michael Cader’s report of their just-announced results, B&N tells us that “physical book sales declined”.

As the digital sales of straight text books — which are estimated by some to be 75% of bookstore sales — routinely climb past 30% of the total units, there’s just less and less print business to go around. Ebook sales seem to have doubled again in 2011 from what they were in 2010. There are high expectations this Christmas for ebook reader sales, newly fueled by color tablet-like devices from Kindle, Nook, and Kobo (all on sale at consumer electronics outlets as well as at bookstores and online). That suggests (to me) that 40% or 50% ebook sales shares might be common by early 2012.

Borders was somewhere around 10% of the print book business when they disappeared. More than 10% of the business will have shifted away from brick stores to ebooks and online sales in the year following their bankruptcy announcement.

So the lift from picking up Borders business is unlikely to replace what brick stores are losing to more customers switching to ebooks and online buying of print. And that squares with what B&N just told us about their most recent reporting.

We are seeing sales staff reorganizations all over town and in the UK as well. Fewer stores and less volume through them mandate smaller field sales organizations. One former high-ranking sales executive I know who is now a thriving consultant was telling me yesterday that finding an executive sales position in publishing today is a nearly impossible task.

If the ranks of sales reps and sales management are being thinned, how about the elaborate systems we have built to support them?

How much longer will we be publishing in “seasons”, which was a paradigm really built to serve a far-flung rep network that needed to gather to learn about new titles? It now seems like an anachronism, particularly when the biggest accounts buy from monthly lists. How much longer can that last? Sales conferences have been scaled back dramatically from what they were a decade or two ago. How long before they’re virtually defunct?

At least printing paper catalogs, which is a largely wasted expense these days has been retired by several companies. A bookseller I asked said Harper dispensed with paper catalogs already and she expects Random House and Macmillan to do so in 2012. I’ll bet the comment section of this post will attract others to say they have done so or are about to do so as well.

The old publishing sales-and-distribution ecosystem is disappearing but the new one is not built out yet. Publishers are, to greater and lesser degrees, converting to digital workflows, developing their metadata chops, collecting names, building vertical communities by genre and topic, collecting and analyzing ebook pricing data, building new models to work with authors and even self-publishers, and they’re still signing the books they want with royalty rates for ebooks of 25% of revenue.

These efforts have been financed by the margins being earned on sales of print and sales of digital that publishers were able to acquire because of their power to distribute print. In Esposito’s words, this cash provides “venture capital for the new all-digital businesses that all publishers are contemplating”. These annual step-increments of digital growth and brick store decline have so far been tolerable to most of the big players we’ve known for decades. (Borders was an exception, but we know Borders was not done in by digital change alone.)

The pace of the digital switchover is quickening. That will reduce the cash available to invest in building a new ecosystem at the same time the urgency of coming up with new answers is rising. It’s enough to make a sober executive, even at a very large, successful, smart, and innovative company, admit to serious concern for the industry’s future.

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Something caught my eye this week that has been very little commented upon elsewhere: the news that Hachette Book Group developed an app-making capability that they are now licensing out. Their first customer was Round Table Companies, a book packager.

I found this striking because big book publishers are not generally known for developing technology; they’re more likely to be buyers of it. This is not an ironclad rule: Scholastic has an ereading platform in development to satisfy the special needs of the children’s book market and it is trying to work with other publishers who might want to avail themselves of the platform.

But from the standpoint of one who has observed publishers wrestling with technology for many years, this deal is very unusual. When Random House bought Smashing Ideas, a technology company, that seemed like the likely course for big publishers to take: acquiring technology that could be useful to them after it had been developed by somebody else.

There are other companies and entrepreneurs developing app-making tools. Most big publishers would be trying those out and getting great deals to do so because the companies making the tools need the validation of having them used by major players. The fact that Hachette even attempted to develop this capability on its own is unusual; that they succeeded at making something useful and cost-effective to the extent that Round Table preferred their solution to one developed by technologists is why it is worthy of comment.

Even acknowledging that selling the tech to a packager is not quite the same as selling it to a direct Big Six competitor, I don’t know if this is a harbinger or an outlier.

But I do know that it challenges one of my long-held assumptions about publishers and technology.

When you invest in intellectual property, whether publishing a book or developing software, you normally want to monetize that investment across the widest possible range of customers which you can only do by distributing through the widest possible array of channels. That’s the handicap Amazon has right now being a publisher: they don’t have effective distribution to brick stores and, as long as they want to keep what they invest in restricted to the Kindle for ebooks, it is pretty certain that they won’t. Over time, the number of brick stores will diminish so that will matter less and less and, if Kindle retains its position of primacy among ebook retailers, what is a real handicap today may become trivial. But traditional or legacy or real (pick your adjective) publishers really do have a wider distribution base than Amazon for books published today. (That doesn’t mean they will necessarily sell more, but it does mean they should!)

By the same token, I never thought it made much sense for a publisher, on its own, to develop software for product development or distribution that should have industry-wide application. I figured it would be hard for one publisher to sell software to another; the buyer would be afraid they were just permanently strengthening the margins and the hand of a competitor.

That same fear of strengthening a competitor is the reason that other types of collaboration that would seem obviously synergistic, like for publishers who do science fiction books to join together to create a science fiction community, haven’t happened. There was a moment a couple of years ago when Macmillan’s Tor.com suggested they’d start selling other publishers’ books to their community and invite other publishers in to strengthen it, but that never happened, even though it can’t make sense in the long run for what are ostensibly genre-driven communities to be siloed by publisher. I felt the same logic applied to publishers doing software development.

But that long-held assumption of mine is being challenged, by Random House buying Smashing Ideas and planning to keep it going as a provider of services to competitors, by Scholastic developing its own platform for displaying digital content and recruiting other publishers to join them, by three US publishers combining to create the new retailer Bookish (and three UK publishers replicating that idea with a UK version called Anobii), and, most dramatically, by Hachette creating an app-maker that a leading book packager finds a cost-effective way to build apps.

We still don’t know what will work. Will Smashing Ideas thrive under Random House ownership? Will Scholastic succeed in establishing a new reading platform for children’s books that can find a prominent place in the market? Will Bookish or Anobii succeed at becoming an important force in ebook sales alongside Amazon, Apple, Kobo, Google, and B&N?

And will what Hachette has done with their app-making capability be a trick they can repeat, developing technology to meet other challenges publishers face? Will Hachette become a specialized software vendor, developing publishing-specific tools, as well as a book publisher?

If so, they have found at least one formula that can help them through what are bound to be increasingly challenging times for general trade publishers.

We’re staging a conference next week in San Francisco which is a reprise of the very successful and well-received eBooks for Everyone Else event that we did in New York on September 26. We have a great show in San Francisco, adding a talk with successful self-publishing author Bob Mayer; a presentation from Penguin’s Molly Barton about their new Book Country initiative; a very interesting group of agents that will be interviewed by Charlotte Abbott; and a reprise of our “speed-dating” 1-on-1 sessions for attendees with service providers and experts to enable everybody to get their specific questions answered.

One major highlight of the show is going to be a presentation by my Publishers Launch Conferences partner, Michael Cader, which sorts out the myriad distribution and go-to-market choices facing today’s self-publisher. Michael did thorough research for this segment and, having seen the outline of the talk, I am certain it is the clearest and most complete survey of what has been a confusing and cluttered landscape of services that anybody attending will have ever heard.

Undoubtedly, Michael’s summary and analysis will make it to the web in the days after the conference, but if you’ll be in or near San Francisco next Wednesday, November 2, it alone will be worth the price of admission to eBooks for Everyone Else.

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Recent performance reports from Simon & Schuster and Penguin, which can be taken as indicative in some ways of what’s going on at the rest of the Big Six and instructive about what’s happening across trade publishing, say that revenue is flat or down, profits are up, and the ebook share of revenue is growing. The most recent reports were that ebooks grew to 14% of revenue at Penguin and at Simon & Schuster.

First a few observations about what those numbers really mean, and then some thoughts about the implications for the months to come.

We must remember we’re comparing apples and oranges when we talk about the percentage of sales that are ebooks versus print books. This percentage is, presumably, arrived at by adding print book sales (which are shipments subject to returns) to ebook sales (which are actual consumer purchases with zero or negligible returns) and then dividing the ebook revenue number by the total revenue number.

This explains the apparent anomaly pointed out in the S&S reporting which sees the ebook percentage higher in the first quarter than in the second, which has occurred in successive years. This is not actually hard to understand. One report I saw pointed to part of the explanation: that Christmas recipients of ereading devices are loading them up in January, an effect which is absent in the second quarter. But what is also the case is that Q1 print sales (which are shipments, let’s remember) are depressed by two factors: they contain returns from Q4 Christmas sell-in and Q1 is not normally a big one for new book shipments.

So as long as there are larger shipments of returnable print taking place in anticipation of Christmas sales and large numbers of new device owners created each Christmas, we can expect the Q1 number to be artificially inflated and the Q2 number to show an apparent decline.

The annual Q2 decline is only apparent; it is not real.

The percentage of revenue number lends itself to misinterpretation. It is an average. You will pardon me for repeating the truth that “the six-foot tall man drowns walking across a river that is an average of three feet deep.” Averages are misleading. That mid-teens percentage number, quite aside from the apples-and-oranges base of it, is also misleading. (I hasten to emphasize that nobody is being deliberately misleading; there is no suggestion intended here that the number isn’t real or that there is any desire to lead people to mistaken conclusions by reporting it.)

But 14%, or about 1/7, could lead people to think that the book that sells 35,000 copies is selling about 30,000 print and 5,000 digital. That’s seldom the case. First of all, “on average” ebooks generate lower unit revenues than print, because so many of them sell for less than half the print retail price when books are in hardcover. So if 14% of the revenue is digital, something more than that percentage of the units are digital. Let’s say that number is more like 17% or maybe 20%.

Secondly, that number is, at least to some extent, historical. It certainly isn’t a forecast. Everybody’s forecast would be for that number to go up. And everybody would agree that (if you factor properly for the Q1 to Q2 and shipments-to-sales anomalies) it has gone up between the period being reported and the reporting.

Third, not all of S&S’s or Penguin’s print list is available as an ebook. (As short form publishing enabled by ebooks grows, the reverse will also be true, but it isn’t in any appreciable numbers yet.) That means the title base for the 14% of revenue and (notional) 17% of units is a smaller number of titles than the print title base. So for books available as both print and ebooks, the percentage of units sold that are digital is substantially higher than that. I’m not familiar enough with the houses’ lists to make a truly informed guess about many titles are heavily illustrated or children’s book titles or deep backlist on which ebook rights are too confused to allow an edition to be published. But it would certainly be reasonable to assume that for straight-text narrative books, the percentage of ebook units to the total is routinely 30% or more.

The power of the ebook marketplace was underscored by a recent Simon & Schuster report of first day sales for a major bestseller. USA Today reported on July 13 that S&S claimed 175,000 total units sold on the first day of availability of Jaycee Dugard’s “A Stolen Life”, of which 100,000 of the sales were ebooks. (The article doesn’t spell it out, but presumably these are apples-to-apples, cash register sales of books and audio as reported by BookScan and, as always, cash register sales of ebooks. If they compared print shipments to ebook sales, the number would probably be more like 40% than the 57% this reporting implies.)

Because ebook sales are, at the moment, revenue dollar-for-dollar, more profitable than print book sales, publishers are able to report revenues flat or down and profits up. With the industry standard of 25% ebook royalties having prevailed for a year or two now, this news definitely catches the attention of smart agents. But, the agents’ future success in negotiating better terms aside, is it likely to stay that way?

One big relevant variable that is hard to predict is how successful publishers can be keeping retail prices up for ebooks with a diminished print price benchmark. If you’re getting something for $9.99 or $14.99 that you believe lots of people are paying more for in another form, there’s evidence that it is a bargain. It will be a bigger challenge to keep prices, and therefore revenues and margins, up — even with the power of agency, which only six publishers in the world today are really equipped to deliver — when the printed book price isn’t seen as a basis for comparison.

In fact, the current improvement in the profit picture suggests that the big houses have done a remarkably good job of managing the transition from print to digital so far. What is implied by the reported numbers, but receiving little attention, is that print sales are down pretty dramatically. Print runs are down with one trade house telling me that their midlist non-fiction first printings having typically declined by 40%. A larger house suggested that the print being shipped from their warehouse is down 35% in less than two years. I’m not close to the numbers but that might mean that for segments of their list shipments are half what they were less than two years ago.

Smaller press runs mean higher unit costs for printing and binding but they also mean fewer units are sharing the cost of design and page make-up. Many of the fixed overheads in publishing houses: warehouses, production departments, catalog creation, and lots of IT, are really only necessary to support the print component of the business. For the past two decades, commercial success in book publishing (and, as the demise of Borders has made clear, in book retailing) depended on an efficient supply chain. Being in stock but not overstocked, shipping quickly, being able to get fast turnaround on reprints, processing returns promptly to facilitate collecting accounts receivable, and providing accurate data to accounts as well as to internal stakeholders all require investment but generate value that shows up in profits.

Until the Kindle came out in November 2007, the question about ebooks was “will this ever be a business?” Since then we’ve watched the ebook share double or more every year, including last year. Since 2008 or 2009, the question has been “how long can this kind of growth go on?” When the share is upwards of 30% for most narrative books, which I think it is now, we know that can’t go on for two more years because that would be a mathematical impossibility.

So the questions about ebooks now are “when will this slow down?” and “is there a plateau at which there is a sustainable and substantial print book business?” If the answer to the first question isn’t “very soon”, then the answer to the second question must be “no”.

The other question being called here is whether the publishing of straight narrative texts becomes a separate and distinct business from the publishing of illustrated books. As long as the print component is commercially important to the success of narrative books, it’s perfectly logical for a publisher to do both. The narrative books and illustrated books, after all, can ride in the same box to Barnes & Noble, Ingram, or any local bookstore. Sometimes they are even manufactured by the same printer (although far less often than they were decades ago.) Their inventory can certainly be monitored with the same capabilities and people (if somewhat different algorithms).

One great imponderable is what the market for ebooks will be beyond the verbatim replication of narrative text. That’s where the growth has been. For illustrated or enhanced or apped ebooks, the success stories are anecdotal, not indisputable trending. It’s true that the right devices aren’t as widely distributed yet, but it is also true that we have no clear evidence that those ebooks will be as compelling to the consumer as the narrative text ones. We do know they’ll cost more to create.

One smart ebook head of a major house remarked to me the other day that their cookbook editors were still preparing their content primarily for the printed page and the digital versions were developed after that. “If our editors are still doing it that way two years from now,” this person said, “then as a company we’re doing something terribly wrong.” That statement is correct, and encompasses the possibility that something like the packages of cookbook content within containers won’t have a profitable market even in digital form, and will have to be monetized completely differently. We don’t know yet as an empirical fact that people will buy digital “cookbooks”, the way we know for sure that people will read narrative text on devices very happily and not look back.

(Cooking and food content? A perfect candidate for the subscription model!)

What we do know is that a high percentage of illustrated book sales is for gifts. To the extent that’s true, it adds a barrier that has nothing to do with design or functionality to the migration to ebooks. And those books, presumably more than narrative text books, benefit from the showroom effect that bookstores provide. And we know what’s happening to bookstores.

The rate of migration from print to digital for narrative text over the past four years would take us to a smidgen of a print business for that kind of book in only a couple more years if it does not abate. If publishers find their print throughput down another 35% over the next 18 months, most of the biggest narrative books are selling upwards of 75% of their units as ebooks, and most of what publishers ship from their warehouse is a different title base than their bestseller business, the game will have changed completely.

We could evolve so that the skills and organizational requirements to publish narrative content, if print becomes a small component of the revenue, will be quite different from what’s required to publish the illustrated content for which print remains an important part of the revenue. In that world, what constitutes a sensible portfolio of offerings for what we today call a “book publisher” might be defined quite differently.

One thing that occurred to me for the first time writing this piece is that Amazon’s apparent resistance to giving any publisher except the Big Six the ability to sell under agency terms gives the Big Six a useful card to play with agents on the biggest books. Agents for big authors tend to like the agency sales model. (This is inherently confusing; the “agents” being referred to have nothing to do with the “agency” in the model…Oh, well.)

The stakeholders who care most about maintaining retail prices for “branded” books (big authors and big efforts, like heavily-researched biographies that take years to write) are the most powerful agents and the Big Six publishers. If I’m right about this, I think we can safely categorize it as an “unintended consequence” on Amazon’s part to have a policy in place that actually strengthens the Big Six’s hand against the rest of their competition for big authors.

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Monday, July 4, was supposed to be a quiet day in the publishing business. It turns out it wasn’t. Three developments reported as special holiday bulletins by Publishers Lunch have strategic implications worth pondering that will have trade publishing people all over the world conferring with their friends and colleagues as soon as they shake the sand off their shoes and settle in to read the weekend email.

First of all: Amazon.com bought The Book Depository. What? You’ve never heard of The Book Depository? Well, then you’re almost certainly one of my US-based readers (about 60-70 percent of you.) The Book Depository is really the other global bookstore. They don’t do ebooks, but they’ve bult their global book business to more than $150 million. No, that’s not as big as BN.com, but they have built a sophisticated many-to-many supply chain (they don’t do it holding stock in distributed warehouses like Amazon), have been growing by something like 30-40% per year for several years, and might even make money.

They’ve even invested heavily in untangling the metadata challenges of global book sales, with a large team in the Middle East tackling the problem.

If anybody were going to mount a global challenge to Amazon as a single consolidated book (and content) distribution business worldwide, The Book Depository was the platform to do it from.

This move by Amazon reminds me of when they acquired Mobi-pocket early in the last decade. In the dawn of the ebook-on-devices era, there were two formats competing as pawns of a hardware competition. Microsoft pushed MS Reader, Palm pushed their own format. Mobi had the clever idea of being able to play on either.

So Amazon acquired Mobi. That meant that they owned the only single-file solution; any other retailer trying to serve the market would have to offer both Microsoft and Palm as a choice to reach all the devices. Palm quickly took that option off the table by insisting it would serve all its files itself. That’s when B&N went out of the ebook business, not to return in a serious way until after Kindle launched in late 2007.

It sure looks to me like The Book Depository would have been a great launch platform for Barnes & Noble to go global.

Second: Pearson, owner of Penguin, became a book and ebook retailer by the purchase of the relevant assets from the bankrupt REDGroup. It appears they will run the business, web sites under the Borders and Angus & Robertson brands, with a minimal staff.

Pearson is a big company whose interests go far beyond Penguin, but it is the trade implications of this that catch my trade-centric eye. Big trade publishers are caught between a rock and a hard place on direct selling and customer ownership. Whatever the future may hold or require, trade publishers today are highly dependent on their intermediaries’ good will. It would likely cause untold grief with Amazon and Barnes & Noble if a major US trade house set up a direct selling operation, despite the fact that niche publishers often have them as adjuncts to community or professional publishing efforts (Wiley, O’Reilly, McGraw-Hill, F+W Media, Interweave. In fact, Pearson owns half of Safari, a direct-to-reader subscription service pioneered and co-owned by O’Reilly. They also own part of CourseSmart, but they’re now selling books and ebooks direct to consumers, not just content-by-subscription to geeks and textbooks to students.)

It might be well down the list of reasons why Pearson Australia is now running online trade selling operations, but it will be interesting to see how Penguin Australia benefits from the association.

Third: J.K. Rowling and the agent that actually handled her business, Neil Blair, have left the Christopher Little Agency which formerly employed Blair and was the agent of record for Rowling. Lawsuits may ensue, but this is another lesson in what disintermediation can mean and it recalls to me something I learned long ago from a lawyer in the music business.

My mother, Eleanor Shatzkin, had a chunk of her consulting career when she designed billing systems for law firms. (This was in the days before personal computers; “data processing” back then was done on punch cards sent to job shops for print-outs to be created.) So she made friends with a lot of lawyers. One of them, a very nice man named Don Engel, left the large New York firm where he’d been a litigator and moved out to California and set up a practice in the music business.

What Don told me (this was in the early 1980s) was that he found a phenomenon out there that didn’t exist in New York because people could start a law firm with just one client, and they often did. (As he said, you can’t take a piece of the AT&T business and set up shop, but you can take one big recording artist.) That meant these firms had no broad capabilities, and if any real legal challenges arose, the little firm with the big client would need savvier outside counsel. Don built a substantial business suing record companies over royalties on behalf of artists, getting cases referred by these tiny “firms” with one star client because he developed a reputation for being an honest guy who wouldn’t poach the client in turn!

I don’t want to suggest that what Rowling and Blair are doing is likely to become a trend. In fact, the prevailing industry conditions at the moment would, I think, mitigate against it. Agencies are more likely to consolidate than to splinter because the capabilities they need to serve their clients effectively are growing with digital change. Whatever threat there is to publishers from disintermediation would require that agents do more and have greater organizational capabilities, not less.

On the other hand, new services being offered by agents that other agents could employ might allow unbundling of the direct client contact from the rest of the agency functions.

I hope you had a really restful 4th of July weekend. The second half of the year begins with plenty to think about.

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The first Publishers Launch Conferences show outside the United States, “A Global Perspective on Digital Change”, will be at the Congress Centre in central London on June 21, with the Publishers Association serving as our partners in putting on the event. We also owe special thanks to the PA’s group of Digital Directors, who were extremely generous with their time and insight. If you can be in London that day, you couldn’t find a better way to spend it than with us.

We’re still putting the finishing touches on what will be a one-day conference packed with illuminating conversation, but we can tell you quite a bit about it already. We aim to deliver strategic, practical, and focused discussion of near-term issues and opportunities. This won’t be a showcase for cool products or a venue to debate what the future might look like some day. We’re examining essential issues — ebook “export” opportunities; what happens to territorial rights; hiring and retraining to meet today’s challenges; revamping publishing systems for a dual print and digital paradigm; getting “found” on digital shelves — that publishing professionals should focus on now to thrive in the days to come.

The UK market is in between the US and the rest of the world in its migration from print to digital reading. Kindle and iPad sales really took off last Christmas and, while ebook penetration may be a fourth or less of what it is in the US, it has grown enough to be disruptive and to generate a consensus acceptance that very substantial change in the industry is inevitable.

On the one hand, my PLC partner Michael Cader and I have followed the developments in the US very closely so we have some firsthand experience with some aspects of what the UK trade is going through. On the other hand, we know history won’t repeat itself precisely. There are important differences in the markets and there is a substantial group of companies with experience and capabilities developed in the North American market that can hit the ground running in Britain or anywhere else in the world. That alone will make everybody else’s experience different than what happened in the US.

In order to be sure we were talking with the UK industry, not at it, we took some preparatory steps. In February, we put a large number of ideas for panels and topics up on Survey Monkey and invited 70 players in the UK book trade to express their opinions on them. In five days, 40 of the people responded.

Then we followed up by spending three days in London meeting with about 50 people to discuss our ideas and theirs. Our partners at the PA provided invaluable assistance, hosting our conversations and inviting us to join a regular meeting of the Digital Directors to get the insights of the most knowledgable people in the UK market. Those conversations were crucial in helping us focus properly on topics and in locating some key sources of insight. Frankly, despite our long experience working with the British publishing community (I have visited London on business three or four times a year for 35 years), putting this conference together would have been impossible without the help we got.

But because of that help, I think we’ll be presenting the UK publishing community with a lot of very useful discussion that hasn’t taken place at the many prior gatherings that have discussed book publishers and digital change.

One topic that we identified very early is the opportunity we see for publishers in Britain and Ireland to sell into the US market now without payng for a distributor infrastructure or taking an inventory risk. When we started to explore this topic, we learned that, of course, people are definitely starting to plan for it. Some are starting to exploit it. This was something we thought should be happening below the radar, and it is.

This is a peculiar opportunity, because it might be more important for independent UK publishers large and small than it is for the biggest global players. We’re still filling out the panel for this one, but we have Helen Kogan of Kogan Page, an independent whose company was already working in the US market (and therefore has some helpful experience to pass along) but who is seeing the expanded opportunity presented by digital, and Jean Harrington of Maverick House Publishers in Dublin. Jean is also President of Publishing Ireland and we invited her to join this particular conversation for a reason. The Irish diaspora in the US has a particularly strong identity with the old country and we expect books of Irish history and Irish fiction will find a substantial additional market through ebook sales in America.

We’re working on adding another British publisher and an agent to that dialogue.

Another topic arose out of a conversation that longtime UK consultant Mark Bide and I had while we were at Tools of Change in New York in February. How long will it be, I wondered, before half of UK sales are digital? Mark said he wasn’t sure about the timing, but he was sure that the publishers’ systems, overhead allocations, staffing, and infrastructure would require a lot of adjustment to be ready for that day. That’s a good conference topic, we thought.

Then, in our conversations at the PA 10 weeks ago, Anthony Forbes Watson, the MD of Pan Macmillan, told us he had charged his team with thinking through the question exactly as we had defined it. Anthony wants to know “what does 50% ebooks look like? What do we have to do to be ready for it?” The next day we talked to James Long of Pan Mac who told us that, yes, he was actually the person in the company with the primary responsibility for thinking this question through.

We decided the best frame for this conversation was “thinking about the future.” James, as he will tell us on June 21, is largely focused on what Pan Mac needs to do in systems development and integration, workflow changes, and skills development to be ready for a 50% digital world.

But there are two other aspects of preparing for the future we felt could be illuminated by other panelists we recruited.

Perseus, a US company whose Constellation division that provides digital services to smaller publishers is a global sponsor of Publishers Launch Conferences, is one of several companies in the world (Ingram in the US is another; so might Random House be in the US and the UK) that are investing in warehouses and print book distribution capabilities at precisely the time many publishers are disinvesting in them, precisely because they know that most publishers will have to disinvest in them. They’re trying to be there for publishers who want to dispose of fixed cost overheads for the shrinking print book market. We put Rick Joyce of Perseus into this conversation to cover the sensitive topic of consolidation on the physical side (a subject that Dominic Myers, the MD of Waterstone’s, famously put on the UK publishing community’s agenda a couple of months ago.)

Copyright Clearance Center, the US RRO which is also a global sponsor of Publishers Launch Conferences, has steadily called our attention to another industry-wide challenge: the need to manage rights more effectively and on a more granular level to take advantage of emerging opportunities to license chunks and fragments for apps, ebooks, and web sites. We thought that the voice for this topic in London should be local, and we were pleased that Sara Faulder, head of the Publishers Licensing Society, agreed to join this conversation.

Mark Bide has agreed to moderate this group in what I think will be a dialogue about publishers and the digital future unlike any the audience will have heard before. (Except, that is, if they are at our Publishers Launch BEA show on May 25, where we’ll have a different version of this conversation, one more focused on export and rights sales than infrastructure, but also covering the change we’ll see to selling more and more fragments.)

We’re not above stealing our own ideas and giving them a local spin. One panel that was extraordinarily successful at Digital Book World last January was one we describe in shorthand as “new skill sets”. It’s about capabilities publishers need to get that they don’t have and it is about process and workflow changes and the use of cross-functional teams as well as hiring in or training people with new skills. Charlie Redmayne of HarperCollins did that panel for us in New York in January and is reprising it at our BEA show. In London, he’ll be joined by Juan Lopez-Valcarel of Pearson and Jacks Thomas, the CEO of Midas Public Relations, on a panel moderated by Jo Howard of Mosaic Search & Selection Ltd. One of the key elements in the New York discussion of this, which we expect will arise again in London, is “when is it best to hire in the skills and when is it better to retrain the people I already have?” This is a subject every publisher needs to be thinking about that isn’t discussed in public very often.

We’ll have three of the top digital leaders of UK houses — George Walkley of Hachette, David Roth-ey of HarperCollins, and Sara Lloyd of Pan Macmillan — joining Michael and me for a dialogue about the big companies who have cut their teeth on the US market and are now taking their capabilities worldwide, starting in the UK. We’ll be talking about Amazon, Apple, Google, Kobo, Ingram, and Overdrive (the six clearly-declared and clearly-capable global ebook players) as well as Sony, aspirants like Copia and Blio, and US titan Barnes & Noble (which has shown no clear signs of global interest yet.) It looks to us like there is only one UK player with a global perspective, still-tiny cell phone provider Mobcast, but we’ll be learning from our panelists whether there are others we should be considering. And our audience will learn more about the North American companies which are bound to be a big part of the local market’s ebook life in the years to come.

We’ve reached a time when “metadata” is an important subject to discuss, no matter how dry or back room it has seemed. We were fortunate to get Graham Bell of EDItEUR to moderate a dialogue about this for us. He’s recruited Jon Windus of Nielsen and Karina Luke of Penguin to discuss it with him. We’re now looking for a retailer to join them. The condition of metadata in the marketplace is not good enough in enough places yet. This is costing publishers sales. This panel will explain why that is and what every publisher should do to make sure this isn’t a huge hole in the side of their boat as online sales, print and digital, grow and the impact of metadata grows right along with them.

We are also going to have a discussion of the future of territorial rights. Richard Charkin of Bloomsbury, a well-known skeptic about them, and David Miller, an agent with Rogers, Coleridge and White Ltd., have agreed to participate. We’re looking for a full-throated defender of the current territorial regime to join them in what will be more of a conversation than a debate. We wonder whether territorial rights make as much sense in a 50% ebook world as they do in the 5% ebook world we might now be in. The agent’s voice in this conversation might be the most important one because, after all, they decide whether the deals are acceptable or not.

One thing that the territorial rights dialogue will certainly entertain is what we should expect to see in terms of author initiatives. That topic is bound to come up in two other discussions as well. There’s one we’re now calling “experiments, best practices, and out of the box thinking” which is really about innovation. But we are going to focus on innovation in business models and practices and innovation in marketing, not on product innovation. We are still working on putting this group together, but we were very impressed with our preliminary conversations with two of the panelists.

Marc Gascoigne is at Angry Robot, a sci-fi imprint started by HarperCollins and then bought by Osprey. Angry Robot’s better mousetrap is its community focus; Gascoigne will make the case that doing that right (which many publishers say they want to do) requires that everybody, and that means every editor and everybody else, communicate directly with the audience. It is hard to see putting that across in many established trade houses.

Richard Mollet of the PA will moderate the conversation with the innovators.

Also on that panel will be Peter Cox, an agent with Redhammer. Cox is changing his own business model (providing more in the way of services to his authors, but charging them more for it and looking to represent fewer authors, not more) but he’s effectively changing the author-publisher relationship as well by making the author an active marketer and community gatherer. He’ll have examples and he’ll have ideas that will challenge the thinking of many publishers and agents in the audience.

The last panel of our day is intended as a Grand Finale. Michael Cader and I will sit with Stephen Page of Faber, Rebecca Smart of Osprey, John Makinson of Penguin, and agent Jonny Geller of Curtis Brown. We’ll get their take on the speed of the ebook takeup and its consequences.

How will British publishers cope in a market that may soon have no full-line bookstore chain? How will the industry cope with the rise of self-publishing? Is there any real danger of a consolidated English-language world in which London becomes subsidiary to New York? Or, in some companies, might it be vice-versa? Will both agents and publishers be changing the core business models which have prevailed for the past century over the next few years?

What excites me about the last panel — aside from the sheer smarts and savvy of the people we got to join us — is the diversity of their perspectives. The publishers run companies of different sizes and with very different approaches to building their publishing lists. The agent joining us has gained a reputation as one of the most digitally savvy players in the UK market. Michael and I thrive on spirited conversations with very smart people; we think we’re going to finish the day very stimulated and with big smiles on our faces.

And we think our audience will too.

Of course, before we get to London, we’ll be running our “eBooks Go Global” show aimed at international visitors and their trading partners at BEA. At that show, we’re particularly excited about two panels we won’t be doing in London. One is with a few booksellers already working with the new Google Ebooks capability reporting on how it is functioning for them. The other takes a slightly different approach to the “selling in the US” opportunity. Patricia Arancibia of Barnes & Noble, which has aggregated about ten times as many ebooks in Spanish as most people in Spanish markets will tell you exists, will open a lot of foreign publishers’ eyes to the possibilities that exist for them in the US market. We’ll also have a chat with Barry Eisler, the author who turned down half-a-million bucks to self-publish. And that’s not all. Tickets still available… And tickets still available for London as well.

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

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

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

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

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

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

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

To a certain extent.

And then we had the events of last week.

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

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

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

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

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

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

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

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

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

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

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

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

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The Wall Street Journal wrote last week about what we have been concerned about for some time: how hard it will be for publishers to sustain book prices as supply (of books) rises faster than demand because of all the self-publishing being done.

WSJ built their story around John Locke, whose thrillers are 99 cents and who earned well over $100,000 in March selling them on Kindle. Locke himself put the pricing in perspective. If his books are 99 cents and most ebooks from big publishers are $9.99 and up, he doesn’t have to prove he’s as good as they are; they have to prove they’re 10 times better than he is!

I can tell you this. I’ve read one of John Locke’s books. Nobody I can think of is ten times better than he is. By his own criterion, he could readily sell for $2.99 (and be earning a higher percentage royalty) because nobody is three times better than he is, either.

Meanwhile, on a much less signficant level commercially, the ebook of The Shatzkin Files is now out from Kobo for $3.99. How did the price get set? Kobo said, “let’s put it there.” Their first thought was that it should be $4.99 but then they suggested scaling it back because, after all, the entire body of content in the ebook is on this blog, which is available free. (This establishes that anybody who buys the book is paying for the convenience afforded by the container, not for the content itself.)

I don’t know what the dilutive impact on “real” ebook sales is of The Shatzkin Files, but it is, like John Locke’s material, additional competition for books that are issued by legitimate publishing houses. It is more supply competing for the same demand.

Trying to understand the actual impact of price is very difficult. Amazon tells us that books on which they control the prices are seeing share growth over books on which the publishers control the price. That is shorthand for “99 cent and $2.99 books by self-published authors are growing share over $9.99 to $14.99 books published by the big agency publishers.” That would tend (and is certainly meant) to suggest that pricing high (and ignorantly) is hurting the big publishers’ and big authors’ revenues, but we can’t actually draw that conclusion from the data.

Locke makes the point that the $9.99 book needs to be “10 times better” than his to be an equivalent value, but I’d make the point that they need sell only 1/10 as many copies to deliver the same amount of revenue. Penguin is still selling Ken Follett’s “Fall of Giants” for $19.99. Would it sell twenty times as many copies if they priced it at 99 cents? And, if it did, would it do so by stealing sales from the hardcover, which, with a list price of $36, is yielding a margin in the ballpark with that nearly-$20 ebook.

I don’t know if $19.99 is the right price for “Fall of Giants”, but I’m pretty sure 99 cents wouldn’t be.

In other words, the big publishers are not crazy to resist following ebook prices to where the new self-publishers would lead them. To be fair, one should not suggest that Amazon would set their prices at that level, even if they had freedom from agency constraints. For one thing, unless pricing schemes changed completely, Amazon would have “bought” an ebook (wholesale) at a price that would limit their willingness to mark it down. They did scare publishers by taking losses on some ebooks, selling for $9.99 what they bought for $12 or $15. But they never sold those books for 99 cents!

In fact, it would appear that Amazon does not have control of Locke’s book pricing, because the Journal article makes it clear that he will stick with 99 cents even if he can make more money at $2.99. (Amazon pays a 35% royalty for books under $2.99 and 70% royalty for books between $2.99 and $9.99, so Locke would get $2.10 a copy at $2.99 and he gets about 35 cents pricing at 99 cents.) Presumably, Amazon would have priced him where he (and they) get the most revenue, not where they get the most unit sales, which we would assume would rise with every drop in price down to free.

But the fact that publishers aren’t necessarily wrong to try to maintain prices at near $10 and up doesn’t obviate two very cogent truths here that it would be a mistake to ignore.

One is that the downward pressure on price is inexorable, because the number of entreprenurial authors like John Locke will grow and they will be discovered and “branded” so that many readers will find them as substitutes for the more expensive big house authors. And because the number of offerings that come like The Shatzkin Files ebook did — from people who weren’t writing for the profit from the content, but who built an audience and had a book issued anyway — will continue to add supply to meet what is relatively static demand.

And the second — made before here and not long ago — is that publishers don’t know nearly as much as they could and should about how price affects unit sales and total revenues.

Sooner or later, a big publisher or two will start seriously experimenting with this. They will gain knowledge that will enable them to tell an author or agent, “we know things about pricing that are worth real revenue to you if you publish with us.” When that happens, it will likely be more significant to an author than an increase in the ebook royalty rate would be. Maybe a publisher can even add enough value with pricing savvy to pay for their cut!

So far, only one author we know of has turned down a significant advance from a major house to self-publish. That’s Barry Eisler, and we wrote about him when he made the decision to give up a half-million bucks to self-publish. We’ve just booked Barry to speak at our first Publishers Launch Conference at BEA on May 25. I’ll be interviewing Barry and focusing on questions of interest to our target audience of international visitors to BEA and their trading partners. We’ll be very interested in how much he anticipates in the way of foreign sales and how he’ll handle translation rights, but we’ll also be looking for Barry’s thoughts about how he’ll set prices for his books when the power is entirely in his hands.

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The ebook revolution is really beginning to remind me of the mass-market papeback revolution.

The mass paperback was really “invented” by Sir Allan Lane when he created Penguin in Britain before World War II. (Wikipedia credits a German publisher with the first cheap paperbacks a few years earlier, but Lane was certainly the first in English and deserving of some extra credit because the company he started continues in the same business to the present day.) Pocket Books in the US was also born just before the war. During World War II, historian and polymath Philip Van Doren Stern (who wrote, among other things, the New Yorker short story on which the movie classic  “It’s A Wonderful Life” was based) ran a program for the US military by which inexpensive paperbacks were made available to the troops.

After the war ended, mass market publishing really grew. Many houses — Ballantine, Bantam, Signet, Avon — were launched immediately following the war. The key to mass-market publishing was that it achieved distribution through the network of wholesalers that put magazines on newsstands and in local stores (often drugstroes) nationwide. Unlike trade books, which required an agreement between publisher and bookseller to get a copy of any book on a retail shelf, mass markets were “allocated” by the publisher to the wholesaler and in turn pushed out by the wholesaler to the racks they controlled.

The advantage of this distribution technique was that it enabled lots of copies to be pushed out to lots of places with much lower sales and distribution costs. The disadvantage was that it really only worked if books were treated like magazines, with “on sale dates” when they went out and “off sale dates” when they were pulled back and, like magazines, had their guts pulped while only the covers were returned for credit.

The paperbacks were typically priced at 25 cents when hardcover books were $2 or $3. (Compare that 8-to-1 or 12-to-1 pricing ratio to what exists today. It doesn’t.) And mass-markets were available in tens of thousands of locations nationwide, perhaps more than a hundred thousand, when bookstores were few, department stores tended to have only one location, and trade books were typically available in hundreds of locations, or at most a couple of thousand.

The much more widespread availability of these titles combined with their much lower prices created legions of new readers. And, in the beginning, most mass-markets titles tended to fit into “genres”. Westerns were a really big one fifty years ago. Bantam’s perennial bestselling author of westerns, Louis L’Amour, may still be the biggest-selling author in unit sales in (what is now) Random House history. Crime and science fiction lines were also popular as were raunchy books. I’m not sure that romance lines existed in the way they do now (although I’ll bet that among the readers of this blog are people who will tell me that answer); at that time there were lots of magazines peddling romance stories (as there were for other genres.)

If this is ringing some bells for an observer of the ebook transition who didn’t know paperback history, it is entirely intended to. Let’s ring a few more.

The hardcover publishers were very snobby about the paperback houses. Over time it developed that the mass-marketers were able to create enormous additional revenues from books previously published as hardcovers. (This did require the mass-market publishers to keep some titles on sale for longer than a normal cycle, which was not simple, but worth the trouble for books that sold really well.)

The name recognition of successful books, along with the ability to put words which said “established bestseller” on the cover, could be converted into huge sales given the much lower prices and much wider distribution mass-market could achieve. Over time this led to rapidly rising paperback license payments from paperback publishers to hardcover publishers. These were, by traditional contract, shared 50-50 with the authors. They provided a substantial, if temporary, bonanza for the trade houses in the 1950s, 1960s, and 1970s.

But the new marketplace also led to the growth of genre authors whose audiences were established for low-priced paperbacks. It was often difficult for those authors to move “up” to more expensive hardcover publication. Their audiences didn’t want to pay the higher prices, but they also didn’t necessarily shop in the bookstores and book departments where those books were found; they were used to buying their books at newsstands and in drugstores.

When I was first coming into New York from the suburbs as a kid in the late 1950s and early 1960s, there was a fabulous selection of paperbacks at a drug store that occupied the corner location in the Grand Central building at 42nd Street and Vanderbilt Avenue. I found a series of baseball biographies there published by Sport Magazine. I remember a book about 1001 things you could get for free by writing away for them. And, of course, the public domain classics were all there. And I got some great trash like “I Sell Love” and a book about airline stewardesses whose title now escapes me but which was great naughty reading for an early teenager.

Then in the summer of 1962, when I was 15, I worked a 2-month stint at the very classy Brentano’s Bookstore on 5th Avenue and 47th Street. My assignment was downstairs in the brand new, just-opened, paperback department. The center of the basement contained the “trade” paperbacks, mostly academic, on shelves. Around the outside were the mass-markets in racks. The mass-markets were on racks arranged by publisher, because the publishers’ reps serviced them on a weekly basis.

Scribners Bookstore, across the street, didn’t deign to stock paperbacks for some years thereafter.

My dad, Leonard Shatzkin, told a story about the legendary Jason Epstein’s Anchor line of paperbacks at Doubleday (perhaps the first line of quality, or trade, paperbacks, but almost certainly the first such line to come from a mainstream trade house). Dad’s responsibilities as Director of Research extended to the sales force and he ran the sales conferences. At one such conference when Anchor Books (and Jason) were very young, Dad told me that Sid Gross, the head of merchandise for the company’s Doubleday Book Stores, tore into the whole concept of the cheap paperback. He hated them. From his perspective, it was bad for a book retailer to be selling 25 cent items instead of $3 items! Many other booksellers back then felt the same way.

My father’s reaction, pretty typical for him, was to support the contrarian and revolutionary view. He pushed the reps to make Anchor Books a success and, a few years later when Epstein had moved on to Random House, Dad created the Dolphin Books line of quality paperbacks to complement Anchor, whose title selection was pretty highbrow, with public domain and more popular current titles.

That anti-paperback snobbery was widespread and the separation between trade and mass-market publishing persisted for a long time. For at least a couple of decades, paperback houses didn’t do hardcovers and didn’t try to put their titles directly into bookstores (as bookstores started to carry mass-markets, at first they bought them from the wholesalers who racked them) and the trade publishers didn’t try to access the mass-market distribution system. This changed in the 1970s. First Peter Mayer and Bill Shinker pioneered the use of mass-market techniques for oversized trade paperbacks published by a mass-market house (Avon). Then a few years later, Bantam starting publishing hardcovers with distribution to mass accounts.

In the end, mass-market distribution was dismantled by a number of forces. The best retail accounts started buying direct from publishers rather than through the local wholesalers. The number of titles grew so that the “allocation” methods wouldn’t work anymore; there were too many publishers and too many titles for a diminishing number of pockets to handle, so the more expensive negotation method became required.

Patterns are being replicated now with inexpensive and widely-available ebooks. New authors are being spawned. Genre fiction works best. Books that were previously successful in more expensive formats can find new audiences as their prices come down and they go where new customers are shopping. And traditional publishers are sure that their “quality” protects them from low-brow competition, even while that competition is taking millions of customer dollars and countless hours of customer mindshare off the table.

But here’s how that old story ended. Mostly, the mass-market publishers won. Penguin bought Viking. Bantam bought Doubleday and then Random House. Simon & Schuster survived largely because they merged very early with Pocket Books. What is now Hachette is largely called Little, Brown, which was a hardcover house, but it really developed over the last two decades of the 20th century as Warner Books, a mass-market house. Really, only HarperCollins and Macmillan of the current Big Six are true descendents of the trade publishers that were dominant when mass-market publishing arose.

There are a slew of differences between the transitions; ebook publishing has a title glut to deal with just like mass-market did, but the challenges are not the same when you don’t have printed books to manufacture and ship around and your distribution isn’t limited by shelf space or pockets to display them. And authors couldn’t do it themselves in the mass-market era the way they can today. But there is a very basic lesson I think publishers better take on board from this history.

Much-less-expensive editions, combined with access to audiences for authors that couldn’t get past the gatekeepers in the established houses, can create millions of new readers that weren’t available to the legacy products at the legacy prices.

And that can lead to economic power that can ultimately swallow up large chunks of the legacy publishing establishment.

I posted more than six months ago that I had read my first self-published ebook, a history of the 1962 New York Mets called “A Year in Mudville”. Then I had an exchange in the comments string of my last post with Joe Konrath, who used to be published by NY publishers but is now finding it much more lucrative to do it himself, and a reader named Chris. They urged me to read a self-published ebook bestseller, “Wish List” by John Locke. It was fabulous, sort of a cross between contemporary bestselling author Carl Hiaasen and a relic of the early mass-market days, Jim Thompson: bold, caustic, and funny with characters you like who suddenly do outrageously anti-social things. Locke has apparently come out of nowhere with just his talent to help him and is selling shedloads of ebooks. (He’ll certainly sell another one or two to me!) I am not price-sensitive about my reading and I haven’t ever shopped the 99 cent pile, but Locke is certainly evidence that there is stuff in there that is the equal of anything the big publishers are doing at major multiples of that price point. It will be an interesting challenge to see if any major publisher can deliver enough added value to make a deal with Locke or Amanda Hocking, another writer who has found a huge market without any help from the establishment.

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Now the Big Six are all selling ebooks on the agency model. Random House has joined their five competitors.

It is almost a year since Apple launched the iPad, opened the iBookstore, and delivered big publishers an opportunity to rewrite the rules of the ebook marketplace, at least for their books and at least for a while. As readers of this blog almost certainly know, five of the top publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) used the opportunity presented by Apple’s arrival on the scene to implement the change to agency for all their customers. Random House, for reasons that made sense to me at the time and almost certainly delivered some competitive advantages to them over the past year, judging by the open annoyance of many of their similar-sized competitors, stayed with the original wholesale model.

The competitive advantaged stemmed from the fact that all the agency publishers “forced” a 30% selling margin in to the ebook retail channel whereas Random House may actually have drawn margin out of the retail channel.

Here’s what I get out of this change.

1. Agency has been successful in cracking Amazon’s hegemony over the ebook market. A year ago, it seemed possible that Amazon could have an enduring 75% or 80% of the ebook market. While they’re still the biggest piece, and almost certainly have more twice as big a chunk as anybody else, agency has enabled real competition to develop from the iBookstore, B&N’s Nook, Kobo, and Google. And the independents served by Google, Ingram, and Overdrive all over the world offer a lot of potential marketing leverage, if they’re not driven out of the game by price competition. Amazon is still the behemoth, but they’re no longer the only game in town. Agency delivered competitive advantage to Random House, but also to Amazon. If they had continued to be 80% of the market, you might not be seeing this switch.

2. Google may not (yet) be selling a lot of ebooks (as in having a big market share), but they are opening the business up to more and more independents. Independents talk to sales reps, and Random House has more sales reps than anybody else. I would imagine the company began to feel some discomfort about the feedback they were getting from the retail network they very much want to keep alive.

3. So far, none of the major publishers has taken the step of aggressively selling ebooks direct to consumers online. But they’re ultimately going to have to. You may recall that Random House’s CEO, Markus Dohle, told me last summer that he realized publishers needed to become B2C. He wasn’t suggesting he’d sell books direct-to-consumers then; in fact he insisted that there were other ways to manifest that vision other than selling direct. But, if it ever enters your mind to sell direct and you think about it for fifteen minutes, you realize that you either have to do it under agency terms or face complicated and very troubling conversations with your retailers.

And here’s what I’m watching for.

So far, as near as I can tell, there has been very little use made by the big publishers of their ability to manage prices in the market. I am not aware of much experimentation. I am not aware of any direct-marketing or dynamic pricing expertise (both of which would be relevant) being brought on board by major houses to help them realize the potential of the opportunities. And I can only think of one senior executive I know who takes much of a personal interest in pricing dynamics.

Maybe Random House will be different. They’ve been the traditional industry leader in operations and analytics. They do vendor-managed inventory for retail accounts; I’m not aware of any other major publisher who does. They’ve done sophisticated supply chain management for years.

Now they’ve had the advantage of seeing what their competitors have done, and not done, over the first year of agency pricing. It will be worth watching to see whether they approach the pricing opportunity more energetically than the other publishers seem to have done so far.

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