Random House

Agents work for authors and sell books (mostly) to big general trade publishers, but there’s really a partnership at work there. Nearly all the books big publishers buy, and almost without exception those for which big money is paid, come to them from agents. There’s a symbiotic dependency between them.

Publishers depend on agents to sort through the possibilities to discover new talent, develop proposals to a professional level, and handhold and cajole the author through the lengthy process of actually delivering the manuscript a contract calls for. Agents live in a world where the big publishers are really the only source of substantial revenue.

So they have lunch a lot to discuss what amount to joint efforts. I don’t know if it is unique to publishing, but our industry’s convention that the buyer (the publishing editor) pays for the seller’s (the agent’s) lunch must be very unusual. By constantly monitoring what the editors are looking for and are inclined to buy and each house’s current frame of mind of what will work and what won’t, agents get the information that, in turn, directs them to what will sell. What will “sell”, to an agent, means what people who are personally known will want to buy. It doesn’t require the agent to think in terms of what the public will buy; that’s the publisher’s job. The agent’s job is to deliver what the publishers have decided is commercially viable.

There is, in general, a great deal of mutual respect here. Obviously, there is a point where the partnership becomes adversarial: publishers want to pay as little as they can for books and agents want to get as much as they can. But, in general, these competing interests are resolved in ways consistent with the need both sides have to continue working together in the future. There are only six very large houses and only a small handful of others that can occasionally play at that level. And while the agent community is somewhat less consolidated (you can be a very successful agent with only one or two big clients; you can’t be a very successful big publisher with only one or two big authors), both sides do each deal knowing there will be a next deal they’ll want to do with each other coming along soon.

This symbiosis is important to remember when we consider that one of the big publishers’ defenses against disintermediation is their ability to curate, to filter. There is a school of thought (which is an attractive one to publishers thinking about their role in the increasingly digital world of books) that when content choices become more plentiful, reliable branded filters become more valuable. All sides recognize that the principal brand value lies with the author. I am increasingly coming to the view that the big publisher name — Random House or Simon & Schuster — also communicates “value” to the consumer, although it doesn’t describe the potential reading experience with anything like the specificity that the author name does. The agent name, of course, means nothing at all to the public. So the publisher is essentially getting credit for a filtering process for which they are the last step after agents have done a lot of weeding out before them.

Two years ago, when we were organizing the first Digital Book World conference, we foresaw that ebooks would lead to much cheaper and more accessible self-publishing opportunities that some authors, at least, would be keen to explore. When we started to organize a panel on the subject, we learned that the rules of the AAR (which is, effectively, the agents’ trade association, although it doesn’t act as such in many ways because of its highly independent-minded membership and the potential for restraint-of-trade violations) were interpreted by many to mean that agents could neither set up publishing operations nor charge authors for services. In that ancient time, very few agents would openly discuss the possibility of working with authors in anything but the time-honored way of selling their proposals to publishers on commission.

But times have changed. A quick check of recent news and announcements in our office turned up nine agencies with announced digital propositions. These range from Waxman Literary Agency’s Diversion Books, an ebook publisher, to the Ed Victor Agency’s Bedford Square Books publishing arm working through Open Road, to, in most cases, consulting services for the agency’s clients on ebook development and distribution.

The other seven on our list right now are The Knight Agency, BookEnds, Dystel & Goderich Literary Management, McDermid Agency, Levine Greenberg, Curtis Brown UK, and Andrea Brown Literary Agency. There are certainly some we’ve missed. And there will undoubtedly be more in the weeks to come.

The Knight Agency did a really nice job of laying out the suite of services they’re going to provide through their offering. It’s very impressive, including content editing, line and copyeditor referrals, ISBN number assignment, copyright registration, cover copy, cover design and consultation, file conversions to ePub and mobi, uploading files to major retailers, dynamic pricing, metadata, search engine optimization, marketing plans, subsidiary rights, royalty tracking and payments, oversight of existing contracts and obligations, and, down the road, arranging for print publication through POD or other means.

But what really surprised me was that the Knight Agency says they are absorbing all costs except copy-editing and working for 15% of the revenue. The range of services they are offering, even without the copy-editing (which can be anywhere from $500 to $3000 or more, depending on the length and complexity of the manuscript), requires real humans to spend real time doing the work. They seem to be offering to design the cover at their expense, which is a value of anywhere from $200 to $2000. The Knight Agency is undertaking a substantial investment in each book that will be done in this program and, if I’m reading them right, will only get that money back at 15 cents on the revenue dollar before they earn any profit.

That’s a commitment! And even though the service is being offered only to existing clients of the agency (at least for now), it’s an impressive one.

So with that context, I’d offer a few observations.

I don’t know what other agents have planned, but Knight has definitely thrown down a marker that other agencies will be highly challenged to match. (Of course, the first thing to see is how well Knight can do against their own checklist!)

Many of the agents, but not Waxman with Diversion, are specifying that their services are only for existing agency clients. That’s a good way of putting a toe in the water and it’s a good way to minimize the concern of publishers. But it’s not likely to last as the policy for any of them that do this kind of work successfully. If their ebook publishing services actually work and the business is shifting in that direction, why would you turn down an opportunity that came from outside the client base. Why would you turn down the opportunity to offer the same suite of services to all the clients of some other agency that doesn’t want to build this themselves? (That’s an opportunity almost certain to arise for all of them.)

Publishers are also working on self-publishing services. Distributors have been noodling for some time about packaging these services for agents. Knight has promised to do a lot, including a substantial per-book investment, for 15% of the revenue. Are any of these other players now going back to the drawing board to reconsider their pricing? I would think so.

How everybody is going to feel about these agent service offerings is going to depend a lot on how they’re used. To the extent that they are used as leverage by authors with big backlists to push publishers to higher ebook royalties, the big houses won’t be pleased with them. But if they turn out primarily to be “farm systems”, giving exposure and building awareness for an author who can then “graduate” to a “real” publishing deal, everybody might be all smiles. If that’s what happens, these services become something like the new digital world’s equivalent of an agent getting an author to write a piece for the New York Times Sunday Magazine or to start blogging to build a following: a career-building step that leads to a major house. If that ends up being the prevailing effect, everybody will be smiling.

Let’s remember that Amanda Hocking went from self-publishing to a major publisher deal and that Barry Eisler decided that taking Amazon’s offer to publish him was more appealing that truly doing it himself.

Perhaps for as long as five or ten years, the print component will remain an important part of any book’s total revenue potential. None of these agents can do much to help there (although a distributor could.) Even if what Knight offers turns out to be high quality across the range of services and what they’re offering to cover out of their pocket versus what they’re planning to take in revenue is sustainable (hard to say from here), they’re still going to want to sell lots of books to publishers. Will this service offering help them or hurt them in that regard? Will publishers see them as developing competition? Or will the commercial proposition of each book on offer remain the key element of each negotiation?

We’ve come a long way in the past two years, from a time when many agents thought getting involved with self-publishing was a non-starter to a moment now when, in the words of one agent I spoke to last week, “none of us has any choice” but to provide digital publishing advice or capabilities to their clients. The next two years will probably bring much more change than that.

We’re putting together a new Publishers Launch Conferences show called eBooks for Everyone Else for both New York (on September 26) and San Francisco (on November 2). More details will be announced shortly. “Everyone else” is anybody without an IT department, and we always knew agents would be an important part of our audience (along with authors and small- and midsized-publishers) and our program. Looks like that show will be very well timed.

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A big ebook shoe dropped on Sunday. It dropped on Kobo first. And it has nothing to do with Borders.

Kobo just delivered a new iOS (that’s Apple’s operating system for iPad and iPhone) app that no longer contains the direct link to the Kobo bookstore within it. That means that buying new Kobo books requires going to Kobo.com through the browser (not hard, but additional steps) rather than from a single click from within the app.

Later news on this developing story is that the Google app has been “pulled” and that the Nook Children’s app no longer has a link to the store. We have to expect that the Kindle and main Nook apps will undergo the same change very shortly. That will mean that the simplest and most seamless way to buy and read ebooks on the iPad or iPhone will be through Apple’s iBookstore. It will almost certainly mean a growth in iBookstore market share at the expense of all the other ebook retailers. It will also almost certainly mean that a lot of people who read their ebooks on an iOS device (I’m one of them) and prefer to use any of the other ebook retailers (and I’m one of those too) will be inconvenienced and annoyed.

However, it is also true that Apple will benefit from this move that many of their customers will resent.

The point most emphatically made by all of this is that the book business is a cork floating on a digital device stream. We don’t control our environment. We must keep adapting to what bigger players, some of which have pretty minimal bandwidth to engage us in a dialogue and pretty minimal interest in what’s best from our point of view, see as the best strategy for them.

I have been guilty of a publishing-centric view of the possibility that Apple would enforce the rule that leads to this change since it was first prominently rumored last February. That is: with wishful thinking, when I first heard about this possibility six months ago I thought they wouldn’t do it. I talked myself into believing that because Apple had benefited substantially from the presence of the book apps on their platform, and because there are millions of us who read ebooks on our Apple devices with a distinct preference for using other readers and other ebook stores, that Apple would not enforce the rules which, through a couple of iterations of clarification, say that the way these apps and stores operated was outside their rules.

I will try to remind myself not to be making that mistake again. One of the other big companies recently congratulated me on the ease with which I accept the idea that companies (and people) act in their own self-interest. That’s what Apple has done here.

What this means depends very much on where you sit.

Barnes & Noble (Nook), Google, and Kobo all benefited enormously from Apple’s arrival on the scene in April 2010 because they brought with them the “agency” sales model that leveled pricing across all outlets for the ebooks that come from the biggest publishers. Without agency, many believe (and I’m one of them) that Amazon Kindle’s aggressive loss-leader pricing policies on the biggest books would seriously have diminished the competition.

B&N needs every penny it can spare to invest in device development and marketing; they’d be seriously handicapped if they had to give away margin to compete for consumers.

Google has signed up about 300 independent stores in the US to be partners in its ebook program. They might not have 10% that many if the indies thought they had to compete with loss-leader pricing on the biggest books even to play. When Random House switched over to agency at the beginning of March this past year — 11 months after it began — one of the motivations they cited was to respond to the desire of independent stores to sell ebooks which they heard over and over again depended on agency pricing.

Kobo has always had a global strategy that could enable them to thrive even if they had also-ran status in the US market. But they were trying hard to compete with Amazon pricing in the pre-agency days and as the smallest of the big global ebook players, they would have to be considered the most vulnerable in an environment characterized by loss-leader price warfare.

This change must mean they’ll all lose sales. It is hard to see that it could mean anything else.

Amazon will lose sales too, but they may win overall just because life gets a bit harder for B&N, Kobo, and Google.

All of these retailers have gotten an enormous (but unquantified in data revealed to them) lift from the massive success of iPads and iPhones and the retailers’ ability to access all those devices pretty seamlessly and at no cost. Amazon and Barnes & Noble sold many Kindles and Nooks, of course (Kobo’s device has been a competitor and Google is about to have one), and they’d be selling lots of ebooks if there were no iOS devices. Publishers know that, of the 55-65 percent of their ebooks sales that go to Amazon and 20-30 percent of their ebooks to Barnes & Noble, some of those sales go to the dedicated devices and most of the rest to the iOS devices. But they have no idea what the split is. Now they will start to find out as they see those sales shift from the other retailers to the iBookstore. (Sales to iBookstore, Kobo, Google, and others constitute no more than 15-20 percent of sales and often far less.)

Anyhow, the unambiguous benefit that Apple and the iOS devices used to represent to the retailers is now reduced in value, but agency pricing remains (cheering everybody but Amazon), as does the ability of their customers to use iPads and iPhones to consume their content.

Some publishers will need to reconsider their strategies.

Because Amazon will only allow agency terms to the Big Six publishers (they have ways to offer a competitive 70% share of sales, but they won’t play ball with giving up control of pricing), because some publishers aren’t comfortable with the agency model, and because the iBookstore has not been as aggressive about sourcing content as their competitors (I don’t know this for sure, but it definitely feels like all of the other ebook players have much bigger teams chasing content than iBookstore does), there are publishers selling to the other players and not to Apple. I’d imagine those might be expecting a sudden drop in sales through iOS purchases, although they never actually knew how much of their sales were iOS purchases.

And this points out a big difference between the publishers and the retailers. The retailers know how much of their sales are coming through their app customers. They also know how much of the reading of their ebooks is done on iOS devices. Publishers have no idea. In the longer run, this shows how publishers can benefit if the new players they are creating — Anobii in the UK (who has told us they will share data with publishers) and Bookish in the US (which we have heard less directly will do the same) — get some market share and can provide visibility into consumption that publishers do not have now.

And that takes me back to the book business cork bobbing in the larger digital device stream. There was no ebook business to speak of until Amazon delivered the Kindle device, put massive muscle behind selling it, and used the ability they had then to sacrifice margin to create a powerful commercial proposition that was the catalyst to create the market. There was no serious competition for Amazon until Barnes & Noble’s new management delivered the Nook with an equally powerful commitment to establishing it, using their presence in stores to introduce ebook reading to new audiences and, with further innovation of the devices, contributing to the explosive growth of reading in digital formats.

There was no restraint on Amazon’s ability to use their deep pockets to discount publishers’ content in pursuit of their own market share growth until Apple’s new device, the iPad, created a whole new sales model that forced price stability in the marketplace and, at the same time, handed publishers a new capability to maximize revenue and to use price as a marketing tool.

There was no effective way to introduce book readers to the convenience of digital reading without the investment in a dedicated device until the iPad put the capability into millions of hands that didn’t know they wanted it.

There was no great motivation for ebook retailers to introduce interoperability across devices until many ebook device owners also became iPhone and iPad owners.

We note that all these changes in the marketplace were created by others, not by publishers. That’s not necessarily a bad thing, or even a new thing. Publishers also didn’t spring for the investment that created superstores and then Amazon in the 1990s, all of which increased their sales. A publisher’s role is to use the channels that are available to get books into the hands of readers.

From most publishers’ perspectives, this change might have very little impact. Any iPad or iPhone reader who wants a book can still find and buy one. If the Apple store is strengthened at the expense of Kindle and Nook, that constitutes marketplace diversification that is good for them. (If the impact somehow fell disproportionately on Nook, though, that might not be.)

But the happy symbiosis between the ebook retailers and Apple, by which the retailers got access to customers they would not otherwise have had and Apple was able to readily deliver their customers content they hadn’t otherwise aggregated, appears to have come to an end. And the iBookstore, which had been fighting others for the scraps after Amazon took half or more of the US ebook market and B&N took much more than half the rest, is about to be a much more significant competitor.

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I have always been in the process of reading at least one book since I was about 8 years old. When I was a little kid, I’d find them in the house (Dad was in publishing) or at the library in my home village of Croton-on-Hudson or in the school library. Sometimes extraordinary measures delivered a lot of reading material. On the fourth to the last day of second grade, I got the chicken pox and was in bed for a couple of weeks. I had already developed an affinity for a Random House series of children’s books on American history called Landmark Books, which are still available. Dad knew the person at the printer responsible for the Random House account and a box of 40 of them arrived the day after I was diagnosed and was completely read through by the time I was back on my feet.

When I was in junior high school, I found that a big drug store in the retail space at 42nd and Vanderbilt in Grand Central Station had a massive selection of mass-market paperbacks and that became a shopping destination for me for a while.

As an adult, the shopping and discovery moved to bookstores. And although I did occasionally get my ideas of what to read next from book reviews or friends’ recommendations, usually I just shopped. I would go browse American history or biography or sports (baseball always had its own shelves within sports).

It never took me much time to find what I wanted to read next until I started reading ebooks.

In the pre-Kindle ebook era, I was a captive of the Palm Digital store, because I read on a Palm and their commercial approach was to not allow other retailers to sell their format. The choices were limited because the publishers before the arrival of Kindle were reluctant to make the investments required to deliver ebooks to me and the four other people who read them at the time. That changed immediately when Kindle arrived and, because of Kindle and the other major formats that have hit the marketplace since then, the choices are robust. Just about every new book I’d want to read is available for my device of choice (the iPhone) and the digitization of the backlist just carries on going deeper and deeper into publishers’ repositories.

But the merchandising, at least for somebody who shops on the iPhone (it’s a bit better through the ereading devices or PCs), leaves a lot to be desired. My shopping experiences are actually a bit of a random walk. I ask my ebook retailer to show me books by category and, since my categories don’t change much (and haven’t since I was a kid) I tend to see the same books over and over again, far too many of which I have already read (perhaps in somebody else’s format.)

A short time ago I was shopping for my next read on the iPhone. I started out shopping with Kindle and then Nook and a few minutes on each of their mobile sites didn’t turn up anything that moved me. Then at Google Ebooks I found “Making of the President 1968″ by Theodore White. That was definitely one I wanted to read. I bought it and I’m in the middle of it.

There is no particular guarantee that I’ll find my next book on Google. I haven’t found any clear pattern yet among the four stores I shop regularly (Kobo being the fourth). Obviously, if I know I want to read another James Patterson or John Locke thriller, any of them would deliver it to me quickly and painlessly in response to a search. It is when I am hunting by subject that the search returns seem to be pot luck. I’m probably not making it any easier on the retailers by spreading my shopping around; if any of them actually did have a good engine to take my purchasing and reading profile and make the next great recommendation, I’d be screwing it up by spreading around my data.

All of this underscores how difficult is the challenge being faced by Bookish in the US and aNobii in the UK, two “find what to read next” sites financed by major publishers. And they join a long line of sites that have tried to build recommendations and community conversation around what people are reading: Goodreads, Shelfari, Library Thing, and the new ebook platform, Copia.

It happens that our office is now going through the exercise of placing the book of “The Shatzkin Files” on platforms other than its originator, Kobo. (Kobo’s 60-day exclusive is about up.) When we encountered a limit of seven keywords in loading process for Kindle, I inquired about it. Why limit this, I wondered?

I got a good answer when I asked. It turns out that any author or publisher’s inclination would be to put in lots and lots of keywords. That was my intention. I was going to take every keyword from every post and put it in for the book. But, on reflection, as my friend at Amazon pointed out, that really wouldn’t be helpful to the reader who was searching. The fact that one blog post is about a holocaust survivor doesn’t mean that somebody searching under that topic would want my book, of which more than 99% is about things totally unrelated.

It turns out that Amazon uses algorithms created by full text searching to enhance what they can deliver in response to searches in ways that the publisher and author would not necessarily think about when creating metadata. As an example, he pointed to a book that you’ll discover on Amazon if you search  for “erasure coding”, a term of art that might very well not have been included by any author or publisher inserting keywords but which their more sophisticated methods enable you to use for discovery.

My friend at Amazon didn’t say this, and maybe I’m reading too much into what they do, but it almost seems like the keywords we put in could be superfluous and the capabilities they have through full-text analysis and algorithms actually govern what is discovered. Of course, if the solicitation of keywords from authors and publishers is a placebo, that’s not something I’d expect them to reveal.

I was just looking for “American history” when I found “Making of the President 1968″ on Google (and didn’t find it anyplace else in the time I allotted to look.) So Amazon’s sophisticated capabilities didn’t deliver it to me and now their engine doesn’t know that this was a book I wanted because I bought it someplace else.

But I’m really glad I found this book, which was probably pretty recently made available in ebook form. I was active in that campaign and at the Democratic Convention in Chicago, where I was Pierre Salinger’s assistant on the first McGovern campaign. (George McGovern declared late to give the Bobby Kennedy supporters who couldn’t abide Gene McCarthy a place to go. I had been one of those; I left the Ambassador Hotel an hour before Kennedy was shot on June 4, 1968 because the security was tight and I couldn’t get into the party. Ironic.) The author of the Making of the President books, Theodore White, was a friend of Salinger’s and I met him at the convention. But I’m saving the stories of that campaign for another post on another day.

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Amazon began a program on June 1 that will apparently run for two weeks. When you go to the Kindle home page, there’s a banner across the top reading “Sunshine Deals, Over 600 Books on Sale for $0.99, $1.99, and $2.99″.

These books are not from the big agency publishers, who set their own prices. Amazon apparently reached out to smaller publishers and worked out deals with them. Amazon could have simply cut these prices themselves, but doing that would require them to take a big margin hit. More likely, the markdown is being shared. (And, in addition, Amazon has plenty of books priced in that band all the time that could simply be featured in this promotion.)

Amazon gains a great price promotion. The publishers in question gain substantial additional visibility for their titles.

Fortunately, there is one entity tracking the impact of price on ebook sales able to tell us: this is having a real impact.

Dan Lubart of iobyte’s “eBook MarketView” blog tracks ebook sales rankings by price band at Amazon. (He tracks it at other retailers too, but, in this case, Amazon is the one that matters.) Dan’s graph tracking the average price of Kindle bestsellers shows a pronounced impact from this promotion.

The average daily price of Kindle bestsellers took a leap on March 1 when Random House moved to agency and a whole slew of bestselling titles could no longer be discounted by Amazon. The Sunshine promotion has very suddenly brought that average bestseller price down to about where it was on March 1!

Dan has another chart showing the distribution of bestsellers among four price bands: up to $2.99, $3-$7.99, $8-$9.99, and $10 and up. Most agency-priced ebooks of titles whose currently available print versions are hardcovers are in the top two price bands. Since the promotion began, the number of bestsellers in the cheapest band has grown from 31 to 47. (He’s charting the top 100, taking out anything that he recognizes as “not a book.”) Half of the increase came out of the top-priced band with the other half distributed between the middle two bands.

In a conversation with Dan about this research, he pointed out that what he’s tracking is ranking, not sales. The movement of titles on and off and up and down on the bestseller list (top 100 rankings) doesn’t tell us anything about unit sales. That’s the piece of the puzzle that the publishers do know (for their own books).

There are a some critical points here, all of which are more important than they are surprising.

1. Amazon can create pricing promotions that will have an immediate and dramatic impact on the ebook bestseller list. (We observed three months ago that publishers might suddenly have a pricing problem with bestseller lists.)

2. Agency publishers are disadvantaged by this fact. The only way they can participate in a price promotion with Amazon is if they lower their agency price across all retailers (which isn’t going to be that exciting to Amazon). On the other hand, publishers on wholesale terms have much more flexibility to “buy into” a promotion (although that flexibility isn’t complete: Robinson-Patman would probably require them to participate in similar promotions with other retailers if other retailers wanted to create them).

3. Since Amazon has demonstrated so clearly that price has a major impact on ebook sales, and since agency publishers can control their prices, it follows that agency publishers need to be experimenting with the impact of price promotion (as self-published authors have already been doing, by the way).

But experimentation only makes sense if you can evaluate the results of what you test. As far as we know, the iobyte database is the only tool that exists right now to help publishers do that. That’s why we’ve started to work with Dan to introduce what he’s doing into the routines and workflows of the major houses.

One observer of Amazon’s new program speculated that it might be a step toward “dynamic pricing”, which is what airlines and hotels use to maximize their revenues for seats and rooms. I’m not sure that forecast makes sense. Airline seats and hotel rooms are limited in number; if you sell one too cheap, you can’t sell it to the next person for more money.

But ebooks are infinitely replicable. The trick for the airlines and hotels is to maximize revenue over a limited — fixed — number of sales. The trick for publishers is to maximize revenues over an unlimited — variable — number of sales. Cutting price to get on a bestseller list that might increase discovery and awareness and maybe generate sales at a newly-raised price is a tactic that almost certainly should be routinely, but not capriciously, employed.

It can’t be a good thing for agency publishers if the only price promoting taking place is with their competitors’ books.

I also discovered looking closely at this promotion that Amazon is not flawless. When I go to the Kindle store on my iPhone and tap on the Sunshine deals, I find lots of agency books listed, which, of course, are not price-promoted. Obviously a mistake — and from my experience a pretty rare one — by the folks at Amazon. (Since I know there are a few readers of The Shatzkin Files in Seattle, perhaps this will be corrected before you have the chance to see it but I first noticed it yesterday — Saturday — and it is still that way as I post much later in the day on Sunday.)

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When Amazon talks about how ebooks are selling in relation to print books, as they did again this week, they are comparing apples to apples. They are comparing what their customers bought in digital form versus what they bought in print in any given period of time.

When PW or the AAP or even the publishers themselves talk about how the industry is doing selling ebooks in relation to print books, they are usually comparing apples to oranges. They are comparing what actual consumers bought from retailers in digital form with what retailers and wholesalers bought from publishers in print form for any period of time. So they are comparing ebooks that consumers actually bought now with print books that consumers might, or might not, buy later.

(It is true that sometimes Nielsen BookScan numbers are referenced in these comparisons and, in that case, they are apples to apples because BookScan measures cash register sales which are legitimately comparable to the ebook numbers. PW, for example, reported that BookScan sales were down 26% for paperbacks and AAP numbers were down 36%, which underscores the effect being explained in this post.)

The ubiquitously flawed comparison is fundamental to understanding many things. It is part of the explanation of why ebook penetration numbers appear to fall sometimes, even though it is counterintuitive that they would.

There is probably a difference in the month-to-month fluctuations in consumer behavior purchasing print and digital books. For one thing, Christmas presents of print would tend to be purchased before December 25 and Christmas presents of ebook-capable devices would tend to result in ebook sales after December 25. (The devices would have been sold before Christmas, of course.) It might be true that people buy more ebooks in the first month or two that they own a device than they do on an ongoing basis.

But analyzing ebook pentration from these numbers is much more complicated than that because we must also take into account the fluctuations in trade ordering behavior which are also partly driven by the publishers’ collective decision about when to issue new books.

As frontlist-oriented as ebook consumption seems to be, the reporting of print book shipments would be even more so because big slugs of of big books are shipped to stores for publication date. Publishers tend to issue far fewer big books in January and February than at any other time of the year. The data suggest that returns fluctuation isn’t as great as shipment fluctuation, but the same returns on a lower sales base yield a higher returns percentage, or a relatively higher impact in depressing apparent print sales.

The lower the print number, the higher the percentage of total sales will be of the same ebook number.

So for the period left in our time of transition when Christmas presents of devices add new digital reading converts — and we certainly have one or two more Christmases like that coming, if not three or four — we can expect ebook sales surges right after Christmas that calm down in March and later.

For the period left in our time of transition when there’s a significant brick infrastructure requiring inventory in anticipation of Christmas sales — and we have some more years of that to expect too — sales of print measured by publisher shipments will look much higher in the fourth quarter of the year than in the first quarter of the following year. Then, assuming the amount of shelf space lost in the post-Christmas period doesn’t cancel out the effect of more big titles coming from publishers in March and after, print sales will rise again.

And for the period left in our time of transition when big publishers continue to slot big books to come in Fall in time for Christmas, hold them back at the turn of the year, and start issuing them again as we move toward the second quarter, and that also most certainly will continue for a couple more years or more because these patterns are deeply ingrained in companies resistant to change of this kind, the ordering pattern of the stores will be reinforced by the issuing pattern of the publishers.

There are always other factors in play. When publishers went to agency, ebook sales briefly went down because the big publishers’ take per copy went down. A smaller version of that impact was just registered when Random House went to agency on March 1. We also have a real impact, if one that is hard to calculate, from the Borders troubles. Publishers aren’t shipping to them, and other retailers are being cautious because so much Borders inventory is competing with them at distressed prices at the moment.

But the apples-to-oranges comparison, where print shipments to the sales channels are lumped with ebook consumer sales for the purposes of analysis, assures us that we’ll see some optical illusions. One of them is the apparent drop in ebook share that will be a seasonal feature of conversation for at least a couple more years.

Next Tuesday afternoon there will be a memorial celebration for the life of Ruth Cavin, the longtime mystery editor at the St. Martin’s division of Macmillan, who died at age 92 in January. It convenes at 5:30 at the Salmagundi Club at 5th Avenue and 11th Street. Ruth was a childhood friend of my mother’s, close to both of my parents from their days in college, and I knew her from my Day One to her Day Last. She was a wonderful person and I hope to see many of the people who knew and loved her at the event.

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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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From the beginning of Digital Change Thinking Time, which for me goes back to the mid-1990s, “subscription” has been high on the list of future expectations. That’s natural. The subscription model has emerged as the dominant one for cable TV (although there is still some pay-per-use) and Netflix works that way as well. Lots of people subscribe to satellite radio. Rhapsody is a successful subscription service for music. Pandora for music has a free model and a paid model, as does Spotify.

Subscriptions actually have a history in trade publishing too, where they were called “book clubs”. The print book club model, which also depended heavily on the club’s role in curation (or title selection), was doomed by the arrival of online bookselling. But O’Reilly has demonstrated the common sense (and worked out the mechanics) of a subscription model for ebooks with their wildly successful Safari program for the past several years.

In the past week, Publishing Perspectives offered up a thoughtful piece by Javier Celaya speculating on a free subscription, ad-supported model for ebooks like Spotify is for the music business. PP’s editor, Ed Nawotka extended the speculation to a model of piecework sales: buying a book in chunks or chapters.

Neither of those is what I have in mind. This piece by John Konczal, building on what’s being done in the textbook business, comes closer.

We’ve reached the point where Amazon with their Kindle and B&N with their Nook are perfectly positioned to make a subscription offer. Publishers will have mixed feelings about it and the agents for the top-selling authors have good reasons to be against it, but the proposition seems (to me) to be one that will be compelling to many consumers and will offer tremendous advantages to the retailer that offers it. In fact, I’m a bit surprised it hasn’t happened already.

Here’s how I imagine it working.

The retailer creates a pool of content that will be offered through the subscription service. The proposition to the consumer will be that for a price (let’s say: $50 a month), they can read all they want from the content pool. In turn, the retailer divides 70% of that money (or 75% or 80%) among the publishers in proportion to how many “pages” (a somewhat arbitrary but internally consistent measure) of their material have been read. Of course, all available public domain content will be in the pool.

I am guessing that a very high proportion of the owners of self-published and small press books will find the proposition attractive from the beginning. How the big publishers would react is less certain. My belief is that the smart ones will try it: put in some titles, perhaps from their deep backlist, to get some visibility as to how the program would work.

Meanwhile, the consumers who do this will determine the course of events from there. It seems possible that the impact of this offer will be similar to the impact of the e-ink readers: the heaviest book consumers will see the greatest financial merit in the proposition. And just like customers for Amazon Prime (one annual fee for shipping) and Kindle or Nook owners are highly resistant to buying outside those programs, customers for this subscription service would largely be lost to other book consumption. It will take a more powerful desire to read any one particular book to make it a purchase outside the subscription than it takes to buy it now.

So that, in turn, will drive more books into the program. Authors, and therefore their agents, won’t want to be left out. The early entrants to the program will reap a relative bonanza because they’re on a shelf with less competition which will drive further expansion of the title base.

The tricky part here is setting the right price. As I was thinking about this piece, a reader pointed out a conversation on the Internet about this subject from a different perspective. Here the question was: “what would you pay to read any book anytime you want?” The bidding seemed to begin at about $100 a month. That strikes me as high, particularly since the pool of titles would certainly lack most high-profile books, at least in the beginning.

But a retailer setting the price too low could cost itself a lot of money. Lots of heavy readers spend more than $40 or $50 a month buying books now and, of course, they’d be the first ones to enter such a program (to save money). The benefit for the retailer would be that those customers would be “locked in” to the service, not buying anything elsewhere.

Of course, this idea runs totally afoul of agency pricing. The publishers who are using agency will have the hardest time even experimenting with such a subscription program. On the other hand, if the subscriber base becomes large enough, it will force some reconsideration.

There are all sorts of wrinkles one can imagine beyond this initial idea. There could be a “premium” subscription that had the higher-profile books, creating a more robust revenue pool for them. There could be “vertical” subscriptions for genres or topics. There could be a special discount for subscribers to purchase books not in the pool (except for agency books, of course, whose terms would not allow it.) And a company like Harlequin or a sci-fi imprint of a major house could create their own in-house pool that might attract subscribers. (In fact, the innovative small sci-fi publisher, Baen Books, already has a subscription service!)

But with ebook consumption now climbing rapidly toward half or more of the sales for many titles, it seems inevitable that models that won’t require a transaction for each and every book must emerge. I’d be a bit amazed if conversations about an idea like this, or something like it, aren’t taking place inside the biggest ebook retail shops already.

We created a “thinking about the future” panel for both of our upcoming Publishers Launch shows. They will entertain the subscription question, among other issues, with an eye to the special complexities of international implementation. At our eBooks Go Global show aimed at international visitors and their trading partners at BEA, the panel will feature Tracey Armstrong, the CEO of Copyright Clearance Center; publishers Ricky Cavallero of Mondadori and Cyrus Kharadi of Random House; and agent Simon Lipskar of Writers House. This panel of four incredibly sharp and thoughtful people, moderated by Ed Nawotka, the editor of Publishing Perspectives, represents a real diversity of viewpoints and will explore the practical barriers to this and other innovations across international markets.

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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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It was just about two years ago that I appeared on a panel at a meeting of agents with, among others, Macmillan CEO John Sargent and Sargent made the point that maintaining ebook pricing and margins was one of the critical challenges facing publishers. Ebook sales were still hovering around one percent of the business. Or maybe two. Nowhere near five. Sargent was prescient.

It was about six months ago that I did a couple of posts on direct marketing techniques. I engaged a publishing friend named Neal Goff, whose background is mostly outside of trade books, to help me with those. I had him walk me through some fundamentals because I didn’t know them and, I feared, neither did the trade houses that were now — because of agency — required to set prices on their own books without the requisite expertise.

It was only last week that Random House announced it was shifting to agency pricing and I said I hoped they would be more ambitious about experimentation with price than their competitors in the arena had been.

All of these thoughts came together for me when I read this post on CNET that has two real wake-up calls in it for the big publishers.

One they are increasingly aware of: very cheap ebooks are selling very well and, with at least two major bestseller lists (The New York Times and USA Today) now counting ebook sales in units for their rankings, there is a real threat that the established business at established price points could be chased from the biggest market-maker there is. (It is important to note that the Times and USA Today methodologies are still a bit opaque and it is not clear how lower-price books are weighted. Some clear successes in the low-price realm haven’t shown up yet.)

The other point is more subtle. Individuals and little publishers are fiddling with price in ways to maximize bestseller positioning and revenues. The rules are complicated. Both Amazon and Barnes & Noble have programs that reward pricing above $2.99 by paying higher royalties. But it would certainly appear that there are many consumers who are limiting their shopping for ebooks to those that cost 99 cents or below. So some authors have learned that cutting their price increases unit sales to put them on a bestseller list, then raising their price results in more revenue. Apparently one very useful strategy for revenue maximization is to shuttle between prices.

The point that “cutting price boosts sales” isn’t exactly surprising, and it also isn’t exactly news. J.A. Konrath, perhaps the first established author to really start raking in shekels self-publishing through Amazon, has been experimenting with pricing and proving this point for a long time. Konrath’s data was charted for clarity by blogger Dave Slusher a few months ago. Konrath’s work and Slusher’s analysis of it further emphasizes the central point Neal Goff made to us. Experimentation matters. (Neal called it “testing.”)

Another author has demonstrated that cutting price is important, and promoting lower prices is also important.

Although I have heard one major publishing CEO suggest that the house is doing some fiddling with pricing, there was no suggestion there of controlled and monitored experimentation. And I believe it is safe to say, without doing any research, that no major publisher is doing that on a consistent and persistent basis, let alone algorithmically-programmed price management such as the major ebook retailers almost certainly do.

There is another hugely ironic point buried in the CNET story. It is built around the work of an author named Christopher Smith, who has mastered the shuttle-pricing technique. Turns out Smith has a new fan named Stephen King. King, of course, has not only published successfully with major houses for decades, he was one of the first great ebook experimenters around the turn of the century when he tried to do author-direct publishing of ebooks before there was a market. King’s blurb for Smith has been very helpful to the lesser-known, lower-priced author.

Might Smith return the favor for King by teaching him the revenue-maximization techniques he’s developed so King can get back into the self-publishing experimentation game? I think that possibility encapsulates the major publishers’ biggest nightmare. Publishers are going to have a devil of a time defending their 25% royalty rate into the future, which just feels intuitively unfair to authors. They can get away with it for the time being because print sales still matter. But they won’t for long and if publishers don’t use their scale to do a better job managing dynamic pricing to extract the maximum revenue from ebook sales than an author might do on his or her own, the challenge of retaining their top talent will become even more difficult.

There is a reasonable suggestion that publishers should be making in a hurry about bestseller lists in the ebook era. In print, books are separated by format (hardcover, trade paperback, mass-market) by The Times and identified by format by USA Today  so that apples-to-apples comparisons are possible for consumers. It is really a stacked deck to rank on unit sales alone any book at 99 cents and Ken Follett’s bestseller “Fall of Giants”  at $19.99. Format in print creates a reasonable proxy for price. I think price-tiered bestseller lists would be a stretch, but going to the movie studio “box office” concept would not. Publishers, while they still have clout as advertisers in media that promote bestseller lists, should suggest a “units times price” ranking as one that provides a more useful comparison for many consumers.

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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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