Shortcovers

It is customary for those of us who do crystal-ball gazing to make some calls about the year ahead at around the time the celebrants head for Times Square. I am not a man to flout custom. Here are some of the things I expect we’ll see in 2010.

1. At least one major book will have several different enhanced ebook editions. This will result from a combination of circumstances: the different capabilities of ebook hardware and reader platforms, the desire of publishers and authors to justify print-like prices for ebooks, the sheer ability of authors and their fans to do new things electronically, and the dawning awareness that there are at least two distinctly different ebook markets: one just wants to read the print book on an electronic screen and the other wants links and videos and other enhancements that really change the print book experience. (Corrolary prediction: the idea of an enhanced ebook that is only sold “temporarily” in the first window when the book comes out, which has been floated by at least one publisher, will be short-lived. Whatever is made for sale in electronic form will remain available approximately forever. Or, put another way, if you have a product that requires no inventory investment that has a market, you’ll keep satisfying it.)

2. Here come some new retail book outlets, but can publishers afford the risk of selling to them? The growing incidence of bookstore-less cities will provoke the mass merchants to explore a greatly increased title selection inside their stores as a magnet to attract disenfranchised bookstore customers. The early emphasis will be on children’s books and illustrated how-to: books for which there is high value to seeing them before buying them. They might even see this expansion as a margin-booster because if they’re responding to scarcity (as they would be), then discounting might not be as necessary as it is with their bestseller-only strategy now. Publishers will be wary of this new initiative, knowing that it could fail and lead to large returns but it will be on the drawing boards by the end of 2010.

3. Thanks to digital, there is no minimum length for a book anymore. Ebooks that are too short to be print books will become a real factor in ebook sales, opening up new opportunities for publishers but even more for authors. Short fiction is already well established in the romance genre and some major publishers have broken out stories from anthologies as separate items to be sold on Kindle. In 2010, authors and agents will discover that shorter-than-a-book works can be the subject of useful experimentation and learning through electronic publishing and, by the end of the year, it will become a frequently-employed device. Periodical media (newspapers and magazines) will also see this paid delivery mechanism as an alternative worth experimentation for them as well. After all, if a big publisher can unbundle a short story anthology to sell the individual stories as Kindle editons, why couldn’t The New Yorker sell the short fiction it publishes that way as well? This concept has been tipped by the announcement in 2009 than the web site Daily Beast will be delivering shorter books in a timely manner through electronic distribution.

4. Ebooks will require a new industry directory (and it won’t be printed.) Driven by new entrants in the field, self-publishing, and unbundled aggregations of print books, the gap between the items listed in “Books in Print” and the items that should be listed in a directory of “Ebooks Available” will continue to grow. There has been a robust conversation in a corner of the book community about whether all ebook editions need ISBNs, but that’s really only one part of a much larger metadata problem. In 2010 we are likely to see at least one serious effort to deliver a new online directory for ebooks.

5. Big publishers start to match their offerings to their marketing capability. The rearrangement of the big publishers’ IP portfolios will begin in 2010 as they emphasize what they do best: deliver narrative-writing and children’s books to multiple outlets in large quantities. This reshuffle will only begin to be evident in 2010, but we will see small slices of big publishers’ lists sold or licensed to specialist small publishers and we will see the beginnings of genre consolidation among the big publishers, with some publishers beefing up and others exiting romance, science fiction, and mystery. In 2010 the latter will take the form of list growth or cutbacks, not the sale of whole lists to a competitor. We’ll see that in 2011 or 2012.

6. Ebooks become significant revenue contributors for many titles. By the end of 2010, ebook sales will routinely constitute at least 20% of the units moved for midlist and the lower tier of bestsellers and at least 10% of the units for really big bestsellers. (These are predictions for narrative writing; illustrated books and kids’ picture books will lag considerably.)

7. Circumstances will outrun the ebook “windowing” strategy. By the end of 2010, the experiment with “windowing” ebooks — withholding them from release when the hardcover comes out — will end as increasing evidence persuades publishers and agents that ebook sales (at any price) spur print book sales (at any price), not cannibalize or discourage them and, furthermore, that this withholding effort does nothing to restrain Amazon’s proclivity for discounting. (Amazon can’t quit with so many competitors joining them; see number 11 below.) There will also be steadily increasing evidence that most readers distinctly prefer either digital books or paper for their narrative reading and the real minority is the people who routinely read both.

8. In the digital world, geographical territories will be found not to make much sense. The problem of managing territorial rights for ebooks will be a growing problem the industry will have to deal with. As ebook platforms are increasingly separated from dedicated readers (a move even Amazon encourages with its Kindle software working on PCs and iPhones by the beginning of 2010 with more to come throughout the year), people all over the world express their frustration about books they are blocked from obtaining by obsolete rights regimes. With the number of ebook platforms and outlets increasing, it becomes almost impossible to police these rights effectively. Authors with global audiences become increasingly sensitive to the frustration of their fans and, through their agents, lobby for “open markets” for ebooks to solve the problem. US publishers back the idea and smaller market publishers hate it, but by the end of 2010 it is obvious that territorial rights will be relegated to print books only, meaning the end could be in sight for the entire concept of territoriality (but, because of old contracts and lots of national laws, it will be a very long sunset.) Pushing back against this concept might be publishers in countries with large English-language populations (Israel comes to mind, but I know publishers getting offers from Nigeria) who want to carve out a national monopoly for their own local editions in English. But that would be print-only.

9. Authors with clout start looking more like publishers. Some authors who have developed huge followings on Facebook and Twitter and their own blogs start to demonstrate that they can have a serious positive impact on the books of other authors they favor. This leads to a variation on the time-honored practice of getting blurbs and jacket quote-lines as savvy editors and agents suss who the new author-megaphones are and line up to get their support. The prediction for 2010 is that this will start to become obvious. The likely prediction for 2011 will be that this leads to authors becoming quasi-publishers or, perhaps, getting “imprint” deals from established houses to select and promote other people’s writing.

10. The “shakeout” in ebook delivery mechanisms won’t start this year; proliferation rules in 2010. With the arrival of Google Editions in the first or second quarter of 2010, there will be multiple channels to the ebook market through a variety of players: Google, Amazon, Apple, Baker & Taylor’s Blio, Kobo (formerly Shortcovers, the ebook operation begun by Indigo of Canada), and Sony will not be alone! During the course of 2010, the industry will become aware that there are three moving parts here: the device ebooks are viewed on, the ebook “reader” software the device employs, and the retailing and merchandising experience for the consumer shopping (or searching) for a particular book. As it becomes clear that ebook readers employ multiple devices and can accept a variety of platforms, the shopping experience will become appreciated as the most important determinant of consumer loyalty for most books. This is a moving target; everybody will be working on it. But as we enter 2010, it looks like Kobo has figured this out better (so far) than anybody else.

11. Retailers will demonstrate that they have more at stake with each file they sell than the revenue from that sale. Because there are so many players fighting for a foothold in ebooks, discounting them deeply will be the “new normal.” This will enable publishers to keep their “established” retail price (and their revenue per unit sold) high, but consumers will increasingly see ebooks as the less expensive alternative.

12. We will see greater integration of ebook offerings with other products and services. The merchandising challenge for ebooks will ultimately be met web page by web page over the entire Internet. This future paradigm will be tipped in 2010 when we start to see ebook stores on more and more non-book web sites, each trying to deliver some sort of value-add with curation or follow-on products.

13. Book publishers will have to admit to real confusion about what the product is that they produce. The big meme coming out of 2010 will be “what is a book?” Publishers will increasingly be releasing productions that contain video, audio, animation, slide shows, and interactive game elements. Movie, TV, and game producers will see an alternate marketing and revenue channel available through “ebookifying” content they have and moving it through book channels like a “tie-in.” Where one stops and the other begins will become increasingly difficult to see (and increasingly irrelevant).

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In the words of Emily Litella, the Saturday Night Live character of the 1970s invented by Gilda Radner, “never mind.”

I’m referring to my post about “debut pricing” from earlier this week. It can’t be done; at least not easily and at least not immediately.

The challenges we face require a continuing conversation and crowds really help. The collective wisdom and knowledge of the growing crowd reading this blog helped me find and face this hole in my own thinking. (It was also a bit of a comfort to be told in the course of previewing this post that other smart and informed people didn’t know what I missed either!)

What I should have known and factored in, but didn’t, is that ebooks aren’t sold like regular books, with a published discount schedule and no contract. Rather, ebook sales between publishers and their customers, whether intermediaries like Content Reserve and Ingram Digital or retailers like Amazon and Barnes & Noble and the Shortcovers business run by the Canadian chain, Indigo, are transacted under contractually defined and mandated terms. What those contracts say is both confidential and variable from publisher to publisher and customer to customer.

So the suggestion I made — that publishers adjust their ebook pricing by changing the discount schedule for newer books — can’t be achieved by unilateral decision of the publisher under most of the contracts that exist today. Any publisher that wants to implement my suggestion would have to wait for their contracts to expire and then negotiate new ones that would allow them to manage their terms of trade in ways that they can’t do now.

I am also told by publishers in the wake of my piece that Amazon has terms in place that very much anticipate the move that I suggested. At least some publishers have terms that tie the pricing of the ebook to the pricing of the print book (the ebook can’t have a higher suggested retail) and that tie the discounting of the ebook to the discounting of the print book. So the publisher couldn’t reduce the discount for the ebook without reducing the discount for the print book at the same time (and one suspects even that flexibility wouldn’t extend to all publishers and all contracts.)

Apparently some contracts go further than locking in the publisher to print book prices and discounts but also require the publisher to subsidize Amazon’s discounting. In one case I was told about, there is a maximum discount Amazon can require to be subsidized based on the publisher set retail price.

On top of their problems with Amazon, a publisher told me that they had contractually given Fictionwise the right to discount their ebooks and commensurately reduce the payment to publishers. For years, the Fictionwise policy was to do very little discounting and usually the discounts were about 10%. According to one publisher, new owner Barnes & Noble saw the opportunity in those terms to cut prices to the consumer dramatically.

So when Dominque Raccah said her choices with Bran Hambric were limited to when and whether to issue an ebook and not much else, she was absolutely right.

What this means is that publishers have largely dealt away control of their businesses, at least for the time being. All they can do right now to defend themselves is to set the retail prices high and let the marketplace do what it will. With competition fierce among the retailers to cut prices to the consumers, the prices at retail will not be as high as the publisher sets them.

A similar contractual situation exists between publishers and the wholesalers Ingram and Content Reserve, where discounts have been negotiated and are in place until multi-year contracts expire. The same situation exists with Sony which would be the next largest account for ebook sales for most commercial publishers.

So at what is really the dawn of the ebook era, publishers have very little leverage to manage the ebook pricing and distribution in the marketplace.

The way that ebooks transactions differ from print books could also argue that ebooks aren’t “sold”, they are “licensed.” That could present another problem for publishers because licensing revenue is often split 50-50; ebook revenues seldom are. Agents are sure to become increasingly aware of the distinction, just as they will be aware that almost all the sales right now can be achieved by making half-a-dozen deals. That’s not very tempting when ebook sales are 5% or 10% of a book’s total. But what about when they reach 25% or more?

There is one big new entrant coming to the ebook game and that’s Google. With the industry (including Google) other than Amazon coalescing around the epub standard, one can see another change in the wind coming. Google has already created a huge challenge to Amazon by making a million titles available in the epub format which Amazon would have to convert to their proprietary code in order to offer on Kindle. (These titles are public domain and the free epub code offered by Google should minimize that conversion cost, but a million times anything amounts to a lot and, whatever it costs, it won’t happen instantaneously.)

Setting up new arrangements with Google presents the next opportunity for publishers to “get it right” and to take back some semblance of control over the products they publish and sell. But Google won’t want to be buying at lower discounts than everybody else and they won’t want to be selling at higher prices than everybody else either.

There are some hard negotiations ahead on the ebook front.

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The news about trade ebook sales growth continues apace. The IDPF has just said that sales in June 2009 were up 136% over June a year ago. Calendar year sales to date are up about 150% over 2008.

Anecdotal information from big trade houses suggests that ebook sales are approaching 3% of total sales. But not all the books big houses sell are “ebookable” with current technology: much of the juvie list, most illustrated books, and books where tabular or graphic material is important might well not have been made into ebooks. So the number is larger, maybe 5% or 6%, of the straight narrative books. And because not all of everybody’s backlist is yet available in ebooks, sometimes because of rights issues and sometimes because it just hasn’t been digitized yet, the number is higher for straight narrative new titles. So maybe that’s at 8%. Now!

And the chart of the sales trend that IDPF shows would certainly suggest we’re still seeing accelerating growth. There’s no reason to think that will stop; in fact, there is every reason to think the growth will gain additional impetus. New reading devices are coming and new features are coming for existing devices. Growth in ebook uptake to now was achieved with no help from the biggest purveyor of consumer books: Barnes & Noble. Now they’re jumping in to the pool with both feet. They have announced a partnership with Plastic Logic on one new reader and there is a rumor they will have another one of their own.

And the Apple tablet is going to be a reality, which many people think could be a Kindle killer. It won’t be, but it will surely be a Kindle challenger and it will grow the market in various ways, including making good ebooks from a lot of books that weren’t good candidates with the previously available screens.

The market is still dominated by Amazon and by Kindle, which may be selling 70% of the trade ebooks at the moment. Publishers are saying that seeing 50% of Amazon sales on a title in Kindle is not unusual. On most big books it is 30 or 40 percent and rising.

It has been reported that this is going to be a big Fall for big books: the late Michael Crichton, Pat Conroy, Jon Krakauer, Dan Brown, E.L. Doctorow, Margaret Attwood, John Irving, Philip Roth, Barbara Kingsolver and many others will have books hitting the shelves between now and Christmas.

If that has any effect on ebook reading, it should be a spur. Of the 90+% of book readers who do not (yet) read ebooks, some know they will, but they just haven’t started yet. Since ebooks are cheaper than their hardcover counterpart, sometimes — given the price wars taking place among retailers — a lot cheaper, the plethora of hot new books should be a merchandising tool to sell devices and to get people who already have ereadable devices like iPhones to try this new way of consuming print content.

And then we have another piece of news: that Sony is pushing its partnership with Content Reserve to boost use of Sony Readers by libraries.

When we get to the point that the ebook share of a new book is consistently 25% or more, we will start to see real strain on many aspects of today’s business model. And we can expect to reach that point before Obama runs for reelection, perhaps in the next 18 months. I don’t want to try to get into answers in this post; it’s enough to just think about the questions. Consider…

1. Bestseller lists. Right now ebook sales don’t get added into bestseller list numbers. With Kindle sales (by our informal estimate) constituting about 70% of ebook sales and no apparent inclination by Amazon to report those sales, that’s a hole that will exist for a while. With all the big books coming this Fall, publishers will have a chance to see how ebook sales vary by author, genre, pricing, and ebook release strategy. Will authors whose audiences switch to ebooks faster be punished on the bestseller list as a result?

2. Library sales. From the beginning, Content Reserve — the principal provider of ebooks to libraries, the power behind Baker & Taylor’s ebook provision and now in partnership with Sony Reader — has attempted to replicate the printed book world with a model that requires libraries to buy the number of copies they want to lend simultaneously. So if a library wants to lend 100 copies of the new Dan Brown at the same time (assuming it is available as an ebook), they’ll have to buy 100 ebooks. But what is not factored into the current model is that print books wear out. A library can only lend a print book X number of times before pages start to fall out. Replacement stock wouldn’t be part of the (current) ebook model. (In fact, with the new Sony deal for readers in libraries, it is the hardware that will wear out, so Sony, not the publishers, will get the replacement stock business.)

3. Library sales again. In the print book world, you have to go to the library to get a book and then go back to the library to return it. In the ebook world, you go to one web site to download the book for free and another one to download it and pay. Consumers are bound to notice. How will publishers that are spending a lot of money and time chasing down pirate copies respond to that?

4. Market fragmentation. Amazon is 15 to 30 percent of a book’s sale; somewhat less when the book has big distribution through mass merchants and somewhat more if a book is long tail and hardly available except on the Internet. That number is rising. They are perhaps 70% of ebook sales. How long will it be before an author says to publishers “I’ve handled Amazon. Would you like to offer me a contract for the rest of the market?” And with another big chunk at another single retailer, Barnes & Noble, an author’s agent could make two deals and get half the potential market. Won’t that be an enormous temptation?

5. Health of the brick-and-mortar channel. As ebook sales climb, many of those sales will be cannibalizing print book sales (although our friends at O’Reilly say that isn’t happening yet; at least not for computer books.) That would suggest we will see declining sales through stores in the years to come. But stores are the publishers’ most important marketing and merchandising tool. If we do start to see narrative books selling 20% or more as ebooks, what can publishers do to help save brick-and-mortar shelf space? What can the stores do?

6. Pricing and timing. There is uneasiness among publishers about simultaneous ebook release, based on the the bestseller list problem, the bookstore preservation challenge, and the intense ebook pricing competition that is driving prices to the consumer far below wherever the publisher tries to set them. At least one publisher has held back the ebook of an important title for several months as a result. The view from here is that the right strategy is the opposite: get the ebook out as fast as possible to get word of mouth going before the print books hit the stores. (We’re not advocating holding back the print book here; just acknowledging the reality that printing, binding, and shipping take time and the book is “finished” when the PDF is finished.) What’s the right practice? Or does it, like so much in the trade business, “depend on the book?”

7. Ebook royalties. The author can get 85% from Smashwords (OK: no DRM, no merchandising, and not really a big league player…yet; but will it stay that way?); 80% from Scribd; 35% of sale price from Kindle. There are bound to be models also paying much higher than publisher royalties coming from B&N and from Indigo’s Shortcovers. How long will publishers be able to hold the line at 15% of retail or 25% of net, where ebook royalties are now. (Random House UK is trying to hold the line at lower numbers than that!)

8. New publishing models. When ebooks can routinely be 20% or more of a book’s sale, they can be 40% or 50% on many titles. The capital risk of publishing an ebook is a fraction of what is required to publish a print book. New entities are forming built around that reality; how long will it be before conventional publishers try an ebook-only, or ebook-first, approach on some titles? (Random House US is already publishing a number of Kurt Vonnegut short stories as ebooks only, where shorter content at a low price can be practical.)

The strategic thinkers at the big publishing houses, retailers, and literary agencies certainly have a lot on their plate.

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This post is part of a growing set initiated by the Sourcebooks experiment holding back an ebook from simultaneous publication with an upcoming hardcover. It is the second (link to the first below) and will be followed by at least one more, as the conclusion of this post makes clear.

To talk sensibly about the Sourcebooks experiment with Bran Hambric, we need to sketch out some context. Trying to provide it will be the objective of this post. A couple of caveats before we begin:

We are talking here about narrative fiction and non-fiction: books that don’t need illustration or design-intensity to get their content across.

And we are talking about books intended for general audiences: trade books.

The first caveat matters because it describes the technical challenges of presenting the content and the second because it defines the commercial parameters for all the players (and the players will be the subject of a subsequent post.) Content that is delivered to more structured and organized markets, such as we see in academia or corporations, has a very different set of commercial realities.

There will eventually prove to be four distinct stages of ebook adoption, and what makes sense for all the players will change as we move from one to another. The four stages are vision, establishment, transition, and the new marketplace.

The first stage, vision, which started in the late 1990s, will be seen to have ended when the Kindle was launched in November of 2007. This was when ebooks attained a minimal market, substantially less than 1% of total trade sales. In that stage, we had the development of the ePub standard, which could be a permanently useful efficiency for the market. We also had the establishment of basic terms of trade, giving intermediaries approximately the same margins based on the publishers’ suggested retail price that they have had in the physical print-book world. (In my opinion, that will not prove to be so helpful.) Author royalties in publishing’s Big Leagues seem to have settled at either 15% of the publisher’s suggested retail or 25% of the publisher’s revenue, another formula that will be challenged by market forces. We have learned a lot about the futility and frustration surrounding DRM. And publishers have tried to establish ebook pricing that tracks the printed book availability at any time, generally listing the ebook at about the same or a buck or two cheaper than the lowest-priced print edition available.

The second stage, establishment, started with the Kindle. This is when ebooks are much more obviously headed for their ultimate central position in consumer trade book publishing. Ebooks are moving from making a negligible commercial contribution to each book to measureable value, a shift which could be said to have occurred. Many major books are now getting nearly half their Amazon sales from Kindle and other ebook sales are growing as well. Publishers are seeing ebook sales that have tripled as a percentage of their total sales in the past 12-to-18 months. In this stage we are also seeing — and will see more — new players enter the game. Amazon’s device play was followed by software launches from Apple (more than one, including Amazon, from the App Store) and Indigo (a smartphone application called Shortcovers which is part of the iPhone expansion). The Kindle device was preceeded by the Sony Reader; there have been UK-based launches of an independent competitor (Cool-er Reader) and one from Borders UK called Elonex; and strong rumors suggest that both Barnes & Noble and Indigo will deliver their own devices very soon. There are others as well. In this establishment stage, ebook revenues are growing, though they are not yet sufficient to change the overall power relationships in the publishing value chain. But because so many devices and channels are competing to get established and because of the high physical-world discounts, publishers have completely lost control of consumer-facing pricing at the title level.

The third stage, the beginning of which I reckon is about 1-to-3 years off, will be the transition stage. Since I’m inventing this paradigm, I’ll declare arbitrarily that the transition stage will begin when it becomes common for ebook sales to be as much as half the sales of ebookable titles (see the caveats above) and trade houses are seeing their overall unit sales (including the many books, still most juveniles and other highly illustrated titles they all publish that are not “ebookable”) grow steadily from 10% of total sales with no end in sight. In the transition stage, we will start to see real shifts in the value chain. Devices that can only import from a single source (such as the Kindle is today) will fade in importance (if, indeed, there are any left by then.) The number of potential purchase points will explode, as many web sites offer some sort of ebook-readable content, a great deal of it free, but lots of it based on the prices set by publishers. Large horizontal aggregators (Amazon, B&N, and the full-line bookstores that build their offerings from wholesalers) will struggle to hold onto a large and loyal customer base as the vertical web increasingly takes hold. Almost all publishers will be among the zillions of sites offering direct downloads to consumers, many through explicit verticals that sell the books of their competitors (as Macmillan’s tor.com sci-fi site, presciently, is doing today.) DRM will gradually disappear but policing commercial-level piracy will become much more effective because the entire industry will be fighting it. What Scribd is doing to fight piracy — using their archived content to locate pirated material posted by site visitors — will be more widespread and collaborative. There’s a real opportunity for a search engine to offer a service here that somebody will take, and then all will follow.

And the fourth stage, the new marketplace, will have arrived when ebook sales dominate and printed book sales shift primarily to short-run and print-on-demand, except for the very biggest titles. This will happen with accelerating speed when sales pass the point of being 40 or 50 percent digital overall, possibly within a decade. When ebooks become the “norm”, prominent authors will have less need for publishers and ebooks will be routinely updated and enhanced and linked to other content in ways that printed books simply cannot match. In the new marketplace, printed books will have very specific uses: tokens and souvenirs, delivery of certain material that makes great use of large presentation surfaces, and, of course, enabling those who are too old, too poor, or just too stubbornly luddite to make the shift to screen-reading that will have become ubiquitous by then.

In the next post on this subject we will really address the Bran Hambric experiment. We’ll tackle how the various stages of ebook development affect each of the stakeholders: authors, publishers, retailers, wholesalers, and, of course, readers. The context of the stages allows us to make sense of the issues of 1) timing, 2) pricing, 3) DRM, and 4) the content itself, and the marketplace impact of each of the four from the standpoint of each stakeholder. And we’ll see that the challenges Sourcebooks is responding to are symptomatic of what publishers face in the early establishment stage.

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We are working on a project in this office to “grid” the ebook world. We’ll have a hard time doing it in fewer than four dimensions. What we see as “major headings” are: 1) hardware/readingdevices, 2) software/platforms, 3) file formats, and 4) ebook retailers. And after we get that sorted out, we’ll start thinking about the various commercial terms. I surprised a reporter this morning (who is probably less well-informed than most readers of this blog) when I told her that Apple gets paid for what goes on an iPhone out of the App Store, but not on what goes on an iPhone from the Kindle store. (And that’s just an example…)

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