Smashwords

My last post tried to lay out a comparison of royalties paid by big publishers to agented authors on ebooks against what they pay on print books. What it showed is that the authors suffer a bit on ebook sales that substitute for hardcover print sales, but that they do pretty well selling an ebook instead of a paperback. And the numbers also showed that a publisher selling ebooks under a wholesale arrangement pays the author a higher royalty than an agency publisher when the print is in its hardcover life, but that the agency publisher is actually paying more royalties if the printed edition is a mass-market paperback.

But this comparison has its limits. It helps an author or agent compare their economic prospects with an agency publisher as opposed to a wholesale one. But it doesn’t help an author understand the next comparison she’ll want to make, between doing her book with a publisher and doing it herself without a publisher at all

Fortunately for authors and agents, the benchmark for self-publishing revenue is clearly established by the ebook platform Smashwords, which I first wrote about at the end of a post 16 months ago. There are certainly alternatives to Smashwords: web-based solutions like Scribd, full-service offerings like our clients at Bookmasters, and things in between like Author Solutions. But Smashwords is the most automated, least expensive, and, at this point, most heavily used self-publishing solution for ebooks.

Smashwords pays authors 85% of the sales price for ebooks sold on its own site, and about 85% of the receipts for sales made through iBooks (Apple), Sony, B&N, Kobo, and the Diesel eBook Store. In other words, an author would get more than three times the “old” standard 25% ebook royalty offered by the big publishers and double the “new” possible 40% royalty implied as the new ceiling by the Random-Wylie agreement announced last week.

It is worth noting that Mark Coker of Smashwords says that all their deals will be agency going forward because control of the retail price is very important to their authors and publishers. The net to the author or publisher through their existing deals is 42.5% for sales made through Sony or B&N, 46.75% for sales made through Kobo, and 60% on their agency deals with Apple and the Diesel eBook Store.

And although Smashwords does not (yet) have an agreement to distribute through Kindle (though they’re working on it), the authors and publishers that use Smashwords would be free to make a separate deal with Kindle, giving them a possible 70% of their retail price if they can keep the potential discounters in line (that would be B&N, Kobo, and Sony.)

One thing very much in Smashwords’ favor is that the barriers to use them are very low. All you need is a doc file and a bright person to pay attention to quality control as you work through your conversion. They make metadata management simple.

What might give big authors pause about using Smashwords is that they distribute DRM-free (although the retailers listed above will be adding their own unless the publisher tells them not to) and that they depend on trust. Each retailer selling Smashwords titles has the content file and the metadata file in their possession and the sales reporting cannot effectively be audited.

But whether or not Smashwords is everybody’s solution, they certainly are establishing that pure automated ebook conversion and distribution services are worth 15% of what is collected from the consumer or from the intermediary selling to the consumer.

Smashwords is already pretty big and growing fast. They have 18,000 titles on offer from 8,000 different authors and publishers at the moment and Coker says they’ve added 2,500 titles in the past 30 days!

And I can personally attest to the fact that Smashwords has some books people will want. I found a title on iBooks called “A Year in Mudville” about the Mets first season — baseball history being a subject I know well and read broadly — which is terrific. It is well-researched, well-written, and well-edited. I found some presentation glitches (type fonts changing for no apparent reason) and pointed them out to Coker. He showed them to the author who then corrected the file. (The glitches didn’t interfere with reading the book at all.) And that book was priced at $8.99 on iBooks, which means the author was getting $5.40 from the sale! Look at that against the chart in my prior post! On a $9 list-price ebook, the author would be getting $1.125 from a wholesale publisher and $1.575 from an agency publisher at 25% royalty; $1.80 and $2.52 at 40%. (And, assuming they did an Amazon deal separately and could meet the restrictions required for the 70% royalty, that author would be getting $6.30 for each sale on Kindle!)

At per-unit revenues from ebook sales anywhere from 2.5-to-6 times what they could get from a publisher, and ebook sales rising inexorably as a percentage of total sales, authors and their agents are ultimately going to be doing their math against this option for each new book they have to offer. Some may be doing it already.

There are a few things publishers can tell authors to try to keep them from jumping.

1. “Don’t forget: we give you an advance!” That is the first, and for many authors the most powerful, argument. Agents like advances too, so they’re likely to be sympathetic to the publishers’ point here. But, of course, with that advance comes the publisher’s claim to more than half of what would otherwise be the author’s ebook profits.

2. “Don’t forget: print books are still 90% of your market!” This is really the reason established authors will be reluctant to jump to Smashwords. And as long as print is 90%, or even 80% (and it is falling to that level on many immersive reading books now), getting a multiple on the ebook sales still leaves a shortfall of revenue to the author unless they figure out how to also have the book available in print. The big publishers won’t be doing print-only deals for quite a while, but smaller publishers will certainly be available to work with brand-name authors on that basis. And when the print share falls to 50% of the total sales, which many of us believe it will over the next few years, this argument won’t be effective anymore. (There are many ways for the author to self-publish print too, but only the print-on-demand solutions don’t require big investment or risk, and you aren’t going to get what a publisher would deliver with POD alone.)

3. “You’ll have to do your own publicity and marketing.” This is true, but it is also true that publishers have wanted authors to do a lot of their own publicity and marketing already. From here, it would seem that the author’s marketing efforts will be critical either way. If the author is already big and branded (likely due at least in part to the prior efforts of a publisher, but that’s not necessarily relevant here), it’s less of a barrier than if they’re not. It might be no barrier at all. This is an uncomfortable point for publishers because the authors who need the least help are the ones they want to publish the most.

4. “If we publish you, you’re legitimatized.” I think this point carries almost no weight with any author who has had a bestseller already or has already had more than a couple of books published by established houses. I think it will carry less and less weight with everybody else. I just found my first great book by an unknown author on Smashwords. Sooner or later, you will too.

5. “We’ve built email lists and other direct contact with the consumers you want to sell to, plus we have relationships with the book retailers to get you more attractive placement and promotion through them than you can get without us.” Now, that would be attractive. Can any big publisher justify that claim?

6. “We will pay you 70% of receipts on ebooks to keep you in our stable. It isn’t the 85% you get from Smashwords, but with our advance, our print book sales, and taking all the admin and management off your hands, it’s a better deal for you.” That will probably work, but no publisher wants to let it get to that point.

Publishers better work on number five.

Bookmark It:

What shoved other news aside this morning was the word from Seth Godin that he won’t be publishing books with publishers anymore. This is another early indication that it is going to get harder and harder for trade publishers to sign up books.

It is not the first one. Thriller writer J.A. Konrath discovered the virtues of publishing through Kindle about 16 months ago. With the help of audience-building through his own blog, plus completed manuscripts that the New York publishers didn’t buy, he was pushed into learning how to monetize his own work without a publisher.

Last December, the news was that S&S author Stephen Covey had taken his backlist to ebook publisher Rosetta which had, in turn, made a temporary exclusive deal with Amazon. The motivations, apparently, were a bigger share of the ebook pie and the unique marketing capability Amazon has to really push something direct to appropriate consumers. That deal seemed to be with the original publisher’s explicit consent. (Agent Andrew Wylie recently formed an imprint to do the same thing with a batch of his clients’ backlist apparently without prearranging consent, although no lawsuits have been filed to date.)

At the last BookExpo, one of the leading agents in New York told me he is working hard to learn about self-publishing options because his authors are asking him about it.

Last week, one of the leading publishing consultants to “brands” told me that the 25% standard ebook royalty was pushing her company’s clients to think harder about self-publishing.

And it happens that right now I’m reading a book about my favorite subject (baseball history) called “A Year in Mudville” (about the Mets inaugural season) that was self-published through Smashwords but which, in editorial quality, exceeds many titles I’ve read from established houses. I don’t know whether author David Bagdade didn’t want to bother with the bureaucracy of pitching trade publishers, was rejected by them, or just chose the control and better margins of Smashwords, but Smashwords rather than one of the established players is dividing with the author 70% of the nine bucks I gave iBooks for the purchase

This way lies destruction.

Many years ago, my friend and sometimes colleague Mark Bide and I were talking about threats to the scholarly journal paradigm. For those not familiar with how journals work, it might be an eyebrow-lifter. Universities pay professors’ salaries and encourage them to write peer-reviewed articles. The journals get the articles for free, operate the peer-review and publication process, and then sell the collection of articles back to the university’s library. So the university both pays for the content’s creation and purchases it in its published form. Since the beginning of the web awareness, it has been predicted that disintermediation of journal publishers would occur.

What Mark told me was “watch the level of submissions.” That is, he believes the first sign that journal publishing is in trouble will be if the professors stop sending in their articles. So far, that hasn’t happened (that I’m aware of.)

But it’s going to be happening in trade.

On an email list I read, you can detect the annoyance of publishers who point out that neither Konrath nor Godin would be where they are today if publishers hadn’t invested in them and built their fame. There’s some resentment that neither Konrath nor Godin emphasize this point and, by not doing so, seem to suggest “anybody can do this.” I’m not sure that they’re saying “anybody can”, but it isn’t necessary to push that idea to do real damage to publishers’ futures, because the authors who can do this are among the the ones publishers need the most.

Starting in the 1990s, publishers started to ask “what’s the author’s platform” when they signed up books. In those days, they were asking whether the author had a radio show, a newspaper column, a speaking circuit, or extensive media contacts that could give them a leg up to promote the author’s book. But with the turn of the century and the development of inexpensive websites and blogs, authors were able to build their own platforms. And, lo and behold, they were able to build them faster and better if they had legitimately published books in the marketplace.

Publishers should have remembered the axiom that you should be careful what you wish for. This was, perhaps, the beginning of the unbundling of the publisher’s suite of services to the author. It used to be that the publication of a book was the platform and the publishers’ publicity and marketing efforts worked to capitalize on it. This was all part and parcel of the package: paying an advance; editing and shaping the book; putting it into a distributable (printed and bound) form; getting it known; and, of course, getting it into a store where a customer could buy it.

Publishers still pay advances although they’re doing their best to scale them back. Many don’t provide the same level of editing services that they used to; they often expect more books to be delivered by each of their editors and they also lean to agents they can trust to do a lot of the work of putting a book in shape. Putting it into distributable form isn’t nearly as hard as it used to be and doesn’t require inventory investment if the form is digital. Getting it known is something that Godin very articulately and accurately suggests he can do better himself. He is not alone and authors who can do this are explicitly what publishers are seeking. And getting the content into the customer’s hands is a drastically different proposition in a digital context than it was in the pure print world of 20 years ago, and digital distribution can be done with far less investment and far less organizational muscle.

So there’s less for a publisher to do for an author than there once was. And the publishers sent that signal when they started to focus on the author’s own ability to promote and then, over time, turned that ability into a frequent requirement for publication. If the publisher is going to do less, the author wants to pay less for it. Joe Konrath is very clear about the advantages he sees in getting the lion’s share of the revenue his books generate, rather than a mere author’s royalty.

But, somewhat more ominously, making more money through disintermediation does not appear to be the primary driver for Seth Godin. What Seth seems to be saying is “I want flexibility. I want to use what I write in whatever is the best way to build my overall career, revenues, and audience. I don’t want to be locked into publishers’ schedules and bureaucracy.”

That’s a massive challenge for big trade houses but it will be of increasing importance to big authors, particularly big non-fiction authors. It is much easier for a publisher to provide real value if they’re vertical. On the same mailing list I mentioned above, we got a comment from a biggish independent publisher who claims that the house is finding more and better ways to work with authors and really investing in them. But, we are told, they are all in verticals.

Godin may be a unique case. There are unique aspects to Covey and Konrath too. But it is not comforting for trade publishers to see that authors have alternatives, that as ebook sales rise the viability of the alternatives grows, and that the authors most likely to strike out on their own or look for new partners are those with the strongest existing connections to audiences.

Bookmark It:

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

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

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

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

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

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

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

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

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

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

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

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

Bookmark It:

As part of the program-creation process for Digital Book World, I had a round of conversations with the top executives of the Big Six companies to discuss the agenda, mostly with the CEOs. The purpose of the check-ins was to find out what topics the CEOs wanted their companies to speak about and, of course, which they wanted to avoid for reasons of diplomacy, commercial politics, or legality.

One topic I had left out of our program initially was “piracy”. Some of the executives I met with found this a very troubling omission. My first reaction was “what’s there to discuss? We’re all against piracy and there isn’t much we can do about it. So what else do we say?” Although there are two of the big houses where that view is, to some extent, shared, most of the others disagree, some vehemently. In fact, Macmillan has a “seven point program” to confront and combat piracy, which will now be the topic of a presentation by Macmillan president Brian Napack on the first morning of Digital Book World.

The topic of piracy is a part of the conversation about “digital rights management”, software that manages how a file can be used. DRM is a pretty standard aspect of software and DVD distribution but it comes in for a lot of complaint and criticism from very knowledgeable observers and participants in the ebook scene.

There is a “first sale” doctrine in copyright law that gives the purchaser of a book (or sound recording or DVD) the right to give away or re-sell that good. It does not give the right to sell or give away a copy, but it does allow you to “share” your book or CD or DVD with your mother, your sister, and your aunt and then to sell the used copy on eBay. Those rights have never really extended to software, which often knows if you’re trying to load it onto a second computer and won’t let you. Attempts to control sharing of music through DRM are commonly blamed for the piracy that became rampant in that sphere (although I don’t buy that; there are other explanations I find more compelling.)

The question of DRM-or-not in the ebook world is a very complicated one, although opponents of DRM often paint it as very simple. O’Reilly Media sells its ebooks “DRM-free”, as do some upstart ebook first publishers. The ebook self-publishing site, Smashwords, also sells only DRM free from their own site, although Smashwords-originated files might have DRM added by intermediary resellers, with which it is making more and more deals.

The opponents of DRM point to the incontrovertible fact that its existence does not stamp out piracy, which is transparent at a time when you can type just about any book title into Google with the word “file” after it and be directed to sites that offer you a free pirated download. In fact, even not publishing the book digitally is insufficent DRM to keep it from pirate distribution.

Mark Coker of Smashwords, despite the fact that he sells onlyDRM-free ebooks from his site, is an avowed opponent of piracy, and even of sharing. He suggests a boilerplate notice in his ebooks that tell you that you should go buy another copy of this book you’re about to read if you didn’t buy this one, or else you’re cheating the author. Mark believes the key to combating piracy is education; he admits to an unusually strong faith in consumer integrity.

But despite the lengthy introduction, this post is not about DRM; it’s to propose what is the ultimate defense against piracy: ebooks that aren’t static; ebooks that change.

The secret sauce behind O’Reilly’s DRM-free policy is that when you buy an ebook from them, you are entitled to the updates to that ebook…forever. The implicit message there is there will be updates.

There is no better antidote to piracy than this. If the pirated or peer-to-peer edition of a book is yesterday’s, or last week’s, and the book is changing, then it’s yesterday’s paper (which the Rolling Stones noted long ago, “nobody in the world” wants.)

This is beyond wrenching to publishers; it completely changes the workflow and it completely changes the business model. The rhythm of a publishing house is based on the fact that books are, at some point, finished. There is a Henry Ford assembly line aspect to how things have always worked. Whether you’re an editor, a marketer, or a sales person, new books have a pretty reliable “cycle” for you: their existence in your life has a beginning, a middle, and an end. The conveyor belt moves the book away from you so you can’t spend too much time on it and can move on to the next one. Having authors not stop adding to or changing a book, even after it’s published, is totally disruptive. And what would we do about the ISBN numbers?

Yet, the possibility for ebooks to be totally up-to-date is one publishers can’t ignore. The Little, Brown division at Hachette has just announced that on December 1 it is publishing a 2,000 word update on the H1N1 (swine flu) virus in the ebook edition of “The Vaccine Book”, which was originally published in 2007. If something startling happened that should change that text on February 1, wouldn’t it make sense for them to update the book again? In October, Wiley published, as an ebook only, “The Swine Flu: The New Pandemic” because they wanted to get the most up-to-date information out quickly. By that logic, wouldn’t they also want to update their ebook if what was up-to-date in October isn’t in March?

And if they did that, what possible value would a pirated edition of yesterday’s ebook have?

Of course, swine flu is a dynamic subject. It isn’t a novel; it isn’t history. It isn’t even programming or software development or technology, the subjects O’Reilly publishes (and often updates.) But every editor knows plenty of authors of non-fiction books that wanted to keep writing and changing and adding past every deadline the house presented. Let the new process start with those; there will be plenty of candidates.

Furthermore, the biggest threat from pirated ebooks is to the most established franchise authors. I believe Tim O’Reilly is responsible for two cogent and pithy observations about piracy: that obscurity is a greater threat to most authors than piracy, and that piracy is “progressive taxation.” Both express the reality that the marketing for most books fails to reach most of the book’s potential audience. That Henry Ford assembly line conveys the book away from the marketers before the task of informing the entire potentially-interested public is anywhere near complete. So piracy, or file-sharing that may fall short of actual piracy, can serve the purpose of spreading the word about a book and triggering more sales. Except there are some authors, and those are the ones that sell the most books for the biggest publishers, who don’t need marketing to inform their audience; their audience, in effect, informs their audience! And those are the ones who would surely lose sales if there were no DRM and books could be freely shared or are made available through illicit channels.

But those authors are also the ones who have the biggest personal followings. They are the most capable of adding material: notes about what they’re working on, correspondence with fans or critics, even observations about other people’s books, that would add some value for many of the readers of their stories. In fact, a regular “update to my readers” from a top-flight author that is available only in their ebooks, or to purchasers of their ebooks, would be an attraction to many and could serve as a constant reminder that downloading their books from illegitimate sources is cheating them.

I’m not against DRM in principle and I’m all for combating piracy any way we can (and I have a couple of thoughts on that subject I’ll save for a subsequent post.) But I am far from certain that piracy represents the same existential threat to book publishers that it did to record companies, although we have others: the music business isn’t nearly so threatened by the shift to vertical.

One of my favorite people in the digital book business, who once worked in the music business said to me: “I don’t worry about piracy. I did in the music business because music was bought by kids. My customers are 53-year old ladies. They don’t go to pirate sites. They’d be afraid of getting a virus!” She’s right about that, at least for today. But for those who are concerned about piracy, I am not sure this problem can be attacked with toughness and muscle as effectively as it would be with creativity and delivering to the market something the pirates just can’t keep up with.

We have observed previously that the day will likely come when Big Authors will go straight to electronic distribution for some ebooks, bypassing the publishers to collect bigger royalties. What could be the first shot of that battle, and a reflection of the ideas in this post as well, may have been fired in the UK where Sony has announced a special edition James Patterson ebook which will contain the new book, “Cross Country”, a month before its general release plus other excerpts and a special letter from James Patterson. Of course, that deal was probably made by the publisher with Patterson’s cooperation, but it points to possibilities that should make publishers nervous.

Bookmark It:

I had a lunch conversation this week with three successful literary agents, who will remain anonymous for this post. They wanted to talk about the panel we’re having at Digital Book World called “The Changing Author-Agent Relationship: How Will It Affect the Business Model?”

That panel was born when I engaged an agent last summer with my observations about digital change and tried to recruit her to join a panel discussion about it. “Suppose you work with an author to develop her manuscript so your creative input becomes part of the work. Then you can’t sell it, or you get only a token offer for it, and the author wants to self-publish. Shouldn’t you, or any agent in that spot, be entitled to something in that case?”

The agent, sensing quickly that I was going to a model of “author pays agent for consulting help” said, “I can’t participate in a conversation like that. We have a canon of ethics in the AAR, and that might well run afoul of it.”

As it turns out, the canon of ethics of the AAR only explicitly prohibits agents from charging “reading fees” to prospective clients. Other charges are explictly permitted, such as for xeroxing and messengers. And others, such as consulting on self-publishing options, aren’t mentioned.

But, still, the question of whether the business model needs to change remains. The kind of book advances that agents have made a living on for years are diminishing in number. And now that self-publishing is legitimately part of the commercial continuum, authors have a right to expect that their career business manager, which an agent is, will employ it, or suggest that they do, when it makes sense. And agents will have a right to expect to be paid for that.

Of course, that’s not what these three successful working agents do. Their business assets are their personal knowledge of and relationships with acquiring editors; their ability to shape a writer’s concept and proposal into a commercial book; their knowledge of the ins and outs of book contracts and publishers’ accounting procedures. Exploring and keeping up with the various print and electronic self-publishing options: starting with Author Solutions and Smashwords, but including many others including our client Bookmasters, lulu.com, and many others, is a fulltime job in itself. (There’s a string started on Brantley’s list today by Joe Esposito who noticed announcements for four new self-publishing startups in his email in the past few days.) And searching out the authors with the money to self-publish, let alone to pay for advice on how to do it effectively, is also not what the successful agent in the current marketplace does.

I had spoken at a Writer’s Digest conference two months ago and told aspiring writers “get an agent” but also, “make sure the agent knows about the self-publishing options.” These very professional and desirable agents did not. But they agreed that when ten or thirty or fifty times a year a project they’d developed goes off for self-publishing, they’ll want to have a way to monetize that. We agreed that the likely solution will be an alliance with somebody who perhaps positioned themselves more as a “consultant” to aspiring authors. There is no shortage of such people.

The conversation turned to contract terms, particularly regarding ebooks. The agents asked me: “don’t the big trade publishers see that the strategy of paying authors half or less of what many ebook publishers will pay on digital book royalties isn’t sustainable? that we’ll end up splitting those deals?” I told them that I had raised this point with Big Six CEOs and they all said, “we won’t buy print-only; never happen.” The big publishers are counting on the authors’ (and agents’) desire for the advance to keep them locked into the current model. (Richard Curtis made this same point in a recent eReads post.) It is clear that the idea of splitting off ebooks from print contracts is one that these agents have been thinking about for a while. The relative attraction of the advance goes down as the level of ebook sales on which you’re taking half or less of what you could get goes up.

We also spent a little time discussing “verticals” and my theory that power is moving from “control of IP to control of eyeballs.” In the past week, I’ve had two conversations with Hay House executives (they’re on the Digital Book World program too) about their business. To somebody with a trade orientation, it’s pretty phenomenal. They run between 30 and 100 live events a year for their community. They have over 1 million email addresses that drive the sales of all their books. One of the agents said he had an author for whom he sold a book to one of the Big Six houses and they sold twelve thousand copies. He sold the next title to Hay House and they sold two hundred thousand. How long will the Big Six houses be able to compete for big-potential books in Hay House’s sweet spot (mind-body-spirit), advances or no advances?

One of the agents at lunch does a lot with juveniles. “Do I have to worry about this ebook thing much?” that agent asked. Soon you will, I said. After lunch I was working with my frequent collaborator Ted Hill on a proposal we’re making for another conference on digital tipping points. One we were talking about is “when does the publishing house have editors shift their focus from developing a print book with an author, with the ebook as afterthought, to developing the best possible digital product, with the print book coming out of it?” That gave me an answer for that agent: you better have somebody on your team now who can see the digital book possibilities in every idea before you peddle it. Now that you’ve made me think about it, I realize that if you’re not fully exploring the creative possibilities for digital products for every kids book you develop, you’re already missing the boat.

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Because I am giving a keynote talk at the Writer’s Digest Conference in New York on September 18, I am thinking about “what do you tell a writer about digital change in publishing?”

The view of the media world that I proselytize, which is that it is “going vertical”, is hard to accept if you are “general” (i.e. horizontal) and it is hard to accept if you are small. Both general publishers and small publishers have always depended on aggregators to create a large enough offering to be commercially viable. General publishers need bookstores, primarily, and general book review media (pre-pub and to the consumer) as well. Small publishers have required wholesalers and distributors to organize a large enough product offering to be effective with bookstores and libraries. The intermediaries have always found it difficult to deal with offerings of a small number of titles.

The vertical vision says that aggregation is not just necessary at the “book” level, but also at the “subject” level. If the vision is accurate, publishers of just a handful of titles — even if they are in a niche — will find it prohibitively difficult and expensive to reach their audience.

One reason why life is getting so much more difficult for general trade publishers and small publishers is that the capital barriers to entry for publishing, particularly ebook-first publishing, have dropped to near zero. The aspiring book author 10 or 20 years ago needed somebody to print a run of books, hold them, and distribute them — mostly one-by-one — to points of distribution (called bookstores, libraries, and wholesalers) all over the country. That took capital and it took scale.

This isn’t true anymore. Anybody with a computer and an internet connection can be a publisher. You can publish a blog on a free platform. You can publish ebooks through Smashwords by sending them your Word file. You can publish a document for download through Scribd by sending them a PDF. You can make your property available as a printed book through a number of services — Author House being the largest — without any investment in inventory and only a modest set-up cost.

This ease of entry is part of what bedevils the established publishers. They’re still gatekeepers, but the gate isn’t attached to a fence or wall anymore so aspirants just walk around it. That doesn’t mean that getting published by a real publisher is of no value; it is still the only way to sell significant numbers of copies, and it will remain that for some time to come.

But most books, even those published by legitimate publishers, don’t sell large numbers of copies. And it is increasingly the case that the self-publishing of various kinds is the best way to get on the publishers’ radar screens and it has the additional benefit of beginning to build an audience and a response loop that are essential components of any successful writer’s platform.

In fact, when we discussed with a leading agent a panel we’re planning for our January Digital Book World conference called “Stalking the Wild Blogger: Scouting Blogs and Self-Published Content for Fresh Voices”, which is about agents and editors finding authors through blogs and self-published books, he said that is now something that “every agent does.” He explained: “it is now the standard way to find new clients.”

That means that blogs and self-published books using ebook and print-on-demand models are now part of the overall commercial structure of publishing. They are not something separate and inferior, as “vanity publishing” was in the past.

The best thing that can happen to a writer is still that an established agent takes on and sells their project to an established publisher for an advance large enough to constitute adequate financial compensation to the writer for her work. Most books published by mainstream publishers still do not earn out their advance and yield additional royalties, so getting paid upfront is still the best financial situation for the author, in the short run. (In the long run, failing to earn out advances and sell books will catch up with an author; it’s a trick getting harder and harder to repeat in a world where BookScan numbers tell each publisher how prior books have performed.)

So here’s a starter list of tips I’ll be offering writers on September 18, a list that would grow between now and then even withoutthe help I may get from readers of this blog.

1. Understand your vertical world on the web, and participate in it.

2. Blog. And build a following for your blog.

3. If you have finished book material, and it is not already in the hands of a capable agent managing the process of selling it to publishers, self-publish it in ebook form at least and promote it the best you can.

4. Join PublishersMarketplace for at least one month and use the deal database to find the agents that handle material like yours. Reach out to those agents and listen carefully to their feedback.

5. If you have a book with an ISBN, self-published or not, take advantage of your free web site at Filedby.com to promote yourself. (I am a proud co-Founder and shareholder of Filedby.)

6. Google yourself and find and fix your presence anywhere on the web where you can influence it, particularly bookish sites like GoodReads, Red Room, Shelfari, LibraryThing, and, of course, BN.com and Amazon.

7. When you talk to agents, try to discern how aware and conversant they are of ways an author can promote his or her own career. Can they coach you on using social networking and blog touring and your own posts to promote yourself? If they can’t, they might be a great 20th century agent and not right for you in 2009.

8. Link, link, link. When you write each blog post, link out to other sites. Have a blogroll of your favorite sites an encourage them to link back to you. Build your connections on Twitter, Facebook, and LinkedIn. And remember that the people you are linking with have their own agendas, which is not about helping you. Respect that.

I know a lot of readers of this blog specialize in helping writers; I don’t. I want the additional thoughts for writers that I’ve missed. You can post them here or send them to us at info@idealog.com.

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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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The one subject I didn’t touch in last week’s series of posts on ebooks was DRM: digital rights management, the software that controls what you can do with an ebook (or any other) file. This topic is so fraught with emotion and misplaced certainty that it has “third rail” aspects to it. So we tackle it today with the knowledge that we’re going to annoy many people: there’s no way to avoid it.

I hold two conflicting notions about DRM over time:

1. In the not-so-long run (5 to 10 years), we will be holding very little content in our devices or hard drives. We will access files — those we create and those we obtain — from the cloud. We will see only what we have license to see (as managed by our passwords, our iris scans, our fingerprints…) When that time comes, everything is, effectively, DRMed and, because we will all have our own private stuff up there, we’ll be damn glad it is and damn glad it works. Large elements of today’s DRM concerns will disappear (such as whether you, the purchaser, can access content on multiple devices); some other objections to DRM expressed today will become fights about the license, but not about DRM itself (lending your content or giving it to a friend.)

2. Also in the not-so-long-run, just about all of us will be in social networks that make file sharing (to the extent that we still have the files) with multiple users very efficient and very simple. When we’re all on Facebook and an unprotected file is posted, how many degrees of separation will there be between you and your friends and the entire world? Is it hard to imagine that every digital book would be available free on Facebook? Or through Facebook?

Both of these futures are within sight; very few people would say that either is impossible within a relatively short time. And both are very different from the world we have been living in for the past 15 years or so as the digital revolution has gotten started.

There is definitely a school of thought, which seems most widespread in the library community and among aspiring authors and aspiring publishers (those which are not, or not yet, making tons of money from selling content), that we should live in a DRM-free world. There are, broadly speaking, four lines of argument against DRM:

1. That it is commercially stupid, because it stops sharing and viral spreading of the word about content that will only increase sales. This is the “obscurity is a greater enemy than piracy” school of thought. Evaluating the scanty evidence about the effects of piracy for books so far would suggest that file sharing boosts sales more than it cannibalizes them. “So far” are important operative words.

2. That it violates the “first sale” doctrine, by which when somebody buys a copyrighted physical something, they can then do what they want with it, including lend it or sell it on to somebody else.  This argument is often couched in moral terms suggesting that the sellers of ebooks who put on digital controls are not just being unwise but also unjust (even though in the physical world “copying” is not something you’re permitted to do without paying for permission.)

3. That because of DRM, abuses occur such as people losing the use of files they bought (because they get a new device or computer and it won’t transfer or because the seller of the file, who was storing the backup copy, goes out of business or because, as happened last week, Amazon reaches into your Kindle and erases a book that they just found out they didn’t have the right to sell you.)

4. That it is futile because all DRM can be “hacked”. (Of course, more to the point, DRM can only raise the cost of getting an unlocked file: anybody can create one by re-keying or scanning and OCR-ing a text, the more expensive and cumbersome version of “ripping” a music CD.)

Let’s deal with these in reverse order.

Of course, all DRM can be hacked. The clearest evidence of this is that pirate sites carry books that didn’t ever have a digital file because somebody went to the trouble to scan or re-key them. There is pretty widespread agreement that DRM is like a lock on the door to keep an honest person out, not a security guard that will stop any interloper or thief.

I have been a longtime believer in what is called “social DRM”; the watermarking of information tying the file to its purchaser (or licensor). It is often said that those watermarks can be hacked off as well. True, but if the lock is to remind the honest person not to open the door, it would seem like social DRM should do it. Would you like a file with your name on it (let alone your phone number or your credit card number) on a pirate download site?

Using social DRM would make it easier (although not necessarily easy: interoperability problems are not all due to DRM) for you to share a book with your mother or your spouse, whom you could presumably trust not to spread your branded file far and wide. It would serve as a real deterrent to having the file end up on Facebook.

When Amazon erased 1984 and Animal Farm from their customers’ Kindles, it sparked widespread outrage. It properly raised the spectre of what a malevolent government could do in a connected world. That’s a big problem, but, in my opinion, not primarily an ebook problem.

We are headed for a world where our files are in the cloud and we need to be tethered to access them across our devices. The advantage to that is that we’ll have access to all our files in the cloud all the time on any device wherever we are. The drawback is that the cloud also will have access to our devices and that our files could be made inaccessible at any time. That’s a big problem that requires legal protection, but focusing on ebooks would really miss a much bigger point.

As for inaccessibility that results from device changes or people going out of business, I wonder where people making that argument have been for the past 40 years. Can you play a record on your cassette player? Can you load the program you bought on 5.5″ floppies twenty years ago on your new computer? We have been living with format changes that render our content or software impossible to use for the lifetime of most people living. Why should ebooks be exempt from a problem that existed even before the digital age?

It is absolutely true that ebooks reduce “first sale” flexibility. It is reasonable to say that an ebook “purchase” is not a purchase in the way we used to understand the word: it is a license with real limitations. And DRM is the tool by which the file creator and seller enforces those limits: enabling or disabling print or copying capability; allowing or forbidding some number of pass-alongs or use on multiple computers or devices.

But it is also true that digital files don’t “wear out” and books do. And books aren’t infinitely replicable for free (quite aside from any licensing cost), and unprotected digital files are. And the copying and printing you can’t do with a DRMed ebook file, you also can’t do with a book.

The argument that ebook pricing should reflect reduced useability is a reasonable one, although pricing is really decided by supply and demand, not by reason or rectitude. (History suggests that all new formats — from CDs to VHS tapes to DVDs — arrive at a premium price and it is ratcheted down over time.) The argument that ebook ownership and rights need to replicate the world of the print book is just that: an argument. And I don’t think it is an argument that would move me as a content owner if I believed that enabling that replication might also result in many potential purchasers of the IP just securing it for free.

From my perspective, the “commercial stupidity” argument against DRM is the strongest one of all. But I believe the evidence that supports the idea that it is stupid is about to become dated. Most of our ebook experience so far has been in what we called the “vision” stage of adoption: a time when very few people read ebooks. We have only recently moved into the “establishment” stage, largely enabled by the Kindle and the iPhone. The Kindle and iPhone are devices for the affluent and the Kindle, particularly, appeals to an older demographic. I can’t prove it, but I’d say the more affluent and the older are less likely to steal content than the population at large. (I don’t know an adult that downloads free and illegal music; I don’t know a millennial who doesn’t!)

So we have evidence from a world where, a) very few people read books on screens at all and b) those who do skew older and more affluent, that pushing out free copies — and indeed, the effect of piracy as well — tends to increase sales of a printed book. With evidence of what is really happening sketchy (although many people, I among them, believe the “obscurity is more damaging to sales than piracy” argument has held true so far), trying to attribute reasons for it is a pretty speculative exercise. But I would speculate that people are buying books of things they get free digital files of because most people don’t want to read digital files.As ebook uptake grows and, according to our paridigm of adoption becomes damn near universal over the next ten years or so, that will change. In an ebook-consuming world, a free ebook will satisfy the potential purchaser, not spur them to a sale.

There are ebooks available without DRM. Many publishers, including O’Reilly, Harlequin, and Baen, sell them from their websites. There are some non-DRMed files available from Kindle (according to my best source), but it isn’t easy to figure out which ones they are. Fictionwise once reported that as many as 50% of the ebooks they sold were without DRM (publisher’s choice), but we don’t know how that experience will port over to BN.com, Fictionwise’s new owner. Smashwords, the new open-source ebook developer and retailer (you send them your .doc file; they’ll put your ebook on sale at the price you want to charge) has no DRM option and they say they never will. But at least so far, Smashwords is for self-published content, not for big publishers or big authors.

My hunch is that the biggest authors will continue to insist on DRM and that they are sensible to do that. And that lesser authors will often be comfortable without DRM, and they are probably sensible to do that as well. But as the establishment stage of ebook adoption continues, I’d also expect that the “viral effect” of non-DRMed titles will stop being healthy for sales. This is an argument that still has a long time to run.

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In three prior posts, we’ve explored the initial conversation that surrounded the announcement that Sourcebooks would delay the ebook release of Bran Hambric; sketched out what we think are the four stages of ebook adoption; and looked at how publishers see the early “establishment” stage, which is where we are now.

This post is about the other stakeholders: authors, retailers, distributors, and, of course, readers.

In the “vision” stage of ebook adoption, which ended with the launch of the Kindle in November 2007, authors were virtually powerless. With ebook sales even for established books struggling to make triple digits, publishers were gunshy about accepting digitization costs for books other than the biggest sellers and it hardly made sense for authors to make the investment on their own. With the exception of genre fiction, particularly romance and sci-fi, where vertical audiences were able to cluster early, the ebook world was inhospitable to the author working on her (or his) own.

That has changed dramatically. Today Amazon Kindle as well as web services Scribd and Smashwords make it easy for an author to upload a pdf or doc file and publish an ebook. While Amazon appears to be paying authors only about 35% of the selling price to access its army of device users, Scribd (80%) and Smashwords (85%) pay much more. Barnes & Noble’s ebook announcement yesterday didn’t mention author-generated ebook content, but with their goal being clearly to offer as many titles as they can, one must assume they’ll figure out a way to get at it too. So there is a clear path to the public developing for anybody with ebookable content; the challenge will be driving audiences to the content.

At each end of the bell curve, the publisher doesn’t contribute much to that equation. Small books and unknown authors often get little or no support from a publisher; big books and big authors often don’t need help to alert the public to their content. So after several years of publishers driving down ebook royalties to the current Major League standards of 15% of retail or 25% of net, we can expect to see the pendulum swing back to the author. Big authors will negotiate far higher ebook royalty rates; small authors will turn down small advances in favor of self-publishing as the ebook market grows (and the physical books, remember, can be delivered through a variety of POD self-publishing options.)

The biggest book retailers basically stayed out of the ebook game during the vision stage. Both Barnes & Noble and Amazon made a pass at the ebook business, but gave up on it pretty quickly (although Amazon first bought the Mobipocket format, which became the foundation for the Kindle software.) That made sense; there was too small a market early in this decade to occupy the attention of corporations doing billions in sales on printed books.

There were other complications which ultimately left ebook retailing to the smaller players. Early in the vision stage, the two big formats for handhelds were Palm, which displayed on Palm Pilots, and Microsoft’s dot lit, which displayed on handhelds that used the Windows operating system. Adobe Reader software, which was installed on PCs, began back then and has been used continuously to this day. Early in the decade, Palm’s model was to keep control of the sale of Palm ebooks, first through “Peanut Press” and then through the “Palm Digital” store. That meant no other ebook retailer could sell Palm books. When Palm became, by far, the preferred format for handheld ebook reading, they left the general ebook retailers, including B&N, without access to the heaviest users of ebooks on devices.

Mobipocket was created as a cross-platform ebook reader that would work on both Windows and Palm software. The first indication that Amazon would look for a path to ebook hegemony was when they bought Mobipocket in 2005 (they bought BookSurge, the print-on-demand capability, at about the same time.) But even though Mobi ebooks would play on multiple platforms, the market was apparently too small to interest Amazon.

The Palm Digital store became Ereader in 2007 and the Ereader platform, just bought by Barnes & Noble, will work on almost all devices (except Kindle and Sony Reader) now. In the final years of the vision stage, before Kindle, ebooks were sold by independent bookstores (Powells being the most successful) and dedicated ebooksellers like Diesel ebooks. Discounts off publishers’ established prices were only offered in targeted and time-limited promotions and seldom offered even as much as 10% reductions. The stores were “powered” primarily by Ingram Digital, which replicates its print-world role as a digital wholesaler. Competing with Ingram was an upstart company in Cleveland called OverDrive, whose wholesaling operation is called Content Reserve. Content Reserve became the primary supplier of ebooks to libraries.

When Sony Reader came on the scene in September 2006, publishers had four formats to convert their ebooks to: Palm, Microsoft dot lit, Adobe, and Sony. Adobe, which played on PCs, was at that time by far the market leader in titles available and sales. But publishers, still seeing very little market, would not necessarily convert each ebook into all formats. At a time when Adobe had over 100,000 titles available, there were perhaps 40,000 on Palm and fewer than that on Microsoft or Sony.

Amazon’s arrival with the Kindle changed everything: title availability jumped, prices were slashed, delivery was vastly simplified, and the biggest online book-buying audience in the world was constantly pushed to think about ebook reading. That signaled the shift from the vision stage to the establishment stage.

Another critical development that enabled the movement from the vision stage to establishment was the development of the epub format by the International Digital Publishing Forum, the ebook trade association, facilitating use of ebook content across platforms.

Now in the establishment stage, the big book retailers — Amazon, Barnes & Noble, and Canada’s Indigo — are in, competing in every possible way: price, selection, and merchandising. B&N and Indigo are trying to appeal to ebook readers regardless of the device they want to use. Amazon has suggested they’ll go that way, but so far are only pushing the Kindle format for Kindle or iPhone. Prices at Amazon and at B&N are clearly being subsidized in pursuit of a larger customer base. That is going to make things very difficult for the independents or any new entrants to make a go of ebook retailing.

As we proceed in the establishment stage, we can expect publishers to start selling digital downloads and we can expect most web sites to offer vertically-curated offerings. The big horizontal aggregators will thrive for the next few years as the market grows, but the verticalization of consumer attention will eventually chip away at their sales.

The distributors are, or have been, Ingram and Content Reserve. (I say “have been” because Barnes & Noble’s just-announced deal to power the Plastic Logic content offering  positions them as a competitor to Ingram as a digital wholesaler, although there is no suggestion as to how far they want to go and, as of now, several days after the announcement, nobody else to my knowledge has raised this point.) CR has recently done a deal to provide service through Ingram’s print-world competitor, Baker & Taylor. The subsidized discounting taking place at Amazon and B&N is going to make it very difficult for the distributors’ horizontal customers. Ingram may recognize this problem as being similar to what they faced when they tried to launch ebook wholesaling the first time in the late 1990s and Amazon responded with deep discounting.

The distributors have to find new opportunities through web sites that don’t think of themselves as content-centric or content-sellers now (they’re communities.) The trick will be to curate the set of offerings in a very granular way, but there is a marketplace that will develop there that will be served by aggregators.

For ebook readers, it is definitely the best of times, so far. Because of the epub standard developed by the IDPF, most ebooks can be offered for use on multiple devices without high conversion costs (which, in any case, are easier to bear now that there are real sales.) More and more titles are available and, despite the Sourcebooks experiment that triggered this series of posts, we are moving to a standard of ebook release when the book first comes out. I believe we’ll start to see ebook releases ahead of the book before long. The competitors have prices of the content to the consumer plunging. The choice of devices is proliferating and, of course, that means the devices will cost less in the future too. The deployment of smartphones that can also be used as book readers continues to increase. The pieces are in place for evolution to turn to revolution and, when it has, a few years from now, we will move from the establishment stage to “transition”. That’s when the printed-book world as we have known it for about the last century will change into something completely different.

Due to a little programming change we did, I haven’t been alerted to comments and I haven’t been answering them for a little while. I will clean this up on Friday (and then this message will disappear…)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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