Sourcebooks

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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