Stanza

For those of you who missed the “Stay Ahead of the Shift” speech at BEA, we posted a link to the slides, but over this coming weekend we’ll do even better. From Friday morning, June 12 until Monday morning, June 15, we will post a link to a video of the entire speech! It is available now on PublishersMarketplace to subscribers only; we are able to offer this link through the generosity of Michael Cader to allow non-subscribers to Marketplace to see the speech. If you weren’t there, I hope you’ll take advantage of the opportunity.

Although there is more mystery than information about ScrollMotion’s new “million book title” offering through Apple’s App store (what are these titles? where are they coming from?), two things are clear.

1. By offering a catalog that sits in the ebooks they’re selling you, they are making shopping considerably easier than any other ebook vendor besides Amazon, and maybe even easier than Amazon does for Kindle.

2. Their prices are going to be high, not attempting anything like the deep discounting of Amazon that others are striving to match but, instead, often pricing the ebook higher than the print version.

I don’t take too seriously one oft-raised objection to ScrollMotion. Because each book carries the application, each book you buy for your iPhone will appear as an icon on your screen and take up a bit more of your capacity than the other books (Kindle, Stanza) that have a resident application and only deliver the content itself each time you acquire a new title. Most people will have no problem with the idea that after they read a book, they should delete it from their screen to avoid visual and digital clutter.

What has not been mentioned in the press I’ve seen following this week’s announcement is that Scroll Motion also has some significant advantages in presentation and functionality. They have a split screen capability to enable illustration or graphics on the top while text continues to appear in the bottom. They can synchronize it so that the pictures change in synch with the text movement. So they can do illustrated books better than anybody else. And they have copy-and-paste, notes and extracts, and emailing ability straight from the app.

These capabilities open up the world of textbooks to Scrollmotion, which may be part of the secret to getting such a huge cache of titles. If they actually get anywhere near a million titles (and the first question I was asked by an executive at a competing ebook platform is “what’s the trick behind that claim?”), they will have the most robust offering in ebooks. That’s huge and it is a big component of what propelled Kindle to the front of the ebook parade when it came out. But Kindle also had two other strong gales at their back: a huge book-buying audience at Amazon and very enticing pricing.

What actually concerns me most about Scroll Motion is margin, and I think the pricing reflects the challenges to margin. With Apple taking a 30% brokerage fee off the top of all sales, the publishers have to split the remaining 70% with Scroll Motion. I don’t know what the deal is, but let’s assume it is “50-50″: Scroll Motion and the publisher split the post-Apple swag in half. That would leave the publisher working on 35% of the actual selling price. 

Readers of this blog know that I have been advocating that publishers seize control and move things in precisely the opposite direction by reducing the “discount off retail” they offer to virtual intermediaries. Doing that is a critical if publishers are going to offer the public attractive (and, increasingly, expected) ebook pricing and maintain some semblance of adequate margin going forward.

If I’m right about that, then publishers may be taking a huge step in the wrong direction with Scroll Motion, advertising to other intermediaries that they can afford to live on a miniscule percentage of the consumer’s ebook dollar.

Many of the digerati I know would predict that Scroll Motion’s offering will fall on its face. The app thing is not digitally elegant and the prices are insane. I am not so sure they won’t succeed because I’ve always thought choice of titles, quality of merchandising, and ease of purchase were the most important components of an ebook offering and they are promising to be stellar on all those fronts.

Another book and ebook merchandising topic I’ve been discussing lately on a listserv is whether the retailers are missing a bet not enabling “affiliate” fees to be paid for email referrals in addition to web clicks. We did some research here and of the many online booksellers we check found that only Abe Books (owned by Amazon) overtlyt extends an offer of this kind: if you put one of their widgets in an email, they’ll capture the clickthrus and pay a 7% commission on sales. (Perhaps that can be done with some other widget at some other retailer, but nobody else we checked suggests it.)

It seemed like a slam dunk to us that a retailer offering to spiff customers for an email recommendation that results in a sale would be a winner. It would produce incremental sales and increase customer loyalty. I was, frankly, surprised by pushback on a listserv that suggested that it would result in too much unwanted spam. I am holding fast to my opinion that this is a good idea (nothing can be proven without somebody with reach and scale trying it, of course) but I’m also interested in yours.

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I love and value The New York Times. But I have to admit that every time they write about something I know a lot about, it makes me wonder whether they’re complete and accurate when they write about the things I don’t know a lot about.

There’s nothing wildly inaccurate in Motoko Rich’s “Week in Review” article of May 17 headlined “Steal This Book (for $9.99)”, but there sure is a lot left out. And more that is misinterpreted.

We start out with an eye-catching but pretty phony premise: that author David Baldacci took it on the chin from his reading public because Amazon briefly priced his new $27.99 list hardcover for $15 instead of $9.99. In sadly typical fashion, a few posts from protesting readers become an undocumented “hundreds more” who have joined an “informal boycott” of “digital books priced at more than $9.99.”

Most customers for most products understand that the retailer sets the price they pay. For those who think they know more about the publishing business and think beyond the retailer, they would know the publisher sets the suggested retail price (which is one reason it is to the bookseller’s advantage that publishers have traditionally printed that price on the book itself so the publisher can take some of the blame.) I won’t say there is nobody in the world that wouldn’t blame Baldacci (or any author) for his book’s price, but that would be an ignorant and relatively rare reaction that shouldn’t be suggested as a widespread fact in any story’s lead, particularly not in The Times.

Rich does a superficial analysis of the economics. She is accurate in saying that Amazon is taking a per-unit loss on many titles in the Kindle store because doing so a)  helps them sell more devices and b) helps them “lock in” their Kindle audience. And she accurately reports the publisher’s fear — and the common-sense likelihood — that Amazon will, at some point, insist that publishers bring the prices they charge Amazon into line with what Amazon is charging the consumer. The choice for publishers then would be painful: either give up a growing army of Kindle owners as customers for a book or lower prices to a point that would make ebook margins a fraction of the print book margins they are replacing.

From that point on, we need to add facts and nuance that the article didn’t cover, and we have to discourage one pretty peculiar suggestion that is floated as though serious from a professor of economics.

What the article misses is that, because of the iPhone and App Store — and similar environments that will soon surround the Google Android phones and Blackberries, as well as just about all smart phones from just about all carriers — Amazon has already had to adjust its strategy in ways that will wean people off of their devices! A month or two ago, Amazon distributed a Kindle reader for the iPhone. That meant that Kindle owners could immediately access their entire Kindle library through their iPhone as well as their Kindle. There are two serious consequences of that action:

1. It exposes people who had formed the Kindle habit to reading on a different device, the iPhone. And, if they get an iPhone reading habit, then Kindle is no longer the only game in town. There are at least three other formats (Stanza, Scrollmotion, and eReader) that work just fine on the iPhone and we can be sure there will be more, just as we can be sure that what works on the iPhone will soon have to work on most, if not all, other smart phones.

2. It “unlocks” the content from being chained to a single device. That means that one “copy” of an electronic book can now be read by two people simultaneously: one on a Kindle and one on an iPhone. 

How does this work in practice? Here’s one man’s true story. I bought a Kindle in December 2007. I read on it almost exclusively until Kindle released their iPhone app. Then I started reading on the iPhone because I was reading the same book on two devices. That was in February. Last week I gave my Kindle to my wife and I am reading on the iPhone exclusively. But I’m not reading Kindle exclusively anymore. I have four books open in the four different readers I referred to above. And my wife is working her way through many of the 40 or 50 books I had purchased on the Kindle for myself over the past year. And when she buys a book (I just introduced her, ironically, to David Baldacci), I can read it too.

So this article misses the importance of the iPhone, and its strategic importance particularly in relation to Amazon and Kindle.

The second big thing the article misses is the sheer complexity of the ebook supply chain. There is this proliferation of formats and points of distribution. There is the fact, that Rich mentioned, that Barnes & Noble has bought Fictionwise (a big ebook retailer) and therefore now owns eReader, Fictionwise’s ebook platform. B&N has been the Sleeping Giant of the ebook space: the biggest brick-and-mortar book retailer, probably still the biggest player in the consumer book business, but not a participant in ebooks. The purchases they made were mentioned, but the strategic implications were not. B&N is rumored to be launching their own reader this Fall. Whether or not they do that, they are certainly going to be doing something to compete in the ebook space. That’s potentially a signficant counterweight to Amazon, but it isn’t mentioned in this article.

And if the looming problem for publishers with ebooks is their margins (and I think we can agree on that), then why not mention the ultimate solutions: publishers selling digital downloads directly to consumers and, at the same time, reducing the discounts off retail (the margins) offered to intermediaries? Rich does a nice job of enumerating how the publishers’ cost structure changes with ebooks; she neglects to mention that the costs for retailers evaporate as well when they don’t have to invest in inventory or handle physical goods (and handle many physical goods twice — purchase and return — without any revenue to show for it!)

The proliferation of ereading delivery options is not only not spelled out in this piece, its absence is magnified in importance by the article’s close. Some anecdotal evidence is introduced to suggest that lower prices might increase book purchases. Brian Murray, CEO of HarperCollins, is quoted as saying “if the overall market is bigger, then we should be O.K.”

Then Rich concludes with the punch line that sales might rise not just because of lower prices but also because of the ease of purchase. So we conclude with a former book editor who, after buying the first of Stephenie Meyer’s “Twilight” series and finishing it at 1 am, bought “the next installment on her Kindle from her bedroom”. Well, here’s my conclusion. She could have done the same thing from many different online locations and in many different formats using her phone. I think the Times should tell you that.

Oh, yes, the professor. Professor Fiona Scott Morton of Yale did entertain a market coming from Apple, based on the new Kindle-sized tablet they are reputed to be about to introduce. Morton says: “then the book publisher of Obama’s next book can say, ‘O.K., which of you is going to offer us the best deal?’”

Uh, probably not. That’s not how publishing works. Publishers don’t put their books up for bid between Barnes & Noble and Borders, and they won’t between Amazon and Apple, either. But what is true is that B&N and Borders are aware of their “market share” on major books, and neither wants to be without a book the other is successfully selling. That, ultimately, is the publishers’ protection against pressure from Amazon. Kindle got where it is largely by offering the best selection of any ereading platform. It is in the retailer’s DNA to try to get some exclusive product, but it is in the publisher’s DNA to put everything they have in front of the consumer in every way they can.

May 28 at 11 am: “Stay Ahead of the Shift”, at the Javits Center. A 20-years out view provides a context for viewing the changes we are likely to see along the way, and what publishers should do about it. 

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Just had a very busy day at the London Book Fair. It is hard to post from here; I don’t have my normal 12 or more hours a day at the keyboard of my laptop. But what Book Fairs are all about is the compressed opportunity to encounter smart and knowledgeable people and I had the chance to check out and validate some thoughts I’ve been having about ebooks.

1. The proliferation of formats, devices, screen sizes, and delivery channels means that the idea of “output one epub file and let the intermediaries take it from there” is an unworkable strategy. Here are two simple reasons for that (I’m sure there are many others):

*Epub can “reflow” text, making adjustments for screen size. But there is no way to do for that for illustrations or many charts or graphs without human intervention (for a long while, at least.) Even if you could program so that art would automatically resize for the screen size, you wouldn’t know whether the art would look any good or be legible in the different size. A human would have to look and be sure.

*The link between text and footnotes, and the easy ability to jump back, is a huge variable among ebooks in different formats. There is apparently some sort of manual work and quality control here that isn’t necessarily done by a downstream converter.

Publishers will find that they must do a QC check on every version of their ebooks which is offered, and a “version” can occur every time a component of the supply chain changes.

2. The branding of ebooks is a mess. The publisher brand is being obliterated. You are buying a Kindle ebook or a Stanza ebook or an Iceberg ebook or an eReader ebook and not Random House, HarperCollins, or Hachette. Publishers are apparently just allowing this to happen. This is pretty ironic because most of the same publishers are mistakenly trying to imbue their brands with consumer significance. For the general trade publisher, that’s not actually possible (since they are not distinguished by their content or their audiences). But if it were possible, the quality of their ebooks should be a big part of it going forward and they’re relinquishing the role of “owning” that voluntarily.

In some ways, they’re also relinquishing their primary responsibility as a publisher, which is to control the quality of the product they deliver for their authors to the authors’ readers.

3. The evolving discount structure for ebooks can’t possibly be sustained. Retailers always use margin to gain share. If publishers sell ebooks to eretailers for 50% off, consumers will soon be buying them at 40% off.  On the one hand, we are ten years into a paradigm of imitating brick-and-mortar pricing and terms and it is difficult to change it. On the other hand, ebooks are still only 1% or so of most publishers’ sales, so any change made now will be “early” in the overall scheme of the ebook business.

Somebody’s got to start building a glide path to a sensible structure. This will be complicated, because publishers in the long run will be much more likely to sell digital downloads direct to consumers than physical books. That means that just going to net pricing wouldn’t be much of a solution. With the publisher selling the books online, any intermediary would be able to calculate what percentage of the retail-to-consumer they were being asked to pay.

The conversation about the prices of ebooks have centered around the costs that publishers don’t incur: printing, binding, cash tied up in inventory, warehouse, returns. But publishers say the manufacturing cost of a book is only about 10% of the retail price and we still have to maintain the operation to do all the printed book stuff and we are still investing to build the infrastructure to do the estuff.

Everybody’s right, but we’re ignoring the retailer side of it.

Retailers also avoid a lot of cost: rent, clerks, cash tied up in stock, shelving, returns. They also have front end investing to do to build an infrastructure to process a digital download business.

I think if I were a big publisher, I would make it clear that the era of 40, 50, 55, 60% off retail for digital downloads is one that must come to an end. I’d lean to a phased reduction and, in the short run, all kinds of support (including additional margin) to help “retailers” (Stanza, B&N Fictionwise, Apple’s and RIM’s App Stores, and every store served by Ingram and Content Reserve) build their offering and their capability. 

The big publishers will have extraordinary leverage to recreate the paradigm. When there’s an ebook market of a size that matters (getting close), people will search Google for their favorite title if the search at their favorite ebook retailer doesn’t deliver the title. There will definitely be retailers that will take the business at lower margins, as can the publisher itself. Boycotting high profile books will be a very dangerous strategy for a retailer.

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Adam Hodgkin at the Exact Editions blog posted a piece that explains the ebook strategies of Apple, Amazon, and Google in simple terms. Hodgkin’s piece really helps think things through, but I think his analysis is a bit oversimplified (which is part of why it helps think things through.)

Hodgkin sees brilliance in Apple’s move not to enter the proprietary ebook wars, but simply to be a facilitator of sales to iPhone users (iPhones being, at least currently, the most widely-distributed handheld device deemed suitable for ebook reading.) He takes special note of Amazon’s 30% “market maker” fee, which he posits might help drive down the accepted price for middle services in the ebook supply chain.

And, as Hodgkin sees it, Google and Apple are pursuing directly opposite strategies to bring the ebook business to themselves. Google is betting that the future is licensing whole libraries in the cloud and Amazon is betting that it is buying ebooks one at a time to download to your device.

Hodgkin also notes that Apple’s 30% fee makes the 37% share Google will take before paying Book Rights Registry and the 55-65% discounts Amazon takes on Kindle ebooks (I actually doubt the discounts are quite that high on the vast majority of the Kindle books sold and Amazon discounting practices sharply reduce the percentage they are taking of actual selling price, which is, presumably, what Apple’s 30% would be based on) look very aggressive.  By this move, he says,  ”Apple will thus appear to most publishers and authors as a reasonable partner, a less monopolistic partner, than either of the other West coast web giants.”

Hodgkin concludes the piece by seeing ebooks as a 3-company race (these three) and says he is “tempted to call it for Apple” although “there are quite a few laps to go.”

That last sentence is the absolute truth.

This piece took no note of Sony, Stanza, or the potential impact of broadly-distributed epub files. Perhaps Sony is considered part of the Google strategy, except that the 500,000 public domain books Google has made available for the Sony reader are free (aren’t they? I am happy to be corrected if I have that wrong) and they are downloaded, not left in the cloud (unlike the PD books that can be read directly on the iPhone, with the toggling between the OCRd version and the original print, which Google announced two weeks ago, and which do remain in the cloud.)

It also took no note of Barnes & Noble’s recent purchase of Fictionwise or the fact that Waterstone’s has teamed with Sony Reader for distribution in the UK.

And if Apple’s strategy is to capture 30% of the ebook revenue for everything that goes to an iPhone, they have a big hole in it already. One buys Kindle ebooks from the Amazon store, not the App Store. They download directly into the iPhone from the net (no intermediating PC necessary). I don’t see how Apple gets any of that revenue. (I am not sure about the “why” of this from Apple’s POV, except that some smarter people have told me that it will be much harder for Kindle to repeat this trick on other phones, so it could be a competitive move by Apple against Nokia and RIM.)

But I think, most of all, this analysis omits full consideration of the discrete functions served by the retailer in the supply chain. 

The online book retailer needs to do these things: 1) secure a customer’s attention 2) aggregate titles to choose from, 3) merchandise, which is enabling discovery through “shopping” 4) provide search, which is enabling discovery through “asking”,  5) transact, which includes delivering the file and accepting the money, and 6) provide customer service.

If a publisher or retailer or ebook platform provider sets up to sell through the App Store, Apple gives them a head start on number 1, nothing on number 2, nothing on number 3, nothing on number 4, presumably all of number 5, and probably nothing on number 6.

Amazon provides it all. I am still trying to understand what Google provides; I don’t think we have all the answers on that yet, except that we know they’re providing a ton of free econtent that will make selling other ebooks at substantial retail prices that much more difficult for everybody. This should not surprise anybody and it is not a knock on Google. They are primarily in the free content business. They are not in the “merchandising” business. And they don’t have the most saleable titles to sell; they actually, title for title, have the least saleable titles. The value of what Google has is in the aggregate and was always intended to be. 

It is also critical to keep in mind that the ebook market for consumers has not happened yet! Publishers are seeing sales of about 1% of their revenue. I am a bit abashed about how over-optimistic I have been about ebooks for the past ten years (a by-product of having personally read more books on devices than on paper, by a factor of about 4 to 1, in the 21st century, and about 40 to 1 since I got my Kindle.) I can see ebooks getting to 7-10% of the units sold for consumer books in the next 3-to-5 years and I’m the optimist.

And with 85% of even that incipient market having not happened yet, most of which will be read on devices that haven’t been delivered yet (including future versions of Kindle, Sony Reader, iPhone, etc.) and, further with whole business models (subscriptions, book-of-the-month plans, bundling of titles together, offers by publishers to give ebooks away with print or audio books) which have hardly surfaced yet, we can only imagine what more changes we might see between now and then.

When there is a real ebook market, there will have to be real ebook merchandising. That means complete metadata on the titles, including reader reviews and information about the printed book publication. (Amazon, because they have it for their regular store, has it for Kindle books. Nobody else comes close, although one presumes Fictionwise will get that printed book metadata once they’re integrated with Barnes & Noble.)

Michael Tamblyn pointed out in his widely-circulated “6 things” address that book merchandising on the web hasn’t really made much progress since Amazon invented it in the mid 1990s. What Kindle has got, what Stanza has built for the iPhone, and even what Fictionwise has,which might be the best presentation of ebooks even before being enhanced by B&N (and even without the book information as mentioned above), are not really well suited for presentation on the smaller screen of a device.

Apple is not providing the full suite of retail services. If you assume that somebody has to be the bookseller here: pull the titles together, curate them, group them, put the right stuff out “in the window” or on the virtual “front table” on a daily basis (or, on the web, a more sophisticated basis than “daily” suggests) and handhold the customer through any further questions (I’ve gotten great customer service attention for ebook problems in the past from both Powell’s and Diesel Ebooks), then there will be a lot of costs to pile on top of Apple’s 30% take for providing the venue and ringing up the sale. Apple is providing the real-world equivalents of “rent” and “shipping”. Looked at that way, 30% doesn’t seem so cheap, even if it is a very high-traffic location.

This is going to get a lot more complicated before it gets simpler. I didn’t mention Scrollmotion, another ebook format that can handle illustrated material better than any of the others so far. I didn’t mention publishers selling direct, which they are definitely going to be doing more and more. I didn’t mention that every phone manufacturer and cell phone network is going to go all out to compete with Apple and AT&T and their devices will handle ebooks too and they’ll have app stores too. I didn’t mention that directing you to your choice of format — any ebook or a printed book which could be in different formats — is (one of) the real end game(s) here. Neither of us mentioned Adobe Reader format, which is still the market leader in ebook units sold.

It isn’t just too early to predict a winner; it is too early to declare the finalists.

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I want to try to lay out a strategic approach to enhanced ebooks which I believe is more extensive than any general house has shown an inclination to pursue so far. I thought the clearest way to express this would be as a letter to an author which is, after all, how a strategic approach would have to begin. (For the purposes of this exercise, I’m sidestepping the obvious requirement to address authors through agents. The best approach would be to introduce the idea through a consultative process with agents and authors to bandwagon some advance support, but we’ll ignore that as well for the moment.)

I also want to stress that I’m thinking this through in here from the perspective of the general trade publisher: one not yet focused on niches and one whose brand is not a consumer brand. I don’t expect houses like Wiley, O’Reilly, or Harlequin to see as much of a gap between what is said here and their present practices as those houses that dominate the bestseller lists and have the most high profile authors.

Because I believe in short posts, and this publisher-to-author letter would not be short, I am going to break it into pieces, sort of a Dickensian approach to telling the story but without the frequent introduction of new characters. This first piece explains the overall strategy for a house-wide approach to “enhanced ebooks” by a notional company I’ve called National Trade Publishing. And it tries to make the case to the author to participate in the spirit necessary for the times: the spirit of experimentation.

Dear NTP Author,

As you know, the fastest-growing market for publishers and authors today is in ebooks: electronic files carrying the content that we have always sold in printed form. Although it is growing the fastest, and has been for years, the ebook market still only accounts for about one percent of our sales (and probably, of yours.) But because we believe that these sales could well reach 10% in the next few years and grow even faster after that, and because we believe that ebooks will be adopted first by many of the most important parts of our audience (and yours): reviewers, writers, and other thought leaders, we at National Trade Publishing are initiating new efforts to deliver a more robust ebook program. This presents opportunities for all our authors that I hope you’ll take advantage of.

There are three important things we want all our authors to understand about ebooks:

1. They present the opportunity to deliver additional content and features to consumers with no additional run-on production cost. Traditional printed books cost something additional for every extra page we put into them; ebooks don’t. (This doesn’t mean ebooks add no costs: the enhanced ebooks we want to do will require a little additional effort from authors and some real developmental effort from us. This letter is just the start of us expending real resources to try to make something new happen.)

2. We don’t know anything yet about how ebook pricing will ultimately work or, put another way, how well either authors or publishers will do as ebook unit sales rise. Publishers, ourselves included, have endeavored to keep ebook prices close to print book prices and, for the most part in the consumer book area, to sell individual titles the way we have in print. But we see pressure on the pricing and we also see the likelihood that various bundle and subscription models might become very important in the book world. So we’re going to need flexibility in how we price these enhanced ebooks. We’ll need modifying contract language to enable that.

3. We speak of ebooks as if they are one thing, but they’re not. Most ebooks today are still read on desktop and laptop computers; only a minority of sales are for handheld devices like iPhones or Kindles. We expect this to change; Kindle is having a big impact on changing it. What this means is that what an ebook can do: whether it can “show” video, make use of outbound links, deliver clear images (even in black and white, let alone in color) is variable. We can’t give the same capabilities to somebody on a Kindle as we can on a PC. And what we can give somebody on an iPhone (and ultimately a Blackberry or an Android) may depend on whether the ebook platform is a Stanza reader or a Scrollmotion reader.

So, with all that in mind, National Trade Publishing is building a dynamic database of resources — digital assets — to make the best possible ebooks in all possible formats, as we learn what that means and what it will take to do it. We are offering you the opportunity to collaborate with us to invent the future and, of course, to share appropriately in the rewards. We are also offering you the opportunity to collaborate with other NTP authors in marketing through your books and theirs, but only if you choose to.

(To be continued…but not tomorrow)

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