The New York Times

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

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

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

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

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

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

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

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

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

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

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

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

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For some reason, I had missed the Mark Bowden article in the May issue of Vanity Fair about Arthur Sulzberger, the publisher and chairman of The New York Times. It’s a painful article, really, describing a guy who seems to be intelligent, decent, and ethical, and who is trying mightily to save his family legacy (the article is entitled “The Inheritance”) And not succeeding in the attempt.

Most of the time when you read critiques of legacy businesses: the Times, the networks, the book publishing industry that didn’t digitize before Google, Publishers Weekly, BEA; you get the writer’s assessment of where they went wrong. It’s the “railroads didn’t realize they were in the transportation business” argument, over and over again.

So when the article castigated the Times for its lack of vision for failing to make a deal with Amazon.com to sell the books out of TBR “because Barnes & Noble was a big advertiser”, I see it as 20-20 hindsight. There were very few people in the mid-1990s (when this took place) who would have seen the day coming when B&N would be playing second fiddle to Amazon in many ways. And there is no assurance — none at all — that if the Times had built this kind of relationship with Amazon, blowing off and alienating a big advertiser, that they would have held the position as “the newspaper that connects you to commerce.” Having paved the way, others would have followed. Unless Amazon were loyal, of course. You set your own odds on that.

I usually don’t buy the second-guessing. There is a reason that successful businesses don’t invent their replacements. It isn’t dumb not to see wholesale changes that will disrupt your entire business model. It is normal. Mistakes get made and the Times made plenty, including buying back their stock at peak pricing starting in the 1990s. In Sulzberger’s case, the inability to see the future clearly was compounded by personal loyalty to the wrong people. He might not have had the best judgment in people pinning his hopes on Howell Raines and Judith Miller, but I find it hard (though not impossible) to think less of somebody because they were decent to people whom they thought were decent to them.

Mark Bowden, the Vanity Fair editor who authored the piece, quotes Max Frankel making a cogent (and not frequently-enough made) and then highly-prescient point about how the net disaggregates. The strength of the Times in the 20th century was that it collected quality reporting and editing across a range of subjects in one broadsheet. You might like the sportswriters better in the News or the TV critic of the Post, but you made the choice of what newspaper you bought based on the totality of what they delivered. 

Of course, it doesn’t work that way on the Internet. You can readily read the Times from Baghdad, the News from Yankee Stadium, and the Post discussion of what was on Channel 2. Now each part of the paper has to stand on its own two feet, so to speak.

Vertical takes over from horizontal.

It was truly visionary to see the power of vertical when Max Frankel, who was executive editor of the Times in the 1990s, did. Frankel was asked near the end of his tenure to think about the impact of “computers” (says Bowden, I’d say “digital change”) on the news business. Frankel wrote two memos; one of them would have required the Times to sabotage its old business model (which is what legacy businesses are quite understandably loathe to do). But the other anticipated the vertical message and, had others been able to see around corners the way Frankel did, could have changed things dramatically. The same strategy still applies today, but it would be much harder to make it work.

The first memo Frankel wrote recognized that because computers managed databases, classified advertising in newspapers was doomed. Frankel suggested a Craigslist solution to the Times before there was a Craigslist. That his bosses didn’t buy it is, to me, totally understandable. Classified ads in the 1990s rescued newspapers from a slump in local advertising. Pursuing such a solution would have threatened to cripple an important revenue source.

But the lesson, of course, is this: if the opportunity to cannibalize an existing business is in the ether, do you want to do it yourself or have it done to you? If anybody at the Times took Frankel’s idea seriously enough to think about implementation, then they apparently missed that point. Yes, they could have done it. But, then, so could just about anybody else.

The second memo was the truly prescient one. Frankel saw the power of disaggregation (and, one might say, reaggregation by individuals!) As Frankel is quoted, “It was the totality of the newspaper that was the marvel, not any of its particulars.” Frankel suggested, in effect, that the Times build itself in verticals: be the place to go for sports, for business, for politics. Go after ESPN.com, the Wall Street Journal, and (before they existed) HuffPo and 538.com.

Would the Times be in a different position today if they had established several verticals ten years ago and built them? I think so.

This is an extraordinary lesson for the Big Six publishers. The power of your aggregation is weakening as well. But it won’t be each book that has to stand on its own, but each subject. The Times had an opportunity to work its way past this problem ten years ago.  Big horizontal trade publishers don’t have ten years. They better start to see the need to build up strength in verticals very soon or they will be envying the current position of the Times. Maybe one of them should hire Max Frankel to analyze the situation for them and write a report.

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