Writer’s House

Sometimes something seems very obvious to me, but other people — smart people I respect — don’t see it that way and it makes me wonder if I’m missing something.

What I’m thinking about that way today is the future of “open territories” in the ebook world.

When English-language rights are sold to US and UK publishers, some territories outside the home markets are “closed” and others are kept “open.” Closed territories are reserved to the publisher who owns them; in open territories a US edition and a UK edition can both be legitimately sold.

For most of my career in publishing, Europe was an open market. Both the American and British editions of a book would be available there. Although currency fluctuations came and went and could temporarily change these things, most times the US edition carried a lower cover price (when converted to the local currency) but the UK editions were usually more widely available. Sales reps from the UK tended to call on the once-small but persistently growing number of bookstores that carry English-language books. British publishers had warehouses that were closer, shipping costs that were lower, lead times that were shorter, and customer service groups that were more comfortable dealing with Europeans.

With the coming of the EU, British publishing has moved to formalize and make contractual what was previously just their natural advantage. British publishers pointed to the fact that once an American edition was sold in Europe, EU rules would allow its importation into the UK itself! So unless the European market were closed to US editions, Britain itself was not closed to US editions. And that, quite naturally, was not a situation that British publishing could accept.

Of course, for an American edition to wind up on a British shelf would require two trips across the water: one from a US warehouse to Europe and then another from Europe to the UK. It might seem that this double-shipping would wipe out any presumed US pricing advantage, and I don’t recall any evidence of US-published imports showing up in any number. Nonetheless, for the past several years, UK publishers have succeeded frequently, if not universally, in excluding the American editions from Europe.

As with all things in publishing this subject is being revisited as publishing adjusts to ebooks.

As we know, the ebook market started to take off in the US in late 2007 and has grown to be a solid double-digit percentage of publishers’ sales with much higher numbers, often 50% or more, of the units sold in the opening weeks for major titles. In the past few months, British ebooks have started on a similar, perhaps even more accelerated, growth trajectory. So ebook revenue is squarely on the radar screen of the English-language publishers who are increasingly cognizant of English’s position as the world’s leading second language. Nowhere is this effect more evident or the future sales expectations greater than in Europe.

Right now, the European ebook market is still miniscule. Germany, one of the countries with the most advanced local-language digital infrastructures, recently reported ebook sales of one-half of one percent of the market. But it is not uncommon for German bookshops to see double-digit sales percentages of English-language books in their shops so we know there’s an English-language market there. English-language publishers, with the experience of explosive growth in their home markets under their belts, have good reason to expect the same thing to happen in Europe and for them to be among the principal beneficiaries.

But there’s a problem. Or, at least, I think there’s a problem.

The open-market competition for print books is waged primarily around service. The reps that call on the stores tend to take business away from the companies that call less often. The advantages of proximity and familiarity favor the British; sometimes the advantage of price can favor the Americans. But no trade publisher in either country tries to create cheaper, locally-priced editions of trade books for the European market.

In the ebook market, the competitive factors that prevail in print are moot. If a store sets up to sell ebooks, it will list every one in the catalogs it offers. As the ebook market matures, that will mean that, if the territory is open, both the UK and US editions will be available to the consumer. And with no other basis on which to make the decision of which to buy, the customer will almost certainly choose the ebook edition with the lowest price.

The logic of this seems inexorable to me. As the market grows, as the publishers become more aware of it, and as the consumers learn more about what is on offer, offering a lower price will be the only effective way to grow share in an open territory. This is damaging to everybody except the ebook consumer, who will get windfall price cuts. The publishers will gain share, but lose revenues. The authors, operating on a piece of the sale price, will lose revenues. And the lower prices for these English-language ebooks will further erode local-language sales and further undercut brick bookstores.

(European bookstores are extremely vulnerable to sales erosion as the market shifts to digital because the English-language selection they offer will look increasingly paltry compared to what will be available online.)

But some very smart agents seem to see something different from what I see. At our “eBooks Go Global” conference at BEA last week, Simon Lipskar of Writers House specifically declined to insist on closed markets and celebrated the virtues of “competition” on behalf of his writers. In another BEA session, Stephanie Abou at Foundry was quoted by one reporter saying “our goal to get authors the best shot at being published the best way. what that means is we have this fight to keep Europe non-exclusive.”

Of course, timing is everything in life and in dealmaking. There really is no European market for ebooks to speak of yet. There are structural impediments to growth. A panel including Google, Kobo, Ingram, and OverDrive at “eBooks Go Global” spelled out some of the complex local compliance issues that make it take time to set up a store in each new country. My concern about a “race to the bottom” assumes a much more developed market than we have today, with both US and UK editions made ubiquitously available in a European ebook market that resembles what we’re seeing today in the UK, if not in the US. That may be two years away, or even more.

So maybe Simon and Stephanie do see what I see but they might also see it as far enough away not to be relevant yet for deals they’re making now. But maybe our difference is more fundamental. They both referenced “competition” in expressing support for open territories. It is precisely my concern about the effects of price competition that it seems to me they’re ignoring.

It feels to me like I must be missing something somewhere. Not only do I think the agents should be moving to close markets in the interests of their clients, I think publishers in both New York and London should be moving to close markets because they’ll ultimately make no money on the books for which the markets are open. I’d say it is better to control a closed market for half your list (or even a third of it!) than have an open market for all of it.

This subject is of great interest in the US but it is existential in the UK. Sales made in Europe are already critical to UK-based publishers, on titles where Europe is open as well as on titles where they control it contractually. Since UK publishers are already trying to close the market in their favor for print, one can hardly expect them to be less zealous about closing it for digital books. But their leverage to close Europe, for digital or print, is primarily based on their ability to sell print in the UK. Those are the sales they can make that nobody else can. And those are the sales that finance serious advances that nobody else will pay.

But will that leverage vanish as bookstores diminish and the sales of print become less important?

The panel that will explore this subject at our “Global Perspective on Digital Change” conference in London on June 21 will be my next chance to be enlightened on this subject and shown the flaw in my thinking if open territories for ebooks are not a race to the bottom. We’ll have publishing CEOs Richard Charkin of Bloomsbury and Toby Mundy of Atlantic Books and agent David Miller of Rogers, Coleridge and White discussing this topic with Philip Jones of Future Book moderating. I’m sure this panel, along with many others on that day, will be opening some minds. Mine is lined up to be among them.

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From the beginning of Digital Change Thinking Time, which for me goes back to the mid-1990s, “subscription” has been high on the list of future expectations. That’s natural. The subscription model has emerged as the dominant one for cable TV (although there is still some pay-per-use) and Netflix works that way as well. Lots of people subscribe to satellite radio. Rhapsody is a successful subscription service for music. Pandora for music has a free model and a paid model, as does Spotify.

Subscriptions actually have a history in trade publishing too, where they were called “book clubs”. The print book club model, which also depended heavily on the club’s role in curation (or title selection), was doomed by the arrival of online bookselling. But O’Reilly has demonstrated the common sense (and worked out the mechanics) of a subscription model for ebooks with their wildly successful Safari program for the past several years.

In the past week, Publishing Perspectives offered up a thoughtful piece by Javier Celaya speculating on a free subscription, ad-supported model for ebooks like Spotify is for the music business. PP’s editor, Ed Nawotka extended the speculation to a model of piecework sales: buying a book in chunks or chapters.

Neither of those is what I have in mind. This piece by John Konczal, building on what’s being done in the textbook business, comes closer.

We’ve reached the point where Amazon with their Kindle and B&N with their Nook are perfectly positioned to make a subscription offer. Publishers will have mixed feelings about it and the agents for the top-selling authors have good reasons to be against it, but the proposition seems (to me) to be one that will be compelling to many consumers and will offer tremendous advantages to the retailer that offers it. In fact, I’m a bit surprised it hasn’t happened already.

Here’s how I imagine it working.

The retailer creates a pool of content that will be offered through the subscription service. The proposition to the consumer will be that for a price (let’s say: $50 a month), they can read all they want from the content pool. In turn, the retailer divides 70% of that money (or 75% or 80%) among the publishers in proportion to how many “pages” (a somewhat arbitrary but internally consistent measure) of their material have been read. Of course, all available public domain content will be in the pool.

I am guessing that a very high proportion of the owners of self-published and small press books will find the proposition attractive from the beginning. How the big publishers would react is less certain. My belief is that the smart ones will try it: put in some titles, perhaps from their deep backlist, to get some visibility as to how the program would work.

Meanwhile, the consumers who do this will determine the course of events from there. It seems possible that the impact of this offer will be similar to the impact of the e-ink readers: the heaviest book consumers will see the greatest financial merit in the proposition. And just like customers for Amazon Prime (one annual fee for shipping) and Kindle or Nook owners are highly resistant to buying outside those programs, customers for this subscription service would largely be lost to other book consumption. It will take a more powerful desire to read any one particular book to make it a purchase outside the subscription than it takes to buy it now.

So that, in turn, will drive more books into the program. Authors, and therefore their agents, won’t want to be left out. The early entrants to the program will reap a relative bonanza because they’re on a shelf with less competition which will drive further expansion of the title base.

The tricky part here is setting the right price. As I was thinking about this piece, a reader pointed out a conversation on the Internet about this subject from a different perspective. Here the question was: “what would you pay to read any book anytime you want?” The bidding seemed to begin at about $100 a month. That strikes me as high, particularly since the pool of titles would certainly lack most high-profile books, at least in the beginning.

But a retailer setting the price too low could cost itself a lot of money. Lots of heavy readers spend more than $40 or $50 a month buying books now and, of course, they’d be the first ones to enter such a program (to save money). The benefit for the retailer would be that those customers would be “locked in” to the service, not buying anything elsewhere.

Of course, this idea runs totally afoul of agency pricing. The publishers who are using agency will have the hardest time even experimenting with such a subscription program. On the other hand, if the subscriber base becomes large enough, it will force some reconsideration.

There are all sorts of wrinkles one can imagine beyond this initial idea. There could be a “premium” subscription that had the higher-profile books, creating a more robust revenue pool for them. There could be “vertical” subscriptions for genres or topics. There could be a special discount for subscribers to purchase books not in the pool (except for agency books, of course, whose terms would not allow it.) And a company like Harlequin or a sci-fi imprint of a major house could create their own in-house pool that might attract subscribers. (In fact, the innovative small sci-fi publisher, Baen Books, already has a subscription service!)

But with ebook consumption now climbing rapidly toward half or more of the sales for many titles, it seems inevitable that models that won’t require a transaction for each and every book must emerge. I’d be a bit amazed if conversations about an idea like this, or something like it, aren’t taking place inside the biggest ebook retail shops already.

We created a “thinking about the future” panel for both of our upcoming Publishers Launch shows. They will entertain the subscription question, among other issues, with an eye to the special complexities of international implementation. At our eBooks Go Global show aimed at international visitors and their trading partners at BEA, the panel will feature Tracey Armstrong, the CEO of Copyright Clearance Center; publishers Ricky Cavallero of Mondadori and Cyrus Kharadi of Random House; and agent Simon Lipskar of Writers House. This panel of four incredibly sharp and thoughtful people, moderated by Ed Nawotka, the editor of Publishing Perspectives, represents a real diversity of viewpoints and will explore the practical barriers to this and other innovations across international markets.

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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.

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