The Shatzkin Files

Will print and ebook publishers ultimately be doing the same books?

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Recent performance reports from Simon & Schuster and Penguin, which can be taken as indicative in some ways of what’s going on at the rest of the Big Six and instructive about what’s happening across trade publishing, say that revenue is flat or down, profits are up, and the ebook share of revenue is growing. The most recent reports were that ebooks grew to 14% of revenue at Penguin and at Simon & Schuster.

First a few observations about what those numbers really mean, and then some thoughts about the implications for the months to come.

We must remember we’re comparing apples and oranges when we talk about the percentage of sales that are ebooks versus print books. This percentage is, presumably, arrived at by adding print book sales (which are shipments subject to returns) to ebook sales (which are actual consumer purchases with zero or negligible returns) and then dividing the ebook revenue number by the total revenue number.

This explains the apparent anomaly pointed out in the S&S reporting which sees the ebook percentage higher in the first quarter than in the second, which has occurred in successive years. This is not actually hard to understand. One report I saw pointed to part of the explanation: that Christmas recipients of ereading devices are loading them up in January, an effect which is absent in the second quarter. But what is also the case is that Q1 print sales (which are shipments, let’s remember) are depressed by two factors: they contain returns from Q4 Christmas sell-in and Q1 is not normally a big one for new book shipments.

So as long as there are larger shipments of returnable print taking place in anticipation of Christmas sales and large numbers of new device owners created each Christmas, we can expect the Q1 number to be artificially inflated and the Q2 number to show an apparent decline.

The annual Q2 decline is only apparent; it is not real.

The percentage of revenue number lends itself to misinterpretation. It is an average. You will pardon me for repeating the truth that “the six-foot tall man drowns walking across a river that is an average of three feet deep.” Averages are misleading. That mid-teens percentage number, quite aside from the apples-and-oranges base of it, is also misleading. (I hasten to emphasize that nobody is being deliberately misleading; there is no suggestion intended here that the number isn’t real or that there is any desire to lead people to mistaken conclusions by reporting it.)

But 14%, or about 1/7, could lead people to think that the book that sells 35,000 copies is selling about 30,000 print and 5,000 digital. That’s seldom the case. First of all, “on average” ebooks generate lower unit revenues than print, because so many of them sell for less than half the print retail price when books are in hardcover. So if 14% of the revenue is digital, something more than that percentage of the units are digital. Let’s say that number is more like 17% or maybe 20%.

Secondly, that number is, at least to some extent, historical. It certainly isn’t a forecast. Everybody’s forecast would be for that number to go up. And everybody would agree that (if you factor properly for the Q1 to Q2 and shipments-to-sales anomalies) it has gone up between the period being reported and the reporting.

Third, not all of S&S’s or Penguin’s print list is available as an ebook. (As short form publishing enabled by ebooks grows, the reverse will also be true, but it isn’t in any appreciable numbers yet.) That means the title base for the 14% of revenue and (notional) 17% of units is a smaller number of titles than the print title base. So for books available as both print and ebooks, the percentage of units sold that are digital is substantially higher than that. I’m not familiar enough with the houses’ lists to make a truly informed guess about many titles are heavily illustrated or children’s book titles or deep backlist on which ebook rights are too confused to allow an edition to be published. But it would certainly be reasonable to assume that for straight-text narrative books, the percentage of ebook units to the total is routinely 30% or more.

The power of the ebook marketplace was underscored by a recent Simon & Schuster report of first day sales for a major bestseller. USA Today reported on July 13 that S&S claimed 175,000 total units sold on the first day of availability of Jaycee Dugard’s “A Stolen Life”, of which 100,000 of the sales were ebooks. (The article doesn’t spell it out, but presumably these are apples-to-apples, cash register sales of books and audio as reported by BookScan and, as always, cash register sales of ebooks. If they compared print shipments to ebook sales, the number would probably be more like 40% than the 57% this reporting implies.)

Because ebook sales are, at the moment, revenue dollar-for-dollar, more profitable than print book sales, publishers are able to report revenues flat or down and profits up. With the industry standard of 25% ebook royalties having prevailed for a year or two now, this news definitely catches the attention of smart agents. But, the agents’ future success in negotiating better terms aside, is it likely to stay that way?

One big relevant variable that is hard to predict is how successful publishers can be keeping retail prices up for ebooks with a diminished print price benchmark. If you’re getting something for $9.99 or $14.99 that you believe lots of people are paying more for in another form, there’s evidence that it is a bargain. It will be a bigger challenge to keep prices, and therefore revenues and margins, up — even with the power of agency, which only six publishers in the world today are really equipped to deliver — when the printed book price isn’t seen as a basis for comparison.

In fact, the current improvement in the profit picture suggests that the big houses have done a remarkably good job of managing the transition from print to digital so far. What is implied by the reported numbers, but receiving little attention, is that print sales are down pretty dramatically. Print runs are down with one trade house telling me that their midlist non-fiction first printings having typically declined by 40%. A larger house suggested that the print being shipped from their warehouse is down 35% in less than two years. I’m not close to the numbers but that might mean that for segments of their list shipments are half what they were less than two years ago.

Smaller press runs mean higher unit costs for printing and binding but they also mean fewer units are sharing the cost of design and page make-up. Many of the fixed overheads in publishing houses: warehouses, production departments, catalog creation, and lots of IT, are really only necessary to support the print component of the business. For the past two decades, commercial success in book publishing (and, as the demise of Borders has made clear, in book retailing) depended on an efficient supply chain. Being in stock but not overstocked, shipping quickly, being able to get fast turnaround on reprints, processing returns promptly to facilitate collecting accounts receivable, and providing accurate data to accounts as well as to internal stakeholders all require investment but generate value that shows up in profits.

Until the Kindle came out in November 2007, the question about ebooks was “will this ever be a business?” Since then we’ve watched the ebook share double or more every year, including last year. Since 2008 or 2009, the question has been “how long can this kind of growth go on?” When the share is upwards of 30% for most narrative books, which I think it is now, we know that can’t go on for two more years because that would be a mathematical impossibility.

So the questions about ebooks now are “when will this slow down?” and “is there a plateau at which there is a sustainable and substantial print book business?” If the answer to the first question isn’t “very soon”, then the answer to the second question must be “no”.

The other question being called here is whether the publishing of straight narrative texts becomes a separate and distinct business from the publishing of illustrated books. As long as the print component is commercially important to the success of narrative books, it’s perfectly logical for a publisher to do both. The narrative books and illustrated books, after all, can ride in the same box to Barnes & Noble, Ingram, or any local bookstore. Sometimes they are even manufactured by the same printer (although far less often than they were decades ago.) Their inventory can certainly be monitored with the same capabilities and people (if somewhat different algorithms).

One great imponderable is what the market for ebooks will be beyond the verbatim replication of narrative text. That’s where the growth has been. For illustrated or enhanced or apped ebooks, the success stories are anecdotal, not indisputable trending. It’s true that the right devices aren’t as widely distributed yet, but it is also true that we have no clear evidence that those ebooks will be as compelling to the consumer as the narrative text ones. We do know they’ll cost more to create.

One smart ebook head of a major house remarked to me the other day that their cookbook editors were still preparing their content primarily for the printed page and the digital versions were developed after that. “If our editors are still doing it that way two years from now,” this person said, “then as a company we’re doing something terribly wrong.” That statement is correct, and encompasses the possibility that something like the packages of cookbook content within containers won’t have a profitable market even in digital form, and will have to be monetized completely differently. We don’t know yet as an empirical fact that people will buy digital “cookbooks”, the way we know for sure that people will read narrative text on devices very happily and not look back.

(Cooking and food content? A perfect candidate for the subscription model!)

What we do know is that a high percentage of illustrated book sales is for gifts. To the extent that’s true, it adds a barrier that has nothing to do with design or functionality to the migration to ebooks. And those books, presumably more than narrative text books, benefit from the showroom effect that bookstores provide. And we know what’s happening to bookstores.

The rate of migration from print to digital for narrative text over the past four years would take us to a smidgen of a print business for that kind of book in only a couple more years if it does not abate. If publishers find their print throughput down another 35% over the next 18 months, most of the biggest narrative books are selling upwards of 75% of their units as ebooks, and most of what publishers ship from their warehouse is a different title base than their bestseller business, the game will have changed completely.

We could evolve so that the skills and organizational requirements to publish narrative content, if print becomes a small component of the revenue, will be quite different from what’s required to publish the illustrated content for which print remains an important part of the revenue. In that world, what constitutes a sensible portfolio of offerings for what we today call a “book publisher” might be defined quite differently.

One thing that occurred to me for the first time writing this piece is that Amazon’s apparent resistance to giving any publisher except the Big Six the ability to sell under agency terms gives the Big Six a useful card to play with agents on the biggest books. Agents for big authors tend to like the agency sales model. (This is inherently confusing; the “agents” being referred to have nothing to do with the “agency” in the model…Oh, well.)

The stakeholders who care most about maintaining retail prices for “branded” books (big authors and big efforts, like heavily-researched biographies that take years to write) are the most powerful agents and the Big Six publishers. If I’m right about this, I think we can safely categorize it as an “unintended consequence” on Amazon’s part to have a policy in place that actually strengthens the Big Six’s hand against the rest of their competition for big authors.

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  • Pturner108

    One big consideration (and one that my be a shifting dynamic) is the proportion of front-list  pBooks pub’d as paperback originals (at lower prices). That effects the relative revenue benefit of eBook sales as part of the blend of p/e.  Back-list eBook sales are also relevant here. Many publishers are front-list driven, of course, but there are also lots who traditionally saw 50-60 of their revenue from back-list.

    • Yes. The margin and revenue comparison between print and ebook changes considerably when you’re clear of the hardcover. In fact, John Makinson of Penguin made the point at our Publishers Launch London conference that it is quite possible, perhaps likely, that ebooks are cannibalizing the trade paperback sale during the hardcover window. If that’s true, the publisher would see a bigger unit performance than expected in the first (hardcover) year but then be disappointed at the combined unit total in the second (trade paperback) year. Because the books that are paperbacks now came out as hardcovers 12, 18, or 24 months ago, it is very hard to do the analysis because 12, 18, or 24 months ago was literally, a different era for ebooks than where we are now.

      Some things won’t be clear for a while.


  • Good article. Regarding your epilogue, another unintended consequence may be that readers largely abandon the overpriced “brand names” and find their own new brands and authors. The new audience doesn’t automatically have a vested interest in those authors.

    • Most books aren’t bought by a new audience; they’re bought by people who have bought lots of books for years. They *have* favorite authors. Over time, things might change but there will be no sudden switch from brand names to unknowns.


  • Gene Schwartz

    Excellent analysis Mike. When will some attorney general wake up to the fact that the Amazon  handling of the agency plan is blatant price discrimination by excluding smaller publishers and tbeir authors from the benefits.

    Gene Schwartz

  • Obviously, it’s too soon to tell. But the statistics that have just come out show the publishing industry as a whole is actually expanding and making more profit than ever (just saw the news on my Twitter stream – sorry I can’t be more precise just now). So the digital revolution has actually worked to the advantage of everybody: traditional publishers and self-pubbed authors alike. It also means the Big Six (no doubt helped by Amazon) have very successfully taken to riding the tiger of the digital revolution…

    So e-books are becoming just what they were always meant to be: a simple new “arm of publishing”! What the e-book does is solve the distribution (and returns) problem – so it has hurt booksellers who didn’t see it coming (Borders) and helped those who did see it coming (Barnes & Noble, Amazon). Publishers who adapt fastest to this new “arm” will gain the most and come out the winners!

    • I think most of the US publishers of any size or scale *have* adapted to this new channel (which is what I call what you call an “arm”). But I am not sure we can declare victory yet. The big publishers are getting the opportunity to sell these ebooks on the back of their ability to sell print. If they couldn’t deliver that (which won’t happen to the biggest ones) or if it becomes irrelevant (which could), their leverage to obtain the rights for ebooks on favorable terms would be crippled.

      As you point out, ebooks “solve” (or, at least, ameliorate) the distribution and returns problems. Solving those problems used to require big, well-funded, and highly capable publishing organizations. If that’s no longer the problem, then do they remain the solution?


  • Rfisher


    Many thanks for yet another thoughtful and illuminating post. The imponderables around the non-narrative stream remain huge, as you say, and what will happen to (say) art history publishing (where 3rd party digital rights and permissions issues loom hugely) is anybody’s guess. The ‘gift’ element remains a hugely significant aspect of book transactions, something the book trade here in the UK has institutionalised with an almost astonishing reliance on the Christmas holiday trade (which lasts from September to December, effectively) for its financial well-being. In the same way as tenure committees for academic positions remain (some would say amazingly) susceptible to the appeal of the physical printed object, the package under the tree continues – in this market segment – to trump the click. What will happen in non-narrative, illustrated publishing in the upcoming holiday season remains to be seen, but would certainly be worth revisiting in January or February.

    • Absolutely it will be necessary to revisit what is happening with illustrated books post-Christmas for some time. They’re suffering for a lack of bookstores, of course, but they’ll also suffer because many people shopping for straight text aren’t looking for it in stores anymore, so they can’t serendipitously discover something illustrated.


  • Chris

    Amazon introduces their CloudReader:

    • Chris

      Update for above comment: This really is a very good web based app, Mike. Give it a whirl on your laptop or iPad.

      Amazon is very impressive with this stuff.

      • Web-based apps are definitely one of the best answers to the question, “what’s next?”


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  • Howard

    An important article especially for those who miss the hidden meanings behind reported sales and revenue figures for the big publishers. Statistics can so easily mislead.
    What is so often missing, it seems to me, from the whole revenue reporting discussion is the eBooks sales going through indie sites and indie publishers across the big markets. The industry statistics are not including most of these outlets and the accuracy of the reports and therefore the wider implications are therefore incomplete.
    I believe the movement of readers from higher priced agency titles to self pub’d and indie titles is being under reported and the increased profits reported by the big publishers, brought about by the huge profits on their eBook titles, is hiding a loss of unit market to those indies and self pub’s titles. I believe the self congratulatory air of the bigger publishers about their profitability figures is hiding trouble in the long grass waiting to emerge as the market matures in the coming years.

    • The new AAP and BISG Bookstats effort is capturing a lot of the indie ebook sales you think are missing. But even if you look at Amazon’s own unit bestseller lists, you see that the more expensive branded titles still occupy more places than the inexpensive ones.

      I think it will get harder and harder for indie authors to get traction, just because there will be so much competition as people figure out how to get their books up for sale. More and more indie titles are a double-edged sword. On the one hand, each one might take another sliver of the market away from the big books. But on the other hand, the more “stuff” that’s out there, the more consumers will seek some certainty of quality. Branded authors is one assurance. But I think we’ll see venerable names like “Random House” and “Simon & Schuster” and “Penguin” acting as an assurance of quality as the morass of possibilities becomes larger and larger and harder to navigate.


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