Publishing and Digital Change: What's Next?
In the late 1990s, ending sometime in the year 2000, the apparent pace of change in publishing was breathtaking. Many propositions we can barely remember: Ebrary, Questia, eRights, eContent, Hungry Minds, Softbook, Rocket Book, and so many others, competed for publishers’ attention, for publishers’ content, and, a bit painfully, for publishers’ staffs. We had barely heard of Google then, Microsoft seemed like a force that would dominate the rest of our lives, and Apple was barely breathing. The idea that Publishers Lunch might become more important than Publishers Weekly would have seemed laughable to almost anybody except Michael Cader. A whole host of things that really matter today – iPods, blogs, and podcasts among them – had not yet arrived on the scene.
People, including some I think are pretty smart like yours truly, thought an ebook revolution for immersive reading of narrative text might be right around the corner. It wasn’t.
That time around, in many ways, the less cyber-minded the publisher, the more money they didn’t waste. TimeWarner showed great faith in their vision of the future by starting iPublish, a web publishing effort I still can’t explain coherently, and lost double-digit millions. Louis Baum, the former Editor of The Bookseller, and Richard Joseph, who sold his Books Etc. chain in the UK to Borders, started a similar venture that went nowhere. And the many publishers who did very little investing in fancy web sites or ebook conversions saved themselves a bunch of money.
The 1995-2000 experience was instructive, but it does not mean that continuing to do all the same old things in the same old ways will work forever. It does mean that the world of book publishing – the oldest living business that is about content and markets – lives in a larger world of content and market equations. We can’t control the future and the larger forces; we have to accommodate to change.
And that starts by attempting to understand the change taking place around us.
College and professional publishing have lived in the new digital world far more than trade or consumer publishing. This is not because they’re smarter. It is because the world they live in has driven the change. Because the web is organized in niches of interest, and facilitates that kind of grouping, their audiences have both demanded and accommodated change far more readily than consumers. Driving consumers to change recalls the problem of “herding cats.”
Ironically, consumer publishing may have benefited the most so far from the Internet because of Amazon.com, which has driven huge sales of legacy product. But, as we will see, that is a benefit that both has its limits and extracts its own penalties.
Last month, Dominic Knight, who is head of college publishing for Holtzbrinck in the UK, predicted, without being specific about the timetable, that we’re on the cusp of a world where “all educational material will be online, and a lot of core material such as big textbook packages will be available only in an online form.” That makes a lot of intuitive sense: college students are all wired and they are all basically tech-capable. Moving all the content online would apparently solve the college publishers’ huge and persistent used book problem and, theoretically, saving all those trees would translate into saving money for students as well.
In the US, Pearson, Thomson, McGraw-Hill, Wiley, Houghton Mifflin, and Holtzbrinck – which comprise 85% of the US market – are organizing a consortium “to generate efficiencies and promote electronic demand for electronic content within higher education institutions.” In other words, they’re sharing the cost of creating the infrastructure for what they expect will be an explosion of digital delivery. Oh, and by inference, they’ll control that infrastructure so the newer or smaller publishers trying to reach this market will have to gain access to their road. Real anti-trust concerns will limit abuse, but one has to believe that this step will consolidate power for the existing market leaders.
At the same time that college publishers might be collaborating to deliver digitally, they are also aggressively competing to deliver digitally-enabled printed books. The Holy Grail at the moment is custom publishing for textbooks: professor-assembled aggregations that can then be delivered as books by short-run printing. O’Reilly has pioneered this concept with a business called SafariU.
Each company, of course, sets up its own system to sell its own content. O’Reilly conceived SafariU as a pan-industry solution; so far it isn’t working out that way. There are entrepreneurial plays to deliver the essential suite of services – locating the content in any format, bringing it in to a common document, designing it all so it looks good, and, one hopes, delivering citations and indexing as well in a custom product – across publishers by clearing rights at Copyright Clearance Center. One of the new third-party solutions – a company to watch – is Lulu.com, which offers automated design and layout as well as print-on-demand at sharply lower prices than the marketplace has previously seen.
It almost seems anachronistic to worry about printing the information into books, but the conversion to e-content is apparently not a sure thing. Abebooks.com polled 5,000 US college students online and found that 49% “were not prepared” to use digital texts at all. It has been said that the failure of many initiatives the first time around was that they were centered on what was good for publishers (selling books without manufacturing them, for example), not for the audience. The first objective has to be to satisfy the market, although, in the case of college reading material, it is a bit ambiguous to what extent the “market” is the students, and to what extent it is the professors. And it is similarly ambiguous whether the students or the professors are the main barriers to switching over to electronic media.
The current profit model has another challenge fostered by the Net. For decades, college publishers have priced their product differentially by market. They just couldn’t get the dollars per copy in Bangalore that they could in Berkeley, so they charged less in Bangalore and more in Berkeley. It will get increasingly difficult to make that work for the same book in two places. The same Abebooks.com poll found that, while only 3.6% of the respondents are currently buying international edition texts, about 60% are now considering that channel. College kids the world over will figure out how to buy at the cheapest possible point. The day when there will need to be one global price is coming and it will almost certainly arrive before there are no physical books to apply it to. Digital delivery could preserve market-based pricing. Requiring the kid in California or Ontario to get an internet address in India adds a barrier not present just to order a book from there.
Of course, one additional zigzag available to the publisher is to use custom publishing technology to deliver a different edition in Bangalore than they do in Berkeley.
This brings us to ebooks, which we will define as digital content meant for downloading onto some device more limited and more portable than a PC, although certainly an ebook could be read on a PC. I am trying to differentiate it from a web page, which is temporary and best viewed on a real computer screen, notebook or desktop.
It may be wrong to suggest that the takeup of used books by college students has anything to do with the explosion of used books in the consumer sector – there really are other reasons it is happening now which we will talk about shortly – but it is certainly true that the threat from used books really began in the college textbook market decades ago. If Dominic Knight is right about textbooks, more and more college kids are now about to get very comfortable absorbing information from computer screens or electronic readers.
This ebook thing has been fooling me for years, although I am stubborn enough to believe I’m right on the substance, just not on the timing. I believe in the ultimate inevitability of ebooks for many reasons, but one of the important ones is that I am totally hooked on them myself. I read ebooks on my PDA and have done so for the entire 21st century. I PREFER ebooks to paper books for immersive reading of narrative text. I mean I prefer them when they’d be an equal choice, such as in my own living room where both would be at hand.
What first hooked me personally on reading on my PDA, though, was portability. I always have my PDA, and therefore my book, with me: in a cab or the subway, in the reception area waiting for an appointment, or, if I may be indelicate, when I visit the loo in somebody else’s house. I found reading this way added a large increment to my book-reading time. Because of that, I started reading on it regularly and, before too long, found I actually preferred it, although I’ll save enumerating the reasons for that until somebody actually asks.
A friend recently told me he had come to immersive reading on his Blackberry with a different portability attraction. He’s British, now working in New York, and started out reading his UK newspapers on the Web. Then he found it was fine reading them on his Blackberry. So then he cancelled his daily subscription to The New York Times and now reads that, as well, on his Blackberry.
In a speech somewhat like this one a few years ago, I said that nobody needed to explain the advantage of ebooks to somebody who carried a PDA and, in fact, that there were no real advantages to ebooks if you did NOT already carry a PDA. Now, in early 2006, the world seems intent on proving me wrong on both counts.
When I thought about the “how” of ebook adoption at the turn of the current century, I figured it would happen the way many technology adoptions happen: through the workplace. It seemed logical that certain professional information tools – like repair manuals for aircraft engines, say – would be switched over to ebook readers. There are lots of good reasons to do that, because keeping those suckers up to date in a looseleaf or whatever for thousands of mechanics can’t be an easy job. So I imagined all these mechanics getting Softbook Readers (they were superior to Rocket for the purpose, and those were the two contenders at the time). As people got comfortable using them on the job, it seemed logical that personal reading matter – for lunchtime or the bus ride home, say – would follow. In this way, ebooks would get adopted the way spreadsheets, word processing programs, and email did. People were required to use them at work, found the value and overcame the learning curve, and then were happy to use them away from work.
But none of this has happened. There has been no widespread takeup of these readers in such circumstances, with the single stark exception of emergency room medicine, where doctors do look up medical info on PDAs. And there has been hardly any takeup of ebooks by consumers at all.
The ebook business has actually been somewhat in retreat for the past few years. A few years ago, there were actually six formats competing for viability. Softbook and Rocket Book had the hardware, dedicated readers, and they had proprietary formats for them. Adobe was hoping to provide a ubiquitous standard. Palm created a format proprietary to their PDA operating system and Microsoft, hoping to compete with them in the PDA space, created Microsoft Reader – to much fanfare – for Windows-operated handhelds. And then Mobipocket created a format that would work on both Palm and Microsoft handhelds. A seventh format, Glassbook, didn’t make much of a dent as it came and went.
Of course, Softbook and Rocket failed because they didn’t sell enough machines to constitute a market. Adobe, despite having a “reader” that could install on both Windows and Palm devices, got little traction. The early versions of Adobe’s product were just not as good as Palm. The Palm and Microsoft strategies recalled earlier format wars – VHS versus Betamax, Windows versus Mac – with different results. Microsoft Reader was made available through multiple retailers and the software was on hardware created by multiple manufacturers. Palm always limited the distribution and ultimately insisted on being its own exclusive retailer. Except for a legacy deal with the niche ebook site fictionwise.com, the only place to buy most Palm-format ebooks was at Palm’s own online store. Anybody who knew the history of VHS clobbering the superior Betamax format or Windows dominating the superior Mac operating system could predict what would happen based on that experience.
And they would have been wrong. The Microsoft Reader format failed, and failed quickly. Palm was soon, and for a period of time that may soon end but hasn’t yet, the dominant game in town. Mobipocket came on the scene as an alternative. If MS Reader had won converts, perhaps an agnostic format that could play on both PDA operating systems would have been needed; as it was, Mobipocket really just became another way to read ebooks on a Palm.
Microsoft Reader was defeated by Palm for two reasons. One is that the Palm format for PDAs won. This is a battle Microsoft is still fighting, but the Palm operating system is still favored by many for the PDA devices.
The other reason is that MS Reader was best used to read ebooks on a PC; it wasn’t as good as Palm on a PDA. MS Reader was literally shut out of monochrome devices because it required color to work and they launched the reader when few MS-ready PDAs were in consumer hands. Since the ebook sells portability, this was a mortal problem for the Microsoft format.
So, for the past several years, the only choice has been to buy a Palm ebook from the source that controls the format, which was sold by Palm Digital to a company called Motricity a couple of years ago. Those books are available at ereader.com.
The leading book retailers on the Web are, of course, Amazon.com and BN.com. Amazon seems to offer mostly Adobe ebooks, which have improved but still not caught on. Amazon bought Mobipocket last year. There are no apparent synergies operating between them yet but we know some are being planned. This week, Jeff Bezos expressed bullishness on the future of digital downloading. B&N, frustrated several years ago because they could sell MS Reader ebooks, which nobody wanted, but couldn’t get a workable deal to sell Palm – the only format that people bought in any numbers – dumped ebooks from their web site. So far, they haven’t missed much in the way of revenue or satisfying their customers. The guess here is that the omission will be noticed if it goes on much longer.
Because I’ve been so personally “sold” on ebooks while watching them march backwards for this entire decade, I have asked people repeatedly “why doesn’t this catch on?” I haven’t been happy with the answers. Most people offer two: “not a good enough reader yet” or “the ebook, to succeed, has to offer interactivity or something that the printed book doesn’t.”
Since I’m hooked on the portability and the other advantages you will have to ask me to hear about, both of these answers leave me cold. I don’t want a “dedicated device;” I’ve got a device. And I don’t want some interactive experience; I want to read the book! I gnash my teeth at the marketing opportunities that have been missed: why doesn’t every PDA come with three books on it? These have a cost of zero. Authors would clamor to be included, particularly if the first chapter of their next book was included as a sales come-on as well. And the merchandising of these books online? Horrendous!
Why are we spending all this time on ebooks? Because they are about to hit our radar screen again in 2006 in a big way. As we learned in 1999 and 2000, noise does not assure acceptance. But there are a number of promising things going on:
1. Sony has announced a new e-Reader device that will make its debut, it is said, in April. Sony is planning to sell the content for their reader in a proprietary format on their own site in a “blades and razors” business approach. They are readying 10,000 titles, which is a big number in this space.
2. A Philips-incubated company has announced a screen for an e-reader that will “roll up,” like paper. Perhaps no reader will come out with it this year, but it is right on the cusp.
3. Mobipocket has announced a deal for their format with RIM for Blackberry. Blackberry’s big competition is the Treo, which started out in life as a Palm operating system device, although it is now available as a Windows machine as well. It could be that Blackberry has the largest installed base of potential narrative book readers of any hand-held device.
4. Many people expect some initiative from Amazon. They bought a print-on-demand operation called BookSurge as well as Mobipocket. Some sort of offering using both capabilities in a new publishing platform just seems inevitable. If that happens, Amazon has a real reason to push ebooks that they never had before.
5. iPods for music and video have been such a wild success that we could be seeing a paradigm shift for the purchase and use of protected content on portable readers. Universities have recognized the value of iPods for a couple of years as digital storage devices for text. And the screens of iPods keep growing; they could become ebook devices very soon as well.
6. The blogosphere is already loaded with speculation that the PlayStation Portable, another Sony device intended primarily for games, can be a great ebook device.
All of this adds up to a lot of wind at the back of the ebook business, for the first time in at least five years. Publishers have expressed and shown great enthusiasm for the Sony reader. Many are stepping up their conversion efforts – putting more of their books into ebook files – after having reduced them for the past several years.
The ebook business is still so small, maybe not even double-digit millions of dollars annually, that it has a lot of doubling to do before it matters much to anybody. But since the marketing of a number of new devices is about to raise consumer awareness, the number of available titles is about to grow more rapidly than in recent years, leaders of the book industry and the hardware people are pushing it, and the leading internet retailer has reason to get in the game, maybe 2006 will be the turning point year.
There are certainly no guarantees. The one Mobi-on-Blackberry book I saw had justified (even length) lines. This is a significant deterrent to readability, because you get those even lines by varying the word spacing. Some lines have as much space between words as the words take up between spaces. Apparently this design faux pas was committed by the publisher (in this case: Random House) and it isn’t inherent to the technology. But justified lines were built into the first Sony attempt at a reader; let’s just hope that they and the publishers don’t repeat this mistake.
All the new device activity may result in very little net change. I am a skeptic about dedicated devices for this purpose. Making mistakes like presenting narrow justified lines will retard progress. And merchandising ebooks separately from books themselves is no way to maximize ebook sales. And nobody should get carried away to think that this is really like the iPod and music, which lets you carry around all the audio CDs you listen to all the time in a device that fits in your pocket. There is no parallel paradigm for books. Even carrying every book you own wouldn’t be as much of an advantage. You’d need to be carrying all the ones you want next, which is an entirely different proposition.
The actual sales and marketing impact of Google Print, so far, is probably about the same as ebooks. Negligible, with the exception, perhaps, of certain areas of scholarly publishing. But the impact on many publishers’ thought processes has been major.
As the people in this room well know, Google is creating the card catalog of the future, attempting to get every book listed and searchable by its engine. This initiative began with asking publishers to put their books in; for doing that, they earn ad revenue, get to decide what links they’d like to create sales, and they are assured of a specified limit on the amount of the book’s content Google will show.
What caused a huge stir was the subsequent announcement of a program to get books from libraries, including that Google would return a copy of the digital file they create of the books to the libraries themselves. Since Google does not intend to restrict its efforts to pre-1923 books, all of which are in the public domain in the US, they will inevitably sweep up copyrighted content in this effort. Google’s offer to publishers to remove books if publishers with a valid copyright claim just ask them to do so failed to satisfy a lot of publishers; lawsuits on this point are now active, although they certainly won’t be resolved for a very long time.
The Google initiative, along with a similar content-serving proposal by Amazon – this one complete with micropayments to be shared worked into the schema – and another rival card catalog-type effort spearheaded by Yahoo and internet visionary Brewster Kahle, have motivated publishers to recognize that serving their content via the web is part of distribution in the future. Random House announced it would serve its own books, making them searchable by Google but ultimately maintaining control of the content itself being served. At the same time, Random put a stake in the ground for a per-page charge for viewing content. HarperCollins announced a similar digitizing initiative. Holtzbrinck did the same in the UK – they call their facility “Book Store” – and they have offered to act as a service bureau for other publishers as well, hosting and serving digital content.
The Holtzbrinck Book Store project is working with a number of what they call “Foundation Clients” now. Effectively, these are development partners who will reap a long-term benefit of discounted services. As of late January, the people running this initiative indicated that they still had room for more Foundation Clients. We can provide contact information there for anybody who is interested in pursuing it.
This is the next big investment conundrum for publishers. Google is offering to digitize books for free, for their purposes. Digitizing from hard copy will cost publishers only a few dollars a book for “page snapshots,” suitable for searching and for showing page copies, but it will cost low hundreds of dollars for ebook-ready files which are accurate character-by-character. Over a list, that can constitute a big investment with a very uncertain return.
On the other hand, Google is not the only place that needs the digital file to search and return, and publishers are understandably reluctant to put their digital fate in somebody else’s hands. It feels to some publishers like letting Google hold the publishers’ IP on their servers is giving away the store. If they’re going to need a digital file for each book for many uses going forward, goes the thinking, then the publisher might as well bite the bullet, do the digitizing, and serve the pages as needed themselves.
These strategies are not mutually exclusive. A publisher might choose to serve its own electronic files of books it has already in digital form, because the conversion cost is much less on those, and let Google scan the books that exist only in hard copy. Since the Google Print contract allows publishers to “pull” books from the Google system in the future, presumeably without limitation, a publisher could move to a strategy of controlling all its content sometime in the future.
All books are not threatened equally by these developments. Limiting the number of viewable pages, or the number of consecutive viewable pages – which all these schemes do in one way or another – pretty effectively protects a novel or a narrative that is to be read from beginning to end. But what about books which are aggregations: of recipes, of crafts projects, or of travel information to various cities and regions in France? In those cases, a handful of pages might deliver all the information the customer would have bought the book for. A free “sample,” or in Google’s word, a free “snippet,” might deliver all the value the consumer was seeking and the book sale would then be lost. This frightens some publishers.
While it is not clear that the sales lost on books like this through snippets that satisfy will be greater than the sales gained through exposure to them, and it probably never will be, the publishers who are concerned about this need to consider what will transpire if they withhold their veal parmesan recipe or listing of the best hotels in Paris. What will happen is that the Google (or Yahoo or Amazon) searcher will just find OTHER veal parmesan recipes and Paris hotel listings from other books or sources. The customer will still be satisfied, and the publisher who withheld the content will still lose the potential sale. But they will a) also lose the sale from the searchers who would have been converted to book buyers and b) they will suffer erosion of awareness for their brand at an accelerating rate over time as more and more people discover what they want on the web.
Publishers need to understand the concept of fungible content, which most reference material is, and most narrative content is not. Fungible content is much more threatened on the web.
It is worth mentioning a Barnes & Noble company called SparkNotes here. Spark is a more modern version of Cliff’s Notes; basically, they publish study guides. Their market is students. Every single word that Spark publishes is available free on their Web site on screens that will neither copy nor print. If you want a file to copy or print, you can buy a PDF version of the book for exactly the same price as the book itself. This is a good deal for Spark, of course, because they don’t have to pay to create and deliver a physical book.
Despite the fact that their content is viewable for free and their market is so notoriously averse to paying for things that college publishers spend most of their time trying to dance around the used book market, this content available free has not slowed SparkNotes down. Barnes & Noble does a big business in their books.
Much more threatening to the current publishing model than Google, in my opinion, are some other developments taking place because of the Internet.
The most immediate of these threats is the recycling of books, particularly as it is being enabled by Amazon.com. Everybody who buys books online is now aware of this. You call up a book and you are offered the chance to buy used copies for a discount, sometimes a hefty discount, off the price of a fresh copy of the publisher’s edition. There are many other used booksellers, but this mixing of the used with the new on what is, by far, the leading book information and sales site on the web, is particularly insidious.
A recent study sponsored by Book Industry Study Group of the used book phenomenon underscores the frightening reality of the problem. They found that sales of used books were up 33% in the consumer segment from 2003 to 2004. And they found very high consumer satisfaction with their used book purchasing; the preponderant majority would “recommend it to a friend.”
Magazines have always loved “pass-along” because it boosts ad rates. Book publishers in the US have eschewed ads for years, though it existed in books in Britain years ago. (I don’t think it is the practice anymore.) US publishers have avoided ads at least partly for a historical reason: the US Postal Service bans advertising from books traveling “special 4th class book rate.” But that reason is an artifact: few books in commercial distribution are sent that way anymore.
Is one economic antidote to used books to place advertising in them? Maybe that’s a way to replace some of the revenue that is bound to be lost.
Advertising is very difficult for publishers to consider, let alone execute. There are a million reasons why it won’t work, starting with bookstore resistance and author resistance, two forces publishers want least to oppose.
On the other hand, we see a quantum shift in marketing, not just for books, taking place as the mass markets disappear. Network TV everywhere in the world delivers a fraction of the audiences it once did as channels proliferate and compete with the Web. Even big consumer package goods companies now recognize that they have to aggregate mass audiences by appealing differentially to niche audiences. Books don’t just appeal to niche audiences, they deliver niche audiences. As the eyeballs delivered through books gain in value and revenues and margins per new title continue to decline, the equation for advertising will change.
This used book issue is a massive one and is bound to get bigger. So far, only 10-15% of the book business is online and the used book infrastructure is most compelling online. Only a small fraction of book purchasers have yet taken this opportunity, although more do every day. And, most important, the supply side of this equation hasn’t gotten organized yet the way it inevitably will be. Libraries are bound to add many used books to the marketplace as they see the opportunity to recover some of the costs for books they don’t need anymore. Often those will be bestsellers on the downslope. How many copies of the new Harry Potter did a library need last July compared to what it needs now?
We don’t have good quantification of this problem so far. We don’t really understand how many copies per title are moving in this way. We suggested a “bestseller list” to the BISG used book study people but we haven’t seen one yet. And the year-on-year growth snapshot is helpful, but not sufficient. If BISG continues to gather this data and analyze it, we’ll learn a lot more in another year.
It was reported last month that Abebooks.com, a used books specialist site, said that 19 of the top 20 titles for them last year were published prior to 2005. We can’t leap to the conclusion that Amazon, which still primarily attracts people looking for new books, would have the same profile. Because BISG, for understandable reasons, can’t reveal data that allows us to learn about an individual retailer, we may need divining skills to parse this further, but the threat to backlist is crystal clear.
The used book phenomenon punches publishers in the gut by enabling the copies they sold last month to satisfy consumer demand next month. But that may not even be the most damaging aspect of the problem.
Let’s recall that used books have always been with us, but they only became a problem for books currently in the marketplace with the advent of the web. That’s no accident. The model that Amazon and others use to handle used books online is far less costly than it would be in a brick and mortar setting. Amazon and their online competitors, including eBay, have this all automated. You, the seller, load in your title information and, when the order comes, you ship the book. Amazon keeps track of whether you are a vendor who satisfies the customers and, by the way, has the money in hand as leverage in case you don’t. They never have to touch the book; they never have to store the book; they never have to invest in the book; and they don’t have to key in any data to find it, sell it, and deliver it.
The additional costs of conducting this kind of business in brick and mortar are substantial. Just the data entry costs alone would change the whole equation. But, also, the consignment arrangement couldn’t be made to work; a brick and mortar used bookseller would have to buy the inventory and hold it before they sell it. And they wouldn’t sell everything they buy. All of this changes the commercial proposition considerably. What it says to me is that used books will, for the most part, remain an online marketplace. They could, perhaps, hang on longer in college towns, where there could be a lot of local supply and demand for the same kind of books and a greater consumption of books in general. But in most places, the economics seem to say that the brick-and-mortar stores could stock used copies of the books that sell the best, but going beyond that will be very difficult for them.
And that’s not good for publishers. I think this is a critical point.
Brick and mortar stores are always going to be more effective at generating many book sales than any online mechanism can be. The effect of being in a place surrounded by tens of thousands of books, the impact of the covers and the organization by sections and on promotional tables and display units and with real live clerks to help you; all of this just is not replicated online and won’t be for the foreseeable future. Anything that shifts sales away from brick and mortar, in the long run, will generally reduce sales. Obviously, there are exceptions, based on specific customers – let’s say somebody in a wheelchair, for example – and for sales of books on the “long tail” that wouldn’t be in most bookstores.
We’ve observed before that the challenge for brick and mortar book retailers gets steeper and steeper. They are losing the top bestseller business to mass merchants who work on the thinnest of markups and offer the books at prices full line bookstores can’t match. And they’re losing the “hard to find” business to the internet. With sales bleeding at both ends, supporting the costs of brick and mortar, particularly more than 100,000 titles in inventory in superstores, gets increasingly difficult. If the used book business becomes substantial, and it seems bound to, this is just going to increase the pressure on the publishers’ most important sales channel.
The corrosive effect of mass merchants and internet merchants on full line brick and mortar stores may be more apparent in the UK than it is, so far, in the US and Canada. The biggest UK chains – certainly Smiths, Waterstone’s, and Ottakar’s – are not performing well. Discounts to consumers, fueled in part by deals that publishers keep agreeing to, keep eroding margins in the marketplace for everybody and, with recent contracts containing “high-discount” clauses, are now cutting into authors’ incomes as well, even as unit sales rise for bestsellers.
We just briefly touched on the “long tail.” The term was the title of an article by Chris Anderson in Wired; the article is now being turned into a book with the help of a blog. The concept is that the books that each hardly sell when viewed cumulatively sell quite a lot. Estimates vary, but people are calculating and guessing that the sales at Amazon of books below the top 100,000 titles are anywhere from 20% to as much as 40% of the total number of units they sell. Those are sales of books that the smartest brick and mortar retailer would probably not have in the store.
The good news about the long tail for publishers is that they get sales out of their deep backlist. The bad news is that all those long tail books are competing with today’s books for consumers, so today’s books get harder and harder to establish in the marketplace. And the further bad news is that the long tail weakens brick and mortar retailing relative to the Net.
There is a complementary phenomenon that I first saw explained by net visionary Clay Shirky called the “power law distribution.” Power law says that the top titles get a bigger and bigger share of the total sales. The power law concept is not a book-centric concept; Shirky was looking at how bloggers in a subject area stratify so that a few blogs get most of the traffic. But it definitely applies to books and mass merchants have a lot to do with it. After all, they only stock the top sellers; they offer them in high traffic locations at rock bottom prices, so they get an unbeatable competitive advantage over all the other books that aren’t there.
The power law effect may have slowed down or just had a bad year; BookScan reported that the top 200 bestsellers got 10.5% of the total scans in 2005, down fractionally from 10.9% in 2004. Maybe the difference is a fluke, or maybe it reflects a change in the panel of stores being polled, although BookScan says that is not the case. Regardless, that is still an eye-popping market share for the Top 200 titles in a marketplace that has a million or more titles in it.
The combination of long tail and power law says that each new book published has a smaller potential audience than it once did, in the days when old books were allowed to die and when many titles were available almost everywhere the bestsellers were.
Another channel that is important to publishers for sales is also about to be adding to their headaches, and that channel is “libraries.” They are also becoming more of a mixed blessing because of the Net. Online reserving and net-facilitated sharing of inventory is making it easier for consumers to borrow the books they want and for libraries to satisfy more demand with fewer copies purchased. As we said earlier, libraries are also likely to be adding to the used book problem by scooping up what they no longer need and making the copies available for purchase.
But perhaps even more serious, particularly if the ebook world starts to grow, is that libraries are lending ebooks. You still have to go to the library to get the physical book; none we know offers mailing them back and forth yet as an option. But the ebook “borrowing” takes place online. The “disadvantage” of borrowing rather than buying is that the file evaporates in your computer or handheld after a period of time. But that’s hardly a disadvantage at all for most books, which you read once and then don’t use again anyway. The current schema for libraries and ebooks is that their “lending” at any one time is limited to the number of copies they are willing to pay for. “Necessary, but not sufficient” is the phrase that comes to mind here. EBook and audio downloads from libraries just add another way to get more readers out of each sale the publisher makes. And that is not good for publishers.
Many libraries are in the “digital downloads” business for all content – not just books – because of a company that started them with books: OverDrive Systems in Cleveland. OverDrive has been in the digital book business for about two decades. When ebooks looked “hot” in the late 1990s, they set up a capability to deliver a turnkey ebook store to the retailers who would want it. As it happened, almost none did. But the same capabilities were converted to a library offering. When iPods and audible.com happened, OverDrive was perfectly positioned to convert “ebook downloads” into “content downloads.” It is almost certainly the case that audiobook and music downloads are, at least for the moment, attracting more action than ebook downloads.
As a result, libraries are also going to cut into the one part of the trade business that’s really growing, audio books. The immediate threat there is greater than it is for ebooks, because audible.com, a great revenue producer for publishers, has already taught iPod users how to use such a facility. How many will migrate from audible subscriptions that cost, and pay royalties to the publisher and author, to their local library for free audiobook loans that pay publishers and authors nothing additional? One has to assume there will be a migration from paid to free.
The part of a publisher’s business that is unambiguously helped by network technology is their improved ability to manage inventory in the supply chain. The idea of getting on hands and knees to check stock in a bookstore, which was just one of the job requirements for a sales rep twenty years ago, is a complete anachronism. Now the accounts are bigger, the sales are recorded at the point of sale, and data feeds telling a publisher what’s selling and where most of the unsold books sit are ubiquitous. Overall market data is aggregated in most English-language countries by BookScan, and is now being supplied in Canada by BookNet Canada.
BookNet Canada’s reporting is unique because it gives publishers both sales through the registers and on-hand inventory from its reporting network. Everybody trying to make money in the book business – publisher or retailer or wholesaler – knows that what sells is only part of the profit equation. What ties up cash and has to be shipped back and forth and does not sell creates costs which have to be reckoned. Knowing all about sales and nothing about inventory can lead to many wrong conclusions.
The total market rollups are particularly useful for competitive purposes and showing all industry data, not just showing each publisher its own. That is an important element of the value proposition for BNC and for BookScan in its markets. But perhaps an even bigger opportunity for publishers is in the data on their own books which many large accounts will provide.
On behalf of publisher clients, we take feeds from retail and wholesale accounts all over the world: B&N, Borders, a US Christian retailer called Family, Ingram, Baker & Taylor, Amazon.com, Waterstone’s and WH Smith in the UK, and, of course, Indigo. Through some calculating, mostly of sellthru rates but of other things too, and some filtering for important exceptions, we’re able to show publishers where the account needs more books, books they’re likely to return, when they’re ordering stock they don’t need, and, particularly with retailers, where opportunities are being missed on the backlist. We’re now in the process of rolling up that information to give clients a view of their supply chain exposure: unsold books that might come back. This is critical outside Canada, where the sales data aggregator doesn’t poll for inventory. And we think it will help some Canadian publishers who sell direct to major US accounts in addition to selling domestically.
This kind of information helps publishers get more sales from less sales representation and leaves them printing fewer books that are not needed yet or which will never be needed at all. In a declining market, which will be the case for many publishers and for many titles for all the reasons we’ve touched on, the way to profit can only be greater efficiency.
Barnes & Noble is a prime example of a company that is prospering through increased efficiency much more than through increased sales. Although they have managed to drive “same store” sales increases, their profit picture is mostly improved by managing to sell more books with less stock. They have built an infrastructure for resupply in the US which, along with rigorous buying and sales monitoring practices, keeps improving their situation. Random House and HarperCollins have done the same among publishers. Supply chain departments, which seek to reduce the pain from returns and the manufacturing of unneeded inventory, are being established across the top tier of US publishers.
Which leads to what we might call the “punch line” on all this: what, exactly should publishers expect to change in their practices as things change in their environment? How do publishers respond to give themselves the best chance to prosper as things change? A good way to think about that is by publishing function.
Acquiring editors must be conscious of all these new circumstances. Often they are offering a contract today for a book that won’t even be written until a year or two from now and not published until a year or so from then. With all this change taking place in the marketplace, paying advances on current assumptions might leave a house wondering what they were thinking by the time the book comes out.
The biggest threats to publishers – particularly the threat from used books and increased library borrowing – are most likely to be felt soonest and hardest on the biggest titles. The more hardcovers a publisher sells, the more used books will be competing with the paperback edition when it comes out. So an acquiring editor needs to really be watching the house’s sales trends for the author and the category whenever a big contract is being considered.
Big authors have the most leverage. If publishers decide to stop overpaying them for their projects, they can, literally, afford to “do it themselves.” Every significant sales force in the industry is available “for rent” through distribution deals. If publishers respond to changing circumstances sensibly – and cutting advances from current levels could well be very sensible – then we can expect a few big authors to take matters into their own hands in the next few years.
Acquiring editors will also be increasingly in a world where “the book” is just part of the author’s entire commercial package. Authors with visibility – in recent years called “platform” – have always been desirable. In our times, more and more content will be acquired because it was created for the Web, or the author’s fame was created on the Web. This will complicate acquisition, publishing, marketing, and rights.
The world is also changing quickly for rights people. One casualty of our shrinking world is territorial rights integrity. The European Union makes it hard for the British publishers to keep US editions out of the UK. Amazon and other online booksellers make it easy for consumers anywhere to order editions from anywhere else. Squeals are beginning to get louder from the London-based publishers, and that is likely to continue. So English-language rights trading is going to get harder to do.
Of course, Canadian publishers have lived with this problem at the forefront for many years, inundated as you are with editions from the US, the UK, and sometimes Australia as well that may compete with a theoretically protected Canadian edition.
Historically, the “big” rights were book clubs and paperback. Paperback has been a diminished market for more than ten years, for reasons that have more to do with consolidation and the breakdown of the local jobber distribution system and competition for space from videos and now DVDs than with new technology. But the book club business is very much a victim of new technology and it is marching relentlessly toward oblivion.
As the potential for revenue from the Web grows, digital rights will become more important. Will there be a market for serialization on the Web? Probably. Audible is an important new rights player for audio publishers. Perhaps in the future we’ll see distinctions among the audio that is digitally downloaded for temporary use, digitally downloaded for permanent ownership, and streamed (not actually “downloaded” at all.) Developments like these could change the environment for libraries; it could be that publishers will stop selling audios or ebooks for “loan” along the model of physical books, but will make sales for “personal use only.” DVDs already have a model by which Netflix or Blockbuster pays per rental, not a fixed “sales price.”
Life will be changing in the publishers’ production departments as well. Content management systems will require “tagging” of all the components of many books that are not simply straight narratives so that content can be sliced, diced, and repurposed. Printings will be shorter, reprintings will be more frequent, and the pressure will be on to do them faster. Short run printing capability, particularly for one-color narrative books, will be built into many books’ lifecycle plan as a standard matter.
Short run printing – even print on demand – is getting increasingly sophisticated. Even full color can be delivered at startling quality now. Costs are generally coming down. Publishers will need to stay abreast of developments in this area; the life extension plan for a book that simply won’t work today might be economically viable tomorrow.
The most sophisticated application of short-run printing technology we have encountered is offered by University of Chicago’s Distribution Center to 50 academic presses that they distribute. They arranged for Edwards Brothers printers to set up a short-run operation right in the Distribution Center warehouse. With financial assistance from the Mellon Foundation, they set up a digital storage center called BiblioVault, which holds print files for all the books.
Then they link their inventory records and order activity to Bibliovault. If they get an order for a book that is out of stock, the system triggers a “printing” of two copies or any multiple of two copies. The publisher can set the printing to be whatever they want – there is no price break until they print more than 75 copies – and they can set the printing to be triggered by an order with inventory at zero or at some earlier point when one or more copies still are in stock. Since printing and delivery to a pick location occurs in a matter of hours, all books in Bibliovault are, effectively, in print and available whether there is copy on hand or not. That allows these academic publishers to fulfill their mission of keeping their books in print and, no less important, means they retain their rights for lucrative course-pack business that might use a chunk of a book that would otherwise have gone out of print, and on which the publisher might then have relinquished their rights.
Used properly, this capability can eliminate both the lost sales through stock outs and the capital wasted through overprinting. It is literally creating a new model for publishing, making up for any reduction in margin by a huge reduction in waste. The Bibliovault model is compelling for books that have a long lifecycle, even at a very low sales level, and a high retail price. One can imagine virtually all academic and professional books being handled this way before long.
Because of account consolidation, which will certainly continue, and data feeds, sales departments will benefit from constant monitoring for resource allocation. The past 15 years have seen the rise of the “national accounts” in relation to the “field.” Office staffs that cover the top trade accounts are now sometimes as large as field forces covering the country. As growth in the trade has stagnated, or disappeared, publishers have found sales at non-book retailers to replace them. What are called “special” sales are now also handled by growing sales departments housed in the home office.
Book marketing isn’t standing still either. As internet conversation grows, it replaces offline communication. Magazine and newspaper owners know that and worry about their own survival. Inexorably, traditional media reaches less of the audience; online reaches more. So the standard “drill” of 10 years ago: review copies to a list of X potential press contacts, a press release to a list of 5X more, and an unchanging list of key media that included PW, Kirkus Reviews, and The New York Times, is in a cocked hat.
Book-dedicated blogs abound. Every subject that could be covered in a non-fiction book or be part of the world of the story in a novel has its own web communities. Keeping up with what’s important for books in general and finding how to promote in each new subject area will be a continuing challenge. And the tools of the trade have grown; it’s no longer just a “press release” anymore. Books need audio plugs for podcasts and can deliver video plugs to desktops as well. Free chapters for promotion can be delivered as downloads or even be embedded in emails. Authors want dedicated web sites and publishers want to “own” authors. A new program called Amazon Connects, which invites authors to set up their permanent web residence at the online retailer, should not only alarm Barnes & Noble and Indigo, it could loosen the bonds between publishers and their authors as well. Publishers’ marketers need to figure out how to build marketing that creates a “switching cost” for an author to leave the house. The big authors will be too smart and savvy to permit that to happen but the small ones won’t. And small ones become big ones over time.
Marketers need to reconsider where they should spend their money, and they are. I noticed that the first issue of Publishers Weekly of 2006 had exactly ONE full-page ad from a publisher in it. Publishers have to decide now whether the few grand they might spend in PW, or The NY Times Book Review, would be better sent on Google Adwords which, by the way, you only pay for if there is “clickthru,” so all the impressions of people just looking which is, after all, all you get from PW or the Times, are actually free!
This example further demonstrates what we touched on earlier: the collapse of mass markets and the need for publishers to reach audiences one niche at a time. Publishers are going to have to learn how to reach audiences through blogs and niche web sites, even when those audiences aggregate up to something very large, suggesting it will take many little granular pieces to reach them all.
There is some debate about the efficacy of publishers actually selling direct to consumers. For very general trade publishers who will, until their dying day, depend heavily on the sales clout of bookstores online and off, the hunch here is that it is an unwise move. Yes, the publisher and, by extension, the author, should have direct contact with the market through the Web. Email addresses and permissions should be collected; an interactive dialogue should be attempted and, where possible, maintained. But capturing the final sale is not necessarily productive.
For one thing, there is no substantial margin “bump” gained by selling direct. A publisher that sets up as an “affiliate” to online retailers can get an additional chunk of the book’s sale for referring it, from 4% to 10% of the selling price at Amazon and comparable shares from others. Add that back in to the revenue after the discount, eliminate all the handling cost – including dealing with returns from consumers – and the margin just hasn’t changed very much unless the publisher charges much more than the retailer including postage and handling.
And referring those sales to retailers gives a publisher the right to ask for something in return: a window in a physical store, better placement in the online environment. Maybe the retailer would see value in discounting a book on which the publisher is sending many referrals, because doing so constitutes an opportunity for the retailer to win over some customers.
A problem arises for publishers executing this strategy when they sell multiple formats and an online retailer doesn’t carry them all; I am thinking particularly of downloadable audio or ebooks here. The same logic that tells publishers to control their digital book files, rather than turning them over to Amazon or Google, should also tell them to serve their own digital downloads of ebooks and audio. None of the retailers offer full service for this business right now. In fact, the opportunity exists for publishers to really help retailers out by setting up the distribution capability for this business and then “reverse-affiliating:” letting the stores send business that they could otherwise not process to the publisher in return for a commission.
A valid point to be raised against the strategy of referring physical book sales is that the publisher loses the sales relationship, the credit card on file, and perhaps the customer’s name. For a publisher whose output is repeatedly aimed at the same niche audience, the cost of routine referral may be too high.
In the next few years, the proliferation of publishing startups and the consolidation of companies will continue. Web content developers will become book publishers, or partner with them. Consolidation is inevitable because the critical mass requirements, many of them systems-driven, will drive it. The number of titles being made available each year will inexorably rise and the sales per new title published will inexorably fall. A great deal of the consolidation will be through distribution deals, so the number of warehouses from which books are shipped will decline even as the number of publishers creating them increases.
Because I write talks like these over a period of several weeks – this one started about the first of the year – new information or late-breaking events can force a bit of re-writing. I am going to take the easy way out here, tacking on a couple of things that were first reported last Monday that, you’ll see, can’t be ignored within this conversation.
First of all, BMW recruited four authors from Random House to create 45-minute audio books that feature BMW cars. The audiobooks are available free as digital downloads; the first one is called “The Beautiful Ride” by Don Winslow. The report I saw didn’t mention whether Random House Audio will sell shrink-wrapped versions for people who don’t do digital downloads yet.
Secondly, HarperCollins announced an experiment by which a backlist book, Bruce Judson’s business book “Go It Alone,” will now be available free, in its entirety, on his web site with ads appearing on the margins of the page. Ads, hunh? What a great idea! But how much you want to bet the sales of the book go UP as a result! What would that do to a case of Google paranoia?
We have been living in a world of change in publishing. That will continue. As has been predicted for a long time, media are converging and the impact of change in one medium affects others. Computers and televisions are getting harder to distinguish from each other. iPod conquered the music world, and now it seems like it will change a lot of TV watching habits as well. eBooks are available in many libraries because iPods popularized digital audio. Books like South Beach Diet turn into web businesses and, increasingly, web sites and blogs spawn authors. And the entire process, and almost every part of it except the actual writing and the actual reading, keeps speeding up. Resistance to change is futile, even suicidal. Constantly looking at the landscape, trying to understand what is changing, and adjusting to suit, is essential.
Reading won’t stop. Writing won’t stop. Stories won’t stop. Information won’t stop. Form will follow function in the 21st century as it always has before. It’s just a little more complicated because function might change a bit between now and next week. And, as the years since 2000 have demonstrated, today’s hot new thing may change our life, or become a name we won’t even remember in a year or two.