Barnes & Noble

Some things I will be looking to learn more about at London Book Fair


The London Book Fair is an every-second-or-third-year thing for me, going back many decades. From an English-centric perspective, it is like a mini-Frankfurt. All the UK players are there and a lot of US senior executives. But because it is so accessible to the Continent, you can get a taste of how things look to the rest of the world.

In the US, we look to me to be in a period when two dominant giants — Amazon for online bookselling and Penguin Random House for general trade publishing — are consolidating their positions. Amazon’s enormous market share is growing, both for print and ebooks. It is too early to draw the same conclusion about PRH, but my guess is that a year or two from now we’ll have seen them taking share from their biggest competitors just like Amazon is from theirs.

(Dominant giants will be part of a conversation I’ll be taking part in on a stage in London. I’ve been asked to participate in The Great Debate, where this year the proposition is ”It’s all about size. Bigger is always better.” I’m arguing the affirmative with Ken Brooks of McGraw-Hill Education as my teammate. We’re opposed by Stephen Page, the CEO of Faber, and Scott Waxman, who is both an experienced literary agent and the entrepreneur behind Diversion Books, a digital-first publisher. It should be fun. And friendly. We’re all nice guys.)

The dominant US brick-and-mortar retailer, Barnes & Noble, appears to be fairly healthy in its traditional business. It is shrinking, but the store operations are still profitable and well run. They appear to have benefited from the demise of its erstwhile competitor, Borders (as have the independents). From across the Pond, one does not get the same impression about UK’s Waterstones chain. However, in the UK, there are forces we don’t have in the US: not just the ubiquitous newsstand-type WHSmith stores, but also two supermarket chains, Sainsbury’s and Tesco, which are each ambitiously trying to build a book business and their own ebook channel. One thing I’ll be asking everybody about is the impact these retailers have in the book marketplace, particularly when we get beyond the top sellers. Perhaps if they’re doing well, it would encourage Walmart to get serious about bookselling. Certainly Walmart would like to do anything they can to poke Amazon in the eye.

Without serious competition from new players who are well-funded, like the UK supermarkets, it is hard to see what stands in the way of the global ebook giants: Amazon and Apple and, to a lesser degree, Google and Kobo. Perhaps I can get a sense in London of how Barnes & Noble’s multi-territory expansion for Nook is faring. But, however they do, there is a so-far little-noted effect beginning to become evident that could tilt the global book business to the English-language marketplace, and to the US in particular.

In a recent conversation, an executive at a Big Five company told me of a recent development. His company had licensed a few titles for Russian language rights to a publisher in Moscow. But by which retailers would most of those ebooks be sold? The answer is Amazon, Apple, Google, Kobo and Barnes & Noble! And the Russian publisher, really just breaking into the ebook business, has far more limited access to these retailing giants than the US publisher which had licensed them the rights.

So the US publisher, in a suggestion that seemed in everybody’s interests, offered to be the “distributor” of those Russian ebooks to the major accounts. The deal was made and it worked. I said to the executive who explained this to me, “You could be helpful in distributing all their books, not just the ones you licensed them.” “Exactly,” he said.

But then we took the conversation a little further. This house is wondering whether, in an ebook-dominant world, it wouldn’t make more sense for them to publish books themselves in Spanish, Mandarin, and French (the first three languages they are thinking about). After all, the translations are done by freelancers. Anybody can hire them no matter where they are. And if most of the books sold are ebooks, and if the publishers of English, especially those in the US, have multiple daily contacts with the big ebook retailers and others don’t, then what is the point to licensing away those rights?

That approach would mean that publishers in at least some non-English territories would, at best, be able to license the print rights for the local geography they really cover. And it would mean that the biggest publishers with the biggest checkbooks to sign the biggest authors and titles will be able to benefit from an even larger share of the book’s global market while paying the author more than they could earn with a local publisher sharing in the other-language rights.

If this is more than one company’s inspiration right now, I should be able to find evidence of that at the London Book Fair.

The other thing for me to learn, of course, is how digital marketing of books looks from the UK. In our fledgling new business with Peter McCarthy (take a look at his new post) we have already done some title optimization work for two UK-based publishers, one large and one medium-sized. So we’ve learned how to do the work using UK-based Google and Amazon and putting BIC codes rather than BISAC codes into the metadata. We’ll be formally announcing the new business and opening our web site the day before the London Book Fair opens. I expect to find a lot of interest in what we can offer, just as we have in the US. There is no doubt that the London Book Fair presents the best possible opportunity to find out very quickly what our own opportunity is outside the US as the need for sophisticated marketing naturally follows the growth and increasing complexity of the overall digital environment.

One person I will be sad not to see at London Book Fair is my longtime friend Bruce Robertson, a founder of the pioneering packagers The Diagram Group, who died a little over a week ago at the age of 79. Bruce was sui generis: a brilliant man with a unique gift for visualization that was the guiding spirit behind dozens of global bestselling illustrated books. Forty years ago, I had the opportunity to sell three of Diagram’s greatest books, “Rules of the Game”, “The Way to Play”, and “Man’s Body” when Bruce’s publisher at that time, Paddington Press, was distributed in the US by my family’s distribution company, Two Continents. I always enjoyed seeing him and hearing his witty, insightful, and often cutting take on the people and practices in our business. Fortunately, there were many opportunities to see Bruce and his endlessly good-natured wife, Pat, over the years, at industry events or when he was in NY or I was in London. We are all one of a kind, but some of us are more obviously so than the rest of us. Bruce was like nobody else. He’ll be missed by many friends from all over the world.

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Sony exits and the ebook business loses an original player


Sony has thrown in the towel on the ebook business and turned its customers over to Kobo. This has unleashed speculation that Nook will soon do the same. If B&N were really forced to choose between the investments they need to make in their stores and the investments required to compete in digital delivery, it would be hard to see them making any other choice but to save the stores. The notion of another retailer, perhaps Walmart, buying the whole thing seems eminently logical, but one can’t account for the role that a sentimental attachment to the stores by B&N’s principal owner, Len Riggio, might play in these decisions.

Despite the hopes and expectations of upstarts like Zola Books (which itself made an acquisition lately, taking Bookish off the hands of the three publishers that started it) and Baker & Taylor’s Blio or longtime competitor Copia or the originally phone-based txtr, it feels to me like we’re seeing the beginning of consolidation of the ebook business. Verticalization may work, as it has seemed to for Allromanceebooks but just being “indie-curated” wasn’t enough for Books on Board, a pretty longtime player that expired last year. (So far, Diesel, a comparable indie, is hanging in there.)

Sony is a big company with a very tiny ebook business. They were also really the “first mover” in the modern era ebook device space. The e-ink Sony Reader is more like the Kindle and Nook than any other thing that came before. But if the ebook play ever fit into a larger objective for Sony, it is not clear what that was.

Apple opened their ebook store because they thought they had a suitable device for book consumption (the iPad), but they also had experience with selling content before (iTunes). They also see potential for iPads in the school and university markets, so they have developed technology to enable more complex books — the kind that haven’t been successful commercially yet — to be developed for their platform. Establishing their devices and the iOS ecosystem in the education market would be a big win for them.

Google recognized over a decade ago that books, being repositories of information that contained the best response to many searches, were a world they wanted to be in. With their growing position in devices — the Nexus 7 phone and Chromebook computers — and as the developers of the Android ecosystem that competes with iOS in the app market, there are many ways that being in the ebook business complements other endeavors, including, perhaps, competing with Apple and iOS in the schools.

In the last post here, I posited (among other things) that ebook retailing just wouldn’t work as a stand-alone business; it has to be a complement to other objectives and activities to make commercial sense. Sony has found that it doesn’t fit for them, almost certainly because it doesn’t add value to any of their other businesses.

Of course, ebooks definitely complement Barnes & Noble’s core business. You have a pretty obvious deficiency if you run a bookstore and don’t sell ebooks, so everybody manages to do it somehow or other. Among the mistakes Borders is accused of having made before they disappeared was turning their ebook business over to Kobo. Doubts about the future of Waterstones in the UK include whether it was wise to turn their ebook business over to Amazon. If Barnes & Noble didn’t have Nook, they’d have to make a deal with whoever did have Nook, or with somebody else.

I’m sure Apple or Kobo or Google would be just delighted to have their ebooks integrated into Barnes & Noble’s suite of offerings, and probably Amazon would too, although they would almost certainly never be asked. All of them have shown interest in affiliating with indie stores, with Google having gone in and out, Kobo now trying hard with them, and, even Amazon, which can’t penetrate indies effectively with their own published books now offering them an affiliate program to sell Kindle ebooks called Amazon Source. But surely all of them would jump at the chance to expand their distribution to Barnes & Noble customers.

It is likely that B&N believes that the Nook business can only be truly successful if they keep investing in improved devices and create a global presence. That may be true, but it also might be that Nook can be a useful adjunct to their store business without continually adding devices or creating a presence outside the US where there are no B&N stores. More and more people are comfortable reading on multi-function devices through apps. Maybe B&N could profitably hold on to a core Nook audience by emphasizing synergies with the stores more (bundling print and ebooks, like Amazon does with its Matchbook initiative and as has been tried on a smaller scale by some publishers, would be one such way) and not worrying so much about making Nook competitive with the other ebook retailers as a stand-alone business.

The wild card here is if some big outside player — Walmart being the most frequently mentioned — saw benefits to having the ebook business (or even the whole book business) in its portfolio. That’s happened in the UK, where supermarket chain Sainsbury’s bought a majority stake in Anobii (a UK-publishers-backed startup, analogous to Bookish in the US) and Tesco bought Mobcast because the ebook business was one that they thought fit in well with their offerings and customer base. (Both Sainsbury’s and Tesco made statements about strengthening their “digital entertainment” and online retailing propositions. Tesco is investing in devices as well.) Kobo has made it a pillar of their strategy to find brick-and-mortar partners all over the world.

On a global basis outside the English-language world, the ebook business is still in its infancy. But it is hard to see how any player without a strong English-language presence could develop the scale to compete with those who have it. Every nation and language will have local bookstore players who have “first claim” on the book-readers in their locality. Some might harbor ambitions to also own their local ebook business, particularly as it becomes increasingly clear that ebooks cannibalize bookstore shelf space. But the cost in cash and time of doing it, combined with the competitive advantage of having English-language books in the offering no matter what language your target market reads, will make a build-it-yourself strategy increasingly unattractive. So it would seem that Amazon, Apple, Google, and Kobo are positioned to grow organically and partner ubiquitously. And it will require some seriously disruptive event, like Walmart buying Barnes & Noble, to break the hold that quartet will have on the global ebook market over the next decade.

A potential disruptive development which this piece ignores is the possibility that ebooks become largely a subscription business over the next decade. I have two overarching thoughts on that.

One is that the book-by-book purchasing habit is sufficiently ingrained that it will not be changed drastically around ebooks in the next ten years. I have no idea what percentage of the ebook market is now subscription, but I think it is safe to say “far less than 1%”. So my instinct is that it would take wild success for it to get to as much as 10% in the next ten years.

The other thing to remember is that any ebook retailer can always develop a subscription offering. Amazon effectively started already that with Kindle Owners Lending Library. You can be sure that if Oyster or 24Symbols starts gathering a substantial share of the market, all of the Big Four as we see them here will find a way to compete for that segment. (It is considerably harder to go the other way around; it is much less likely that Oyster or 24Symbols will open regular stores.)

So whether subscription grows faster or not, the giants of ebook retailing will remain the same.

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Book publishing may not remain a stand-alone industry and book retailing will demonstrate that first


You are missing some good fun if you don’t know those AT&T commercials where the grown-up sits around a table with a bunch of really little kids and asks them questions like “what’s better: faster or slower?” There always seems to be an obvious “correct” answer. Those kids could answer some important questions about ebook retailing in the future like these:

“What’s better? Selling just ebooks or selling ebooks and print books?”

“What’s better? Selling in just one country or in all countries?”

“What’s better? Selling just books or selling books and lots of other things too?”

“What’s better? Having one way to get revenue, like selling books with or without other stuff, or having lots of ways to get revenue so that books are only a part of the opportunity?”

And the answers to those simple questions, so obvious that a 5-year old would get them right, explain a lot about the evolving ebook marketplace and, ultimately, about the entire world of book publishing.

Book retailing on the Internet, let alone an offer that is ebooks only, hardly cuts it as a stand-alone business anymore. The three companies most likely to be in the game and selling ebooks ten years from now are Amazon, Apple, and Google. The ebook business will not be material to any of them — it is only really close to material for Amazon now — which is why we can be sure they will see no need to abandon it. It is a strategic component of a larger ecosystem, not dependent on the margin or profit it itself produces. And the rest of their substantial businesses assure they’ll still be around as a company to run that ebook business.

Kobo is owned by Rakuten, a large Japanese online retailer. They started a global  expansion in 2005, buying up ecommerce companies in different key markets, including Buy.com in the US. They also have invested in Pinterest. I don’t know what it is, but I have to believe that deep in Rakuten’s strategic consciousness there is a larger reason for them to have Kobo, probably based in the opportunities inherent in having a consumer’s email address and credit card information and knowledge of what s/he reads. So they also have a base bigger than the ebook business.

Barnes & Noble demonstrates the principle that books alone and one market alone just aren’t enough. They were able to use their US store presence to jump-start the Nook, but after they grabbed the low-hanging fruit among their store customers for digital reading, they quickly ran out of steam. Without a global presence and without a strong online store (BN.com has been deficient, and an albatross, for years), they just don’t have the ballast to be competitive. And that’s a shame, because B&N is the player that could make the most powerful consumer offer in the book space. They have online and offline, print and digital, but it really hurts them that the execution of offline print isn’t up to competing with Amazon and the overall coordination that would maximize the power of all these capabilities is not in evidence.

This is a totally conceptual theory being posited here, not one with any data to support it. And it is not based on the value of the consumer proposition, although it does seem to me that the “right answers” to the questions in the lead can be formulated strictly from the consumer perspective. The thinking is that book retailing, and particularly ebook retailing, is doomed to being a low-margin business. As such, it is much easier to sustain and support if there is benefit to be gained that goes beyond the margin that can be captured from those sales.

This has really been Amazon’s secret sauce from the beginning. The book publishing industry scratched its collective head for years as Jeff Bezos and his crew grew a giant online bookseller without keeping much margin and had Wall Street shovel money at them to grow and invest. The widespread wisdom in publishing in the late 1990s was that Amazon was performing some kind of parlor trick that would shortly come to an end. Instead, they built on their customer base, their tech, and their reputation for service to expand way beyond book retailing. And today they can afford to run a profit-less book retailing and publishing operation (if they want to; I have no evidence that they don’t make profits and don’t claim to know), taking the margin out of the game in a way that would squeeze any competitor trying to make a profit from book retailing.

Google and Apple are similarly situated in that way and profits (or losses) from ebook retailing don’t even rise to the level of a rounding error for them. Their ebook retailing operations exist in service to larger initiatives: search and Nexus 7 and the whole Google Play content offering in Google’s case; making devices more useful and complementing the iTunes and apps offerings in Apple’s. Their ecosystems are much larger than their ebook businesses and they benefit just from the ebook business being there.

And they’re global. As is Kobo, and Rakuten presumably has an ecosystem play in mind, although it isn’t evident yet.

This is a paradigm that leaves Barnes & Noble out in the cold. Their business, on which they must make money, is selling books. They are trying to diversify their merchandise selection a bit in their stores, but that’s a strategy that is both difficult to execute and has nowhere near the upside that Amazon, Google, and Apple have with their other businesses. This is an unfair fight where B&N is dependent on margins from their ebook (and book) sales while their competitors, if perhaps not totally content to break even on that business, aren’t materially affected if they do, or even if they lose a bit of money on that aspect of their business.

All of this is good for publishers, who benefit from having lots of retailers.

But publishers are bound to face the same problem due to atomization. As the share of the book market — print or digital — reached by online retailers grows (and it is perhaps past 50 percent for fiction already), it makes it easier and easier to put book content into the marketplace and have it reach a substantial percentage of its potential audience. Ambitious self-publishing authors have been reaping the benefits of this reality in growing numbers for the past several years; now entities ranging from newspapers and magazines to ad agencies and colleges and manufacturers are discovering the same opportunity.

In other words, publishing — like book retailing — is likely to become a subsidiary function pursued in strategic support of larger goals. Unlike in retailing, this will not be consolidated among a few players, but as widely scattered as the subjects about which books are produced. But the core challenge for the legacy publishing establishment, that they will increasingly face competition that doesn’t need the profits from that activity as much as they do, will be the same. Book publishing as a stand-alone industry with most of its significant players earning all their profits within it is in the process of morphing into something quite different, starting with the retailers.

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The future of bookstores is the key to understanding the future of publishing


One of the subjects we have been probing for a long time is the inevitable impact that increased purchasing of books online would have on the shelf space at retail and what that would mean to trade publishers. (You’ll see that this speech that is well more than a decade old also says publishers are going to have get audience-centric, or vertical, as well.)

Of course, there has already been one shock to the system — one “Black Swan” event — which was the closing of Borders stores in 2011. That suddenly took about 400 very large bookstores out of the supply chain. Since then, the anecdata about independents — which includes encouraging, but unaudited, financial information from the BEA and a lot of rah-rah from thriving indies (a fire we threw a log on with a great break-out session at DBW last week) — has been very upbeat (although Bowker data seems to suggest Amazon gained more from Borders’s passing than anybody else did). And while B&N has continued to show some sales slippage, its more drastic setbacks have been in the Nook business, not selling print in stores.

One distracting fact for analysts considering this question has been the apparent slowdown in the growth of ebook sales, suggesting that there are persistent print readers who just won’t make the switch. The encouraging fact is distracting because it is incomplete as far as predicting the future of shelf space at retail, which is the existential question for the publishers, wholesalers, and bookstores (and, therefore, by extension, for legacy authors too). We need to know about changes in the division of those sales between online and offline to really have a complete picture. If ebook takeup slows down but the online buying shift doesn’t, the bookstores are still going to feel pain.

This point about the key index being online sales versus offline sales rather than printed book sales versus digital book sales is a key one that we’ve been hammering for years. It was nice to see Joe Esposito emphasize it in a recent post of his addressing some of my favorite questions about Amazon.

We had a panel of four successful independent booksellers at DBW. One of them, Sarah McNally of McNally-Jackson, has recently been quoted as saying she worries about the future of her Soho bookstore when her lease is up. (Rents rise quickly in that part of the city.) Meanwhile, she’s taking steps to move beyond books to retailing design-heavy but perhaps-more-enduring retail goods like art and furniture. (And, in that way, McNally-Jackson takes a page out of Amazon’s book, not limiting themselves to being a bookstore brand.)

A friend of mine who is a longtime independent sales rep says that even the successful indies are finding it necessary to sell books and other things — cards, gifts, chotchkes — to survive. The mega-bookstore with 75,000 or 100,000 titles or more was a magnet for customers in the 1970s, 80s, and 90s. It isn’t so much anymore because the multi-million title bookstore is available through anybody’s computer. This is a fact that makes the number of successful stores a weak indicator of the distribution potential available to publishers. If replacement stores carry half the inventory of the ones that go out, we can have a lot of indie retail success stories but still a shrinking ecosystem into which publishers distribute their books.

In general, the proprietors of successful indie bookshops and their trade organization, the American Booksellers Association, paint the times as hospitable to independent bookselling. They dismiss the skepticism of people like me that believe that the current surge of apparent good fortune is due to a window of time (now) when Borders’s closing removed shelf space faster than Amazon and ebooks had removed demand for books in retail stores.

It has been an unspoken article of faith that bookstores would not go the way of stores selling recorded music or renting and selling video, both of which are segments that have just about entirely disappeared. The physical book has uses and virtues that a CD, a vinyl record, a DVD, or a videotape don’t, not the least of which is that a physical book is its own “player”. But it also provides a qualitatively different reading experience, whereas the other “physical” formats don’t change the consumption mode at all. Of course, that only helps bookstores if the sales stay offline. People ordering books online are overwhelmingly likely to order them from Amazon. In other words, it is dangerous to use the book’s ability to endure as a proxy for the bookstores’ ability to sustain themselves. The two are not inextricably connected.

But the fate of almost all trade publishers is inextricably connected to the fate of bookstores. There are only two exceptions. Penguin Random House is one, because they are large enough to create bookstores on their own with just their books. The other is publishers who are vertical with audiences that open up the possibility of retail outlets other than bookstores. Children’s books and crafts books are obvious possibilities for that; there aren’t a ton of others.

The feeling I had at Digital Book World is that most people in the trade have either dismissed or are wilfully ignoring the possibility that there could be such serious further erosion of the trade over the next few years that it would threaten the core practices of the industry. With more than half the sales of many kinds of books — fiction in the trade area, of course, but also lots of specialized and professional and academic topics — already online, many seem to feel whatever “adjustment” is necessary has already been made. They got support for optimism at Digital Book World. Stock-picking guru Jim Cramer touted Barnes & Noble’s future (because they’re the last bookstore chain standing) and, from the main stage, the idea was floated that Wal-mart might buy and operate B&N as part of an overall anti-Amazon strategy.

All that is possible, and I have no data to refute the notion that we’ve reached some sort new era of bookstore stability, just a stubborn feeling in my gut that over the next few years it will turn out not to be true. I don’t mean to ignore the positive signs we’ve seen over the past year or so. And the overall decline in physical retail versus online purchasing affects all retail, not just books, so it is possible — some might say likely — that the rent squeeze will ease. It isn’t just bookstore shelf space that seems to be in oversupply compared to demand; that’s broadly true of retail. So your gut may differ and would have some logic to support a contrary point of view.

But my hunch (and this is not a “prediction” as in “this will happen; take it to the bank”) is that shelf space for print in Barnes & Noble and dedicated bookstores could well shrink by 50 percent over the next five years. What CEO or CFO of a trade publishing house would consider it prudent not to consider that possiblity in their own planning?

Obviously, less shelf space and more online purchasing change each publisher’s practices in many ways. They will want to deploy more resources for digital marketing and less for sales coverage. They will want to own less warehouse space and less inventory, changing the overall economics of their business. As we’ve been saying for years, they’ll find it sensible to become more vertically consistent: acquiring titles that appeal consistently to the same audience. Each house’s own database of consumers will become an increasingly important component of their equity: an asset that provides operational value today and balance sheet value if they become acquired.

But, most of all, publishers are going to have to think about how they maintain their appeal to authors if putting printed books in stores becomes a less important component of the overall equation. It is still true that putting books in stores is necessary to get anywhere close to total penetration of a book’s potential audience. Ignoring the in-store market obviously costs sales in stores but it also costs awareness that reduces sales online. (After all, stores are very aware of the “showrooming” effect: customers who cruise their shelves with smartphones in hand, ordering from Amazon as they go!)

But that’s today when the online-offline division may be near 50-50 overall and is 75-25 for certain niches. If those numbers become 75-25 and 90-10 over the next five years, the bookstore market really won’t matter that much to most authors anymore. Whether through self-publishing or through some fledgling publisher that doesn’t have today’s big publisher capabilities but also doesn’t have their cost structure, authors will feel that the big organizations are less necessary than they are now to help them realize their potential.

Higher ebook royalty rates, more frequent payments, and shorter contract terms are all very unattractive ways from the publishers’ perspective to address that issue. So far the marketplace hasn’t forced publishers to offer them. If bookstores can hold their own, the need to move to them may not be compelling for a long time. But if they don’t, most legacy publishers will have very few other levers to continue to attract authors to their ranks.

We are already seeing big publishers quietly moving away from publishing books that haven’t demonstrated their ability to sell as ebooks: illustrated books, travel books, reference books. That implies an expectation that the online component — particularly the ebook segment of it — has already changed the marketplace or certainly will soon. Adjustment of the standard terms with authors is a shoe that hasn’t dropped, but if the marketplace continues to change, it might become very hard to keep things as they’ve been.

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Looking at predictions from here going back a few years


Prediction posts are common blog- and article-fodder at the end of a calendar year. I don’t think we’ll do one this time around, but I thought it would be fun to review some of the prediction posts from prior years. So pardon the highly self-referential post, but I think reviewing the predictions and reality from the past provides some perspective on the changes we’ve experienced over the past half-decade.

In December 2012, I wrote about “what to watch for” in 2013. I don’t think this was very adventurous, but it was mostly right.

I said that:

1. Overall migration of sales from print to digital will continue to slow down.

2. “Other-than-immersive” books will continue to lag in digital transition.

3. Mergers and consolidation among publishers are likely to become more common, after a long period when they haven’t been.

4. Platforms for children’s books will become increasingly powerful gatekeepers.

5. Marketing for publishers will be a constant exercise in learning and reinvention, and increasingly difficult to separate from editorial.

In December 2011, I steered away from predictions to raise what I thought were the important questions facing the industry coming up in 2012. Despite no “predictions”, this one anticipated a number of developments that mattered, including the challenges Amazon Publishing would face, the difficulty for B&N trying to create a workable international strategy, the lift indie bookstores would get from Borders going out, and the conundrum facing illustrated book publishers as consumption migrates to digital.

That same year, I chimed in with others for Jeremy Greenfield’s annual round of predictions on the DBW blog. I commented on the restructuring of big companies that would result in new positions. And that was before anybody had people with the word “audience” in their job titles. Doesn’t everybody now?

But I really got it wrong about ebook royalties, which I thought back then would go up from the “standard” 25% and, although that may still happen someday, it hasn’t happened yet.

I didn’t write a single consolidated predictions post in December 2010 but I did posts making some predictions. One thing I got right was that ebook sales would continue to rise quickly (some people back then expected a slowdown, but we were still in a more-than-doubling-each-year period though, as noted above in the predictions last year, that slowdown came eventually). I thought bookstores would be headed for very hard times. That was just before Borders’s demise.

I’ve made the point on the blog before that every book purchased online is another nail in the coffin of brick-and-mortar bookselling. … I’m expecting that what brick-and-mortar booksellers will experience in the first six months of 2011 will be the most difficult time they’ve ever seen, with challenges escalating beyond what most of them are now imagining or budgeting for.

I think the next six months will make what we’ve been experiencing for the past year look very gradual. I know smart people who have thought for the past year that there would be some flattening coming soon in the ebook switchover. It doesn’t feel that way to me.

At the same time, I focused on marketing with a suggestion — for topic-specific (vertical) ebook recommendation apps or ebooks — that I still think is out there waiting to be exploited. Maybe Mike Fine’s Mediander will take hold and carry us in that direction. (What has happened instead is ebook notification of ebook price sales, which is, to my mind, not as useful.)

I also saw backlist emphasis as a logical consequence of ebook ascent. I think publishers are still lagging in taking advantage of this the way they could. And that blows the end of this prediction, because I said everybody would see that by the end of 2011. They didn’t. (And we now understand the constraints — of time, timing, and budgeting – that make backlist marketing difficult. Publishers are now looking to tackle the backlist in scalable, data-driven, and efficient ways.)

In December 2009, I made 13 predictions for 2010. One stands out: I said that ebooks would become significant revenue contributors for many titles. That happened. And also accurate was my hunch that “windowing” for ebooks, for a little while the strategy employed by publishers to protect print, would be overwhelmed by circumstances. Windowing really didn’t last long.

In January 2009, I wrote a piece for PW analyzing how my 2008 predictions had held up. I gave myself a pat on the back. I think I deserved it. As I said in PW:

I said the popularity of e-books would increase—that the rising Kindle tide would lift all the e-book boats. That appears to be unambiguously correct.

I said Apple would make an e-book reader out of the iPod and iPhone. They haven’t, but they’ve made it easy for others to do so.

I said B&N would continue to leverage its great supply chain to lengthen its lead over Borders. And, in an incredibly difficult year for all book retailers, B&N has substantially outperformed its closest competitor.

I said the lack of a competitive supply-chain infrastructure would handicap Borders, which would get a new owner. Turns out I was half-right. The lack of a competitive supply chain has been such a handicap that Borders has not yet found a new owner!

I said publishers would push harder to publicize books through the Internet because traditional review channels would continue to diminish. Well, the traditional review channels have certainly diminished, and publishers have increasingly turned to bloggers, Web sites and e-mail blasts to promote their titles. Most publishers now have dedicated staff for Web marketing.

I also said 2008 would be the year of experimentation. In many ways it was: Random with free e-book giveaways; Penguin beefing up its e-book editions of classics; Harper creating an imprint with Bob Miller that has a new business model for authors and a no-returns option for intermediary customers, as well as its Authonomy and BookArmy sites. Experimentation will be curtailed in 2009 because of the difficult economy, so I got that one into the right year.

At the end of 2013, we look forward to a new year with a revised commercial trade publishing landscape, mainly because what was formerly the Big Six is now (to my way of thinking) the Big One and the Following Four. The challenge for publishers will be to hang on to their margins, which will be under assault from a single dominant store network, a single dominant online retailer, and literary agents who know their author clients are reading the same articles they are about how the publishers’ profit has remained healthy through the early phases of the digital transition. The challenge for bookstores will be to stay relevant now that the most avaricious readers no longer must visit them to get their next book. And the challenge for everybody is to make a profit and generate some leverage on the even-diminishing share of the business that isn’t controlled by Amazon.

At this year, the fifth Digital Book World, I’ll start the show with a quick summary of what has changed since we started having the Digital Book World conference in 2010. And the wrap-up panel I co-host with Michael Cader will focus again on “Looking Back, Looking Forward”; what has happened that is significant in the past year and what we expect in the year ahead. We are delighted to have John Ingram, Mary Ann Naples, and Simon Lipskar joining us for that conversation.

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No, Mike Shatzkin did NOT say that publishing is spiraling down the drain


As part of the promotion of the Digital Book World conference, I do some interviewing with the very capable Jeremy Greenfield, the editor of their blog. And Jeremy takes our conversations and chops them up into short pieces around the themes of our show. Since the focus of Digital Book World is “how digital is changing publishing”, Amazon is a topic of great interest and one we try to address in an original and enlightening way.

In my interview with Jeremy, for which he published very brief but entirely accurate excerpts, I did say that publishers would face a real selling job with authors when Amazon’s share grows by another 25% from its current base or if Barnes & Noble closed. Neither of those things is likely to happen in the next few years. If and when the day comes that one of those things does happen, not all publishers would be entirely defenseless even with today’s arsenal of capabilities. And Jeremy’s piece closes with my suggestion that publishers can help themselves by doing “digital marketing at scale, which is audience-centric in its thinking.”

Despite how this is interpreted in some circles, it does not add up to publishing “spiraling down the drain”.

Amazon is already truly disruptive and it isn’t clear to anybody but those on the inside of Amazon exactly how disruptive. I’ve written earlier that we know nothing about the used book marketplace they host and foster, which we must assume cuts into sales, particularly of bestselling books which have many copies in circulation. A recent discussion on a mailing list I’m on revolved around what we don’t know about how many ebooks are being published. Why? Because Bowker, which issues ISBN numbers and therefore helps us count the titles going into the marketplace, doesn’t necessarily get to touch (and count) titles that stay entirely inside of Amazon and therefore only use the Amazon “ASIN” substitute for the ISBN. Other ebook retailers will handle titles without ISBN numbers, but only Amazon has a large enough market by itself to make a substantial number of self-publishers work with them alone.

And now we have the anomaly of sales reporting from the AAP, once again working without totally internal Amazon IP, that suggests ebook sales are going down. Are they going down? Or are self-published titles exclusively inside Amazon taking share away from the part of the business we can see and count for ourselves and masking the ebook sales growth that is actually taking place? I have no evidence, but that strikes me as a more likely reality than that ebook sales have actually fallen year-to-year recently.

What that means is that we are developing two publishing businesses. One of them includes all of us: all the publishers, all the retailers, all the industry bodies counting books and sales. And one of them is “private” or “proprietary”; it is Amazon. They are publishing an unknown number of titles selling an unknown number of copies netting an unknown number of dollars under a numbering system nobody else can crack or track.

Actually, Amazon is not entirely alone in wanting proprietary titles. Perhaps there are some within Nook or Kobo, but hosting proprietary titles to establish themselves in the market is the declared strategy of upstart retailer Zola Books. Last week they announced exclusive titles from Joan Didion and her late husband, John Gregory Dunne. They think having showcase titles of this kind will enable them to crack the ranks of established ebook retailers. I think it would take a lot more of them than they’ll ever get to make a dent, but time will tell. And if they don’t sell a lot of the ones they have, it will become impossible to persuade anybody else to give them such an exclusive on any basis.

But Amazon, being more than half the market already for a lot of genre fiction, can use painless (to them) financial incentives to induce authors to give them exclusives through the KDP Select program. So they get them in numbers none of the rest of us can count but which could conceivably be large enough to actually make industry figures inaccurate.

My assumption is that Amazon can do more for a book inside Amazon than a publisher or author can working Amazon from the outside, all other things being equal (although the U-turn from the ambitious Larry Kirshbaum publishing program might cast doubt on that). And the publisher takes a big share of the Amazon-generated revenue. That means that the publishers have to make up the difference in revenue for the author in one or both of two ways:

They have to do a superior job publishing the book — editing, positioning it in the marketplace, selling rights, and sustaining a marketing effort that will be largely digital — so that it sells more even inside Amazon than it would without those efforts. In other words, they have to assure that “all other things” do not remain equal.

They have to sell lots of books outside of Amazon so that the revenue from the larger publishing ecosystem makes up for the Amazon-generated revenue that the author shares with the publisher.

The shift that has taken place so far is apparently not crippling publishers at all. There are no clear tallies about this, but it certainly feels like there are more authors moving from self-publishing to a publishing house (to borrow a term that usually has a different meaning in our business: “discovered” by publishers because of their self-publishing success) than the other way. So either they’re able to make more money, or they really appreciate the full bundle of editing and marketing services a publisher provides, or they value the broader exposure through a publisher’s entire distribution network more than the perhaps-higher revenue they could make from fewer sales through Amazon alone, or some combination of the three.

My point, and what should be a broad industry concern, is that the publisher’s challenge continues to get steeper. Amazon’s share is growing in relation to the rest of the market and more and more service offerings for editing and marketing are making it ever-easier for authors to entertain a non-publisher option. There is a very small but growing population of authors with lengthy backlists who have gotten their rights back, or secured their ebook rights alone, and are able to consider alternative paths to market.

Although she wasn’t the first, Jane Friedman saw this very early — and it is the opportunity that got things started for her Open Road Integrated Media, probably the largest new publisher built during our current shifting paradigm. Richard Curtis of E-Reads and Arthur Klebanoff of Rosetta were pursuing a similar strategy before Friedman got started, but she found the funding and added the promotional sizzle to build a bigger business faster. (It is still an open question whether the companies that are building themselves by offering more generous royalty splits for already-established backlist have a sustainable business model.)

We’ve said repeatedly in this space that the publisher’s time-honored core proposition has been “we put books on shelves”. That is changing and the new proposition has to be “we will help authors reach their whole audience”. A very smart executive from a major house suggested another formulation that makes sense: “publishers are experts at building author brands.”

Either of those, as a competitive statement against Amazon, will almost certainly reflect a potential advantage for authors. But as the difference between what is Amazon’s audience and what is the whole audience gets smaller, the publishers’ challenge gets harder. And only by doing a smashing job at both publishing in a way that sells more on Amazon and by maximizing the market outside Amazon will publishers retain their power to attract authors in the years to come.

The answers for publishers as seen from here are “verticality”, or “audience-centricity”, combined with scaled skills (and tools) to do digital marketing in ways the authors can’t on their own and which Amazon isn’t likely to develop. The two go together: focusing on an audience enables a publisher to build scaled capabilities to reach that audience that others without that focus will not have.

There have always been publishers that have gone “down the drain” or, more likely, seen themselves become part of some other publisher rather than a stand-alone entity. We will certainly see consolidation in various segments of the industry at the same time that we will see lots of new smaller entrants attracted by book publishing’s diminishing cost of entry. (We call this atomization.) But seeing that things will get harder is not the same as seeing a pending apocalypse, and recognizing there are benchmarks that would signal a real escalation of the challenge is not the same as saying we’re about to hit them.

The topics covered in this post will get a thorough airing at the Digital Book World conference on January 14-15, 2014. (Here’s the full program.) Our Amazon coverage will include presentations from Brad Stone, Benedict Evans, and Joe Esposito, followed by a panel discussion among them. Professor Dana Beth Weinberg combines her data analysis skills as a sociologist with her publishing interest and knowledge as a romance writer to present a unique perspective on the changing dynamic between publishers and authors. And Phil Sexton, the publisher of Writer’s Digest, will present the results of his organization’s survey of more than 5,000 freelance writers, capturing an up-to-date picture of how writers view the choice between working with a publisher and putting their material out on their own.

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Amazon might lose interest in total hegemony over the book business before they achieve it


The industry got the news that Amazon was probably reassessing its own publishing program a couple of weeks ago when it was announced that Laurence Kirshbaum was stepping down as the head of Amazon Publishing and being replaced by a 14-year veteran of the Seattle company, Daphne Durham. Whatever are Durham’s strengths and connections, they don’t include the familiarity with the New York publishing scene and agents that Kirshbaum brought.

While this certainly does not suggest an overall reduction in Amazon’s publishing activity, it does signal a change in tactics. It would appear that the unorganized but united stand by Barnes & Noble and independent bookstores to boycott Amazon-published titles and refuse to give them shelf space made it virtually impossible for Amazon’s publishing enterprise to compete with the big houses for brand name authors. The few that they tried — Penny Marshall and Timothy Ferriss wrote the high-profile titles that were watched — had disappointing results. Whether that was largely because the stores wouldn’t play along or for other reasons (not all books by famous authors or celebrities are equally edited or equally appealing), the overall environment did not leave agents or the authors everybody wants panting for an Amazon publishing deal.

Retreats — apparent or real — by Amazon are rare. (The last one we can recall is when they pulled the buy buttons from Macmillan titles in 2010 to protest agency pricing and very quickly rescinded the action.) But it would be a mistake to think either that Amazon is less interested in publishing than they were before or that the threat they pose to publishers’ relationships with authors is no longer something publishers need to concern themselves with.

In fact, all the recent evidence suggests that Amazon’s market share is still rising. The Bowker numbers reported at the end of July of 2012, trying to measure who got the Borders sales (which were 10% of the total when the retailer went out of business) put Amazon’s total share of the book market at 29%, up from 23% a year earlier. In that same report, it was reported that B&N had gained a point of share, up from 19% to 20%. So Amazon out-benefited B&N from Borders’ collapse by six to one.

Earlier this year, it was reported in Britain that Amazon had a whopping 79% of the burgeoning ebook market. That’s more than they have in the US. It is also apparently the case that Amazon has the lion’s share of the online book sales market in the UK (and, along with their subsidiary company The Book Depository, most of Europe and the English-speaking world).

The share of total sales that goes through their registers is only one measure of Amazon’s disruptive growth. They’re also signing up more and more books directly to their imprints (the genre publishing growth continues unabated and was never heavily dependent on Kirshbaum) and getting more and more books through authors self-publishing. And as they disintermediate publishers by bringing in books directly by either means, they also threaten their competitive retailers in all venues. Although you can be self-published through Amazon and continue to distribute to other channels, they offer financial incentives to discourage that.

In fact, Hugh Howey, the enormously successful self-publisher of “Wool”, told us a year ago that the decision to broaden his distribution base to include Nook and other platforms cost him money. He did it because he thought it was the fan-friendly thing to do but he’d have made more money on his ebook sales if he’d sold fewer units and given up the other formats.

(KDP Select is the program that demands exclusivity. By enrolling, authors get their works in the Kindle Owners’ Lending Library, increased royalties on sales outside the US, and access to additional promotional tools. You can still have your book on sale in physical, “or in any format other than digital”.)

We see Amazon growing into a large and slightly separate book industry of its own. They don’t use the book business’s standard ebook format, epub; they use their own format, mobi. (The Amazon “flavor” is AZW, and they also have the newer KF8.) They don’t care much whether a book has an industry standard ID, the ISBN number. Amazon assigns its own number, unless the publisher has a 10-digit ISBN they can use, which they call an ASIN. They own a must-optimize author page (Amazon’s author page affects an author’s discoverability on Google; the converse is not true) and a must-use book readers’ social network (GoodReads). They have their own print-on-demand operation making it simple for an author to set up both ebooks and print at the same time.

The “advantage” a publisher has pursuing authors is that they can offer a much broader distribution base as well as their honed skill at marketing and publicity. But there’s a price for that; self-publishing with Amazon brings an author four times the revenue for ebooks and somewhat more for every print copy sold as well. Whether Amazon is a quarter, a third, a half, or more of a book’s sale depends on the book, but authors will be increasingly facing the choice Hugh Howey faced: publish exclusively with Amazon and sell a bit less but make a bit more, or publish to a broader audience through a publisher (or on your own) and make less money. Apparently, many authors are doing 90-day runs of KDP Select to get a boost at Amazon, then switching back to broader distribution

Fortunately for the rest of the publishing business, the shift to ebooks and to online purchasing may have stalled. In the US, Amazon appears to have about 60-70% of the ebook business, and ebooks constitute about 30% of the total business. But the ebook share is much higher for immersive reading, higher still for fiction. For fiction, more than half the sales of many titles can be digital. And the print sales are anywhere from 25% to 35% online. So for fiction, Amazon may already be nearing half the total sales for many titles.

We wouldn’t expect the slowdown of the shift in sales to last. New offerings of ever-cheaper and more-flexible devices, more and more cheap ebooks in the market (discounting the backlist ebooks seems to be publishing’s latest most common marketing trick), and the natural growth in digital interaction as older people exit and younger people with new credit cards replace them, pretty much assure that the online sale will continue to grow in relation to the store sale. As that happens, as the 2012 measurements after the demise of Borders showed, Amazon experiences organic growth.

So, when does Amazon’s share growth stop? And who is left standing when it does? Here we have to enter a realm of pure speculation; there are no data points that can help us figure this out.

To answer these questions, we need to look at the book business in segments.

For narrative text, books that one reads from the first page to the last, we’d expect continuing growth of digital. For genre fiction (including YA), which has the additional characteristic of having audiences that consume many titles a year, we’d expect a lion’s share digital market — 80 percent or more — to be common within a couple of years. For those books, Amazon will continue to just eat away at the publishers’ position. More and more of the genre readers will migrate to them because they’ll have an increasing number of titles on an exclusive basis, more — and more aggressive – price promotion, and probably a variety of subscription opportunities. That should lead inexorably to more and more of the genre authors being willing to publish with them exclusively because they’ll be able to reach an increasingly large percentage of the reader base through digital and Amazon alone.

If I were looking for the first candidates not to be “left standing”, we’d expect to find them in genre publishing. In time, the big publishers will increasingly focus on “big” genre titles, rather than lengthy genre lists.

I also expect more DRM-free trials, particularly in genre fiction, so that publishers and third-parties can sell mobi files to existing Kindle customers. For while genres are where Amazon has their greatest potential strength, it is also true that genres are where publishers have the best chance at building brands and direct customer relationships that matter.

More general fiction and non-fiction will be read mostly in digital form in a short time too, although the hardcovers for those books will continue to exist. But for the big players in general trade, there’s another problem besides Amazon to deal with. That’s the new publishing behemoth: Penguin Random House. I would guess (all we can do) that by three or four years from now, the first choice for most authors will be either PRH or Amazon. PRH will provide the biggest reach; Amazon will often provide the biggest potential revenue. The other general trade houses will fight each other for the authors that don’t want to be part of either behemoth.

For illustrated books and children’s books, the environment will be different. Stores will remain important, but there will be fewer of them (and therefore fewer books of this kind published). The bookstore I’d imagine in several years will have far more illustrated and gift books in it as a percentage of the total title mix than it does now.

What I think will save publishers from disappearing, oddly enough, will be a loss of interest at Amazon in taking more market share. This conclusion comes from a combination of something I learned from people at Google about Google and what is clear from Stone’s book.

Last spring, I visited a Google installation that was not about the book business, but about an online game. The game is a big online experiment in engagement. Googlers showing us around were thinking about the revenue potential of the game, which was not supposed to be their primary concern. They had come to the conclusion that $100 million in annual revenue would be achievable, but they didn’t think they’d be able to go after it. Why? Because nobody in a responsible position at Google would take ownership of something as small as $100 million in revenue.

Brad Stone paints a picture in “The Everything Store” of Amazon as, above all, a highly rational company. Jeff Bezos can be impetuous, but he’s not nuts. He is zealous about the things he cares about because he believes they matter: customer happiness being number one on the list. As the book business becomes a smaller and smaller part of the total Amazon picture and the challenges that matter to the business revolve around delivering your fresh produce in 30 minutes, not 90, it is likely that Amazon will have less and less interest in squeezing just a little bit more margin out of the book business. There will be easier places and easier ways to make money.

Amazon achieved the position it has in the book ecosystem through a combination of brilliance, execution, natural forces, and some good luck but, above all, focus. It had to take some big chances with pricing and margin to get where it has gotten, but that’s not really necessary anymore. Doing some very logical and natural things, like the new Matchbook program and rolling out more subscription and pricing offerings (like their new “Countdown Clock” discounts for new Kindle titles) will keep their share growing and their competitors scrambling. They will also almost certainly be coming after publishers for more margin (as will their equally dominant counterparts on the store side, Barnes & Noble), but it would seem unlikely that they’ll see the need to extend themselves to sign up authors or build out their ability to distribute print to other people’s stores.

Amazon will certainly continue to make it difficult for publishers to use price offers as a way of teasing away some of the direct ebook business. Publishers are finding that increasingly tempting as more and more vendors emerge who can solve the tech challenges for them. But even with publishers taking some ebook share directly, and more of them will, chances are that the ebook business will grow faster than the publishers’ shares and that Amazon’s growth, partly at the expense of other ecosystems, will not stop.

So the good news for publishers is that the business they now have will look less and less appealing compared to other worlds Amazon might conquer. That should save them from having a bulls-eye on their backs, but it will remain a very challenging environment where their biggest customer is the most powerful force in the marketplace and growth outside that customer is harder and harder to achieve. The publishing activities of Amazon will continue to get bigger; the industry of other publishers will continue to get smaller. But we are probably in for a period of slow and steady shifts rather than cataclysms.

As long as Barnes & Noble can stay healthy and the other ebook platforms aren’t crushed by losing titles to Kindle exclusives, that will remain the case. And that means “for quite a while” but not “forever”.

Remember that Brad Stone will be joined onstage by analyst Benedict Evans and publishing sage Joseph J. Esposito for a wide-ranging discussion about Amazon at Digital Book World in January.

Note that I also posted on Amazon yesterday. That piece describes three important pieces of their story that didn’t make it into Stone’s book.

And, if you’re from a start-up or your job at a publisher includes meeting with and evaluating start-ups, we really want your response to our survey, which will inform our dialogue about start-ups at Digital Book World.

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Three points worth adding to the excellent account of the Amazon story in The Everything Store


The publication of Brad Stone’s book about Amazon, “The Everything Store”, is the catalyst for a lot of new discussion about the topic most difficult for the book business to discuss. It is pretty much impossible to be in the book business without benefiting from Amazon’s market reach. But it is also pretty standard fare to be worried about what the impact will be on your business as that market reach grows.

Amazon is, at the same time, both the biggest customer for most publishers and many wholesalers and their most potent competitor. They compete with every bookseller for sales, which weakens the brick-and-mortar trade, and thus dilutes the core value proposition that publishers have always offered: putting their authors’ books on bookstore shelves. Weakening the diverse bookstore ecosystem weakens the wholesalers. At the same time, Amazon competes with publishers for authors, both through their publishing programs and through their self-publishing services.

They also compete with the free ebook lending from public libraries and the various ebook subscription services with their Kindle Owners Lending Library, a service offered to their Amazon Prime customers that makes a large number of titles — many published by Amazon or self-published exclusively through Amazon — available for no-additional-payment downloads.

And they are capable of creating propositions that every other retailer would love to match but would find quite difficult to do, such as their recently announced “Matchbook” program which offers a free or very cheap ebook edition to any customer who has bought the print version of that book from Amazon. In fact, many publishers believe in the print-and-digital “bundle” and have made efforts to engineer it for bookstores, but it is hard to do that cost-effectively. It isn’t hard for Amazon.

Candid public conversation about Amazon from other players in the industry is pretty much a non-starter. Every publisher is walking the fine line of trying to make their sales grow through their largest account and, at the same time, somehow growing their sales faster everywhere else.

And that’s just about impossible. For the few years (just concluded) when all ebook sales were growing, publishers were seeing upswings in their business with other digital accounts besides Amazon. But recent evidence suggests that ebooks have hit either a point of serious resistance or a temporary plateau so even that may not be true anymore. It is likely that for many publishers Amazon represents the only significant account that continues to grow.

Last week, Jeremy Greenfield of Digital Book World interviewed me about “why it is so hard to compete with Amazon”. Since this is a topic of such widespread interest but also so hard for so many of the industry leaders to discuss, extending that discussion seemed warranted.

In this post, I want to cite three important aspects of Amazon’s history — important as far as the book business is concerned, although not necessarily to the overall picture Stone successfully conveys of the Bezos vision and the strategy and culture that achieve it — that didn’t make it into Brad Stone’s excellent book. In a subsequent one, I will explore what I think are the two key questions about Amazon that everybody in the book business is quietly asking:

* When does Amazon’s share growth stop?

* Who is left standing when it does?

About those two questions, all we’ll say here is that Stone’s book gave me fresh insight into the possible answers.

Now for those three missing points and why they’re important.

I first raised these questions and wrote about Amazon’s squashing of Ingram Internet Support Services (known as I2S2) about two years ago, but what I think is a very important story didn’t make “The Everything Store”.

As Stone describes clearly, Amazon began its business basically standing on Ingram’s shoulders. They stationed themselves in Seattle, near a big Ingram warehouse in Roseburg, OR. When Amazon started, they were able to take a customer’s order and money; order and receive the book from Ingram and deliver it to the customer, and then sit on the cash for a while before they had to pay Ingram for the book.

Pretty early in the piece, Ingram saw that all retailers could take advantage of this capability of theirs. So they created the I2S2 offering and went out to book retailers to persuade them to use it the same way Amazon did. Of course, at that time Internet retailing of books was a tiny part of the market, but Ingram hoped that the opportunity to offer a cash-flow-positive service to their customers would entice some stores, who were already Ingram customers, to diversify the choices for online customers.

Before I2S2 could get off the ground, Amazon killed it with high-profile discounting to as much as 40% off the cover price, effectively taking the profit out of Internet sales. This move was seen as a tactic to grow the customer base quickly and satisfy the investment community’s desire to see growth in top line and in customer base. That’s accurate. But it also stopped what could have been serious competition in its tracks. Booksellers profiting from their stores had little patience to build online business that was small and would now not even be profitable.

A publishing executive who was at Random House in the late 1990s recalled in a conversation we had last week that Peter Olson, who ran Random House at that time, told him not to worry about Amazon because their share grew by about 1% per year. In fact, that’s probably just reflecting that the consumer tendency to purchase online grew by 1% per year. The executive who told me this story made the accurate point that Olson was proven right about the share growth over many years, with additional surges when events like Borders’ closing took place. (And, of course, he told the story because we both knew that Olson was proven wrong that this 1 percent growth a year was nothing to worry about. “When does it stop…?”)

But imagine if Amazon had not reacted to the existential threat of a multitude of potential competitors by trading their margin for survival!

The I2S2 experience of the late 1990s adds some poignancy to a piece of excellent reporting by Stone about a meeting Amazon had with Ingram early in the century when Amazon’s stock was falling and some industry players were worried about whether they could pay their bills. Stone reports John Ingram making it clear to Amazon that Ingram could not afford an Amazon bankruptcy. Clearly, Ingram’s credit policies had continued to fuel Amazon’s growth in the years that had elapsed when they killed I2S2 with discounting.

The second point that is somewhat more significant than I think Stone portrays it was Amazon’s purchase of the ebook technology Mobipocket in 2005. In those days before there was a real ebook business and an “epub” standard (which Amazon eschews, which is another story not thoroughly enough explored), the two leading reflowable ebook standards were controlled by Palm Digital and Microsoft. Palm’s strategy was to sell the ebooks themselves through sites they owned or controlled. Microsoft was going for the broader play and enabling retailers to sell their format.

But the problem was that the lion’s share of the tiny ebook market read Palm, not Microsoft’s Dot Lit format. So the retailers, one of which was Barnes & Noble, were really hobbled. They could only sell the ebook format nobody wanted. Mobipocket’s format would work with both the Palm reader and the Dot Lit reader, so selling that format would reach most of the hand-held devices then used for ebook reading. If B&N or Borders or anybody else had made a strong push for the ebook customers using Mobi, and capitalizing on the format’s ability to serve the entire ebook market of the time, the effort might have gained a foothold. After Amazon bought Mobipocket, they did nothing with it for three years until they used it as the ebook format for the Kindle. (By that time, Dot Lit was about dead and Palm’s core business in hand-held PDAs was about to be demolished by the iPhone.) Did Amazon buy Mobi to postpone the ebook revolution until they were ready to lead it? It would certainly seem that way.

The other significant item that I think “The Everything Store” underplays is Amazon’s enabling of the used book business online. Although this is a “marketplace” function — Amazon is not the seller of the used editions, independent players are (presumably, although questions have been raised about whether all the marketplace sellers are actually entirely independent) — it was Amazon’s decision to place the used book availability and pricing right on the same page which sells all the editions from the publisher. That means that everybody who searches Amazon for a title is shown the used copies that are available competing with what the publisher offers.

What is the impact of this ubiquitous used book availability competing with new copy sales at the world’s biggest book retailer? Well, actually, nobody really knows. In 2006, Amazon (for some unexplained reason) participated in a study and industry conversation about used book sales. They haven’t done it again between then and now, and since Amazon’s marketplace almost certainly sells the lion’s share of used books, there’s not much point to examining this question without their participation.

We launched a DBW survey today on “start-ups” about which we’ll write more in a future post. But if you are either part of a start-up or in the business development function of a publisher that includes meeting with them, you will find our survey of interest (and we will value your response). You can read more about the survey here or just jump in and start answering questions.

And, of course, Brad Stone, the author of “The Everything Store”, will be one of three great speakers we’ll have talking about Amazon at Digital Book World in January. He’ll be joined by Benedict Evans of Enders Analysis, who has a paradigm for analyzing Amazon as a business that is uniquely insightful, and by Joseph J. Esposito, an industry veteran with a strong background in scholarly publishing who has noticed for years that Amazon is a significant competitor in the institutional market (schools and libraries).

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Finding your next book, or, the discovery problem


A big flap has arisen this week — which I believe I would have been equally aware of had I been home in New York rather than in London — because the giant UK books-and-stationery retailer WH Smith has apparently found inappropriate ebooks being recommended through the kids books portions of the Kobo-managed ebook offering they host. This has sparked a lot of conversation about how recommendations — indeed how curation — is managed in the online environment. In this case, the discussion is about the specifics of this problem and how metadata might have been wrong, gamed, misunderstood. This has resulted in Smith’s turning off their whole web site, which contains the Kobo-offered ebooks, while the problem is “fixed”. It’s a mess that points to how far we are from solving core challenges of selling books in a virtual environment.

Online bookselling has a long way to go before it can deliver even what it intends to deliver in response to a search or to prompt a next sale. Of course, there are two additional and larger problems that come first: knowing what the right suggestion(s) would be and being able to make enough of them to match the book shopping experiences online sales must replace.

Analysis offered by Russ Grandinetti of Amazon at our Publishers Launch Frankfurt conference last week suggested that the US and UK are on the verge of transacting more than 50% of the book business online, with other markets in Europe and Asia not more than two or three years behind. (This may understate the real state of affairs; in a meeting I just had in London I was told that one of the biggest UK publishers says that 60 percent of their sales of print, ebooks, and audio are through Amazon!) Online sales of books were probably in the neighborhood of 10%, or less, for most publishers a decade ago. That shift is why retail shelf space has diminished so much, with major chains having sunk in both of the big English-speaking markets (and in smaller ones as well).

When most books were bought in physical locations, it was axiomatic that a book displayed in a store had an exponentially greater chance of selling than one that wasn’t, despite wholesale supply in the US from Ingram and Baker & Taylor that could get almost any book to almost any store in 24-48 hours. It had to be seen in the store to be bought. Competent commercial trade publishers knew there was very little point to pushing a book through marketing efforts if inventory wasn’t in place at retail, because seeing the book at the time you might buy it was a more powerful trigger for purchase than any other. Indeed, all the other stimuli (reviews, suggestions from friends, conversation at the office) tended to be acted upon only when the presence in the store was in proximity to the suggestion or recommendation. (And that’s why recommendations from clerks in the store were the most powerful recommendations of all: hence the concept of “hand-selling”.)

One problem with the change to online buying from the discovery perspective is that the funnel for each shopper keeps getting narrower. It isn’t hard for somebody in a bookstore to look at hundreds of books in a few minutes. It’s nearly impossible online. This either requires the consumer to spend more time shopping to see the same number of titles they used to see in a store, or to make a decision having seen fewer. And the concern is that the decision that gets made having seen fewer can be not to buy anything at all. (Or, particularly in the case of tablet users, to buy something other than books.)

Of course, in theory, being able to present a personally-curated batch of suggestions for each customer could be far more precisely targeted than what a store can do, and, in that case, fewer titles shown might do the same job. But we are a long way from that. And, for reasons I hope this piece will make clear, personally-curated choices would actually be far more likely to be delivered by Google than by Amazon (although they would raise a host of what would be considered big privacy concerns to a lot of customers by doing it). And that’s not a reflection on the quality of anybody’s programmers, and certainly not of their commitment to their customers.

The technology that hopes to help you “pick your next book” is referred to as a “recommendation engine”. I’ve never been on the inside of such an effort but the thinking behind them seems to center around analyzing what books you’ve bought and what you’ve searched for and, from that, figuring out what you might read next. This might be based on analysis of the content itself (e.g. Pandora recommending music of similar style and quality) and/or collaborative filtering models — leveraging user inputs (purchase history, ratings, and reviews) to make recommendations for other similar users (“people who bought x also bought y”). It all recalls for me the experience of being told when I met a great bookseller, the late Joel Turner, at the 1978 American Booksellers convention in Atlanta, that “if a customer walks up to my cash register with five books, I can always sell him a sixth”.

Of course, over time, a bookseller can fill out that knowledge with even more data as they see more and more purchases and get to know their customers, and perhaps their families. But, in fact, using books bought as a guide to recommendations is an incomplete data set. It can also be a misleading one since people buy books for people other than themselves.

Another way to look at it came from my friend, Andrew Rhomberg.  Based on his experience with start-up Jellybooks, he formulated five major book discovery paths: serendipitous, social, distributed, data-driven and incentivized.

The point is that most people get their ideas about what to read next from many sources: people they talk to, reviews, news reports, business interactions. Some people say they get book recommendations from their friends; others (like me) say they don’t often read the same things their friends or relatives read. I suspect that online communities of readers tend to work best for people who do a lot of reading in genres and not nearly as well for people who mix fiction and non-fiction, entertainment and learning. And some people gravitate to what’s popular, so bestseller lists work best for them. It is clear that getting on a bestseller list fuels a book’s sales.

And books are bought for motivations other than “to read”, so it might also be important to know that a customer’s son is having a birthday, that a customer’s cousin is getting married, that a customer is shopping for a new home or looking for a new job or starting on a new hobby or spending money on an old one.

Few, if any, of these things would be apparent to even the most diligent hand-selling bookstore personnel. Bits and pieces of it might be detectable by the super-merchant Amazon (but not likely to any other).

This is one devilishly complex problem. There are countless potential inputs to the “next book purchase” decision and they are processed by each different individual in a highly personalized way. If you think it through, it seems obvious that most recommendations to most people wouldn’t work. Which takes us back to the need to make a lot of them, which a bookstore display does much better than online pages that show 10 or 20 books at one time.

In the long run, it would seem to me that Google is the entity best-positioned to address this challenge if they can somehow combine the knowledge of what you searched for (which they know), with what you read online (which they could know if you use Chrome for your browser), and the topics and book titles that have appeared in your emails (which they could know if you use Gmail) and the things you ‘like’ and talk about online (if you use Google+). Knowing your travel plans and patterns would be helpful too.

Of course, unless you use Google Play for ebook purchase and consumption, they’d be missing the two most important bits of data — what you bought and how voraciously you read it and they still wouldn’t know your print book purchases (unless they crawl your email receipts for that as well) – which Amazon is building on without all the other information. What you’d really want to do is to correlate the book buying and consumption information from the past with the behavioral data contemporary to it. With it all combined, perhaps you could filter recommendations so that the 20 or 50 you could show on line would have the commercial power of the hundreds or thousands you could see in the same amount of time in a store.

At the moment, both Amazon and Google are trying to see a pattern through one nearsighted eye.

But is this all really part of a larger problem for publishers? Is online discovery really affecting the sales patterns for books? It would appear so. One of the global ebook sellers told me during Frankfurt that their online sales are far more concentrated than publishers’ sales tended to be, with a tiny fraction of titles (under 5%) making up a huge percentage of total sales (nearly 70%). (I am assuming here that this retailer’s data is typical; of course, it may not be.) If memory serves, at the turn of the century Barnes & Noble stores saw only about 5% of their sales coming from “bestsellers” and, I believe (relying on memory of detail, which I admit is not my most powerful mental muscle) backlist outsold new titles. Publishers really live on the midlist. We know the long tail is taking an increasing share of sales and it would appear the head is too. Those sales come out of the midlist. It is pretty hard to run a profitable publisher without a profitable midlist.

And that would suggest that the increasing concentration of sales, which is likely the result of our hobbled ability to present choices in the digital sales environment, is a problem that publishers will want to address.

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Barnes & Noble and managing the digital transition


We keep making the case that the split that matters when trying to foretell the future of the book business (and everybody in it) is not “print” versus “digital”, but “bought online” versus “bought in stores”.

Of all the major retailers, only Barnes & Noble has a stake in all four of the meaningful transaction streams for trade books: print in stores, devices in stores, print online, and ebooks. (All devices are available online.) Amazon has no store presence. Kobo has a minimal store presence through independent retailers but has no print business. Apple has no store presence for content at all and doesn’t sell print online. And Google seems to only tangentially deal with any of the non-digital content businesses.

In fact, B&N is in a fifth “segment”: college bookstores. That segment was the only one that showed revenue growth in their latest reporting, although even in that segment same store sales showed a slight decline. College textbooks having been slow to move to digital has helped preserve that business, but it would be a weak bet to expect that to last forever, or even for many more years.

What this means is that Amazon, Kobo, and Apple are firmly planted in parts of the business that are growing. Kobo and Apple only sell ebooks and Amazon sells print too, but, in general, the migration to online buying and ebook consumption is going to continue so the sales taking place in the environments in which they operate will continue to grow. Whatever their share, they will be taking it from a bigger and bigger pie.

B&N, on the other hand, gets most of its sales from print in stores. That is the component of the sales which is declining and bound to continue to decline. That means that B&N, uniquely, has the challenge of keeping its customers as they switch their mode of buying and consuming books.

The retailer announced their latest quarterly results this week and, at least superficially, they are not encouraging. Sales of devices are down. Sales of digital content are down. Sales of print in stores and online are down. The company points out that book sales in general took a hit because the two most recent book sales phenomena, “Hunger Games” and “Fifty Shades of Gray” are running out of steam and haven’t been replaced by The Next Big Thing(s) yet. But in the absence of sales information about print and ebooks from Amazon (which data is normally well-masked in their overall reporting), we have no basis for comparison. And comparison is what we need to know how B&N is doing and what their future holds.

In other words, are Amazon’s online and ebook sales declining because of the lack of a replacement for “Hunger Games” and “Fifty Shades”? Or is B&N not only losing sales, but also losing share as the market migrates from stores (their strength) to online (Amazon’s strength)?

There really is no “industry” data to help us get at an answer to that. For a few years in the prior decade, Idea Logical did some sales data analysis work for a number of publishers large and small. Each publisher gets clear reporting of its sales in a granular-enough way to examine this. Of their B&N sales, they know what is digital and what is print, and they know what is sold in stores and what is sold by BN.com. At the time that we were doing this work, which ended before ebooks became a significant portion of the commerce, it appeared that Amazon sold about 10 times as many books across most lists than BN.com did. (Of course, at that time at least, B&N stores sold more than Amazon.)

Barnes & Noble is in a unique position. Every other player is looking to capture customers migrating from old patterns to new ones, whether switching from buying print in stores to buying it online (Amazon) or switching from reading print to reading ebooks. Only B&N is trying to keep customers who came to them for print in stores.

In 2010 and 2011, it appeared they were doing very well at just that, selling lots of Nook devices in their stores. It appeared that there were a large number of heavy book readers who had been unwilling to jump to digital. Perhaps they wanted to see and touch the devices first. Perhaps they wanted to see that many friends and family of theirs had made the leap before they would. Or perhaps they just wanted their trusted book vendor, Barnes & Noble, to offer them the ebook opportunity.

The anecdata suggested (there was no clear objective data to prove) that, following the launch of Nook in the Fall of 2009, B&N’s format shot up pretty quickly to a market share in the neighborhood of 20-25%, with Apple (initially) taking about 10% with the iBookstore. Amazon’s Kindle declined from more than 90% of the market to around 60%.

Then some things changed in the marketplace. The DoJ suit effectively ended publisher-set pricing. Apple took the direct link to the bookstore off all the iOS apps except their own. And tablets and phones increased their share of the ebook market in relation to dedicated ereaders. Again, relying on anecdata where no industry data exists, reports suggest that the B&N/Nook share has declined, Apple’s iBookstore has risen, and Amazon has perhaps come back a bit. (Amazon, Apple, and Kobo have a much bigger global footprint than B&N, although that probably doesn’t matter much in the US market.) Certainly, the numbers from B&N reporting that digital content sales have declined in real terms strongly suggests a reduction in their US market share. Overall digital content sales have almost certainly not declined.

It is beyond B&N’s power — or anybody else’s — to do much to affect overall consumer behavior. People will buy and read in the way that the current combination of price, convenience, and technology motivate them to. In the abstract, it would seem that a company that has a foot in all the markets would have a better chance to capture people switching buying or reading modes than a company with a more limited offering. It would seem that way, but it isn’t working out that way. B&N has to figure out how to make their ubiquity work in their favor which, except for a year or two around the debut of the Nook, they haven’t managed to do yet.

The facts tell us that Barnes & Noble failed years ago to make its store customers into online customers. They’ve been sharing customers with Amazon since Amazon began. Indeed, the skill sets a corporation needs to run a successful online business aren’t the same as they are to run a chain of physical stores. But it can be done: the office supply retailer Staples is the second-largest online retailer in the US. I think if I were at B&N I’d be asking somebody up there how they did it.

BN.com has been the weak link in the Barnes & Noble chain since they launched it under joint ownership with Bertelsmann. When the company was run by strong merchants, they didn’t pay close attention to it. For the past few years, the company has been run by an ebook-focused management and they didn’t improve it. In both cases, BN.com’s success was secondary to another agenda. It is ironic that the current management, rooted in finance and operations, seems to have focused on this core — perhaps existential — strategic problem, with improvements in BN.com promised shortly.

Another aspect of the B&N reporting was that major shareholder and Chairman Leonard Riggio announced that he is “suspending” his interest in buying the stores. Whether that is an indication that he’s less confident of their future than he was before or whether, as the announcement says, he just feels that B&N as a company needs to concentrate on making the Nook-and-store combination work more effectively, is not something anybody but he and his closest advisors know for sure.

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