Taking book marketing where the book readers are likely to be

Digital marketers who want to sell books are increasingly turning to the virtual places where readers cluster. This includes marketing through the major social networks (Facebook, Twitter, Pinterest, etc.), using the data mining tools available to target within those networks, as well as marketing in niches and online communities of readers (in some cases publishers are even building vertical communities themselves). Publishers are also increasingly turning to book- and reading-focused social sites to get the word out about their books. These vehicles carry an additional bonus in the digital age: they’re global and give publishers a one-stop opportunity to reach markets beyond their natural national audiences.

Goodreads, recently acquired by Amazon, has built a network of book-oriented conversation. Now with 19 million members, they have been for the past few years trying to show publishers how to use the platform as a marketing tool. This was, of course, their original reason for being. They have overtly built a site around books and conversation about books. Since the book business routinely deals in “comps” — books that are like the book I’m trying to sell you — Goodreads has a firm foundation from which to sell publishers marketing services. They’ve been doing that for some time.

What is not clear is whether that business will be reined in by their new corporate owners in any way. Amazon’s prior history doesn’t demonstrate great interest in marketing that isn’t Amazon-centric. And we know that big publishers are generically nervous about Amazon and not inclined to spend any more promotional money than an already aggressive large account with lots of coop buckets already squeezes out of them.

Whatever the extent to which Goodreads maintains its mission as a marketing vehicle for publishers to reach book audiences regardless of where they shop (and, as of this writing, the B&N link is actually above the Amazon link in their drop-down menu of “online stores”), publishers are bound to be looking for alternatives to work with as well. We think we see two of them emerging, although neither of them started out in life aimed at being a marketer of books available to publishers.

Wattpad is a Canada-based startup that is a reading and writing community. It preceded Penguin’s “Book Country” , started with social reading of public domain titles, and doesn’t have Book Country’s overtly commercial focus, nor its stated emphasis on genre fiction (although, perhaps inevitably, Wattpad’s strongest areas are YA, paranormal, romance, and fantasy), but the sites are similar in that they give aspiring writers the opportunity to have their work commented upon by a community of other aspiring writers. Wattpad has grown to over 10 million users. And it is a very active and engaged community. They publish stats suggesting that that users spend an extraordinary amount of time on their site, something like half-an-hour, twice-a day. And they have attracted such luminaries as Margaret Atwood to post content on the site.

There are already several examples of aspiring authors who have published on Wattpad, built audiences, developed their stories, and gotten a book deal including Beth ReeksAbigail Gibbs, and Brittany Geragotelis. And PW just did a piece on up-and-comer Nikki Kelly.

With its large number of highly-engaged readers and a track record of being successful promoters for undiscovered talent, Wattpad has recently started to call attention to the opportunity for publishers to market to its audience. It is now encouraging publishers to connect with its audience by posting teaser or attention-getting content in advance of the launch of a book. Random House, Scholastic, and Macmillan (for Amanda Hocking) have already taken advantage of this.

A similar opportunity is now also being seen by Scribd. Scribd is a repository of documents. It is often used as a “convenience”: a place to post court decisions or company reports or anything somebody wants to make accessible to a broad audience. In its early days, Scribd was seen as a pirate-enabler, but it has aggressively worked with publishers to make sure unauthorized copyrighted content is taken down. Meanwhile, it has built a vast treasure-trove of documents from 200 countries in 70 languages and is getting 10 million unique visitors a month.

That’s a lot of people looking at a lot of documents, giving Scribd a lot of knowledge about who they are and what else they might like to read.

Our view is that the marketing opportunities through all three of these companies should be understood by publishers. It is early days for all three of them, really, but as marketing entities Wattpad and Scribd are really just getting started. Some things have been “proven” to work at Goodreads, but, really, all three of them are like jungles still being hacked through with superhighway travel still in the forseeable future, but not around the corner.

There’s quite a bit of marketing activity by US-based publishers on Goodreads; it’s beginning to happen on Wattpad and it is a gleam in the eye at Scribd. But they all have big numbers of readers paying attention to their site and they’re all looking for ways to make themselves more valuable. It looks like Wattpad and Scribd are seeing the possibility that marketing for publishers could be a very significant revenue-generator, if not their principal one. (Goodreads started out with that hope.)

Painful aspects of the digital transition — the diminution of bookstore shelf space and the reduction of room for book marketing in the established press — are just beginning to bite in markets outside the English-speaking world. With all three of these communities teeming with non-English-speaking members, they all become tools publishers around the world will need to know about.

And that’s why we have them all speaking at our Publishers Launch Conference at Frankfurt, focused on what meaningful marketing reach they can offer to publishers outside the US. As conference programmers, we look for those win-win situations where what the presenter wants the audience to know is information they will find immediately useful. For our Frankfurt conference audience, which last year had c-level executives from 25 countries, this would appear to be a bull’s-eye.


How the ebook evolution might get started in other places

The organizers of the Buenos Aires Book Fair, which will run for the next few weeks, invited me to speak at an opening session of their event last Friday. They left the topic completely up to me. What I offered to do, which the organizers liked, was to review the history of the past 20 years of digital change in the US and in the English language which has brought us to this point. The presumption is that understanding how it happened to us will help them understand what is going to happen in their market, in other Spanish-speaking markets, and in other countries and other languages.

The underlying premise of my talk, which was delivered formally at a Book Fair opening event last Friday and informally to other gatherings they scheduled for me — of students, of young editors, and of some publishing executives — and in a meeting consulting with about 20 employees of one publishing house, was that what happened in the US and then elsewhere in English was unique and would not be replicated in the same way in other languages and territories. What I had identified as the unique characteristics of the US market were:

Three hundred million people with one language, one currency, one commercial set of rules.

A powerful player (Amazon) able to change both publisher behavior (twisting arms to have them provide more titles as ebooks) and consumer habits (getting them to consider what started as an expensive device — a $400 Kindle) with their marketplace power.

Indeed, no other market has those two elements. In fact, in many markets, including all of the players I talked to in Latin America, Amazon is not seen as a really signficant factor.

In addition to the conditions that made the US market unique, I stated two additional assumptions which drew little objection from my audiences in Buenos Aires.

At some point — whether it is five years from now or 20 years from now — the world’s book publishing markets will look very similar. That is, the effects we see in the US — patterns of ebook uptake and the consequently devastating effects on bookstores — will somehow be replicated in other markets.

Both because the unique market characteristics of the US don’t exist elsewhere and because the market already made in the US has created global players and infrastructure that weren’t here when the ebook revolution caught hold, we need to expect that it will be a different path to the future in other places from what we saw in the US. The markets will not be made by the inherent marketplace scale and by Amazon, as ours was.

I thought some things we’ve seen constituted “universal” lessons worth taking on board. We’ve seen ebooks consistently work commercially for narrative reading and not for any other kinds of books. We haven’t seen “enhancements”, like video or interactivity, pay off in bigger sales or in making it easier to command higher prices. I suggested they should expect the same, and the people I spoke with agreed. They should also expect that the product competition from outside the commercial publishing community, which we’ve seen so far primarily from self-published authors, will drive down the prices for books from established authors as it has in our market.

But the more I probed, looking for what would make the market, the more I ended up in blind alleys. There is no online purchasing market anywhere in Latin America to compare with ours. That’s why Amazon hasn’t gained a strong foothold. Kobo’s strategy of working through local booksellers — an alliance has been formed in Brazil and they are clearly looking for partners elsewhere — apparently hasn’t made much of a dent either. One publisher said Apple sales were “promising”, but they’re still “insignificant”.

The reality underlying all this futility is the relative dearth of credit card use. In the US, we have had about three generations of ubiquitous credit card use. They are second nature to us. And the online purchasing world — Amazon in particular — would never have achieved the position they have if that weren’t true.

Well, it isn’t true in Latin America.

There is no way to make an ebook market, which must be an online market, without a payment mechanism. And the one we have in the US isn’t set up to work in Argentina, Brazil, or the rest of Latin America (or, for that matter, in many other parts of the world).

Of course, the cell phone carriers, who do send a bill and collect money from the masses in all these countries where credit card use is limited, had figured that out a long time ago. Nokia and others have been dancing around this opportunity for years. Txtr, a Germany-based ebook play, targets the cell phone companies as its path to the market. Txtr is building an inventory of titles and has come up with an ultra-low-cost ereading device called beagle to jumpstart their market. In doing that, they show that they learned something from Google’s experience, where ebook sales only started to grow when the Nexus7 tablet, which is tied to Google, made its way into the market.

All the conversation led me to come up with my own version of an “answer”; I don’t know if anybody else has made this suggestion but the small bit of conversation I was able to have between having this thought and leaving Buenos Aires didn’t uncover evidence that anybody else had.

It takes three components to make an ebook market:

1. A device to read the ebooks on. That could be a laptop or desktop computer or dedicated ereading device, but it is most likely to be a smart phone or a tablet.

2. A store: a merchandised selection of ebooks that can be shopped through browsing and searching that is compatible with the device.

3. A payment mechanism.

In the US, we really didn’t think about the payment mechanism. For many other places in the world, that’s a very tricky part.

Txtr is trying to deliver the missing pieces to the solution to the telcos, right down to delivering a very inexpensive device that can be the reader if the cell phone is not.

What occurred to me, and I’m wondering whether it is being developed by anybody else, is what I think would be an even better — as in more likely to build a market quickly — solution. What I’m imagining is that a device manufacturer (or more than one, but if one, preferably one that makes both smart phones and tablets) teams up with a cell phone company (to do the billing) and persuades the ebook retailers — Amazon, Google, B&N, Kobo — to accept payment through the phone company. Then that hardware manufacturer has a fabulous value proposition to help them sell their devices and the ebook market has a choice of the best retailers with the best selections of ebooks already aggregated.

Actually, persuading one retailer will persuade them all. If Samsung were pushing a tablet and smartphone and got any of the major ebook retailers to go for the proposition, the others would surely have to follow. And, in fact, it would make sense for either Apple or Google to do this when they sell apps in credit-card-challenged markets as well.

Another complication in some places — particularly Brazil and Argentina at the moment — is created by complex regulations that make the sale of hardware manufactured outside their country either impossible to get or extremely expensive. Although that’s a problem that extends beyond the book business, it is much more likely to be solved by a multi-function device-maker than for one dedicated only to ebook consumption.

It is interesting to think about Apple’s position here. The other big ebook retailing operations already provide apps for both iOS and Android devices as a matter of course. The iBookstore, however, is a Mac-only play. If the solution I’m envisioning were to roll out around the world — and one can imagine a company like Samsung making such a thing happen — would that continue to be the wisest play for the Apple-owned ebook retailer? I think not, but one can only imagine how intense the internal discussions around that point could be.

Today (April 30) is the last day to get the Early Bird pricing for our next Publishers Launch Conference, which will be at BEA on May 29. The theme for this event is “scale”, a fairly obvious topic of great importance that we don’t believe has been a central focus for a digital change event before. We’ll have agents talking about it as well as presentations from three publishers — F+W Media, Hachette, and Random House — who are applying it in very different ways. We’ll have Brian Napack presenting the investor’s view of its importance. We’ll have a presentation on the current state of more complex ebook- and app-making from Ron Martinez, followed by a panel of publishers considering the future of the illustrated book. And Michael Cader and I will discuss the topic of scale in circumstances that most executives won’t (or can’t) in public, like how it is applied by Amazon and how it might be used by the new Penguin Random House.

See pricing information and registration options on the PLC site for more details. You may register either through our dedicated Launch BEA registration link, or via the main BEA registration page where you can sign up for BEA itself and other events at the same time.


Ideas about the future of bookselling

There is a vision of online bookselling, which I share, which is that it will become increasingly atomized. Books (and, ultimately, other content too) will be merchandised in unique ways across countless web sites curating and presenting content choices for their own communities and audiences. One early prototype of how this might work is the Random House initiative powering “bookstores” for Politico and Publishers Lunch’s Bookateria.

This is not a new idea. I remember a meeting more than five years ago hosted by O’Reilly Media in New York City to plan the first Tools of Change conference at which Brian Murray of HarperCollins, not yet their CEO, talked about how a way should be found to merchandise books on current affairs topics around and adjacent to today’s news stories that were relevant. The Random House capability, among many other things it can do, readily enables just that.

This is not necessarily bad news for the biggest online retailers like Amazon, B&N, Apple, and Kobo. The Random House execution delivers “their” customers to one of the others to consummate the sale and they’re rewarded for having pushed the “discovery” by collecting referral fees from the etailer  which processes the sale. (How the revenue is split between Random House and the web site providing the screen real estate is not known to me, and presumably only one of a number of moving parts in the negotiations between them.) Doing things this way allows both Random House and their clients to avoid the two biggest (and closely-related) headaches of online bookselling: managing DRM and customer service. In addition, the costs for what is called “card and cart”  – handling credit cards and providing shopping cart technology — are also avoided by handing off the actual transactions.

Bookish, the new discovery engine and bookseller which was financed by three of the Big Six, also offers referrals in addition to their own fulfillment (which is provided by Baker & Taylor).

Peter Hildick-Smith of Codex, our go-to guy for understanding the concept of “discovery”, says that bookstores offer discovery combined with availability, a “twofer”. In effect, web sites offering ebooks (and possibly print too) alongside their information and conversation are doing the same thing.

In fact, the same approach makes sense in the brick-and-mortar world, but it is a lot harder to do.

Merchandising is the bottleneck for any retailer, online or in stores, trying to sell books. Which books do you offer? Which books do you feature? What do you discount? This is a challenge online, which is why Random House believes it can build a business helping web sites do it. But it is even more challenging in a physical environment, which requires actual printed books to be displayed, sometimes to be sold and sometimes to be returned.

But smaller and more targeted displays of print books in stores — whether a general selection or one targeted to store’s other customers — also make more sense than big book superstores in the digital era. Physical bookselling locations can offer consumers convenience and speed. If you’re shopping, you can see more titles faster than you can online and you can walk away with your purchase rather than waiting for delivery.

Publishers gain access to their audience through retailers. Non-book retailers, just like web sites, are specialized in some way and they both attract and serve customers if they offer appropriate books.

The challenge for non-book retailers who would like to carry books is stocking them. Almost no matter what a store sells, from clothes to hardware to specialty food, there would be a selection of books that would please their customers and perhaps increase their sales of core items. This is obvious in, say, a crafts store or hardware store where just about everything that’s sold is part of a project (selections of which and instructions for which are often found in books) and could require instruction about how to use it most effectively (also content well suited to books).

Picking the right books is hard work. If the retailer buys them from publishers (whose sales representatives would know their content and could actually guide one to the best title choices for one’s audience), it is a hopelessly fragmented challenge. In many areas, you might find 25 good books that could require you to buy from 10 or more different publishers. The publishers’ sales terms will be one problem (minimum order sizes) and the administrative costs would be far too big to justify considering the small sales the store would get from ancillary merchandise like this. Wholesalers have the books of many publishers, but their teams don’t have the kind of title-level knowledge the store needs to make the selections.

Meanwhile, bookstores labor under a similar constraint. We pointed out in our recent B&N analysis that the cost of their supply chain gets harder to bear as sales of books diminish. Independent bookstores have also always been constrained by the cost of buying, although they don’t really see it that way because it is part of the landscape.

The core point is this: the responsibility for getting the right books onto retail shelves is one that has always belonged to the retailer. That reality encouraged, even required, large book retailing operations: big independent stores and large chains could amortize that cost across far more sales than a small bookstore or a little book department in another retailer.

There is one established way to reduce those costs: vendor-managed inventory. With VMI, the cost of negotiation — of conversation between a “buyer” and a “sales rep” — plummets. In addition, it is actually easier to stock the right books at the right time. A key component of making better decisions is making more decisions that cover shorter prediction times. Ordering more frequently makes it much easier to avoid over-ordering as a protection against going out of stock. That increases stock turn (the key to bookstore profitability) and reduces the need for returns (leaving more margin for both the retailer and the publisher).

As I’ve written previously, a long-standing client of mine called West Broadway Book Distribution has been operating a VMI system in a small number of non-book retailers for a decade. They have a system which interprets the sales reporting and makes restocking decisions based on them automatically. They also have a system to test new titles in a sample of a chain’s outlets to decide whether or not to roll them out. Their automation has enabled them to manage a lot of granularity — thousands of potential titles in more than a thousand stores with the books coming from more than a hundred publishers — profitably and with workable margins for both the retailers and the book-providing publishers.

West Broadway started because its owner had a few books of their own that they wanted to sell to a couple of “women’s hobby” accounts where they already had relationships. We encouraged them to be more ambitious and they were willing to try. So they aggregated the books from many of their competitors, larger and smaller, to add to their own and invested in the VMI system (which they might not have needed to make sales of their own books alone).

That’s a path we should expect to see other specialty publishers taking in the future. Subject-specific knowledge is helpful in doing that (although it can be done successfully without it).

Stocking a general interest store with VMI is much more complicated and will take more time to evolve. But bookstores can take steps in the right direction by consolidating their buying to a smaller number of suppliers and pushing all their really small vendor ordering to a wholesaler (or two) to gain efficiencies from managing fewer vendors.

Remember that one of the keys to efficient stocking is frequent ordering. Bookstores mostly understand that and order from wholesalers every day. But they probably also order directly from dozens of publishers. They do that to gain a little bit of additional margin and, perhaps, to reward the sales rep that calls on them to present the list.

I’m going to say flatly that the margin differential is almost certainly not worth pursuing for what it costs in stock turn (capital tied up) and risk (returns because people buy more copies when they’re tempted by the higher margin order). My father made that clear in numerous examples in his monograph, The Mathematics of Bookselling.

The rep reward is a little more complicated but most publishers these days figure out how to pay their reps for sales that go through the wholesalers.

Any store routinely dealing directly with more than 20 publishers and distributors will almost certainly improve their financial performance by cutting that back and consolidating. They might  lose a little margin; they might miss a couple of smaller-potential titles (but not big ones), but their lives will be simplified and that will save a lot of money.

And with daily ordering from wholesalers, which just about all stores do, it becomes unnecessary to carry more than a copy or two of most books, except for the purpose of display prominence.

Once a bookstore has taken those steps, it is in a position to start demanding some VMI help, even if just from the sales reps. This was an idea that was pioneered in around 1980-81 by an indie in Shaker Heights, OH, called Under Cover Books in a project on which I consulted.

We were too far ahead of our time (the computers were too klunky), but the idea was that we gave the reps reports of how their titles were performing: on-hand, shipments in, and sales. Then they had an inventory ceiling stipulated and were free to order more books, of their choosing, up to the inventory ceiling. We then calculated the inventory’s performance (beyond the scope of this piece to get into that particular detail, but essentially combined the impacts of discount and turn) and raised the inventory level for the most profitable publishers and reduced it for the less profitable.

What defeated us was the complexity of administration. Part of that was because there were so many more smaller publishers then. Part of it was that the only way to communicate the inventory data was by shipping spreadsheets by snail mail (slow and not cheap).

This would be infinitely easier to do today, and the ease would be multiplied if you were only trying to do it with a handful of big suppliers.

I am only aware of one publisher today that has worked corporately on a VMI system for books, and that’s Random House. I believe they initially developed the capability and implemented it for chains: first for Barnes & Noble and more recently for Books-a-Million. But they also seem already to be prepared to offer the service to independents. Since, when the Penguin merger is complete in a few months, stores will be able to get damn near half the most commercial books from Penguin Random House, having “just” them operating VMI would constitute a sharp reduction of the store’s operational demands.

Whether or not this is what they’re thinking at the moment, the new Penguin Random House is bound to find it sensible to employ its VMI capabilities in self-defense to open retail print book outlets in places that are bereft of bookstores in the years to come. Those outlets will have space for shelves, customers and cash registers, but no ability to discern what books they ought to stock or what the timing should be of ordering. They’ll be sought out as necessary because bookstores, which are carrying the requirement of making these stocking decisions, will have increasingly become uneconomic (and therefore defunct).

This vision of the future is of books being sold mostly in stores that aren’t bookstores, enabled by VMI systems that largely don’t exist yet. It would be even better if the VMI vision took hold in time to save some of the bookstores that exist today to survive to that future time when the demands on them to manage inventory will have been ameliorated by necessity.

In my last post, I cited a bunch of suggestions pulled together by Philip Jones for how publishers could help bookstores survive and promised to review them. This post was intended to get to that, but I couldn’t get there within a reasonable number of words. Next time.


More thoughts about the future of bookstores, triggered by Barnes & Noble’s own predictions for itself

On Monday, the Wall Street Journal published a story by Jeffrey Trachtenberg quoting Barnes & Noble’s retail group CEO Mitch Klipper on the company’s plans for shrinking its store footprint over the next decade. Klipper suggested only a gentle acceleration of what has been the pace of contraction for the past couple of years far into the future.

Klipper was quoted as saying that “in 10 years”, the chain would have “450 to 500 stores”. Trachtenberg reports that the chain had 689 locations operating as of January 23.

In addition, the chain operates 674 college stores. The college stores are, along with the NOOK device, BN.com, and the ebook business, part of “NOOK Media” which took recent investment stakes from Microsoft and Pearson.

As usual, Cader’s overview is a helpful summation of the facts.

On Tuesday, I got a call from a reporter who started out by asking me, in effect, “how will publishers manage with 200 fewer B&N stores in 10 years?”

That question jumps past what I think are the first two questions the WSJ story begs.

The first one is to please tell me how much shelf space for books will diminish, not just how many stores will be closed. The piece reports that B&N peaked with 726 stores in 2008, which means a net reduction of 37 stores in the past five years. That’s a five percent reduction in locations. But publishers know that shelf space at B&N has contracted considerably more than that, as space in the stores that used to be devoted to books now merchandises NOOK devices and a variety of non-book items.

Trachtenberg reports that sales of print books (as reported by BookScan) have declined 22% since 2008. Anecdata and intuition suggest that sales of print in stores have fallen more than that. Every time a store closes, online purchasing becomes the more convenient option left for some of its customers. Even if BN.com keeps some of that business away from Amazon.com, it doesn’t help support a physical store of B&N’s or anybody else’s.

The second one is “how likely is Klipper’s forecast to be right?” They had a net reduction of 5% of the stores in the past five years and he’s suggesting a further 30% reduction over the next ten. That calculates to net closings at about triple the recent rate. Is that realistic?

Frankly, I’d be concerned that it isn’t.

Among the developments of the last five years has been the shuttering of Borders. That took something like 400 big competitor locations out of the market. There is no comparable subtraction of competition available in the future.

And while the migration to digital, as measured by what we can glean about what percentage of the publishers’ sales are ebooks, has slowed, we don’t know if that’s temporary. We also don’t know if the split we see between books of narrative reading and other books will continue. There is good news and bad news for stores if it does.

The good news is that stores will continue to be desperately needed for illustrated books. The bad news is that the readers of narrative books won’t be in the bookstores to have their eye caught by them anymore.

Forecasting of this kind is highly dependent on intuition and belief because there’s no data today on which to base a prediction for a product form that hasn’t evolved yet. There are still legions of techies and illustrated book publishers trying to find the formula that will enable the books which haven’t “converted” to digital to do so in the future. If somebody finds the way to make a digital rendition of illustrated books that consumers want, it might save the illustrated book publishers from their dependence on physical stores. But that would, at the same time, accelerate the reduction of stores.

I’m personally skeptical that there is an answer to this. I’m not expecting or predicting the demise of illustrated books anytime soon. To the extent that they are replaced by digital products, I expect something far from the 1-to-1 relationship between the print and digital iterations that has saved the publishers of narrative reading from far greater pain than they’ve felt so far. And if the digital products aren’t close to the books, then book publishers might have very little to do with making or selling them. Since we don’t even know what the replacement for books will be, I think we can assume all these questions will take a long time to answer.

It is clear that bookstores have an uphill battle in front of them even if we don’t know the steepness of the slope or how big the boulders rolling down on them will be. The questions that all publishers should be asking themselves now are “what are the bookstores really worth to us” and “what, if anything, can we do to bolster them financially”.

Michael Cader has made the point that B&N’s market cap (my app says it is $775 million at the moment) combined with B&N’s own valuation of its new business (nearly $1.8 billion based on the valuations of the Microsoft and Pearson investments) is worth pondering. One could interpret the numbers to mean that the stores are worth considerably less than nothing. Of course, that’s not true; the stores still generate more than $300 million in EBITDA annually (and that number was up slightly in 2012 over 2011). But it does suggest that having the legacy B&N store business in a common entity with the NOOK Media businesses (NOOK, the college stores, and dot com) is not making the investment community jump for joy.

So could somebody come along and do everybody a favor by buying the retail component of the B&N business? Would the market reward that move, or would it just reveal that the notional value of the new business is wildly inflated?

The businesses with the biggest strategic interest in keeping the stores alive, of course, are the publishers. So if publishers were to seriously ask themselves what they can do to help the B&N stores, buying them would have to be a recurring thought. One wonders whether the DoJ would like it better if one big publisher bought them or if a bunch of publishers got together to do it.

Cader has also made the point that the physical stores are being made the last line of defense for book pricing. It is a virtual certainty that if a book has three different prices: print in the store, print online, and ebook, the printed book in the store will cost the most. This is not a formula to assure bookstore survival.

Philip Jones of The Bookseller tried to sum up the ideas that have been offered from around the industry about how publishers could help booksellers be more profitable in an emailed post entitled “Books Need Bookshops”. What he covered were sales on consignment (the store doesn’t pay the publisher until they sell the book); higher discounts (more margin); a suggestion that bookstores could somehow exploit Amazon’s “weaknesses” in online selling (good luck with that one!); that bookstores themselves should change into something slightly different (based on B&N’s claim that they are creating new “prototype” stores); and creating special print editions of particularly high quality (which Random House has done for Indigo in Canada).

Examining whether any of these suggestions point the way for publishers to make stores more profitable will be the topic of another post, maybe even the next one.



The ebook marketplace is about to change…a lot

Now that the DoJ’s response to the public comments has made it overwhelmingly likely that the settlement it negotiated with Hachette, HarperCollins, and Simon & Schuster will be accepted by the Court, it is time to contemplate the changes we’ll see in the ebook marketplace in the next couple of months.

The settlement requires the three affected publishers to inform retailers working under agency agreements that they can be released from them. Ten days is alloted from the time of the Court’s acceptance for that to take place. Then the retailers have 30 days to terminate their agreement and then the publishers have 30 days from receiving that notice to actually end it.

So the process could be almost instantaneous, if the publishers served notice immediately, the retailers responded immediately, and the publishers reacted to the response immediately. Or it could take as long as 70 days from the Court judgment, if everybody used the entire time alloted by the judgment.

Assuming that Amazon acts with competence and alacrity in its own interests (and I’d expect nothing less), the entire process could take no more than 40-45 days with them. (Each retailer can be on its own clock.) That should liberate Amazon from most pricing constraints on the three settling defendants’ books by the middle of September.

There’s a bit of confusion in the settlement language here. In the same paragraph, IV-B, that lays out the 10-day, 30-day, and 30-day requirements as described above, it also says that 30 days after “entry of the Final Judgment” (the starting gun for everything), the Settling Defendants take “each step” required to terminate or not renew or extend the agreement. Or maybe the language makes sense to a lawyer but I’m just confused. It seems like they’re asking for results before the first 30-day period would have expired.

The settlement, which ostensibly does not eliminate agency agreements (although it clearly eviscerates them), requires that any new agreements not allow publishers to dictate final sale prices by the retailers, except to cap them (in an unwieldly way we’ll consider below in more detail) and also disallows any “most favored nation” (MFN) clauses protecting any retailer from the impact of other retailers’ pricing decisions. These restrictions are specified to last for two years for each retailer, starting from the date the old agreement’s price-controlling clauses are mooted, whether by the agreement being terminated or by the publisher notifying the retailer, in writing, that the offending clauses will not be enforced.

It is back to the drawing board for new agreements. Ostensibly they can be “agency” agreements by which the publisher sets a price and pays a commission for sales based on that price. But since agency agreements were actually attractive because they achieved what is now deemed illegal price parity across the marketplace, these publishers must be rethinking the efficacy of the model. I would be.

So new contracts will be needed between the three settling publishers and all the retailers. And they’ll need to be crafted, negotiated, and signed within a maximum 70-day window.

Anybody responsible for this who remembers what a combination marathon-and-sprint these negotiations were in 2010 won’t be planning any 2-week vacations over the next few months.

There is one big fat joker in the settlement. The publishers are allowed to negotiate agreements limiting the retailers from discounting from the publishers’ (now) suggested prices. The settlement allows the publisher to prohibit discounts on their books which in the aggregate over one year exceed the margin the retailer has earned on those books.

In principle, that isn’t complicated. Retailer A sells ebooks with a retail value of $1 million in a year and would earn $300,000 in commissions. They have to charge customers at least $700,000 for those ebooks, or they’d be in violation of a contract that the settlement allows the publishers to negotiate.

In practice, monitoring and enforcing that might be a nightmare. It requires either reporting or tracking of ebook sales and the prices at which they’re transacted which is far more robust than what has been required or done so far. But even with perfect data, it’s still extremely difficult to assure compliance, particularly if a retailer is inclined to “spend” its whole allotment of discount margin. The wording of the settlement would seem to require allowing discounting that exceeded the margin earned over the course of the year, as long as the cumulative discounts were under the stipulated cap at the end.

What that also means is that retailers can’t work with price-matching bots alone. It isn’t sufficient for Retailer A to monitor Retailer B’s pricing and automate meeting or beating it because Retailers A and B aren’t selling the same quantities of each publisher’s other books and therefore don’t have the same “budget” for discounting. This is a game of three-dimensional tic-tac-toe. The retailers have to watch each other and, at the same time, watch how their discounting to consumers stacks up against the allowances they are earning through above-cost sales for each of the three settling publishers.

And the publishers need to watch the sales of each of the retailers, presuming they are provided with data they don’t now get to allow it, to make sure each one is staying under its cap.

We can’t make too many assumptions here. The settlement rules allow a publisher to negotiate a discounting cap based on total margin, but they don’t require a retailer to agree to it. And there is no acceptable punishment specified for a retailer breaking the cap, so that will have to be worked out in the negotiations about to take place (if they haven’t already started).

One thing the DoJ was completely right about is that the whole agency idea breaks down if it isn’t applied across most of the Big Six. Random House demonstrated that for the first year of agency when they stayed out and reaped an immediate double bonanza. By sticking with their wholesale pricing model (by which the retailer gets 50% off a wildly unrealistic ebook price that would be almost impossible to sell very many copies at), they got more money for each copy sold than they would have under agency (by which the retailer only gets 30% but of a much lower, realistic, selling price). And, at the same time, Random House ebooks benefited from the aggressive discounting (led by Amazon but matched by other ebook retailers) at which their high-profile titles, alone among the Big Six competitive set, were offered to the consumer.

In fact, it was made clear by Apple to the publishers when they were recruited for the iBookstore that the store would only open if at least four of them signed on. Apple was probably thinking that without having a critical mass of top-flight titles, their store would have no appeal and not be worth operating. What publishers may have been thinking about is that if were a lot of Big Six titles being discounted because they weren’t covered by agency rules, the ones that weren’t would be at a tremendous competitive disadvantage.

It seems that the necessity for concerted action to make agency work is a core element of DoJ’s thinking that collusion was required to implement it. But the specific allegations of collusion (the Picholine meeting that took place long before anybody was thinking about agency or an Apple bookstore and the various instances where publishers are alleged to have told each other whether they were in or out of the program) seem very weak, particularly when you acknowledge that they all knew “four or no store”.

Something that one comes away with from reading the settlement language is that we might see some very different terms in the replacement contracts. DoJ’s suspicions were aroused by the great similarity among the agency contracts and they seem to be asking that they not look so similar when they are renegotiated.

This could drive any number of changes. Publishers could return to a wholesale model. Publishers could try to change the agency commission, now uniformly fixed at 30%. It even seems like publishers are being told that the commissions don’t have to be uniform across retailers (although negotiating different terms would seem to violate the spirit of the Robinson-Patman Law that a previous generation of publishers grew up believing required them to give the same terms to all like sellers. There is a R-P exception for contractual relationships, however.)

In fact, there is language in the settlement agreement which seems aimed at stopping publishers from even revealing the details of these agreement in case one of their competitors could find out. (One might assume an agent with clients at more than one house would be able to figure out the commercial terms from their royalty statements. Actually, one would assume that a responsible agent wouldn’t be waiting for a royalty statement to find out.)

So the settling publishers have to negotiate new deals. The other agency publishers (Macmillan and Penguin who are fighting the legal battle and didn’t settle and Random House, enjoying one more big delayed benefit from having stayed out initially which is that the collusion argument certainly can’t be stretched to cover them) will have to rethink their pricing as they see what happens in the changed marketplace.

It is a safe prediction that one of the stories of Christmas 2012 will be the extent to which the agency publishers dropped prices from what they were permitted to charge to meet competition, driven by Amazon.

Remember that the permissible discounting constraint is an annual number. There are any number of strategies Amazon could pursue (and I wouldn’t presume to be smarter than they’ll be about choosing the right one), but if they chose to press their opportunity to the max this Christmas, they could cut prices to the bone – way below “cost” — and figure to make up the margin in the 9 months that will remain the first year of the contract.

Whatever they do, the agency publishers will have to respond in their pricing too.

It’s an equally safe prediction that a consequence of that will be that fledgling authors living at the lower price points will lose market share. That will not be obvious and nobody will actually notice.

Of course, B&N and Kobo also have to figure out a pricing strategy and a means to execute it.

Apple has to completely rethink what it will do as a retailer because publisher price-setting has been severely crippled and they never seemed to want to do it themselves.

And I have to think again about whether my conviction that publishers need to sell direct to the end consumer stands up in a world where Amazon is free to turn its pricing guns on any competitor and make them look like extortionists no matter what price they charge consumers for their ebooks.


Paying authors more might be the best economics for publishers in the long run

If you imagine the publisher’s business as one that divides most of the consumer’s dollar between two core stakeholders in the supply chain — the retailer and the author — you’d have a pretty accurate picture. The publishers, at least theoretically, decide what the retailer’s “working margin” will be with their discounts and agency agreements. And they decide what the author’s share of the proceeds will be by the advances and royalty rates they offer and agree on through their contracts.

These are the essential, and basically non-substitutable, trading partners for a publisher. They can choose a different printer or publicity firm without changing the character of their business or their economics. But the author relationships are existential and defining and the intermediaries who reach the public and enable the consumer transaction are indispensible.

Plenty has been written, by me and others, about the challenges trade publishers face due to the decline of shelf space for books. But, in some ways, it looks at the moment like those (also including me) who have said that publishers are in big trouble as bookstores decline are mistaken. Sales in stores are declining and sales of print books are declining but total sales, including ebooks, are holding pretty firm and the big publishers are reporting pretty healthy results. So if declining bookstore shelf space, which we have clearly seen over the past few years, doesn’t weaken trade publishers’ commercial performance, what will?

I have written before about asking my friend and sometimes-collaborator Mark Bide a similar question about another segment of publishing. As a John Wiley stockholder, I was worrying 15 years ago about their reliance on journals for their revenues and profits. We thought way back then that journals were likely candidates for disintermediation. After all, the university pays the professor’s salary to write the journal article that the publisher gets for free and then monetizes by charging the same university’s library for a subscription to the journal. Even in the early days of the web, we could see the potential for professors to post their own articles and for peer review to be crowd-sourced, delivering the IP to the academic community faster and saving universities a boatload of dough.

At the time Mark said the thing to watch was whether the publishers stopped getting the submissions. If the professors didn’t need the journals, they’d stop getting the raw material that feeds the whole engine.

So far, it hasn’t happened (and I still own the stock). Despite lots of open source academic publishing, the journals remain important brands in their fields and the professors want the journal publication as a credential. (In books we know that lots of people read the book and have no idea who the publisher was. In journals it is the opposite: more people will know the professor published in the journal than will read the article.) The business has changed and library budgets grow considerably more challenged, but most of the journals, including Wiley’s, remain highly profitable and highly desirable to the authors.

In fact, Mark identifed the point of vulnerability for trade publishers. If the stores and other intermediaries they rely on go away, they have to find other ways to sell their books. That’s a challenge, no doubt.

But if the authors don’t play along, they have nothing to sell. Making deals with authors is the publishers’ price of admission to the game.

As the central player whose contracts and sales terms manage the distribution of revenues throughout the supply chain, how publishers view the commerce of our business is central to how it operates. This has, historically, been challenging. The activity of publishing is complicated and its economics are complicated.

A couple of months ago, Michael Cader pointed out to me that the big publishers were making a serious tactical error in the way they were accounting for sales under the agency arrangement. (Quick reminder: under agency, the publisher is considered the “seller”, not the retailer. The publisher sets the price which the retailer can’t change and pays the retailer, or sales “agent”, a fixed 30% of the set price paid by the consumer.) Publishers simply imitated their convention from the wholesale terms transactions they’d always done before. They book as revenue the 70% they keep of the sale, not the full price the consumer pays (and which, if they did, would make the 30% paid to the retailer a “cost of sale” like printing or shipping is in the physical world or like DRM costs might be in the digital world).

Cader spelled out two important benefits that would flow to publishers if they made a different choice of how to account these sales. (He says, and I trust him, that GAAP rules don’t require them to employ the methodology they do.)

One is that that their “top line”, their “total revenue” line, would be higher. That’s critical to foster a helpful perception in the investment community, which worries when they see declining revenues. And if publishers insist on sticking to booking only the 70% they get on the ebook sales as the total revenue, they’re locked into declining revenue for years to come as competition drives down ebook prices (probably) and as ebook sales continue to replace hardcover print sales (for sure).

The other perception publishers are manipulating against their interests is within their negotiating community. Both agents (on behalf of authors) and the big accounts publishers sell through look at the publishers’ margins as a percentage of sales to decide if there’s more there for them to get. Reporting ebook sales as they do, publishers are achieving about 75% margin on ebook sales (because they give 25% of the take to the author.) If they took the full price as the revenue, they’d be achieving 52.5% margin on those sales (although, of course, nothing really changes.)

There are fewer knock-on problems for the publishers when the big accounts move to convert this (apparently excess) margin into changed business terms than if they allow agents to change the author deal. Changes forced by Amazon or Barnes & Noble could conceivably affect only them, depending on how the change in terms were framed.  But were an agent to succeed in pushing up the contractual ebook royalty, that change could affect a whole host of other contracts because of most favored nation clauses. That could mean royalties are suddenly due on contracts that under the previously-negotiated royalties hadn’t earned out their advances.

So we acknowledge that the price of raising contractual ebook royalties could be high. But it still might be worth it. As we will see later, more margin given to accounts achieves no incremental gain for the publishers; more margin to authors does.

There’s one more very big reason for publishers to change their accounting in the way Cader’s insight suggests. Right now, every big publisher’s life is being disrupted by state, federal, and international investigations into the legality of agency selling, which is characterized by some as “price fixing”. The defense is that the publisher, not the retailer, is the seller and it isn’t illogical for somebody selling something to charge the same price to every customer no matter how they reach them.

If “I’m really the seller” is the defense, it would be much more persuasive if the accounting supported that paradigm. As it stands, the accounting contradicts it.

The total situation not only argues for publishers to change their accounting, it also argues for them to give a bigger percentage to authors and to do it now! Doing so would deliver them two important benefits. It would reduce the apparently excess margin that their retail trading partners are noticing and coveting. But — of much greater importance —  it would also reduce the differential between what Amazon (and who knows, perhaps B&N in the future) offers an author and what the publisher offers, making it more difficult for Amazon to lure their authors away with higher royalty terms.

In fact, they might even get some sympathy from Barnes & Noble about having less excess margin to trade if they can make it clear that giving more to authors is keeping them out of Amazon’s clutches, which B&N and all other retailers absolutely need them to do.

Part of what prevents publishers from seeing merit in paying more to authors is their high cognizance of another accounting element they track: unearned advances. Unfortunately, either publishers aren’t looking at that category of expense in the right way or they’re eliding important distinctions when they discuss those unearned advances with agents.

Because all unearned advances are clearly not created equal. All of the biggest authors pile up unearned advances because they are intended to be unearned. When the agent for a megaselling writer sits down with a publisher to negotiate the advance, they are often negotiating around dividing up what they both see (perhaps without explicitly saying so) as the total revenue pie likely from the book. That leads to agreement on the advance against royalties, which divides the revenues at what is effectively much higher per-copy royalties than standard contracts call for.

But then, for reasons of “not establishing precedent” and, perhaps, not kicking in “most favored nation” clauses that could exist in other contracts (all in the publishers’ interest), the actual contract has conventional royalty splits. The book would have to sell a big increment over expectations to “earn out” on conventional royalties. That’s very unlikely because these are deals done with highly established authors where the track record is a good predictor of future performance.

So some of these “unearned” advances were never intended to be earned; they simply measure how much of a premium the publisher was willing to pay to get certain revenues into the fold.

In other words, publishers aren’t trying to manage all unearned advances down, just some of them. And if they don’t make that distinction (and some further nuance to their measurement) when they analyze this, they’re doing themselves a disservice in a number of ways. Right now, one of those ways is that it is persuading them not to pay higher royalties when doing so could well be in their interest, both because it will keep the author away from Amazon and because it leaves less margin on the table for their trading partners to pursue.

Declared royalty rates that are closer to what Amazon can offer are critical for publishers to turn around a PR war for new authors that they have been losing. The focus of a great deal of the author community buzz is around the ebook royalty differential. Disadvantages of self-publishing — the biggest three being the actual financial cost of necessary editing and core marketing (like a cover); the difference in risk between taking those costs versus taking a revenue guarantee in the form of an advance; and the additional marketing and sales a publisher generates (right now largely through the merchandising and additional revenue from print) — are too easy to ignore or elide. The royalty comparison is straightforward and apparently persuasive when it is as stark as it is now.

A 50% ebook royalty from an agency publisher on revenue after agency commissions would match the 35% royalty that Amazon pays when they pay advances and publish. But publishers don’t actually have to reach that number to be offering  a better deal because they offer sales through other channels Amazon currently either doesn’t reach or actually prohibits employing when they pay an advance to publish. It’s just a tough argument to make when they offer half that number.

One more reflection on unearned advances to bend your mind in the other direction, and then we’ll stop. When the publisher sells a copy of a book that has an unearned advance, the cash flow for this month on the book is better, because no payment to the author is triggered. If publishers paid authors higher royalties on ebook sales, they’d have fewer dollars in unearned advances (because books would earn out faster) very quickly. Of course, that’s not “good” for them because it means they have to pay new royalties on those books as they sell. This is just to say reiterate what I said above: publishing economics are complicated. Anytime you hear them oversimplified, like by somebody lumping together all “unearned advances” into a number or a percentage and wielding it like evidence or analysis, have your grains of salt handy.

I make no secret that my view of the world is publisher-centric. I was brought up that way and I’ve spent 50 years learning about the book business with that point of view. And I also make no secret of my high regard for the current leadership of the biggest publishing houses. With all due respect to the executives of my father’s generation and since, the current crop of leaders is the smartest and most thoughtful and innovative group I’ve ever seen in those slots. But (unless I’m missing something, which is, of course, always a possibility…) they all appear to be making the same mistake at the moment. I would sum up the observations from this post with three suggestions for today’s biggest publishers:

1. Change the way you account for ebook sales in the way Michael Cader suggests: call the consumer payment the top line revenue and the payment to the retailer a cost of sale.

2. Recognize that no excess margin will go unpunished. The forces of big author agents and powerful retail channels will assure that. You know there’s a minimum margin you need to survive; in fact there will also be a maximum margin you’ll have any prayer of holding onto.

3. Pay authors more so you can pay retailers less. There will be a direct connection between the two.


Competing with Amazon is not an easy thing to do

Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 


How many Christmases until we see a whole new industry?

John Makinson, the global CEO of Penguin, was quoted in a Reuters article saying that the post-Christmas period in publishing coming up is “tougher to predict” than “any time that I can remember”. Asked what he sees in the immediate future, Makinson replied “dark clouds”.

Makinson’s concerns reflect one we have written about many times in this space: the rise of powerful ebook vendors who are tech behemoths essentially replacing the network of brick bookstores, many of which were free-standing independents. (This is true in the UK, where Makinson is based, as well as in the US, for which he is also responsible. It will also happen everywhere else.) He made a very cogent point when he said that publishing has been driven more by supply than demand. He was quoted as saying “consumer taste doesn’t actually change all that much but what does change is the availability of books in different channels.”

He’s completely correct. Up until 15 years ago (the dawn of Amazon), only books that were on store shelves had much chance at all to sell. The biggest and most successful publishers today are still the ones which ascended because of their power to put books on those shelves. It is not the publishers’ fault or doing that this is changing.

Longtime industry executive and consultant Joe Esposito wrote a post around the Borders bankruptcy that makes this general point: publishers are part of an ecosystem that is changing in ways they can’t control.

The growth in ebook sales is not an unbroken line pointing up. Industry stats suggest that sales may even have slowed a bit in September compared to August. But this is the time of year when we get the next step-increment change in the publishing reader-supply network. Starting in November, 2007, when Amazon put the Kindle on sale for the first time, the Christmas season has been when the huge leaps in device ebook reader distribution take place. That includes a huge ebook sales day on Christmas itself followed by a couple of months when ebook sales reach new peaks.

This is inevitably accompanied by bad news from the brick book trade. Last year’s first quarter included the bankruptcy filing of Borders. Stores fight hard to keep their doors open through the Christmas season but, with each passing year, if they’re not selling ebook reading devices, they find disappintment more often than salvation.

One bookstore owner I know has been doing a great job; the store held its own despite the overall slide in print. The bookseller told me that this year, through October, sales at the store were down 5%. Not bad. They were down 2% year-on-year last year. They were down 1% year-on-year in 2009. And they had a record year for sales in 2008.

There’s a pattern there. The percentage reduction is doubling each year. When I said, “so you’ll be down 10% next year and 20% the year after that, right?” Bookseller said, “probably.”

Almost no brick store can stand a sales loss of 20% and remain viable. Maybe one could make up the 20% by selling something else in addition to books. But maybe branching out into other lines of merchandise will cost more than it will generate.

Maybe they won’t be able to hold even that 5% reduction through Christmas. And maybe the 20% we see as two years away is even closer.

Anecdotal reports abound that stores that are near where there formerly was a Borders are seeing a lift in sales. One sales executive I know speculated that B&N would pick up half the Borders business. Since Borders sales were a high double-digit percentage of B&N’s sales, that should provide quite a lift. But because B&N’s store sales now include Nook devices, we aren’t able to analyze very readily from their announced results what the trend of their actual book sales in the stores (or online) is. According to Michael Cader’s report of their just-announced results, B&N tells us that “physical book sales declined”.

As the digital sales of straight text books — which are estimated by some to be 75% of bookstore sales — routinely climb past 30% of the total units, there’s just less and less print business to go around. Ebook sales seem to have doubled again in 2011 from what they were in 2010. There are high expectations this Christmas for ebook reader sales, newly fueled by color tablet-like devices from Kindle, Nook, and Kobo (all on sale at consumer electronics outlets as well as at bookstores and online). That suggests (to me) that 40% or 50% ebook sales shares might be common by early 2012.

Borders was somewhere around 10% of the print book business when they disappeared. More than 10% of the business will have shifted away from brick stores to ebooks and online sales in the year following their bankruptcy announcement.

So the lift from picking up Borders business is unlikely to replace what brick stores are losing to more customers switching to ebooks and online buying of print. And that squares with what B&N just told us about their most recent reporting.

We are seeing sales staff reorganizations all over town and in the UK as well. Fewer stores and less volume through them mandate smaller field sales organizations. One former high-ranking sales executive I know who is now a thriving consultant was telling me yesterday that finding an executive sales position in publishing today is a nearly impossible task.

If the ranks of sales reps and sales management are being thinned, how about the elaborate systems we have built to support them?

How much longer will we be publishing in “seasons”, which was a paradigm really built to serve a far-flung rep network that needed to gather to learn about new titles? It now seems like an anachronism, particularly when the biggest accounts buy from monthly lists. How much longer can that last? Sales conferences have been scaled back dramatically from what they were a decade or two ago. How long before they’re virtually defunct?

At least printing paper catalogs, which is a largely wasted expense these days has been retired by several companies. A bookseller I asked said Harper dispensed with paper catalogs already and she expects Random House and Macmillan to do so in 2012. I’ll bet the comment section of this post will attract others to say they have done so or are about to do so as well.

The old publishing sales-and-distribution ecosystem is disappearing but the new one is not built out yet. Publishers are, to greater and lesser degrees, converting to digital workflows, developing their metadata chops, collecting names, building vertical communities by genre and topic, collecting and analyzing ebook pricing data, building new models to work with authors and even self-publishers, and they’re still signing the books they want with royalty rates for ebooks of 25% of revenue.

These efforts have been financed by the margins being earned on sales of print and sales of digital that publishers were able to acquire because of their power to distribute print. In Esposito’s words, this cash provides “venture capital for the new all-digital businesses that all publishers are contemplating”. These annual step-increments of digital growth and brick store decline have so far been tolerable to most of the big players we’ve known for decades. (Borders was an exception, but we know Borders was not done in by digital change alone.)

The pace of the digital switchover is quickening. That will reduce the cash available to invest in building a new ecosystem at the same time the urgency of coming up with new answers is rising. It’s enough to make a sober executive, even at a very large, successful, smart, and innovative company, admit to serious concern for the industry’s future.


The ebook value chain is still sorting itself out, and so are the splits

The division of the consumer’s dollar across the publishing value chain has a history of change. When I came into the business 50 years ago, discounts from publishers to retailers often topped out at 44% and even wholesalers seldom got more than 48% off the retail price on hardcover books. Today discounts into the mid-50s for big retailers and for wholesalers are common.

The top royalty for authors was, as it is now, 15% of the retail price, but there were fewer exceptions allowing the royalty to be cut, contractually or in practice. Today “high discount” clauses, calling for a royalty of something less that 15% of retail (and sometimes a lot less than 15% of retail) will often apply to more than half of the sales the publisher makes. (It is also true that in those days the agent’s standard cut was 10%. The 50% increase they’ve achieved to 15% is the single biggest change in share in the past 50 years.)

Lower royalties subsidize higher discounts and higher discounts have subsidized price cuts to the consumer. Discounting off the publishers’ suggested price by the retailer was rare until the Crown Books chain, which had a meteoric tenure as a major retailer from the mid-1980s until the mid-1990s, made it a core component of their offering. The Barnes & Noble and Borders chains, which rose to prominence during the Crown decade, used the tactic, although less aggressively than Crown.

All of these numbers: the discount determining what the retailer will pay; the royalty calculated either as a percentage of the stated retail price (usually printed on the book) or of the net paid by the retailer on a high-discount sale; and the ultimate consumer price (whether what the publisher printed or lower if the retailer wants it lower) are based on the price the publisher sets and prints on the book in the first place. The informal internal formulas for setting the price have changed over the years too and, although it is a bit hard to really compare, it would appear that the markup over manufacturing cost has also risen steadily over the past 50 years.

So we had reached a point, somewhat before we had the Internet and Amazon.com, where, on big books at least, the publisher would charge a price higher than they expected the consumer to be charged, give the retailer a discount larger than many retailers would keep as margin, and state a percentage as the per-copy royalty in the main body of the contract that didn’t apply to most of the sales. One could say there was a “virtual” world in trade book publishing’s value chain before the term was applied to our new digital reality.

The core underlying point here — obvious but often ignored — is that the division of revenue across the value chain is never fixed. That’s important to remember as we consider how the ebook chain is shaping up. One hears authors and publishers arguing about what is the “fair” division of the ebook consumer’s dollar (as if “fair” had anything to do with it, which it doesn’t) and we have a very unsettled picture of what the retailer’s share of that dollar will be (even though Apple is doing its best to be definitive about it.)

Right now for ebooks we have two “standards” for the publisher-retailer division of revenue. For agency publishers across all retailers and for all publishers selling to (or perhaps we should, with respect for the agency logic, say “through”) Apple, the retailer share is 30% of the purchasing customer’s payment for the ebook, or the publisher’s “digital retail price”. For non-agency publishers selling to everybody else but Apple, the normal offer is 50% off the publishers “suggested retail price”. The DRP is set within boundaries basically set by Apple, primarily based on the price marked on the print version of the book. The SRP is the publisher’s own creation and has been at or close to the lowest-priced print version. The non-agency publishers who sell to Apple are obliged to have both: their DRP is the price Apple will charge (until and unless they’re undercut) and the SRP is the price that forms the basis of discounts to wholesale customers. I haven’t studied this but I think most publishers set SRPs higher than the break-even point because they want wholesale customers to go agency and would trade less revenue to achieve that, as they did when they switched over in the first place. (The publishers could set the SRP at a point where 50% of it equals 70% of the DRP, so their take is the same either way.) Theoretically, the publisher can count on the wholesale-purchasing retailer to discount the book to match the DRP, reducing their own margin and being competitive with the DRP in the consumer’s eyes.

This pricing strategy depends on the retailer discounting from the SRP to keep the pricing of the ebook from looking ridiculous. Not discounting is a way for the retailer to push the publisher to lower the SRP, which could start a cascade of price-cutting. That discounting has usually started with Amazon; others then follow suit. There are anecdotal claims that Amazon is starting to foil this strategy by letting publishers who set high prices live with the prices they set more often than they once did, but nobody but Amazon knows that for sure.

During the period when Random House stayed out of agency pricing, one thing they said was they thought the 30% agency standard was high and they didn’t want to memorialize a retailer cut that rich. Either other considerations prevailed or Random came to the conclusion that they couldn’t singlehandedly change that standard cut.

But if we maintain a competitive landscape of retailers, there is a way it could come down. What if one retailer (B&N? Kobo? Google?) were to offer publishers a deal where a discounted version of an ebook were offered through them on a temporary exclusive — say, the first 60 days the ebook was out — during which they would help subsidize the discount by taking a smaller percentage themselves during the promotion. Would publishers find it tempting to accept such an arrangement to poke a hole in the 30% standard? I think they might. (They would certanly enjoy the conversation with a competing retailer inquiring about how that happened, in which the publisher could offer a “matching” deal for some other equally appealing book and leave that retailer to think about whether to hold the line on the 30%.)

Another value chain segment the industry is still trying to value and price is the percentage a distributor can charge in the digital world. There’s wide variation here already, as there is in the print world, where the same bundle of services (sales, warehousing, shipping and returns processing, collecting receivables) can cost anywhere from around 20% to around 33% (fully loaded.) In ebook distribution, we see BookBaby willing to set up for a fixed fee (with no percentage deducted), BookMasters and Smashwords and some agent services like Knight charging about 15% of the revenue, and then offers from various publishers, distributors, and literary agents that go as high as 30% of the revenue.

Usually those offers are framed as “we pay 70% of revenue” which, I think, some hope will be confused with the 70% the agency retailer pays of the consumer dollar. Of course, if they are paying 70% of the revenue on a wholesale account buying at 50% off and the account doesn’t discount to the consumer, the distributor is actually paying 35% of the consumer dollar to its client.

The challenge for distributors is to offer services which don’t commoditize. Many authors already manage their own digital publishing affairs and sneer at the idea that a distributor or publisher has anything to offer that is worth even a token payment, let alone a substantial share. Over time, one can imagine information dashboards, metadata enhancement, dynamic pricing, and marketing assistance capabilities that will give ample justification for a distributor’s presence in the value chain for many authors and small publishers. It would be premature to predict how much value can be added and how much margin it could command. Most of these roads aren’t paved yet. What the distributors are offering at the moment is their ability to navigate unpaved roads and constant marketplace change which, despite the skeptics, is service many of us can see the need for.

What gets perhaps the most attention in the industry’s conversation about dividing the digital swag, but which is dependent on the upstream divisions of revenue, is the author’s royalty from the publisher. The majors have held the line for a year or two at 25% royalty, which means 25% of the 70% they get from the retailer, or 17.5% of the consumer’s dollar. That’s a quarter of what the author can get from Amazon or Kobo, and just a bit more than a quarter of what they can get from Barnes & Noble. Aside from publishers’ significant efforts to build marketing capabilities that will grow sales and their ability to charge a retail price often four times higher than an author would on his/her own, the publishers are offering guaranteed payments (advances against royalties) and a print revenue stream to sugar-coat the 25% digital royalty. Still, as the percentage of books sold digitally rises, it is likely to pull up the percentage of the sale authors will get along with it.

Everything happens faster with digital than it did with physical. And so it will be with changes in the revenue distribution along the value chain. My hunch (all hunch, no data) is that in the long run (5 or 10 years?) retailers will find it hard to keep 30% of the consumer’s dollar, publishers will find it nearly impossible to keep 75% of what the retailers pay, and that any author who wants to compete seriously will have a cost structure that will often make a royalty rate taking even as much as half of it away worth considering. Right now putting an ebook into Amazon and having them sell it on autopilot can get a lot more of the total market than will be the case over time as a more fully articulated and global ebook infrastructure builds out.

If I’m right, retailers should want longer contracts than publishers in their agreements; publishers should want longer contracts than authors, or at least longer terms for the stipulated ebook payout percentages; every author or publisher wants as short a contract as they can get with their distributor; and every author giving an ebook exclusive to a retail channel for longer than an introductory period should think twice about what that might cost in years to come.

Michael Cader did an absolutely fabulous reporting job on the distribution alternatives available today for our eBooks for Everyone Else conference in San Francisco. We’re doing an eBEE track at Digital Book World in January, and Michael’s doing a reprise of that presentation, with time for q&a, at a breakout session there. The distribution piece is by far the most complex of the three moving parts (the retail function and the royalty rate being much more straightforward components that don’t vary much in their definition) and a lot of DBW attendees will benefit from Michael’s reporting.


The ebook marketplace could definitely confuse the average consumer

There are no links in this post. I refer to searches done in several ebookstores, but the pages reporting results would be dynamic, so creating a link wouldn’t assure you’d see the same results as I saw. You can replicate the searches and you may or may not see the same thing because the facts might change.

Here’s what the ebook marketplace looks like without agency pricing.

Having just polished off Phil Pepe’s “61″ about Roger Maris’s great home run season of 50 years ago, I was ready for my next read. No book has gotten more press on my radar over the past week than the new memoir from Jacqueline Kennedy, transcriptions of interviews she did with historian Arthur Schlesinger just a few months after JFK’s assassination. That looked like a good next choice for me.

(I have learned through the exercise described herein that the book is actually billed as “by Caroline Kennedy”, who controlled the property, edited it, and contracted for its publication and also “by Michael Beschloss”, the historian who wrote the introduction.)

Although I have several readers loaded on my ereading device (the iPhone), I have found myself recently defaulting to the Kindle store because it is the best place for me to browse. It allows me to search very granularly by category and sub-category (which the others don’t) and to array the choices in inverse order of publication (which the others don’t, or if they do, they don’t make it obvious enough how). That’s how I found “61″ and “The House That Ruth Built”, my two most recent reads in baseball history (my favorite subject.)

However, when you know you want a very specific book, all the ebook services are pretty much equivalent. They all let you search by title or author and deliver what you’re looking for. Since I like to spread my reading around to keep up with what the various experiences are like, I decided to search Nook first for “Jacqueline Kennedy”.

And the search engine found 22 items matching my search, the first two of which were what I was looking for.

Sort of.

Match number 1 was the book I wanted (“Jacqueline Kennedy: Historic Conversations on Life with John F. Kennedy” by Caroline Kennedy), but only available for pre-order, delivery taking place on January 3, 2012. The list price is $29.99 and the NOOK price is $9.99. Obviously, not agency, Apparently B&N will accept about a $5 bath on each copy, presuming they get these $29.99 ebooks at 50% off from the publisher, Hyperion.

But I want to read it now!

Match number 2 is the same book. However it is a “NOOK Book Enhanced (eBook)”. It is available right now. The list price is $60.00 and the NOOK price is $32! That’s thirty-two dollars! List price of SIXTY dollars? WTF?

Let’s note here that B&N is apparently making very little margin on this, if they’re paying 50% to Hyperion. But since I’m the biggest spendthrift I know on ebooks (I happily bought and read both “Fall of Giants” and “George Washington” from Penguin for $19.99 without blinking; some years ago I bought an ebook bio of Grover Cleveland for $28) and this price stops me, I wonder if anybody would buy it.

So I kept shopping.

My next stop was Google eBooks. The book I’m after was not in the first two pages of results returned in a search under “Jacqueline Kennedy”. (However, there was one book called “Inventing a Voice: The Rhetoric of American First Ladies of the Twentieth Century” that is on sale for $42.36 and another called “The Kennedy Family: an American dynasty, a bibliography with indexes” for $55.20).

So I tried Kobo. By the time I got to the bottom of the first page of results, we were on to other Jacquelines. And the book I wanted, the one getting all the publicity, wasn’t shown.

I almost never use the iBookstore because the selection is more limited. But I decided to try it for this. I found something cool immediately: it gave me an auto-complete choice for “Jacqueline Kennedy” when I had typed a few letters of her first name. Helpful on an iPhone.

Here I found a variation of what I’d found on NOOK. The first listing was for the plain vanilla ebook, only for pre-order for January 3, 2012 delivery, for $14.99. (iBookstore, unlike NOOK, doesn’t list a publisher’s list price.)

The second listing labeled “Jacqueline Kennedy The Enhanced Edition” offered that book for $19.99, also without telling me what the publisher’s list price was.

One thing was odd. iBookstore says that the “print length” of the enhanced edition is 400 pages and the print length of the vanilla edition is 256 pages! Since I thought most of the enhancement was video and audio, that’s a bit of a headscratcher too.

So, finally, I went to Kindle. The number one listing there, available now, was “Jacqueline Kennedy (Kindle Edition with Audio/Video)” for $9.99. The book’s page says the list price is $60 and the Kindle price is a saving of 83%. (Of course, I bought it, and I can tell you that my iPhone progress bar says there are 349 pages in the book!)

What that suggests is that Amazon could be subsidizing sales of this book to the tune of a massive $20 per copy sold! (Next time I’m with a person from Amazon, the cup of coffee is on me.) I’m assuming that Amazon is paying half that $60 retail price to Hyperion.

People’s deals are private and I don’t claim inside knowledge, but my understanding is that all publishers sell to Apple on what amount to agency terms (publisher sets a price with Apple and Apple remits 70% of it) but that part of the commitment is that iBookstore can lower its price to meet competition and adjust remittances accordingly. Perhaps what happened here is that Hyperion set its Apple price at $19.99, figuring that nobody else (meaning Kindle or NOOK, in this case, since apparently Google and Kobo don’t have the enhanced book and aren’t listing the vanilla one for future sale) would drop the price more than that. But Kindle did. So, if I’m right about terms, iBookstore will shortly see this, cut its price to $9.99, and Hyperion will find themselves getting 70% of $9.99 from Apple rather than 70% of $19.99. And still Kindle and NOOK will be paying $30 a copy with Amazon Kindle choosing to lose $20 a copy to sell them and B&N NOOK choosing not to subsidize and probably hardly selling any.

Amazon’s strategy before agency was to aggressively discount the most high-profile books, the ones that the reading public would most often search for, in order to send the strong signal that their prices are the lowest and to force less-affluent competitors to engage in costly price competition. In this case, that strategy is being applied successfully, although both iBookstore and NOOK can respond. Whether one thinks it is a good thing or a bad thing that the deepest-pocketed retailer can spend $20 a copy on a big book to promote a price perception depends on your point of view but this clearly demonstrates what the publishers, the retailers, and the consumers face when a high-profile, high-demand book is sold without the price discipline of agency terms.

Clearly, something has to change here. Perhaps Google and Kobo aren’t listing this title because they can’t or don’t want to sell an enhanced ebook. Perhaps Hyperion didn’t offer it to them. We know that Apple insists on agency-like terms and Amazon is just as determined to stick with wholesale terms. My understanding is that B&N will work either way although they have made public statements that seem to support agency. In cases like this, though, I’d expect B&N to pursue the same terms as Apple gets (which, because it includes publisher price control, Amazon doesn’t want). B&N certainly doesn’t want to be selling an ebook for $32 their competitors are selling for ten and twenty dollars less than that and they also don’t want to lose $20 a copy on a high-volume title. (Perhaps by the time you read this, there will have been price adjustments already made.)

But if B&N and Apple both had terms that allowed them to cut to Amazon’s discounted price and just pay less for each ebook, it is hard to see how Amazon could accept that!

I am sorry there is no way to present this as anything other than confusing. Maybe one of the service providers or experts at our “eBooks for Everyone Else” show will be able to explain it better!