Borders

The idea of vendor-managed inventory has never become particularly popular in the book business, despite a few experiments over the years where it was implemented with great success. (And despite the fact that I was pushing for it back in 1997 and 1998.) But as the book business overall declines, with the print book business leading the slide and that portion of the print book business which takes place in retail stores falling off at an alarming rate, it is time for the industry to think about it again.

In fact, VMI for the book business began with the ID wholesalers and mass-market paperbacks right after World War II. The IDs — the initials stood for “independent distributors” — managed the distribution of magazines and newspapers at newsstands and other accounts within their geographical territory. The retailers had no interest in deciding how many copies of LIFE they got in relation to Ladies Home Journal; the ID made that determination. And since only the torn off covers were necessary for confirmation of a “return”, the “bulk” cost of distribution was in putting the copies in, not taking back the overage. And because newspapers and magazines had a disciplined frequency, it was obvious that you had to clear out yesterday’s, or last week’s, or last month’s to make room for the next issue.

When the first mass-market paperback publishers started their activity right after World War II, providing books for, among others, returning servicemen who had access to special servicemen’s editions of paperbacks (in a program created by the polymath Philip Van Doren Stern, a Civil War historian and friend of my father’s) they helped the jobbers along by having monthly lists. They also were comfortable with a book only having a one-month shelf life and having the stripped covers serve as evidence the book hadn’t been sold.

For quite some time, the initial allocations to the ID wholesalers (the local rack jobbers were called “Independent Distributors”) were really determined by the paperback publishers. Eventually, that freedom to put books into distribution choked the system, but there were a lot of other causes of the bloat. By the 1960s, many bookstores were carrying paperbacks and many other big outlets were served “direct” by the publishers, leaving the IDs with the least productive accounts. But VMI, even without any system and very little in the way of restraints on the publishers, was responsible for the explosive growth of mass-market paperbacks in the two decades following World War II.

In the late 1950s, Leonard Shatzkin, my father, introduced The Doubleday Merchandising Plan, which was VMI for bookstores on Doubleday books. For stores that agreed to the plan, reps reported the store’s inventory back to headquarters of Doubleday books rather than sending an order. Then a team posted the inventories, calculated the sales, and followed rules to generate an order of books to the store. Sales mushroomed, particularly of the backlist, and returns and cost of sales plummeted. Doubleday was launched into the top tier of publishing companies.

In a much more modest way, a distributor that my father owned called Two Continents introduced a VMI plan in the 1970s. Even with a very thin list and no cachet, we (I was the Marketing Director) were able to get 500 stores on the Plan in a year. We achieved similarly dramatic results, but from a much more modest base.

Two Continents was undone by the loss of some distribution clients. The Doubleday plan was undermined by reps who convinced headquarters years after my father left that their stores would be more comfortable if they wrote the Plan orders rather than letting them be calculated at headquarters. And the rise of computerized record-keeping systems for inventory and national wholesalers who could replenish stock quickly improved inventory performance, and store profitability, without VMI. Although our client West Broadway Book Distribution has successfully operated VMI in specialty retail for more than a decade, and Random House has worked some version of VMI at Barnes & Noble for the past several years, the technique has hardly been considered by the book trade for a long time.

It is time for that to change. What can foster the change is a recognition about VMI that is readily apparent in West Broadway’s implementations in non-bookstores, but would not have been so obvious to the bookstores using Doubleday’s or Two Continents’ services.

From the publisher’s perspective, the requirement that there be a title-by-title, book-by-book buying function in the store in order for the store to stock books purely and simply reduces the number of stores that can stock books. The removal of that barrier was the key achievement of the ID wholesalers racking paperbacks after World War II. Suddenly there were thousands of points of sale that didn’t require a buyer.

From the store’s perspective, buying — and managing the supply chain to support the buying decisions — is expensive. VERY expensive. Books are hard to buy. New ones are coming all the time; the number of publishers from which they come (and who are the primary sources of information about the books, even if you could “source” them from wholesalers at a slight margin sacrifice for operational simplicity) is huge; the shelf life of any particular title is undeterminable; and the sales in any one outlet are very hard to read.

Consider this data provided by a friend who owns a pretty substantial bookstore.

Looking at the store’s records for a month, 65% of the units sold were singles: one copy of a title. Only 35% were of books that sold 2 or more. (I didn’t ask the question, but that would suggest that 80-90 percent of the titles that sold any copies sold only one.)

Then, the following month, once again 65% of the units sold were singles. But only 20-30 percent of them were the same books as had sold as singles the prior month. Upwards of 70% of them were different titles. And upwards of 70% of the ones that sold one the prior month didn’t sell at all.

To further underscore how slowly book inventory moves, another report they do shows that more than 80% of the titles in the store do not sell a single copy in any particular month. So it is no surprise that an analysis of books from a major publisher that promotes heavily showed that more than half the new titles they receive from that publisher don’t sell a single copy within a month of their arrival in the store, which would include the promotion around publication date!

These data points demonstrate another compelling reason for VMI. When a store sells none of 80% of its titles in a month, and of the ones they do sell 80% of those sell one unit, they clearly need information about what is going on in other stores to know which ones to keep or reorder and which ones to return. Above the Treeline is an inventory service which provides its stores with broader sales data to address that issue, but the information is not as granular or as susceptible to analysis as what a publisher or aggregator could do with VMI.

Partly because of the high cost of buying and a supporting supply chain that a book outlet requires, publishers will see shelf space for books drop faster than retail demand. (The closure of Borders, which wiped out a big portion of the shelf space, is part of what is behind the recent good sales reports from many independents.) At the same time, retailers of all things will be under increased pressure to find more sales as the Internet — often, but not always, Amazon — keeps eating into their market.

This all adds up to VMI to me. We’ll see over the next couple of years whether industry players come to the same conclusion.

There are three overarching realities that are determining the future course of book publishing. They are clear and they are inexorable:

Scale, and its close cousin “critical mass”, is the ability to use size as a competitive advantage in any endeavor;

Verticalization, or being in sync with the inherent capability of the Internet to deliver anything of interest in an audience-specific way; and

Atomization, or the ability for any person or entity to perform the most critical component of publishing — making content available and accessible to anybody anywhere — without capital and without an organization dedicated to distribution.

Scale

In the 20th century, scale in publishing was really an internal concept. Big publishers had more resources to sign books, get to bookstores, and roll out marketing than smaller ones. Barnes & Noble and Borders had supply chain and cost advantages over independent bookstores, except that Ingram and other wholesalers lent their scale to provide partial compensation. Bigger literary agencies had negotiated more boilerplate agreements than smaller ones and often had helpful relationships that went beyond publishing, but a single operator could still cultivate enough editors to make a legitimate case that he or she could place a book as effectively as the giants.

But that’s changed entirely in the past 10 years. Now publishing operates in a world increasingly controlled by Amazon, Apple, and Google, all companies that make far more money outside of books than through books. One Big Six CEO observed to me about five years ago that the time had passed when s/he could call all the biggest trading partners of their company and reach the CEO instantly. Penguin Random House has merged into a publishing company that will control about half the most commercial titles in the marketplace, but any suggestion that their size will enable them to dictate much to Amazon, Apple, or Google is deluded.

What Random House can do is apply scale against other publisher competitors. And they will.

Critical mass is a scale-related concept but it is also a component of verticalization. When a publisher, or any aggregator, has enough material to allow it to ignore competition in a consumer offer, it has achieved the effective barrier to entry that scale also provides. For example: subscription models for general books are a very difficult commercial proposition because the biggest agents for the biggest authors wouldn’t want their titles included. But Amazon might just have so many titles they can make available through a subscription offering that they can do it successfully even without the top of the bestseller list. The new Penguin Random House combination might also be able to do something here, if the avoidance of a 3rd party could generate enough revenue for the authors to change the minds of the agents, even though they’d be doing it with just their books. After all, Spotify was able to aggregate enough music to sell subscriptions even before they brought The Beatles into their catalog.

Another smart and relevant application of scale is by F+W Media (our partners in Digital Book World conferences), which publishes across a range of communities. They are able to offer each one the advantages of a direct retailing operation, because they maintain that capability through the scale of their entire operation. Some of the verticals in which they apply it wouldn’t be able to support such a capability on their own. F+W applies scale to their niches with their web and event teams as well.

Verticalization

In the 20th century, most trade books reached their customers through bookstores. That liberated publishers to be largely audience-agnostic in their choices about what to publish. They could stick a memoir, a novel, a knitting book, a travel guide, and a kid’s pop-up book into the same box and the bookstore would sort it out for the consumer, putting it on the appropriately-labeled shelf for the shopper.

In those days, the devotee of any subject from baseball to cookbooks would think nothing of browsing the shelves of several different bookstores to find all the offerings relevant to their interests.

Those days are gone. Twice.

Thanks to Google and its competitors, the entire universe of offerings around any topic of interest are aggregated and surfaced very quickly. And bookstores and the staff and shelf space publishers used to sort things out are disappearing.

All of this is driving publishers to be audience-centric in their thinking in ways that were never required before. If the Internet is how customers are reached, not bookstores, it becomes evident pretty quickly that it makes for highly inefficient marketing to be all over the lot with your subject matter or genres. It didn’t used to matter to publishers if they had the “next book” for the person who bought the last book. But it surely does when you’ve spent good marketing money and effort to find and reach that person, and when you can often stay in touch with them in a cost-free (or at least very low-cost) way going forward.

It is in audience-centric marketing that scale can be applied successfully today, using size and resources to improve the ability to reach out rather than to lower the unit cost of some internal mechanistic function. Understanding the reality of verticalization should also prompt publishers to rethink the way they define and build brands. Imprints are brands within a publishing house meant to communicate to their trading partners: bookstore buyers and reviewers in one direction and authors and agents in the other. In a vertical world, brand-building should be much more audience-centric. This particular requirement to think differently seems to be very challenging for publishers.

Atomization

In the 20th century, it took capital and an organization to publish a book. While you always had to provide your own capital to be a publisher, ways evolved to “rent” the organization, specifically the distribution services offered by most publishers and some specialist organizations.

The barrier to entry for book publishing was always relatively low compared to other media: magazines, newspapers, radio, TV, and movies would all require much more of a financial and organizational commitment than was required to publish a book. But there definitely was a fence around the book publishing world, and the position of “gatekeeper” was both well-earned and well-rewarded.

But those days are gone too.

As of this writing in April 2013, sales of any book of narrative reading will, depending on topic or genre, be 20% to 60% in ebooks, which requires no inventory investment and minimal distribution infrastructure. Sales of the printed books — the other 40% to 80% — will be anywhere from 25% to 50% through online channels. Those sales can also be achieved (largely through Amazon) without an investment in inventory, printed at the moment they’re ordered.

The first flood of opportunists exploiting this new reality were authors who self-published. Some, like Bob Mayer and Joe Konrath, took the brands they’d built through traditional publishing (and sometimes even the very books themselves) and created a new commercial model where the majority share of margin taken by the publisher was divided between them and the retailer, usually Amazon. Others, like Amanda Hocking and John Locke in the early days  and hundreds of others since, built publishing brands on their own. These authors were driven by the desire for recognition of their writing and, in some cases, by the conviction that they could make money. Their existence in large numbers fueled the creation of an “author services” industry. The biggest and most profitable of the companies in that business, Author Solutions, was bought by Penguin a year ago. Amazon built a business called CreateSpace to serve this market; Barnes & Noble and Kobo and Apple all offered varieties of the same set of capabilities.

Recently, we have seen a rush of other content creators — newspapers, magazines, web sites, and new companies dedicated to exploiting the book opportunity — building their presence as book publishers, or at least as ebook publishers. There are experiments with content types (short form, author-centric) and business models (subscription being a frequently-tried one on which the jury is still definitely out).

But all of this is a precursor to the next wave, when every law firm, accounting firm, consulting firm, department of a college or university, retailer, service provider, and manufacturer will see the benefits to them of building the function of book publishing into their marketing mix. This will truly constitute an existential threat to book publishing as a business, because these entities will not be building their publishing programs with profits primarily in mind. That will make it exceedingly difficult for the companies that do — the book publishing business we’ve always known — to compete. The quality they deliver costs money. The prices they need to charge are based on their costs.

Their books will be in a marketplace competing with titles supported by other rewards and priced with considerations other than profit in mind.

Scale, verticalization, atomization. Examine any new proposition you hear about against the filter of those concepts and I think you’ll have a pretty fair sense of whether it has much chance for success. Hitting two of those three marks is no guarantee of prospering, but failing to hit any would be a pretty fair assurance of failure.

Our Publishers Launch conference at BEA on May 29 has several presentations focused on the theme of scale. We’ll have presentations from Random House, Hachette, and F+W Media about how they’re applying it for competitive advantage. We’ll have a panel of agents discussing how scale affects their role in publishing. And in a discussion my PLC partner Michael Cader and I will be having, trying to talk about the things people in publishing jobs are constrained to discuss, it will certainly be a core topic.

Our regular readers may notice a relative lack of links in this post. Because this synthesizes and re-articulates many thoughts we’ve expressed over the years, we thought it might be more helpful to gather the relevant internal links here at the bottom of the post rather than placing some of them throughout. The links from speeches and posts here are presented chronologically to document the evolution in thinking that led to today’s post.

End of General Trade Publishing Houses: Death or Rebirth in a Niche-by-Niche World – 5/31/2007

Stay Ahead of the Shift: What Publishers Can Do to Flourish in a Community-Centric Web World – 5/29/2009

The Emerging Opportunity for Today’s Publishers – 6/17/2009

The Need for Critical Mass is Why Verticalization is a Process – 6/22/2009

Verticalization in Action – 7/2/2009

Why Publishers Need to Understand Brand – 9/23/2009 

My Advice is Not Always Easy to Follow, But Sometimes It Proves Right Anyway – 3/29/2010

Cool Springs Press, a Gardening Publisher that Really Understands “Vertical” – 6/23/2010

Publishing is Living in a World Not of Its Own Making – 7/24/2011 

Will Book Publishers Be Able to Maintain Primacy as Ebook Publishers? – 10/9/2011 

True “Do-It-Yourself” Publishing Success Stories Will Probably Become Rare – 11/6/2011 

Publishers Adding Value on the Marketing Side – 11/17/2011 

Two Questions That Loom Over the Trade Publishing Business – 2/28/2012 

Amazon’s Growth and Its Lengthening Shadow – 4/30/2012 

Everybody in Hollywood Needs an Ebook Strategy – 5/14/2012 

Subscription Models Seem to Me to Be for Ebook Niches, Not a General Offer – 7/16/2012 

Explaining My Skepticism about the Likelihood of Success for a General Subscription Model for Ebooks – 7/22/2012 

Going Where the Customers Are Might Be an Alternative to Selling Direct – 8/9/2012 

Full-Service Publishers Are Rethinking What They Can Offer – 9/4/2012 

New Publishing Companies Are Starting That Are Much Leaner Than Their Established Competitors – 9/24/2012 

Peering Into the Future and Seeing More Value in the Random Penguin Merger – 11/26/2012 

Business Models Are Changing; Trial and Error Will Ensue – 12/3/2012 

Rethinking Book Marketing and Its Organization in the Big Houses – 12/17/2012 

Buying Is a Hard Thing for Bookstores to Do Effectively, and That Becomes an Increasingly Important Reality for Publishers – 1/23/2013 

Ideas about the Future of Bookselling – 2/7/2013 

Publishers Are Reshaping Themselves – 3/12/2013 

Atomization: Publishing as a Function Rather than an Industry – 3/19/2013 

More on Atomization: Why the New Publishers Are Coming – 3/26/2013 

Although “digital change in publishing” has a year that lags the calendar year and this year won’t “end” until we have a read on how post-Christmas ebook sales were affected by the new devices consumers got for Christmas, the dropping of the ball in Times Square is the signal most of us respond to when timing our look ahead.

The signals about what to expect when the “digital year” ends are mixed, but not wildly encouraging. There are anecdotal reports of strong sales by US indies selling Kobo devices and Amazon has bragged about their Kindle Fire sales. On the other hand, B&N does not seem to be meeting its targets on the digital side and we’re learning that we don’t get the ebook sales surge from replacement devices that we get when a consumer first switches over from print. Most of the devices being sold now are replacements. And we’re also seeing tablet sales surging past ereaders. Prior analysis has told us that people spend more time reading books on ereaders than they do on tablets.

But quite aside from precisely where Digital Year 2012 ended up, there are five trends I think will be increasingly noticeable and important in trade publishing that are worth keeping an eye on in 2013.

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

We have already seen this clearly in data that has been reported throughout 2012. After ebook share growth that was in triple digit percentages for four years (2008-2011), this year we saw that switchover slow down considerably to substantially less than a 50% increase over last year.

Although the slowdown was pretty sudden, it shouldn’t really have been that surprising. Since the ebook era began in earnest with the arrival of Kindle in November, 2007 (5 years and a few weeks ago), it has been clear that heavy readers were early adopters. Both price and convenience were drivers that made the reader of a book a week much more interested in the new way of purchasing and consuming than the reader of a few books a year.

There appear to be those out there who believe this is a temporary lull and that the ebook switchover will shortly accelerate again. I really don’t think so. Although I don’t think the various surveys of reading habits have captured this, my hunch is that there are relatively few heavy readers left to make the change and those are, demonstrably, extremely resistant.

It is entirely possible that the death of Borders and changes at B&N reduced the amount of shelf space for books by as much as 50% in the two years that ended with 2011, a year ago. (That emphatically does not mean that print sales declined by that amount, or even that print sold in stores did.) That adjustment of shelf space to the reality of the purchasing shift consumers had made was a sudden over-correction, with the result that the remaining booksellers got a bit of wind at their backs. The data is hard to interpret, but it is possible that the indies benefited from that more than B&N did, perhaps as a result of B&N’s more intense focus on its NOOK business compared to the indies, who (despite the lift they got from selling Kobo devices this past Fall) are more focused on print.

This does not mean the digital switchover has ended. My gut (I don’t think there’s a great empirical substitute available here) tells me that store sales for books will continue to lose ground to online (print and digital) at a rate of 5-to-10 percent a year for some years to come. But that’s a much more manageable situation than the one bookstore owners had been dealing with for the several years leading up to 2012.

This is good news for big publishers. Their model is still built around putting print on shelves and managing a marketplace that works around a publication date focus and the synchronized consumer behavior that store merchandising really stimulates. It is good news for B&N too, if they can take advantage of it.

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

The commercial realities of ebooks and print are very different for immersive reading than they are for reference books, illustrated books, and picture books for kids. This difference is unfavorable for other-than-immersive books both in their creation and their sales appeal.

For immersive reading — books that are all text where you basically start on the first page and read through to the last — the “adjustment” to ebooks is both technically simple and uncomplicated for the consumer. Make it “reflowable” and it works. And the additional “labor” to make the two different versions (print and digital) is minimal.

But for books that aren’t consumed that way (reference) or which have important content that isn’t mere words, a single digital version might not work effectively (think of the difference in screen sizes and what that could do to a picture and caption or a chart). And compromises we make for a printed book — using six still pictures instead of a video or a flat chart instead of an animated one — can be downright disappointing in a digital context.

There are ongoing efforts to make creating good complex ebooks cheaper and easier, the most recent one coming from Inkling. Apple offers tools to do this, but then you can only sell the output through Apple. Vook was on this trail, although their most recent pivot seems to be away from reliance on illustrated books. The ebook pioneers at Open Road Digital Media have been making deals with illustrated book publishers — Abrams and Black Dog & Leventhal among them — and appear committed to solving this problem

But it seems to me that it might not be readily solvable. The inherent issue is that precisely the same intellectual output in both formats, which works fine for immersive reading, almost never does for complex books. So the core realities that have cushioned the digital transition for publishers of novels and biographies — that the cost of delivering to the digital customer is really very low and the appeal of the content is undiminished in digital form compared to print — don’t apply for illustrated books for adults or kids.

Will the how-to or art book in digital form ultimately be as close to its print version as has been the case for novels? Or will the how-to or art digital products in the future come from book publishers at all? Will there be any real synergy there? I don’t think we know that yet. As pressure grows in the retail marketplace, it gets increasingly urgent for illustrated book publishers to find out.

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

I have been a bit surprised about how little imagination has been evident from the kommentariat about the pending merger of Penguin and Random House. It seems like it is being viewed primarily for its cost-cutting potential (and that will be real), but I think it could actually be transformative.

I see two very big immediate wins for the combined company. They’ll be able to launch a credible general subscription, book-club-type offer using their own books exclusively (print and digital, although the big opportunity is digital). And they’ll be able to serve no-book-buyer retail accounts with a commercially-appealing selection of books working with a publisher’s full margin, not the thinner revenue available to a third party aggregator.

This is the two biggest of the Big Six joining forces. The other combination that is believed to be under discussion, putting together HarperCollins and Simon & Schuster, would be something like half the size of Penguin Random House and it wouldn’t have an equivalent reservoir and flow of highly commercial titles.

While Macmillan, according to the year-end letter from its CEO, John Sargent, remains determinedly independent, it is hard to see Hachette staying outside the merger tent as a stand-alone if Harper and S&S were to execute on the current rumor. The three of them together would present a competitive challenge to PRH and would have similar opportunities to open up new and proprietary distribution channels.

The merger activity will not be confined to the big general players. Both F+W Media (our partners in Digital Book World) and Osprey are building out the “vertical” model: providing centralized services to enable development of “audience-centric” publishing efforts for many and diverse communities. F+W has more than 20 vertical communities, most recently having acquired Interweave. Osprey, starting from a base in military history, has added science fiction (Angry Robot) and mind-body-spirit (Duncan Baird) to their list by acquisition.

The key in both cases is being able to add revenue channels to an acquisition as well as the time-honored objective of cutting costs through a combination. In different ways, all of the mergers we’re talking about here accomplish that.

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

Publishers discovered the power of platforms when Kindle showed them that they, not the publishers, controlled the customers and they, not the publishers, controlled the pricing. It took less than a year for Kindle to “own” enough customers that it would have been very difficult for any publisher to live without their sales, even without the leverage Amazon had as a significant customer for print.

Now we suddenly have a plethora of platforms that want to convince parents and teachers that they are where kids should be doing their reading. This is coming from the retailers: Amazon has a subscription offering for kids’ content and both Kindle and NOOK have parental control features. It is coming from the people who have been in this market all along: Storia from Scholastic and Reading Rainbow’s RRKidz. It is coming from outside enterpreneurs: Story Town and Ruckus.

And, before long, I think we’ll see branded digital subscription offers from the biggest publishers. (Why not?)

This suggests that a lot of shopping and purchasing decisions for young reading are going to take place outside of any environment that one could say now exists. And that’s going to be true pretty soon.

There are a lot of moving parts here. Sometimes the content has to be adjusted in some way for he platform, or can be enhanced for it. Sometimes the platform can facilitate a sale of stuff that is pretty much as it already was. Some of the platforms work on subscription models and others on discrete product sales models. But publishers (and agents) are going to be thinking about what those deals ought to look like. For now, platform owners are eager to engage the content so they have something to capture an audience with. When the audience is captured, the power shifts to the platform owner for anything but the most highly visible and branded content.

This will be an interesting arena. (And one that will be discussed at length at our conference, “Children’s Publishing Goes Digital” on January 15.)

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

I spent a post recently trying to describe an “audience-driven” rather than “title-driven” or, worse, “title-on-pub-date-driven” approach to marketing. When you get down to actually trying to use the biggest new tools publishers have in the digital world — the top two coming to my mind are using email permissions and social media for dirt-cheap communication and lots of data sources with more and more tools for analyzing big data — you very rapidly realize that it is very limiting to think about using them on a per-title basis.

Rick Joyce of Perseus presented some ground-breaking thinking at our Frankfurt event about using social listening data tools for publishing marketing; he learned that the tools were most effectively applied across categories rather than for titles. (Part of the reasoning here was that using the tools is time-consuming and therefore expensive; part of it is that you just get more actionable information categorically than you do title-by-title because you’re crunching more data.)

So when publishers start to conform their publishing and marketing to what the new tools can do best (we’re still in the stage where we’re mostly trying to make the tools do what we did before), it will mean an explosion in the number of marketing decisions that have to be made (because the age of the book will not be a central factor in the decision to include it in a marketing opportunity.) This is accompanied by the big increase in decisions required to respond to the near-instantaneous feedback marketing digital initiatives deliver.

All of this will continue to be very challenging to the structure and workflow practices in large companies.

I think the clearest indication that marketing is reaching its proper 21st century position in publishing will be its increasing importance in driving title selection. As publishers become more audience-centric, it is the people who are communicating with the audience (the marketers, but also the editors, and the line between them will get fuzzier, not that it hasn’t sometimes previously been blurred) who will see what’s needed that isn’t in the market yet. In a way, that’s always happened. But in another year or three, it will be a formal expectation in some structures, and will have a defined workflow.

One obvious trend I’m not discussing here is “globalization”. In fact, one analyst sees exploiting global opportunities as one of the big wins of the Penguin Random House merger. With all the retailers publishers know well (Amazon, B&N, Kobo, Google) expanding into new countries every month, there will be no shortage of reminders that publishers should clear rights and price books in all territories for which they possibly can. But the problem starts further upstream than that, with the licensing practices of agents, who still often maximize advances-against-royalties by selling books market by market. There is a long gestation time on deals, so even if the dealmaking changes, it will take a while for that to be reflected in more ebooks on sale in more places. That’s why I am not expecting globalization to have a major commercial impact in 2013 and it is also why I see it as a more distant opportunity for the new PRH business than the ones I suggested in this piece.

The switchover from reading print to reading on screens, with the companion effect that increasingly the purchase of books is done online rather than in stores, is far advanced in the English-speaking world and especially so in the United States. In the past 12 months, the UK has begun to resemble the US market in this way.

With all due respect to everbody else, the primary driver of this change has been the efforts of Amazon.com. They made the online selling of print books work in the US and then provided the critical catalyst — the Kindle — to make ebooks happen. Other players — Barnes & Noble and Kobo with their devices and the publishers with their sales policies — have crafted their strategies primarily in response to Amazon. They are participants building out a market that Amazon first proved existed.

The impact of digital change in the US and UK markets has been both profound and severe. Bookstore shelf space has been lost at a rapid pace. (This has long struck me as the key metric to watch to predict industry change.) I have seen no estimates to quantify this, but with Borders gone and Barnes & Noble devoting much less space to books than it once did and the disappearance of many independents, it seems apparent that half of the bookstore shelves that were available in the US in 2007 are gone by now. The book trade in Britain is moving in a similar direction.

The publishers are well aware that their ecosystem has changed and that they have to change too. Many have changed their workflows so that ebooks and print books can be outputs from the same development process. They are all seeking new ways to interact directly with readers, which no general trade publisher would have considered doing ten years ago. They are learning about how to deliver their digital products with better metadata. They are learning to optimize that metadata for search. They’re trying to build vertical communities — or at least develop vertical audience reach — and developing new services and products to sell to the customers that they attract with their books. They’re recognizing that digital distribution newly empowers authors and responding by trying to make the experience of working with them more author-friendly.

And they’re recognizing that the world is getting smaller: that their outputs can reach readers outside their home market much more readily than ever before. That recognition is particularly useful to American and British publishers because English is the world’s leading second language, with potential customers for English language books in every country in the world.

Change has come much more slowly in non-English markets. There are many reasons for that. One is that the US and Britain have exceptional — if not unique — marketplace rules that encourage retailers to compete for book sales using pricing as a tool (or, if you prefer, as a weapon). Amazon used deep discounting to solidify its position in the late 1990s when it was building its print-selling hegemony and then again to create locked-in ebook customers for the Kindle when it launched in 2007.

The combination of price controls on books and VAT rates that have been uniformly higher for ebooks than they are for print have prevented Amazon from replicating these tactics in some other markets. There are cultural differences as well; American (and British) consumers seem more relaxed about online credit card purchases than are the citizens of many other countries in the world.

And because there was a market for ebooks in English before anyplace else, the investments have been made to assure a large reservoir of titles in English faster than for any other language.

But four major companies — Amazon, Apple, Kobo, and Google — (as well as a number of smaller ones) have been methodically building out a global infrastructure to deliver digital downloads (of books or anything else.) Barnes & Noble, which has been the most successful Amazon competitor (albeit only in the US so far), has just gotten a large investment from Microsoft to help finance a global expansion and has announced its first non-US online store will open in the UK shortly.

So the roads to deliver ebooks to the global consumer have been getting paved, even if there is very little traffic on most of them so far. It seems unlikely (at least to me) that there will ultimately be much variation in the ratio of digital to print reading by country or language. (One exception: I’d expect the poorest parts of the world to get to near-zero print faster than the developed world because, ultimately, distributing books electronically will be so much cheaper that printed books will become a relative luxury.)

The US and the UK transitions are in some ways instructive to the book businesses in other markets as they prepare for a similar period of change. But, cultural differences and local commercial rules aside, the next five or ten years outside the English world will only share some of the characteristics of what the English world has seen. Because times have changed.

There are some real differences in circumstances between how things stood when the transition began in earnest in the US and UK five years ago and what we’ll see in the rest of the world over the next five years.

** The companies that built the digital distribution infrastructure for English were “local”, English-speaking, companies. Amazon, Apple, Google, and Barnes & Noble are American; Kobo began as Canadian (which feels local enough to an American). Michael Tamblyn of Kobo has spoken very articulately about what it takes to open up business in a new market and building a team of locals is high on the list of requirements. I think we can expect local language players to be critical partners in most markets as ebooks roll out. That will be less true over time as proprietary device sales by the retailers decline in importance. Which I say because…

** The key for all the players in the first five years of the ebook revolution (which I’m dating from November 2007, when Amazon introduced the Kindle) has been a total offering: device and store. Many who were disappointed by the relatively minor impact of Google in the US, despite its attempt to build an alliance with independent bookstores, blamed the fact that Google had no device to compete with Amazon, Apple, Barnes & Noble, and Kobo. Of course, Google recently introduced a phone and the Nexus 7 tablet.

It seems likely that the proprietary ereader will have much less impact going forward. (The Nexus 7 isn’t an ereader; it’s a tablet. And Apple doesn’t sell an ereader; the iPad is also a tablet.) When Amazon entered the market, there was no widespread distribution of devices people could read an ebook on, so Amazon had to get them out there. This created an obvious challenge that came with a robust opportunity, which was device lock-in of the customer base for future content purchases.

This is no longer true. Tablet computers are ubiquitous and the question is already being posed whether eink readers dedicated to displaying straight text have any future.

So while device distribution was an important part of building the ebook markets in the US and UK, ebook sellers in non-English markets will be peddling into an environment already heavily seeded with devices.

This cuts both ways. On the one hand, there is an installed base of capable devices, which could speed up ebook uptake. On the other hand, those devices will play movies and songs and do email, so, unlike the original Kindle or Nook, they don’t represent a screen walled off from temptation that tempt you away from a book.

** The selection of ebooks in English is in the millions of titles. Many people around the world can read in English. As they develop ereading capability, they could be tempted by the wider selection of titles in English than they’ve ever seen in any language in local stores, particularly in places where digitization in the local language lags. This is, in the aggregate, a big opportunity for English-language content but, in most individual cases, only a minor sales erosion challenge for local language publishers. All things being equal, people prefer to read in their native language. But the ratio of title availability between English and most other languages makes things far from equal.

** Digital makes everybody global. We’ve observed that ends up engendering competition from English. But it also enables smaller language publishers to find their global diaspora much more effectively than they could in print. I’d expect marketing to pockets of same-language readers distributed around the world will be a worthwhile skill worth to develop to stimulate ebook sales. Digital brings the sale closer and makes the promotion cheaper. It really changes the equation.

** There is another way it will prove important that publishers in a digital world are no longer restricted to publishing for their local market. We learned from some Slovenes last year about small-language publishers who translated their original fiction into English to give them a chance to sell rights in all languages. Now they’re in a position to publish those English translations digitally at very little additional cost. This is an opportunity we are seeing non-English publishers recognize and at least one US entity, Open Road, has seen the opportunity from the other end. They’re courting those publishers for distribution and marketing in the US market.

In fact, the German publisher Lubbe is doing original ebooks in both English and Chinese.

One thing that will be different but similar in the rest of the world will be the decline of bookstores. Retail price maintenance and the fact that in many markets publishers own the bookstores will definitely slow the process down compared to what we’ve seen in the US and the UK, but if the sales move from stores to online (and ebooks will compel that, despite some elaborate schemes and fantasies to preserve a place for stores to sell digital), the stores can’t stay open.

At least the non-English markets will get the benefit of seeing how the English language copes with the challenges of discovery and marketing in a digital reading environment.

Maybe they can even solve the problem of making illustrated books succeed in a digital format, which the English world has not done yet. The Italian publisher RCS (owners of Rizzoli, among others) have done this for a handful of titles so far in a market that has hardly moved the digital needle overall but the successes have been too few in number to call the problem “solved” yet. Perhaps the English-language publishers will find something to learn from them.

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I keep wanting to make an observation that isn’t worth a whole post, so I’ll stick it here. The “Fifty Shades of Gray” phenomenon, which hit our collective consciousness in March, was foretold by our Romance study at Digital Book World last January. (A hat tip and thanks to AllRomanceebooks for having done that survey for us.) What at first glance appeared to be the romance community “voting” with their purchases for less DRM turned out, on closer examination, to be votes for more sex. I made the point in this piece that mainstream publishers might be letting fledglings steal the market for raunch. Those days are over.

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This piece raises a lot of issues we’ll be covering at our Publishers Launch Frankfurt conference on October 8. Many of the players mentioned here will be speaking there. Check out the entire program and I think you’ll agree that if you can get to Frankfurt on the Monday before the Book Fair, you’ll want to be there. We have shifted the time of the conference slightly, starting at 10:30 instead of 9, to make it easier to travel in that morning and make it.

Readers who have been following publishing’s digital transition for two years or more will recall the situation in 2010 when five of publishing’s Big Six switched over from selling their ebooks on wholesale terms, by which the retailer sets the price to the consumer, to agency terms, by which the publisher sets a price that prevails across all retailers. Random House stayed out.

That decision seemed to puzzle many observers despite the realities for the publishers. Making the change required actually reducing per-unit revenues to the publisher (and author) while at the same time making each unit more expensive to the consumer, so it was done by what was then called the “Agency Five” at some sacrifice (in their view) for the greater good (in their view) of the industry. Agency protected weaker ebook retailers — Barnes & Noble, Kobo, and Google as well as independents — from having to compete with the deep-pocketed Amazon’s loss-leader pricing strategies. The immediate payoff was the opportunity to sell through Apple’s fledgling iBookstore.

As we explained at the time, Random House’s choice was transparently in their short-term self-interest. It was understandable that their competitive cohort, who saw themselves making a sacrifice on behalf of the industry’s long-term future, were unhappy that the biggest player among them was staying out. But it was a bit hard for me to understand what was so hard for everybody else to understand about why Random House did what they did. (Random House switched over to selling on the agency model in March, 2011.)

Those times are recalled for me by the recent round of indignation and analysis over the jockeying among the retailing competitors over the titles published by Amazon. Everybody is just acting in their own best interest. There really isn’t much mysterious about anybody’s behavior.

We could say the most recent set of events was begun by Amazon’s escalating efforts to capture titles for ebook rendering exclusively on the Kindle platform. They were apparently doing this two ways: by signing up authors directly for their own imprints and by offering self-published authors financial incentives — such as paid participation in their lending library program — for making their ebook a Kindle exclusive.

For the books they signed directly, Amazon recognized that it might not be the most comfortable sales call in the world for any rep to pitch these books to B&N’s buyers. Representing the books of every bookseller’s biggest competitor would be a challenge but it was one that Houghton Mifflin Harcourt decided to attempt. Last year it was announced that HMH had taken the opportunity to license the Amazon-originated titles in paperback. Major publishers had often expressed the view that publishing in print without ebook rights was a non-starter for them. HMH hoped that their efforts wouldn’t be viewed in that light since it is not considered unusual (although I’m not sure how often it has happened) for ebook rights to remain with the hardcover publisher when paperback rights are licensed.

More heat was generated when the Kindle Fire debuted with some graphic novel content delivered exclusively to it. When Barnes & Noble pulled the paper versions of those books off their store shelves, they explained that their policy would be to refuse to stock the print version of something not offered to them for sale “in all formats”.

The message at the time seemed clear. If Amazon wanted to sign up books directly and sell them broadly, they couldn’t maintain a Kindle monopoly on those titles. Undoubtedly, it was becoming clearer and clearer to Amazon that getting broader distribution for printed books was an important element if they wanted to sign up important books. Let’s remember that Larry Kirshbaum had been brought on board in June to sign up big titles. He was the first person to work at Amazon who had the relationships and the experience to tell them what it would take to succeed in those efforts.

But things were dynamic at B&N as well. With Borders gone, they have become the only player at scale able to offer print book merchandising. There is an increasing awareness of how important print display still is to “making” a book. It is very likely that inside B&N there has been increasing appreciation of the power of their position.

There is complementarity here. Amazon had a dominant position with Kindle before the Nook arrived that has been eroding since then due to increased competition. They’re still more than half the ebook sales in the US, but they want to shore up their position. Using their strength to get Kindle exclusives is a sensible way to do that.

At the same time, the leverage Barnes & Noble has from its print store dominance is perhaps at its peak. In their case this isn’t because competition in their channel is likely to erode their share. It is a continuation of the consumer trend of shifting to online buying and ebook reading that will dilute the importance of brick-and-mortar even if B&N’s share remains very high. So they too want to use the leverage of that position to strengthen themselves while they can.

Both Amazon and B&N demonstrate the power of their position by looking for an increased share of the book sales revenue from publishers.

Anyhow, Amazon continued to work on this problem of getting the books they acquired directly from authors into broader store distribution. In January, they expanded the first-look licensing deal they had with HMH and announced the New Harvest imprint there to deliver paperback editions of their books to broader distribution. And, proving they’d been listening to what Barnes & Noble said earlier, they announced that New Harvest books would have ebooks made available in formats that would enable their sale in all ebook channels.

It took Barnes & Noble less than a week to respond. Ignoring Amazon’s willingness to make the new imprint books available as ebooks, they instead focused on the continuing programs Amazon had that kept other titles as Kindle exclusives. B&N announced that they wouldn’t carry any Amazon-originated titles in their stores, although they would make them available online and as ebooks. Of course, that “offer” gave Amazon precisely what they didn’t care about (BN.com online sales) or didn’t really want (Nook availability) and denied them what they were really after (bookstore shelf and display space).

Pretty quickly, both Daily Finance and Time Business found fault with Barnes & Noble’s move. It was seen as boneheaded for a retailer in the declining brick-and-mortar space to decline to stock some books that might sell. It was even suggested by some that this was an “opening” for Barnes & Noble’s terrestrial competitors to carry attractive Amazon titles, with the implication that this could help them steal customers from B&N.

But Barnes & Noble’s competitors actually saw things the same way that B&N did. The independent store and publisher, Melville House, was quickly supportive. A few days later, the Canadian chain Indigo (which occupies the same dominant position there that B&N does in the US) and the second-ranked US chain, Books-A-Million, announced that their policies would mirror B&N’s.

The day that B&N announced they wouldn’t carry the Amazon books, a reporter called me for comment. This reporter clearly expected me to castigate B&N for shortsightedness. I think he was surprised when I told him I thought the policy made complete strategic sense for them.

The bottom line here is that as Amazon’s power to sign up books away from the major publishers grows, the retailers who depend on publishers for a flow of commercial product suffer along with the publishers. B&N saw — and Indigo and Melville House and Books-a-Million saw — that Amazon wanted bookstore distribution to enable them to sign up more titles directly. Even though those titles would be made available to them, they see themselves as strengthening their enemy when they stock those books.

B&N’s decision seems to me like the right move for them. Most very regular bookstore customers aren’t really surprised if any particular store doesn’t have any particular book. Indeed, the impossibility of stocking everything anybody might ask for in a store is part of the reason that online bookselling is such a useful service. In this day and age, most people who want a particular book don’t go to a bookstore to buy it; they just order it online. They go to bookstores to browse and shop and choose from what is within the store. So, yes, there may be some disappointed customers if B&N doesn’t have a high-profile Amazon title, but I don’t think that disappointment will be widespread.

On the other hand, authors and agents who might have considered an Amazon publishing deal will have to think twice if they know very few bookstores will carry it. Amazon can do some remarkable things to sell books to their mammoth online customer base and that won’t change. But there is both a practical and a vanity aspect to getting store display that will still be seen as indispensible by many authors and agents who otherwise might have taken the leap to sign with the newest big checkbook in town.

Amazon still has the biggest forces, and time, on its side. eBook reading will continue to grow and Kindle will remain the most powerful platform as it does. More and more print buying will shift from stores to online and nobody has mounted meaningful competition to Amazon in the online print channel. The Amazon online experience for search and selection and delivery remains — in this consumer’s opinion — far and away the best. Their reach beyond books to so many other product lines gives them further advantages in many ways, including fueling their Amazon Prime program, which is an unmatched tool to encourage customer loyalty. The shelf space for books at B&N will almost certainly continue to decline and the leverage that comes along with it will do the same.

This tactical decision will not change the overall course of history. Neither did Random House’s decision to postpone moving to agency for a year after everybody else did. But, just like Random House’s decision, everything Amazon and Barnes & Noble (and the retailers that followed them) have done is actually perfectly sensible when viewed from the perspective of their own self-interest. There are a lot of smart people engaged in a pitched battle here. Outside observers would be well-advised to keep that in mind as they evaluate the moves they make.

The American Booksellers Association held their seventh annual “Winter Institute” in New Orleans this year, and it took place last week. When I had a meeting at Frankfurt in October with the ABA’s Chief Executive Officer, Oren Teicher, to recruit him to speak at Digital Book World 2012 (which he will do this coming week), he urged me to attend so I could get a taste of the optimism and innovative spirit of the independent booksellers who gather to share best practices and learn more, largely from each other, about how to run successful stores.

(Actually, Skip Prichard of Ingram captured this “learning from each other” zeitgeist beautifully in his opening remarks when he stopped talking and told the attendees, seated at round tables in the ballroom in front of him, to tell each other the most important new thing they had done in the past year. The room buzzed with activity for a few minutes and then Skip resumed his talk, confident that everybody in his audience had learned something during his time on the stage. It was an artful moment.)

I attended about half of the 3-day show and it is easy to see why a number of publishers are so enthusiastic about it. The publishers and other hangers-on (press and observers like me) are hardly noticeable in a sea of booksellers. And, indeed, this year (at least), they were a very optimistic bunch. The anecdotal impression was of many stores who had great years. Some attributed this to the demise of Borders but others thought there had to be another explanation because the closest Borders to them was too far away to be responsible.

There is data and anecdata that suggest that we’ll look back on 2011 as a year when the hockey-stick-like ebook growth slowed. (“Plateaued” would be too strong a word.) We may learn that even the Christmas devices-as-gifts effect on ebook sales wasn’t as strong this year as in years past because many of the “new” devices are actually “replacements”, which won’t spark the same sort of pipeline-filling buying spree that is apparently set off when people get their first ereader. Combined with Borders closing and the closing of other indies, this could have brought national store inventory more in line with more-slowly-reducing print book purchases in stores by consumers.

Anyhow, the vibe at WI7 was great. And so was the program. What I enjoyed most was bestselling author and fledgling Nashville bookseller Ann Patchett, who claims she not only doesn’t read ebooks or write a blog; she claims never to have even read a blog! (I was wondering if she does email.) But she talked about her experiences encouraging booksellers to handsell her work and the joy she gets from handselling the books she loves. Her talk was inspirational and witty and charming. Even though the only “practical” suggestion (not a bad one) was that stores find a local author to be part of their ownership-management (they do attract press coverage, as Ann pointed out), it was a highlight for most of the people there.

But there were two other sessions, which opened my eyes in one case and turned my thinking around in another, that delivered the most compelling additional insights for me.

Matt Sutko of ABA moderated a session of booksellers talking about their experiences selling ebooks. He delivered data before the panel discussion (ABA has visibility into the activity on many member web sites and can present an aggregate picture) and one particular element really caught my attention. This is the one that opened my eyes.

What I found startling were two things in juxtaposition. Matt reported that the percentage of ebook sales to total sales on ABA member web sites rose from 0.7% to 5.2% in 2011. That’s a 750% increase, which is impressive even though the Google eBook capability kicked in during that year. But it is also actually understated, because the total volume of business on these sites rose by 82%. So the share increase of 750% is in an environment where total sales nearly doubled.

(I only wish that Matt had given us a breakdown of the same data by half-year, so we could see the growth within Google’s first year. I think ABA would benefit going forward by tracking and reporting those stats by quarter.)

There is good reason to believe that kind of dramatic share growth can continue into the future. Many stores just got started with their ebook program (Chris Morrow of Northshire, one of the most successful and innovative indies in the country, told me he only started selling ebooks in December! He’s not alone.) And store after store reported steady efforts educating their staff, educating their customers, making things clearer on their web site, and learning how to be good merchants online as they are in their shops. (They also pointed to improvements in the infrastructure being made by Google at their request.) All of these things take time. But they also improve the customer experience and increase sales.

Many people acknowledge that Barnes & Noble performed a bit of a miracle with the Nook, moving to a strong second-place position in ebook sales in a year. But B&N is a chain; their booksellers are paid staff and their learning is all aggregated and reflected on one centrally-controlled web site. The ABA membership, somewhat fewer stores and less shelf space to begin with and without a highly-visible device to anchor their efforts, moves more slowly and with less cohesion into the digital age. But they’re moving and they’re making progress. And they have loyal customers who want to shop with them if they can.

So I personally will postpone writing off Google ebooks or the possibility that indies can be important ebook vendors until we see at least one more year of data.

The thing I got turned around on was World Book Night.

World Book Night, which will take place on Monday, April 23, is an “event” in which it is envisaged that about 20,000 people in the US will each give away 50 books to total strangers, for a total of 1 million books passed from human to human in one book-awareness-raising night. It was first done in the UK and was deemed a success: the books chosen for giveaways spiked in sales and the participating stores and publishers all seemed to think it gave the business a shot in the arm.

I first heard about this from a presentation by Madeline McIntosh of Random House at the BISG annual meeting last September. Certainly no fault of Madeline’s, but I just didn’t “get it” the first time. Twenty thousand people to give away books? Where are they going to find them? How much distracting effort is this going to take? The “harumph” in my brain overwhelmed my imagination, I guess.

But as Carl Lennertz, who quit his job with HarperCollins to head up the World Book Night effort, explained what had taken place and what would, imagination picked up the idea. (Maybe the “harumph” piece was rendered inactive by the overall vibe of WI7.) He described an effort that has already gotten contributions of paper and printing for the giveaway books, aggregating and reshipping (by Ingram) to the contact points, as well as permissions from publishers and authors to include the books and waive royalties. B&N is in. Libraries are in. Everybody is in!

But it was actually Oren Teicher’s appeal to the stores to get involved that brought back lessons of my youth to see the real virtue in World Book Night.

My first post-college “real” job was putting together the McGovern campaign in upstate New York in 1971 and 1972. We saw various hurdles we needed to jump — winning over delegates to the annual state convention of reform Democrats, holding a delegate nominating caucus in each congressional district, getting petitions signed to put the delegate candidates on the ballot, and then components of the primary campaign itself — as a series of discrete “organizing opportunities”. When you have a “cause” and you need help with a specific and comprehensible task, it brings out volunteers who will ask you to tell them what to do.

And that’s what World Book Night presents local stores: an enormous “organizing opportunity”. They get to galvanize their customers around their mutual love of books, enlisting them to participate in spreading the joy of reading. That strengthens the bonds to particular people and to the community at large. They get to take these efforts to the local media and give them a local spin and generate more conversation around these books and books in general. And that is something, as Oren pointed out, that 500 independent bookstores can do better than 500 Barnes & Nobles!

The collective effort of many individuals can have a galvanizing national impact, as we saw two years ago with the Tea Party and over the past few months with the Occupy movements. I’m not promising to stand on the corner of 2nd Avenue and 51st Street and hand out books next April 23, but I’m sure way past believing it is a waste of time to find 20,000 people who will do the equivalent in their neighborhood.

[Subsequent to posting this, I got a note from Jamie Byng of Canongate in the UK, whose idea this whole effort was. It's clear in that note that WBN is looking for 50,000 US volunteers to give books away, not 20,000 as I mistakenly reported here. I believe the target of 1 million total books as reported here is still correct.]

In addition to Oren Teicher speaking from the main stage at Digital Book World this week about indie booskeller data from last Christmas, the growth of the ebook program, and the business model experiments being conducted by various indies with different publishers, we’ll have a panel of indies discussing new business model approaches in a breakout session moderated by John Mutter of Shelf-Awareness. I hope to see lots of you at Digital Book World or at our kickoff Publishers Launch Conference on childrens books on Monday, also at the Sheraton. If you’re a reader of The Shatzkin Files and you see me, please say hello.

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.

One could say (and I would) that the ereading revolution is coming up to its 4th anniversary since it was late November 2007 when Amazon first released the Kindle. There had been dedicated ereading devices before then, including the Sony Reader — in the market when Kindle arrived and still here, if not wildly successful — and the already-defunct Rocket Book and Softbook devices that had debuted and disappeared some years before. And in the early 1990s we had the Sony Bookman, which showed only a few lines of text at one time and disappeared with barely a trace. The biggest-selling ebook format, before Kindle, put content on the Palm Pilot and the total ebook market was so far beneath a rounding error that any investment by a publisher in digitization was being made on faith, not on commercial evidence.

And many people in publishing believed that reading on a screen would take many years to take hold, if it ever would.

Now, less than four years later, we are living in a changed world, although not yet a transformed one. But transformed might be coming very soon.

As ebook sales in the US now appear to have reached the 20% of revenue threshhold at some publishers already (so it is there or will be for everybody very soon), there are some things we can say we know about the shape of the future, but some very important other things that we don’t know yet.

We know that most people will adjust pretty readily to reading straight text narrative books on a screen rather than paper.

We know that parents will hand their iPad, iPhone, or Nook Color device to a kid so that they can enjoy children’s books on the device.

We don’t know whether adult illustrated book content will be equally well accepted by book consumers on devices, even though there are more and more devices capable of displaying pretty much what publishers deliver on a printed page.

We don’t know what parents will pay for a brief illustrated children’s book delivered for a device, but it appears it might be much less than they’re willing to pay for paper.

We know that consumers will pay paperback prices and more for plain vanilla ebooks, or “verbatim” ebooks.

We don’t know whether consumers will accept paying higher prices for video, audio, or software enhancements to the verbatim ebooks.

In fact, we don’t know if consumers would pay paperback prices for ebooks if the paperback were not ubiquitously on sale as a benchmark for pricing.

We know that ebook uptake, as measured in sales or their percentage of publishers’ revenues, has doubled or more than doubled every year since 2007.

We know that rate of growth is mathematically prevented from continuing for even three more years (because it would put ebooks at 160% of publishers’ revenues if it did!)

We know from announcements about new devices and a recent Harris poll predicting increased device purchasing that there are no expectations for a slowdown in ebook adoption anytime soon.

We don’t know if we’re going to find a barrier of resistance, or perhaps we should call it the barrier of “paper-insistence”, at some sales level over the next two years (at the end of which ebooks would be 80% of publishers’ revenues at the growth rates we’ve seen over the past four years).

We know there’s a big and developing market for English language ebooks globally, as the ebook infrastructure builds out in markets around the world.

We don’t know how quickly those markets will develop or how big they can ultimately become.

We know that the number of bookstores suffered a sharp reduction in 2011 because of the Borders bankruptcy.

We don’t know if the remaining brick retail network, the bookstores led by B&N and including the independents as well as the shelf space devoted to books by the mass merchants, will get a second wind from the disappearance of the Borders competition, buying publishers some temporary stability in their store network, or if the erosion of shelf space will continue (or even accelerate).

We don’t know what the loss of brick store merchandising will mean to the ability of publishers and authors to introduce new talent to readers, or even just to introduce a new work by established talent.

We don’t know if improved book discovery and merchandising is amenable to the application of “scale” by publishers outside of vertical niches, be they topics or genres.

We know that agents and authors will accept an ebook royalty of 25% of net receipts in today’s environment, where 70% or more of the sales are still made in print.

We don’t know if the threat of the alternative publishing options will force that royalty rate up if sales fall below 50% print or 30% print.

We don’t know if sales falling below 50% print or 30% print is several years away or much less.

We know that the Epub 3 standard and HTML5 enable app-like features to be delivered as ebooks.

We don’t know if those features will make any commercial difference for the straight text content which is the only commercially-proven ebook type.

We know that content-creating brands that are not book publishers are using the relative ease of publication of ebooks to deliver their own content to the ebook marketplace.

We don’t know if book publishers will develop an ebook publishing expertise that will make them able to persuade those brands in time to go through them, the way they have in the print book world, rather than disintermediating them.

Since I have been expressing my concerns about the impact of the ebook revolution on general trade publishing, which I have been doing with dramatic intent since six months before the Kindle at the BEA in 2007, I have been saying the general trade houses have to get audience-centric (which means choosing content to fit vertical niches).

Today I will add another urgent suggestion to general trade publishers: reconsider your commitments to publish illustrated books in any time frame more extended than a year or two and think about sticking to straight text, unless you have paths to the customers for those books that do not go through bookstores. If we do end up in an 80% ebook world anytime soon, and we very well might, you’ll want to own the content you know works (for the consumer) in that format, not what you don’t know works any way other than in print.

For children’s books, the key is brand. There will be demand for Eloise and Madeline and Alice in Wonderland for years to come, but the product and pricing equations could be totally up for grabs.

A big ebook shoe dropped on Sunday. It dropped on Kobo first. And it has nothing to do with Borders.

Kobo just delivered a new iOS (that’s Apple’s operating system for iPad and iPhone) app that no longer contains the direct link to the Kobo bookstore within it. That means that buying new Kobo books requires going to Kobo.com through the browser (not hard, but additional steps) rather than from a single click from within the app.

Later news on this developing story is that the Google app has been “pulled” and that the Nook Children’s app no longer has a link to the store. We have to expect that the Kindle and main Nook apps will undergo the same change very shortly. That will mean that the simplest and most seamless way to buy and read ebooks on the iPad or iPhone will be through Apple’s iBookstore. It will almost certainly mean a growth in iBookstore market share at the expense of all the other ebook retailers. It will also almost certainly mean that a lot of people who read their ebooks on an iOS device (I’m one of them) and prefer to use any of the other ebook retailers (and I’m one of those too) will be inconvenienced and annoyed.

However, it is also true that Apple will benefit from this move that many of their customers will resent.

The point most emphatically made by all of this is that the book business is a cork floating on a digital device stream. We don’t control our environment. We must keep adapting to what bigger players, some of which have pretty minimal bandwidth to engage us in a dialogue and pretty minimal interest in what’s best from our point of view, see as the best strategy for them.

I have been guilty of a publishing-centric view of the possibility that Apple would enforce the rule that leads to this change since it was first prominently rumored last February. That is: with wishful thinking, when I first heard about this possibility six months ago I thought they wouldn’t do it. I talked myself into believing that because Apple had benefited substantially from the presence of the book apps on their platform, and because there are millions of us who read ebooks on our Apple devices with a distinct preference for using other readers and other ebook stores, that Apple would not enforce the rules which, through a couple of iterations of clarification, say that the way these apps and stores operated was outside their rules.

I will try to remind myself not to be making that mistake again. One of the other big companies recently congratulated me on the ease with which I accept the idea that companies (and people) act in their own self-interest. That’s what Apple has done here.

What this means depends very much on where you sit.

Barnes & Noble (Nook), Google, and Kobo all benefited enormously from Apple’s arrival on the scene in April 2010 because they brought with them the “agency” sales model that leveled pricing across all outlets for the ebooks that come from the biggest publishers. Without agency, many believe (and I’m one of them) that Amazon Kindle’s aggressive loss-leader pricing policies on the biggest books would seriously have diminished the competition.

B&N needs every penny it can spare to invest in device development and marketing; they’d be seriously handicapped if they had to give away margin to compete for consumers.

Google has signed up about 300 independent stores in the US to be partners in its ebook program. They might not have 10% that many if the indies thought they had to compete with loss-leader pricing on the biggest books even to play. When Random House switched over to agency at the beginning of March this past year — 11 months after it began — one of the motivations they cited was to respond to the desire of independent stores to sell ebooks which they heard over and over again depended on agency pricing.

Kobo has always had a global strategy that could enable them to thrive even if they had also-ran status in the US market. But they were trying hard to compete with Amazon pricing in the pre-agency days and as the smallest of the big global ebook players, they would have to be considered the most vulnerable in an environment characterized by loss-leader price warfare.

This change must mean they’ll all lose sales. It is hard to see that it could mean anything else.

Amazon will lose sales too, but they may win overall just because life gets a bit harder for B&N, Kobo, and Google.

All of these retailers have gotten an enormous (but unquantified in data revealed to them) lift from the massive success of iPads and iPhones and the retailers’ ability to access all those devices pretty seamlessly and at no cost. Amazon and Barnes & Noble sold many Kindles and Nooks, of course (Kobo’s device has been a competitor and Google is about to have one), and they’d be selling lots of ebooks if there were no iOS devices. Publishers know that, of the 55-65 percent of their ebooks sales that go to Amazon and 20-30 percent of their ebooks to Barnes & Noble, some of those sales go to the dedicated devices and most of the rest to the iOS devices. But they have no idea what the split is. Now they will start to find out as they see those sales shift from the other retailers to the iBookstore. (Sales to iBookstore, Kobo, Google, and others constitute no more than 15-20 percent of sales and often far less.)

Anyhow, the unambiguous benefit that Apple and the iOS devices used to represent to the retailers is now reduced in value, but agency pricing remains (cheering everybody but Amazon), as does the ability of their customers to use iPads and iPhones to consume their content.

Some publishers will need to reconsider their strategies.

Because Amazon will only allow agency terms to the Big Six publishers (they have ways to offer a competitive 70% share of sales, but they won’t play ball with giving up control of pricing), because some publishers aren’t comfortable with the agency model, and because the iBookstore has not been as aggressive about sourcing content as their competitors (I don’t know this for sure, but it definitely feels like all of the other ebook players have much bigger teams chasing content than iBookstore does), there are publishers selling to the other players and not to Apple. I’d imagine those might be expecting a sudden drop in sales through iOS purchases, although they never actually knew how much of their sales were iOS purchases.

And this points out a big difference between the publishers and the retailers. The retailers know how much of their sales are coming through their app customers. They also know how much of the reading of their ebooks is done on iOS devices. Publishers have no idea. In the longer run, this shows how publishers can benefit if the new players they are creating — Anobii in the UK (who has told us they will share data with publishers) and Bookish in the US (which we have heard less directly will do the same) — get some market share and can provide visibility into consumption that publishers do not have now.

And that takes me back to the book business cork bobbing in the larger digital device stream. There was no ebook business to speak of until Amazon delivered the Kindle device, put massive muscle behind selling it, and used the ability they had then to sacrifice margin to create a powerful commercial proposition that was the catalyst to create the market. There was no serious competition for Amazon until Barnes & Noble’s new management delivered the Nook with an equally powerful commitment to establishing it, using their presence in stores to introduce ebook reading to new audiences and, with further innovation of the devices, contributing to the explosive growth of reading in digital formats.

There was no restraint on Amazon’s ability to use their deep pockets to discount publishers’ content in pursuit of their own market share growth until Apple’s new device, the iPad, created a whole new sales model that forced price stability in the marketplace and, at the same time, handed publishers a new capability to maximize revenue and to use price as a marketing tool.

There was no effective way to introduce book readers to the convenience of digital reading without the investment in a dedicated device until the iPad put the capability into millions of hands that didn’t know they wanted it.

There was no great motivation for ebook retailers to introduce interoperability across devices until many ebook device owners also became iPhone and iPad owners.

We note that all these changes in the marketplace were created by others, not by publishers. That’s not necessarily a bad thing, or even a new thing. Publishers also didn’t spring for the investment that created superstores and then Amazon in the 1990s, all of which increased their sales. A publisher’s role is to use the channels that are available to get books into the hands of readers.

From most publishers’ perspectives, this change might have very little impact. Any iPad or iPhone reader who wants a book can still find and buy one. If the Apple store is strengthened at the expense of Kindle and Nook, that constitutes marketplace diversification that is good for them. (If the impact somehow fell disproportionately on Nook, though, that might not be.)

But the happy symbiosis between the ebook retailers and Apple, by which the retailers got access to customers they would not otherwise have had and Apple was able to readily deliver their customers content they hadn’t otherwise aggregated, appears to have come to an end. And the iBookstore, which had been fighting others for the scraps after Amazon took half or more of the US ebook market and B&N took much more than half the rest, is about to be a much more significant competitor.

The end of Borders took place within a larger context.

I was in Italy for the IfBookThen conference last February when Borders’ impending bankruptcy was a rising expectation. Somebody in the audience asked me if I attributed Borders’ difficulties to ebooks. I said:

“When the flu hits town, the old and sick die first.”

Ebooks present an enormous challenge to brick-and-mortar stores. And the growth of ebooks over the past three years or so has been nothing short of astonishing, even to somebody like me who expected a more gradual rise to have started much sooner. (The IDPF chart which shows the growth in the market, sharing data actually collected by the AAP, has apparently not been updated for the past two quarters, but this gives you the idea.)

But the disruption to brick stores started before ebook sales were even visible with a microscope, more than a decade sooner, when bookstore customers started migrating to online buying. Ebooks just accelerated what had been a trend of traffic and sales erosion that had existed for quite some time.

Ed Nawotka of Publishing Perspectives has a nice account of some serious errors Borders made around the turn of the century. Replacing a book-experienced management with merchants from outside the book trade was the gateway mistake. Eliminating the local marketing function was one that probably came from it: the local differentiation and customization required for a successful bookstore is much greater than what is needed for pets or groceries and successive managements from outside the book trade wouldn’t have known or understood that.

Turning over ecommerce to Amazon showed a shocking lack of digital vision. It is often forgotten that Barnes & Noble once made half the same mistake: they originally owned their BN.com ecommerce capability jointly with Bertelsmann until they bought their partner out. And Barnes & Noble had obvious challenges reconciling their online business with their overall business until they brought in new management that clearly saw the online business as the future. That wasn’t until much later in the century’s first decade. The problem both chains probably saw is that the skill sets required to run a successful brick store chain didn’t apply to creating a digital business so they were nervous about investing too heavily in it. When the time came that it was obvious that they had to do so, Borders was too weak to recover and Barnes & Noble, despite a web operation that had serious flaws, at least had a platform and customer base to build on.

And they had strong cash flow from a healthy, well-managed in-store print book business.

The category management idea Borders tried to implement and which Nawotka documents was a fiasco in every way: poorly conceived, poorly executed, and an idea that, if it could work for the book business at all, would have to be selectively applied, not forced on every section of the store.

The reduced selection concept that was underlying category management suggests that perhaps Borders had an early and accurate read on the fact that the Internet had diminished the power of selection in a brick store as a magnet for customers. It is true, and it was true then, that the power of aggregation had shifted from offline to online. It is just impossible for any physical location to deliver the choice that an online bookstore can. Most people now know that if you want to choose from the widest possible selection of just about anything the the last thing to do is go to a store. And that’s particularly true of books, which you don’t have to smell or taste or try on for size.

In my opinion, the defect in Borders that led to their ultimate demise was “none of the above.” It was their supply chain, which for well over a decade has been an inefficient mess.

The irony is that when Borders started, inventory management was their signature strength. The Borders brothers developed a tracking-and-purchasing system which was state of the art at the time (the 1980s) and turned it into an expansion opportunity. It all worked so well that they were able to sell the chain to K-Mart, which already owned the mall store chain, Waldenbooks, in 1992. That was probably the beginning of their downfall.

Borders and Barnes & Noble were on parallel paths building out superstore chains, featuring bookstores that pulled over 100,000 titles together under one roof. Until Amazon arrived in 1995 and started gaining traction, this was a nearly-irresistible proposition to the heaviest book consumers. Both chains, fueled by Wall Street investment, grew their number of large stores quickly. The stores were free-standing destinations, not in large shopping malls.

But this is where the chains diverged. Barnes & Noble made a substantial investment in a supply chain infrastructure. They built what was effectively an internal wholesaling operation, putting backup supplies of the books their stores carried within one day’s delivery of most of their chain and within two day’s delivery of just about all of it. They built systems to set stocking levels and maintain them. My first client work at B&N was in the late 1990s when they were crawling with logistics experts to make inventory management rules and policies, but they were also smart enough to want some book inventory expertise from outside their company (not that they didn’t have plenty of it on their own payroll) to help with the planning as well.

Meanwhile, Borders was working on gimmicks like category management and their supply chain became increasingly bureaucratic and convoluted. They pushed books through a warehouse, but only to put stickers on them. This compounded the irony. In the 1970s, the B. Dalton chain that B&N owned had virtually invented computer-assisted inventory management based on stickers they put on the books carrying an SKU number. Walden, in the days before they were owned jointly with Borders, had leap-frogged Dalton in that regard by scanning the ISBN instead of needing a sticker. Now, 15 or 20 years later, B&N regained that same advantage over Borders. Borders suffered the delay and the cost of stickering new books as they came in and B&N didn’t have to.

But, much worse, Borders backlist ordering was haphazard (almost totally human-controlled, whereas B&N’s was largely automated) and infrequent. B&N literally ordered from many publishers every day; Borders was ordering from major publishers as infrequently as every six weeks.

When you order infrequently, you face two choices. You can be overstocked on many things or out of stock of many things. There is no other alternative.

The complications to inventory management posed by the granularity and diversity of book selection utterly defeated the non-book veterans that serially ran, or mis-ran, the company. The lack of a digital strategy compounded the problem, but the supply chain lunacy was the problem. The cost of inventory is the greatest variable expense of running a bookstore. If you don’t get value for your inventory dollars, your leases and your staff couldn’t save you, even if they were good.

What this means for publishers’ sales is a bit difficult to predict and will even be harder to discern. Sales this year have been skewed by the Borders inventory dump. Publishers’ editions elsewhere and the stores their books are in have been competing with liquidation sales. This depressing effect on other retailers’ business and, as a result, their willingness and ability to order from the publishers, will be coming to an end.

Publishers Lunch got together with Bowker a couple of months ago to ask questions of Borders customers to try to discern where the business would go. They have hard data to the extent that it is possible to develop it, having asked people how their purchases would be affected and where they would buy when their Borders was gone. Only 8% said they’d buy fewer books, although nearly 20% said they’d use the library more.

My own totally hunchy math, checked out in a rigorous conversation at dinner with a good friend who is a publisher, is that Borders constituted about 10% of a publisher’s business until very recently. My guess is that half that business goes to Barnes & Noble, most of the rest is split between online purchasing and independents (with online getting more, much of it in ebooks), and maybe 1% or so, or 10% of the old Borders business, will be “lost.”

Of course, the movement of sales from print in brick-and-mortar to print and ebook online will continue, so how much lift from this will actually be felt by chains, independents, and mass merchants is still up for grabs.