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In an indie-dominant world, what happens to the high-cost non-fiction?


I first learned and wrote about Hugh Howey about four years ago. At the time, he was one of the first real breakthrough successes as an indie author, making tens of thousands of dollars a month exclusively through Amazon for his self-published futurist novel, “Wool”. As soon as I could track him down, I invited Hugh and his agent, Kristin Nelson, to speak at the next Digital Book World, which they did several months later, in January 2013.

In the years since, Hugh has had a very public profile as a champion of indie publishing and as a critic of big publishers. When I first encountered Howey, he and his agent had already turned down more than one six-figure publishing deal. Nelson ultimately did a print-only deal for “Wool” with Simon & Schuster, a deal consummated before the big publishers made the apparently-universal decision that they would not sign books for which they didn’t get electronic rights.

This week there was a lengthy interview with Howey done by DBW editor Daniel Berkowitz published on the DBW blog. In this piece, Howey reviews many of his complaints against publishers. According to him, their royalty rates are too low and they pay too infrequently and on too much of a delay. Their authors are excluded from Kindle’s subscription revenue at Kindle Unlimited. Their ebook prices to consumers are too high. And, on top of that, they pay too much rent to be in New York City and they pay their big advances to wealthy authors who don’t really need the money, while aspiring authors get token advance payments that aren’t enough to give them time off to write.

Howey’s observations are not particularly welcomed by publishers, but he has a deep interest in indie authors and, by his lights, is always trying to help them by encouraging them to indie-publish through Amazon rather than seeking a traditional deal through an agent. He has organized the AuthorEarnings website and data repository along with Data Guy, the games-business data analyst who has turned his analytical skills to the book business whom we featured at the most recent Digital Book World this past March.

Howey and I have had numerous private conversations over the years. He’s intelligent and sincere in his beliefs and truly devotes his energy to “industry education” motivated by his desire to help other authors. Yet there are holes in his analysis of the industry and where it is going that he doesn’t fill. Given his substantial following and obvious comfort level doing the marketing (such as it is, and it appears Howey’s success as an author hasn’t required much) for his own books as well as his commercial performance, it is easy to understand why he would never consider publishing any other way but as he has, as an indie author who is “all in” with Amazon. But he seems to think what worked well for him would work best for anybody.

In this interview, Howey says that any author would be better off self-publishing his or her first book than going the route of selling it to a publisher. And he actually dismisses the marketing effort required to do that. Howey says the best marketing is publishing your next book. He thinks the best strategy is for authors to write several books a year to gain success. In fact, he says taking time away from writing to do marketing is a bad choice. Expecting most writers, or even many writers, to do several books a year strikes me as a highly dubious proposition.

It is impossible to quarrel with the fact of Howey’s success. But he makes a big mistake assuming that what worked effectively for him makes self-publishing the right path for anybody else, let alone everybody else.

Howey also has an unrealistically limited view of the output of big publishing. If you read this interview (and I would encourage anybody interested in the book business to do so), you see that he thinks almost exclusively about fiction or, as he puts it, “storytelling”. Books come, like his did, out of an author’s imagination and all the author needs is the time to write. Exposure through Amazon does the rest.

He gives publishers credit for putting books into stores (although he would have them eliminate returns, which would cut down sharply on how effectively they accomplished that). But he thinks stores will be of diminishing importance. (We certainly agree on that.) He gives credit for the indie bookstore resurgence to Amazon, which would be true if you credit Amazon with the demise of Borders that wiped out over 400 big bookstores and created new opportunities for indies. But the idea that Amazon is allied with indie bookstores is contradicted by two realities. One is that the indie stores won’t stock Amazon-published books. The other is that Amazon, now in the process of opening its second retail store, may plan dozens, hundreds, or thousands more to come! We really don’t know. Certainly, very few indie bookstores would be applauding that.

Here’s how Howey sums up his advice to authors.

“Too few successful self-pubbed authors talk about the incredible hours and hard work they put in, so it all seems so easy and attainable. The truth is, you’ve got to outwork most other authors out there. You’ve got to think about writing a few novels a year for several years before you even know if you’ve got what it takes. Most authors give up before they give themselves a chance. It’s similar to how publishers give up on authors before they truly have a chance.”

This seems like sound advice, but it isn’t how it appeared to work for Howey. He published a novella which was the start of Wool and his Amazon audience asked for more. Three more novellas later, over a period of just a few months, and the four combined became his bestselling novel. Six months after he started, he was making $50,000 a month or more and had an agent selling his film rights. Then his agent started selling his book rights in non-US territories and in other languages. Meanwhile, Howey continued to earn 70 percent of the revenues from his ebooks, in a deal Amazon offered that matched what they paid to agency publishers, the biggest publishers. (Would Amazon be paying authors 70 percent if publishers hadn’t come up with that number for agency? Should big publishers get some of the credit for the very good deal indie authors are getting?)

The logic that Howey offers about how self-publishing stacks up against doing deals with a big house is very persuasive, but there are two pieces of reality that contradict it.

One is that, at this time, four years after Howey did “Wool” and eight years after the launch of Kindle, there are no noteworthy authors who have abandoned their publishing deals for self-publishing. (It appeared briefly that Barry Eisler was the first such author, except that it turned out he signed an Amazon Publishing deal after turning down a Big Six contract; he didn’t go indie. And, frankly, while he’s somewhat successful, he’s not a show-stopper author for any publisher.) In fact, Amazon’s own publishing strategy has apparently switched away from trying to persuade big commercial fiction authors to do that and is focused on the genre fiction that is the core of the self-publishing done through them. Howey has been offering the same analysis for quite a few years now but so far, the publishers have lost hardly anybody they care to keep to self-publishing. And we’re now in a period where the split of books sold online (ebooks and print) to books sold in stores (where publishers are beyond helpful; they’re necessary) appears to have stabilized — at least for the time being — after years of stores losing share.

The other is that Howey’s analysis totally leaves out one of the biggest categories of publishing: big non-fiction like history or biographies or industry analyses that take years of research and dedication to complete. Unlike a lot of fiction, those books not only take time, they require serious help and expense to research. In a imagined future world where all books are self-published, aspiring fiction writers give up very little (small advances) and successful fiction authors have the money to eat while they write the next book they can make even more money on doing it the Howey way (even though none have). But big non-fiction books like Jane Mayer’s “Dark Money” (or anything by David McCullough) took years of research to put together. “Dark Money” was undoubtedly financed at a very high level by the Doubleday imprint at Penguin Random House. How books like that will be funded in the future is not covered by Howey’s analysis.

Now, that’s not to say they must be. Economic realities do rule. Howey’s thesis that things are shifting in Amazon’s direction and away from the ecosystem that has sustained big book publishers is correct. He predicts that there will be three big publishers where once there were six and now there are five. I concur with that. As that happens, maybe the big fiction writers will take Howey’s advice.

But that solution is no solution for authors like Jane Mayer or David McCullough. A world without publishers where authors do the writing and the publishing might give us an output of fiction comparable to what we have now. But the biggest and best non-fiction would need another model if publishers weren’t able to take six-figure investment risks to support them. Amazon’s not offering it and neither is Howey. If the future unfolds as Howey imagines it, we’ll never know what books we’re missing.

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If Amazon pricing of ebooks is the problem, is agency actually the right solution?


In the past week, I’ve had conversations with leading executives at two of Amazon’s competitors in the ebook space. They had strikingly different takes on whether the agency pricing regime, which is now in place by contract with all five of the biggest trade publishers, helps keep competitive balance in the ebook marketplace or prevents it.

Agency pricing was promulgated by Apple for the opening of the iBookstore in 2010. What it meant was that publishers would set a price that was “enforced” across the retail network. Apple liked this because it meant both that they didn’t have to price-compete with Amazon and because they didn’t have to think about pricing hundreds of thousands of items on a daily basis. (And it fit the model Apple used to sell other media.) Publishers liked it because they feared the erosion of print sales that cheap ebooks might lead to and because it seemed that level prices might reduce what was then Amazon’s stranglehold on the ebook market.

As we know, the Department of Justice interceded because they saw the Apple-publisher agreements as collusive. The DoJ cares most about price; discounting is a good thing unless it is “predatory”. If companies get together to prevent low prices, that’s clearly bad. So the short-term remedy was to enable retailers to discount off agency prices. That pretty immediately stopped the decline in Amazon’s ebook market share, which started to grow again once discounting was reinstated.

Now the big publishers have replaced the original agency agreements with new ones that appear satisfactory to the court because they were obviously separately negotiated. And the new ones seem to allow at least some of them more flexibility to set and enforce higher prices than the numbers in the original Apple-promulgated deals. And all of that has led to a reconfigured marketplace.

The good news for the publishers is that print sales erosion — at least for the moment — seems to have been stopped. (Print sales started to grow even before “new Agency”; when higher prices hit the ebook market, print was immediately assisted.) A variety of industry and company sales statistics seem persuasive on that point. The percentage of revenues coming from ebooks for big publishers has declined and the sales of print have risen. And there is even some anecdotal evidence suggesting that bookstore retail shelf space is increasing again. Even if that is true, it is an open question whether it is sustainable, or whether it is a delayed and temporary marketplace response to the shuttering of 400 giant Borders stores, which occurred in 2011. Bookstores might also be helped by the diminishing book shelf space at mass merchants, a venue where print continues to lose ground.

But there is also some good news for Amazon in how all this has worked out. Their market share on the ebook side is rising. Their margins on the ebook side must have gone up even more, since they’re being “forced” to keep the margin they earn on Big Five ebook sales. (Wouldn’t it be ironic if Amazon’s internal calculations are that they can afford more losses on their Kindle Unlimited subscription program because of the margin they’re earning on the Big Five single-title sales? We can only guess…) And certainly Amazon benefits from the increased sales of print.

In fact, they could be partly responsible for it. All the searches on Amazon for Big Five books show an agency-priced ebook with a highly-discounted print book, often cheaper than the ebook, alongside of it. How much of the print book sales increase is due to the reaction of consumers being presented with that choice?

(Let’s remember how much of a “better deal” it is for the consumer to buy print if the prices are the same or close. The print book can decorate a bookshelf. It can be resold, which the ebook can’t be, or at least can’t be yet.)

Only Barnes & Noble can even attempt to meaningfully compete with Amazon in this environment. The price-sensitive book consumer needs to see both the ebook and the print book to make a wise purchasing decision. They won’t see that at Kobo, Google, or Apple’s iBookstore.

So competing with Amazon on price is confined to B&N on print and confined to non-agency titles — which means only a sliver of the bestseller list — for everybody else. So, is everybody happy? Publishers are selling more print, which they wanted. There’s growth in the indie store base, which publishers also wanted. But Amazon continues to grow market share in relation to Barnes & Noble and now threatens to open bookstores to compete with B&N and the indies. And that is most definitely not what publishers wanted.

Is there any way to achieve both robust competition for Amazon and also to protect print books from being cannibalized by much cheaper ebooks?

The conversations I had this past week with two of the competitors to Amazon surfaced diametrically opposite opinions about whether agency was helpful or not in that regard.

One ebook executive suggested that the Big Five publishers should stick to the agency pricing margin but should do it on wholesale pricing terms. That person encouraged me to think through this proposition: what if those ebooks were sold to the accounts at 70 percent of the publisher’s price (or even a bit more), but without any restrictions on discounting?

The other believes that price-competing with Amazon is a game that is impossible to win and that there is clear evidence from the experience in the UK market, where several ebook players tried to undercut Amazon on price, that it is not an effective strategy.

The advocate for the wholesale model, which would allow discounting by retailers up to whatever the authorities decide is “predatory” (and that definition is anything but clear), believes that Amazon is being given a free ride. Of their competitors, it would seem that only Google and Apple would have the deep pockets to fight Amazon by sacrificing margin, but either of them certainly could and it would certainly be, at the very least, a big nuisance to Amazon if they did.

This raises again the question of what discounting would be permissible before the discounting would be labeled “predatory”. There is no definitive answer. Some believe that retailers are not permitted to discount below their own cost (although, even then, it is not clear whether that means on a per-title basis or across all their ebook purchases and sales or some other basis). By that interpretation, if an ebook were listed at $15.99 and sold at a wholesale price of $11.19 (70 percent), there could be a legal risk that pricing below that point could be considered “predatory”. In fact, ebook pricing flexibility is such that publishers could make that same ebook $18.99 for the first month ($13.29 wholesale), when the print is fighting for bestseller status.

(It should be noted here that Amazon sold Kindle ebooks at well below cost in the days before they had competition, as a carrot to get customers to buy Kindle e-readers, which were originally priced at $400. By doing so, they made the reader-and-content equation attractive to the people who bought the most books. The DoJ and Judge Cote said that Amazon’s pricing at that time was not predatory, but the Supreme Court could, at least theoretically, change that understanding. And, in fact, Amazon has continued to behave as though the $9.99 price point is the “right” ceiling for ebooks, even as the device-and-content equation has changed with considerably lower Kindle device prices and a plethora of multi-function devices having changed the market.)

Big 5 players going to wholesale could change the ebook marketplace in two ways. One is that it would unleash Google and Apple — both of which have plenty of cash — to discount aggressively to compete with Amazon. At the very least, that would diminish Amazon’s margin as they compete on price and it might also reduce their unit sales. It could also lead to the smaller publishers now selling wholesale to attempt to reduce their discounts. And that could lead to Amazon using its market power to resist a reduction in margin. That could be construed as an abuse of marketplace power, which is another test for anti-trust.

An anti-trust lawyer explained it to me this way. The analysis is more nuanced than just looking at whether prices are lowered. Generally, the antitrust enforcers do look favorably on practices that result in lower prices.

That being said, the goal of antitrust is broader: it is to protect the competitive process. It can get complicated in two-sided or multi-sided markets where prices might be low on one side of the market, but the platform uses its power on the other side of the market to harm competition. In the case of Amazon, one side of the market faces the consumer and the other faces the publisher.

It’s particularly problematic if the conduct locks in participants, raises barriers to entry, or results in the platform extracting more than its fair share on the other side of the market.

By that measure, perhaps the most problematic aspect of Amazon’s commercial terms could be the requirement for exclusivity to be part of the Kindle Unlimited subscription program. That keeps titles away from competitors.

But going to wholesale is not viewed as a solution by all of Amazon’s competitors. One of them thinks having agency in the marketplace is a big boon to competition. That executive saw the UK market as a “test bed”, because over the last three years a number of companies have tried deep discounting to buy share. It was tried pre-agency and during the post DoJ “agency lite” period. From this executive’s perspective, the results of those efforts make discounting looks like a pretty futile competitive strategy.

Unlike the “wholesale” advocate who thought the agency publishers were helping Amazon by preventing price competition from the other deep-pocketed players, this executive presented a completely different analysis. By their lights, market share comes from two sources.

Access to cost-effective customer acquisition sources. Amazon and B&N have their own existing customer bases. Kobo has retail partners. Apple and Google have pre-loaded apps and registered customers for iTunes and Android. So everybody has a pool of customers to draw on. (We pegged this as an advantage Scribd had over Oyster when those two companies started selling ebook subscriptions.)

Then the trick is to retain customers and capitalize on lifetime value.

What this executive believes is that price-cutting as a way to recruit customers is a fool’s errand. The customers who come aboard for a cheap deal will abandon you just as fast for somebody else’s cheap deal. They don’t stick. On the other hand, offering pricing advantages based on customer loyalty is a better bet. This player thinks that having agency in the market makes it easier to hold onto customers once a platform has acquired them. As evidence, that person pointed to the loss of market share by Nook that occurred once the DoJ restored discounting under agency.

It has seemed to me from the very beginning that making ebook discounts mirror print book discounts was a major strategic mistake by publishers. The two products are not comparable from the standpoint of the store’s economics. Stores don’t have to buy ebooks in advance. There is no “shrinkage”; they don’t get lost or stolen. They don’t have to be handled. Rent doesn’t have to be paid on the space they occupy before they’re sold. With such a different commercial reality, aggressive discounting by retailers should have been a predicted outcome when they were given so much more margin than they needed to operate.

So the division of the customer’s dollar instituted by agency is more appropriate to ebook realities and probably takes things back to where they should have started.

The wholesale versus agency question is more complicated. But it does certainly seem like the time would be right for one of the Big Five publishers to break ranks, as Random House did when agency was originally instituted, in their own selfish interest. They’d achieve what Random House did then (before the Penguin merger): collecting the same or a higher price from the retailers and seeing them peddled to the public at a lower price. (Of course, nobody is doing this anytime soon. The current round of agency contracts which went into effect over the past two years still have some years to run.)

The same executive who analyzed the marketplace for me offered another observation that really matters. Less than half of the reading public has made the switch from reading print to reading digitally. There are a lot more future converts left in the pool. There is a lot of ebook growth left for retailers whether they’re attracting their competitors’ customers or not.

And so it would seem that the stability we now see in the ebook market is a temporary thing.

Thanks to Teleread for the Q&A with me they just posted.

And Digital Book World is just around the corner. I hope we’ll see you there.

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On Amazon stores and publishers accepting standardization; two unrelated commentaries


When the “Amazon-opening-400-stores” rumor landed a week ago, many people were gobsmacked. It took me a minute to get past that, which also required getting past my firm conviction when they opened the Seattle store last year that it was an information-gathering exercise, not the opening move of a bigger retail play.

But, when you think it through, it not only doesn’t seem crazy that Amazon would open stores, it seems like an obviously compelling move.

Other retailers that started strictly online have opened retail locations, most notably the eyeglasses shop Warby Parker. (This New Yorker story mentions that. It also has an interesting disclaimer at the end because “Amazon Studios is producing a New Yorker series in partnership with Condé Nast Entertainment”. Wow.)

“Omni-channel”, which is really a new-fangled fancy term for selling both online and through a brick store, is the buzzword du jour of retailing. Actually, the online piece of that is the harder part and Amazon already had that licked.

Barnes & Noble “beat” Borders largely because they had a network of distribution centers that made stocking their retail locations extremely efficient. Amazon’s network of distribution centers is complicated because it isn’t just books, but they have many times the number of points of inventory storage as B&N. In fact, they have many times the number of storage points as B&N and Ingram and Baker & Taylor combined!

Amazon has tons of information that nobody else does that would inform their stocking decisions if they harnessed it. They know where searches are coming from for particular book titles or for generic needs, both geographically and psychographically. And they probably can detect early lifts for particular books faster than anybody else, simply because they have more data.

It is possible that if B&N and the indies had responded differently to Amazon Publishing, agreeing to stock the books rather than boycotting them, this could have played out differently. (No stronger argument could be made for the efficacy of that strategy than this post arguing that stores should stock Amazon titles to punish them because the returns would make them unprofitable! You can’t beat logic like that.) If the stores had stocked their titles, Amazon might have chosen to use their distribution center advantage to start wholesaling, rather than to support their own retail locations (as they appear to be doing).

But the determination of the brick retailers to boycott Amazon was spelled out loudly and clearly. So opening Amazon retail locations — as it increasingly appears they have every intention to do — has two strategic payoffs for them. One is that it gives them access to at least some brick-and-mortar retail locations for their publishing output, which otherwise they can only sell online. And the other is that it capitalizes on their distribution centers, delivering additional sales and margin for investments already made.

In a recent post, I suggested one specific way Amazon could get very disruptive if they had more than a handful of stores. There’s another. They are a tech company that likes to have computers make decisions that in other companies and in other times have been made by humans. I suspect they’ll figure out pretty fast that they will want to have some sort of vendor-managed inventory system to streamline and optimize the stocking decisions for what will almost certainly be a growing network of retail locations. (The part of a trade book person’s DNA that is most out-of-step with the digital age is that we like to make decisions case-by-case, rather than living with decisions made by rules we create. That’s the key to the second half of this post.)

Sophisticated but automated stocking and restocking decisions are not part of the toolkit at B&N or of any other retailer or wholesaler we know. Could that be the next battleground that Amazon retail stores create? That would certainly be disruptive, but at least in this corner of the world it would not be a surprise.

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One mantra of the book publishing world is “every book is different”. We sometimes refer to that fact as reflecting the “granularity” of the book business compared to other kinds of consumer goods businesses or other media. Even if you think in terms of categories, there are just more of them in publishing than there are for other products or media.

Perhaps, then, it isn’t surprising that publishers are often inclined to encourage that uniqueness beyond where it is required. And, frankly, it is only required for editorial development and for targeting the marketing. The objective at every place in the value chain in between should be to standardize and, as much as possible, to treat many different books the same. That’s not a creative imperative; it is a commercial imperative.

My father first experienced the tension that this insight can create at Doubleday in the 1950s when he persuaded the company to standardize the trim sizes of their books for maximum printing efficiency. That didn’t require radical changes. It simply meant that books would be an eighth- or quarter-inch longer or shorter, wider or narrower. These were differences that were really not perceptible to most people, yet it was a real internal corporate battle to wrest control from designers who believed “every book is different” and that this mystery (or cookbook) had to be published as a 6 by 9 inch book while that one had to be 6-1/2 inches by 9.

In fact, the trivial differences in trim size were not important at all to the books’ chances of success. There were other decisions — the specific paper or type face among them — that also had no discernible commercial impact on each individual book but were, nonetheless, intentionally made book-by-book as though they did. In many houses, and (admittedly I’m saying this without any supporting data) probably more in smaller houses than larger ones, they still are. And that’s true even though whether the paper is 55 pound or 60 pound or the type face is Times Roman or Baskerville can’t be shown to have any impact at all on a book’s sales.

Now the University of North Carolina Press has been funded by the Mellon Foundation to put Dad’s theory to use in the university press and academic publishing world. They’ve created a service offering through their Longleaf distribution platform that takes the design, pre-press, production, and distribution burden off the hands of university press and academic publishers so they can focus on what makes them distinctive: the books they choose to publish and the skill with which they edit them.

This fits an industry reality I identified a couple of years ago that I called “unbundling”.

On one hand, UNC Press Director John Sherer reports real success, expecting to grow that part of their business by 50 percent in the coming year. But he also reports resistance by some presses who believe that making these design and production decisions adds so significantly to the “quality” of their output that they’re comfortable losing money doing it.

My own hunch is that many directors just don’t have the heart (or courage) to get rid of staff that, with all the best intentions and capabilities but without the advantages of technology and scale, provide them with no better than average quality at a much higher cost than they need to spend. This was a battle for Leonard Shatzkin when he fought it at Doubleday in the early 1950s and apparently it is still being fought hard six decades later.

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Book publishing lives in an environment shaped by larger forces and always has


(Note to my readers. This longer-than-usual post is really two. The first half is a recital of what I believe is very relevant history. The second half is about how things are now. Although I am personally fascinated by the historical context, if you get bored with the history, the bolded text below marks the spot you can skip down to to get to “today”.)

Book publishing has always adapted to an environment shaped by larger forces. That hasn’t changed.

Andrew Carnegie provided a big lift early in the 20th century when he financed a lot of libraries, taking books and reading into every corner of the country. In the 1930s, publishers led by Putnam and Simon & Schuster made “returns” a part of the commercial equation between publishers and bookstores because the depression was making stores especially wary of taking on inventory.

After World War II, the mass-market paperback revolution was made possible by a network of magazine wholesalers (also called “IDs”, or “independent distributors”) who could push product out to hundreds of thousands of points of purchase.

In the 1960s, shopping center development boomed. The mall developers wanted “bankable” entities to sign up for their stores before the projects were built. Banks providing mortgage cash liked national brand names for that purpose better than unknown local entrepreneurs. That fact spawned the mall chains, Waldenbooks and B. Dalton, which each grew into the hundreds of stores by the 1970s. All those new stores opening created pipelines for publishers to fill that made the book business grow even faster.

Then in the late 1980s, Wall Street believed the destination superstore was a good bet and happily financed Borders (which bought Walden) and Barnes & Noble (which bought Dalton) to build out the 100,000+-title store model. This again created huge pipelines for publishers to fill and, unlike the situation when 25,000-title mall stores were proliferating, the orders to fill them went deep into publishers’ backlists.

All of this 20th century growth fit a similar model for publishers, leaning on booksellers to present their books to the public and to manage the inventory in an ever-expanding number of bookshops. So publishers continued to focus on business-to-business marketing, honing their expertise at positioning their titles for reviewers, bookstore buyers, and library collection developers but only occasionally addressing the public, or any segment of any book’s consumer audience, directly. And they continued to focus their sales efforts on persuading stores to make commitments to their books. The ability to get “buys” from the booksellers really drove marketing and revenue.

Then in 1995, Amazon arrived and changed the game in many ways. And we can see in retrospect that the birth of Amazon heralded an even bigger change in the commercial context for publishers. Amazon’s arrival began an era which is now in full flower, where the environment for book publishers is largely influenced by major tech companies for which publishing is a hardly-noticed activity even though their impact on the world of publishing is profound. Although there are certainly others who figure in, the environment today for marketing and delivering books is shaped by what Professor Scott Galloway of NYU Stern School of Business calls “The Four Horsemen”: Amazon, Apple, Facebook, and Google.

Amazon, like booksellers before them, handled the direct relationship with consumers and evolved, after an early period of depending on Ingram for their stock, to staging the inventory to serve them. It pretty quickly became apparent that they were much more disruptive than prior innovators in many ways. Among them:

Amazon operated in an environment without geographical constraints; their sales weren’t constrained by local boundaries like the physical bookstores. They could effectively provide service to customers from anywhere. So even in the beginning, when they were taking such small share away from each of the existing market players that they hardly noticed it, Amazon was building a substantial customer base for itself.

Pretty early in the game, Amazon persuaded Wall Street that it was “different” and didn’t ultimately have to make its fortune selling books. Books were just the key to the first step: customer acquisition. The profits would come from subsequent steps: selling those customers other things (and — the more sophisticated part — selling the infrastructure it was creating at scale). Once the investment community was on board to finance that strategy, Amazon was liberated to price-compete in a way that, it is clear in retrospect, no book-centric retailer could keep up with.

The number of shipping points for Amazon, which have recently proliferated and is now in the dozens at least, grew slowly, so Amazon was inherently more “efficient” with its purchases than bookstores could possibly be. Each book shipped to them had a much bigger sales base than it would in a single store and therefore also had a much lower chance of being returned. At the same time, as they took sales away from brick-and-mortar stores, returns from that side of the business tended to go up, at first because the publishers’ sales forecasting was unconsciously working with a diminishing base, and then later because moving to fewer titles in stock became part of the solution to reduced sales and returns were part of how they got there.

The book-buying public adjusted very quickly to Amazon. For several decades leading to the 1990s, publishers and bookstores had learned that a massive in-store selection was a powerful magnet to draw customers. The choice of books has always been so granular that it is virtually impossible for any retailer to stock everything a customer might want. Jeff Bezos knew and understood that, and he had the vision to understand how an online retailer could benefit from the impossible challenge a brick-and-mortar bookstore faced.

Amazon used a Baker & Taylor database that hadn’t been “cleaned”, so it had a lot of out-of-print books in it. Amazon turned that into a benefit for their customers, because it gave Amazon a platform to tell a searcher that the book they wanted was no longer available if that were the case. (If you just don’t find your book when you search, you would be inclined to look again elsewhere. But if you find it and are told it is out of print, you would perhaps look for a substitute.) Combining that with rigorous “promise dates” telling customers when their books would arrive progressively lured, and then satisfied, more and more book buyers. The less likely the buyers thought it would be that they’d find a book in a store, the more likely it would be they’d just order it from Amazon. In a story we’ve told on this blog before, we learned on a consulting assignment with Barnes & Noble in the first couple of years of this century how dramatically the buying habits of academics had shifted away from store-shopping to buying from Amazon.

By the end of the first decade of this century, the future had arrived with a vengeance. Amazon dominated the rapidly-growing ebook business, driving the publishers into an embrace with Apple (one “Horseman” come to save them from another) that brought them into conflict with the Department of Justice. And then Borders, one of the two dominant national bookstore chains and proprietors of more than four hundred 100,000-title stores nationwide, shut down, taking a big double-digit percentage of the nation’s bookstore shelf space with them.

The collapse of Borders had an impact on the publishers’ ecosystem comparable to what the effect will be on sea levels when the Greenland or West Antarctica ice sheets break off: a sudden surge of change reflecting a long-term trend. As Hemingway wrote about the way things often happen: “gradually, then suddenly”.

And this brings us to the world we live in today. Like a frog in gradually heated water, many of us have lived through the change so we may think we’re more adjusted to it than we actually are.

Publishers now live in a world where more than half the sales for most of them — the exceptions are those who are heavily into illustrated books and children’s books — occur online through varying combinations of print and ebooks. Their two biggest accounts — Amazon for online sales and Barnes & Noble for stores — each reign supreme for their channel of the business. (And although Amazon has opened a store and Barnes & Noble has an online sales capability, they are likely to remain the leading player where they are now and much less important in the other channel.) Because they’re so important, they can be increasingly aggressive in how much margin they insist on as discount from the publishers’ price and various merchandising fees.

When bookstores were the distribution path for books, they were also the primary avenue for “discovery”. That was what the big store was about. People could browse it and find things they had no idea existed that they wanted to buy. But, as we all know, “discovery” now is largely an online thing, driven by some magical combination of “search engine optimization”, social media promotion and word-of-mouth, and online retailer merchandising.

So the model that has served publishers for a century, putting out books through a network of stores that both draw in the public and contextually position the books for them (in topical “sections” and some featured placements like windows or front tables), has been seriously eroded. What has replaced big parts of it are online purchases of books “discovered” through a variety of mostly online channels. And that’s where the Four Horsemen become so prominent.

Amazon and Apple are, along with Barnes & Noble, where most of publishers’ sales will take place. Each retailer does its own merchandising, of course. All of them will undoubtedly be increasing the variety and sophistication of its offerings, but will also have different rules and algorithms influencing how they respond to descriptive copy and metadata triggers the publishers will be providing. Understanding how this all this works at Amazon and Apple as well as publishers always did with Barnes & Noble and other brick-and-mortar retailers is a clear agenda item for all publishers. And they get it.

What some are still learning is “the fallacy of last click attribution”. (This is one of the more important nuggets of knowledge I’ve picked up in the past couple of years from my partner, Peter McCarthy, as we’ve been building our Logical Marketing business.) In a nutshell, that means that where somebody buys something is not necessarily where they made the buying decision. If you’re an Amazon Prime subscriber getting free shipping on your books, you go to Amazon to buy regardless of where you learned about the book. And that’s why all four horsemen are so important.

Although Google is also a retailer, a much less potent one than Amazon or Apple, Google’s importance is that it dominates search. And despite the penetration of apps on both the iOS and Android platforms (more everybody needs to understand about Apple and Google), search is still the primary way almost everybody looks for things. Google still has in the neighborhood of 60 to 70 percent of search activity (even though Microsoft’s Bing now powers AOL and Yahoo search). Many of the sales transacted on Amazon and Apple are made because of search results delivered by Google. According to the latest SimilarWeb numbers, approximately 25% of Amazon’s traffic originates as a Google search. One quarter. And Amazon is one of Google’s very largest advertisers.

Google also has an enormous impact on an author’s ability to be part of the merchandising process. Google Plus hasn’t turned out to be much of a social interaction platform, but an author’s profile there can have a big impact on how the author and his/her books rank for search. This has long been true but is not, even now, universally appreciated.

In short, Google Plus author pages are nearly as important as Amazon author pages, a fact totally independent of the traffic either of them gets.

Facebook is the only one of the Four Horsemen that doesn’t (for now, anyway) actually function as a retailer at all, but Facebook is increasingly important to book marketing. Something north of two billion people use Facebook, a billion of them every day. Nineteen percent of the world is on Facebook; forty percent of Internet users. More and more time is spent there by more and more people.

As anybody who uses it knows, Facebook makes it incredibly simple to share content or links. More and more authors and publishers are learning how to use Facebook as a marketing and advertising tool. Everybody’s there. Rule #1 of marketing: fish where the fish are.

So the transactions take place primarily at Amazon, often at Barnes & Noble (still) and Apple, and occasionally at Google. But the drivers to the transactions are Google and Facebook. (And others, of course, but none approaching the importance of those two.) How successfully publishers will sell books in the future will largely depend on how well they master the opportunities presented by Amazon, Apple, Facebook, and Google.

One of the big new opportunities, beyond the scope of this piece to cover in detail but very much part of the new operating environment, is “nearly effortless global” sales. All of the Four Horsemen reach every corner of the planet. The structural barrier there is that the responsible sales operators haven’t historically had to think about many different global sales opportunities.

Another is to make better synergistic use of author relationships. What authors do on Facebook and Google Plus (and a host of other social networks) needs to become part of the publisher’s overall picture of the book and its marketing. And the structural barrier there is that the editor is too often forced to be the conduit for this coordination, a task for which they are neither prepared nor supported.

Operating through and with these behemoth companies is a big challenge for our industry. David Young, who just retired from Hachette UK, shared an observation with me when he was CEO of Hachette US a few years ago. The CEO of a big publisher in the past could always get the CEO of his or her biggest accounts on the phone if necessary. That was no longer true eight years or so ago when he made the observation, talking about Amazon. (And talking about Amazon a few years before Hachette and Amazon had a very public dispute that hurt Hachette sales very badly.)

There are two legacy accounts for publishers that remain critical to their future: Barnes & Noble, the industry’s one omni-channel wholesaler, and Ingram, which began as a book wholesaler but which has morphed into a service provider helping publishers with all sorts of modern challenges, including global distribution, print-on-demand, and now, with the acquisition of Aer.io, the ability to promote and sell through new technology Ingram and Aer.io offer. Ingram, unlike any of the other players, is helping smaller publishers with tools to enable them to punch above their weight. That is likely to be a growth proposition in the years to come.

But B&N and Ingram, just like all the publishers, will have to understand the strategies and activities of the four big companies driving change and creating a new ecosystem for the book business. They’ll also have to do it without a direct line to their CEOs. But, then, not very many publishers were able to get Andrew Carnegie on the phone 100 years ago either.

Digital Book World 2016 has a lot of programming addressing the issues raised in this piece. Professor Scott Galloway will talk about the Four Horsemen. Professor Jon Taplin of USC will analyze how revenue has moved from content creators to tech companies and suggest some ways some if it might be clawed back. Rand Fishkin, founder, former CEO (and now Wizard) of Moz and perhaps the most knowledgeable person in the world about search, will offer the latest insights into how search is being affected by “local” and “mobile” and then have a session to take questions.

Virginia Heffernan, author of Magic & Loss will discuss the cultural and economic impacts of the digital age for content creators.  Antitrust attorney Jonathan Kanter  will look at the relationships among book publishers, major technology players, and consumers from a competitive and regulatory perspective

Roy Kaufman of Copyright Clearance Center will moderate a panel talking about changes in copyright law, something also driven by big players affecting the publishers’ commercial environment. And we have a slew of presentations about companies “transforming” — changing how they do business in fundamental ways while maintaining the revenues that sustain them. That will include a presentation from Ingram Chairman and CEO John Ingram. And Barnes & Noble’s new Chief Digital Officer, Fred Argir, will talk about how they are building out an “omni-channel” strategy and what they can offer publishers in the way of improved digital discovery.

And there will be panel discussions of both the issues we identified as publishing opportunities: global sales and marketing collaboration with authors.

DBW 2016 takes place in New York March 7-9, 2016.

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Can crowd-sourced retailing give Amazon a run for its money?


Although it has always seemed sensible for publishers to sell their books (and then ebooks) directly to end users, it has never looked to me like that could be a very big business. In the online environment, your favorite “store” — the one you’re loyal to and perhaps even have an investment in patronizing (which is how I’d characterize Amazon PRIME) — is only a click away. So however you learn about a book (or anything else), it is very easy to switch over to your vendor of choice to make the purchase.

There is a concept called “the fallacy of last click attribution” that is important in digital marketing. You don’t want to assume that the place somebody bought something (the last click) was the place they decided to buy it (attribution). If you’re a marketer, you want to aim your messages where the decision gets made and you need to know if that wasn’t where the purchase was made. You learn quickly that the two are often not the same.

There are a variety of reasons why direct sales are hard for publishers. One is that their best retailer customers — Amazon and Barnes & Noble, of course, but many others as well — don’t like their turf encroached upon by their suppliers and they have power over their suppliers’ access to customers. They particularly don’t like it if suppliers compete on price.

But it isn’t just publishers who have trouble competing with the online book retailers and ebooks are just as hard as print. On the ebook side, many readers are comfortable with specific platforms — Kindle, Nook, Kobo — and are uncomfortable “side-loading” content into them. And when you get away from the owner of an ecosystem, the complications created by the perceived need for DRM — some ability to either lock up or identify the owner of content that might be “shared” beyond what its license (which is what a purchase of ebooks is) allows — makes things even more complicated.

Because it appears so superficially simple to transact with trusted customers, attempts to enable book and ebook sales by a wide variety of vendors are nearly as old as Amazon itself. In fact, Amazon began life in 1995 leaning almost entirely on Ingram to supply its product and began discounting in earnest when Ingram started to extend the same capability to other retailers through a division called I2S2 (Ingram Internet Support Services) in the late 1990s. The aggressive discounting by Amazon quickly and effectively scared off the terrestrial retailers who might have considered going into online sales.

When one company, a UK-based retailer called The Book Depository, organized itself to fulfill print books efficiently enough to be a potential competitor, Amazon bought them. Nobody else ever really came close. Borders didn’t try, initially turning over its online presence to Amazon. Barnes & Noble partnered with Bertelsmann in the 1990s to create Books Online, which has continued (to this day) as BN.com. But they have not (to date) managed to achieve a synergistic interaction with the stores to give themselves a unique selling proposition. And the Amazon discounting strategy, designed to suck sales away from terrestrial retailers and partly supported by Amazon’s reach well beyond books, was never a comfortable fit for BN. As a result, Amazon has never been threatened as the online bookselling king.

Barnes & Noble dominates physical retail for books; Amazon owns online. One channel is shrinking; the other is growing.

Trying to do retail for print books without a substantial infrastructure is just about impossible, but ebooks are tempting because, at least superficially, those challenges appear to be much smaller. That may have been behind the attempt by three publishers — Penguin (before the Random House merger), Hachette, and Simon & Schuster — to launch Bookish a few years ago. By the time it opened, Bookish was touted as a “recommendation engine”, but its true purpose when it was started was to give its owning publishers a way to reach online consumers in case of an impasse with Amazon. They get points for predicting the impasse, which Hachette famously suffered from during ebook contract negotiations with Amazon in 2014. But the solution wasn’t a solution. Bookish never had the juice to build up a real customer base and probably never could have, regardless of how much its owners would have been willing to invest.

There are currently two noteworthy players in the market enabling any player with a web presence to have an ebookstore selling everybody’s titles. One is Zola Books, which started out two or three years ago promoting itself as a new kind of web bookstore. They were going to let anybody create their own curated collection of books and profit from their curation. And they were going to host unique content from brand name writers that wouldn’t be available anywhere else. It didn’t work, and now Zola, having acquired much of the defunct Bookish’s tech, is trying to be an enabler of online ebookstores for anybody who wants one.

That same idea is the proposition of Hummingbird, an initiative from American West Books, a California-based wholesaler that provides books to leading mass merchants. They have created technology to enable anybody with a web presence to sell ebooks. The company told us that their internal projections suggest that they can capture 3% of the US ebook market in 24 months from their imminent launch. They promise an impressive array of resellers, ranging from major big box retailers (many of which are their customers for books) to major publishers themselves.

There are others in the space, providing white label platforms and other direct sales solutions, including Bookshout, Enthrill, Bluefire, and Impelsys. And there are distributors, etc. who support their clients’ D2C efforts — Firebrand, Donnelly/LibreDigital, Demarque.

Then, yesterday (Tuesday) morning, Ingram announced that they have acquired Aer.io, a technology firm based in San Francisco headed by Ron Martinez. The Ingram-Aer.io combination will probably motivate the owners of Zola and Hummingbird to rethink their strategies. It is motivating me to reconsider whether, indeed, a large number of Net points of purchase for books could change the nature of the marketplace.

Disclosure is appropriate here. Ingram has been a consulting client of ours for many years. In that role, I introduced them to Aerbook, the predecessor to Aer.io, two or three years ago and I knew that Ingram had invested in it. But I didn’t know about the integration the two were working on until literally moments before they announced the merger on Tuesday. It is extremely powerful.

What Martinez and Ingram have built with a simple, elegant set of tools is the ability for anybody — you, me, a bookstore, a charity, a school, an author — to build its own branded and curated content store. You can “stock” it with any items you want from the millions of books and other content items Ingram offers. You can set any prices you want, working with a normal retail margin and paying “by the drink” for the services you need, namely management of the transaction and fulfillment. And while there is certainly “effort” involved in building your selection and merchandising, there are no up-front or recurring charges to discourage anybody from getting into the game.

One of our observations in the past couple of years has been that Amazon’s competitive set is limited because most of their ebook competitors don’t sell print books. It seemed to me that the one chance to restrain their growth — and every publisher and bookseller that is not Amazon would like to do that — was for Google to get serious about promoting and selling print as well as ebooks. But that won’t happen. Google is a digital company and they’re interested in doing all they can with digital media. They don’t want to deal with physical, even — as I suggested — doing it by having Ingram do the heavy lifting.

Whether any publishers or booksellers or other merchants or entities can build a big-and-profitable business selling books using the Aer.io tool remains to be seen. But it would seem that many can build a small-and-not-unprofitable sideline to their current activities and it would be one that would underscore their knowledge, promote their brand, and provide real value to their site visitors and other stakeholders. Thousands of these businesses could be consequential; millions could be game-changing. How many will there be? That’s impossible for me to predict, but the Aer.io proposition is totally scaleable, so the answer depends entirely on how enticing it is for various entities with web traffic and brands to have a bookstore.

And, depending on the uptake here, there will be some strategic conversations taking place around this at Amazon as well. When they have a handful of competitors selling print and ebooks, as they have, price-matching (or price-undercutting) can be an effective, and targeted, strategy. But how do you implement that when there are thousands of competitors, some of which are discounting any particular title and many of which are not? And does the customer care if they’re paying a couple bucks more to buy the book “directly” from their favorite author, particularly if the author offers a hand-signed thank-you note will be sent (separately, of course) to acknowledge every purchase?

How this will play out is something to watch over the next few years but there is at least the potential here for a real change in the game.

We already had John Ingram, Chairman and CEO of the Ingram Content Group slotted as a keynote speaker for Digital Book World 2016 to talk about one of our main themes: “transformation”. More than half of Ingram’s revenues come from businesses they weren’t in 10 years ago. We’ll see how things look as they start to roll out Aer.io, but it would seem likely Aer.io would be an appropriate add to the program as well.

If you haven’t signed up yet for DBW (which runs March 7-9), the Publishers Lunch code gets you the lowest price.

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Big focus at DBW 2016 on the tech companies that are shaping the world the book business has to live in


Realities change.

Ever since Amazon arrived in the “book business” 20 years ago, each year the “book business” has become less and less of a stand-alone industry. Of course, the only part that ever really was a stand-alone was the trade business, where the entire ecosystem: authors and their agents, publishers, booksellers, and even — for the most part — the printers lived in a world of mutual dependency but pretty much standing apart from what went on in the rest of the world.

Amazon actually took advantage of that industry insularity. They developed a business model that used books as a customer-recruitment tool but with the intention of making their profits elsewhere. In ways that were not understood at the time, that strategy was both viable (the book publishing world didn’t believe Wall Street would fund a company nearly indefinitely with current losses to build a future position of strength, but they did) and impossible for a book-dependent business to compete with. (Barnes & Noble and Borders had to make money selling books; Amazon didn’t.)

By the latter part of the first decade of this century, a Big Five CEO in the US delivered this observation to me. “I used to be able to get the CEO of my biggest accounts on the phone if there was something to discuss.” That was no longer possible with Amazon. And, in fact, if he could have gotten Jeff Bezos on the phone, there would have been very little to talk about.

When we started Digital Book World in 2010, we were following closely in the footsteps of O’Reilly Media’s Tools of Change conference, which had established itself a few years before and shut down a year or two after we started. The F+W executives who had the vision for DBW thought ToC was not “practical”; they felt that it didn’t give book business attendees “actionable” takeaways. When we agreed to program a competing event, providing “actionable” programming was our prime objective. We achieved that, initially, by eschewing what we saw as the “cover the tech developments and the book business will figure out how to follow” mindset of ToC in favor of a focus on how digital was changing the world of trade publishing. Our intent has been to concentrate on what publishers need to do to adapt to the change.

This year when we met with our Conference Council to plan the next DBW, they told us our business needed to hear more about the big tech companies. That reflected the reality the CEO observed nearly ten years ago. Our world is being shaped by the big tech companies. And that doesn’t just mean the obvious one, Amazon, which is almost every book publisher’s biggest trading partner. It means Facebook and Google, which have become perhaps our primary marketing mechanisms. And, of course, it also means Apple, which has become the second-leading ebook provider to Amazon.

I was proud to see I wrote this (linked to above) back in 2011:

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.

Indeed, we have reached a point where every trade publisher needs a strategy for its company’s dealings with the tech giants. And the forces that might affect the growth, stability, or strategies of the big tech companies, including anti-competition actions by and within the European Union, now call for attention and understanding from publishers in the US who could be affected by these changes.

Since the mission of Digital Book World remains to inform and educate book publishers about how digital change will affect them, we took the hint from our Council and have lined up a number of speakers for DBW 2016 who will shed light on the technology companies that are increasingly shaping the ecosystem in which we live.

We intend to make DBW 2016 the indispensable conference for book people who recognize the need to understand the tech companies we interact with every single day.

We’re really proud to be featuring SEO expert, blogger, and Moz founder, Rand Fishkin, at a book publishing conference for the first time. Search Engine Optimization is the single most important new skill publishers are learning to market their books effectively in the digital environment. And Moz is the single most important tool for Search Engine Optimization. Fishkin arguably knows more about the science of search, local, and mobile marketing than anybody else on the planet. He will deliver a talk from the main stage about what everybody needs to know about search now and then he will also be available for a 50-minute Q&A session in a breakout.

Scott Galloway is a Clinical Professor of Marketing at NYU Stern School of Business where he teaches Brand Strategy and Digital Marketing. One of his primary interests is tracking the biggest tech companies. His talk on the “Four Horsemen” (Amazon, Apple, Facebook, and Google) demonstrates the depth of his understanding. We were really pleased to find an academic who has made a specialty of studying the four companies we identify as most influential in the environment publishers must operate in. At DBW, Galloway will talk about these companies with special attention to how their strategies and future growth will affect us in the book business.

Jon Taplin is a Professor at the Annenberg School at the University of Southern California. He is a veteran of the music and movie businesses, having produced concerts for Bob Dylan and The Band and more than a dozen movies, including “Mean Streets” and “The Last Waltz”. He also has stints as an investment banker and a founder of the first Internet video on demand service in the 1990s. Taplin sees the tech-centric and libertarian Silicon Valley values having gradually taken control of the revenues for content away from content creators, a point of view he spells out in a video called “Sleeping Through A Revolution”. In his talk at Digital Book World, Taplin will explain how tech took control away from content creators and spell out what he thinks the content community can do to fight back and start getting paid more fairly for the quality content that he believes drives the success of many tech companies on the Internet.

Virginia Heffernan is a journalist who writes frequently at Medium and in the New York Times Magazine on the intersection of content and technology. Her next book, coming from Simon & Schuster in June, is called “Magic and Loss: The Internet as Art”. Heffernan sees the Internet as a large collective art project. She will look at how the Internet and digital technologies have changed our fundamental relationship with content. Heffernan reminds us that the Grateful Dead probably began our reordering of thinking about how content creators can benefit commercially from their work, being the inventors of the idea of “giving away” the music (encouraging their fans to go ahead and record their concerts and share the tapes), making up for any lost revenue from sales of recordings by selling concert tickets and branded chotchkes. Heffernan will also explore the impact of ebooks on how people read and the value of books as branding assets and calling cards for professionals and experts.

Jonathan Kanter is an antitrust attorney at Cadwalader, Wickersham & Taft and co-head of the firm’s technology group. Jonathan represents both tech companies and content providers. He is totally familiar with the business models of the major tech companies, including Amazon, Apple, Facebook, and Google. This includes both the benefits they provide and concerns that some of these companies use their position in the market to distort competition to the detriment of content providers. At DBW, Kanter will focus on how book publishers interact with the big tech platforms. He will explain the current antitrust actions pending against big tech companies and the potential impact on US-based book publishers.

We’ve also asked Kanter to talk about what remedies might be applicable here in the longer term to preserve the important services that big tech companies offer to consumers while at the same time protecting the rights and businesses of content creators. Could the government impose rigorous but intelligent remedies that address concerns without destroying the value that these tech companies create? Kanter will spell out how things could get worse for the content industries if there are no controls and explore how government agencies could use enforcement action or regulation.

And we’re working on more. There are anti-monopoly legal actions taking place in Europe against the both Amazon and Google. While Kanter will include those in his analysis, we are also talking to our European friends, looking for the right person to bring us a report from the front on these as well.

Until the last two decades — starting with the arrival of Amazon — book publishing only had to understand itself to plot its strategy. That has changed. Without real knowledge of how the tech world is changing its ecosystem and engaging book-readers with other choices for their information and entertainment, highly-predictable changes will be very surprising. Digital Book World 2016 aims to help publishers build that understanding as the next stage of the digital transition unfolds.

Register now for Digital Book World 2016, taking place March 7-9, 2016 at The New York Hilton.

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It is being proven that smaller bookstores can work commercially


Sometimes it takes a decade or more for an insight to be validated, but it is always nice when it happens.

Around the turn of the century, I was developing a business called “Supply Chain Tracker”, which had a nice client base for a few years. What we did was take the data feeds — Excel spreadsheets — provided by publishers’ major accounts and find the nuggets of insight within them that enabled better inventory decisions.

This followed the logic of one of Shatzkin’s Laws, which in this case is “every spreadsheet is one calculation short of useful”. We added some calculations to make meaningful metrics out of raw data. For B&N’s spreadsheets reporting inventory and sales activity to publishers, two of these were calculating the “percentage of store inventory sold” from the “on hand” and “sales this week” columns and “the percentage of total stock in the warehouse” derived from “on-hand in the stores” and “on-hand in the warehouse”.

My first client for this work was Sterling in the final year that they were independently owned before they were bought by B&N, which still owns them. When we showed our first prototype of a Supply Chain Tracker report to Sterling, we sorted by “the percentage of total stock in the warehouse” and two books popped to the top: 5000 copies with 100 percent in the warehouse! When Sterling’s then-Sales VP (later CEO) Charles Nurnberg saw that he said, “those books have been there since October!” This analysis was taking place the following February.

It turns out that B&N at the time had no systematic check of this metric in their workflow. If a B&N buyer bought five thousand copies and didn’t order a “store distribution”, the books would go into the warehouse and just sit there. It was a hole in their system. And since publishers tended to eyeball the spreadsheets in order of “sales”, looking for books that needed to be replenished, they just never caught this.

When Sterling showed the problem to the responsible execs at B&N, it bolstered the view of one of them that having the publishers intelligently reviewing inventory was useful support for the chain’s buying activity. They became supporters of our Supply Chain Tracker reporting (which we then extended to other accounts: Borders, Books-A-Million, Amazon, Ingram, and Baker & Taylor). But Barnes & Noble was everybody’s biggest account at the time and they offered the most robust reporting, so they were the primary focus of our work.

Let’s recall that the early years of this century were still the years of superstore expansion. B&N and Borders were proudly featuring stores that had 120,000 titles or more. It was precisely because they stocked so many titles and that the great majority of them turned very slowly that they wanted the additional publisher help in inventory tracking, particularly further down the sales ranks. And no publishers seemed more logical candidates for that help than university presses. B&N wanted to stock them more heavily, but their books were predominantly in the slow-turning majority. Distinguishing the books that would sell a copy or two in a store versus the ones that wouldn’t demanded the deep title knowledge of the publisher combined with the insight of well-structured reporting. Our work seemed to fit, so B&N subsidized our relatively expensive engagements providing our reports and tutorials on how to use them to university presses.

What we found as we started analyzing, though, was disappointing and initially surprising to all of us. But, as we thought about it, it was intuitively logical.

The university press titles had effectively stopped selling, even in B&N stores that were near university campuses. Why? Those sales had all moved to Amazon, which, at the time, was barely more than five years old. This first struck us all as disappointing and surprising. But, then, think about it…

The university professor would hear about a book. S/he’d go down to the local bookshop — could be a B&N or another store, didn’t matter — and look for the book. It would almost always not be there. So s/he’d “special order” it and wait for it. It didn’t take long for this to become an expectation, so ordering online became a very sensible default behavior. By 2002 and 2003, when we were doing this work, the battle to sell the obscure book to an audience that knew it was there and wanted it through a brick-and-mortar store was already lost. When you thought about this, it was intuitive, even though none of us anticipated it when we started doing the work.

Cambridge University Press at the time had a sales representative (since deceased) named Steve Clark. He was one of my most engaged B&N-subsidized clients. As we were doing this work and analysis, Clark told me that Amazon was already a bigger account for CUP than all other US retail outlets combined! That was a “wow”. But it underscored the degree to which Amazon had captured market share from the stores on hard-to-find books.

B&N still operated smaller stores that had been in the B. Dalton chain and Borders had a similar chain called Waldenbooks. While B&N and Borders were building out the 100,000-plus title stores, their mostly-mall chains were 20,000 and 30,000 title stores. They were in the process of shutting them down as leases expired.

With full knowledge of the strategy that governed their activity in those days, I said to my principal contact at B&N, “you guys should be figuring out how to use your infrastructure to make the twenty-thousand title store work”. He said to me, “Mike, we’re thinking about the million title store!” In other words, there was no appetite to take on board what we had all just learned to make a big change to the overall strategy. They had fully absorbed and couldn’t rapidly unlearn the lesson first discovered by my father, Leonard Shatzkin, when he was running Brentano’s in the 1960s: a big selection of books is a huge magnet for customers.

Unfortunately, Amazon had already changed that reality in a few short years after their inception. The huge selection was not as powerful a magnet as the online marketplace when the customer knew exactly what they wanted, particularly if it wasn’t a bestseller.

Now, flash forward to the present day. I’ve been fishing for lessons from retailers around the world that might constitute useful insight for the Digital Book World audience. My friend Lorraine Shanley of Market Partners suggested I talk to Anna Borne Minberger, the CEO of the Pocket Shop chain of stores, owned by the Swedish publisher, Bonniers. I got to meet Minberger for a conversation at the Frankfurt Book Fair in the last fortnight.

And, lo and behold, Pocket Shop has taken the suggestion I made to Barnes & Noble well over a decade ago and made it work at an extreme I didn’t imagine. Their tiny bookstores stock only about TWO thousand titles, but they are a thriving chain in Sweden and Finland now expanding into Germany. Their formula is a very small title selection placed in very-high-traffic locations (of particular interest here in New York City where both our main railroad stations are losing somewhat larger bookstores) with highly knowledgeable and helpful staff. I didn’t get into the details of buying, inventory management, and centralized infrastructure support in our Frankfurt conversation.

But, near as I can tell, Barnes & Noble still needs a solution to grow their book business; the strategy today only seems to be about how to profitably manage shrinking it. Particularly if it continues to work in Germany, a market (unlike Sweden and Finland) where online buying is strong and Amazon is a real presence in the market, one would think that the Pocket Shop formula would be even more effective if supported by the B&N infrastructure and branding in the United States. Of course, making a strategic shift of this nature is probably a heavier lift for B&N now than it would have been when I first suggested it many years ago.

But I don’t discern any other strategy that leads to growth in what B&N is doing now. If they don’t try copying Pocket Shops strategy in the US, maybe somebody else will. One could execute on this leaning on Ingram’s infrastructure rather than creating one’s own supply chain. Who knows? Maybe even Pocket Shops themselves would like to give it a try.

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What Oyster going down demonstrates is not mostly about the viability of ebook subscriptions


The news that the general ebook subscription offering Oyster is throwing in the towel was not really a surprise. The business model they were forced to adopt for the biggest publishers — paying full price for each use of a book with a threshold trigger at considerably less than a complete read while, at the same time, offering consumers a monthly subscription price that barely covered the sale of one book, let alone two — was inevitably unprofitable. Their only hope was that they’d build a large enough audience fast enough that publishers would become in some way dependent on it (if not the revenue it produced) and agree to different terms.

It would be a mistake to interpret Oyster’s demise as clear evidence that “subscriptions for ebooks don’t work”. Obviously, they can. Safari has been a successful and profitable business for nearly two decades. The Spain-based 24Symbols has been operating an ebook subscription business, mostly outside the US and mostly not in English, for too many years to be running exclusively on spec VC money. Scribd has very publicly (and a bit clumsily, in my opinion) adjusted their subscription business model to accommodate what were unprofitable segments in romance ebooks and audiobooks, but the inference would be that for other segments the business model is working just fine. And then there’s Amazon’s Kindle Unlimited, which is sui generis because they control so many of the parts, including deciding more or less unilaterally how much they’ll pay for much of the content.

What seemed obvious to many of us from the beginning, though, was that a stand-alone subscription offer for general trade books could not possibly work in the current commercial environment. The Big Five publishers control the lion’s share of the commercial books that any general service would need. All of those publishers operate on “agency” terms, which makes it extremely difficult, if not impossible, for a subscription service to pull those books in unless the publisher allows it. The terms that the publishers would participate in the subscriptions required, which were, apparently, full payment for the book after a token amount was “read” by a subscriber, combined with a limited number of titles offered (no frontlist), made the subscription offer inherently unprofitable.

The publishers see the general subscription offers as risky business for books that are currently selling well a la carte. Not only would they threaten those sales, they threaten to convert readers from a la carte buying to going through the subscription service. To publishers, this just looked like another potential Amazon: an intermediary that would control reader eyeballs and have increasing clout to rewrite the terms of sale.

So they only participated in a limited way. Penguin Random House (the biggest, and in shouting distance of half of the most commercial books all by themselves) and Hachette Book Group did not even experiment with the non-Amazon subscriptions. HarperCollins and Simon & Schuster, and to a lesser extent Macmillan, participate in a limited way. Multiple motivations drove the participation that did take place. The primary goad, probably, was to simply oppose Amazon. Having customers nested anyplace except the behemoth in Seattle can look like a good idea to most publishers. But another was to collect at least some of that VC money poured into an unlikely-to-work business model before it was exhausted. And because the publishers got to decide which books to include, they could choose backlist titles that weren’t generating much revenue anyway and which might benefit from “discovery” within the subscription service.

(Carolyn Reidy, the CEO at Simon & Schuster, tipped to this in her talk last week at the BISG Annual Meeting where she specifically mentioned the value of the discovery S&S has seen take place in the subscription platforms.)

But not all the subscription services were equal. The established Safari was in a market niche, serving mostly B2B customers in technology companies. (They have recently gone to an expanded offering because Boeing and Microsoft techies don’t just need books about programming; they’re also parents and cooks and gardeners so general-interest non-fiction can appeal to them. But that’s not the foundation of Safari’s business and they’re not trying to push fiction.) Scribd had a foundation business as a sort-of “YouTube for documents” that the ebook subscription business both built on and enhanced. For Amazon, Kindle Unlimited just gave them another way to transact with the ebook customer and it gave them another outlet for their exclusive Kindle content.

Only Oyster and another pretty-much simultaneous startup, Entitle (which had a proposition more like a book club than a straight subscription service), were trying to make the alternative ebook revenue stream into a stand-alone business. Entitle went down before Oyster. Librify, another variation on the theme, was acquired by Scribd.

So the failure of Oyster is actually another demonstration of a “new” reality about book publishing, except it is not so new. Book publishing — and book retailing — are no longer stand-alone businesses. Publishing and bookselling are functions, and they can be quite complementary to other businesses. And as adjuncts to other businesses, they don’t actually have to be profitable to be valuable. What that means is that entities trying to make them profitable — or, worse, requiring them to be profitable to survive — are at a stark competitive disadvantage.

Amazon is the past master at making this reality obvious. Remember that they started as a “book retailer” and nothing else. They leaned on Ingram’s Oregon warehouse to enable their business model, which was to take an order for a book and accept payment, then procure the book from Ingram and send it to the customer, and then a little later pay Ingram’s bill. This positive cash-flow model was so brilliant that Ingram could have readily enabled lots of copycats, and they formed a division called Ingram Internet Support Services to do just that. So Amazon killed that idea by cutting their prices to no-margin levels and discouraged anybody else from getting into the game. That was in the late 1990s.

They could do that because the financial community had already accepted Amazon’s strategy of using books to build a customer base and to measure future business prospects by LCV — the “lifetime customer value” of the people they did business with. And it became clear pretty rapidly that they could sell book readers other things so no- or low-margin sales were simply customer acquisition tactics. This was a game Barnes & Noble and Borders couldn’t play.

Now book and ebook sales are almost certainly no more than a single-digit percentage of Amazon’s total revenue. Kindle Unlimited, like their publishing enterprises and self-publishing offerings, are small parts of a powerful organization that has many ways to win with every customer they recruit.

Scribd is not as powerful as Amazon, but they began with a network of content creators and content consumers. That gave them a marketing advantage over Oyster — not every customer had to be acquired at high cost since many potential customers were already “in the tent”. But it also gave them some stability. Eyebrows were raised recently when Scribd put the brakes on the lending of romance books and audiobooks. But tweaking the business model for those verticals simultaneously leaves open that the model is actually working in other niches.

We can see this playing out in a much more limited way in Barnes & Noble stores, where books are being replaced on shelves by toys and games. But that’s not likely to be enough diversification to matter in the long run. It is certainly not going to get B&N where Amazon is, where far more than nine out of every ten dollars comes from something other than books. And Barnes & Noble is nowhere near a point Amazon has reached: where the profit from book sales is incidental if they keep bringing in new customers and also keeps them loyal.

The story on Oyster, still incomplete as of now, is that a lot of their management team is on its way to Google, which, in effect, “bought” the company to get them. Google seems to be trying hard to make sure we don’t think they bought Oyster’s business, they just bought Oyster’s staff. Obviously, Google fits the description of a company with many other interests in which books can play a part. In the beginning, that was all about search. Now it is also about the Android ecosystem and media sales in general. An ebook subscription business, or even a content subscription business, could make sense in Google’s world. But it would be a relatively small play for them. My hunch, and it is only a hunch, is that they have something other than a mere “book subscription service” in mind for that Oyster staff to work on. Smarter observers than I seem to believe that the personnel Google recruited give them knowledge about Oyster’s mobile reading and discovery technology. Of course, that’s core information for Google.

Similarly, Apple, which now has subscription service for music, might also consider doing one for books — or for all media — at iOS at some point. They don’t have one of Amazon’s advantages — a big stable of intellectual property they control — but they are all about creating an ecosystem that people stay in and don’t leave. Book subscriptions could enhance that.

But the central point I’d take away from this is not that subscription failed, but that a pure book business play failed. One obvious question that provokes is when we will see some signs of synergy between Kobo and their owners at Rakuten, who presumably have Amazon-type ambitions but haven’t seemed to use their ebook business to help pursue them.

And what is true of book retail is also true of book publishing, as we observed in this space quite some time ago. Both publishing and book retailing will increasingly become complements to larger enterprises and decreasingly be stand-alone activities that business can dedicate themselves to for profit.

The New York Times this morning has a front-page article essentially reporting that the ebook surge is over, at least for now, and the print business appears stable. This is great news for publishers if the trend is real. Unfortunately, there were a few important points either elided or ignored that might have undercut the narrative.

One is that, while publishers report ebook sales as a percentage of total book sales steady or slightly declining, Amazon says (and Russell Grandinetti was quoted in the article) their ebook sales are going up. Assuming all this is true, is the difference perhaps sales migrating away from publishers (which sales would be reported by the AAP stats they rely on) and moving to cheaper indie titles available only through Amazon (which sales would not)?

Another is that publishers are raising prices on ebooks and making the price rises stick because of Agency. Is all the sales resistance created by higher prices resulting in print sales, or is some of it causing the book to be rejected for something cheaper? In other words, might total sales for many titles be less than publishers would have looked for before? (At least one agent tells me this is the case.)

And another is that the indie bookstore resurgence has occurred in the years following Borders’s demise and the shifting of the product mix in Barnes & Noble. It is worth asking whether the indies are temporary beneficiaries of a sudden shelf space deficiency or whether we’re really seeing not only an increase in print reading, but a renewed interest by book readers to go to stores to buy the print. That question isn’t posed in this piece.

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Barnes and Noble results and the latest news from Perseus


The most recent Barnes & Noble financial results — which appear to have discouraged Wall Street investors — aren’t good news for the book business. They show that the sale of books through their stores is flat at best, as is the shelf space assigned to books. And it would take a particularly optimistic view of their NOOK results to see anything but an accelerating slide to oblivion for what was, for a time a few years ago, the surging challenger to Kindle.

It is safe to say that every book publisher wants a healthy Barnes & Noble. I asked the CEO of one large publisher recently whether the touted recent growth of independent bookstores was making up for the loss a few years ago of Borders. The response was “not even close”. Less dramatic than all the Borders stores going out at one time is that B&N must logically be reducing its shelf space for books, since some stores — though not many — are closing and the presence of toys and games is growing in those that remain.

In some ways, changes in the merchandise mix makes sense. Borders and B&N were, for quite some time, in a competition to provide the greatest possible in-store selection. With Borders out and most indies a fraction of the size of superstores, B&N can have the biggest selection available to most consumers with fewer titles in stock than they had before. (They do not publish any data that shows makes it explicit that there is a reduced title selection. One can only intuit that from the fact that other products have a growing presence and that some publishers report anecdotally that midlist is harder to place in the stores.) In any case, since the slowest-selling books are really barely selling at all, it would make sense that replacing them with other products could add to the store’s margins.

If B&N is successfully weeding only the slowest selling books, they should be removing titles that are turning so slowly that, after the initial hit of taking the returns, the publishers’ revenue line shouldn’t be too seriously affected.

But the overall store experience is definitely diminished. When big store selections were being built up in the 1990s, it was widely believed — or understood — that the books that didn’t sell brought people into the store to buy the books that did sell. And some book categories have so few strong sellers that eliminating the slower-turn books means you don’t have much of a section at all.

And all this ultimately drives sales online and that usually means to Amazon. (I did a calculation several years ago that suggested that Amazon had picked up several times the amount of once-was-Borders business that B&N did. It was Bowker data that I based it on.) It could well be the case that Barnes & Noble has held close to the same market share over the past few years, but they were the logical inheritors of the Borders brick-and-mortar business, and that is not what happened.

The real failure we see at B&N, which almost certainly affected the NOOK business as well as the stores, was that the customer knowledge within the dot com and NOOK operations apparently has never been used on behalf of the store business. This might be blamed on organizational silos that ran these three components as separate businesses. The failure is otherwise hard to explain. How hard can it be, really, to dig up email addresses of people who bought a book by a particular author to let them know s/he’ll be autographing books near where they live sometime soon?

Or, putting that in terms Barnes & Noble should relate to, might you not be able to charge the publishers a promotional fee for doing that? (AND you’d drive more traffic and sell more books!)

We had a recent conversation with Sergio Herz of the Livraria Cultura chain in Brazil. They are much smaller than B&N, 17 stores rather than many hundreds. But they started a dot com business in the mid-1990s, about the time Amazon did and before BN.com (which started as a joint venture between B&N and Bertelsmann called Books Online, or BOL). Their dot com is by far their largest single store, doing 28 percent of the chain’s total sales. (We don’t see how to discern from B&N’s public numbers how they compare with Cultura in that regard, but we’ll admit to being something less than the best analyst of financial reporting.)

One thing that distinguishes Cultura is the success of their in-store events, which are frequent (thousands per year) and take place in theater-like spaces within their stores. When I asked Herz whether Cultura drove dot com customers to store events he told me they do, and have done so “from the beginning”. Cultura’s management sees the integration of their stores and their dot com presence as an important competitive tool, becoming increasingly important as Amazon makes inroads into the Brazilian market.

That should be B&N’s secret sauce as well: delivering an integrated branded experience, with customer loyalty payoffs that encourage book readers to stick with B&N for both in-store and online purchasing of print and their branded ebooks, applying whichever would work best for them for each book they purchase. And while they do not appear to use their email lists on behalf of store events, B&N does enable online purchase for in-store pickup. The offer to do that appears on book product pages; it isn’t particularly featured. You can also buy in a store for dispatched delivery as if bought online. But there is almost no promotion of that capability either. I would guess that if you asked loyal B&N customers, many wouldn’t even be aware those choices exist. And if you are not a B&N customer, you certainly would have no idea. Promotion of those capabilities to former Borders customers (which would have been a highly targetable group when the Borders demise was still fresh) might have enabled B&N to do better at picking up their business instead of having the lion’s share of them apparently go to Amazon.

The people who own and run B&N are plenty smart. Before the game changed and was complicated by the online option, they had organized their supply chain to give them real competitive advantage over Borders and all other book retailers. But they were tripped up by a combination of Amazon’s longer-term view as an upstart in the 1990s and early 2000s when B&N was an established and profitable company. This was a classic “innovator’s dilemma”, failing to employ a new technology to maximum advantage because a legacy position was being defended.

Amazon was willing to lose money for many years to build its customer base. That was how they could build their stock price. B&N was a profitable company at the top of their category. Profits were how they grew their stock price. This not only discouraged deep investment in the early years of online bookselling, it discouraged the kind of discounting from their online store that Amazon did. Both of them knew that discounted books online put competitive pressure on the brick-and-mortar business. That was fine with Amazon. It was not appealing to Barnes & Noble.

In fact, long before NOOK, Barnes & Noble tried to be in the ebook business. At the turn of the present century, they had such ambition in the ebook space that they built a capability that was later spun out to be a company called Publishing Dimensions (now owned by Jouve) to help publishers with the digital conversion from print books to ebooks. But in the early part of the last decade, the ebook business wasn’t ready yet. There were three formats: PDFs (we all know about them), Microsoft Reader, and Palm Digital. Most ebooks were read on Palm, but Palm’s strategy was to sell the content themselves rather than let retailers do it.

Mobi was invented as a solution to the formats problem, to be one that could serve both MS Reader and Palm. By the time Mobi was created, B&N had expended a lot of cash and effort on an ebook market that didn’t materialize. They never took the next step of using Mobi. Amazon, bought Mobi in 2005 and effectively buried it for a while, only to bring it a couple of years later as the format that ran on the Kindle.

The ebook decisions B&N made were not crazy. Launching the Kindle business was a big roll of the dice for Amazon in 2007 when there had been no empirical evidence that there would really be an ebook market. Once again, as with the deep discounting of print books for online sales in the 1990s, the heavy investment in building a customer base made more sense for a multi-product retailer whose stock price responded to customer base growth, regardless of revenue or profitability, than for a more conventional legacy retailer.

When B&N decided to go after the ebook market with the NOOK, organizationally they did it with a dedicated and largely independent effort, not an integrated one. That might have been necessary. But it also might have been B&N’s last chance to build on its one distinctive advantage: having a strong store base and a real dot com business. (Borders never had the latter and Amazon, of course, doesn’t have the former.)

Doing the integration among the three strands of their business — stores, dot com, and ebooks — should still be Barnes & Noble’s top priority. That’s their biggest lever. There potentially are others. Moving from a sale-and-return purchasing paradigm to consignment terms with publishers, which would also almost certainly require allowing vendor-managed inventory, would also really help their financials by removing a large capital requirement. But it would also require rewriting the rule book on buying and substantial changes to their systems. There is also a potential opportunity getting indie authors to pay the cost of putting printed-on-demand copies on the store shelves on consignment as well, with potential profit in the printing and sales as well as new positioning with the growing base of indie authors and their readers. The recent attention Walmart got for stocking one indie title tips to the potential PR and merchandising advantage of that tactic.

But the time B&N has to change the reality that they can’t seem to grow their market share continues to shorten. The one big advantage they are likely to retain over their competitors in Seattle — who are certainly growing theirs! — will be a cooperative attitude from the publishers, who live in fear of Amazon’s growing power. But even that advantage has its limits.

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The news comes this week that Perseus has engaged bankers to help them sell their company. This follows the collapse about a year ago of the sale of Perseus to Hachette with the simultaneous handoff of Perseus’s distribution business — many times the size of its publishing operation — to Ingram.

There has never been any official or public explanation of what caused the Hachette deal to be called off a year ago. But the tricky part of selling this company is definitely that the distribution component will likely need a different home than the publishing assets. It will take a Big Five or other very large publisher to be able to absorb the publishing assets of Perseus. Those companies do distribution deals, but they seem to prefer much larger publishers for that service than many of the hundreds of Perseus distribution clients are.

Ingram was the logical home for the distribution business because it has the ability to scale, has been developing the automation of its distribution service offering through Ingram Spark, and it already handles smaller clients routinely. If Perseus’s estimated $300 million in distribution business yields about $40 million in revenue (as we’ve seen in one estimate), that’s a pretty small business for one of the Big Five to take on as a separate operation. But the many small publishers wouldn’t necessarily combine very well with the current distribution activities of the big houses.

So whichever big publisher might want the Perseus publishing operations (primarily Basic Books, Running Press, Da Capo, and the travel publisher Avalon) might well need an Ingram in the deal the same way Hachette did. It will almost certainly take a combination of two companies to swallow this particular elephant. Presumably the publishing components lean on some acquirer’s overhead, but the distribution piece would probably take a bit of a margin hit as a stand-alone.

There are, presumably, some companies who might want to break into the publishing business with a fully operational scaled entity like Perseus distribution. So maybe a new entrant will be enabled by this opportunity.

Of course, Ingram was interested the first time because they want to add clients to their existing distribution operation. Presumably, they still do. Perhaps they get back in this game again as somebody’s partner, like they did last time. But in the short run, it wouldn’t take a rocket scientist to tell Ingram that Perseus clients, knowing the company is on the block, might be receptive to switching and at least some of the growth Ingram sought might be attainable through salesmanship rather than through acquisition.

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The publishing business as we have known it is not going away anytime soon


Regular readers, please pardon me for the unusual length of this post, but it covers a lot of ground that I think is necessary to make the point.

A friend who has actually been working fulltime in the book business since I was still in college and who remains active was speculating at BEA about the “next big disruption” in our business. He’s expecting it sometime pretty soon.

I don’t think I am.

Gareth Cuddy is one of the most practical service providers in the industry. His Vearsa ebook distribution company is providing global services to publishers large and small and he is a pioneer in reading and sales analytics. He recently wrote a piece that concludes “whatever emerges from this next phase will surely be a complete departure from what we understand today as an industry” with timetables around it wondering whether 2016 will be too late to respond and whether we’ll have an unrecognizable industry in 2020.

I don’t see it.

One of the disruptor-authors, one who studies the industry trends closely with special attention to indie author growth, told me he “is pegging 2019 as the year that major media outlets cover the collapse of the major publishing houses the same way they started reporting on newspaper declines last decade”.

I wouldn’t be surprised to see a merger or two by then, but “collapse”? I don’t see that either.

The industry has a myriad of sales stats that are not rationalized in any way and don’t talk to each other:

BookScan (print sales, reported by select retailers)

BookScan data is compiled from reports of print sales by most, but not all, retailers. That data includes all the ISBNs (but perhaps not retailer- or indie-published books that don’t have ISBNs), but not all the sales. BookScan covers an estimated 85% of the print retail market in the US and 90% in the UK. (See the “About Nielsen Book” section.)

PubTrack Digital (ebook sales, reported by select publishers)

The PubTrack Digital data, compiled from reports by publishers, doesn’t include all the ISBNs — only those from reporting publishers — but they do include all the sales of those publishers’ ebooks.

AAP (cross-format sales, reported by select publishers)

The AAP tracks sales across all major channels and formats. Like PubTrack, AAP stats are based on reports by participating publishers. (Though all of the Big Five houses report in both cases, other publisher and distributor participation varies.)

Consumer survey data (purchases, attitudes, and behaviors, reported by consumers)

Market research firms and consumer panel surveys (Nielsen Market ResearchCodex Group, and PlayCollective among others) provide another look at how book sales are shifting.

Other survey data

Additional surveys, particularly of authors (e.g. DBW’s author surveyHarry Bingham and Jane Friedman’s author survey) help fill in some of the blanks. But as the survey organizers frequently note, these are not representative samples, so the conclusions that can be drawn from these surveys are limited and primarily directional in nature.

Proprietary data (publisher and retailer-specific)

We also get regular reports from publicly-traded companies and whatever data accounts happen to reveal to the public, which can provide useful benchmarks and comparison points. (The sales data from the accounts themselves includes self-published or retailer-published books that other two sources don’t, but no by-book sales numbers told to the public.)

Bestseller lists and scraped data

Author Earnings tries to translate ebook sales rankings (which are publicly visible at retail, and therefore “scrapeable”) into actual sales numbers. (The now defunct DBW Ebook Bestseller List, powered by Dan Lubart’s Iobyte Solutions, was based on similar principles.) And the major bestsellers lists (like USA Today and NYT) provide at least some context for relative sales performance.

And as a sign of how complicated it all is, the DBW Ebook Bestseller List was discontinued at least partly because the “noise” from Amazon reporting “sales” on ebooks distributed and read through their subscription service was making the bestseller status of many titles a bit contentious.

Despite and because of all the sources, the data is incomplete and scattered. There is inevitable ambiguity in interpretation so that a variety of conclusions can be reasonably drawn. From the big publisher perspective, it would appear that sales are about flat and that the ratio of print and digital sales has become pretty stable. This is true in an environment where publishers have experimented with even higher ebook prices and, for a variety of contractual and commercial reasons, discounting of ebooks has diminished. But that’s been true for a relatively short period of time, and the ebook reporting is routinely delayed by three months, so we don’t have enough evidence to know for sure that higher ebook prices are sustainable in this marketplace. And even if they are sustainable today, that doesn’t prove they will be in three months or a year.

On the print side, Amazon continues to be the largest single customer for almost every publisher. And even though they have managed to increase their discounts and various marketing fees and their returns have creeped up, they are still the most profitable large account for many, if not most, publishers. Since Borders went down several years ago, Amazon has, indeed, grown, but independent stores have also thrived and become more numerous. And although Barnes & Noble still slowly shrinks in sales, it remains the most important account for “breaking” many new titles and still provides more sales to most publishers than all the indie bookstores combined.

While I’ve been working on this piece, the AAP data has been being worked through. Nate Hoffelder (whose blog has been renamed “Ink, Bits, and Pixels”) scoffed at the Nielsen claim that their hard numbers constitute 85 percent of the book market. The AAP, which like Author Earnings, uses modeling and guesstimating to get from the data they have to a bigger industry picture, sees a much bigger trade industry. The point Nate wanted to make, using the AAP data (echoed by an indie author friend of mine who believes that the indies are toppling the establishment and we’d all know that if we knew the “real” numbers that didn’t leave out all the indie success stories) is that the ebook market is not shrinking or flattening.

But if you want to use AAP figures to prove that point you have to use this year’s AAP data. Because last year the AAP said the ebook market had shrunk. By the way, the AAP data was the first to offer some insight on how much ebook subscription offerings are changing the market. The answer, so far, is not very much so far. They account for about 2 million ebook units out of a market of 500 million!

I asked my knowledgeable indie author friend what he thought the consumer dollar volume was for indies last year. He reckoned it at $459 million (I love the presumption of precision: not $450 million or $475 million, but $459 million!) Since the AAP figures adult trade fiction and non-fiction at about $10 billion (and the juvie numbers, another $5 billion, actually have some big “adult” sales in them), he is implicitly acknowledging (but would never say explicitly) that indies are 5 percent of the adult business at retail, using what I’m sure is the most ambitious estimate of indie sales you’ll see anywhere.

The reality is that the business has been actually pretty stable for the past few years, after a period — about 2008 to 2012 — when the shifts away from print and from stores were dizzying and immediately disruptive.

That’s not to say we haven’t seen a lot of change or that change doesn’t continue to be much faster than it was in the period before 2008. But not all of that change is bad for publishers.

More sales at Amazon, less inventory in the physical store supply chain, more ebooks, and the outsized impact of ebooks on the inefficient mass market channel means that returns are lower and less capital is tied up in inventory, which makes publishers more profitable.

The promise that offshore markets can be reached efficiently with ebooks (which, indeed, might be masking a reduction in ebook sales domestically in the overall publisher-reported numbers) is increasingly being realized, partly through the growth in capabilities of the service offerings from old standbys like Ingram and new entrants like Cuddy’s Vearsa.

New tools and workflows are enabling publishers to package their content for both print and digital delivery much more efficiently than they did when ebooks were in their infancy.

Techniques that make it possible for books to be “discovered” through online means — search, social referrals, and growing book- and topic-based communities — are being mastered by publishers.

And a number of factors — consolidation of the accounts, more efficient wholesalers, consolidation of the publishers’ shipping through growing distributors — have reduced costs on the back end for most publishers as well.

So the publishers have, thus far, dealt with massive changes in sales, marketing, and distribution pretty effectively. They’re selling as many books as they used to despite growing competition from both indie authors (a million titles a year or more) and from Amazon itself, whose own publishing operation reportedly intends to issue 2,000 titles in 2016.

Trying to view things from the author perspective requires one to divide them into at least three big “buckets”: successful authors who know where their next totally-acceptable contract that pays them a living wage in advance to write a book is coming from; aspiring authors who either can’t get an agent or a deal or have decided that with self-publishing working as it does that they simply don’t want one; and the ones in the middle, who might have an agent or have had a deal or two, but aren’t really making a commercial success of authorship.

For those authors who find it hard or impossible to get an agent or a deal, self-publishing is a godsend. It gives them a way to really reach the global public at minimal cost and, as we’ve seen repeatedly over the past decade, they can, indeed, break through and achieve commercial success. This is only a good thing for everybody. Even publishers benefit because they get to discover new talent that is surfaced by self-publishing.

For those authors who are working steadily and profitably for publishers, self-publishing has offered the possibility of greater control and bigger margins: more profit if they can achieve the same level of sale. This is not an opportunity very many authors in this category have pursued. That has surprised me a little bit, but probably it shouldn’t have. Being a publisher is a lot of work and no small risk. If an author is making a living doing the writing and letting a publisher handle the rest, that’s damn near nirvana. Very few in that position want to abandon it.

So that leaves the authors “in the middle”: getting deals or capable of getting deals, but not really making the living they want to make with those deals. Among those authors, if they have the skills to manage an enterprise and the personality to put themselves out there for promotion, self-publishing offers a real alternative to the legacy system. Particularly for those authors who have a backlist they can claw back rights to and use as a foundation for their efforts, this new opportunity has real possibilities.

And writing in genres, being able to deliver several books a year, and writing in a way that allows pieces of big books to “work” as self-contained smaller chunks, are all attributes that enhance the likelihood of self-publishing success. It is worth noting that, so far, publishers haven’t developed the techniques to make the most effective use of chunked stories or a voluminous output (unless you’re James Patterson!).

So another source of potential disruption — authors abandoning publishers to do it themselves to make more money per unit and claim greater control of their work and career — has also not really happened. I was among those who expected, during the era of dizzying change we experienced for a few years until a couple of years ago, that publishers could have a big problem holding on to their biggest stars.

Both the supply (authors) and demand (sales channels) sides of the equation appear more stable than they’ve been in recent memory. But there’s no guarantee they’ll stay that way. The number of self-published titles keep growing by a million titles a year or more. They sell a paltry average per title, and a very small percentage sell a measurable amount at all, but cumulatively, their sales add up. Most of the revenue from that growing market segment goes to Amazon and a very small share of it goes to print or brick-and-mortar. Amazon’s growth in any way fuels their ability to be tough on terms, reducing publishers’ margins. (One big potential wild card is Amazon’s pressuring publishers to allow them to manufacture more and more of the inventory; that could be a paradigm-shifter if they succeed in making it widespread.) And more ebooks, particularly indie ebooks, and the subscription services for ebooks also tend to force down retail prices, which puts further pressure on publishers’ margins.

One other source of potential disruption — and this is one that I think many have in mind when they predict real danger for the establishment is around the next bend — would be some sort of disruptive product innovation. What if book readers suddenly demand video in books, or that stories be turned into games, or that books be enhanced by the margin notes made by prior readers? Would today’s publishers be able to compete? What would that do to margins?

There are areas of publishing outside trade where the “book” has either already become obsolete or could well be in a few years. As we have pointed out repeatedly over the years, ebooks have only really “worked” as substitutes for print books that one reads from beginning to end, narrative reading. The additional “functionality” that might be employed, such as those described above, has been pretty consistently and over a long period of time rejected — or, at least, not widely embraced — by the book-reading public.

But that’s not true in professional publishing, where books have often already been replaced by websites, online tutorials, and other uses of digital interactivity. (John Wiley, one of the biggest professional and trade publishers in the world, is largely exiting the business of “books”. O’Reilly Safari demonstrated over a decade ago that a subscription service was a great commercial proposition for professional books, long before it was even tried for consumer.) It is likely not to remain true in school and college textbook publishing, where the value of integrating testing and then adjusting what’s presented in the content delivery has enormous value and where institutions, rather than individual consumers, are in control. Predicting big disruption in these markets over the next few years seems like a much safer bet than in trade. Of course, those parts of the trade markets that look similar to those — cookbooks and travel in particular — have already seen wide-scale disruption.

Frequently, those who say they’re expecting disruptive change also promote the expectation that there will be some really substantial shift in consumer behavior. Quoting Cuddy:

So what is a book? What is reading? How will the millennials and children of the future consume stories? Will they even want to? I don’t think any of us know.

This is the big bugaboo: the death of long-form reading. That’s a reasonable thing to conjecture about, but not in the next three years or five years or even ten. In 2025, most of the books being read on the planet will be read by people who are reading them now. The most recent serious study about “designing books for millennials” (from Publishing Technology) seemed to conclude that millennials aren’t much different than the generations that preceded them when it comes to their book-reading habits.

Over the long run, things will almost certainly change in very big ways because of the inexorable forces eroding publisher margins described above. I wouldn’t be surprised to see only two or three big trade publishers as soon as ten years from now. I’d expect that the two recent plateaus we’ve reached, with ebook sales stabilizing in relation to print and with bookstores holding their own, will prove temporary. I wouldn’t expect ebook sales or online purchasing to grow by the leaps and bounds they did a few years ago, but it would surprise me if we’ve reached any long-term limit, particularly in ebook use. (The devices keep proliferating and people get increasingly comfortable reading for a long time on screens.)

More and more entities of all kinds will be using books, and particularly ebooks, to further their own missions through education or content marketing. They may not “flood” the market, but they’ll add a lot of product not necessarily priced with commercial intent that will steal sales and reader time from what publishers are trying to peddle.

For some time, I have figured that book reading might grow but that the industry that delivers books for profit might shrink. That would still be my expectation.

The biggest threat to publishers as we have known them would be consolidation among the intermediaries who sell their books. My hunch today would be that Amazon sells more than 40 percent of the books in the US. Indeed, their own publishing operation is growing despite the fact that they face continued resistance from their competing retailers to carrying their books. That suggests that books can be profitable, and authors made happy, on sales made to the Amazon audience alone. The bigger their share gets, the more that presents a real danger to publishers.

The whole point of publishers is “many to many”. They handle the output of multiple authors to give them the scale necessary to provide services to multiple sources of revenue for both books and rights. Amazon consolidated a big enough share of the audience that what they alone could sell constituted a viable market. That, combined with the elimination of inventory investment enabled by ebooks, created a robust indie publishing business. (Yes: iBooks and Nook and Google and Smashwords and others are part of it, but Amazon created it, and it might not be much of anything yet if they hadn’t!) Amazon could afford to pay a higher share of the consumer price than any publisher selling through them could and that created the marketplace in which indie authors could thrive financially and have a logical basis to express incredulity that other authors would take a publisher’s deal. During the days when both Amazon’s share and the ebook market were growing without any obvious limits, predicting that they would one day soon put a bullet in the heart of the publishing business might have been an overambitious projection, but it wasn’t entirely illogical.

But those days have passed. In retrospect, the big threat to publishers probably ended when Larry Kirshbaum’s efforts to get big name mainstream authors to leave legacy publishing in some numbers for Amazon failed, largely (I’d conjecture, we’ll never really know) because the competing retailers refused to play ball. Their outspoken refusal to carry Amazon books escalated the risk to an author’s career if they took any amount of money to be Amazon-published. That was not necessarily a deal-killer to a genre author who could reach a big share of their market with Amazon alone, but it made it just about impossible for Kirshbaum (or anybody else who might have occupied that seat) to use a checkbook to persuade an author already successful with legacy publishers to, essentially, risk their career.

Since then, despite Amazon Publishing’s continued growth (primarily in genres, not general trade) and what appears to be the continued growth in self-publishing have not really threatened the legacy publishing business. As long as the big authors don’t abandon the publishers, they’re safe. And as long as there is a complex demand chain for publishers to manage and service to pull in the revenue, they probably won’t.

So figuring out whether or when the industry turns upside down depends on figuring out whether or when the demand consolidates at Amazon to such an extent that the rest of the market can be lived without.

There will be fewer bookstores. There will be more titles competing from outside the commercial publishers. There will be continued downward pressure on prices. There will be diminishing interest in having a narrative book in printed form. And despite publishers’ efforts to add value by reaching distant markets and learning how to do digital marketing at scale, the publishing industry will, indeed, shrink.

But an apocalypse is probably not around the corner. And the book business as we see it today will still be recognizable in 2020 and even in 2025. I suspect that the business environments for all other media — music, movies, TV, and games — will change more than the business for narrative trade books over the next ten years.

Remember that we are conducting two surveys of industry opinion to inform the programming we’re doing for next March. Click here if you want to express yourself on the topics for Digital Book World 2016 and here if you want to register opinions on the program ideas for Publishers Launch Kids. 

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