Big publisher bashing again with fictional facts

The estimable Clay Shirky has written a lengthy piece called “Amazon, Publishers, and Readers” on medium.com saying, essentially, that an Amazon-dominated world would be an improvement over the Big Five “cartel”-dominated world of publishing we have today. This is an apples to oranges comparison. The Big Five are not nearly as broad a cartel as Amazon — which reaches way beyond the consumer books they publish — is a monopsony. Amazon touches much more of the book business than the Big Five publishers do. To make his case, Shirky recounts some very questionable history and employs some selective interpretation to get from his own impression of the current Hachette-Amazon dispute (about which he says “Amazon’s tactics are awful, the worst possible in fact”) to a completely different conclusion.

My complaint with the facts and logic start at the top: with the two paragraphs Shirky uses to set up his argument and establishes the “holier-than” context for his position. He says:

Back in 2007, when publishers began selling large numbers of books in digital format, they used digital rights management (DRM) to lock their books to a particular piece of hardware, Amazon’s new Kindle. DRM is designed to transfer pricing power from content owners to hardware vendors. The publishers clearly assumed they could hand Amazon consolidated control without ever having to conspire with one another, and that Amazon would reward them by passing cost-savings back as inflated profits. When Amazon instead decided to side with the customer, passing the savings on as reduced price, they panicked, and started looking around for an alternative conspirator.

Starting in 2009, five of the six biggest publishers colluded with Apple to re-inflate ebook prices. The model they worked out netted them less revenue per digital sale, because of Apple’s cut, but ebooks were not their immediate worry. They wanted (and want) to protect first editions; as long as ebook prices remained high, hardback sales could be protected. No one had any trouble seeing the big record companies as unscrupulous rentiers when they tried to keep prices for digital downloads as high as they had been for CDs; the book industry went further, violating anti-trust law as they attempted to protect their more profitable product.

Almost every sentence of this is subtly or blatantly wrong.

1. Publishers did not begin selling large numbers of books in digital format in 2007. Amazon started Kindle in late November 2007. Significant sales of ebooks didn’t start to occur until after Christmas and continued to grow rapidly thereafter.

2. Although an uninformed person would be led to infer from reading this that DRM was somehow created for Amazon, in fact DRM was routinely used for ebooks for their entire existence before Kindle. DRM on Kindle continued current practice; DRM was not created for Kindle or at Kindle’s behest.

3. DRM maintains pricing power for content owners as well as hardware vendors. In fact, I’d say it is more for the content owner than for the hardware owner. What it does for the hardware owner, particularly Amazon because they eschew the industry standard Adobe, is lock customers into their ecosystem. Of course, it is that lock-in that Shirky is telling publishers they can overcome by going DRM-free. (This precise antidote to Amazon was offered up by Matteo Berlucchi, then the CEO of Anobii, at a talk we put him on stage to give at Digital Book World in 2012.) In fact, it is not transparent that eliminating DRM would curb Amazon; it might fuel them. How well would the other retailers stand up to Amazon having easy access to their customers? Because that would happen at the same time.

4. Publishers did not believe — let alone “clearly assumed” — they were handing Amazon any sort of consolidated control. Perhaps that was a failure of vision, but it was a justifiable expectation since nobody had succeeded at selling ebooks before Kindle.

5. Amazon’s discounting was entirely at their own expense and was a tactic designed, at least originally, to sell devices and create captive customers. The publishers’ “inflated profits” (if that’s what they were) were not at issue in 2007 or 2008. So Amazon “sided with the customer”, but they also “sided with their own interests”. Some might say that’s not relevant; I think it is. Either way, it should be acknowledged, not elided or ignored.

6. Amazon was partly enabled to give the big discounts to consumers because publishers gave discounts too big to them, foolishly aping the print book business model even though a retailer’s costs drop much more than a publisher’s do with the change to digital. Stock turn is the key profitability metric for retailers. Stock turn on digital books is “infinity”. (I’d note that these are small points in this piece but are really really big points that go ignored in most of the discussions about ebook economics, which are almost always “fails” at understanding the core economics of publishers or retailers.)

7. The reduction in publisher revenue per book sold which resulted from Agency pricing (pejoratively characterized by Shirky as “colluded with Apple” rather than the at-least-equally accurate “using Apple’s established app store business model”) was not due to “Apple’s cut”. “Apple’s cut” was less than “Amazon’s cut” had been under the wholesale model. And, if you doubt that, you should take note that Amazon prefers not to switch to “Apple’s cut” so they don’t allow any but the biggest publishers to sell on the agency model with its lower margin. (Publishers can get 70% of net direct through KDP, but they have to stick to the $2.99-$9.99 price band and are at the mercy of KDP’s terms.)

8. It is misleading to attribute the publishers’ desire to keep “hardbacks” (really, all print) alive as a desire to protect “first editions”. It was primarily a desire to protect the brick-and-mortar bookstores. It should be said that way for accuracy but also to make the motivations of the sides clear. Publishers want to strengthen or maintain bookstores because their ability to reach them is a core competence that keeps them in business. Amazon wants to weaken or eliminate bookstores because it is clearly established that many customers of each bookstore that closes come to them. Another motivation for the publishers was to maintain a diverse ebook ecosystem, which at that time had just added Nook to its ranks and was about to add Apple. It is likely that Amazon’s discounting — thanks to the DoJ’s and court’s actions weakening agency — did as much to weaken Nook as any mistakes made by Barnes & Noble. And let’s not forget that Kobo has also abandoned active marketing in the US ebook market since then as well.

The other piece of Shirky’s screed that is misleading and inaccurate is his history of paperbacks.

Whether you date the beginning of paperbacks in the US to Pocket Books’s founding and Penguin’s establishing itself in the US in 1939 or to the period right after World War II when paperback publishing writ large discovered the magazine distribution system and really took off, there were decades between their arrival on the scene and their consolidation into the larger book business under joint ownership with hardcover houses. So it shouldn’t surprise anybody that, to the degree that the ebook disruption is analogous to the paperback disruption, the reaction would be even more extreme on the part of the incumbent establishment dealing with the lightning-quick change that has transpired since ebooks took off in 2008.

And that is quite aside from the fact that the paperback revolution was not 60-to-70 percent controlled by a single account that also controlled a substantial and growing chunk of the rest of the book sales as well. Be that as it may, Shirky is simply factually wrong to say that what happened was that the hardcover houses just bought up the paperback houses and consolidated them into the existing business. The acquisitions took place in both directions. In at least three cases, the paperback house bought the hardcover house (Avon bought Morrow, Penguin bought Viking, and Bantam bought Doubleday) in order to assure themselves a steady supply of good books.

And before the consolidation even began, real troubles had started to develop with the distribution through the magazine ecosystem. Returns were climbing (that is why prices of paperbacks went up) and paperback publishers were finding they needed to sell directly to many accounts, which made them more like the hardcover publishers. And over the couple of decades between the end of World War II and the beginnings of consolidation, almost every “hardcover” house had started doing its own “trade” paperbacks: not rack-sized and sold through the same network that sold hardcover books.

In other words, the analogy is not analogous in many important ways.

It is true that Amazon, at least in the current competitive environment, has everything to gain by pushing prices down and everybody else in the publishing world does not. And it is also true that the lower the prices of books are, the more accessible they are to more people. And accessibility is definitely a “good”.

Even so, I really resist the Manichaean view that it is “the Amazon way” or “the publishing cartel way”. It seemed like Shirky himself tried to dismiss that idea near the opening of his piece, when he attacks Steve Coll for writing “about book-making and selling as if there are only two possible modes”, which Shirky describes as maintaining the current “elites” or seeing Amazon become a “soul-crushing monopoly”. But that is precisely where he ends up. To look at things this way rejects not only what the publishers keep trying to tout as their “added values” (curation and editing, yes, but also marketing, distribution, and rights management) but it also ignores the interests of academic and professional publishing, textbook publishing, bookstores, and a diverse book retailing — and therefore book recommending — ecosystem.

There will be many Hachettes fighting their version of this battle over the next few years. But there will only be one Amazon.

Russ Grandinetti of Amazon.com is joining us for an interview by Michael Cader of Publishers Lunch and me at Digital Book World 2015, coming up next January 14-15. 


Amazon channels Orwell in its latest blast

Anybody who reads Amazon’s latest volley in the Amazon-Hachette war and then David Streitfeld’s takedown of it on the New York Times’s web site will know that Amazon — either deliberately or with striking ignorance — distorted a George Orwell quote to make it appear that he was against low-priced paperbacks when he was actually for them.

This recalls the irrelevant but delicious irony that the one time Amazon exercised its ability to claw back ebooks it had sold was when they discovered that they were selling unauthorized ebooks of Orwell’s “1984”. The right thing to do was exactly what they did: pull back the copyright-violating ebooks and refund the money to the purchasers. This (apparently) one-time event has often been cited as some sort of generic fault with ebooks, as though ebook vendors would make a practice of taking back what they had sold their customers. This was a case where Amazon was villified in some quarters for doing the right thing which simply adds to the irony.

However, the most misleading aspect of the Amazon piece is not the Orwellian treatment of Orwell, but the twisted metaphor in which the low-priced ebook is the low-priced paperback of today’s world. (The analogy was one I wrote about three years ago with, I think somewhat more care for the facts.) Yes, they were both new formats with a lower cost basis that enabled a lower retail price to yield positive margins. And there’s one other striking similarity: they both unleashed a spate of genre fiction to satisfy the demand for the format, largely because the rights to higher-value books were not available for the cheaper format, but also because lower prices attract some readers more than others. But that is where the similarities end.

This argument against Hachette, using authors as proxies and lower-prices-for-consumers as the indisputable public good, once again employs two logical fallacies that are central to their argument that Hachette (and its parent company, invoked to give the appearance of relative equality of size between the combatants, which is still nowhere near the case) is craven and muleheaded and that Amazon is merely engaged in a fight for right.

1. Amazon’s logic is entirely internal to Amazon. It does not attempt to take into account, or even acknowledge, that publishers and their authors are dependent on other channels besides Amazon. And, in fact, the publishers and authors know for sure that the more the sales do concentrate within Amazon, the more their margins will be reduced.

2. The price elasticity statistics they invoke (for the second time in as many public statements), which are also entirely internal to Amazon, are averages. They don’t even offer us a standard deviation so we can get a sense of what share of the measured titles are near the average, let alone a genre- and topic-specific breakdown which would show, beyond the shadow of a doubt, that many Hachette books would not achieve the average elasticity rate. See if you can find anybody with an ounce of statistical sophistication who thinks a book by Malcolm Gladwell has the same price elasticity as a romance or sci-fi novel by a relatively unknown author.

The actual history of the paperback in America contains elements of what Amazon claims. It actually begins after World War II, not before (although Penguin began in this country in 1939). During World War II, under the leadership of historian and renaissance man Philip Van Doren Stern, the military made 25 cent paperbacks available to the troops. That introduced the idea to the masses and after the war several mass-market paperback houses started.

They distributed through the magazine distribution network: local wholesalers that “pushed” copies of printed material to newsstands and other intermediaries who took their distribution of copies, displayed them until the next edition of the magazine would come out, and then sent back the covers to get credit for what was not sold. The first paperback books had a similar short shelf life in that distribution environment.

What made the cheap prices possible were several factors:

1. The books themselves were frequently formulaic and short and therefore cheap for the publisher to buy. The universe of titles for the first several years was, aside from classics from the public domain, a different set of titles than those sold by mainline publishers through bookstores.

2. There was no expensive negotiation between publishers and the accounts over an order for each shipment of books. The wholesaler simply decided how many copies each outlet would get and, in the beginning, the wholesaler pretty much distributed what the publisher asked them to. The “check and balance” was that the publisher would get worthless covers back for the unsold books and that was their constraint against oversupplying the system. Over time, that aspect of things broke down and the publisher had to work the wholesalers to get the distributions they wanted.

3. The books themselves were cheaper too: less and cheaper paper and much less expensive binding.

4. The adoption of the magazine system of covers-only for returns created a big saving compared to the trade book practice that required returns of the whole book in saleable condition to get credit.

5. The retailer took a considerably smaller share of the retail price than bookstores got on trade books.

At the same time that the mass-market revolution was beginning, conventional trade publishers also started experimenting with the paperback format. The first extensive foray of this kind was by Doubleday in the early 1950s, when wunderkind Jason Epstein (later the founder of NY Review of Books and still active as one of the founding visionaries behind the Espresso Book Machine) created the Anchor Books line.

My father, Leonard Shatzkin, was Director of Research at Doubleday (today they would call it “New Business Development” or “Change Management”) at the time. He often talked about a sales conference at Bear Mountain where Sid Gross, who headed the Doubleday bookstores, railed against the cheap paperbacks on which the stores couldn’t make any money! So, it was true that the established publishing industry and the upstart paperback business had a period of almost two decades of very separate development.

It took until the 1960s — a decade-and-a-half after the paperback revolution started — before the two businesses really started to coalesce into one. And the process of integrating the two businesses really took another decade-and-a-half, finally concluding in the late 1970s when Penguin acquired Viking, Random House acquired Ballantine and Fawcett, and Bantam started to publish hardcover books.

My own first job in trade publishing was in 1962, working on the sales floor of the brand new, just-opened paperback department of Brentano’s Bookstore on 5th Avenue. Even then, the two businesses operated separately. The floor of the department had chin-high shelves all around with what we’d call “trade paperbacks” today, arranged by topic. They were mostly academic. On a wall were the racks of mass-market paperbacks and they were organized by publisher. If you wanted to find the paperbacks of a famous author whose rights had gone to a mass-market house, you had to know which house published that author to find the book. (That was good; it made work for sales clerks!)

There was a simple reason for that. The two kinds of paperbacks worked with different economics and distribution protocols. The trade paperbacks were bought like hardcovers; everything that was shipped in was because a buyer for Brentano’s had ordered it. The mass-markets were “rack-jobbed” by the publisher. They sent their own reps in to check stock on a weekly basis and they decided what new books went into the racks and what dead stock was pulled. It was to make the work of the publishers efficient that the mass-markets were grouped by publisher.

The highly successful commercial books that became mass-market paperbacks got there because the hardcover publisher, after it had booked most of the revenue it expected to get for the book, then sold mass-market rights to get another bite of the apple.

Little of this bears much resemblance to what is happening today. Little of this is comparable to the challenges trade publishers face keeping alive a multi-channel distribution system and a printed book market that still accounts for most of the sales for most of the books.

But the most striking difference today is that a single retailer controls so much of the commerce that it can, on its own, influence pricing for the entire industry. The mere fact that one single retailer can try that is itself a signal that we have an imbalance in the value chain that is unprecedented in the history of publishing.

One other aspect of this whole discussion which is mystifying (or revealing) is Amazon’s success getting indie authors to cheer them on as they pound the publishers to lower prices. (The new Amazon statement is made in a letter sent to KDP authors.) This is absolutely indisputably against the interests of the self-published authors themselves, who are much better off if the branded books have higher prices and leave the lower price tiers to them. That seemed obvious to me years ago. Yet, Amazon still successfully invokes the indie author militia to support them as they fight higher prices for the indies’ competition! You will undoubtedly see evidence of that in the comment string for this post (if history is any guide).

The tactic of publishing Michael Pietsch’s name and email address with a clear appeal for the indie authors to flood his inbox is an odious tactic, but, in fairness to Amazon, that odious tactic was initiated by the Authors United advertisement headed by Douglas Preston which gave Bezos’s email address. This is something that both sides should refrain from and, in this case, Amazon didn’t start it.


Amazon’s clarifications always come when I’m on the road

Amazon’s recent brief “clarification” calls for some brief annotation, which is all I can give it while I’m traveling this week. The material below that is not bolded is the complete statement Amazon has just issued. The bolded paragraphs preceded by [MS] are my annotations.

With this update, we’re providing specific information about Amazon’s objectives.

A key objective is lower e-book prices. Many e-books are being released at $14.99 and even $19.99. That is unjustifiably high for an e-book. With an e-book, there’s no printing, no over-printing, no need to forecast, no returns, no lost sales due to out-of-stock, no warehousing costs, no transportation costs, and there is no secondary market — e-books cannot be resold as used books. E-books can be and should be less expensive.

[MS] “Unjustifiably high” is an opinion, not a fact. Everyone is welcome to their opinion, but everyone is welcome to not share it as well. Publishers pay money for the right to exploit copyrights and their “opinion” on pricing should be at least as important as anybody else’s. Agency publishers had a lot of experience with higher ebook prices that couldn’t be discounted before the DoJ stepped in and they apparently disagree.

It’s also important to understand that e-books are highly price-elastic. This means that when the price goes up, customers buy much less. We’ve quantified the price elasticity of e-books from repeated measurements across many titles. For every copy an e-book would sell at $14.99, it would sell 1.74 copies if priced at $9.99. So, for example, if customers would buy 100,000 copies of a particular e-book at $14.99, then customers would buy 174,000 copies of that same e-book at $9.99. Total revenue at $14.99 would be $1,499,000. Total revenue at $9.99 is $1,738,000.

[MS] This elasticity measurement considers only sales of ebooks at Amazon. What is the impact on print book sales when the ebook price goes up and ebook sales go down? What is the impact on the bookstore distribution network when ebook prices go up and ebook sales go down? It would be commercially irresponsible of publishers not to consider those effects as well.

The important thing to note here is that at the lower price, total revenue increases 16%. This is good for all the parties involved:

* The customer is paying 33% less.

* The author is getting a royalty check 16% larger and being read by an audience that’s 74% larger. And that 74% increase in copies sold makes it much more likely that the title will make it onto the national bestseller lists. (Any author who’s trying to get on one of the national bestseller lists should insist to their publisher that their e-book be priced at $9.99 or lower.)

* Likewise, the higher total revenue generated at $9.99 is also good for the publisher and the retailer. At $9.99, even though the customer is paying less, the total pie is bigger and there is more to share amongst the parties.

[MS] The publisher also benefits from bestseller list effects and is not likely to ignore them. The total ebook pie is bigger for that title; whether the total pie is bigger depends on a) the impact on print sales for that title and b) the total marketplace impact.

Keep in mind that books don’t just compete against books. Books compete against mobile games, television, movies, Facebook, blogs, free news sites and more. If we want a healthy reading culture, we have to work hard to be sure books actually are competitive against these other media types, and a big part of that is working hard to make books less expensive.

[MS] It is true that ebooks live in a world where they compete with other media. It is also true that the they live in a world which includes print, also an important component of a publisher’s and an author’s economic world. This analysis is very short on measurements of the impact on print sales of lower ebook prices.

So, at $9.99, the total pie is bigger – how does Amazon propose to share that revenue pie? We believe 35% should go to the author, 35% to the publisher and 30% to Amazon. Is 30% reasonable? Yes. In fact, the 30% share of total revenue is what Hachette forced us to take in 2010 when they illegally colluded with their competitors to raise e-book prices. We had no problem with the 30% — we did have a big problem with the price increases.

[MS] It is good to hear that Amazon accepts a 30% share for retailers as reasonable. Will they now extend terms reflecting that to all the non Big-Five publishers who are trapped in “hybrid” terms, giving 50% or more in wholesale discounts to Amazon for ebooks? Of all the points raised by Amazon in this document, this is the most consequential in terms of commercial impact.

Is it Amazon’s position that all e-books should be $9.99 or less? No, we accept that there will be legitimate reasons for a small number of specialized titles to be above $9.99.

[MS] Which titles are those? How about the academic and professional title universe that never operated on trade discounts until Amazon forced them into the trade discount world recently? The economics of those segments of the book industry are being devastated by trying to put them into the trade paradigm where they never belonged and never intended to be. It would be helpful if Amazon addressed with more specificity which titles they mean here and whether the differences in pricing that would apply to those titles might also suggest a difference in terms within the supply chain as well.

One more note on our proposal for how the total revenue should be shared. While we believe 35% should go to the author and 35% to Hachette, the way this would actually work is that we would send 70% of the total revenue to Hachette, and they would decide how much to share with the author. We believe Hachette is sharing too small a portion with the author today, but ultimately that is not our call.

We hope this information on our objectives is helpful.

[MS] And I hope the same for these annotations.


Subscriptions are in the news this week

Subscriptions for ebooks are certainly in the news this week. Amazon just announced their Kindle Unlimited offering, taking its place beside Oyster and Scribd as a “one price for all you can eat” Netflix- or Spotify-for-ebooks program. And the Book Industry Study Group has released a lengthy and fact-filled report from Ted Hill and Kate Lara covering subscriptions across publishing segments.

It is hard to quarrel with the report’s contention that “subscriptions are here to stay”. The report makes clear, and documents extensively, that there are a great variety of ways subscriptions can be offered and that tools making it easier to manage them are becoming cheaper, better, and more ubiquitous. The report suggests that subscriptions could occur for as narrow an offering as one author’s works. As technology enables subscription offers to be economically viable with less and less revenue, the tendency for more and more publishers to want to “own” their customers, combined with the tendency for publishers to build up their intellectual property inventory in an audience-centric (vertical) way, either organically or by acquisition, it is easy to see how they could proliferate.

When I have expressed skepticism in the past about the commercial viability — or commercial importance — of subscription services, my intention was (is) to confine my skepticism to broad-based services like KU, Oyster, and Scribd. In other segments, the viability of the model is obvious. Safari has operated successfully for a decade-and-a-half. Journal publishers figured out in the 1990s that selling annual access to the whole catalog of their publications, including backlist, was an opportunity presented by digital delivery because of the value of being able to search across the catalog. The science-fiction publisher Baen has had an apparently successful subscription offering for years. And patron-driven acquisition, which the BISG report calls a form of subscription (loose defining, to be sure), allows a publisher’s whole catalog to be exposed to a library’s patron base with purchase decisions to follow (rather than patrons only being able to see what a library had already bought) just makes sense for everybody.

But the consumer ebook business is a different animal and it is far from obvious (to me) that a model can be constructed that will satisfy all the stakeholders and provide profits for the model owner. But the pieces are certainly in place for us to find out.

It is clear from the catalogs presented by KU, Oyster, and Scribd that the jury on subscriptions is still out because big publishers are still reluctant to participate. No Big Five house has put books into Kindle Unlimited. Only HarperCollins and Simon & Schuster are (as yet) participating with Oyster and Scribd. Penguin Random House, Macmillan, and Hachette have — so far — held out. What those houses do in the next few months will tell us a lot about how likely the concept of the broad-based ebook subscription is to succeed in the future.

The BISG report surmises, and I agree, that only PRH could possibly deliver a general subscription offer on their own. I “predicted” some time ago that they would. A top Random House strategist tried to set me straight on that some months ago. This person asked the rhetorical question: “why would we want to turn $1000 a year book customers into $100 a year book customers?” Last week, an even more senior executive, recalling that s/he had read this speculation from me told me directly and assertively, “we aren’t going to do that.” (Random House executive Madeline McIntosh is quoted in the Hill-Lara report issued by BISG saying “Many people who are buying our books today are spending more than they would with a subscription.  If that amount starts to dip, then subscription services will become more interesting to us.”)

These people are straight shooters. I believe them when they describe their current intentions. But what if Scribd and Oyster and KU build big subscriber bases? And what if those subscriber bases tend to buy fewer books outside the subscription offering? It is in a publisher’s DNA to push books into any channel that will take them. They have resisted the subscription offers so far because they don’t want to empower an aggregating intermediary the way Amazon is now empowered (which is why KU has the hardest time pulling big publisher books into its aggregation) to beat them down on terms. This is good forward thinking if staying out stops the subscription services from reaching viability. But what if it doesn’t? How long can publishers refuse to participate in revenue opportunities for their books and authors?

The offers (as we understand them) by Scribd and Oyster, and in other ways by Amazon, have been very generous. Scribd and Oyster are apparently paying 80% of the cover price (to the big agency publishers; others don’t get that deal) once a book is deemed “bought”, which requires a threshold amount of the book — often suggested to be 10% for the Big Houses, which is where Amazon put the bar for Kindle Direct Publishing authors within Kindle Unlimited — has been perused by the subscriber. (Not everybody gets that deal either.) 

Amazon presumes the right to include books in Kindle Unlimited from its wholesale trading partners (everybody but the Big Five), but it considers the ebook “sold” when it is cracked, a far more generous interpretation of when a book has been consumed. (Nor is that deal for everybody. For authors and pubs participating in KU via KDP Select, the threshold for a “sale” is 10% like Oyster. Then they are compensated from the “KDP Select Global Fund”.) The introduction of KU and the various terms around it have been met by initial grumbling in Amazon’s indie author community, according to both Publishers Lunch and Hugh Howey.

Agents will be seeing what the subscription revenues mean to their clients. It will be harder for them to get a handle on whether those subscription services are cannibalizing regular per-copy sales, but they will have ample information from which to form opinions about that as well.

Part of what holds back the big publishers from participation in subscriptions is a fear that agents share. Today Scribd and Oyster offer 80 percent of cover price, and Amazon pays the minute an ebook is opened, because that’s what they have to do to get books in their service. And the books in the service are what bring in the subscribers.

But if one of these services has a million members three years from now, each individual book won’t be quite as important anymore. Just as Amazon can get along without maximizing their sales of Hachette books today, the subscription owners will see a different, and lower, value for each book and each publisher then. Amazon gambles today that the customers of theirs who don’t find the Hachette book they’re looking for will often just buy something else rather than go shop somewhere else. Their own subscription lock-in, PRIME, shifts the odds in their favor there.

Amazon will be in this game to stay. Offering Kindle Unlimited is relatively painless for them. They have the books and they have the audience; it is just another way to keep their customers loyal. The big questions for the industry are whether Oyster and Scribd succeed in taking a substantial number of single-purchase customers out of the market and, if they can, whether they have a sustainable model with the prices they charge customers and the way they compensate publishers.

If what they have works for them, then all publishers will eventually have to play. That will mean that HarperCollins and S&S will be joined by Hachette and Macmillan. And despite what their executives tell me today, I’d bet a steak dinner that Penguin Random House will see more opportunity and less risk in creating their own service than in joining one of the existing ones. In fact, a Penguin Random House “backlist only” subscription offer today would constitute the most robust commercial assortment in the marketplace if it existed.

It has seemed to me for a long time, and I said in a public forum over a year ago, that all the Big Five (and others) should immediately create a subscription service for kids’ books. Parents want their kids to be able to “shop” without actually delegating to them the decisions to spend money; many would love a service of this kind, even if it were publisher-specific. As the support services Hill and Lara describe get cheaper and better and better known, perhaps that will start to happen.

We will cover subscriptions at Digital Book World with a panel chaired by Ted Hill. Scribd and Oyster have already agreed to participate.


It is hard for publishers to apply even Harvard B School advice in their struggle with Amazon

Harvard Business Review published an article recently by Benjamin Edelman called “Mastering the Intermediaries” which gives advice to businesses trying to avoid some of the consequences of audience aggregation and control by an intermediary. The article was aimed at restaurants who don’t want their fate controlled by Open Table or travel companies who don’t want to be beholden to Expedia. The advice offered is, of course, scholarly and thoughtful. It seemed worth examining whether it might have any value to publishers suffering the growing consequences of so much of their customer base coming to them through a single online retailer.

The author presents four strategies to help businesses reduce their dependence on powerful platforms.

The first suggestion: exploit the platform’s need to be comprehensive.

The author cites the fact that American Airlines’ strong coverage of key routes made its presence on the travel website Kayak indispensable to Kayak’s value proposition. As a result, AA negotiated a better deal than Kayak offered others or than others could get.

Despite some suggestions in the late 1990s that publishers set up their own Amazon (which they subsequently half-heartedly tried to do with no success) and a couple of moves to cut Amazon off by minor publishers that were minimally dependent on trade sales, this tactic has never really been possible for publishers on the print side. Amazon began life by acquiring all its product from wholesalers — primarily Ingram and Baker & Taylor — before they switched some and ultimately most of its sourcing to publishers to get better margin. But the publishers can’t cut off the wholesalers without seriously damaging their business and their relationships with other accounts, and the wholesalers won’t cut off Amazon. So for printed books, still extremely important and until just a couple of years ago the dominant format, this strategy is not worth much to publishers.

However, the strategy was and is employable for ebooks, which are sold via contractual sufferance from agency publishers, even if the sourcing is (sometimes, not typically by Amazon) through an aggregator. That was the implied threat when Macmillan CEO John Sargent went to Seattle in the now-famous episode in 2010 to tell them that ebooks would only be available on agency terms. Amazon briefly expressed its displeasure by pulling the buy buttons off of Macmillan’s print books. (Publishers can’t cut them off from print availability, but they can cut publishers off from print sales!) In the meantime, Amazon’s share of the big publishers’ ebook sales has settled somewhat north of 60 percent, and those Kindle customers are very hard to access except through Amazon. This is considerably more share than Kayak had when American Airlines threatened their boycott.

In fact, it is likely that Amazon could live without any of the Big Five’s books for a period of time, except for Penguin Random House, which is about the size of the other four big publishers combined. The chances are that PRH’s size will prevent Amazon from treating them the way they are now treating Hachette. And the massive share that Amazon has of both print and ebook sales makes it extremely difficult for Hachette, or any other big house except PRH and possibly HarperCollins, to sustain an ebook boycott (with consequent print book sales reductions) for any significant length of time. In other words, for publishers dealing with Amazon, this horse has left the barn.

Where it has not yet left the barn is with the ebook subscription services, and for them many publishers actually appear to be following the strategy being suggested here. Only two of the big houses have put titles into Scribd and Oyster, and it appears that they got extremely favorable sales and payment terms in order to do so. Indeed, these fledgling subscription offerings must have the big houses’ branded books to have a compelling consumer proposition.

The second suggestion is to identify and discredit discrimination.

The HBS piece cites the complaints that eBay was giving search prominence to suppliers who advertised on the site forcing a reversal of the policy.

Although the search algorithms on powerful platforms are ostensibly geared only to give the customer what they’re most likely to want, it is probably generally understood that these results are jiggered to favor the platform’s interest. It is not surprising that Google has underwritten White Papers from UCLA professor Eugene Volokh and from Supreme Court nominee Robert Bork defending that conduct. Volokh argues that the first amendment prevents the government from interfering with search results and Bork says nobody is harmed if Google favors its own interests.

Could we apply that same logic to Amazon? How about this scenario?

Amazon is well on its way if not already past the point where they sell more than half of the books Americans buy (combining print and digital). Book consumers are highly influenced by the suggestions made and choices surfaced by their bookseller, whether physical or virtual. That is: the process of buying books is inextricably linked to the process of discovering books. So Amazon is getting a stranglehold on recommendations which for many consumers also means a stranglehold on marketing and promotion.

The “damage” to society that results from results being gamed in fiction is probably minimal, and restricted to Amazon promoting either its own published titles, its favorite self-published authors, and books from other publishers that have paid to play. But, with non-fiction, the consequences could be much more severe and of real public interest.

Imagine a persuasive book arguing that the government should sharply increase the minimum wage and let’s also imagine that Amazon corporately doesn’t like that idea. Is it really okay if they suppress the awareness of that book from half or more of the book-buying public?

This is the kind of an argument that can arouse the government which, so far, has shown scarcely more interest in Amazon’s dominance of book commerce than they would if they dominated the commerce in soft drinks or lawn fertilizer. Can they be awakened by publishers to this concern before dramatic cases affecting public awareness and policy are documented? We don’t know, but we do know that Hachette sent lawyers to Washington early in the Obama Administration to call attention to Amazon’s growing marketplace power and their willingness to use it. That apparently had no affect (unless, in some perverse way, it contributed to the government’s interest in pursuing the “collusion” case).

There could certainly be some consumer blowback to the gaming of search results by a platform, perhaps including Amazon. The Harvard article says Google changed algorithms that seemed to be burying Yelp because consumer sentiment, partly measurable in search queries, showed dissatisfaction among the public. But in the absence of an aroused government, it would seem unlikely that this suggestion will do publishers large or small much good.

It is definitely worth noting here that Hachette authors are involved in just such an effort right now over the current Hachette-Amazon dispute. (And Amazon authors, also often called “indie authors”, are pushing back in the other direction.) There is a difference of opinion about how much this is “hurting” Amazon or whether it will push them to a quicker resolution of the dispute; I’m not sure anybody will ever know the answer to that.

The third suggestion is to create an alternative platform.

As the piece explains, when MovieTickets was on the verge of dominating phone and online ticketing, Regal Entertainment and two other large theater chains formed Fandango.

Unfortunately, this is a strategy that simply won’t work as an antidote to Amazon. In fact, trying it, which publishers have, demonstrates a failure to understand the source of Amazon’s power in the marketplace.

Amazon’s strategy is in plain sight and is the title of the best and most recent book about them: Brad Stone’s “The Everything Store”. Books had a central role in getting Amazon started, but have now declined to very likely less than 10 percent of their revenue and far less of their operating margin. Books are strategic for Amazon, but not commercially fundamental. This is one of the reasons, perhaps even the principal one, why they operate their book retailing on margins so thin that the incumbent book retailers can’t match them. After all, B&N can’t make up the margin shortfalls created by offering books cheaply by selling that same customer a lawnmower. Nor do they benefit from additional scale provided by selling lawnmowers or cat food or server space.

The fact that Amazon did book retailing in a thorough and sophisticated way as they established their business to become an online Walmart made them different from omni-retailers in the past (going back to departments stores a hundred years ago) who sold some books.

The story has been told on this blog before about Amazon cutting prices more than fifteen years ago to discourage competition coming into the market. Although publishing is a profitable business for them, it is also a strategic component of larger objectives: getting an increasing share of its customers’ purchases across a range of physical products as well as to compete as a streaming content provider across the entire range of digital media.

No enterprise focused primarily on books can compete with that. Amazon takes too many customers off the table before whoever else is competing gets to begin and keeps them for a wide range of reasons. They’ve got the most admirable competitive position conceivable: a first-class operation supported by scale provided by myriad other enterprises, totally wide-ranging and broad knowledge of the details of book retailing, and the financial heft to accept diminished (or even negative) margins from time to time to support strategic objectives.

So, Bookish, the attempt to compete (although that objective was not explicitly stated) forged by three major publishers more than a decade after Ingram’s I2S2 attempt to create a broader base of online retailers, was never a serious threat. (It is now owned by another Regal, Joe Regal, whose Zola Books — an ambitious upstart ebook retailer — bought Bookish, apparently for its recommendation engine, from the publishers.)

This is probably the 20th year in a row, dating from their start in 1995, that Amazon has gained market share for sales of books to consumers. And that’s because consumers are making what for them is the obvious choice for convenience, total selection, and competitive pricing, as well as getting tied into Amazon through their PRIME program. Unless one of the other two tech giants in the bookselling world — Apple or Google — decides to make a dedicated effort to take some of that market share away from Amazon in both print and digital (and neither of them is much interested in print), it is hard to see where a serious competitor can come from.

As of this moment, there is no way for any ebook retailer except Amazon to put DRMed content on a Kindle, which eliminates a big part of the audience from play for any competitive platform.

The fourth suggestion: deal more directly. The article points out that people ordering takeout through online platforms like Foodler and GrubHub have often already chosen their restaurant so that restaurants that deal directly can afford to exit the platform.

As I was working on this post, HarperCollins announced that they have redesigned their website to be consumer-facing which enables them to sell books directly to consumers. They’ve collaborated with their printer-warehouse partner, Donnelley, to handle print book fulfillment and have a white-label version of indie ebook platform Bluefire to deliver ebooks. They promise that authors will be able to use the capability very easily to connect their own web presences and they’re thinking about additional compensation to authors that generate those sales.

This bold move has a hole in it, though, and it is one that publishers so far have no easy way to fill. All the non-Amazon platforms use Adobe DRM, which HarperCollins/Bluefire supports, so they can put your ebook on a Nook or Kobo device with copy-protection. Of course, they have their own “reader”, which can be loaded with ease on most web-capable devices and can apparently also be squeezed onto a Kindle Fire. But, because HarperCollins wants to continue to use DRM protection for the content, they won’t be able to sell directly to users of Kindle devices that are dedicated e-readers.

Although publishers have certainly encouraged that competition to Amazon which exists, their direct efforts have for the most part been limited to cultivating direct interaction with the end user audience to influence awareness and selection. Many smaller publishers are willing to sell direct without DRM and other large publishers sell direct in a more restrained way, but this seems to be the first concerted effort by a major player to drive direct sales.

It will be interesting to watch the pricing interaction between Harper and Amazon and whether Harper can come up with “specials” (bonus content, some connection to the author, bundling) that Amazon or another retailer can’t match. Competing on price is the retailer’s first instinct, but for publishers competing with Amazon on price is a fool’s errand, fraught with the potential for retaliation in many ways (including that “discounts” from publishers, the retailers’ margin, is presumably based on the publisher’s price. What does “publisher’s price” mean if they sell for less?)

But HarperCollins doesn’t need to get a big volume of direct sales for this to be a worthwhile initiative for them. I’d expect it to be copied. Any sales they can get directly increase their power in the marketplace.

There is one other initiative we’re aware of that can perhaps help publishers disintermediate Amazon for direct sales. That’s Aerbook, which widgetizes a book or promotional material for a book so that it can be “displayed” in any environment. Aerbook’s widgets can contain the capabilities for transacting or for referring the transaction to a retailer, Amazon or anybody else. Putting the awareness of the book directly into the social and commercial streams can be a big tool for authors and publishers. But even Aerbook can’t put a DRMed file on a Kindle. They offer a version of “social DRM” — essentially “marking” the ebook in a way that identifies its owner — which can be loaded onto the Kindle. But big publishers and big authors have apparently not yet come to a comfort level with that solution; perhaps the need to get to the Kindle customer directly and the experience Aerbook develops with their method will encourage a more open mind on that question over time.

So, it would seem, the best thinking presented by Harvard Business Review for how producers and service providers can dodge platforms trying to lock in their audiences has precious little that can be usefully applied by publishers to escape the grip of Amazon. Having taken about half the retail book market over the two decades of their existence, they have given themselves a reputation, tools, and momentum that will make it very hard to stop them from eating into the other half substantially in the years to come.

The fact that competing with Amazon is difficult doesn’t stop smart people from trying to figure out how it might be done. A group of publishing thinkers are holding a 2-day brainstorming session at the end of this month to come up with ideas. Two of them, Chris Kubica and Ashley Gordon, will be presenting at a session at Digital Book World in January called “Blue Sky in the ebook future”, which will include thoughts on how to improve the narrative ebook itself from Peter Meyers and somebody not yet chosen to speak about complex ebooks.


Much as I like Hugh Howey, I disagree with just about all of this recent post of his

I need to say couple of things at the outset here. The first is that I really like and admire Hugh Howey and the fact that I disagree with almost every paragraph of this post of his shouldn’t suggest that I don’t. That’s not snark or irony; it is sincere. I think it is both noble and natural for people to defend the entities and circumstances that make possible their commercial success and it is just human nature that those who have benefited from a paradigm reflexively want to defend it. I only wish that Hugh would exhibit the same respect for that tendency when it is exhibited by authors who have done well with publishers.

The other is that I don’t see the “Amazon versus the publishing establishment” battle as a moral choice, just a tug of war between competing business interests. (There are societal questions at stake, which some might see as moral choices, but the companies involved are doing what is best for them and then arguing afterwards that it is also better for society.) When I wrote what I intended to be a balanced piece about the Amazon-Hachette battle, it brought out the troops from the indie author militia in the comment string to call me to task and accuse me of many things, including being a defender of the people who pay me (although my overall revenues from Big Five publishers is actually pretty paltry with not one active consulting client among them for well over two years). I expect this post will do the same, which I find an unpleasant prospect. On the other hand, I’m sorta stubborn about saying the things I believe nobody else is saying…

I am not trying to “make a case” here for anybody: not for the publishers and obviously not for Amazon. All I am trying to accomplish is to call out what I see as the almost certainly unintended bias in the arguments as Hugh frames them. I continue to believe that self-publishing is a useful tool that most authors should employ at one time or another but that, still almost all of the time, an author who is offered a publishing deal from a major house willing to pay an aggressive advance is better off to take it than go it alone. (If you’re not offered a substantial advance, the calculus shifts, but there is a lot of work involved in self-publishing that is not described in much detail in this post, even though Hugh Howey knows much better than I do how much work it is!) And I think that generalized advice to authors to eschew publishers in a world where print still matters and stores still matter remains, as of today, unwise. That may well change in the future, but it hasn’t changed yet.

In this post, everything preceded by [HH] was written and posted by Hugh Howey. Everything preceded by [MS] is my response. I have left nothing out from Hugh’s original post.

[HH] A few weeks ago, I speculated that Hachette might be fighting Amazon for the power to price e-books where they saw fit, or what is known as Agency pricing. That speculation was confirmed this week in a slide from Hachette’s presentation to investors:


So, no more need to speculate over what this kerfuffle is about. Hachette is strong-arming Amazon and harming its authors because they want to dictate price to a retailer, something not done practically anywhere else in the goods market. It’s something US publishers don’t even do to brick and mortar booksellers. It’s just something they want to be able to do to Amazon.

[MS] Uh, yes. It is something they want to do in the market for ebooks that they don’t need to do for print. And it is something they want to do to the entity that controls 60% of their ebook sales, which no print bookseller does. And you’d be forgiven if you got the impression from this that Hachette only wanted to control the price Amazon sells at, not the price everybody sells at, keeping it the same across retailers. It does matter how you frame things…

[HH] The biggest problem with Hachette’s strategy is that Hachette knows absolutely nothing about retail pricing. That’s not their job. It’s not their area of expertise. They don’t sell enough product direct to consumers to understand what price will maximize their earnings. Amazon, B&N, Kobo, and Apple have that data, not Hachette.

[MS] But what Amazon, B&N, Kobo, and Apple know is not how to maximize Hachette’s or Hachette’s authors’ “earnings”, however they get divided between author and publisher. What they know is how to maximize their earnings and, mainly, their market share. And only Amazon and B&N have any picture of how the interaction between ebook prices and print sales works, which deeply affects an author’s and publisher’s earnings. None of the other ebook retailers have a clue about that, and Amazon doesn’t know how bookstore sales are affected (and it would be their objective to have them affected negatively, wouldn’t it?)

[HH] Beyond their ignorance of pricing strategy, Hachette also has a strong bias toward print books. Their existing relationships with major brick and mortar retailers gets in the way of their e-book pricing. This has been confirmed by my own publishers, who have admitted privately that they would like to experiment with digital pricing but don’t want to upset print book retailers. This puts their pricing strategy at odds with their investors’ needs, their authors’ needs, even their own profitability. In sum, they are making irrational decisions with their pricing philosophy. Hachette is making the same mistake that many publishers make, which is to think that harming Amazon somehow helps themselves.

[MS] Publishers are trying to keep a print book physical distribution infrastructure alive. That’s not irrational. It is rational. And it is the crux of the difference in objectives between a publisher’s strategy and Amazon’s strategy. The more bookstores fade, the better it is for Amazon and the worse it is for publishers. This is a problem you could have read about on this blog a long time ago.

[HH] The same presentation by Hachette to investors stressed the importance of DRM and the need to fight piracy. The presentation had very little to say about authors, which would be like an oil company giving a report to prospective investors and not discussing how its current wells are performing, the proven reserves it has on-hand, and what they are doing to discover new sources of oil. You know . . . the product they make their money from. Little is also said in the presentation about readers, possibly because Hachette doesn’t know who their readers are. Again, this is a presentation to investors by a company that doesn’t know its customers. Because they have too long relied on and been beholden to middleman distributors.

[MS] I’d substitute “leveraged” for “relied on and been beholden to” in the sentence that concludes that paragraph. Up until very recently, there was no efficient means or mechanism for publishers to sell directly to readers. Their “customers” were bookstores, and they understood them very well. And all the big publishers I know are investing in learning more about who are their readers. This graf begins with the complaint that authors aren’t acknowledged by publishers and ends with the complaint that publishers don’t know their readers. And the cherry on top is a biased characterization of the value and role of brick and mortar retailers. I guess the oil company reference is just to associate bad people with each other, but it otherwise seems gratuitous. The important and relevant point is that we’re still waiting for the first major author to say “no” to a publisher. It will happen, but it hasn’t happened yet.

[HH] DRM, piracy, and high e-book prices are not what a publisher should be fighting for and bragging to its investors about. Many consumers aren’t even aware that Amazon isn’t the source of their e-book DRM. Publishers (and self-published authors) opt in or opt out of DRM as they see fit. Those of us who think about the paying customer first and foremost opt out, and we are rewarded with their repeat business and their advocacy. Those of us who don’t fret over piracy invest our time where it can actually achieve something. Publishers need to adopt these same policies with all haste. More importantly, they need to stop ripping off their authors and their customers when it comes to digital pricing.

[MS] Recent data suggests pretty strongly that taking down pirate copies increases sales. But the efficacy of DRM is a good debatable point and it shouldn’t be in a paragraph that concludes with a gratuitous slam at big publisher pricing and royalties, which have nothing to do with DRM.

[HH] We know publishers are ripping off artists and readers when it comes to e-books. Harpercollins released this slide one year ago this month:


As author Michael Sullivan broke down in this damning blog post, it shows publishers making $7.87 on a $14.99 e-book while the author only gets $2.62. For a hardback that costs twice as much at $27.99, the publisher makes $5.67 to the author’s $4.20. What used to be a fair split is now aggressive and indefensible as publishers make more money on a cheaper product while the author makes far less. Publishers are ripping off readers and writers as they shift to digital, and they are getting away with it. They are even winning the PR campaign against Amazon, a company that has fought for lower prices for its customers and higher pay for its authors.

[MS] I agree that ebook royalties should be higher. But, in fact, only authors who sell their books to publishers without competitive bids (which indicates either “no agent” or “limited appeal generated by the proposal”) are living on that 25% royalty. The others negotiated an advance that effectively paid them far more than that. And guaranteed it before the book hit the marketplace. Publishers are making a massive PR error not raising the “standard” royalty since they effectively pay much more than that now, but the authors signing contracts with them know the truth.

[HH] Let me repeat: Publishers are waging a war here for higher prices and lower royalties. $14.99 is their ideal price for an e-book that costs nothing to print, warehouse, or ship. That’s twice what mass market paperbacks used to cost, which is what they are replacing. Reminds you of how cheaper-to-produce CDs suddenly cost twice as much as cassettes simply because they were new, doesn’t it?

[MS] Now, who’s not paying attention to authors? Right, it cost nothing to print, warehouse, or ship an ebook. But it cost something to create. And for many, if not most, publisher-published books, the publisher gave the author a substantial payment before publication. Focusing on the price without considering the value is the grossest form of “ignoring the author”. And the $14.99 price is more like the equivalent of the hardback; most publishers I know charge much less for the ebook when it is being published against a printed version that’s a paperback. And, in fact, they often charge less than $14.99 when the print edition available is a hardcover!

[HH] Publishers are also colluding with one another to offer lockstep digital e-book royalties of 25%, which is indefensible. Their every actions, when it comes to DRM, to pricing, to selling direct, to offering abusive services like Author Solutions, screams to anyone with ears that they don’t care about the writers and they don’t care about the readers. It doesn’t matter what they say, it matters what they do. And what they do is charge as much as they can get away with and take as much of the split as they possibly can. And they work with their competitors and against their retail partners to pull it off.

[MS] Publishers live in a competitive marketplace in general but nowhere more than when it comes to signing authors. The 25% hasn’t moved, but every book that is signed based on a competitive situation (one agent told me that’s at least 2/3 of them; one big publisher believes they compete for 95% of what they sign) is getting an advance that is calculated on a much higher percentage than the “standard”. So they “care” about the writers. If “caring about readers” is only demonstrated by low prices, then I’d say “Hugh has a point.” The problem is that the point is in direct conflict with “caring about the writers”, whose revenue is directly related to what readers pay (with only one exception: unearned advances paid by publishers).

[HH] Their own authors defend them, partly because they don’t spend any time investigating or understanding the business in which they are engaged. One Hachette author — a good friend of mine — said something to me the other day that made me realize they don’t understand how their books are ordered by retailers or delivered by the publisher. I suppose it’s okay to write books and not worry about the rest of the business, but this same author and friend had much to say about the Amazon/Hachette dispute, but without the basic understanding of how the relationship between those two companies works. Part of the blame for not knowing falls to publishers, who keep authors at bay and away from the business aspects of publishing. It was one of my primary complaints in that old blog post. Publishers need to embrace authors as business partners, and any author who hopes to make a career at this needs to be at least a little curious about how the industry works.

[MS] This slam at Howey’s fellow authors is both uncharacteristic of him and beneath him. The Hachette authors are doing precisely the same thing Howey is doing: defending their biggest source of revenue. What’s so surprising about that? And let’s not get too worked up about what people do and don’t understand. This piece demonstrates very little understanding of the economics of brick-and-mortar and the overall effort to sustain it as long as possible.

[HH] So we can see in their own slides that publishers do not have the best interests of their artists and consumers at heart. What about Amazon? Here we have a company that forsakes profits in order to pass along the savings to: A) Readers in the form of lower prices and to: B) Authors in the form of higher pay. That’s what we know today based on their actions. Of course, some interpret Amazon’s behavior as: “Once they are big enough, Amazon will gouge customers and take advantage of authors.” If you press on numbers, you might hear that Amazon will raise e-book prices to $12.99 one day and pay authors a miserly 25% of gross. Both of which are better than what publishers offer right now.

[MS] The pricing and split speculation is a pure straw horse. We know that what Amazon does today that pleases Howey also serves their larger strategic interests: growing market share and building the installed base of Kindle users. It’s nice when interests align. But what happens when they align tells you nothing about what will happen when they don’t. The recent changes that reduced author splits from Amazon-owned Audible shouldn’t be ignored in a paragraph like this one. (Emphasis here: I don’t think Amazon was wrong or immoral to have done this, but I think those making the argument that worrying about terms changing in the future is silly should at least acknowledge what has already happened!)

[HH] This bears repeating: The very worst that Amazon might do, in some hypothetical future, according to their fiercest critics, is still better than what publishers brag to their investors about doing today.

[MS] And this bears repeating. It’s a straw horse. The argument is attributed to these unidentified “fiercest critics” because it a straw horse. Pure speculation. Who knows what is the “the very worst that Amazon might do”?

[HH] Instead of operating under the hope that publishers will improve their business practices in the future and that Amazon will reverse course and start harming writers and readers once they gain more market share, why aren’t we condemning publishers for being the problem right now while celebrating Amazon for all they are doing to expand reading habits and to provide for artists? Why?

[MS] Simple answer. Because many authors are still being very well paid and well served by publishers. That’s why.

[HH] I think two reasons: The first is that we equate publishers to bookstores and Amazon to the loss of bookstores, and we all love bookstores. This is fallacious reasoning, though. Online shopping has impacted all of retail. These changes were inevitable, and they are the result of consumer choice. How those changes played out could have been publishers colluding with a distributor to price digital works higher than their paper counterparts. That would have been bad. Amazon leading those changes with their pricing philosophy has been good.

[MS] Much of this is true. Online shopping is inevitable; the pressure on brick-and-mortar is inevitable. And we all love bookstores, even though they don’t “map” into the future very well. But it is really disingenuous to just forget that Amazon benefits by brick stores going down faster and has discounted print books as aggressively as possible as well, which has contributed to the brick-and-mortar stores decline. I’m not demonizing Amazon over this; everybody has to run their own business and they run theirs very well. But let’s not pretend that altruism is all that is working here, or that changing circumstances couldn’t change Amazon’s pricing philosophy.

[HH] The second reason for the anti-Amazon bias is that some see Amazon as the giant and little old publishers as the underdog. That’s also wrong. The publishing and bookselling arm of Amazon is likely smaller than the combined earnings of the Big 5 publishers. Amazon makes a pittance on every e-book sold, while the Big 5 make out like bandits. Also, to say that these wings of Amazon’s operations are owned by a larger entity is to ignore that the same is true for the major publishing houses. If anything, Amazon is the clear upstart and underdog here. They are new to the market, rapidly innovating, blacklisted by brick and mortar retailers, setting up shop away from the established players, and ganged up on in an illegal manner.

[MS] No question Amazon gets “ganged up on”. We have two book businesses now: Amazon and everybody else. Everybody else includes publishers and retailers and wholesalers and agents and established authors. Amazon’s decision to “make a pittance” on certain products, including some ebooks, is tactical, not altruistic. I have to admit that characterizing Amazon as an “underdog” does activate the “gag reflex”. If this doesn’t qualify as hyperbole, I’m not sure what would. Let’s be clear and real: Amazon and Hachette are both leveraging their respective negotiating positions as best they can. It’s called business. (And,, from where I sit, it looks Amazon is in the stronger position, not Hachette. I’m not sure by what measurement Amazon could be considered the underdog here; I haven’t read any other analysis that makes that claim.)

[HH] I’ll go one step further and state something both outrageous and obvious: If the Big 5 had gotten together twenty years ago and DREAMED UP an ideal business partnership, one that would increase their distribution, provide excellent customer service to their readers, improve the livelihood of their authors, keep their backlists viable and books from going out of print, reduce their 50% return rate from bookstores to 4%, provide next-day and even same-day delivery, all while only costing them 30% instead of the 45% they lose to bookstores, they couldn’t have done better than what Amazon did for them.

[MS] Lots of truth in this paragraph, up to a point. Publishers (and authors) have benefited for years from Amazon’s willingness to sell books for almost no margin and by the shift from the less-efficient sales in stores to the more-efficient sales online. I spelled out clearly in my Amazon-Hachette post that Amazon has been the most profitable print account for most trade publishers for a long time. And I am happy to give them the full credit they deserve for making the commitment necessary to make the ebook business happen. That doesn’t change the reality that as their market share grows, we can see a concentration that changes what has been a good thing into a threat. For everybody else in the book business: those who are aware of it and those who are not.

[HH] Soak that in. Publishers should have engineered Amazon from the ground-up. A company that invests in distribution networks for their products rather than pocketing profits. And instead of celebrating all the hundreds of benefits, like pre-orders and customer reviews and the savings on print runs and returns that Amazon’s algorithms provide, they are trying to figure out how to put their best resource out of business. It boggles the mind. Like those authors who fear Amazon might take royalties away tomorrow, so are happy to give up those royalties today, publishers are siding with companies that are hurting them today out of fear of their greatest ally getting even more market share tomorrow. And readers and writers are the victims of this illogical behavior.

[MS] The unreality in the suggestion that publishers are trying to put Amazon out of business is mindboggling. I have cognitive dissonance. On the one hand, I believe Hugh Howey believes what he says. On the other hand, I can’t believe he believes that! Any publisher that thought this was possible would be deluded. The idea that it is some sort of deliberate strategy to put Amazon out of business is as far from the world we actually live in as the world of Hugh’s novels is.

[HH] What is the solution? As a writer, the solution is to retain ownership of your rights. This has never been more important than it is today. E-book royalty rates are going to move to 50% of net. I know from some insiders that this is already happening for top-name authors and hot new acquisitions. Selling your manuscript now for half of what it will be worth in the very near future is a bad move. It takes years for books to come to market with a traditional publisher. If that is your publishing goal, exercise a bit more patience. Hold on to that manuscript (or self-publish it) while you write the next. Let the market come to you.

[MS] This advice ignores the fact that a large number of authors got an advance that already pre-paid them for the royalties they could conceivably have earned by doing their own self-publishing when the publishers’ sales died. (Those “insiders” referred to are almost certainly talking about how the ebook component is calculated for advances paid to big authors, not a change in the contractual percentage.) Howey is conflating agreeing to a “half of what it should be” digital royalty with “selling your manuscript for half of what it will be worth” in the future. They’re not the same thing. I guess it’s just part of the campaign to find that first big author who turns down a publishing deal to do it themselves instead. To read this post, you’d never know we haven’t had one yet! (I thought we had one three years ago, but the one author who really threatened to do it changed his mind and signed a publishing deal with Amazon instead.)

[HH] The other option is to embrace a smaller press that has more flexibility. Online print book sales and e-book adoption have helped level the playing field for small publishers. They are becoming more viable every single day. These are the true Davids. They now have the tools and ability to see their works sell to a wide audience and win awards. I put them as the second best option behind self-publishing, and I include Amazon’s imprints in this category. They offer higher royalty rates and terms similar to small presses, though some have grumbled lately that Amazon’s imprints are becoming more and more like the Big 5, so watch what you sign.

[MS] I’m always happy to see smaller presses succeed, but they have a hard time competing against the Big Five, mainly because of Amazon. They are forced (by Amazon) to sell their ebooks on “wholesale” terms, which means giving much more of the retail price they set to the supply chain. This leaves them two choices. They can set a reasonable retail price (like an Agency price) and get nearly 30% less revenue than an Agency publisher. Or they can set an artificially high price and hope the retailer will discount from it. So even if they give the author a higher percentage of ebook sales, the net might not be higher. It is hard to succeed in today’s environment as a small press, not easy.

[HH] For readers, keep doing what you’re doing. Self-publishing and small presses are booming because you care about great stories, not where they come from. You are the disruptive force in this industry, and I say that with every ounce of love I can muster. Keep disrupting by doing what you do best: Read. Write reviews. Share your enthusiasm. Infect others. Spread the joy of this greatest of pastimes. And we will trust that those who cater to your needs and to the needs of the artists you admire will be the ones who come out on top. All others will need to change their ways or perish. If they do the former, let’s cheer for them. If they persist in the latter, let’s not be sad to see them go.

[MS] I am not happy to see anybody go. The desire to make villains out of the industry establishment is the most unattractive trait of what should be a hero class: intrepid authors who forge ahead without institutional support to make success happen. There is no doubt that Amazon has made that opportunity possible for most of them and it is easy to understand why anybody who has profited from the infrastructure Amazon created would celebrate it and want to see it grow. But author success has been achieved in a wide variety of ways and the way Hugh Howey has done it is still very much the exception, not the rule. We shouldn’t leap to conclusions from unusual cases. And I think it is an iron rule of nature that it is dangerous to generalize from one’s own personal experience.

I see from a subsequent post of Hugh’s that he will be in Toronto this week at Book Summit, as will I. I hope we’ll have a chance to have a Diet Coke and talk about this while we’re up there. My Logical Marketing Agency partner Pete McCarthy and I are kicking off the show on Tuesday morning. I always love visiting Toronto.


Subscription services for ebooks progress to becoming a real experiment

My long-held conviction that broad-based subscriptions for ebooks were not likely to work is partly based on facts that are now changing. It is still by no means a slam dunk that ebooks must go where Spotify has taken digital music and Netflix has taken the digital distribution of TV and movies, but it looks more likely today than it did six months ago. Still, looks could be deceiving.

The core of subscription economics is to pay less to the content supplier than they earn other ways to give you some headroom to create a value proposition for consumers. That’s how Spotify and Netflix work. That’s how Book-of-the-Month Club works.

And what happens over time with subscription services is that the power of “brand” passes from the individual titles (and authors) to the subscription service itself. In order to attract customers, a subscription offer depends on recognizable branded product to bring people in. But, over time, the value shifts. Eventually, a subscriber-reader can become used to choosing from what the service offers and will either not know about, skip, or accept purchasing the occasional book s/he wants outside the service if it isn’t offered inside. (A varient of this reality is playing out now in the Amazon-Hachette dispute, where Amazon’s brand power, including people who have a subscription to PRIME free freight, makes any particular publishers’ books subordinate to the seller’s brand with the consumer.)

None of this is particularly startling or insightful. Every agent for a big author knows it. Until very recently, that has meant that big publishers did not put the big books from big authors into these services. When the first shoe — the HarperCollins shoe — dropped and the second biggest trade publisher (and by far the largest of the four majors who trail Penguin Random House) went into Oyster and Scribd several months ago, I should have taken on board that the perception of agents must be changing. Now, with S&S having joined them, and with major authors included in the offerings from both companies, it is clear that agents are withdrawing their objections.

There are three reasons for this.

One is that the incumbents in the book business are circling the wagons against the dominance of book retailing’s most powerful brand: Amazon. As the market share of and customer loyalty to the industry’s biggest player grows, other dangers — such as those posed by subscription services if they mature — look relatively less onerous.

The second is that publishers and agents love the opportunity to establish that if subscription services want to “play” in publishing, they’ll have to pay for each ebook on a purchase deal. That is: the subscription services are establishing their “model”. And the publishers and authors are also establishing theirs!

The last is that the two big current subscription efforts are disdaining the fundamental economics to get their services started. The current model, as outlined by S&S CEO Carolyn Reidy in a letter to agents announcing her house’s participation, is that the service buys a copy of the book at “full price” when a “a certain threshold of reading has been surpassed for a given title”. But her letter also suggests that authors make even more money on these sales than they do on normal sales, which implies that Scribd and Oyster are paying more than 70 percent of the retail price for the privilege of using these books. (I have heard a range of numbers for where the threshhold of use to trigger payment is, from 10% to 40%, but I have no idea what it is and how it might differ among publishers.) Whether they’re paying 70% of retail or more, that means that it would take no more than two full-priced S&S or HarperCollins (assuming they have the same deal) titles a month to cost the service more than the revenue from a full-freight subscriber. And if the subscriber came through iOS, Apple’s 30% cut off the top would mean that even one major publisher ebook being read in a month will likely put the service in a deficit position.

Even when the purchase model is favorable, which this one appears not to be, it has been generally understood that the viability of a subscription model depends on what is called “breakage” or “health club economics” to succeed. They count on the expectation that relatively few subscribers will read and trigger payments on two, three, four books a month compared to many who will read one or less than one, or who will choose from among books (like public domain titles) that cost the services less or nothing.

The first of the subscription services for books — Safari — used a model that is much safer for the services because it assures cost stability, assigning a percentage of the revenue as a pool to compensate publishers rather than guaranteeing a purchase for every read as Scribd and Oyster are doing. I expect the purchase model to be very difficult, if not impossible, to sustain. But persuading the big players to come in depended on getting away from the safe “pool” model and purchasing the ebook anew for each new user.

A huge danger for the subscription services is the likelihood that subscriptions will be shared within families (let alone within dormitories!) That could drive up the average use per subscriber very quickly if it isn’t controlled.

Only now, with two of the Big Five in the game, giving the services about a third of the most commercial backlist titles in publishing, can they really find out whether the price-and-cost model they’ve set up will work to give them a profit. (It is important to note that HarperCollins and Simon & Schuster only put backlist titles into the services, so the most attractive commercial titles, which are new, are not part of the offer. This also means that all shoppers and purchasers of new titles will continue to use the stand-alone purchase model.)

I’m sure Scribd and Oyster have data and analytical skills that I don’t have. But, intuitively, this seems like a tough proposition. Subcription services are attractive to consumers because they’re bargains. If you normally read a single ebook or month or fewer, the $8.99 monthly subscription charge would not seem attractive. But if you read an ebook or two a month or more, the services will likely lose money on you.

Meanwhile, there are two players currently sitting on the sidelines that could really disrupt the subscription incumbents (which also include Spain-based 24Symbols, which has been around much longer than Scribd and Oyster but which hasn’t succeeded so far at bringing in the big publishers and the big books.)

There are rumors that Amazon is already canvassing for participants to deliver a subscription service of their own. Of course, they really already have one. Their PRIME subscription offer, for which the headline attraction is free shipping of hard goods, also includes access to the “Kindle Owners Lending Library”, which is effectively a broad-based ebook subscription service with some limitations and a far less robust title selection than Scribd and Oyster. Amazon could find ways to expand that. Will they match the implied compensation from Scribd and Oyster and pay more than the 70 percent which is the current standard for sales by agency publishers (which, therefore, becomes the basis for royalties to big authors)? One would suspect they would want something in return for that: exclusives, perhaps, or earlier access to the titles than Scribd and Oyster have.

Of course, Amazon (or Google or Kobo or Nook or Apple) would have an automatic advantage over the subscription incumbents if they decided to compete with them. Because they already sell all the books, they could sell you the books you wanted that weren’t in the service as part of a single offer.

The other future player of consequence is Penguin Random House, which by itself has well-known commercial titles that exceed in number what the services would have even if they signed up one more of the remaining big publishers. Hachette’s chief marketing and sales officer, Evan Schnittman, is quoted by the Wall Street Journal saying that this model is “not for us”. That leaves Macmillan, but even if Scribd and Oyster get them, PRH could have the most attractive title base on offer all by itself.

When I speculated some time ago about the opportunity PRH had to do this, one of their executives set me straight about why they wouldn’t. What I was told was that PRH was not thrilled by the idea of turning $500 and $1000 a year book customers into $100 a year book customers. Of course, that calculus changes for them if others are succeeding at doing that, and those new $100/year customers are then one step further removed from buying PRH books.

If PRH did this, they’d have one big decision to make: do they attempt to include the biggest titles from the rest of publishing in their offering or not. They’d already be starting with the most attractive title selection, but the Scribd and Oyster assortments would be competitive. If they went for some of the rest — even if only the top 10 percent of the rest — PRH could present a noticeably more attractive selection than Scribd or Oyster.

Would other publishers go in with them? I’d say, “probably”, because they can’t afford not to have their biggest books exposed to all possible substantial audiences, and PRH would almost certainly have the biggest subscription audience.

Would Penguin Random House want them? I’d say, “probably” again. It would stamp their offering as by far the best, and they’d still be advantaged dealing with authors because they’d be the only publisher not paying a third party to get the subscription revenue.

If “fear of Amazon” is the factor that made big agents relent in their opposition to subscription, would they also support joining an Amazon subscription service? That’s a trickier call, but as noted above, Amazon would have the capability to sweeten their offer to make it more compelling if that’s what they had to do.

But the main thing that works in favor of participation, now that the dam may have broken, is the psychology of trade publishing. Every big trade publisher has grown to be what they are today by selling their publications through intermediaries. Bookstores and then Amazon became the “gatekeepers”, owners of the customers. There was a symbiotic relationship: the retailers depended on publishers to deliver products to please their consumers and the publishers depended on the retailers to merchandise their offerings and manage the transactions. Access to a retailer’s customers first depended on getting your offerings into their store and then on having them be seen by the largest possible number of the store’s customers. That meant front tables and face-out display in the physical world; it means the right screen real estate, recommendations, and response to search terms in the virtual one.

That’s why the current hegemonies of Barnes & Noble and Amazon are so disconcerting to publishers. And that’s why the potential control of customer access by Scribd or Oyster might now look more like counterweight than threat.

Of course, it is also possible that the price-and-payment models Scribd and Oyster have begun with will prove unsustainable and that HarperCollins and Simon & Schuster — and their authors — will simply be the beneficiaries of a short-term bonanza financed by money that took a flyer that didn’t pay off. (And they’re not done taking those flyers.) That seems to me at least as likely as an outcome as these broad subscription offers becoming a permanent part of the bookselling landscape.

A lot going on around our place, so we haven’t had the time to switch away from what has become the horrendous service from Feedburner distributing The Shatzkin Files to its email subscribers. This one from last week on Amazon and Hachette (which is also linked to above) never was sent. (Of course, as I write this, who knows if this one will be or not?) It was written before the latest escalation where Amazon has removed pre-order buttons from Hachette book, a nasty blow that makes getting books on the bestseller list the week they come out very much harder. A lot has been written on this subject, but I think it still delivers some consideration of what it all means that hasn’t been picked up anywhere else.


7 starter principles for digital book marketing learned from Peter McCarthy

Times are changing in publishing and publishers know it. Almost every publisher recognizes that their value to authors, and therefore their future, is dependent on their ability to deliver effective marketing at scale. In this day and age, that means digital marketing, which also has the characteristic of being “data-driven” marketing. And not only is that a science that is really less than 10 years old, it is changing all the time. Ten years ago many of the most important components of digital marketing for books today — Twitter, Facebook, Goodreads — barely existed or hadn’t been born yet. They certainly didn’t matter.

Publishers can’t address their digital marketing challenge by simply spending more because the choices in digital marketing are endless. They have to be smart about what they do. Which means they have to be smart about something for which there is little established wisdom and no deep experience inside of publishing houses.

For a large part of the past year, I have been learning about digital marketing for books from the man whom I will regard as The Master until the day comes when I meet somebody who knows more. He’s Peter McCarthy. Pete started his career with nearly 3 years at The Reader’s Catalog, New York Review of Books, and the Granta family of publications. Reader’s Catalog formed part of the backbone of Bn.com 1.0. Then Pete spent six years at Penguin in the early digital days helping them build a DAM system and put out ebooks for the first time, followed by six years at Random House pioneering their digital marketing efforts.

Pete has made the point repeatedly that much of what he knows, does, and is teaching me is already well understood in the modern world of branding and marketing. The distinctions among psychographics, demographics, and behavior, and their importance in marketing, were new to me but are familiar stuff to people who sell Pepsi or Toyotas. Pete’s really invented something in publishing by looking for comparable products that aren’t other books, but outside publishing they know all about seeking comps that aren’t precisely the same as their own product. The techniques Pete employs to find audiences in people that are like the known audiences for a book are standard tools in consumer marketing outside publishing.

But that doesn’t mean publishers can just hire big digital agencies to help them. It won’t work. Because while publishing can use techniques that sophisticated marketers are using to sell other products in other places, the truly more complex world of books will be hard for them to cope with. And marketing budgets for a title that are rarely five figures, often three figures, and sometimes less than that don’t fit the best agencies’ idea of “workable”, either.

The big agencies would actually have no clue how to deal with thousands of highly differentiated products at the same time, which have some interconnectedness to them (because they’re all books, so Amazon author pages have to be optimized for all of them, for example) but mostly are unrelated. And not knowing that causes lost value two ways:

1. They don’t have techniques to apply mass optimization across hundreds or thousands of highly differentiated “products”, because the work they do doesn’t require it;

2. They don’t have the capacity big publishers need to run hundreds (or maybe even thousands) of campaigns at one time with realtime “budgets” (or “go, no-go” gauges).

So the big agencies wouldn’t know how to deal with a publishing house. The granularity would frustrate them and they’d freight each ISBN (publishing speak for “SKU”) with too much overhead.

That has left most publishers on their own, with service providers delivering some by-title assistance (you can hire somebody to do an author’s tweeting for them), but with the publishers themselves left to sort out how to make maximum use of a book or author’s digital footprint and social media presence to drive sales. And it is not really surprising that Pete McCarthy, having had the opportunity to meet the marketing challenge across thousands of titles and authors and hundreds of genres, topics, and imprints, would have figured out a lot of things that elude the publishers who aren’t digital marketing sophisticates and the digital marketing experts who rarely, if ever, encounter the granularity and product diversity that characterizes book publishing.

I’ve learned a lot from Pete, but I’ll never catch up to him and I won’t even try. He uses more than 100 different digital tools to help him understand followers in various social platforms and who they are. He is using a marketer’s understanding of each individual’s demographics, psychographics, and behavior (and behavior’s subset, intent), to define the groups of people he sees clustering. That, in turn, helps him find groups of people who are similar to the ones who already like the author or the book.

Pete has articulated many principles which make a lot of sense, even to somebody who didn’t know about demographics and psychographics and who has not worked his way through even a handful of “listening” tools, let alone a hundred or more.

1. The digital marketing menu contains nearly an infinite number of items. That results in a tremendous amount of wasted effort spent trying things that a little research would have indicated will never work.

2. The key to making sales is to put the right message in front of the right person at the right time. Research finds the right people; testing finds the right message and the right time.

3. The various tool sets will allow you to profile the “followers” of a book or author in Facebook, Twitter, or LinkedIn (or by securing an email address) and it will enable you to understand for each of them what kind of following they have. This is critical research to do before you invest effort and time in actual marketing.

4. Another key research element is to carefully pick your nomenclature. Tools can also tell you how common various words and terms are in searches made through Google, Amazon, and other venues. This informs the best choices for metadata tagging, of course, but it could also affect a book’s titling.

Understanding the book and author’s digital connections and the right language to describe the book you’re selling are “foundational” elements; everything flows from them.

5. The whole concept of marketing “budgeting” needs to be rethought. While the trap or danger in digital marketing is its infinite number of possibilities, the opportunity is that the results of efforts are visible and measurable. So everything that is tried should be measured and evaluated, continued it if is working and either altered or terminated if it is not.

This reality collides with the historical practices and commercial realities of publishers, particularly big publishers. Editors, who have to sign up the books and keep agents and authors happy, want to tell agents and authors what their marketing budgets and efforts will be. Whether the book is selling or not, agents and authors don’t want to hear that the marketing spending was cancelled because the efforts weren’t adding value. But a house can’t just add to the budget when something is working and not cancel anything that is not, or they’ll go broke.

6. The whole concept of “time” also needs to be rethought, both “time on the clock” (work people do) and “time on the calendar” — not just how long programs run (as above) but also when they take place in relation to the lifecycle of the book. In the digital era, whether books are well-represented in stores at any moment is not necessarily the key determinant of how well they’ll sell, so pushing a backlist book that might be thinly distributed but which is suddenly timely is perfectly sensible (“the calendar”). And it wasn’t that way five or ten years ago when marketing efforts wouldn’t be extended if books weren’t in the stores. It is also true that the external costs of digital marketing could be very low but a campaign could consume a lot of in-house time (“the clock”) with copy creation, design, and posting.

7. The key to successful digital marketing is to do the research that finds the right messages and targets, test the messages to the targets looking for a defined result, measure the impact, and then adjust the messaging and targeting. Pete calls that “rinse and repeat”. The objective is to find replicable actions that provide results with an ROI that can be continued until the ROI stops.

With Peter McCarthy’s help and in conjunction with Digital Book World, Cader’s and my Publishers Launch Conferences has organized a Modern Book Marketing Conference to lay out the core tenets of digital marketing for publishers. (So we can all learn from Pete McCarthy.) 

After Pete opens the day by introducing his basic approach, we’ll have a panel of top publishing strategists — Rick Joyce of Perseus, Angela Tribelli of HarperCollins, Matt Litts from the Smithsonian, and Jeff Dodes of St. Martin’s Press — talk about how they apply digital marketing in their companies. Then Murray Izenwasser of Biztegra, a top digital marketing company, will clarify the core principles of using consumer demographic, psychographic, and behavioral data before Susie Sizoler of Penguin covers how publishers can build powerful customer databases and reader insights. Marketers Matt Schwartz of Random House, Rachel Chou of Open Road Integrated Media, and Brad Thomas Parsons of Houghton Mifflin Harcourt will  talk about how they promote, including a “lightning round” of commentary about how and when to use the most important venues and tools: Amazon author pages, Twitter, Facebook, Goodreads, and many others.

We will have a round of speed-dating, so attendees can meet with key sponsors and expert speakers in small groups and get their individual questions answered. And we’ll conclude the day with Erica Curtis of Random House on best practices for measuring and analyzing your marketing ROI, and two panels. The first, on “how digital marketing changes budgeting and timing”, will feature case histories from Sourcebooks, Running Press, and at least one other publisher. The second on the new collaboration required among authors and marketers, will feature agent Laura Dail, outside marketer Penny Sansevieri, inside marketer Miriam Parker of Hachette, and an editor still to be selected.

This Marketing Conference is co-located with our Publishing Services Expo, which I described in a previous post, and attendees of the Marketing Conference are welcome to sit in on any part of PSE as well. At the breaks, sponsors and many of the speakers from both events will be available to the audiences for both events.

Full disclosure and a teaser “announcement”: Pete McCarthy and I are forming a digital marketing agency to apply his knowledge on behalf of publishers, authors, and agents. We’ll reveal more details, including our starter assignments, over the next few weeks.


Anybody Press is the new member of the Big Six (for ebooks, at least)

Bowker reported last week that 12% of the ebooks being bought now are self-published. There was skepticism about the methodology from The Digital Reader and Good e-Reader says Bowker’s data should be taken “with a grain of salt”. But the exact number doesn’t matter; the trend does. The share of the consumer ebook dollar going to books that aren’t coming from publishing entities means that the new Big Six for ebooks are the ones we know well — Penguin Random House and the four (HarperCollins, Hachette, Simon & Schuster, and Macmillan) that among them add up to about their size — plus Anybody Press.

And Anybody Press is almost certainly growing faster in ebook sales than any of the other Big Six.

This is happening almost solely with individual authors and still mostly with authors who are not in demand by the commercial publishers. Although it does happen that authors turn down their next deal to self- or unconventionally-publish (which publishing with an Amazon imprint, even under advance-against-royalty terms, still is because there’s to date no effective retail distribution), it’s still rare for that to happen.

The self-publishing or Amazon-publishing route still requires pretty much giving up on bookstore or other retail distribution. (Or so it has seemed. The news that Amazon has sold a million of “The Hangman’s Daughter”, an unknown number through the paperback licensed to Houghton Harcourt, may be contradicting that notion. Except we don’t know how many Houghton Harcourt has sold.) But the ebook royalties are higher, so it is a balance that deserves, and gets, constant review by agents and authors as the share of sales through bookstore or other retail distribution continues to decline.

If I were the business development manager for Anybody Press (and, on some consulting projects we are working on, I am) I would see lots of target markets for growth. I’d encourage my targets to keep doing the calculation of what the sales times royalty rate is for the “bought online” portion of the market versus what the sales times royalty rate is for a conventional deal that gets you the “whole” market. As the “bought online” share grows, more and more genres and authors will find that giving up the retail sale in favor of a bigger share of the revenue per sale online is to their financial benefit.

And the way things are developing — “Hangman’s Daughter” aside — you might not have to give up the store sale forever.

The “Wool” deal, where Hugh Howey sold only print rights to Simon & Schuster, hasn’t really been replicated yet for anything else that big, but it will be. (Successful indie authors John Locke and Bella Andre have done different versions of the same trick.) Royalty rates on ebooks from big publishers are bound to go up (while royalty rates for print books will probably go down). These will change the details of the calculations as they transpire.

Another way to make the jump from purely online sales to a publication strategy that includes print in stores is to use print-on-demand technology from Ingram’s Lightning Source. That’s how Open Road, which began life as an opportunistic ebook-only publisher, has chosen to manage print beyond Amazon. As has Byliner. (You can always deliver print with Amazon by working through their CreateSpace capability.) Now, that’s not the same as being published with an advance sale in the stores on pub date, but it does mean that if somebody walks into a Barnes & Noble or an indie bookstores and asks for your book, they’ll be able to order it for delivery in a day or two.

So aside from the market share fight big publishers will have with each other, there’s going to be a continuing market share fight between Anybody Press and the commercial industry. And for some time to come, Anybody Press is going to be winning. The question, like the question about online (and Amazon) market share growth is: where does it stop?

Big publishers do have ways to fight back. Putting together our upcoming (September 26) Marketing Conference with Peter McCarthy, who used to plot digital marketing strategy for Random House, I’m learning what can be accomplished when scaled technology and expertise are employed by engaged title-and-audience knowledge. And, particularly viewed in a global context and aside from straight narrative books, the print-at-retail component has a long way to go before it becomes irrelevant. But when I say that, I mean “many years”, not “many decades”.

This amorphous but growing competition is the “atomization” concept I wrote about recently in action. It can’t be neglected in the consideration of any branch of publishing’s future. In fact, indie entities, which is the way I think about atomization, are more likely to be disruptive on a larger scale than indie authors have been so far. So we might have Any Organization Press growing even faster in the next few years than Anybody Press has for the past few.

What people spend for books won’t necessarily shrink drastically, but where the money goes will shift drastically. The challenge for today’s leading revenue producers will be to find the ways their business models can adapt to the shift.


Further ruminations about the complex notion of scale in publishing

Our May 29 conference is built around the theme of “scale” in our business, which means something different than it did a very short time ago. Usually “using scale” means “employing the competitive advantages of size” but it can also be leveraging efficiency; the key beneficial characteristic of scale is that unit costs decline with increased activity.

In times past in publishing, the advantages of scale included lower printing costs (bigger companies doing more volume get better prices); lower warehousing and systems cost (because operations almost always get cheaper on a unit basis as they get bigger); and more revenue for each unit sold (because bigger publishers with better lists could get retailer and wholesaler customers to buy at slightly lower discounts).

All of these scale advantages were centered around what has been the core capability of a book publisher: to put books in sight and in reach of consumers on retail shelves. For the better part of the past 100 years, the publisher who could do that more effectively than its competitors had a significant advantage in the marketplace.

But with more and more of the business of customers finding and buying books shifting away from stores, those scale advantages are both reversing in reality and diminishing in importance. Publishers who had built great systems, efficient warehouses, and a nonpareil sales network find them managing less and less “throughput.” That means that less of their business is taking place in their scale-advantaged activities, but it also means the price of maintaining them is going up on a unit basis.

That’s why you see the two Big Six publishers who have invested most heavily in their scalable activities — Random House and Hachette — most active in competing with Ingram and Perseus (two companies far more dedicated to providing services) pursuing distribution clients. They can offer the benefits of their scale pricing to clients and, at the same time, preserve those benefits for themselves as the print-to-store segment of their business diminishes.

The shift in the business to online discovery and purchase would, at first glance, seem to have a leveling effect. Scale in reaching customers that used to require big publishing operations are now largely offered by Amazon, Apple, and Google. When you “searched” for a book in stores (whether you knew you were searching for that specific book or not), you might find it there and you might not. And you were ever so much more likely to find it if the publisher had a stack of copies in the front than if they had one spine-out copy in a store section. Those distinctions aren’t nearly as determinant of whether you’ll find a book at Amazon, or have it suggested to you by Google.

So the smartest big companies have focused on where scale can benefit them in the new context. Brian Murray, the CEO of HarperCollins, made the point to me over a year ago that his company was advantaged because they were launching books by the dozen into the marketplace every week, and each one gave them an additional opportunity to learn about search optimization, customer reactions, and how various tools from Facebook to Pinterest worked to boost awareness and sales. He was confident that the volume of activity they engaged in provided its own scale advantage.

As former Random House marketing strategist Pete McCarthy will make exceedingly clear in his introductory remarks at our May 29 show (and will amplify considerably at the Marketing show we’ll hold on September 26 just about to be announced), publishers can and should plan and execute all their marketing efforts in a holistic way to keep learning both about the components of the marketplace environment and about individual consumers. And, yes, the bigger companies will have a definite scale advantage in doing that.

But in our increasingly unbundled book business, “scale” — unit costs going down with increased activity — can be applied to niches with precision.

Companies like Hay House and Harvard Common Press and even F+W Media are relatively tiny compared to Random House (even before the Penguin acquisition) or HarperCollins or Hachette, but their focus on specific audiences means they may learn more on a niche-by-niche, or even customer-by-customer, basis than the big guys do.

I keep being amazed at what my longtime clients at Vogue Knitting can do on the back of a relatively small-circulation magazine brand in a niche market, including staging phenomenally successful and profitable live events that will ultimately dwarf the returns from their book publishing efforts (and augment them at the same time). But they can truly apply the scale they have reaching the audience of people who knit and want to know more about it. Nobody can do it as effectively as they can.

(I’ve told this story before. An agent told me several years ago that he had sold a mind-body-spirit title to Random House and that they sold 12,000 copies. He sold the author’s second book to Hay House, a MBS publisher, and they sold 200,000 copies. At that time, I believe Hay House had about one million email addresses of MBS-interested people. They undoubtedly have many more now. That’s people that you can mail to free; scale doesn’t come more starkly presented than that. For MBS scale, Hay House is the 800 pound gorilla.)

What we’re beginning to see repeatedly is that scale can be provided from a position outside publishing. One of our panels on May 29 is of new publishers that work from a base outside the publishing business. Two major daily newspapers (the Chicago Tribune and the Toronto Star), a kids’ animation studio (Frederator), and a business school (Wharton) all have publishing programs. They’re built on their own scale, and they have cost-effectiveness both on the content creation side and the audience-reaching side of the spectrum of publishing activity provided by their existing activities.

Publishers have watched Amazon come into the publishing business employing their scale. They’re now seeing Google do the same thing. Google’s entrance is in a self-created game niche, apparently far less threatening than Amazon’s far-reaching multi-genre plus general publishing approach to signing up titles many publishers might also be competing for. (How long before Apple decides to publish some books?)

These cuts to the commercial publishers’ share of the market are coming from literally thousands of directions. Each is a relative pinprick, but cumulatively they could lead to a lot of bleeding. Will the “scale” that a big publisher can bring to marketing from the experience they have with thousands of titles from across the interest universe provide a proposition that gets them into the game for the biggest commercial-potential books that can be produced by this new myriad of players? If there is truly scalable marketing activity, it should only become more efficient by adding relevant titles to its activity base. That would seem like the modern publishing equivalent of the perpetual motion machine.

I’m not smart enough to know if that’s possible, but I don’t think we’d even be asking the question if bookstores had the share they had five years ago.

A dramatic demonstration of the opportunities that can be provided by scale occurred yesterday, when Amazon announced its new initiative “Kindle Worlds” around fan fiction. Fan fiction has existed in a commercial box; because it depends on using characters invented and owned elsewhere, it couldn’t be sold. But the all time record bestseller “50 Shades of Gray”, liberated by rewriting away from the “Twilight” characters that spawned it, showed the powerful commercial possibilities in the genre.

So Amazon is applying scale to create a whole new commercial enterprise. First, they are licensing the rights to material fans can turn into their own stories, starting with properties from Alloy Entertainment but clearly planning to build out from there. Then Amazon will sell (and own copyright) in the output, using its huge audience as a commercial launching pad and paying royalties to all the stakeholders. Everybody in the game wins: the originators, the fans who create the fiction, the fans who buy and read the fiction, and, of course, Amazon.

No Comments »