John Sargent

Digital marketing and coping with Amazon are the two big challenges for publishers as we begin 2017

I am getting ready to attend my first Digital Book World as a “civilian” (having programmed and moderated the first seven), Thinking about DBW entails recognizing how different the book publishing world today is from what I expected three or six years ago. Be that as it may, the big challenges for the industry — how to change marketing to hit customers who are mostly learning what to buy online (which, as you’ll see, is well covered) and how to cope with the steadily growing market share that is Amazon’s — remain the ones I would have anticipated.

Although I do actually know other people who, like me, consume just about all their books on screens, we’re a minority who are not really looked upon by those who have stuck with paper as the avant garde. Whatever market share ebooks achieve by evolution (and the data suggest that share has plateaued in the past couple of years), the expectations of revolution are at least temporarily over. I thought we’d be clearly on a path by now to most people reading most narrative books digitally. We aren’t, even though the one precondition I thought was necessary has been met: most people carry screens all the time that would work fine for ebooks. This clearly demonstrates that there is a limit to how much the appeal of convenience changes reader habits when the comfort level with a form is a competing consideration.

But a flattening ebook share has not prevented the market from consolidating in the way I thought was worth worrying about when I mistakenly saw a more accelerated ebook future. By anecdotal information gleaned from publishers, Amazon appears to be booking half or more of the print sales for many publishers and many books.

(I told this fact to a former CEO who has been out of the business for 20 years last week. He said, “you mean, if I sell 40,000 books, Amazon will sell 20,000?” I said, “yes”. He said, “wow.”)

One informed estimate I heard is that Amazon constitutes upwards of 95 percent of online print sales. Kindle has outrun its ebook competition, gaining share consistently from Apple’s iBooks, B&N’s Nook, and Kobo and Google. Amazon probably has an ebook share in the mid-60s for most publishers. However, with the ebooks they control and keep off other platforms — Amazon Publishing and many of their top indie authors — and with additional impetus compared to the other vendors from their subscription business, their overall ebook market share is perhaps 10 or more points higher than that.

That anecdata is supported by a December 29 Wall Street Journal story that says that only a diminishing minority of Americans does not shop at Amazon!

(There is one big caveat about any observations about Amazon “share”. Like Ingram, Amazon is a domestic U.S. account that sells what it buys here all over the world. Probably the third biggest topic-of-interest for publishers is how to take advantage of the increased export opportunities promulgated by topics one and two. But one must take note of the fact that some of the dollars that flow through Amazon should not really be considered part of the U.S. market share. That varies by publisher, by book, by time of the year. It is also not transparent to any vendor or statistical analyst.)

When I went fulltime into the business in the 1970s, publishers were concerned because Walden and Dalton combined threatened to become 20 percent of the business between them.

But even percentages as large as what Amazon owns and what share ebooks get are worthy of closer and more granular examination. It is always worth remembering that the 6-foot tall man drowns walking across a river that is an average of 3-feet deep. Using aggregated averages is an engraved invitation to mistaken analysis.

So my expectation this year is that the most important information DBW is going to have to deliver will come from Data Guy, Hugh Howey’s collaborator on the Author Earnings website, whom Michael Cader and I introduced to the DBW audience last year. (We put Hugh Howey on the DBW stage when “Wool” became an Amazon bestseller many years ago.)

Data Guy has broadened his remit, which was originally about understanding ebook sales, by joining forces with Nielsen Bookscan. That enables him to analyze print, audio, and digital sales through online and physical store channels, and to look at the books both by source (indies, Amazon-published, and “traditional”) and by genre. DBW has published a mini White Paper, available now, that tips to a lot of this information. It is particularly readable and informative with an introduction by Porter Anderson.

But the big payoff — the examination of data broken down in 44 discrete categories and genres — will be delivered at the show. That should provide a great deal of value and insight for all of us.

I am hoping that there will be price breakdowns as well. I have noticed that the last four or five ebooks I’ve bought have been pretty pricey — well above $9.99. These books are all non-fiction and they are relatively serious and nichey, not aimed at mass audiences. I’m pretty certain that both the publisher and the author are making more profit on those sales than they would on a print sale of that book. The information already revealed by Data Guy through the White Paper would support conjecture that the biggest ebook sales are going to much cheaper ebooks published in high-volume-per-reader genres (like romance, mystery, and sci-fi).

We have had a bifurcated publishing business before. In the 20 years right after World War II, mass-market paperbacks did “originals” that were sold primarily through magazine outlets and not much in bookstores. (One cultural note: at that time, one of the key genres was “westerns”.) Authors could “migrate” to a hardcover life, but there were many who didn’t. It took years for the established houses to buy up the mass-market houses. That — plus changes in the economic structure of mass-market (caused by an allocation system for placement that resulted in ever-increasing returns of the covers of unsold books) that made the books go up in price — over time blurred the line between the two separate production-and-distribution systems.

If the same thing is happening today, it won’t lead to the same result. There are no returns from ebooks.

There are a number of other items on the DBW program that pique my interest besides Data Guy. My Optiqly partner, Peter McCarthy, is on a panel about “what sells books now” that is increasingly important to keep reconsidering as the market shifts and consolidates. And as the reviewing of books and conversation about them moves from the book review pages of newspapers to an increasingly diverse collection of blogs and influencers. Susan Ruszala, who recently ran NetGalley, is talking about “influencer marketing”, which is largely replacing the relatively static list of reviewers that NetGalley was originally created to address.

“The Changing Role of the Agents” is definitely one of the continuing evolutions we all need to keep track of. My sense is that agents three or four years ago were really frightened that indies would keep surging and their role would be highly challenged. I’ll want to hear what this panel, which includes Ginger Clark and Brian Defiore, has to say, but my sense is that that the once palpable-fear has really dissipated. Whatever Data Guy says about the direction of the market, and the data already revealed says he sees the share of author revenue going to indies going down for the first time, that fear no longer seems to be present. What I want to get a better grip on is how agents view the author-publisher division of responsibility for marketing and, if they’ll tell us, which publishers “get it” on that front and which don’t.

There is also a panel about “taking control of the channel” which promises conversation about vendor-managed inventory, a subject that has gotten too little attention from the industry forever and should become more important in a time when we’re going to want to sell books in non-book retailers that can’t afford the buying expertise books require. That was a challenge we never addressed when I was programming. I am glad it is on this year’s agenda and I look forward to getting a picture of how it is viewed today.

And Peter Hildick-Smith of Codex, who was on our programs frequently over the years, has two sessions that will make my list. One is on “converting book browsers to book buyers”, which is the holy grail. The other one is on pricing strategies on a panel that includes Dan Lubart of Iobyte, another longtime friend who has been mining online data for many years (while he also served as an executive at two Big Five houses). I suspect I’ll get some confirmation that the higher pricing I’ve observed for niche non-fiction is part of a widely shared strategy at the moment.

DBW keynoter and Macmillan CEO John Sargent fingered “maintaining ebook prices” as a key challenge for the industry in a session I saw him do at an agents’ gathering at least six years ago. He was right. How pricing strategies have evolved is something we all need to understand.

The one big missing piece for me in DBW 2017 is Amazon. I know from my own experience that they only come and talk when they’ve got a message they want to deliver to your audience, which makes them no different from any other big company.

The big “get” for DBW 2017 is Sargent. Perhaps he intends to use the time to highlight an announcement or initiative. Not that that’s necessary! Sargent has a refreshing and original take on things, whatever he’s discussing. And DBW has added a nice wrinkle by soliciting audience suggestions for the questions Sargent will answer after his talk. *That nicely finesses a challenge I recognized when I was running the show. It is cumbersome to take questions in the plenary sessions: too many people, too big a room, and too much of an invitation to host an unwanted speech. This way, they get audience participation without those problems. Nice innovation.

(*Turns out I got this wrong when I first posted. The answers to the 7 questions ARE the keynote! So I guess if Sargent has any topics he really wants to cover, they could make sure they get a question for them.)

The Data Guy analysis will certainly produce some Amazon-centric insight. But considering their mushrooming importance to everybody in the book world, that’s a subject about which we can’t get enough information. At least there will be ample opportunity to talk about Amazon and how different publishers are looking at them with the other attendees. I suspect there will be a lot of such conversation. At least I’ll be having some!

One big innovation at DBW 2017 is that they’ve added a third day which is an IndieAuthor conference. They’ve lined up some great speakers including Pete McCarthy. One of real interest will be Jon Fine, whose career in publishing encompasses both Knopf and a long stint at Amazon. The agenda for that one is, as it should be, aimed more at the indie author I’m not than the publishing-establishment-analyst I am, but it will be very interesting to see how successfully they can pull an indie author audience to midtown Manhattan. 

And, in conclusion, a hat tip to Ted Hill who took over the reins at DBW this year. The author day and the questions for Sargent are two of a number of innovations he’s introduced. I first met Ted in 1993 when I was programming my first conference — Electronic Publishing & Rights — in partnership with Publishers Weekly. Ted was selling “electronic rights” for Simon & Schuster and making a LOT of money for the company from sources they never knew existed before. Over the years, he’s seen publishing’s digital change from a number of angles, some on assignments we’ve worked on together. He put together a good team of vertical captains to help him. I’m looking forward to an enlightening couple of days.


The big global publishers are integrating across both territories and languages

Since I posted this two days ago, one of the Big Five CEOs pointed out some things I missed that are important. These are addressed in a post-script at the bottom. Subscribers to the blog would have received the original post without the “correction”. My apologies.

The announcement this week that John Sargent has apparently moved up another notch in the global Holtzbrinck hierarchy reminds us that the cross-border and now cross-language integration of the publishing giants, a very complex undertaking, continues to develop. Sargent was already the global “trade” head for the company, which suggested that integration of the publishing strategy and operations across Macmillan (Holtzbrinck’s trade division) companies was already an important priority. Now he is EVP of the entire global entity.

This follows an announcement a few months ago by HarperCollins that it was appointing digital head Chantal Restivo-Alessi to be EVP, International, to oversee the publishing through Harper’s growing foreign language capabilities.

Until very recently, just publishing simultaneously in a coordinated way across English language companies located in different countries was a seldom-attempted challenge. HarperCollins and Holtzbrinck seem to be shooting right past that hurdle and are setting themselves up to publish in multiple languages in a coordinated way, which is a much heavier lift.

The publishers who are doing this are seeing at least two things that motivate them.

One is that selling books is considerably more profitable for publishers than selling rights. This fact has been behind the creation of the global trade publishing behemoths in the English language. Until things began to change in the 1970s, there really were no trans-national book publishing companies. Since then, acquisitions have given us five big global trade book publishing houses. The only American-owned one, Simon & Schuster, and the French-owned one, Hachette, seem to have the least integrated global English trade presences. Simon & Schuster just has less in the way of foreign-based assets. Both Hachette and Penguin Random House have a federated structure by which the local companies report up to the parent, not to a global trade head. Macmillan and HarperCollins have both been more aggressive about integrating their international English publishing efforts.

And now both of them appear to be interested in extending that integration beyond their English-language companies.

The logic behind this kind of integration is both clear and unassailable. In the Internet age, as we’ve seen for a long time, there really is no such thing as “local” publication anymore. Anything announced anywhere is heard everywhere. And it actually requires active controls to stop anything that is available anywhere from also being available everywhere. Because English is so widely known beyond native English-speakers, the English language editions of new high-profile books sell in many countries for which the first language is not English. This has become a new factor in placing non-English rights.

Until the Internet really “arrived” two decades ago, the rights-trading activity could take time and it didn’t matter, even within the English-speaking world. I remember about 20 years ago when my friend George Gibson discovered the bestseller phenomenon “Longitude” by Dava Sobel. He published it in the US and it became a big bestseller. But even though it was a story that took place in England, it took him a year or more to make a sale to a UK-based publisher. (When he did, “Longitude” went on to one of the longest-runs of all time on the UK bestseller lists.)

A story like that would be very unlikely today. Gibson owned those rights to sell. The chances are the search traffic numbers alone would have accelerated the process of finding a buyer. Or else the US publisher, even a tiny one like Walker, where Gibson was at the time, would have released the ebook for global distribution and made some sort of deal for print to be made available as well.

Because the marketing of each and every book starts with the enthusiasm of an acquiring editor, and because each new deal an agent can negotiate is a new opportunity to get a publisher to overpay, both agents and publishers were comfortable with the process as it has always been. Relatively few of the high-profile agented books are even sold for “world English”, let alone with rights beyond the English language. Just like publishers’ value is directly related to the number of accounts through which they find customers for a book, an agent’s value is directly related to the number of deals they can make for each property.

If an author can get the reach they need through Amazon alone, then it is hard to accept a royalty from a publisher of a third or less of what Amazon will pay directly. Amazon, the publishers, and the author community are all very aware of this. It is one of the two main reasons why publishers try so hard to shift share away from Amazon. (The other, of course, is that the bigger Amazon’s share of the market, the more leverage it gives them to push for a bigger share of each sale.)

And if we see a trend where one publishing deal gets an author just about all their revenue, it will also be harder for authors to accept paying a full 15 percent agent’s commission to get it, particularly once the author becomes a global brand. (And the big brand authors are precisely the ones whose books will benefit the most from a coordinated global publishing effort.)

The structural impediments to publishing this way are not trivial. It will be a very long time — not in the working careers of any of today’s executives — before coordinated global publishing is important for any but the biggest books on the list. Most titles that each of the local companies puts out will be territorially constrained, as they have always been.

But it will, indeed, be the biggest ones — probably fewer than five percent of the titles that could earn half the revenue — that the coordinated efforts will affect. These are the books that every big global house needs to sustain itself.

Nielsen, through its Books & Consumer data service, is able to create individual author profiles for approximately 350 authors: those with substantial enough sales to enable digging down into the demographics of their book buyers and getting useful information with granularity. I’d guess those profiles will make popular reading as the publishers develop their global capability, particularly since Nielsen is also tracking across both countries and languages. And those 350 authors are almost certainly among the 500 top candidates for this type of treatment.

Sargent and Restivo-Alessi are blazing a new trail. Integration of publishing efforts this way will affect advances, royalties, workflows, and marketing strategies. They will effectively create “new propositions” to put in front of the biggest authors in the world. Penguin Random House and Hachette, because of their internal structures and S&S, because of its relative US-centricity, will be challenged to keep up. (Until their internal structures change, of course, or until they make some other adjustment. Which they will.)

Agents for the biggest authors in the world will be hearing the new pitch. On the one hand, they’ll be looking at opportunities to do record-breaking contracts. On the other hand, they’ll be doing what used to be two, three, four, or more deals in one and, in the long run, probably making at least some of their authors wonder whether they should have to pay that same hefty commission the next time around. When an author in this category asks for a fee reduction to continue the relationship, I suspect that most of the time, they’ll get it.

Of course, working in multiple languages and territories is something Amazon can also do very well. But they will probably stay out of this competition, at least at the beginning, because it will be a high-advance environment and Amazon has shown no taste for that as a strategy.

Nonetheless, the signs are that the ecosystem at the top of the commercial pyramid is going to have some new distinguishing characteristics. It has been noted many times in many places by many people that the economy the Internet creates favors the winners and exacerbates power law distribution. This is about to become another example.


And now the postscript.

In fact, the “structural” differences are not as dramatic as the post describes them, although there are differences and, indeed, HarperCollins and Macmillan are best-positioned to offer and execute on global multi-language and multi-territory deals than the others.

Markus Dohle is the CEO of Penguin Random House. He has the same “authority” as Murray and Sargent do. But Random House has always been highly “federated”, with a lot of power in the imprints. That makes coordination across territories that much more challenging, as does the fact that PRH is twice the size of HarperCollins and six times the size of the other three. Being of a “certain” size is necessary to make global publishing possible, but the larger you are beyond the minimum required, the harder is coordination. It could even be that smaller global publishers — there aren’t many, but Quarto is one example and Bloomsbury another — could execute on this concept even better than the Big Five. On the other hand, smaller publishers won’t compete for the massive books like those of the 350 authors that Nielsen tracks.

In Hachette’s case, Arnaud Nourry in France holds a position above all the companies as well. All the English-language Hachette publishers report to him, as well as others. But since the biggest books have their biggest share of sales in English, and because Hachette too has given great autonomy to the local companies, it is still likely that they would find it difficult to engineer the kind of coordination we’d expect to see from Harper and Macmillan in the relatively near future.

And, finally, Carolyn Reidy of Simon & Schuster is also a global head, but the company doesn’t have nearly the resources across languages and countries that the other four do.

Since I’m adding this post-script, I will also report that a couple of significant agents pushed back at me on Twitter, saying that they were very skeptical of the potential for big company coordinated synergy across the world. They’re saying they’ll be hard to convince. But, then, so did the original piece.

1 Comment »

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.


What to watch for in 2013

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


The ebook marketplace is a long way from settled

When we put on conferences, we sometimes book speakers because of who they are, or who their company is, but we also do our best to make sure the content of their presentation will be useful to our audience. So I had booked Matteo Berlucchi, the CEO of the British ebook startup Anobii, to speak at last January’s Digital Book World 2012 some months before the event for two reasons. For one, I had met Matteo at our Pub Launch London conference last June and he impressed me. And, in addition, his social-network-conscious ebook retailing operation has three major houses — Penguin, HarperCollins, and Random House — as investors.

A couple of weeks before DBW 2012, we got on the phone with Matteo to learn what he wanted to talk about. That’s when he told me he’d call for publishers to give up DRM because, as he saw it, their doing so was the only way he could compete for Kindle customers. As a conference organizer and promoter, I was instantly aware that he was handing us a major news break: a retailer partly owned by three Big Six publishers was calling for the end of DRM! There was some gallows humor on the call about how Matteo would bring his CV (curriculum vitae, which the Brits use more freqently than the American “resume”) along to New York.

But, of course, Matteo wouldn’t have been doing something like that without the knowledge of his owners. So it was not a stretch to draw the inference that three major publishers didn’t mind floating a trial balloon, or perhaps what they were thinking was that it would be good if Amazon knew they’d seriously consider this.

His presentation created a stir, as we knew it would.

But Pottermore created an even bigger stir when they demonstrated how to execute on the “no DRM” strategy, including how to position the big retailers in that context. As we all know now, the threat that Pottermore might be able to load Kindles with Potter books (by selling DRM-free; it would be hard if not impossible for an outside vendor to crack Kindle’s proprietary DRM to load “protected” content on it) persuaded Amazon to play ball. They send Potter ebook buyers over to Pottermore’s site to register and pay and then are willing to take the customer back to load a DRMd ebook file on their Kindle. (Meanwhile, Pottermore enables also loading a Nook file, an iBooks file, and even provides a non-DRMd epub file for more general use, all for the same single purchase.)

Back in the early days of ebooks, which was not a hundred years ago but actually about five, Brian Murray, the CEO of HarperCollins, invested in the company that became LibreDigital (now owned by Donnelley) because he had a vision that publishers should deliver their own ebook files. Murray’s concern at the time was about piracy and file control. Whatever it was, the ebook retailers (mostly Amazon back then) shot the idea down. No way were they going to trust a publisher, any publisher, to provide service at the level their consumers had been taught to expect from them. So the model we’ve lived with until Pottermore has been that each retailer has its own copy of the publishers’ ebooks, and they serve their customers and account to the publishers for what was sold.

Pottermore pointed the way back to Murray’s original vision.

A few weeks later, Macmillan announced that one segment of its company,, was going DRM-free, although not jumping into the full Pottermore model of serving the content themselves. (One Macmillan executive told me that they’ve been selling the books of anti-DRM crusader Cory Doctorow without protection for years, including through Amazon.)

Fritz Foy, the Macmillan EVP who oversees digital, is speaking about the DRM decision at our Publishers Launch BEA event on June 4.

Last Friday, the next round in this battle was fired. Berlucchi published a post calling on all the big publishers to copy the Pottermore model, and do it now.

How this will play out depends a bit on what happens with the DRM-free experiments now begun at Pottermore and about to start at Macmillan. If sales of their books collapse under the weight of ubiquitous piracy as a result, it would stop this kind of experimentation dead in its tracks.

It would also surprise a lot of people, including me.

If the net destructive impact on sales is too trivial to be measured compared with the DRMd status quo, then we are bound to see this practice spread, and quickly. And then all the biggest publishers could be compelled to return to Murray’s several-years-old vision with Pottermore’s execution template.

The question for the first publisher that wants to try this will be whether the power of a Big Six publisher to compel Amazon to play along is as great as J.K. Rowling’s Harry Potter franchise. It’s a really scary thing for them to do. After all, Rowling had zero digital revenue to protect and zero responsibility to anybody else for delivering it. All the major publishers have triple digit millions of dollars of Kindle revenue at stake and thousands of authors counting on them to deliver it.

But with Barnes & Noble now funded (by Microsoft) for battle for the next several years and Kobo and Apple committed to the fight as well, there’s a serious question as to whether Amazon would feel as comfortable going forward without one of the Big Six’s ebooks the way they have been willing to work without those from IPG.

In January 2010, John Sargent and Macmillan had a confrontation with Amazon and the retailing giant was forced to back down. The concessions that Charlie Redmayne of Pottermore (and he was, incidentally, recruited to that job from his position as Chief Digital Officer at HarperCollins) extracted from them are nothing short of stunning, but understandable if one considers what the impact of a Harry Potter ebook launch without the titles being available through Amazon would have been. (Oh, the headlines that would have generated!!!)

It’s easy for me to say, because I have nothing at stake, but I think Berlucchi is right. The big publishers can make this happen; it would change the game. I have trouble seeing any potential fly in the ointment for them except whatever would be the dangers of DRM-free. And that should be ascertained pretty well in the next few months.

There are still plenty of twists and turns to come in the evolving ebook marketplace.

It is important to remember that DRM isn’t Amazon’s only advantage or even their principal advantage. I’m not an Amazon fanboy (have you noticed?) and I read on an iPhone, but I buy most of my ebooks from the Kindle store because they offer the best shopping experience I’ve found.

However that (the shopping experience) isn’t a permanent advantage. The Kindle format and DRM are, as long as publishers feel DRM is essential.


What’s the greater fear for publishers? Amazon or piracy?

Pottermore changed the game this morning. Congratulations to Charlie Redmayne, their CEO.

The “aha” moment for me was when somebody on a listserv mentioned they’d bought Kindle editions of the seven Harry Potter books which, it had been announced, were available only from the Pottermore site.

Penny drops. First thought: Hnh? How did that happen?

Then the news came that Amazon was referring people off its site to Pottermore to buy the Kindle editions of Harry Potter ebooks. (It turns out that Barnes & Noble is doing the same.) There they register themselves and then can buy the ebooks.

This is, by far, the biggest concession that has been wrested from Amazon since John Sargent faced them down over the buy buttons on Macmillan print books on that January weekend in 2010 following the Thursday when Sargent flew out to Seattle to tell them Macmillan was going to the agency model.

In January at Digital Book World, in what turned out to be a prescient presentation, Matteo Berlucchi of Anobii (an ebook retailer based in the UK that is partly owned by three major publishers) observed that only by eliminating DRM could he sell to Kindle customers. He pleaded with publishers to do that.

Now Redmayne, who until November was working for HarperCollins, has demonstrated the truth in what Berlucchi said.

Back in about 2007, HarperCollins was instrumental in turning LibreDigital into an ebook delivery platform. At the time, Brian Murray, Harper’s CEO, articulated the vision that the publisher would just serve all the ebooks to customers, with no need to entrust retailers with digital copies. I believe one of the stated motivations was to reduce piracy by reducing the number of points of distribution of files. The idea was shut down pretty quickly because Amazon and other retailers wouldn’t go along. They would have said, and it would have been a reasonable point, that they had to control the service levels to their customers.

Redmayne and Pottermore have now demonstrated that if you will live with the anti-piracy protection of watermarking, rather than insisting on a digital hammerlock through DRM, you can gain extraordinary leverage.

Without DRM, as Berlucchi explained, anybody can sell ebooks that can be read on a Kindle. Once Pottermore decided they could live without DRM, they faced Amazon with a very difficult choice. The ebooks were going to go on Kindle devices whether Amazon wanted them there or not. Either they could ignore them or they could play along. I am sure the “play along” deal includes compensation to Amazon for the sales they refer (as it does B&N and, according to a quote from Redmayne, other distribution relations and affiliations will be enabled going forward.)

In other words, in a refreshing change from recent history, the content owner was able to present Amazon with a “take it or leave it” proposition. They decided to “take it”. They were wise. The game was changing either way.

The $64 million question is how the Big Six executives and strategists are viewing these developments. There is no author in the world with the power of J.K. Rowling to do this; she’s the Beatles. But, how about a big publisher? What would happen if Random House or HarperCollins (or one or more of the other four) told Amazon, “we’re taking off the DRM and we’re going to serve all our ebooks ourselves; you’re welcome to continue to sell our books on a referral basis”?

Could this change the strategy for Bookish going forward?

Obviously, this tactic won’t work if it is done by a publisher without tons of bestsellers and must-have backlist. In fact, it could generate a huge advantage for big publishers, assuming they can pull it off and smaller ones can’t.

I’ve been posing two questions in recent posts. “When does Amazon’s share growth stop?” and “Who’s left standing when it does?”

I put a new one at the top of this post. If publishers can overcome their fear of piracy, they will have, as Matteo Berlucchi proposed and Charlie Redmayne has just demonstrated, an enormous weapon to fight Amazon.

One entity that will definitely be “left standing” is Pottermore. And they’ll have the names of the people that were referred over to them by Amazon.


Publishers better start using their scale to price better, and soon!

It was just about two years ago that I appeared on a panel at a meeting of agents with, among others, Macmillan CEO John Sargent and Sargent made the point that maintaining ebook pricing and margins was one of the critical challenges facing publishers. Ebook sales were still hovering around one percent of the business. Or maybe two. Nowhere near five. Sargent was prescient.

It was about six months ago that I did a couple of posts on direct marketing techniques. I engaged a publishing friend named Neal Goff, whose background is mostly outside of trade books, to help me with those. I had him walk me through some fundamentals because I didn’t know them and, I feared, neither did the trade houses that were now — because of agency — required to set prices on their own books without the requisite expertise.

It was only last week that Random House announced it was shifting to agency pricing and I said I hoped they would be more ambitious about experimentation with price than their competitors in the arena had been.

All of these thoughts came together for me when I read this post on CNET that has two real wake-up calls in it for the big publishers.

One they are increasingly aware of: very cheap ebooks are selling very well and, with at least two major bestseller lists (The New York Times and USA Today) now counting ebook sales in units for their rankings, there is a real threat that the established business at established price points could be chased from the biggest market-maker there is. (It is important to note that the Times and USA Today methodologies are still a bit opaque and it is not clear how lower-price books are weighted. Some clear successes in the low-price realm haven’t shown up yet.)

The other point is more subtle. Individuals and little publishers are fiddling with price in ways to maximize bestseller positioning and revenues. The rules are complicated. Both Amazon and Barnes & Noble have programs that reward pricing above $2.99 by paying higher royalties. But it would certainly appear that there are many consumers who are limiting their shopping for ebooks to those that cost 99 cents or below. So some authors have learned that cutting their price increases unit sales to put them on a bestseller list, then raising their price results in more revenue. Apparently one very useful strategy for revenue maximization is to shuttle between prices.

The point that “cutting price boosts sales” isn’t exactly surprising, and it also isn’t exactly news. J.A. Konrath, perhaps the first established author to really start raking in shekels self-publishing through Amazon, has been experimenting with pricing and proving this point for a long time. Konrath’s data was charted for clarity by blogger Dave Slusher a few months ago. Konrath’s work and Slusher’s analysis of it further emphasizes the central point Neal Goff made to us. Experimentation matters. (Neal called it “testing.”)

Another author has demonstrated that cutting price is important, and promoting lower prices is also important.

Although I have heard one major publishing CEO suggest that the house is doing some fiddling with pricing, there was no suggestion there of controlled and monitored experimentation. And I believe it is safe to say, without doing any research, that no major publisher is doing that on a consistent and persistent basis, let alone algorithmically-programmed price management such as the major ebook retailers almost certainly do.

There is another hugely ironic point buried in the CNET story. It is built around the work of an author named Christopher Smith, who has mastered the shuttle-pricing technique. Turns out Smith has a new fan named Stephen King. King, of course, has not only published successfully with major houses for decades, he was one of the first great ebook experimenters around the turn of the century when he tried to do author-direct publishing of ebooks before there was a market. King’s blurb for Smith has been very helpful to the lesser-known, lower-priced author.

Might Smith return the favor for King by teaching him the revenue-maximization techniques he’s developed so King can get back into the self-publishing experimentation game? I think that possibility encapsulates the major publishers’ biggest nightmare. Publishers are going to have a devil of a time defending their 25% royalty rate into the future, which just feels intuitively unfair to authors. They can get away with it for the time being because print sales still matter. But they won’t for long and if publishers don’t use their scale to do a better job managing dynamic pricing to extract the maximum revenue from ebook sales than an author might do on his or her own, the challenge of retaining their top talent will become even more difficult.

There is a reasonable suggestion that publishers should be making in a hurry about bestseller lists in the ebook era. In print, books are separated by format (hardcover, trade paperback, mass-market) by The Times and identified by format by USA Today  so that apples-to-apples comparisons are possible for consumers. It is really a stacked deck to rank on unit sales alone any book at 99 cents and Ken Follett’s bestseller “Fall of Giants”  at $19.99. Format in print creates a reasonable proxy for price. I think price-tiered bestseller lists would be a stretch, but going to the movie studio “box office” concept would not. Publishers, while they still have clout as advertisers in media that promote bestseller lists, should suggest a “units times price” ranking as one that provides a more useful comparison for many consumers.


It isn’t wise to draw lines in the sand that ultimately can’t be defended

Apologies in advance for a much-longer-than-usual post.

It is not like the publishers haven’t seen the ebook royalty fight coming. On a panel he and I were on together in March of 2009, John Sargent, the Chairman and CEO of Macmillan, identified ebook margins as the critical issue for publishers going forward. Even though ebook sales at that point were financially insignificant and the growth surge that we’ve seen in the past 15 months wasn’t yet evident, Sargent expressed the belief that ebooks would be the future and that publishers had to be diligent to preserve their margins in the digital environment.

There are three moving parts to the publishers’ margin equation for ebooks.

The one that I think Sargent was thinking most of at that time is ebook pricing. If “misguided” publishers or market forces drive down prices a great deal, that could threaten publishers as sales migrate to digital.

The second one, which was then and remains today a focus of publishers, is the potential consolidation of sales channels so that power moves from a multitude of publishers to a small number of, or perhaps a single dominant, point of contact with the customer. Until the Nook came along from B&N last winter and the iPad from Apple in the spring, Amazon and Kindle looked dangerously close to being able to dictate both pricing and margin in the ebook supply chain.

And third, of course, is the amount of the consumer spend that is taken by the authors: the royalty.

The ebook pricing and channel consolidation issues have been front and center for the past year, ever since Dominique Raccah of Sourcebooks put “windowing”, which had been tried before for ebooks, in the spotlight as her solution to the perceived damage deeply discounted ebooks could do to print book sales, particularly of the hardcover edition. After she announced that she was holding back the ebook for Bran Hambric, similar announcements came from other publishing houses. At that time, only a year ago, Amazon was the dominant ebook vendor with Kindle sales amounting to 80% or more of the ebook sales for narrative trade books.

But the introduction of Barnes & Noble’s Nook device began to eat into Amazon’s hegemony last winter as 700 B&N stores started pushing a Kindle-type experience on their millions of customers. Then, in April, Apple introduced the iPad and changed the game two ways.

First of all, their tablet computing device, which can serve as a larger-than-a-cellphone screen for an ebook reader, started adding tens of thousands of new device-equipped potential book customers every day!

But along with the device competition, the iPad and its iBooks platform added a new business model called Agency. And, under Agency, the pricing of ebooks at retail theoretically becomes standardized across the web, not subject to discounting by individual retailers. This visibly upset Amazon, which appeared to pick a fight with Macmillan over the terms. It looked to those of us with no inside knowledge of their conversations to be an attempt to bully publishers to give up the Agency idea. In retrospect, this was perhaps a bad fight to have picked. Amazon’s threat was to stop selling the print editions of titles from those publishers who sold ebooks on Agency terms. Since five of the top six publishers were moving in that direction, and none of them blinked, Amazon had to, in their own words, “capitulate.” (On the other hand, we are not aware of any other publisher, beyond the Big Five, to whom they also capitulated, so the final score on this fight isn’t in yet.)

So it would seem that the big publishers have solidified two of the major components of their ebook margin. With their help, consolidation in the ebook channel has been reversed and they’ve taken critical steps to control prices to the consumer, while ebook sales have continued to rise at an accelerating pace.

But there remains this tricky question of royalties.

Agency pricing compounded the 25% problem from the authors’ and agents’ point of view because the base price for Agency books is 25% to 40% lower than it is for the old model, wholesale, so the authors’ share is commensurately reduced. Most agents liked the principle of getting uniform pricing, likely to create a healthier ebook marketplace, but were understandably miffed that their per-copy take could be reduced without any agreement required on their part. The publishers would no doubt point out that their take per ebook unit was going down as well. And Random House, still selling at wholesale, is no doubt making the point that their 25% amounts to substantially more per unit than the other guys’ 25%.

There had already been signs for a while that a lot of legacy backlist wasn’t being enticed by the royalty offers of its current publisher. Jane Friedman, formerly the CEO of HarperCollins and an important player on the New York publishing scene for four decades with a lot of very solid relationships, started a new publishing company called Open Road. Among her propositions was to secure ebook rights to some very well established backlist titles by offering a royalty of 50% of receipts while many of the big publishers were apparently holding the line at 25%. The early headline “get” for Open Road were novels by William Styron.

Then in December, S&S bestselling author Stephen Covey announced that he was putting some of his backlist into ebooks for a deal calling for more than 50% of receipts through Rosetta Books, which had litigated inconclusively with Random House about these matters a few years ago. Through Rosetta, Covey’s books were going to be exclusively offered for a time through Kindle. At the time that announcement was made, Nook hadn’t taken hold and iPad hadn’t come out and Kindle was the dominant platform in the market. A time-limited exclusive with them at that moment didn’t seem crazy.

Last week, the plot really thickened.

In retrospect, one could say that there were two preliminaries to the big news about the intentions of the agent Andrew Wylie.

On Tuesday Teleread carried the story that Knopf was pushing ahead to digitize more backlist. There appears never to have been a formal announcement of this, and it seemed a bit curious on a couple of counts. One is that Random House, of which Knopf is a part, has already digitized backlist for years. What could they have missed in their prior efforts? The other is that it always seemed that Random House’s digital efforts were corporate, not imprint-specific. Why would there be news about Knopf on its own?

Then my good friend Evan Schnittman published a post on his Black Plastic Glasses blog called “Pass the Gestalt, Please.” Evan’s point was simple and forcefully made. Ebooks don’t exist in a vacuum; they can’t be evaluated with stand-alone economics. Publishers acquire intellectual property and they monetize it every way they can. They make more from some formats and channels than they do from other formats and channels. But what matters in the end is how much total money they produce, for themselves and for their authors.

I have a problem jumping from the math Schnittman lays out to the characterization that agents are being unreasonable when they ask for a higher percentage of ebook receipts than they get of hardcover receipts. Schnittman argues that margin is irrelevant because the parties aren’t negotiating a profit-sharing deal. I’d say the receipts comparison that he draws is irrelevant. Hardcover receipts are offset by printing costs, handling costs, and spending for excess inventory that receipts on ebooks are not.

Schnittman’s post, which was debated as soon as it hit, turned out to be prologue to the events which then dominated conversation for the rest of the week.

By all public appearances, big publishers were being very stubborn about their 25% ebook royalty, even on very important backlist and more or less daring authors to do something about it.

On Wednesday morning, the plans of the Wylie office were dropped like a bomb, apparently by Amazon. (I am told by a source I trust that Amazon revealed the news and that Andrew Wylie himself was, and is, away on vacation. The Times, as you can see, didn’t report it that way.) It was announced that Wylie that had formed a new publishing company called Odyssey to handle some significant backlist  and — in an apparent middle finger to the entire publishing community — were putting the books into Amazon for a 2-year exclusive. Left unrevealed were what Wylie was paying the authors, what splits Amazon offered Wylie’s authors, and whether any money changed hands between Amazon and the new Odyssey entity. The announcement of Odyssey followed a long period where Wylie had complained publicly about publishers’ reluctance to pay what he (and many other agents) thought were reasonable ebook royalties for legacy backlist.

Response was quick. John Sargent, tongue deeply in cheek, welcomed Wylie to the community of publishers and suggested he should perhaps be paying AAP dues. Random House announced they would not be buying any books from the Wylie agency until this issue was resolved. And many people observed that signing an exclusive deal with Amazon when they’re losing market share quickly and are likely to lose more soon was questionable, not to mention whether there was a conflict of interest for an agent publishing his own clients’ books.

Without knowing what incentives Wylie got for his authors from Amazon in return for the exclusive, it is hard to be sure that it is a mistake (although it seems likely, given the current growth pattern of the ebook suppy chain.) But the conflict of interest for an agent charged with looking for the best possible deal for an author and then self-publishing, in the face of potential litigation, is transparent. And even if Random House is the only house that openly boycotts the agency, there’s an impact on all Wylie clients in return for a theoretical advantage for the ones being he will publish through Odyssey. One must imagine there are more than a few current authors with that office who are scratching their heads about what this might mean for them.

From my perspective, there’s plenty of justification on all sides of this argument. Although I didn’t like his math, Evan Schnittman is entirely correct to say that a publisher making a deal for a copyright plans to exploit it through all channels. In words I’ve heard often from John Schline of Penguin, “you don’t do a P&L on a format; you do a P&L on a title.” They’re right that the author negotiating a deal with them accepts a basket of compensation schemes for different channels in return for an advance. Logical fallacies can creep in when you take one element of it in isolation and say it “isn’t fair” (although, in practice, that’s exactly how contracts are negotiated.)

But the controllers of old copyrights — the Styron estate and Stephen Covey, among others, and apparently several other estates and authors represented by Andrew Wylie — are also right to believe that the ebook rights weren’t contemplated in the contracts for the books in question and that a publisher starting today to publish those books electronically will have a tiny cost base and relatively astronomical margins.

Certainly not all publishers are being stubborn about the 25% number in all negotiations. And agents usually feel they can’t talk about concessions they get publishers to make. One made it very clear to me that s/he was getting concessions from publishers on ebook royalty terms in the form of escalators, but would never say so out loud for fear of angering the customers of s/he’d wangled those concessions from.

(On the other hand, things might be changing fast. In a story I saw just as I was finishing this post, the Financial Times wonders if the Wylie plans don’t signal the conclusion of publishing as we have known it. In that story, superagent Amanda (Binky) Urban is quoted saying her ICM office is getting significant royalty concessions from major publishers, including Random House. Perhaps the Wylie story has changed the dynamic so that now publishers want all the agents to know they’re ready to be reasonable. I’m not aware of an agent having been quoted to that effect before, and it would seem highly unlikely that Urban said what she said without having consulted any house she would name in advance. All of that would anticipate the suggestion I’m making below.)

All public statements are, by definition, posturing.

But the arguments publishers have made publicly to this point have elided the fact that their negotiating position is not the same for these books as they are for a new book. When a new proposal is put in front of them for purchase today, whether they are offering $10,000, $100,000 or $1 million for the rights, they’re in a position to say “if you want my check, it comes attached to these royalty terms.” But they didn’t stipulate those terms when they published books 40 or 30 or 20 years ago, or even 10 years ago. At a minimum, they require agreement from the author on a royalty rate to publish the ebook today; they may need agreement from the author to publish the ebook at all.

Why would the publishers expect an author whose book has earned out long ago, who has no requirement to allow the publisher to publish the ebook and (at the very least) a case to make that they’re free to sell ebook rights elsewhere, to accept the same terms that are offered to authors not in that position?

Publishers may have trapped themselves by not articulating that distinction. Their public position seems to be that they can’t make a competitive deal on this backlist because it would create precedents for the new titles they’re negotiating for today. But it doesn’t have to. There’s a very simple, clear policy they could declare that would make this whole issue go away. Maybe there are one or two already acting this way, but it would be nice if even one publisher would just say this:

“Our policy for all new titles we sign up in the context of all our other standard terms is that we pay 25% royalty on ebooks. But for those books on our backlist which a) have earned out their advance and b) have ambiguity in their original contracts making it unclear what the royalty rate for an ebook should be, we will negotiate a higher royalty in recognition that a contractual element is being negotiated after the value of the copyright has been demonstrated in the marketplace and the risk profile has changed.”

Life is very complicated here. Every deal is different. There are costs and risks for authors and publishers trying to set up these separate ebook deals while a print backlist remains with a legacy publisher. The publisher might sue (although that opens up, for them, the danger that they’d lose, and the consequences of that could be dire.) At the very least, the author annoys the guys with the big checkbooks who are still the custodians of their print sales.

Although it is certainly possible that some authors or estates would want a publisher as talented as Jane Friedman remarketing their backlist, I still believe that if Open Road and others are offering 50%, publishers would find many authors receptive to avoiding the conflict if the publishers were offering 40%. But even if they had to pay 50% to some authors, the publishers would be doing themselves a favor by stating the position articulated above.

Each publisher has to do its own math about how many books of theirs would be affected and what openly paying 60-to-100 percent higher royalties on those books would cost them. Undoubtedly, it would also require them to make concessions to authors they’d roped in for the 25% royalty; certainly many of those have re-openers or most favored nation clauses of some kind in their contracts. That’s the downside. But there is a lot of upside. For one thing, Open Road and Rosetta and Wylie’s new imprint would be seriously weakened; except for Open Road, which has strong cachet with Jane Friedman at the helm, they might just disappear. For another, lots of great titles that could be selling robustly as ebooks if only they were available as ebooks would be producing revenue for the publishers (as well as the authors.) Significant legal costs and liabilities would evaporate. And they’d gain enormously in trust and goodwill with the agents, who are spending far too much time trying to figure out how to go around publishers for the best backlist they control, rather than how to work with them. The conversations I have had make me believe that most agents do not believe that most big publishers are willing to deal on the basis I’m outlining here, (although a lot of them will be calling the publishers tomorrow after they read Binky Urban’s quotes.)

Aside from the reduced per-copy royalties agents and authors are seeing from the Agency pricing, they are also afraid that robust ebook sales at the hardcover price are postponing the issuance of trade paperback editions, on which the 25% Agency royalty does exceed the normal 7% of retail paid on print. That makes them feel like they’re losing again.

It is a paradox that traditional contracts have legacy publishers — the ones who write the large advance checks — paying higher per-copy print royalties than many little publishers pay on hardcovers, even with the various high-discount clawbacks that have been built in over the years. The ebook-first publishers who do print will almost certainly pay lower print royalties than print-first publishers have, if they do hardcovers at all. Publishers will need a foundation of good will, but over time should be able to negotiate lower hardcover royalties in return for higher ebook royalties on new contracts. And that will make sense, because, ultimately, print sales are more expensive for publishers to deliver than ebook sales.

Even if the publishers pushing back manage to win this round with Wylie, and they well might, I don’t think the 25% royalty can hold for very long. As more and more of the business shifts to ebooks, companies without the legacy costs that big publishers have will find it easy to pay higher royalties than that and agents will keep doing the math about how many sales they can afford to lose and still end up ahead in dollars with a higher ebook royalty. As Amazon should have learned in their fight with Macmillan in January, it isn’t smart business to draw a line in the sand marking a position you ultimately can’t defend. I hope every big publisher in town will take that lesson on board, or, even better, that Urban’s remarks tell us that they already have.

In a dialogue with a couple of smart people in my “kitchen cabinet” between writing this piece and posting it, I was asked whether I thought the ebook should have a royalty “greater than the hardcover or less than the paperback.” My response was:

I don’t have an ideology about this. Applying logic alone, I would think a Harlequin or O’Reilly ebook author should get a lower percentage than a Big Six ebook author because the Harlequin and O’Reilly brands add to the online ebook sales power in ways the Big Six publisher brand does not. The same author and the same book wouldn’t sell as well if it were under another imprint. Fully applied, that approach would mean that every deal would be different, which is utterly impractical. I don’t like to advocate things that are impractical.

Publishers should try to make standard the lowest royalty that they can apply in the marketplace without making enemies of their trading partners. It just isn’t realistic to offer a brand name with a choice of where to go 25% in this day and age. It’s just bullheaded. My sense is that any house that offered a standard 25% to earnout and 35% thereafter would be fine for now, except with the biggest authors with whom they’ll have to negotiate escalators (or change the basis on which the not-intended-to-be-earned-out advance is calculated.) But all solutions here are temporary. The line won’t hold. When ebook sales get to 50% of the total (2014-15), even 50% is not going to cut it.

I don’t have an ideology about this. I think a Harlequin ebook author should get less than a Harper ebook author because the Harlequin brand adds to the sales power: the author wouldn’t sell as well if the same book were in another imprint. Fully applied, that means that every deal would be different, which is utterly impractical.
I think publishers should try to apply the lowest standard royalty that they can get away with based on marketplace reality. It isn’t reality to offer a brand name with a choice of where to go 25% in this day and age. It’s just bloody-minded. My sense is that any house that paid a standard 25% to earnout and 35% thereafter today would be fine, for now, except with the biggest authors with whom they’ll have to negotiate escalators. When ebook sales get to 50% of the total (2014-15), even 50% might not cut it.


The wild weekend of Amazon and Macmillan

Now I swear all this is true. As everybody knows, a very serious food fight broke out between Amazon and Macmillan late Friday night. All weekend Michael Cader led the way in ferreting out additional useful information and I spent most of today (Sunday) trying to write an analytical blogpost. I got it just about finished in the early afternoon, and the bottom line to what I’d written was “Amazon will not be able to sustain this.”

I decided to hold the post until after going to see Crazy Heart this afternoon and, when I came home, Amazon had already folded. But I had written a post that provided a lot of useful information, even if events had stolen my punchline.

So I’m giving it the once-over to edit it for the reality that Amazon has already announced that they will not continue to boycott Macmillan books.

It is received wisdom in Washington that when you have news you have to release but would prefer to have minimum impact, you release it on Friday afternoon. The latest tiff in the Amazon versus Big Publisher brouhaha went that idea one better; it appears to have broken in the middle of the Friday-to-Saturday night.

About midnight that evening, David Wilk alerted the Brantley list to a VentureBeat post that indicated that Macmillan titles were no longer available at Amazon.

By noon the following day, Brad Stone had posted a further explanation to the NY Times blog.

The VentureBeat post had no clue as to what was going on and even carried a link to a post from author John Scalzi suspecting a “glitch.” But Stone pinned down that the disappearance of the Macmillan titles was, indeed, retaliation for Macmillan’s move to the agency pricing model, first revealed by Michael Cader in Publishers Lunch and discussed on this blog last week.

Sometime late Saturday afternoon, Lunch posted a narrative explaining what was going on and including a paid insertion from Macmillan: a letter from Chairman and CEO John Sargent giving Macmillan’s account of what had transpired.

Which, as many people who care know by now (as I write this on Sunday morning and afternoon) is that Macmillan told Amazon about the new agency model, by which Amazon would actually get ebooks at lower prices than now but also by which Macmillan would set the prices to consumers. Amazon retaliated with what is, more or less, a “nuclear option.” Macmillan books are no longer on sale except through third party vendors (extending the ban to those dealers would open up yet another big can of worms for Amazon and they hardly need any more) and that includes Kindle. Most of the third party vendors are selling used books and no Macmillan books are being transacted directly by Amazon at all.

We have said on this blog, repeatedly, that publishers’ discounts to retailers would have to come down and that the windowing tactic (delaying ebooks from being available when the hardcover first comes out) was all about pricing control and nothing else.

What I want to accomplish in this post is to lay out clearly what is happening and then enumerate some key points about what’s going on: paradoxes and prospects.

Before the Agency Model (like “now”), publishers sell ebooks at about 50 off an often ridiculously high established price (“parity” is common; same price as a hardcover on a new book) to retailers who were setting the prices to the consumer themselves and, following Amazon’s lead, always discounting. The publishers are paying the authors royalties that are frequently 25% of net, which amounts to 12.5% of publisher declared retail. Some publishers pay 15% of retail; Sargent, in a previous letter to agents, indicated a desire to move from 25% of net to 20% of net, which would be 10% of retail.

The proposed Agency Model will have publishers setting a price lower than the established retail they had before but higher than the deep discounts Amazon led retailers to sell at. The publisher intends to  pay 30% of that established price to the retailer and 25% of either the full consumer price or of the 70% “net” (still to be determined) to the author. This means that the retailer will get a higher price from the consumer and a better margin than they realize now (even though a lower percentage of the “established” price). The author’s cut per copy could actually be reduced!

The wholesalers, Ingram and Content Reserve, often get the same discount as publishers. They handle the stores and libraries publishers serve don’t want to deal with directly. So those stores and libraries get less margin than the big ones publishers handle without an intermediary. One thing that was new to me that came out on the Ebook Supply Chain panel at Digital Book World is that publishers insisted on vetting the accounts that would be selling their books to make sure they didn’t violate territorial restrictions. So Ingram (and presumably Content Reserve) has to manage a granular control by title by publisher by account.

It is not at all clear how the Agency and price maintenance protocols get applied through wholesalers. Perhaps this means that smaller accounts and libraries just won’t have the newer titles that will only be released on the Agency basis (assuming that the scenario Sargent describes is what is also followed by other big publishers.)

This is a bizarre paradox, really. Macmillan actually proposed to sell Amazon the ebooks at what is, in effect, a lower wholesale price than Amazon gets now and their enforcement of a retail price puts more margin into Amazon’s pocket on every sale made than they earn now! And Amazon is fighting it.

Sargent’s note makes clear that the discount-off-retail pricing that has existed all along will still be offered, but that newer books wouldn’t be included in that offering. Those would be available only on Agency terms. What is not clear is whether Macmillan intends to continue the Agency terms past the nine-month “window” for new books. We’d guess they will for some accounts.

But that leads to another paradox because publishers unambiguously benefit if retailers sacrifice their own margin and discount when hardcover price maintenance and NY Times Bestseller list rankings are not at stake. Lower prices to consumers sell more copies. Presumably retailers will continue to want to compete on price and will do so when sales terms allow. But what does that do to the publishers’ challenge of “setting” prices for those accounts that want that done across the entire list?

Yet another paradox is the position of the agents. On the one hand, we have seen that many of those representing big authors see the same danger the big publishers do of inexpensive ebooks undercutting valuable hardcover sales and Times Bestseller rankings. On the other hand, publishers lowering established ebook prices and reducing their take from their intermediaries could often mean lower royalties for authors. But not necessarily.

If publishers are paying on “net receipts” (and many are) and if a) retail prices aren’t cut by as much as half (which they often won’t be) and b) if the publisher doesn’t deduct the Agency “commission” from its computation of net (sure to be debated), then the basis of the author’s royalty wouldn’t go down.

Quick summary: if you have a $25 list price ebook on which the author’s royalty is 25% of net, the author is now getting 25% of $12.50, or $3.125. If that book becomes a $15 ebook with a 30% commission, the author would get $3.75 (a nice increase) if the commission is not deducted first and $2.625 if it is (a sharp cut.) Of course, the $25 and $15 prices described here are notional and with different prices (as they say) “your results will vary.” If that notional book had been priced at $30 in hardcover, the author’s share would have been $4.50 and the ebook price change would clearly cost them something on every copy.

Author Charles Stross had a very insightful post on his blog, speaking from the perspective a gored ox (he has books published by Macmillan which have been taken down.) Stross makes clear that Amazon is miffed because their competitive strategy of driving away ebook competition through aggressive discounting will be foiled by publisher price-setting. Stross says:

Amazon are going to fight this one ruthlessly because if the publishers win, it destroys the profitability of their business and pushes prices down.

I’m not sure it “pushes prices down”; I think it actually pushes (ebook) prices up, at least temporarily. But the points Stross makes about Amazon wanting to achieve ebook hegemony and the Agency model being part of the publishers’ plan to beat that back and strengthen other players seem right to me.

We had a lot of this conversation last Spring before Sourcebooks’s windowing move with Bran Hambric, followed by Hachette with True Compass and HarperCollins with Going Rogue, pushed this tussle between Amazon and publishers to the forefront. In his analysis at that time, Cader made the point that publishers were actually helping Amazon undercut other retailers with their “parity” pricing; making the ebook retail the same price as the hardcover print retail. His logic was that the high prices increased Amazon’s advantage over other retailers because they could better afford to sell high-profile titles at a loss than their competition. Meanwhile, the publishers (and authors working on “net”) continue to get higher ebook revenues than the consumer spending would really entitle them to.

My first question when all this arose overnight on Friday was “why Macmillan?” Sargent’s note may have answered that question: because John was in Seattle on Thursday officially delivering Amazon the Agency Model news that we only assume is going to come to them from other publishers as well. One presumes that Amazon thinks that taking such drastic action as this might discourage the other publishers thinking about doing the same thing (and the iPad announcement on Wednesday would lead us to think that four of the remaining five Big Six players are indeed working out the details of a similar consumer-price-controlling sales model.)

And Amazon apparently figured out, as I was writing these words, that the only brand blown to smithereens by the nuclear option would be theirs. It is hard to imagine how extensive the brand damage could have been if Amazon delisted even one more major publisher along with Macmillan for even a couple of weeks. For a brand whose principal attributes are dependability and dedication to the consumer, it would have been catastrophic.

Amazon says now that the boycott is temporary and they were candid about the fact that they have no choice but to yield. They take a swipe at the publishers’ copyright-based “monopoly” on titles. But this was a really bungled response on every level. Amazon deserves credit for being smart enough to walk this thing back within 48 hours. Amazon may have to learn something new for them in the ebook space: how to be one of a number of players, not the only game in town.


One brave publishing executive speaks out on ebook pricing, and we comment

When I did my two recent posts on ebook pricing — first one proposing “debut pricing” and then one taking it back as not viable — I got a note from a major company CEO saying that, of course, no publisher could discuss pricing with me because of anti-trust concerns. At the same time, I have been trying to staff a panel for Digital Book World on ebook pricing and was told by one of my Board of Advisors, who is from another of the big companies, that I shouldn’t expect any publisher to be able to discuss that issue.

So it was mildly refreshing to see that Arnaud Nourry, the global CEO for Hachette Books, expressed some pretty strong opinions about ebook pricing to the Financial Times in an interview. Nourry said publicly what I have only heard expressed privately before: that the aggressive pricing by ebook retailers (led by Amazon) where they actually sold ebooks at a loss could come to no good end.

On Amazon’s current policy of selling many high-profile new releases at $9.99, FT quoted Nourry as saying: “That cannot last . . . Amazon is not in the business of losing money. So, one day, they are going to come to the publishers and say: ‘by the way, we are cutting the price we pay’. If that happens, after paying the authors, there will be nothing left for the publishers.”

Nourry also expresses concern about the reported one million public domain titles that Google is releasing as free ebooks. Although the article is wrong in its reporting that Amazon charges $9.99 “for all its e-books in the US” (Michael Cader has reported several times that many are higher than that and, of course, many are also lower), we can understand Nourry’s expressed concern that “all the rest will have to be sold at between zero and $9.99.”

I agree with Nourry’s characterization of the present condition as unhealthy and threatening, but I think things look a little better for him and his fellow large publishers than his comments would suggest. And as powerful as Amazon’s position in, there is reason to believe it is at a high-water mark in the ebook marketplace and that, at the very moment Barnes & Noble is stepping up, the conditions are perfect for a competitor.

The downward pressure on ebook prices has been apparent for some time. I reported that John Sargent, CEO of Macmillan, said at a panel discussion for agents (I was one of the panelists) several months ago that maintaining ebook margins was the key strategic concern for publishers over the next few years. Since Sargent made that statement, very shortly after the announcement of Kindle 2 and Kindle DX, we’ve had a reported surge in ebook sales, a host of new reader and retailer announcements, and the further entrenchment of the epub standard. These, combined with B&N’s entry into the market, are good news for publishers.

Epub is probably the publishers’ best defense against Amazon and the Kindle. With all other device manufacturers able to coalesce around a non-Amazon standard, we have a situation analogous to the VHS-Beta conflict of the 1980s and the Mac-Windows duke-out of the late 80s and early 90s. On one side, we have a standard that remains closed to enable “control” (Beta, Mac, Kindle.) On the other side, we have a wide-open standard to enable multi-player use (VHS, Windows, Epub.) In the two cases we know about because they are historical, the consensus was that the “loser” of the numbers race (Beta and Mac) provided a superior technological performance. Kindle does not seem to have even that element in its favor. Whether you use something larger that does e-ink (Kindle, Sony Reader) or something you’re carrying anyway that is backlit (the iPhone or any other smartphone) is a matter of personal preference. But does anybody doubt that a world full of hardware creators will soon make a device that is similar but demonstrably better than the Kindle?

Right now, Amazon has a huge head start on the narrative-reading consumer ebook market. By putting Kindles into the hands of (estimates are) 1 to 1.5 million of the heaviest book consumers, they jump-started ebook uptake and grabbed a huge lead in sales. Anecdotal information gathered from publishers and agents suggests to me that, right now, 70% of the ebook sales for most titles offered in Kindle and epub are Kindle. And a lot are still sold as pdf.

But Google just put a huge thumb on the scale by making one million public domain titles available in epub for free! Those can’t be read on a Kindle without a little bit of technological bridge-building. On the one hand, if Amazon makes that bridge-building transparent and shows that it is easy for people to load epub titles on the Kindle, they compromise the whole Kindle business model. But the perception of choice — and the relative number of titles that will show up under any consumer’s search — is attacking what has been one of Kindle’s greatest advantages: a bigger title selection.

Amazon made what looked from here like a major concession last winter when they released an iPhone app for Kindle. I am hesitant to read too much into my own behavior, but that was the catalyst for me to give my Kindle to my wife and do all my reading on my iPhone. So it was easy for me to switch over to B&N when they came back into the marketplace a month or two ago. And, you know what? The shopping experience is just as good as Kindle. My wife may buy Kindle books again, but I won’t. (The Kindle on iPhone mimics the worst fault of Kindle’s presentation on the device itself: it only presents justified lines, no ragged right!)

Of course, all this means that the blades and razors strategy is going too. When Sony launched the reader, it looked for all the world like they figured they’d make their money selling the books. That was Palm’s idea too nearly a decade ago. Amazon blew them away because they were real booksellers, which they parlayed into both more title availability (they had the contacts) and a better presentation.

It will be a big surprise to me if B&N and Indigo’s Shortcovers don’t rapidly become the dominant horizontal purveyors of epub-formatted titles. And every web site and blogger will sell ebooks in their niche (why not?) which will include offerings that might not make the full-line distribution system. The next question is how long it will take Amazon to start selling epub titles as aggressively as they sell Kindle and print books. Or make Kindle transparently epub-compliant, which amounts to the same thing. They’ll need to do one of the other to protect their overall franchise, but it might mean the end of a meteoric Kindle era (remember the Commodore 64?) when they do.

Oh, and one note on all that to Mr. Nourry. If I’m right about the overall situation, don’t worry about Amazon telling you they need more margin. Because they’re going to need your titles fully as much as you need their sales. Expect to start seeing movement on this first from the smaller publishers, some of which report that they have been pushed into relatively low-margin deals by Amazon. There will be competition among epub vendors; they’ll all want to have the biggest number of titles (and accept the challenge of curating and presenting that.) If you can get higher revenues by 25% or more in one channel, might you be tempted to try to “force” consumers to buy it there by withholding from the lower margin channel? You’d surely be tempted.