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Things are calmer than they were in the book business, but change is a constant


Among the shifts that have been taking place in publishing houses over the past decade is an increase in the head count dedicated to marketing and a decrease in head count dedicated to sales. This reflects the reduction in the number of bookstore accounts and the transfer of “discovery” from store shelves to digital search.

The reduction in bookstores and the concurrent and related reduction in print books sold in stores also affects how publishers view the economics of the sales departments and the entire support system for print distribution. The big houses still need sales forces and warehouses and sophisticated systems to track inventories and payments and returns but the “throughput” of print from their own publishing programs is declining. For many, that means that distribution clients are increasingly important. They provide the volume to support scaled operations without requiring the publisher to invest in publishing more titles. For at least four of the big five (HarperCollins being an apparent exception), distribution of other publishers’ books, with or without providing the sales force effort, is a critical component of maintaining the volume that keeps unit costs in line.

But that adds risk. Distribution contracts vary in length, but they generally only extend two or three years out. With four major publishers plus Ingram, which has, effectively, five different full distribution options to offer, on the prowl for clients, there is a plethora of choices for any publisher seeking to shed their own fixed-cost distribution or to switch distributors. Indeed, the percentages being charged for distribution services have dropped drastically over the past two decades. The competitive environment is likely to perpetuate that trend.

While the big publishers doing distribution have (so far) tended to insist on fairly large clients, Ingram is using its multiple configurations to try to serve publishers of all sizes and entities that aren’t primarily publishers at all. Today a publisher that is really a literary agency or, before long if not already, a bank, an advertising agency, or a not-for-profit with a mission, can put a book or a list of its own into the book publishing arena with sales and distribution capabilities competitive with the biggest and most experienced publishers. So a revolution that began with Amazon enabling indie authors, starting about ten years ago, to reach a big percentage of the total book market through Kindle and CreateSpace, is being dramatically extended. Going after real bookstore distribution definitely requires incremental investment and marketing savvy, even with the machinery in place to help.

But incremental investment and marketing savvy were always far easier to come by than the machinery has ever been for the small or occasional publisher.

While this levels the playing field in a major way, there are still distinct advantages to size and a B2B publishing brand. The diminishing bookstore shelf space has made the also-diminishing mass merchant (Walmart, Target) shelf space relatively more important. Between the chains — primarily Barnes & Noble and Books-a-Million — and independent stores, there are only about 1000 to 1200 points of purchase for books provided by bookstores. There were three to five times that many two decades ago. So the additional thousands of opportunities to put a book in front of the public through the mass merchants are critical, particularly to move bestseller quantities.

But relatively few titles can make the cut for those outlets and the pressure on them to perform quickly is immense. Returns are high. These slots are simply not available to publishers who aren’t recognizable B2B brands with a solid reputation for backing their books effectively. These outlets represent the competitive advantage that remains for the Big Five publishers.

For the past few years, pretty much since the demise of Borders in 2011, the number of bookstores has been going up a bit each year. (It is not clear that the bookstore shelf space has been going up; indie stores seem to be smaller, on average, today than they were two decades ago, or at least there are fewer mammoth ones.) It could well be that, aside from Borders, the indie revival is also fueled by the reduction in shelf space for books at the mass merchants. If so, that is good for smaller publishers and it is good for backlist, both of which are seriously challenged getting in front of the public through mass merchants.

So, while it is definitely true that the dizzying pace of change we saw during the early years of ebooks has subsided, and it is true that the print format has not yielded much share, if any, to ebooks in the past couple of years, it is not time to celebrate a new stability. The marketplace itself is still changing; the online share when you combine print and digital is still growing and the ratio of shelf space available for backlist and slower-sellers is still declining. The smallest publishers are getting better and better market access and the biggest publishers are seeing escalating risk in how they place the books they publish and in the danger they’ll face a sudden decrease in distribution volume that would turn their fixed costs into a burden.

This is a great time in the book business to be very big (among your peer group) or very small and focused. It is a challenging time to be anything else.

A very frequent point of contention when negotiating distribution arrangements is how Amazon will be handled and compensated. Amazon is almost always the single largest account and it is not uncommon for it to represent — on many books and even some publishers — 50 percent or more of the sales. Although sophistication definitely helps in dealing with Amazon, it is also true that Amazon provides incentives to give up the “other half” of the market and just work through them. Any sophisticated businessperson is likely to get more money out of Amazon working it themselves than any distributor can get for them, even before distribution fees. (IF, and this is a big if, you discount the marketing value of books throughout the supply chain which, counterintuitively but frequently, will raise the level of sales at Amazon from what they would have been without books broadly distributed.) In any case, being able to really add value to Amazon sales would be a Holy Grail. Right now, most of the time, distributing publishers really have to make the argument that you can’t effectively split things and that they will add so much value in the rest of the world, and do the work around Amazon, that the overall relationship is worth the trade-off.

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Barnes and Noble results and the latest news from Perseus


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Another wake-up call from Amazon as they serve author interests better than publishers have


The Authors Guild and its allies have recently appealed to the Department of Justice to investigate Amazon’s possible monopoly control of the book business. It is hard to quarrel with the fact that Amazon delivers more of the publishing output to consumers than any single account ever has and that they are, inevitably, changing the economics of the business as a result.

Although those fighting Amazon can and will point to what they consider to be situations where Amazon takes unfair advantage of its marketplace position, there are two aspects of what has transpired over the past 20 years that the critics who plead for government intervention will almost certainly ignore.

Most of Amazon’s success is due to their own stellar performance: innovating, investing, executing, and having a vision of what could happen as they grew.

Most of what Amazon has done to build their business — almost all of what they’ve done until the past few years of Kindle dominance — benefited most publishers and helped them grow their sales and their profitability. (In fact, book publishing uniquely among media businesses didn’t fall off a cliff in the decade surrounding the millenium and a strong case could be made that Amazon actually saved them.)

This has not stopped. The most recent example was announced yesterday. Amazon is now enabling readers to sign up on their favorite authors’ pages for notification of forthcoming books. This once again demonstrates Amazon’s willingness to innovate. And by doing this they also will deliver benefits to the publishers — an increase in out-of-the-box sales of new books to the authors’ sign-up lists. But the chances are that authors will be more appreciative than publishers will. That aspect of this initiative then feeds into the meme that “Amazon is taking over!”

In our digital marketing business, we often point out to publishers and authors that creating a robust and complete author page at Amazon should be a key element of any author’s digital footprint. It gets seen by a lot of people and it gets crawled by Google, enhancing Google’s understanding of who an author is and increasing the likelihood that they’ll be found through search, even searches that don’t include their name or their book titles. Looking at things from the publishers’ perspective as we tend to do on this blog, we’ve made the point that publishers need to encourage — or create — competent and well-SEOd author websites or risk having the Amazon author page. or even the book’s Amazon title page, become the highest-ranking return for a search for that author’s name.

When we talk about author websites, we stress the importance of building the fan base in size and intensity. Among the big literary agencies investing in helping authors with their digital presence (and many are), we helped one figure out the techniques to teach to help their authors gather mailing list names (or what Seth Godin called “permissions” for the first time about two decades ago when he was among the first to see the value in building email lists).

Now Amazon has, in their typical way (simple and self-serving) made this incredibly easy. We’ve met publishers who wonder why an author would need a website of their own rather than just a page on the publisher’s site. There are a lot of reasons that might be true, including many publishers’ apparent reluctance to “promote” the books an author has done with a prior publisher. But now publishers might hear authors asking the question a different way. Why do they need any author page on the Web besides the one they get from Amazon?

This topic is not new. Goodreads, which was bought by Amazon, has enabled fans to sign up with authors for years, a feature that was recently updated. So have some publishers, but too seldom in an effective way. They often put their author pages in silos — like a “catalogue” — that won’t get much traffic and less engagement. The author pages are incomplete. They don’t promote interactivity.

So there is still an answer to the author’s question: what else might they need? What Amazon has created doesn’t deliver true direct connection between authors and fans. In effect, the fans are signing up with Amazon — through the author’s branded page — for notifications that will come from Amazon. There is scant indication that there will be any further sharing of that author mailing list, or any other opportunities created for the author and the fan base to communicate (although “invited authors” may be able to create a personalized message to go with the announcement). But the single most important thing an author would want to tell his/her fans is “I’ve got a new book coming” and Amazon has handled that.

And in so doing, they have increased the control they have of the book marketplace and highlighted once again that part of the ground they take is ground the publishers simply cede to them. Any publisher that is not helping authors engage with their readers and actively create their own email lists to alert the interested to new books is put on notice now that they are quite late. But one thing is still true: better late than never.

Helping authors with their digital footprint needs to move up every publisher’s priority list.

An unrelated topic but another one in the news that is important is that the German ebook market seems to be going DRM-free. The latest announcement is that Holtzbrinck will take DRM off their ebooks in Germany. The last big holdout in that market is Random House, but one wonders for how much longer. Since two of the Big Five — Macmillan and Random House — are German-owned, it is fair to ask how long it will be before the experience there is reflected in what happens here. We’ll be watching closely to see whether there is any noticeable impact on sales as a result of DRM’s removal. Although Amazon permits DRM-free distribution to those who want it, we probably won’t see them pushing this option. There’s a case to be made that one of the principal effects of DRM today is that it protects Amazon’s ability to monopolize sales to the Kindle ecosystem they created.

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Asking whether Amazon is friend or foe is a simple question that is complicated to answer


I’ve been invited to join a discussion entitled “Amazon: Friend or Foe” (meaning “for publishers”) sponsored by the Digital Media Group of the Worshipful Company of Stationers (only in England!) and taking place in London next month. I think the answer must be “both”, and I suspect that my discussion-mates — Fionnuala Duggan, formerly of Random House and CourseSmart; Michael Ross from Encyclopedia Britannica; and Philip Walters, the moderator for the conversation, will agree. This is a simple question with many complicated answers. I am sure that Fionnuala, Michael, and Philip will introduce some perspectives I’m not addressing here.

The first thoughts the question triggers for me are three ways I think Amazon has profoundly changed the industry.

Although just about every publisher has headaches dealing with Amazon, very few could deny that Amazon is their most profitable account, if they take sales volume, returns, and the cost of servicing into consideration. This fact is almost never acknowledged and therefore qualifies as one of the industry’s dirty little secrets. Because they’ve consolidated the book-buying audience online and deliver to it with extraordinary efficiency, Amazon must feel totally justified in clawing back margin; it wasn’t their idea to be every publisher’s most profitable account! But since they are effectively replacing so many other robust accounts, the profitability they add comes at a big price in the stability and reliability of a publisher’s business, which feels much more comfortable coming from a spread of accounts. Publishers strongly resist Amazon’s demands for more margin, partly because they don’t know where they’ll stop.

It is also true that Amazon just about singlehandedly created the ebook business. Yes, there had been one before Kindle was introduced in November, 2007, but it was paltry. It took the combination that only Amazon could put together to make an ebook marketplace really happen. They made an ereading device with built-in connectivity for direct downloading (which, in that pre-wifi time, required taking the real risk that connection charges would be a margin-killer). They had the clout to persuade publishers to make more books, particularly new titles, available as ebooks. And they had the attention and loyalty of a significant percentage of book readers to make the pitch for ebooks. With all those assets and the willingness to invest in a market that didn’t exist, Amazon created something out of nothing. Everything that has happened since — Nook and Apple and Google and Kobo — might not have worked at all without Amazon having blazed the trail. In fact, they might not have been tried! Steve Jobs was openly dismissive of ebooks as a business before Amazon demonstrated that those were downloads a lot of people would pay for.

The other big change in the industry that is significant but might not have been without Amazon is self-publishing. The success of the Kindle spawned it by making it easy and cheap to reach a significant portion of the book-buying audience with low prices and high margins. Amazon added its skill at creating an easy-to-use interface and efficient self-service. Again, others have followed, including Smashwords. But almost all the self-publishers achieving commercial success have primarily Amazon to thank. It appears that, in the ebook space at least, self-publishers among them move as many units as a Big Five house and, in fiction, they punch even above that weight. Without Amazon, this might not have happened yet.

So, in the three ways Amazon has really changed the industry — consolidating the bulk of online book buyers, creating the ebook business, and enabling commercially-viable self-publishing, publishers would really have to say the first two are much to their benefit (friend) and the last one they could have done without (foe).

The second big heading for this Amazon discussion is around the asymmetry between what Amazon knows about the industry and what the industry knows about Amazon. Data about the publishing industry is notoriously scattered and because of the large number of audiences and commercial models in the “book business”, very hard to interpret intelligently. Amazon, on the other hand, has its own way of making things opaque by not sharing information.

The first indication of this is that Amazon doesn’t employ the industry’s standard ISBN number; they have their own number called an ASIN. So whereas the industry had a total title count through ISBN agencies that required its own degree of interpretation, the titles published exclusively by Amazon, which only have ASINs and not ISBNs, are a total “black hole”. Nobody except Amazon knows how many there are or into what categories they fall.

Another piece of Amazon’s business that has critical relevance to the rest of the industry but is totally concealed from view is their used book business. There is an argument to be made that the used book marketplace Amazon fosters actually helps publishers sell their new books at higher prices by giving consumers a way to get some of their money back. But it is also pretty certain that people are buying used copies of books they otherwise would have bought new, with the cheaper used choice being offered to them from about the first moment a book comes out. One would intuitively assume that the effect becomes increasingly corrosive as a title ages and the supply of used copies keeps rising as the demand for the book is falling, inexorably bringing the price of the used books down. But none of us outside Amazon know anything about this at all, including how large the market is.

And, by the same token, we have no idea how big Amazon’s proprietary book business is: the titles they sell that are published by them exclusively. Beyond not knowing how many there are or what categories they’re in, the rest of us can’t interpret how the sales of Amazon-published titles might affect the prospects for titles a publisher might be signing up. Amazon has that perspective to inform their title acquisition, their merchandising, and to gauge the extent of their leverage in negotiations with publishers.

Going back to the original question, except for the possibility that some new book sales occur because the purchaser is confident of a resale, this is all foe!

In retrospect, it is clear that Amazon’s big advantage was that they always intended to use the book business as a springboard to a larger play; they never saw it as a stand-alone. This was an anticipation of the future that nobody inside the book business grasped when it was happening, nor was it imitated by book business pure players. But it was the key to Amazon’s economics. They didn’t need to make much margin on books; they were focused on “lifetime customer value” and they saw lots of ways to get it. Google and Apple have the same reality: books for them are in service to larger purposes. But they started with the larger purposes and, for that and other reasons, have never gotten as good as Amazon is with books. (One big deficiency of the Google and Apple offers is that they are digital only; they don’t do print books.) And B&N and Waterstone’s never thought beyond books; it appears that Waterstone’s scarcely thought beyond physical stores!

But it could well be that Amazon is approaching its limits in market share in the book business. What they did worked in the English-speaking world — for printed books two decades ago and for ebooks almost a decade ago — because they were first and able to aggregate an enormous customer base before they got any serious challengers. They will not find it as easy to dominate new markets today, particularly those that have rules that make price competition harder to employ. Language differences mean book markets will remain “local” for a long time and strong local players will be hard for Amazon to dislodge.

Amazon has powerful tools to keep their customers locked in. PRIME is the most effective one: once customers have paid a substantial fee for free shipping, they’re disinclined to buy elsewhere. Kindle is another one. The devices and the apps have broad distribution and, because of self-publishing, Kindle remains the ebook retailer with the biggest selection.

The marketplace is changing, of course. Amazon’s big edge is having the biggest selection of printed and digital books in one place. That’s been known for decades to be the best magnet to attract book buyers. But now a lot of book reading is done without the title-by-title shopping in a bookstore that it always used to require. We are at the beginning of an age of “distributed distribution”. Many different tech offerings — Aerbook, Bluefire, De Marque, Page Foundry, and Tizra among them — can make it easy for publishers to sell ebooks directly (and Aerbook enables that and promotion in the social stream). The subscription services Scribd, Oyster, 24Symbols, and Bookmate (as well as Amazon’s own Kindle Unlimited) are pulling customers away from a la carte ebook buying and Finitiv and Impelsys make it easy for any entity to offer digital reading by subscription. All of these sales except Kindle Unlimited come primarily out of Amazon’s hide, since they are the dominant online retailer for books. Publishers mostly see this dispersal of the market as a good thing for them, even though some of the same opacity issues arise and, indeed, the big general subscription services are a new group of potentially disruptive intermediaries now being empowered.

For the foreseeable future — years to come — Amazon will remain dominant in most of the world as the central location where one shops online for books a la carte because they have the best service, the biggest selection, and they sell both print and digital books. But they now have their own new challenge dealing with the next round of marketplace changes, as what they dominate becomes a smaller portion of the overall book business in the years to come. Publishers face the same challenge presented a somewhat different way.

The event that gave rise to this post takes place the night before the London Book Fair opens. The entry fee is nominal. If you’ll be at LBF and want to attend, please do! I will, typically, have no real base of operations at LBF, but I’ll be there all three days with some time available to meet old friends and new. Email to [email protected] if you want to set something up. 

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End of a year, and perhaps the end of a stage of the ebook transition


The year ends with a front-page New York Times story reporting the consternation in the indie author community at the current state of their commercial lives at Amazon. The proximate cause of distress is seen to be the Amazon Kindle Unlimited subscription service, through which indie authors are receiving considerably less compensation per read than they get through a sale, combined with the apparent migration of many Kindle readers to subscription, which would also explain the simultaneous sharp decline in those authors’ single-copy sales. Indie author and author service-provider Bob Mayer is quoted in the piece describing a complete turnaround in the past six months, with authors going from what they thought were secure incomes from writing to looking for day jobs.

Nate Hoffelder at Digital Reader makes the point that we’d want to know whether it is just the indie authors feeling this pain or whether publishers are seeing revenues shrink too. But that’s a very difficult comparison to make. Amazon gets the attractive books from the big non-agency publishers by just buying them for each use (paying whatever is the publisher’s wholesale price). Amazon wins that way because they don’t have to get the publisher’s permission to participate in the subscription program, but they’re paying a lot more for each subscriber read than they pay the indies. So even if the reader balance shifts from “individual purchase” to subscription read”, the publisher wouldn’t lose income.

My hunch is that the indie author community has a much more serious and intractable problem. It’s called supply and demand.

What a long list of indie authors has proven in the years since Kindle was invented is that there is a substantial market willing to try storytelling from unknown writers if it is offered at a relatively low price. As a result of that and of Amazon — joined by all the other ebook platforms and a legion of service-providers like Bob Mayer — making it relatively easy to “publish” a manuscript, many tens of thousands of authors have published hundreds of thousands of ebooks that way.

What is now being proven is that market is not infinitely elastic. Most of the data we see suggest that ebook sales growth has stopped. (As Mayer says in the piece, many ebook readers have an inventory of ebooks they’ve bought and not yet read.) Ever-growing supply and stable demand is a toxic formula for the prospects of each successive ebook published for that market. My own hunch is that Kindle Unlimited is simply the straw that broke the camel’s back.

And while Hoffelder’s question about the distribution of the pain is still a good one, it seems likely that the low-priced indie authors are disproportionately affected by KU. Who bought indie author ebooks in the first place? The price-sensitive reader! Who switches from buying individual ebooks to the subscription service first? The price-sensitive reader! In other words, the subscription service offering appeals most to the same audience as those who read indie-published ebooks.

And if that theory of what is happening is correct, authors may get less relief from dropping out of KU than they’re hoping for. They still have the supply and demand problem, compounded by the conversion of a chunk of their static market to the subscription model. Evidence of that is a shoe I expect we will soon hear drop.

POSTSCRIPT: Apparently the Disqus comment facility isn’t working (at least at the moment) on the site. I just got this note from Nate Hoffelder, commenting on “And if that theory of what is happening is correct, authors may get less relief from dropping out of KU than they’re hoping for.” Nate said:

As I pointed out a month ago (and have mentioned since) there are authors who never went into KU who are seeing a similar drop in revenue. So leaving KU will bring exactly zero relief.

So Nate has evidence that supports my conjecture.

Happy New Year to everybody. I hope we’ll see you at Launch Kids and Digital Book World!

59 Comments »

Big publisher bashing again with fictional facts


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

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

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

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

Almost every sentence of this is subtly or blatantly wrong.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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This is a teamwork play that could really give Amazon a headache if they got together


I will admit that I have long been among those who believe that Amazon has what amounts to an enduring stranglehold on the book business. They have achieved a market share — which could be in the neighborhood of half the trade books sold if you combine print and digital versions — that is unprecedented in book business history. This is a smaller share than the two giant bookstore chains — Barnes & Noble and the now-defunct Borders — had combined at the peak of their marketplace power.

Lately, I have seen that point of view challenged. Jake Kerr wrote a very thoughtful piece making the point that Amazon’s desire to take margin out of the ebook business is a good defensive move that diminishes the appetite of their mega-company ebook competitors — Apple, Google, and, less so, Microsoft — to invest in beating them back. Suw Charman-Anderson picked up on the theme that Amazon is being defensive, “looking tired”, and found others who seemed to think the same way. Both of them express doubts about Amazon’s continuing hegemony without even using one powerful argument I think is important. Amazon is protected from ebook competition by the inability of competitors to put DRMed content onto dedicated Kindle ereader devices. (Another barrier is that so many early ebook adopters did so via a Kindle account, so their content and login credentials are in the Amazon platform along with a lot of other shopping data that raises the switching hurdle.) But the share controlled by dedicated devices is diminishing and anybody reading on a multi-function device can choose from a range of ebook retailers. (And that’s not to mention that somebody might invent a way to place protected content on Kindles without Amazon’s help; rumors have it that somebody already has!)

Contemplating Amazon’s weaknesses is new thinking for me. What I see is Amazon’s power over the book business, which is great. Amazon has achieved this position through smart and efficient operations and brilliant tactics like Amazon Prime that build customer loyalty, as well as being beneficiaries of the natural migration of sales from brick stores to online. But, most of all, Amazon benefits from its broad business base. They don’t have to support their business exclusively, or even substantially, from their book sales margin. And, on top of that, they don’t have to finance the building and maintenance of a global operation strictly from what they earn in the United States.

So they trump everybody. Barnes & Noble, their only competitor selling both print and digital books, seems to have stalled in its bid to build a rival global empire with the Nook device as the leading edge. Their lack of stores outside the US robs them of the main tool they used to build Nook from a standing start to what seemed for a while to be a serious threat to Kindle and the consequent lack of global scale is hobbling their Nook business. The US stores are still profitable as print-sellers, but very few are those who maintain that print-in-stores is anything but a declining market. (As for BN.com, the less said the better. Of the four principal components of B&N’s business: bookstores, college stores, Nook ebooks, and their online retailing operation, the most dramatic and persistent failure has been BN.com.)

Kobo, Apple, and Google are all ebook purveyors only with no print book complement. Kobo has nominally tried to deliver a combined offering, and claimed some store support to sell their devices, by making alliances with leading local booksellers in many markets. Apple, a company primarily interested in selling its hardware and the ecosystems it builds around them, has no apparent interest in print. Google appears to have hit on a broader variation of the Kobo strategy, making alliances with physical retailers by offering a combination of its power in search and a same-day delivery capability called Google Shopping Express — competing with Amazon Prime — that retailers in a single vertical couldn’t deliver for themselves.

Under that rubric, Google is now allied with Barnes & Noble. But I see this as an initiative with the accent on the wrong syllable. The combined companies’ offering is only of real value applied to the small number of book purchases for which same day delivery adds substantial utility (and for which the digital version — always delivered instantly — doesn’t constitute an adequate solution for the need for speed). They are further limited by the books available in the particular B&N store plugged into the program in each locality and each store carries far fewer titles than the chain does as a whole. So the number of books customers will need delivered with that alacrity will be further reduced by the imperfect match between the demand and what’s available. Even if this program steals a high percentage of the same-day demand sales from Amazon, I’m not sure how much it would shift market shares. And with Amazon also offering rapid delivery and probably around a greater number of titles, it is not a given that the new offering from Google and B&N will steal much market share at all.

That doesn’t make it a bad move. The sales and visibility are incremental pluses for Barnes & Noble. Google’s new Google Shopping Express has a business model into which B&N fits very nicely. Books are a nice-to-have additional product line to offer within that service, designed to compete with Amazon’s growing same-day goods delivery. This is a fight between two behemoths that is much larger than the book business (as it has to be to interest them). B&N has a role to play, but it is a supporting position, not a lead.

From where I sit, this offering from Google and B&N doesn’t look like a game-charger for the book business. Nothing about it would seem to threaten Amazon’s overall (and still growing) hegemony in book retail. The migration of sales from print to digital and from stores to online has clearly slowed down, perhaps even plateaued, in the past year or two but few are those who believe those trends are permanently over.

Google is on a right track with Google Shopping Express; people who buy physical goods use Google search to find them and see Google ads when they do. But going after the smallest corner of the print book business — those books on which 6-hour delivery presents a very big advantage over 24-hour delivery — is not going to bend the curve much on Amazon’s future, even if it provides some marginal benefit to B&N and Google.

But there is a different combination that could give Amazon a real headache. There are two companies that together could deliver print and digital, just about anywhere in the world with competitive delivery speed, with discovery capability that would rival Amazon’s as well. Between them, they really have almost all the capabilities and infrastructure required already in place.

One of those companies is, of course, Google.

The other is Ingram, the book business’s biggest US wholesaler and, through its present activities already providing global digital and print distribution as well as print-on-demand. Ingram is positioned to deliver any book in any form anywhere extremely efficiently. They also have a robust and accurate database of book metadata which, if combined with Google’s data and search mastery (and capabilities that match Amazon’s “Search Inside” offering as well), could challenge Amazon effectively as a “best first place to look” for any information about books.

What Google needs to take on board to make the strategic leap to explore a partnership like this is that most book consumers read both print and digital and probably will for some time to come. It will get harder and harder to compete with Amazon without a print-and-digital offering; you can’t be fully effective with either one unless you do both.

And it would help if Google saw the book business as distinctly different from the other media businesses that with books constitute Google Play. The differences play to and can enhance Google’s core strength. Book marketing is almost infinitely granular, because the number of possible motivations to buy a book are so great in number. Rarely do you buy music or video because of where your next vacation will be or because you want to put a new roof on your house or change careers. Associating specific book suggestions to discerned interests and motivations is the key to effective book marketing in the digital environment. And the insights about any individual by analyzing their book search also can tell you what else they may be looking for. Nobody does those things better than Google. They have limited impact on the ability to suggest music or movies, but enormous value in selecting what books to feature to any particular customer at any particular time and what else they can be sold after they’ve bought a book.

A Google-Ingram partnership would not only start with every capability necessary to compete with Amazon as a global bookseller, they would have some additional Secret Sauce as well. Google and Ingram wouldn’t actually have to make money on the combined retailing component because they make money other ways that are associated with it. Google would be adding incremental search and ad placement opportunities. Ingram would be benefiting as a wholesaler providing all the print books and many of the ebooks the new “store” sells. They could make nearly nothing from the new retailing operation, just like Amazon does with its book retailing operation, and still have the enterprise return a profit for their engagement.

A joint digital retailing enterprise to sell books and ebooks from Google and Ingram is the only possibility I can see on the horizon that would save the legacy publishing business from being entirely subject to Amazon’s inexorably growing marketplace power. It is almost certain that Ingram — part of the book business Amazon is so successfully disrupting — sees this very clearly. (Full disclosure seldom necessary in this space: Ingram has been a client of The Idea Logical Company for many years.) Being a hero to the book business may be a less immediate objective for Google, but making life a bit more difficult for Amazon almost certainly is. Nothing they could do would create more challenges for Amazon than a partnership with Ingram to create an all-media store that sells both physical and digital versions of everything, including and especially books.

Since I posted my last piece, triggered by Amazon’s invoking of Orwell and Streitfeld’s accusation that they got him wrong, two conflicting posts have arisen. I’m indebted to Hugh Howey for pointing out that apparently Orwell really did want to destroy cheap paperbacks but Orwell’s estate takes a different view. In fact, I don’t think which side got it right is particularly germane to the arguments I was making. The Orwell connection made a cute hook, but it is not really an essential part of either side’s story.

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