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Sony exits and the ebook business loses an original player


Sony has thrown in the towel on the ebook business and turned its customers over to Kobo. This has unleashed speculation that Nook will soon do the same. If B&N were really forced to choose between the investments they need to make in their stores and the investments required to compete in digital delivery, it would be hard to see them making any other choice but to save the stores. The notion of another retailer, perhaps Walmart, buying the whole thing seems eminently logical, but one can’t account for the role that a sentimental attachment to the stores by B&N’s principal owner, Len Riggio, might play in these decisions.

Despite the hopes and expectations of upstarts like Zola Books (which itself made an acquisition lately, taking Bookish off the hands of the three publishers that started it) and Baker & Taylor’s Blio or longtime competitor Copia or the originally phone-based txtr, it feels to me like we’re seeing the beginning of consolidation of the ebook business. Verticalization may work, as it has seemed to for Allromanceebooks but just being “indie-curated” wasn’t enough for Books on Board, a pretty longtime player that expired last year. (So far, Diesel, a comparable indie, is hanging in there.)

Sony is a big company with a very tiny ebook business. They were also really the “first mover” in the modern era ebook device space. The e-ink Sony Reader is more like the Kindle and Nook than any other thing that came before. But if the ebook play ever fit into a larger objective for Sony, it is not clear what that was.

Apple opened their ebook store because they thought they had a suitable device for book consumption (the iPad), but they also had experience with selling content before (iTunes). They also see potential for iPads in the school and university markets, so they have developed technology to enable more complex books — the kind that haven’t been successful commercially yet — to be developed for their platform. Establishing their devices and the iOS ecosystem in the education market would be a big win for them.

Google recognized over a decade ago that books, being repositories of information that contained the best response to many searches, were a world they wanted to be in. With their growing position in devices — the Nexus 7 phone and Chromebook computers — and as the developers of the Android ecosystem that competes with iOS in the app market, there are many ways that being in the ebook business complements other endeavors, including, perhaps, competing with Apple and iOS in the schools.

In the last post here, I posited (among other things) that ebook retailing just wouldn’t work as a stand-alone business; it has to be a complement to other objectives and activities to make commercial sense. Sony has found that it doesn’t fit for them, almost certainly because it doesn’t add value to any of their other businesses.

Of course, ebooks definitely complement Barnes & Noble’s core business. You have a pretty obvious deficiency if you run a bookstore and don’t sell ebooks, so everybody manages to do it somehow or other. Among the mistakes Borders is accused of having made before they disappeared was turning their ebook business over to Kobo. Doubts about the future of Waterstones in the UK include whether it was wise to turn their ebook business over to Amazon. If Barnes & Noble didn’t have Nook, they’d have to make a deal with whoever did have Nook, or with somebody else.

I’m sure Apple or Kobo or Google would be just delighted to have their ebooks integrated into Barnes & Noble’s suite of offerings, and probably Amazon would too, although they would almost certainly never be asked. All of them have shown interest in affiliating with indie stores, with Google having gone in and out, Kobo now trying hard with them, and, even Amazon, which can’t penetrate indies effectively with their own published books now offering them an affiliate program to sell Kindle ebooks called Amazon Source. But surely all of them would jump at the chance to expand their distribution to Barnes & Noble customers.

It is likely that B&N believes that the Nook business can only be truly successful if they keep investing in improved devices and create a global presence. That may be true, but it also might be that Nook can be a useful adjunct to their store business without continually adding devices or creating a presence outside the US where there are no B&N stores. More and more people are comfortable reading on multi-function devices through apps. Maybe B&N could profitably hold on to a core Nook audience by emphasizing synergies with the stores more (bundling print and ebooks, like Amazon does with its Matchbook initiative and as has been tried on a smaller scale by some publishers, would be one such way) and not worrying so much about making Nook competitive with the other ebook retailers as a stand-alone business.

The wild card here is if some big outside player — Walmart being the most frequently mentioned — saw benefits to having the ebook business (or even the whole book business) in its portfolio. That’s happened in the UK, where supermarket chain Sainsbury’s bought a majority stake in Anobii (a UK-publishers-backed startup, analogous to Bookish in the US) and Tesco bought Mobcast because the ebook business was one that they thought fit in well with their offerings and customer base. (Both Sainsbury’s and Tesco made statements about strengthening their “digital entertainment” and online retailing propositions. Tesco is investing in devices as well.) Kobo has made it a pillar of their strategy to find brick-and-mortar partners all over the world.

On a global basis outside the English-language world, the ebook business is still in its infancy. But it is hard to see how any player without a strong English-language presence could develop the scale to compete with those who have it. Every nation and language will have local bookstore players who have “first claim” on the book-readers in their locality. Some might harbor ambitions to also own their local ebook business, particularly as it becomes increasingly clear that ebooks cannibalize bookstore shelf space. But the cost in cash and time of doing it, combined with the competitive advantage of having English-language books in the offering no matter what language your target market reads, will make a build-it-yourself strategy increasingly unattractive. So it would seem that Amazon, Apple, Google, and Kobo are positioned to grow organically and partner ubiquitously. And it will require some seriously disruptive event, like Walmart buying Barnes & Noble, to break the hold that quartet will have on the global ebook market over the next decade.

A potential disruptive development which this piece ignores is the possibility that ebooks become largely a subscription business over the next decade. I have two overarching thoughts on that.

One is that the book-by-book purchasing habit is sufficiently ingrained that it will not be changed drastically around ebooks in the next ten years. I have no idea what percentage of the ebook market is now subscription, but I think it is safe to say “far less than 1%”. So my instinct is that it would take wild success for it to get to as much as 10% in the next ten years.

The other thing to remember is that any ebook retailer can always develop a subscription offering. Amazon effectively started already that with Kindle Owners Lending Library. You can be sure that if Oyster or 24Symbols starts gathering a substantial share of the market, all of the Big Four as we see them here will find a way to compete for that segment. (It is considerably harder to go the other way around; it is much less likely that Oyster or 24Symbols will open regular stores.)

So whether subscription grows faster or not, the giants of ebook retailing will remain the same.

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Nine places to look in 2014 to predict the future of publishing


The digital transition of the trade book publishing business, which I would date from the opening of Amazon.com in 1995, enters its 20th year in 2014. Here are some of the ponderables as we close out the first two decades of a process of very rapid change that is far from over.

1. What’s going to happen with retail shelf space for books? The market for the kind of narrative reading that comprises the bestseller lists has gone anywhere from half to three-quarters online, ebooks and print combined. The rate of movement has slowed, but it hasn’t stopped. It has now been two full years since Borders shut. Barnes & Noble continues to close stores as leases expire. Independents are, anecdotally, reported to be holding their own, but they’re definitely challenged to deliver on the online component and, so far, the successes have depended on individual entrepreneurs running good local stores, not any formula that is replicable or scalable. When will we see a stable “floor” for bookstores, a sustainable foundation from which year-to-year fluctuations won’t persistently be down? I don’t think it will be in 2014, but it’s the most important bunch of tea leaves to read for some segments of the business.

2. Illustrated book publishers are likely to be the most attentive of all to the bookstore shelf space question. Six years into mass ebooks (as dated from the Kindle) and three years into good hand-held delivery of graphics (as dated from the iPad), the digital version of illustrated books have not found the market that the digital version of novels have. The illustrated book publishers learned to be global over the past four decades, so many have avenues to market that aren’t changing as fast as the US bookstore network has. But the reduction-in-shelf-space line on the graph or the sales-of-these-books-as-digital-products line, or both, have to start moving in the opposite direction or there’s a major problem brewing in that very large segment of our business. Will 2014 be the year that somebody cracks the code for delivering how-to or art-book material in a digital form that will replace shrinking print revenues?

3. As 2014 dawns, we have a host of ebook retailing models that deviate from what the book business has always done: sell one book at a time for a price for which the starting point of reference is one set by the publisher for that book. Safari, created by O’Reilly and Pearson, showed a subscription model more than a decade ago but it was for professional books. 24symbols, based in Spain, is a sort-of granddaddy of this business in the trade segment, being about three years old. They are joined by Oyster, a new start-up dedicated to ebook subscriptions and Scribd, an old start-up originally dedicated to being YouTube for documents. And Entitle, formerly called EReatah, has a slightly different subscription proposition that is more like a “book-of-the-month-club” in its structure. An even newer start-up called Librify has an offering for reader-organized book clubs in the offing. Amazon already has a lending library for its PRIME subscribers, which amounts to the same thing, and a subscription of content for kids on Kindle Fire. With so many experiments in play, we ought to get a picture by the end of 2014 of the degree to which this model appeals to consumers and whether the economics are enticing enough to get big authors and big publishers to play with more enthusiasm than they have demonstrated so far.

4. It is accurate, but misleading, to describe the Penguin Random House combination as a merger of “two of the big six”. It is actually a merger of the two biggest of the former Big Six, and it creates a publisher that is nearly as big as the four others combined. So we now really have a Big One and a Following Four, rather than a Big Five. The big question is what PRH can do to apply what is a huge difference in size as a scale advantage. The hunch here is that proprietary distribution channels can be created by a company that controls approximately half the most commercial books in the English-language world. Whether that will manifest itself as ebook subscriptions, special retail distribution using vendor-managed inventory, or the creation or purchase of marketing channels for its exclusive use — or all of the above and more — will be one of the most important things to watch in 2014.

5. The financial reports from big publishers in 2013 have been mostly encouraging. It looks like the shift to ebooks has had the impact of improving publisher margins and profitability. But can those good times last? Publishers now face a world where there is a single dominant bricks-and-mortar retailer, a single dominant internet retailer, and, as noted above, a single dominant publisher. Agents want to keep competition alive, so they’re going to be sensitive about pushing the Following Four too hard or allowing too quick a migration of authors to the industry leader, but the retailers won’t be so accommodating. Another pressure point on margins will be ebook pricing. It has been driven down by successful self-publishing and the the court’s elimination of agency as a protection. Now big publishers have discovered “dynamic pricing” — lowering prices on a book temporarily to spike sales and awareness — adding their own activity to the list of forces reducing margins. Both the top line and the bottom line will be harder to maintain in 2014, but how it will turn out is an open question. After all, most of these things were true in 2013 and margins still improved.

6. Literary agents have been dabbling with publishing for the past several years since ebooks and POD have made it possible to do it without inventory or an organization. Agencies have started publishing operations (E-Reads, Diversion, Rosetta) and many more have brought on the expertise to give authors help with digital services (Curtis Brown, Writer’s House). Publishers have expanded into author services with speaker’s bureaux, but, so far, none has thought to add literary agenting services except for the time-honored practices of selling rights (foreign, paperback, book club), which was part of their publishing process. Might a publisher either create or ally with a literary agency to create a way to “own” an author’s entire career? If one tried this in 2014, it wouldn’t come as a total surprise.

7. Simon & Schuster has made a number of pioneering deals for a publisher of its size. They offered print distribution service to bestselling indie author John Locke. Then they made a print-only deal — which the big houses pretty much said “we will never do” — with another indie with a hit, Hugh Howey. Now they’ve extended an idea they started a few years ago and signed a deal to give Yankee shortstop and icon Derek Jeter an imprint to be a publisher. Jeter has the ability to focus public attention on any book he wants (although certainly more with some topics than others) and he’s an articulate spokesperson with a strong personal following. S&S had done this in 2007 with 50-Cent; Hachette more recently gave an imprint to Chelsea Handler and HarperCollins gave one to Johnny Depp. Will celebrity imprints become a common idea? There will be plenty of attention paid to how Jeter’s initial efforts work. Or it may be that some other athlete or actor, musician or politician, will be the next experiment with this model. In any case, this is something else to watch in 2014.

8. It has been happening quietly but it has been happening: we increasingly have two separately-operating book businesses: Amazon’s and everybody else’s. This starts with the numbering system: Amazon uses its own ASINs, rather than depending on everybody else’s ISBNs. It extends to the titles available: Amazon has an untold number, but certainly hundreds of thousands, that it either publishes exclusively or which authors or small presses publish exclusively through them. And it has service offerings from Kindle Owners Lending Library to its recent Matchbook offer to pair ebook and print sales, which range from “extremely difficult” to “impossible” for any other publisher-retailer combination to match. How far can this go? Can Amazon create a closed world which is more profitable for an author or publisher than the whole world that includes everybody else? Or have they already?

9. And, in that same vein, we have what would seem to be an unsustainable dichotomy in the ebook marketplace as a result (I would say, editorializing here) of the Justice Department’s lack of understanding about where power really lies in the book business. Apple insists on “agency pricing”: publishers set prices, Apple keeps 30%. Amazon — for everybody except the former Big Six — insists on the wholesale model which gives them 50% of the publisher’s set price to divide as customer discount and margin as they choose. This has resulted in all publishers except the biggest being forced to put two prices on their ebooks: a ”digital consumer retail” price (intended to be a selling price, for Apple, and lower) as well as a “list” price (intended for the retailer to discount, for Amazon, and higher). When the distinction began, the agency price couldn’t be discounted. Now it can so the only real differences are the margins and the hard-to-explain-or-justify publisher-set prices. Only the biggest publishers have the clout to overcome the marketplace power of Apple and Amazon to dictate how the sales structure will work. Everybody else lives in an Alice in Wonderland world. I’d expect something to give on this in 2014.

Many of these questions will be explicitly discussed at the biggest and best Digital Book World ever, coming up in less than two weeks. It has become the premier global gathering of book publishers talking about the impact of digital change. We’ve counted them up and there are 156 speakers and moderators on the 2-day DBW program, plus dozens more in DBW’s workshop program and the Publishers Launch Kids conference hosted by Michael Cader and me and programmed by Lorraine Shanley of Market Partners International. You can’t spend that week with us without bumping into smart people who are getting great things done.

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Looking at predictions from here going back a few years


Prediction posts are common blog- and article-fodder at the end of a calendar year. I don’t think we’ll do one this time around, but I thought it would be fun to review some of the prediction posts from prior years. So pardon the highly self-referential post, but I think reviewing the predictions and reality from the past provides some perspective on the changes we’ve experienced over the past half-decade.

In December 2012, I wrote about “what to watch for” in 2013. I don’t think this was very adventurous, but it was mostly right.

I said that:

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

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

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

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

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

In December 2011, I steered away from predictions to raise what I thought were the important questions facing the industry coming up in 2012. Despite no “predictions”, this one anticipated a number of developments that mattered, including the challenges Amazon Publishing would face, the difficulty for B&N trying to create a workable international strategy, the lift indie bookstores would get from Borders going out, and the conundrum facing illustrated book publishers as consumption migrates to digital.

That same year, I chimed in with others for Jeremy Greenfield’s annual round of predictions on the DBW blog. I commented on the restructuring of big companies that would result in new positions. And that was before anybody had people with the word “audience” in their job titles. Doesn’t everybody now?

But I really got it wrong about ebook royalties, which I thought back then would go up from the “standard” 25% and, although that may still happen someday, it hasn’t happened yet.

I didn’t write a single consolidated predictions post in December 2010 but I did posts making some predictions. One thing I got right was that ebook sales would continue to rise quickly (some people back then expected a slowdown, but we were still in a more-than-doubling-each-year period though, as noted above in the predictions last year, that slowdown came eventually). I thought bookstores would be headed for very hard times. That was just before Borders’s demise.

I’ve made the point on the blog before that every book purchased online is another nail in the coffin of brick-and-mortar bookselling. … I’m expecting that what brick-and-mortar booksellers will experience in the first six months of 2011 will be the most difficult time they’ve ever seen, with challenges escalating beyond what most of them are now imagining or budgeting for.

I think the next six months will make what we’ve been experiencing for the past year look very gradual. I know smart people who have thought for the past year that there would be some flattening coming soon in the ebook switchover. It doesn’t feel that way to me.

At the same time, I focused on marketing with a suggestion — for topic-specific (vertical) ebook recommendation apps or ebooks — that I still think is out there waiting to be exploited. Maybe Mike Fine’s Mediander will take hold and carry us in that direction. (What has happened instead is ebook notification of ebook price sales, which is, to my mind, not as useful.)

I also saw backlist emphasis as a logical consequence of ebook ascent. I think publishers are still lagging in taking advantage of this the way they could. And that blows the end of this prediction, because I said everybody would see that by the end of 2011. They didn’t. (And we now understand the constraints — of time, timing, and budgeting – that make backlist marketing difficult. Publishers are now looking to tackle the backlist in scalable, data-driven, and efficient ways.)

In December 2009, I made 13 predictions for 2010. One stands out: I said that ebooks would become significant revenue contributors for many titles. That happened. And also accurate was my hunch that “windowing” for ebooks, for a little while the strategy employed by publishers to protect print, would be overwhelmed by circumstances. Windowing really didn’t last long.

In January 2009, I wrote a piece for PW analyzing how my 2008 predictions had held up. I gave myself a pat on the back. I think I deserved it. As I said in PW:

I said the popularity of e-books would increase—that the rising Kindle tide would lift all the e-book boats. That appears to be unambiguously correct.

I said Apple would make an e-book reader out of the iPod and iPhone. They haven’t, but they’ve made it easy for others to do so.

I said B&N would continue to leverage its great supply chain to lengthen its lead over Borders. And, in an incredibly difficult year for all book retailers, B&N has substantially outperformed its closest competitor.

I said the lack of a competitive supply-chain infrastructure would handicap Borders, which would get a new owner. Turns out I was half-right. The lack of a competitive supply chain has been such a handicap that Borders has not yet found a new owner!

I said publishers would push harder to publicize books through the Internet because traditional review channels would continue to diminish. Well, the traditional review channels have certainly diminished, and publishers have increasingly turned to bloggers, Web sites and e-mail blasts to promote their titles. Most publishers now have dedicated staff for Web marketing.

I also said 2008 would be the year of experimentation. In many ways it was: Random with free e-book giveaways; Penguin beefing up its e-book editions of classics; Harper creating an imprint with Bob Miller that has a new business model for authors and a no-returns option for intermediary customers, as well as its Authonomy and BookArmy sites. Experimentation will be curtailed in 2009 because of the difficult economy, so I got that one into the right year.

At the end of 2013, we look forward to a new year with a revised commercial trade publishing landscape, mainly because what was formerly the Big Six is now (to my way of thinking) the Big One and the Following Four. The challenge for publishers will be to hang on to their margins, which will be under assault from a single dominant store network, a single dominant online retailer, and literary agents who know their author clients are reading the same articles they are about how the publishers’ profit has remained healthy through the early phases of the digital transition. The challenge for bookstores will be to stay relevant now that the most avaricious readers no longer must visit them to get their next book. And the challenge for everybody is to make a profit and generate some leverage on the even-diminishing share of the business that isn’t controlled by Amazon.

At this year, the fifth Digital Book World, I’ll start the show with a quick summary of what has changed since we started having the Digital Book World conference in 2010. And the wrap-up panel I co-host with Michael Cader will focus again on “Looking Back, Looking Forward”; what has happened that is significant in the past year and what we expect in the year ahead. We are delighted to have John Ingram, Mary Ann Naples, and Simon Lipskar joining us for that conversation.

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Examining the relationship between start-ups and publishers


We are in another high-funding era for digital start-ups. The book business has always looked ripe for disruption, but never any more so than now. With bookstore shelf space shrinking, ebooks growing in very uneven ways across the types of books that are published, and everything about technology getting cheaper, everything is up for grabs.

It is not a new thing that the world looks different to the companies funded by the revenues from the legacy business than it does to outsiders, some of whom want to bring tech disruption into collision with the legacy business.

Publishers see an ebook business that has been very commercially unkind to the digital versions of books that aren’t immersive narratives. Start-ups and their funders see publishers too stuck in old forms, and unable to break away from a book-style presentation when the content and use cases would call for something quite different.

Publishers see a printed book marketplace that is dominated by Amazon with less and less room for books in stores. Start-ups and their funders see an opportunity to gain further digital discovery by making the content easier for people, and web crawlers, to “see” online. And they also see making digital versions of books easier to “share” as an aid to discovery; publishers often see it as an enabler of unauthorized distribution that could cut into sales.

Publishers see books as products driven primarily by interest in the author or genre (for fiction) or the subject (for non-fiction). Start-ups and their funders see reading as an activity at least partly driven by convenience and availability and the ability to share the reading experience.

Publishers see Netflix and Spotify and think, “How many people read more than a book a month? The subscription model doesn’t really apply to our business.” Start-ups and their funders see that the consumers of all other content really like the subscription model and they can’t see why it wouldn’t work in the book business, too.

So we have, for example, several serious initiatives around subscriptions: dedicated (and often well-funded) start-ups like Oyster, eReatah, Skoobe and 24 Symbols, as well as initiatives from the totally-established Amazon.com and the differently-established Scribd. At the same time, some agents are outspoken in their objection to the whole concept, seeing it as a way that commercial power will pass from the author brand to the subscription brand. Publishers generally pay close attention to what agents say. Whatever the reasons, as of this writing only HarperCollins has broken ranks among the Big Five to place any substantial number of books in subscription services.

If you get many of the start-ups to speak candidly about publishers, they’ll often accuse them of being hidebound, unimaginative, wedded to old ways and models, and still “experimenting” with things that should be well-established.

If you get many of the publishers to speak candidly about start-ups, they’ll bemoan the fact that they too often don’t understand how the business really works or the true commercial imperatives at the publishing houses, which must continue to sign up and please authors and harvest revenues that still come overwhelmingly from sales of one item at a time to one consumer at a time through intermediaries.

At Digital Book World in January, we have five elements in the program to address the relationship between start-ups and established publishers.

First: we are running a survey of start-ups and publishers to get them each to talk about what they expect from the other. If you work for a start-up or your job at a publisher includes meeting with and evaluating start-ups, please respond to the survey! We will announce the results at DBW.

Second: Ron Martinez, who has a start-up (Aerbook), partly financed and supported by an industry leader (Ingram) and a long background in tech, patents, and design, will speak about the relationship between start-ups and incumbents.

Third, Fourth, and Fifth will be three panels exploring the question from three sides.

A panel of start-ups, which will include Martinez and Andrew Rhomberg of Jellybooks and two others we’ll pick after we see the survey results, will talk about what it takes to get traction with publishers, what publishing, marketing, or ecosystem problem they’re addressing, and explain their own vision of a path to success for their enterprise.

A panel of publishing business development people, including Rick Joyce of Perseus Books Group and Leslie Hulse of HarperCollins, will talk about how they view start-ups. What makes them give start-ups a meeting? What makes them engage? How much buy-in do they need from the rest of their company to be able to work together?

Finally, a panel of investors in start-ups, three of which are owned or controlled by existing publishing entities (Ingram, Macmillan, and Harvard Common Press) will talk about what persuades them to fund a start-up and what disruption they see on the horizon for publishing from the start-up community.

Very good publishing minds from three continents around the world, including Arthur Attwell,  Javier Celaya, and Brian O’Leary, have expressed themselves recently on this very problem. Although I disagree with chunks of what each of them has to say (as Jeremy Greenfield’s interview with me on the DBW blog makes clear), they individually and collectively express the real challenge of finding both workable paths to the future and workable ways for innovators to work with incumbents to get there.

The post from Jeremy triggered an exchange on Twitter among Rhomberg (from whom it inspired a thoughtful post), Peter Turner, and me which surfaced another important point. An incumbent’s job is to continue to maintain economic viability. A start-up’s objective, often, is to “change the paradigm”. If the paradigm does change, the incumbent needs to roll with that, but they don’t need to be an instrument of change. A start-up often does. That is an inherent difference in perspective that a start-up can’t afford to ignore.

As a guy who questioned why anybody would want another device just to read books when Amazon introduced the Kindle, I’m the first to admit that predicting in advance how an innovation will do — including the observations I made with such conviction in the DBW piece — is rarely a slam dunk.

It isn’t likely that our sessions at DBW will help anybody predict which innovations will succeed in the future, but it might help both start-ups and incumbents develop more mutually productive approaches to engaging with each other. That’s certainly the intention.

Don’t forget to respond to the survey if you are either a start-up or in a role at a publisher that involves meeting with or evaluating them. We’ll be collecting responses through next Monday, November 18.

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Three points worth adding to the excellent account of the Amazon story in The Everything Store


The publication of Brad Stone’s book about Amazon, “The Everything Store”, is the catalyst for a lot of new discussion about the topic most difficult for the book business to discuss. It is pretty much impossible to be in the book business without benefiting from Amazon’s market reach. But it is also pretty standard fare to be worried about what the impact will be on your business as that market reach grows.

Amazon is, at the same time, both the biggest customer for most publishers and many wholesalers and their most potent competitor. They compete with every bookseller for sales, which weakens the brick-and-mortar trade, and thus dilutes the core value proposition that publishers have always offered: putting their authors’ books on bookstore shelves. Weakening the diverse bookstore ecosystem weakens the wholesalers. At the same time, Amazon competes with publishers for authors, both through their publishing programs and through their self-publishing services.

They also compete with the free ebook lending from public libraries and the various ebook subscription services with their Kindle Owners Lending Library, a service offered to their Amazon Prime customers that makes a large number of titles — many published by Amazon or self-published exclusively through Amazon — available for no-additional-payment downloads.

And they are capable of creating propositions that every other retailer would love to match but would find quite difficult to do, such as their recently announced “Matchbook” program which offers a free or very cheap ebook edition to any customer who has bought the print version of that book from Amazon. In fact, many publishers believe in the print-and-digital “bundle” and have made efforts to engineer it for bookstores, but it is hard to do that cost-effectively. It isn’t hard for Amazon.

Candid public conversation about Amazon from other players in the industry is pretty much a non-starter. Every publisher is walking the fine line of trying to make their sales grow through their largest account and, at the same time, somehow growing their sales faster everywhere else.

And that’s just about impossible. For the few years (just concluded) when all ebook sales were growing, publishers were seeing upswings in their business with other digital accounts besides Amazon. But recent evidence suggests that ebooks have hit either a point of serious resistance or a temporary plateau so even that may not be true anymore. It is likely that for many publishers Amazon represents the only significant account that continues to grow.

Last week, Jeremy Greenfield of Digital Book World interviewed me about “why it is so hard to compete with Amazon”. Since this is a topic of such widespread interest but also so hard for so many of the industry leaders to discuss, extending that discussion seemed warranted.

In this post, I want to cite three important aspects of Amazon’s history — important as far as the book business is concerned, although not necessarily to the overall picture Stone successfully conveys of the Bezos vision and the strategy and culture that achieve it — that didn’t make it into Brad Stone’s excellent book. In a subsequent one, I will explore what I think are the two key questions about Amazon that everybody in the book business is quietly asking:

* When does Amazon’s share growth stop?

* Who is left standing when it does?

About those two questions, all we’ll say here is that Stone’s book gave me fresh insight into the possible answers.

Now for those three missing points and why they’re important.

I first raised these questions and wrote about Amazon’s squashing of Ingram Internet Support Services (known as I2S2) about two years ago, but what I think is a very important story didn’t make “The Everything Store”.

As Stone describes clearly, Amazon began its business basically standing on Ingram’s shoulders. They stationed themselves in Seattle, near a big Ingram warehouse in Roseburg, OR. When Amazon started, they were able to take a customer’s order and money; order and receive the book from Ingram and deliver it to the customer, and then sit on the cash for a while before they had to pay Ingram for the book.

Pretty early in the piece, Ingram saw that all retailers could take advantage of this capability of theirs. So they created the I2S2 offering and went out to book retailers to persuade them to use it the same way Amazon did. Of course, at that time Internet retailing of books was a tiny part of the market, but Ingram hoped that the opportunity to offer a cash-flow-positive service to their customers would entice some stores, who were already Ingram customers, to diversify the choices for online customers.

Before I2S2 could get off the ground, Amazon killed it with high-profile discounting to as much as 40% off the cover price, effectively taking the profit out of Internet sales. This move was seen as a tactic to grow the customer base quickly and satisfy the investment community’s desire to see growth in top line and in customer base. That’s accurate. But it also stopped what could have been serious competition in its tracks. Booksellers profiting from their stores had little patience to build online business that was small and would now not even be profitable.

A publishing executive who was at Random House in the late 1990s recalled in a conversation we had last week that Peter Olson, who ran Random House at that time, told him not to worry about Amazon because their share grew by about 1% per year. In fact, that’s probably just reflecting that the consumer tendency to purchase online grew by 1% per year. The executive who told me this story made the accurate point that Olson was proven right about the share growth over many years, with additional surges when events like Borders’ closing took place. (And, of course, he told the story because we both knew that Olson was proven wrong that this 1 percent growth a year was nothing to worry about. “When does it stop…?”)

But imagine if Amazon had not reacted to the existential threat of a multitude of potential competitors by trading their margin for survival!

The I2S2 experience of the late 1990s adds some poignancy to a piece of excellent reporting by Stone about a meeting Amazon had with Ingram early in the century when Amazon’s stock was falling and some industry players were worried about whether they could pay their bills. Stone reports John Ingram making it clear to Amazon that Ingram could not afford an Amazon bankruptcy. Clearly, Ingram’s credit policies had continued to fuel Amazon’s growth in the years that had elapsed when they killed I2S2 with discounting.

The second point that is somewhat more significant than I think Stone portrays it was Amazon’s purchase of the ebook technology Mobipocket in 2005. In those days before there was a real ebook business and an “epub” standard (which Amazon eschews, which is another story not thoroughly enough explored), the two leading reflowable ebook standards were controlled by Palm Digital and Microsoft. Palm’s strategy was to sell the ebooks themselves through sites they owned or controlled. Microsoft was going for the broader play and enabling retailers to sell their format.

But the problem was that the lion’s share of the tiny ebook market read Palm, not Microsoft’s Dot Lit format. So the retailers, one of which was Barnes & Noble, were really hobbled. They could only sell the ebook format nobody wanted. Mobipocket’s format would work with both the Palm reader and the Dot Lit reader, so selling that format would reach most of the hand-held devices then used for ebook reading. If B&N or Borders or anybody else had made a strong push for the ebook customers using Mobi, and capitalizing on the format’s ability to serve the entire ebook market of the time, the effort might have gained a foothold. After Amazon bought Mobipocket, they did nothing with it for three years until they used it as the ebook format for the Kindle. (By that time, Dot Lit was about dead and Palm’s core business in hand-held PDAs was about to be demolished by the iPhone.) Did Amazon buy Mobi to postpone the ebook revolution until they were ready to lead it? It would certainly seem that way.

The other significant item that I think “The Everything Store” underplays is Amazon’s enabling of the used book business online. Although this is a “marketplace” function — Amazon is not the seller of the used editions, independent players are (presumably, although questions have been raised about whether all the marketplace sellers are actually entirely independent) — it was Amazon’s decision to place the used book availability and pricing right on the same page which sells all the editions from the publisher. That means that everybody who searches Amazon for a title is shown the used copies that are available competing with what the publisher offers.

What is the impact of this ubiquitous used book availability competing with new copy sales at the world’s biggest book retailer? Well, actually, nobody really knows. In 2006, Amazon (for some unexplained reason) participated in a study and industry conversation about used book sales. They haven’t done it again between then and now, and since Amazon’s marketplace almost certainly sells the lion’s share of used books, there’s not much point to examining this question without their participation.

We launched a DBW survey today on “start-ups” about which we’ll write more in a future post. But if you are either part of a start-up or in the business development function of a publisher that includes meeting with them, you will find our survey of interest (and we will value your response). You can read more about the survey here or just jump in and start answering questions.

And, of course, Brad Stone, the author of “The Everything Store”, will be one of three great speakers we’ll have talking about Amazon at Digital Book World in January. He’ll be joined by Benedict Evans of Enders Analysis, who has a paradigm for analyzing Amazon as a business that is uniquely insightful, and by Joseph J. Esposito, an industry veteran with a strong background in scholarly publishing who has noticed for years that Amazon is a significant competitor in the institutional market (schools and libraries).

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Losing bookstores is a much bigger problem for publishers than it is for readers


Start with this. You’re kidding yourself if you’re a book publisher who believes the digital revolution has slowed down, that independent bookstores will thrive in the new environment, that ebooks — if not a fad — have reached their growth limits, and that something resembling the book business we’ve known for the past 100 years will survive for another 100 years. Or even for another 20. It might even be breaking down in five or 10.

The obsession with the false dichotomy between printed books and digital ones is beginning to give way to attention for the more important shift taking place between purchasing books online and purchasing books in stores. It has been my concern for years — first elaborated on at length in the “End of General Trade Publishing Houses” speech I gave at BEA in 2007 — that the publishing industry that grew up around 50 years of expanding retail shelf space for books would be seriously challenged by its 10-years-on and continuing diminution. It will not be a happy time, frankly, seeing that prediction being proved correct, and it hasn’t been proven correct yet. But the circumstances that will test the proposition are rapidly being put into place.

The motivation to discuss this subject came from the convergence of a few recent stimuli. One was Bowker’s research, reported by DBW, suggesting that about half of US book sales were now taking place online.

That confirmed that the US market was in approximately the same place that Hachette UK had reported itself to be in the past few weeks.

Next was the hopeful thinking that printed books were holding their own and, anyway, all that was required for publishers to live without bookstores was some pluck and imagination, all capped by a piece in The Times making some perfectly valid points about how much easier it is to remember what you’re reading with print than it is with ebooks.

My two-part hypothesis, from the beginning, has been pretty simple. Online book buying — whether print or digital — takes business away from bookstores. So bookstores close or reduce shelf space. That decreases both their attraction and their convenience, which makes online buying increase even more. So bookstores close or reduce shelf space further. (This is called a “vicious cycle”.) That’s part one.

Part two is about publishers, particularly the big general trade publishers (Big Five plus a few others) but all of them, really, who depend on bookstores for their value. Publishers perform the service for authors of getting their books in front of readers. That has primarily meant, for about 100 years, “we put books on shelves”. My concern was that, without shelves, publishers had diminished value to authors.

The fact that part one is nearing a conclusion was confirmed in Monday’s Times with a front-page story about bookstores turning to charity to stay afloat. If anybody believes this is a sustainable strategy, I’d like to hear the explanation. This is a “Hail Mary” pass and the fact that some bookstores cited in the piece have managed to score a touchdown doesn’t mean the bookstore team is winning this game.

I have to emphasize here — to reduce the future flow of indignant comments — that the continuing decline of bookstores is not something that makes me happy. My first job in publishing, 51 years ago, was in a bookstore. My dad’s career was made on his understanding of the importance of bookstores to publishers and figuring out ways to create more mutually profitable ways for publishers and bookstores to interact. But if about half the sales of books today are being made online (which is probably five times or more the percentage it was less than a decade ago), you’d have to be able to predict a sudden reversal, or at least a cessation, of the trend to see a positive future for bookstores.

I never believed the trend would stop or reverse because I don’t see any end to the “vicious cycle” described above. But my friend, Joe Esposito, has been even more thorough and cogent in explaining why it won’t end. As Joe articulates it, at least part of the print versus digital choice for some consumers is based on price and convenience. As long as stores constitute an important tool for “discovery” — finding new things to read — it will be more convenient for most people to walk out of the store with the discovered book than to purchase it any other way or in any other form.

As bookstores become less powerful discovery engines (fewer of them farther apart and fewer books on display in those that are left), people are forced to find out about books some other way. Many of those other ways are already online (without even counting the suggestions of online retailers). A lot of “word-of-mouth” these days is digital communication (email, Facebook, Twitter, or even a blog).

Since the beginning of the year, it has been frequently observed that ebook sales are not rising very quickly anymore at all. Nicholas Carr just wrote about it again, citing his post from the beginning of the year. (If you care about how the Internet and ebooks might affect our brains and thinking ability, read Carr’s book, “The Shallows”. There’s some digitally-delivered word-of-mouth. I told you it could happen on a blog!) Certainly, part of the slowdown is rooted in the shift from dedicated ereaders like Kindles and Nooks to tablet computers. Books aren’t the only game in town anymore; in fact, they’re competing with real games and videos and music and email and the whole damn Internet on the devices people might read ebooks on these days. And, at the same time, the later device-acquirers are also lighter readers to begin with. Heavy readers had more financial incentive to switch from the beginning.

But, in fact, is ebook sales growth slowing? Maybe not. It depends on how you look at it. Author Nathan Bransford, who probably has as much to contribute to publishing houses with cool analysis as he does with content, did an excellent post a couple of months ago demonstrating that the smaller percentage increases don’t indicate a decline at all. In fact, Bransford does the math (and the graph) to show that ebook sales continue to rise, at pretty much the same pace they have been, in real unit terms. And this is despite the fact that self-published ebooks, which were credited with 12% of the market a very short time ago are not counted in these numbers!

So it is actually a myth based on a misunderstanding of how percentage increases are affected by a change in the base on which they’re calculated to claim that the ebook switchover is slowing down.

Esposito’s post cited above was making the case that it is publishers that have much to fear from the decline of bookstores because it robs them of their prime value to authors. That is a point we’ve made often in this space. But some of those objecting to his point of view did so by making the case that many books don’t “port” to digital very successfully. Certainly we have seen very few successes with digital illustrated books of any kind.

In fact, there was false hope created that the children’s book market — which is largely illustrated — was going digital about 18 months ago. It turns out that, really, this was a misreading of reality. What made it appear that way was the massive sales of “The Hunger Games” which, although categorized as young adult reading (so tallied that way; thank you, metadata) is actually straight narrative reading that was not just read by kids but also by many adults.

Yes, it is absolutely true that ebooks haven’t “worked” (commercially) yet for anything except narrative reading, books that you start on page 1 and read to the end. We are where we were when I wrote in my first post of 2012 that the problem hadn’t been solved yet  and then worried out loud a few months later (more than a year ago) that this was an existential problem for illustrated book publishers.

So objecting to Esposito’s argument by pointing out that some books don’t work as ebooks is a non sequitor. Bookstores can’t continue to exist because there are some books being published that don’t work as ebooks; that’s even less of a sustaining proposition than asking for shekels in a digital tin cup.

Logic and facts tell us some immutable things. They can be ignored or papered over with wishful thinking, but anybody with a commercial interest in the book publishing value chain is probably making a big mistake rationalizing them away rather than confronting them.

1. Narrative books, those read from beginning to end, are being increasingly read in digital form.

2. Both because of that, and for several other reasons (bookstores being less ubiquitous and stocking fewer books, a wider range of actual choices making the odds of a bookstore having what you want even lower, and a general propensity for all consumers to shop online more for all things), online purchasing of books is still taking share away from brick stores.

3. Books that are not narrative books don’t have the same natural opportunity to have their sales migrate either to ebooks (because the format doesn’t work as well for them) or online (because they often have to be seen and touched to be purchased).

4. The single biggest reason (aside from a fat advance payment, which few get) for authors to work through a publisher is to get the distribution of printed copies to many stores.

5. As the number of books grows that have commercial appeal but which are published so far outside the conventional trade that their sales aren’t even captured in industry data, it further weakens the legacy publishing ecosystem and further encourages both established and aspiring authors to work around it. Aspiring authors every week see books on the NY Times Bestseller List that are either self-published or have imprint names they’ve never heard of. When conventional publishing requires an agent to get a deal (which it does, and which takes time), then you have to wait for publishers to make a buy-or-not decision (more time), and then put your book out on a trade publishing schedule that usually wants to give Barnes & Noble and other retailers months of advance notice (still more time), it can seem ever-so-much-more appealing to just skip the wait and go straight to self-publishing, which will put books on sale right now (more or less).

6. What you will need to do as a publisher to survive longer in this increasingly hostile environment depends on what you publish.

* If you do straight narrative reading, your books may continue to sell in equivalent or even better numbers than they did previously, but both your authors and your retailers will be looking hard at what you take and wondering if they can go around you. Your challenge will be to continue adding enough value to be worth enough of a share to have a business. How? Digital marketing at scale is your best bet.

* If you publish children’s books, you have a launching pad to get into the world of licensed products and video (which some are doing), which promises a rosier future but brings with it a slew of powerful new competitors.

* And if you publish anything else (art books, instructional books of any kind, travel books), you’re looking for a new business model. We’re believers that being vertical makes the most sense (don’t publish all over the lot; stick to audiences you can know and grow). But “being vertical” is not in and of itself an adequate strategy. Professional publishers have had an edge here; professional needs can be satisfied with content and services that aren’t delivered as books, and, in general, the relevant publishers have responded sensibly to that.

The challenges to publishers in the US are only just being felt in markets outside the English language. But ultimately, they’ll be felt everywhere. That sums up the perspective of our Publishers Launch Frankfurt Conference, which will take place on October 8. We’ll be looking at markets in transition, getting views from Amazon and Nielsen about which markets are showing signs of a digitally “tipping”, as well as a scan of the developing world from Octavio Kulesz. We have a great panel of industry leaders from Germany to discuss whether that market is about to look like an English-speaking one, with diminishing bookstores, scrambling publishers, and increasing numbers of do-it-yourself authors. We’ll hear from Goodreads, Wattpad, and Scribd about how international their large communities of reading-centric people are. We’ll have presentations about Big Data from Ken Brooks and DRM from Micah Bowers that I promise won’t repeat things you’ve heard anywhere else. And some very sharp CEOs — Charlie Redmayne of HarperCollins UK, Rebecca Smart of Osprey, and Marcus Leaver of Quarto — will be on the program as well. Michael Cader and I will try to cover the subjects that are hardest to talk about, including the growth of Amazon and the power of the new Penguin Random House.  If you’re in the neighborhood on October 8, this will be a show not to be missed.

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The totality of the relationship is what matters


Like a marriage, relationships between people and companies are seldom made or broken on the back of one transaction or one kind of transaction. They are bigger and more complicated than that. That point was driven home in my house over the weekend by the dustup between Time Warner Cable and CBS, which resulted in both our local Channel 2 and Showtime being removed from our service. That meant that Martha couldn’t see the last episode of “Dexter”, a show she has loyally followed for years.

Although, as of this morning, it is still not clear to us whether CBS pulled their programming as a negotiating ploy or whether Time Warner booted it to strengthen their own hand, it seems evident that the broadcast networks want to move to pay-channel remuneration from the cable systems that use them, among other programming, to get us to use their services and pay their bills. (In our case, that’s north of $300 a month for TV, internet, and telephone service.) Pulling just one brick out of that wall — the CBS-owned programming — has us immediately questioning the whole bundle.

We say we’re confused about this because TW customer service, and some news reports, said that CBS pulled the programming. But the Times contradicts that.

“Indeed, timing seems to be the dominant factor driving the dispute. CBS has continued to insist that it would make its programs available to the cable company throughout the negotiations and that the cable company acted now to remove them from its service because Time Warner Cable would lose leverage as the football season got closer — a point the cable executives do not dispute. They acknowledge they need to push the issue now.”

I remember that when we had RCN — an alternative provider — one “price” we paid was that we didn’t get Channel One, a NY news channel. We didn’t switch to Time Warner for that reason (I can’t remember what the motivation was; probably a price offer at the time) but we weren’t losing popular series or can’t-miss sports like Tiger Woods’s golf victory yesterday or the NFL games coming on CBS.

My reaction was anti-Time Warner immediately, and to start investigating alternatives. But since some accounts suggested that CBS had pulled the programming to gain the edge in negotiating, Martha reserved a large part of her annoyance for them. If they can pull programming she’s been following closely for years in this way, she reasoned, then she can’t trust them not to do it again. Her solution is to reconsider becoming loyal to any CBS (or Showtime) series in the future. She says she will immediately stop watching “Ray Donovan” for that reason.

But I think it is easier for her to find substitute dramatic series than it is for me to find a substitute for NFL football. Both of us are annoyed at the moment, but how we respond depends on the totality of our relationship with CBS. CBS is apparently counting on us to punish Time Warner, reasoning that TW is producing a large-scale relationship on the back of their programming.

Publishers will want to watch how this plays out. CBS really has a small fraction of the total possible programming, comparable to the sliver a large-ish but not supersized publisher might have. The new Penguin Random House combination, on the other hand, has about half the most commercial book titles in the marketplace. How will anybody run a functioning bookstore without those titles? (In fact, Amazon backed down from its own mini-boycott of Macmillan in 2010 because it would have upset the totality of their relationship with their customers.)

This “totality of the relationship” point is going to become more important to us, but it is not new. In 2010, when five of the Big Six publishers had gone to Agency pricing — reducing their revenue-per-ebook-sold in a vain attempt to re-engineer the ebook marketplace into one  in which publishers controlled the selling price — a sales executive at one of them was querulous about B&N’s apparently unwillingness to “punish” Random House for continuing wholesale terms. “We largely did this for B&N,” was the executive’s complaint. He really couldn’t understand why B&N was, effectively, letting Random House “get away” with staying out, effectively gaming the change to its own advantage.

Of course, the fact that B&N lived with Random House’s ebook selling policy was not because they weren’t unhappy with it. It was because so much else in their relationship worked so well. With Random House having invested in systems that enabled them to provide vendor-managed inventory, they were probably B&N’s most profitable trading partner. B&N wasn’t going to cut off its nose to spite its face. On the whole, they did well in the Random House relationship, even if a high-profile component of it wasn’t to their liking.

The same principle applied, in different ways, when Apple started to enforce its requirement that in-app sales pay a 30% “toll” to Apple. Since that requirement would have effectively made profitable ebook sales impossible, the other ebook vendors — Kindle, Nook, Kobo, and others — complied by taking the direct link to their stores out of their apps. So, from that day (until now), you can only buy ebooks for iOS devices directly from the app if you’re buying from iBookstore. That’s annoying, and it certainly has had the effect of increasing sales at the iBookstore at the expense of their competitors for readers using iPads or iPhones to read books. (iBookstore share has reportedly jumped since then. Of course, they also have added Random House titles, which they didn’t have at the beginning and which certainly diminished the totality of their customer relationship until they did.)

But many iOS-device customers who are satisfied with the totality of their experience with Kindle or Nook or Kobo continue to shop with them, even if it is less convenient. And Apple has apparently decided satisfaction with the total iOS experience might be too badly damaged if they took the step of prohibiting the apps for other platforms entirely.

One senior executive from a big publisher was recently expressing frustration at what it took to set up a functioning direct relationship with consumers, opining that publishers couldn’t sell ebooks profitably one-at-a-time. Only a subscription model of some kind could work. That’s likely to be true, but underscores again that there needs to be a relationship larger than individual transactions to enable individual transactions.

Amazon has operated on this principle for a long time; it is the core of the logic behind Amazon Prime, which entices a customer to stay loyal with a variety of incentives, the most obvious of which is “free” shipping.

And that brings me to a point worth considering in today’s news about the evolving ebook marketplace. The Department of Justice has asked for changes that are intended to be punitive to Apple. Certainly the suggestion that Apple be forced to allow in-app sales without compensation would be. It is likely that iBookstore sales will suffer almost immediately if they are no longer the only ebook vendor on iOS devices with a link straight to the store from within the app.

But with the DoJ’s desire to totally liberate the book marketplace from price controls, they could also be setting up the whole incumbent ebook business, including Amazon and the others as well as Apple, for an entirely new kind of competition based on total relationships that aren’t being contemplated.

(Caution: this coming bit of future-think will only work effectively for ebooks in a DRM-free environment. My own hunch is that DRM-free is coming before long for unagented and midlist books, particularly those of an instructional nature. It should be noted that F+W Media, one of the largest active “books to use rather than read” publishers, already sells DRM-free.)

Let’s say you’re a seller of home improvement tools, fixtures, and services, like Home Depot or Lowe’s. Wouldn’t you like to have all the searching for books on those subjects taking place on your site, so you knew who was looking for new bathroom fixtures and who was looking for robin’s egg blue paint? What if you made your site a destination for that kind of searching by offering no-margin pricing on all books in that category, combined with enhanced metadata for those titles in the subject area(s) that matter to them? (Metadata enhancements will come from the knowledge of the specialists at a vertical retailer who think about what is in a book differently than a book publisher or retailer would.) How about if you sweetened the pot further by offering customers a credit on their purchase of a sink or a can of paint based on their book and ebook purchases?

Or let’s say you’re a law firm that specializes in bankruptcies and divorces. You could do the same thing, perhaps enhanced with your lawyers’ (and their clients’) highly relevant commentary on whether one book or another was particularly useful in a real-life circumstance.

On the hard-copy side, these vendors can set themselves up with Ingram or Baker & Taylor to fulfill print as well. But since margin-free transactions are baked into the strategy, whether or not they make the sale wouldn’t be the central concern. They want the interested traffic and the information that come from the searches. That’s the payoff.

(At the moment, there is a below-cost selling war on print taking place between Overstock.com and Amazon.com, sparked by Overstock.com’s announcement that they’d sell at 10 percent below Amazon’s prices. This is an attention-grabbing device for Overstock.com, not a sustainable strategy, and Amazon is demonstrating that by driving many books into a downward pricing spiral in response. The most damaged parties will be BN.com, and all the bookstores. Overstock will gain some share, but mostly at the expense of those who don’t have the breadth of total experience being provided by Amazon, which will be everybody else that sells books. Amazon will just use the challenge as an opportunity to demonstrate again that they won’t be undersold.)

Whatever you sell, the books on the subject are of interest to the customers for your goods. If the ebook marketplace is further court-mandated into unprofitability, it is probably just a matter of time before books which are used rather than read will become part of the “totality of the relationship” with a vendor who doesn’t sell books for a living. They’ll be the ones who can benefit from being the front end.

And that is a sustainable reason that selling books for a living is going to continue getting harder to do.

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The future of books in stores


The future for books in retail stores is not unified; it’s dispersed. To the extent that there continue to be bookstores (and although shelf space in them will continue to decline inexorably, they’ll also be around for years to come), the bookstores will increasingly be more about books for reading and less about books for using. Much of the slack can be picked up by merchants of other things, but there are challenges.

The one piece of good news from Barnes & Noble’s most recent reporting was that their stores are still throwing off cash. We don’t know how much of the margin they’re reporting comes from books as opposed to NOOKs or toys and games. But it is definitely good news that the stores, which publishers still depend heavily on for sales as well as “discovery” are apparently still healthy.

Unfortunately, it would be a surprise if things stayed that way for very long. The share of book sales that are migrating to the Internet keeps growing. Amazon’s print book sales keep going up (more slowly, of course, but everybody else’s are going down) and sales of ebooks keep rising as more and more people get the digital habit. Amazon gets 60% or more of those sales through the Kindle platform.

The term “showrooming” is becoming familiar to people in the book business to describe the retailer’s role in the consumer’s new tendency to use stores to shop but the Internet to buy. Part of what drives this effect is Amazon’s well-earned reputation for heavy discounting — it seems just about every book at Amazon sells for less than the publisher’s suggested retail and most books in stores sell at the price the publisher printed on the book. (It was actually instructive in a recent NY Times piece decrying the reduction of discounting at Amazon to see that even academic books with very limited audiences were being sold at some discount from the publishers’ suggested price.)

With handheld devices that can check Amazon (or any other online) prices now ubiquitous, capitalizing on showrooming isn’t surprising consumer behavior, but it keeps bookstore retailers from “capturing all the value they create” as their own revenue.

Ultimately, illustrated books and the publishers who create them will be the most affected by these changes. There are two important reasons for that. One is that “straight text”, narrative books that are read from beginning to end work just fine as ebooks. That means they’re already cheaper and it is easy for more and more consumers to purchase them this way. (And from the publisher’s perspective, their margin is — at least for the moment — fully replaced when a sale migrates from print to digital.) The other reason is that a novel doesn’t need to be seen or touched to be considered for purchase. Even with the capability to “look” or “search” inside the book, many illustrated book customers really want to examine the printed version to make a buying decision. As there are fewer stores carrying them, that gets harder and harder for the consumer to do.

One of the changes we’re living through is that content as a “pure play” is getting less and less viable at retail. For Amazon, “media” (i.e. content) is no more than 20% of their business. It’s what got them started and it is still very valuable because the content people search for and buy sometimes can provide important clues about what else you can sell them. At least some of Amazon’s success against online media competitors is due to the fact that their base is broader than media.

Selling media alone has become a dinosaur in brick-and-mortar. Stores selling music and renting video have all but disappeared. Retail shelf space for books isn’t ever precisely measured, but what’s available in book-centric stores must be less than half of what it was five years ago, when Borders was still in business and before cutbacks in shelf space that are visible in Barnes & Noble and others. One of the hopes for traditional publishers is that smaller independent stores will pick up some of the slack. But the kind of stores they’re envisioning would probably carry less in the way of illustrated books, particularly illustrated how-to books.

All of this should spell opportunity for other retailers, particularly those who are in “verticals” where there is a lot of publishing: gardening, home repair, and crafts, as examples. Just about every retailer could benefit from a customized selection of books that would both attract and excite their core audience, often stimulating them to buy the other things the store sells.

But doing that is hard because buying books is hard for all retailers to do but it is particularly challenging for non-book retailers. They get foiled by the unique characteristic of the book business that frustrates just about everybody coming into it from the outside: its sheer granularity. A store that wants to carry 100 or 500 SKUs on gardening, home repair, or crafts will most likely need books from several, perhaps dozens, of publishers to have the best selection. And they’d be selecting from 10 or 100 times as many titles as they want to carry. New titles will be issued every week. Each individual title might have a sales potential in any one store of $150 or $250 or $500 at retail, less than any other single item that store has ever carried or thought of carrying.

The biggest publishers of illustrated books in the categories that can benefit from non-book merchants are all quite aware of their importance to their future. If you talk to people at companies like Abrams, Chronicle, Quarto, and Workman — and I have — they will all tell you that “special sales”, the industry term for sales outside the bookstore trade, are critical to their future.

Of course, publishers have been doing special sales for many years, certainly including the five decades that I’ve been involved in the business. They have done it in ways that aren’t necessarily optimal. They’ve forced stores to “buy”: select the titles and quantities and place orders for each shipment they get. That’s an unacknowledged bottleneck. It has also engendered two sales policies which are counterproductive but well-established. Special sales accounts customarily buy from publishers at high discounts (lower costs) than bookstores but, unlike bookstores, don’t get the rights to “return” unsold stock. This has “taught” some publishers that returns aren’t “necessary”; retailers should just mark down what they can’t sell.

And it has taught the retailers to expect unrealistic margins. Of course, those margins are also largely unrealized, because they are buying stock without the right to return and end up marking down a too high (but unknown to the publisher) percentage of what they buy.

Of course, stores that don’t return any other merchandise don’t know anything’s missing in their terms. But, ultimately, it reduces those stores’ ability to experiment and it reduces the publishers’ ability to get stock in place on speculation. They can only sell “sure things”, and even those end up not being sure things.

But that’s not the biggest constraint. The challenges of mastering the mechanics of buying are. Non-book retailers simply don’t have the inventory management systems or the ordering practices that are necessary to manage books, where good practice might be to bring in one copy 20 times over a year to get 20 sales. Why? Because the book might only sell 1 or 2 or 5, and putting in 20 to sell 20 would result in overstocks most of the time.

There is a better way for distribution to work for non-book retailers, and that’s with vendor-managed inventory, relieving the retailer of the need to manage complexity challenges greater than they face in their core business for what amounts to a sideline. So far, we are only aware of one distributor — West Broadway Book Distribution — that offers that capability. (Full disclosure: West Broadway is our client, and we had a lot to do with creating their offer and their system over a decade ago.) WBBD gathers books from many publishers for their retailer clients. That’s also almost always necessary because very few publishers have enough titles in any category to stock a store adequately on their own.

The future of bookstores is challenged. The likelihood is that those that survive will be smaller (or, like today’s B&N, devoting some of their floor space to things other than books). The book-centric retailer will be increasingly inclined to stock “writerly” books rather than “practical” ones. That creates an enormous opportunity for non-book retailers to create a traffic magnet, incremental margin, and a stimulus for their customers to buy their principle lines of merchandise by creating book departments. More of them will, but the challenges of buying will continue to be a constraint in the market.

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Publisher margins today may be enviable, but it will be a big challenge to keep them that way


The major publishers have apparently worked themselves into a very strong commercial position at the moment with the transition to ebooks. I say “apparently” because the data that gives the most recent rise to that understanding — a presentation by HarperCollins of the current economics — is somewhat incomplete.

What Michael Cader reported in Publishers Lunch on June 4 — about which agent Brian Defiore commented on the Aardvark blog the same day — is that HarperCollins CEO Brian Murray had laid out the standard revenue and cost structure for hardcovers versus ebooks for shareholders. What it showed very starkly is that:

1. (Even though) revenues (the top line) for ebooks are lower on a unit basis than they are for hardcovers;

2. (And) royalties for ebooks are also lower on a unit basis than they are for hardcovers;

3. (Still) unit margins for publishers net of manufacturing, distribution, returns, and royalty costs are considerably higher for ebooks than for hardcovers.

So the authors working on the contractual rates make less per unit on the ebooks than they do on hardcovers and the publishers make more. The joker in that last sentence is “working on the contractual rates”.

The biggest authors don’t, and that’s how this situation has been allowed to happen.

The savviest agents for the biggest authors don’t negotiate contracts in the same way the rest of the world does. They figure out in concert with the publisher how many copies they think the book should sell (big authors with long track records are somewhat more predictable than the rest of the universe, which is one more reason their books are so desirable to the publishers) and get an advance that is equal to a startlingly high percentage of the revenue that sales level would produce.

The advance is not expected to earn out (and, believe me, with advances calculated this way, they almost never do). That means the royalty rates are irrelevant. So they can have their star authors sign the boilerplate contract, permitting the publisher to say — almost truthfully — that they don’t pay more than 15% of cover price royalty on print or more than 25% of net royalty on ebooks (among other things).

So Murray’s chart is accurate, except that it doesn’t cover the commercial reality — even though it reflects the actual contracts — for all the biggest books.

But that doesn’t change the fact that, the chart being out in the open, there’s an adverse reaction from beyond the agent community to what looks very much like big publishers improving their financial position at the expense of authors. What other reaction could there possibly be? The Authors Guild is upset and blogger-reporter Porter Anderson catches some additional commentary from Defiore.

At the same time, publishers are doing battle on the other side of their business, with retailers looking to increase their margins as well. This is not just about Amazon. They dominate online sales and are indispensable for that reason. But Barnes & Noble is nearly as dominant in terrestrial retail and have apparently been engaged in a dispute with Simon & Schuster for months which has reduced the presence of S&S’s books in their stores. The just-announced financial results for B&N make it very clear that they’d be motivated to be extremely covetous of any additional margin they can squeeze out of their trading partners.

When ebooks started to become commercially important, which we date to the launch of the Amazon Kindle in the fourth quarter of 2007, publishers faced the challenge of reducing overheads required for print publishing as the demand for print declined. Quite aside from what was (and is) the unpredictability of the rate of the change, this is not an easy challenge. The printing you’re ordering may be smaller, but you still need to set type, design a book, and order a printing. The number of copies you’re shipping and processing as returns might be smaller, but most big publishers owned their own warehouses so it wasn’t a simple matter to reduce the cost of that component either.

In fact, it would appear that returns may have declined more than print sales have, and even more drastically as a percentage of overall sales since ebooks don’t get returned at all. All of this has been good for publisher profitability. In fact, seeing the data we see now, one might wonder whether the publishers were being self-destructive when they went through great gyrations (including everything that landed them in the lawsuit Apple just finished for them all alone and which was expensive for them to settle) to preserve print sales at the expense of ebooks. They tried windowing — withholding the ebook from the market for a while — and then, famously since the DoJ involvement, maintaining somewhat higher prices on ebooks at retail.

But, of course, they weren’t being self-destructive. As I’ve written repeatedly, putting books on shelves is the publisher’s primary value proposition; as the need for that declines in importance, so do they. The bigger margins of the current environment will be extremely difficult to maintain. Agents for the big authors will be looking for an even higher percentage of the projected revenue as it shifts to digital. Since advances from publishers for other-than-the-biggest titles are also declining, those next-tier authors will find self-publishing or publishing with smaller houses that pay lower advances but higher ebook royalties an increasingly tempting alternative. Most of all, the biggest retailers will keep pushing for more margin. And most publishers won’t have the stomach for the lengthy fight S&S has undertaken (particularly since there is no evidence, yet, that S&S will prevail in the argument).

The big publishers who are reinvesting their current margins to develop the value proposition that will be important in the future — and that’s “digital marketing at scale” — might still be able to prosper as the transition progresses. But their trading partners on both sides — authors and retailers — will be relentless at chipping away at any “excess” margin they perceive. Michael Cader has pointed out that Amazon, making a margin of less than 1% of sales, has little reason to be sympathetic to publishers complaining about how hard it is to achieve double-digit margins. Barnes & Noble will need more margin from publishers every year to keep stores open in the face of declining sales.

Authors will be tempted to try something other than the old-style deal in direct proportion to two factors: how much the sales move online and how effective they can be at getting the word out on their books on their own digital backs. The first factor is out of the publishers’ control (and difficult to predict); the second means that the most desirable authors below the very top tier will become the hardest to retain.

I offered the advice some time ago that publishers should raise their author royalties as insulation against being hit up for margin by the retailers. At the time, one major publisher CEO said to me that there was merit in the advice I was giving, but it was “pretty hard to make changes like that with the DoJ in your shorts”. So perhaps we’ll see some overt moves to raise that 25% ebook royalty rate sometime soon since the DoJ problem seems to be in the past.

I’ve felt for a long time that what authors (agents) should work toward is a fixed amount-per-copy-sold as an ebook royalty and just get out of the percentages business on ebooks, which, as we know, can have their prices change on a frequent basis. I know that would be resisted by the publishers, but it makes a lot of sense.

But the current state of affairs says pretty emphatically what I’ve felt all along: the incumbent management of the big publishers is damn smart and has managed a very tricky transition extremely effectively. Where they’ve brought things as of today is an impressive feat, even if it will be almost impossible to sustain.

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How the ebook evolution might get started in other places


The organizers of the Buenos Aires Book Fair, which will run for the next few weeks, invited me to speak at an opening session of their event last Friday. They left the topic completely up to me. What I offered to do, which the organizers liked, was to review the history of the past 20 years of digital change in the US and in the English language which has brought us to this point. The presumption is that understanding how it happened to us will help them understand what is going to happen in their market, in other Spanish-speaking markets, and in other countries and other languages.

The underlying premise of my talk, which was delivered formally at a Book Fair opening event last Friday and informally to other gatherings they scheduled for me — of students, of young editors, and of some publishing executives — and in a meeting consulting with about 20 employees of one publishing house, was that what happened in the US and then elsewhere in English was unique and would not be replicated in the same way in other languages and territories. What I had identified as the unique characteristics of the US market were:

Three hundred million people with one language, one currency, one commercial set of rules.

A powerful player (Amazon) able to change both publisher behavior (twisting arms to have them provide more titles as ebooks) and consumer habits (getting them to consider what started as an expensive device — a $400 Kindle) with their marketplace power.

Indeed, no other market has those two elements. In fact, in many markets, including all of the players I talked to in Latin America, Amazon is not seen as a really signficant factor.

In addition to the conditions that made the US market unique, I stated two additional assumptions which drew little objection from my audiences in Buenos Aires.

At some point — whether it is five years from now or 20 years from now — the world’s book publishing markets will look very similar. That is, the effects we see in the US — patterns of ebook uptake and the consequently devastating effects on bookstores — will somehow be replicated in other markets.

Both because the unique market characteristics of the US don’t exist elsewhere and because the market already made in the US has created global players and infrastructure that weren’t here when the ebook revolution caught hold, we need to expect that it will be a different path to the future in other places from what we saw in the US. The markets will not be made by the inherent marketplace scale and by Amazon, as ours was.

I thought some things we’ve seen constituted “universal” lessons worth taking on board. We’ve seen ebooks consistently work commercially for narrative reading and not for any other kinds of books. We haven’t seen “enhancements”, like video or interactivity, pay off in bigger sales or in making it easier to command higher prices. I suggested they should expect the same, and the people I spoke with agreed. They should also expect that the product competition from outside the commercial publishing community, which we’ve seen so far primarily from self-published authors, will drive down the prices for books from established authors as it has in our market.

But the more I probed, looking for what would make the market, the more I ended up in blind alleys. There is no online purchasing market anywhere in Latin America to compare with ours. That’s why Amazon hasn’t gained a strong foothold. Kobo’s strategy of working through local booksellers — an alliance has been formed in Brazil and they are clearly looking for partners elsewhere — apparently hasn’t made much of a dent either. One publisher said Apple sales were “promising”, but they’re still “insignificant”.

The reality underlying all this futility is the relative dearth of credit card use. In the US, we have had about three generations of ubiquitous credit card use. They are second nature to us. And the online purchasing world — Amazon in particular — would never have achieved the position they have if that weren’t true.

Well, it isn’t true in Latin America.

There is no way to make an ebook market, which must be an online market, without a payment mechanism. And the one we have in the US isn’t set up to work in Argentina, Brazil, or the rest of Latin America (or, for that matter, in many other parts of the world).

Of course, the cell phone carriers, who do send a bill and collect money from the masses in all these countries where credit card use is limited, had figured that out a long time ago. Nokia and others have been dancing around this opportunity for years. Txtr, a Germany-based ebook play, targets the cell phone companies as its path to the market. Txtr is building an inventory of titles and has come up with an ultra-low-cost ereading device called beagle to jumpstart their market. In doing that, they show that they learned something from Google’s experience, where ebook sales only started to grow when the Nexus7 tablet, which is tied to Google, made its way into the market.

All the conversation led me to come up with my own version of an “answer”; I don’t know if anybody else has made this suggestion but the small bit of conversation I was able to have between having this thought and leaving Buenos Aires didn’t uncover evidence that anybody else had.

It takes three components to make an ebook market:

1. A device to read the ebooks on. That could be a laptop or desktop computer or dedicated ereading device, but it is most likely to be a smart phone or a tablet.

2. A store: a merchandised selection of ebooks that can be shopped through browsing and searching that is compatible with the device.

3. A payment mechanism.

In the US, we really didn’t think about the payment mechanism. For many other places in the world, that’s a very tricky part.

Txtr is trying to deliver the missing pieces to the solution to the telcos, right down to delivering a very inexpensive device that can be the reader if the cell phone is not.

What occurred to me, and I’m wondering whether it is being developed by anybody else, is what I think would be an even better — as in more likely to build a market quickly — solution. What I’m imagining is that a device manufacturer (or more than one, but if one, preferably one that makes both smart phones and tablets) teams up with a cell phone company (to do the billing) and persuades the ebook retailers — Amazon, Google, B&N, Kobo — to accept payment through the phone company. Then that hardware manufacturer has a fabulous value proposition to help them sell their devices and the ebook market has a choice of the best retailers with the best selections of ebooks already aggregated.

Actually, persuading one retailer will persuade them all. If Samsung were pushing a tablet and smartphone and got any of the major ebook retailers to go for the proposition, the others would surely have to follow. And, in fact, it would make sense for either Apple or Google to do this when they sell apps in credit-card-challenged markets as well.

Another complication in some places — particularly Brazil and Argentina at the moment — is created by complex regulations that make the sale of hardware manufactured outside their country either impossible to get or extremely expensive. Although that’s a problem that extends beyond the book business, it is much more likely to be solved by a multi-function device-maker than for one dedicated only to ebook consumption.

It is interesting to think about Apple’s position here. The other big ebook retailing operations already provide apps for both iOS and Android devices as a matter of course. The iBookstore, however, is a Mac-only play. If the solution I’m envisioning were to roll out around the world — and one can imagine a company like Samsung making such a thing happen — would that continue to be the wisest play for the Apple-owned ebook retailer? I think not, but one can only imagine how intense the internal discussions around that point could be.

Today (April 30) is the last day to get the Early Bird pricing for our next Publishers Launch Conference, which will be at BEA on May 29. The theme for this event is “scale”, a fairly obvious topic of great importance that we don’t believe has been a central focus for a digital change event before. We’ll have agents talking about it as well as presentations from three publishers — F+W Media, Hachette, and Random House — who are applying it in very different ways. We’ll have Brian Napack presenting the investor’s view of its importance. We’ll have a presentation on the current state of more complex ebook- and app-making from Ron Martinez, followed by a panel of publishers considering the future of the illustrated book. And Michael Cader and I will discuss the topic of scale in circumstances that most executives won’t (or can’t) in public, like how it is applied by Amazon and how it might be used by the new Penguin Random House.

 
See pricing information and registration options on the PLC site for more details. You may register either through our dedicated Launch BEA registration link, or via the main BEA registration page where you can sign up for BEA itself and other events at the same time.

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