Rachel Chou

Print book retailing economics and ebook retailing economics have almost nothing in common


There has been a lot of conversation lately about the differences between wholesale pricing and agency pricing for ebooks and about what constitutes a “fair” division of revenue between publishers and retailers. Since the economics of bookstores have been generally misunderstood for years, it is not surprising that the understanding of what changes make sense as we switch to digital have also been misunderstood. A better grounding in the print book economic realities might enable a more informed discussion of what makes sense for digital.

Here are a couple of points about book economics that I learned at my Daddy’s knee.

1. The investment in inventory is the single biggest capital requirement for a bookstore.

2. Given that the ability to invest in inventory is limited, the speed at which inventory “turns” (a measurement of how long a retailer has to hold stock before it sells) is a much more powerful determinant of a store’s total gross margin, and therefore its profit, than the margin it earns on each sale (the difference between what it pays for the inventory and what it is sold for).

In simple shorthand, that means that a retail store selling books can improve its profit more easily by more closely matching what it buys to what it sells than it can by squeezing more margin out of its suppliers. It also means that a publisher can do more for a store’s profitability by shipping quickly and allowing smaller orders at workable discounts (which make it easier to match supply to demand) and offering delayed billing than it can by offering extra points of discount (which is what added margin is called in the book business). The additional benefit of employing this understanding is that margin division is a zero-sum game, but increased inventory efficiency is actually synergistic: both the publisher and the retailer benefit from it.

This reality about bookstore economics explains the value to the supply chain of wholesalers like Ingram and Baker & Taylor. By offering the ability to combine orders across publishers and giving rapid, often next-day, delivery, the wholesalers enable stores to gain much more inventory efficiency at a relatively trivial reduction in margin. (Where the publishers’ “deal” is sometimes better than the wholesalers’ in a meaningful way is that publishers will often allow a longer period before demanding payment. Inventory “investment” only really begins when the books the store received are paid for.)

So, in fact, there is very little similarity between the economics of retailing print and retailing ebooks. The tech infrastructure for selling is not a trivial investment, and DRM — including customer service — is a significant expense that ebook retailers deal with that bookstores do not. The print retailer has to build a customer-friendly location and invest in (presumably knowledgeable) clerks. How those costs of doing business compare is a complicated question that changes over time as the tech gets cheaper and the cost of physical locations — driven by ever-higher real estate values in the attractive neighborhoods where bookstores tend to thrive — goes up.

But the things that change aren’t nearly as important as the things that don’t.

The stock turn of an ebook retailer is infinity. There is zero inventory investment.

Publishers first had to deal with the question of what the bookstore’s margin should be on ebooks back in the late 1990s when Palm Digital and Microsoft created the first reflowable ebook platforms. Prior to that we had PDFs, which delivered — in the current jargon — “fixed page layout” ebooks which didn’t adjust the number of words per screen to the screen size. At that time, the ebook retailers were inclined to sell at publishers’ “list prices” and publishers tended to price ebooks at about the same level as print.

But nobody paid a lot of attention because the sales and revenue were de minimus. Since Palm had the most hand-held digital assistants (Palm Pilots) in circulation back at the turn of the century and because (as we have clearly learned since) portability is one of the big drivers of ereading, Palm’s ebooks were the best-selling format. But Palm decided not to enable widespread distribution of their ebook format; they sold the ebooks themselves through a controlled vendor (originally called Peanut Press and then Palm Digital).

In fact, the mobi format that Kindle uses today was developed at the time as a bridging format, able to be read on both Microsoft and Palm devices. This was before the creation of the epub format used by everybody except Kindle today. When Amazon bought Mobi, it was apparently to prevent any other retailer from building a real ebook business selling to what was then the “entire” ebook market. B&N’s one-time exit from ebooks was because they could sell only to Microsoft and not to Palm devices, which meant they had the smaller piece of what was a very small market. Amazon apparently figured then that they’d enter the market when they were ready, but they wanted to prevent B&N from building a foothold in it before then.

I’d argue that the biggest mistake B&N made in the history of ebook evolution was not buying Mobi before Amazon did.

So it became “established” that ebooks would be sold on a similar basis to print books with discounts of 40 percent or 50 percent off publisher-set retail. It should have been no surprise to anybody that once “real” retailers — not software companies like Microsoft and Palm — took the reins, they’d give away a lot of that margin to go after market share. That’s what real retailers do; it’s in their DNA.

In fact, the first wave of discounting of print in the 1980s by the Crown Bookstores chain followed very quickly behind increases in publishers’ discounts to stores from the low 40s to 46 percent and up. Most people never noticed that; others think there’s no connection. It always seemed to me that the increased publisher discounts and the discounting to consumers were linked.

In the early days of ebooks, the volumes were so low and the tech was still under development, so the significant margin the publishers offered — and the retailers employed — might have been necessary to have any ebook retailing at all. As time passes, the fixed retailing costs get lower and the customer service costs also tend to get lower.

Once a real retailer, Amazon, got into the ebook business, deep discounts off publisher prices had to follow, and they did. The move to agency pricing had purposes beyond the principal one, which was to remove pricing as a weapon from the retail competition arsenal. It also put publishers on a path to set realistic retail prices for consumers and to reduce the notional share given to the sales intermediary from around 50 percent to 30 percent.

There’s reason to believe that even 30 percent is too high, given the plunging cost structure for retail and the economic reality of infinite turn on inventory investment. A senior Random House executive told me during the period they were not in agency (the first year it existed) that part of the reason they stayed out is that the 30 percent figure Apple wanted and the other publishers agreed to seemed “too high”. As it turned out, Random House came in a year later and accepted the 30 percent. They said at the time it was because indie bookstores were attracted to ebook retailing by the assured 30 percent margin and fixed retail prices, and Random House always wants to support independent retailers.

It was always curious to me that the preference of all the other retailers except those who can use the book business as a loss leader — Amazon, for sure, and perhaps Google —  for publisher-set retail prices never made its way into the discussion of the publisher motivation at the time, nor to Judge Cote’s reasoning, nor to the arguments which have taken place about it since.

Ebook pricing today is very confused. Apparently, many of the retailers will accept wholesale terms at a lot less than 50 percent, although this is not widely known and, indeed, isn’t even really confirmable. Discounts of print to bookstores were published, standard terms. That’s not the case with ebooks (because they’re not really sales, they’re licenses, no matter what anybody says, and they are individually negotiated contracts, the terms of which are kept private). Nobody outside Amazon really knows what margin Amazon actually takes from ebook sales; it is certainly true that most of the ebooks are discounted from whatever prices publishers “suggest”. (And sometimes those publisher-set prices may be inflated, particularly if the publisher is selling at a bookstore-like 50 percent discount.) Perhaps they only really take the 30 percent that they get from agency publishers and that they take from individual authors in KDP and that they have said in their arguments with Hachette is the “right” share for a retailer.

We actually still don’t know what the “right” or “fair” margin is for retailers of ebooks. Random House had some idea of that in 2010 when they were holding out and they seemed to think “less than 30 percent”. Comparing ebook retailing economics to print book retailing economics only tells us that physical retailers of print need a lot more to have a viable business. Dad also taught me is that the reason publishers give stores a discount off the publishers’ retail price — which should be the price a publisher would sell the book at if a member of the public came directly to them — is to give stores the margin they need to operate. Because publishers want there to be stores. First purposes may have been forgotten in course of the digital transition.

There is programming relevant to this post at Digital Book World 2015 in addition to the main-stage appearance of Amazon’s Russ Grandinetti main-with Michael Cader and me. We have a great panel discussion on “price promotion” with Josh Schanker of BookBub, Rachel Chou of Open Road, and Matt Cavner of Vook. And “Blue Sky in the Ebook World” where a panel of visionaries will talk about what is over the horizon for ebook retailing, rethinking simple ebooks, making complex ebooks, and creating ebooks with soundtracks. Jonathan Nowell of Nielsen Book’s talk about how the profile of what sells in print has changed will enlighten around this topic as well.

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7 starter principles for digital book marketing learned from Peter McCarthy


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Seven-and-a-half days of conference programming coming up during 4 days in January


Blog posts have been scarcer for the past couple of months because I’ve been so engaged with a major responsibility: putting together what amounts to 7-1/2 days of conference programming that will be presented on four days next month in New York City.

As most readers of this blog probably know, we’re responsible for the programming of the two-day extravaganza that is Digital Book World. DBW 2013 — taking place on January 16 and 17 at the Hilton New York Hotel — will be the fourth iteration of the event, which aims to explore the commercial challenges facing trade publishing in the digital transition. DBW is not about technology per se; it is about the business problems publishers must cope with in an age of technological change.

DBW’s main two days are divided between morning plenary programming — all 1500+ people in one big room — and afternoon breakouts. We’ll have up to five simultaneous breakout sessions in each of three slots each day. So we have what amounts to 4-1/2 days of programming in the breakouts plus one on the main stage.

Because people really do come from all over the world to attend DBW, we were delighted to agree when they asked us at Publishers Launch Conferences (the conference business I own with Michael Cader) to add a show on each side of theirs to build out a week of programming. (The team at DBW itself are also putting together some pre-conference workshops that will run on Tuesday.)

So on Tuesday, January 15, we’ll do our second annual “Children’s Publishing Goes Digital” conference at the McGraw-Hill Auditorium (put together with the invaluable assistance of our Conference Chair and close friend, Lorraine Shanley of Market Partners). And on Friday, January 18, we’re presenting (in conjunction with the DBW team) a new program called “Authors Launch“, a full day of marketing advice for publisher-published authors. (Self-published authors are welcome and will learn a lot, but the program is framed for authors who are working with publishers, not looking for ways to avoid them.)

Programming the “Children’s Publishing Goes Digital” show revealed what we think will be the most important theme in the children’s book space for the next few years: the development of  digital “platforms” that, like subscription offerings (which some, but not all of them, clearly are), will “capture” consumers and make them much less likely to get ebooks and other digital media from outside of it. The list of platform aspirants in this space is long and varied: Storia from Scholastic; RRKidz from Reading Rainbow (the TV show brand); Poptropica from Pearson (which launched Wimpy Kid before it was a book); Magic Town; Disney; Capstone; and Brain Hive. All of them are presenting, as well as NOOK, which, like Amazon Kindle, has announced parental controls on its platform that encourage parents to manage their kids’ reading experience there.

There are other big issues in children’s publishing, particularly the creation of original IP by publishers so they can better exploit the licensing opportunities that follow in the wake of successful kids’ books. We’ll have data presentations from Bowker and from Peter Hildick-Smith of Codex to help our audience understand how kids books are found and selected outside the bookstore in today’s environment.

But we know that the digital discovery and purchase routines will be markedly affected by the platforms as they establish themselves. Publishers are faced with an interesting conundrum. They can’t reach the audiences that are loyal to a platform without going through the platform. But it is the presence of many publishers’ books that strengthens the attraction of the platform and, once it gains critical mass, the value of the content to it (and probably what it will be willing to pay for the content) is reduced. So publishers licensing content to these platforms may be strengthening beasts that will ultimately eat them. I think the roundtable conversation Lorraine and I will lead at the end of the day, which will include publishers Karen Lotz of Candlewick, Barbara Marcus of Random House, and Kate Wilson of Nosy Crow, will have interesting things to say about that paradox.

We’ve developed some “traditions” in the four years we’ve been doing Digital Book World. As we’ve done the past two years, the plenary sessions will open on Tuesday with the “CEOs’ view of the future” panel organized and moderated by David Nussbaum, the CEO of DBW’s owner F+W Media and the man who really dreamed up the idea of this conference. David will be joined this year by Marcus Leaver of Quarto, Karen Lotz of Candlewick, and Gary Gentel of Houghton Mifflin Harcourt. And Michael Cader and I will — as we have every year at DBW — moderate a panel to close the plenaries, “looking back and looking forward” with agent Simon Lipskar of Writers House; Harper’s new Chief Digital Officer, Chantal Restivo-Alessi, and Osprey CEO Rebecca Smart.

Among the presenters on the main stage who will be unlike what our audiences usually hear at a digital publishing conference will be Teddy Goff, the digital director for the Obama campaign, who will talk about targeting and marketing techniques that might serve us well in the publishing world; Ben Evans of Enders Analysis in London, who will tell us how publishing fits into the strategies of the big tech companies (Amazon, Apple, Facebook, Google, and Microsoft) that he tracks regularly*; ex-Macmillan president and now private equity investor Brian Napack, talking with Michael Cader about the investment climate in publishing; and Michael D. Smith, Professor of Information Technology and Marketing from Carnegie-Mellon, talking about a study he and his colleagues have done on the real commercial impact of piracy.

(We’ve also scheduled a breakout session for Teddy Goff so he can talk more about the Obama campaign for those in attendance who want to learn more of its lessons to apply.)

We’re also delighted to have gotten Robert Oeste, Senior Programmer and Analyst from Johns Hopkins University Press, to deliver his wonderfully insightful, entertaining, and informative presentation on XML, the subject so many of us in publishing need to understand better than we do. And we will after he’s done. (We’re also giving Oeste a break-out slot to talk about metadata which I’ll bet a lot of our audience will choose to attend after they’ve heard him on XML.)

(*Late edit: Ben Evans had to cancel.)

Some authors have had remarkable success without help from publishers in the past year, but few or none more than Hugh Howey, the author of “Wool”, who has just signed a groundbreaking print-only deal for the US with Simon & Schuster. His dystopian futurist novel has sold hundreds of thousands of self-published ebook copies and rights all over the world and to Hollywood. We’ll have a chat with Howey about how he did it and we’ll be joined by his agent, Kristin Nelson, for that dialogue. Kristin will stick around to join a panel of other agents (Jay Mandel of William Morris Endeavor, Steve Axelrod, and Jane Dystel from Dystel & Goderich) to talk about “Straddling the Models”: authors who work with publishers but are also doing some things on their own.

We will have several panels addressing the challenges of discovery and discoverability from different angles. One called “Closing the New Book Discovery Gap” teams Patrick Brown of Goodreads with three publishing marketers — Matt Baldacci of Macmillan, Angela Tribelli of HarperCollins, and Rachel Chou of Open Road — and is chaired by Peter Hildick-Smith. That will focus on what publishers can do with metadata and digital marketing to make it more likely their titles will get “found”. Barbara Genco of Library Journal will share data on library patron behaviors and then helm a panel discussion with Baker & Taylor, 3M, Darien Public Library, and Random House exploring the role of libraries in driving book discovery and sales. Another session called “Making Content Searchable, Findable, and Shareable” introduces three new propositions from Matt MacInnis of Inkling, Linda Holliday of Citia, and Patricia Payton of Bowker, along with SEO expert Gary Price of INFODocket. Publishing veteran Neal Goff (who is also the proud father of Obama’s digital director) will moderate that one. MacInnis, Holliday, and Payton offer services that will help publishers improve the search for their books. Price will talk knowledgeably about how the search engines will react to these stimuli.

We’re covering new business model experimentation (with Evan Ratliff of The Atavist, Brendan Cahill of Nature Share, Todd McGarity of Hachette, and Chris Bauerle of Sourcebooks) where publishers discuss ways to generate revenue that are not the old-fashioned ones. We’ll underscore the point that we’re about changes caused by technology rather than being about technology with our “Changing Retail Marketplace” panel, featuring publishers and wholesalers talking about the growth of special sales (through retailers that aren’t bookstores and other non-retail channels).

The future for illustrated books will be discussed by a panel with a big stake in how it goes: John Donatich of Yale University Press, Michael Jacobs of Abrams, Marcus Leaver of Quarto, and JP Leventhal of Black Dog & Leventhal. Two publishers who have invested in Hollywood — Brendan Dineen of Macmillan and Pete Harris of Penguin — will talk about the synergies between publishing and the movies with consultant Swanna McNair of Creative Conduit.

We will have major US publishers and Ingram talking about exports: developments in the export market for books — print and digital. And we’ll have some non-US publishers joining Tina Pohlman of Open Road and Patricia Arancibia of Barnes & Noble talking about imports: non-US publishers using the digital transition to get a foothold in the US market.

One session I think has been needed but never done before is called “Clearing the Path” and it is about eliminating the obstacles to global ebook sales. That one will start with a presentation by Nathan Maharaj and Ashleigh Gardner of Kobo where they will enumerate all the contractual and procedural reasons why ebooks are just not available for sale in markets they could reach. And then Kobo will join a panel conversation with Joe Mangan of Perseus and agent Brian Defiore to talk about why those barriers exist and what might be done in the future to remove them.

Oh, yes, there’s much much more: audience-centric (what I call “vertical”) publishing; the changing role of editors; the evolving author-publisher relationship; and a conversation about the “gamification” of children’s books. David Houle, the futurist and Sourcebook author who wowed the DBW 2012 audience, will return with his Sourcebooks editor, Stephanie Bowen, to discuss their version of “agile” publishing: getting audience feedback to chunks before publishing a whole book.

We will also do some stuff that is more purely “tech”. We have a panel on “Evolving Standards and Formats” discussing the costs and benefits of EPUB3 adoption, which will be moderated by Bill McCoy of IDPF. Our frequent collaborator Ted Hill will lead a discussion about “The New Publishing IT Department”. Bill Kasdorf of Apex will moderate a discussion about “Cross-Platform Challenges and Opportunities” which is about delivering content to new channels.

But purely tech is the exception at Digital Book World, not the rule.

And purely tech won’t show up at all at Authors Launch on Friday, January 18, the day after Digital Book World.

Authors Launch is what we think is the first all-day marketing seminar aimed squarely at authors with a publisher, not authors trying to work without one. It is pretty universally taken as a given that authors can do more than they ever have before to promote themselves and their books and that publishers should expect and encourage them to do that. But, beyond that, there is very little consensus. What should the publisher do and what should the author do? That question is going to be addressed, in many different ways, throughout the day.

The Authors Launch program covers developing an author brand, author involvement and support for their book’s launch, basic information about keyword search and SEO, use of metrics and analysis, a primer on media training, when and how to hire a publicist or other help, and a special session on making the best use of Goodreads. We’ll cover “audience-centric” marketing, teaching authors to think about their “vertical” — their market — and understand it.

The faculty for Authors Launch includes the most talented marketers and publicists helping authors today: Dan Blank, co-authors MJ Rose and Randy Susan Meyers, journalist Porter Anderson, David Wilk, Meryl Moss, Lucinda Blumenfeld, agent Jason Allen Ashlock, and former Random House digital marketer Pete McCarthy.

We have assembled a group of publishers and an agent to discuss how an author should select the best places to invest their time from the staggering array of choices. (Facebook, Twitter, YouTube, Pinterest, etcetera.) That panel will include agent Jennifer Weltz of The Naggar Agency as well as Matt Baldacci of Macmillan, Rachel Chou of Open Road, Rick Joyce of Perseus, and Kate Stark of Penguin. Matt Schwartz, VP, Director of Digital Marketing and Strategy for the Random House Publishing Group, will conduct the session on metrics.

A feature of both our Kids show on Tuesday and the Author show on Friday are opportunities for the audience to interact with the presenters in smaller groups so each person can get his or her own questions answered. At Kids we’ll do that at lunchtime, seating many of our presenters at tables with a sign carrying their name so our attendees can sit with them and engage. At Authors Launch, we’ll be conducting rounds of workshops, crafted so that the authors can get help in their own vertical (genre fiction, literary fiction, topical non-fiction, juvies, and so forth), and on the topics of greatest need for them.

We are sure the week of January 15-18 will prove to be an energizing and stimulating one for all of us living in the book publishing world. We hope you’ll join us.

Digital Book World Week | January 15-18, 2013

Children’s Publishing Goes Digital | Tuesday, January 15, McGraw-Hill Auditorium
DBW Pre-Conference Workshops | Tuesday, January 15, Hilton New York Hotel
Digital Book World Conference + Expo | January 16-17, Hilton New York Hotel
Authors Launch | Friday, January 18, Hilton New York Hotel

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Business models are changing; trial and error will ensue


The announcement late last week that Random House is starting three digital-first imprints was just the most recent example showing that publishers are exploring new business models. Just days earlier we got news of the partnership between Simon & Schuster and Author Solutions making S&S the third major publisher — preceded by Christian publishing titan Thomas Nelson and dominant romance publisher Harlequin — to put their name to an offering in the “author services” sector.

One might say that S&S is the first of the Big Six to take such a big step in this direction, except that Pearson, Penguin’s parent company, actually bought Author Solutions a couple of months ago and HarperCollins bought Thomas Nelson last year. So, in fact, three of the Big Six are now involved with author services and it is four out of six if you remember the other recent big news, that Penguin and Random House are merging. (And that’s not counting more modest initiatives like HarperCollins’s “Authonomy” or Penguin’s “Book Country”.)

I remember being on a panel in Canada a few years ago with Carolyn Pittis, the very smart digital pioneer from HarperCollins, who referred to the way most publishers did business — buying the right to exploit copyrights and then monetizing them — as one possible business model for a publisher’s organization. She explicitly mentioned “author services” as another one. That was before her company had launched Authonomy, a couple of years before “Book Country”. In other words, big publishers have been thinking for a while about “author-pays” models (just as the professional publishers have).

This really all follows the lead of Amazon, which has made a practice for years of selling a la carte every component of its own value chain. I was just reading an ebook called “The Amazon Economy” published by The Financial Times (an example of a non-book publisher adjusting its own business model to include being a book publisher, about which more on another day) that suggested that Amazon actually makes more money making its infrastructure available to others than it does using it to sell stuff.

In other words, there is potentially profit in deconstructing one’s value chain and selling access to it in pieces.

In a sense, publishers have known this for a long time. They’ve made the part of their operation that handles things after the books exist: warehousing, distribution, credit and collection, and sales available to other publishers for years. Some publishers, like Random House, have built distribution into a significant business with its own management structure within the corporation. Perseus, which as a publisher is itself a roll-up of a number of smaller houses, has built a distribution service that has more than 300 clients. Ingram, whose core wholesaling operation combined with the Lightning subsidiary they built in the 1990s to provide print-on-demand and later digital services, has a comparable publisher distribution offering.

But what Author Solutions — and a host of less robust (and largely cheaper) competitors — has shown is that there is also very widespread demand for the services that precede the actual delivery of books ready for sale.

I have no way except inference to know how Nelson and Harlequin are doing with their author services offering powered by Author Solutions, but the fact that Penguin parent Pearson bought them and S&S has now done this deal certainly suggests that ASI has a good story to tell. Of course, they are market leaders because they make money, and they make money by having good margins. And the prices announced for the services for the Archway initiative — ASI’s project with S&S — are higher than those services could be purchased for elsewhere. That doesn’t mean they won’t sell lots of aspiring authors on using them.

This is all very logical, but also very tricky. Most publishers — at least until very recently — would have thought about the services they sold in a distribution bundle as “commodities”, widely available and highly comparable. It is true that any of the major publishers, many minor ones, and distributors even beyond Ingram and Perseus can deliver the core capabilities: active accounts with all the major retailers, the ability to transact with them and collect the money, and placement of the messages of availability throughout the supply chain. Obviously, they all strive to do these things better than the next guy and to justify charging a point or two more because they’re better at it.

But further up the value chain the publishers’ pride and belief in a qualitative difference between what they have and what the next guy has is much greater. Publishers generally believe in their editors and marketers more than they believe in their sales forces and warehouses. (Buddies of mine in sales 20 years ago used to say, with conscious irony, that there were two kinds of books: editorial successes and sales and marketing failures.) They see their time and bandwidth as precious. They are far more reluctant to make that time available for rent and, in fact, it would appear that all three of the big publisher deals with Author Solutions rely on ASI to provide those capabilities. They’re not coming from the publishers themselves.

All of this sidesteps another important component of successful publishing: the coordination of all these activities. Successful publishing is the result of a lot of very small decisions: in editing, in presentation (both the book itself and the metadata, like catalog copy and press releases, that support it), and, increasingly, in the SEO tags and signals about “placement” that are included in the book’s digital file or marketing metadata. In the digital age, these things can change over time. Every day’s news — about UN votes or Pentagon sex scandals or anything else — could call for a change in the metadata around a book published a month or a year ago to make it more likely to be shown by the search engine queries being placed today.

(The FT ebook on Amazon, which I recommend, makes it clear that Amazon also sells “coordination” on the retail side as an extremely important, and apparently much-appreciated, value-add.)

Indeed, whether to put more effort into a book or stop paying attention to it is — or should be — based on an analysis of sales and search trends, as well as more old-style measures like the reviews it is getting.

In the old pre-internet days, publishing books was like launching rockets. Most crashed to the earth, some went into orbit. But the publisher’s efforts — most of the time — were limited to the launch. Then the marketing team could move on. This was not a way of doing business that was appealing to authors, but it was consistent with the realities of the marketplace. The big book chains wouldn’t keep a title in stock if its sales appeal wasn’t evident at the cash register within 90 days. Without copies of a title in the stores, there was no point to the publisher pushing it.

That’s something that has changed dramatically in the digital age. With some titles and genres achieving half their sales through ebooks or online bookselling, there is no longer a time limit on marketing effectiveness. In what is a subject we will certainly explore at a future conference, this must be causing traffic jams in publishers’ marketing departments. They can no longer be counting on the older titles making way and clearing marketers’ schedules to work on newer ones.

Open Road is a digital-only publisher that works primarily, but not exclusively, with backlist. (Recently they seem also to be specializing in books brought in from offshore publishers and in helping illustrated book publishers break into ebooks.) What impressed me when I met with them a year ago was that they didn’t distinguish between “frontlist” and “backlist”. They marketed to the calendar and the events and holidays everybody was thinking about, not to the newness of their books. I believe this actually brought increased relevance to their marketing. Obviously, this was also making a virtue of necessity because they didn’t have a flow of “new” books to tout. But it also capitalized on the new situation: that the books don’t suddenly become largely unavailable because retailers throw them off the shelves.

A by-product of the extended sales life of books is that it makes it easier for publishers to cluster them for marketing purposes. Now four books on a similar topic can be pushed in unison, even if they were published months or even years apart. Open Road has made ample use of that reality.

These are challenges and opportunities that compel publishers to rethink the organization of their marketing departments and the deployment of their marketing resources. It is an opportunity for a publisher to extend its value to an author if it pushes an author’s book six months or a year later when a related title hits the marketplace or a news event makes an older book newly relevant. Since authors are increasingly able to do some useful things on their own behalf to capitalize on these opportunities, they will be increasingly impatient with publishers that quit on their books too soon..

There are things the author just can’t do. They can’t adjust the book’s metadata and add tags. They can’t push for or buy promotional screen placement from the retailers when somebody else’s new book makes them suddenly relevant again. Authors also don’t have the benefit of arriving at marketing best practices and rules of thumb by examining performance data across various groupings of titles: large title sets, categorized sets, comparable-selling sets, and others. They’re counting on the publishers to do that.

The publisher’s role in coordinating and managing a myriad of details has always been one of its principal value-adds and it can be even more so in the digital age. But only if they actually do it, and there’s precious little indication that they intend to do it for the titles they’re being paid for.

Jane Friedman (the blogger and expert advisor to writers, not the CEO of Open Road) points out that her alma mater, Writers Digest, and Hay House — the vertical publisher in mind-body-spirit that has done so well interacting with their reading audience — also did ASI deals. She points out that the big successes we all know about among self-published authors — John Locke, Joe Konrath, and Amanda Hocking being the headline names — didn’t go through ASI. Jane takes issue with the ASI promise to help publishers “monetize unpublished manuscripts”. It’s hard to dispute that publishers who are primarily in business to pay authors to publish them could be walking a fine line having a business model right alongside that charges authors for services that are unlikely to lead to them making money.

On the other hand, Random House has made an emphatic statement about the value legitimate publishers can bring with the success of “Fifty Shades of Gray”, originally a self-published story and now, very much thanks to the biggest publisher, the biggest commercial success of all time. No self-published book has come close and it will be a very long time before one does. I see their digital-first imprints (which they are not the first to launch, but seem to be the first promoting aggressively to the self-publishing diaspora) as a step toward a different business model that recognizes the new commercial realities of publishing. It enables lower-investment publishing — the authors in these digital-first imprints are unlikely to receive advances at levels commensurate with most Random House books — and perhaps they’ll get less editing attention too. Marketing is simplified by the fact that print isn’t involved and therefore retail stores aren’t either. So the threshold for profitability is much lower and, as we have learned, they can still decide to give any book in these new imprints the “full treatment” — print copies stacked up in stores — later on if they want to.

It is too early to judge whether the tie-up between publishing houses and author services offers will produce value on all sides. All these publishers now have or will have, at the very least, a stable of self-published authors that are contributing margin to them and in which they have a financial stake (even if they didn’t have to invest to get it). There is definitely inherent conflict between trying to make the most money one can from an author hiring publishing services and recruiting authors and books that will be commercially successful.

But publishers still know how to make books with commercial potential sell better than mere civilians do. Whether ASI and their partner publishers can find the formula that makes the promise inherent in a publisher’s brand productive for authors that hire services under it is a question that will be answered in the months to come.

Having more companies trying to figure it out certainly improves the odds that somebody will (and ASI has every interest in spreading best practices as they emerge). And more and more cheaper services for those aspects of self-publishing that really are commodities means that ASI and all its partners are going to have to demonstrate convincingly that they can add effective marketing to their offering mix if they’re going to be around ten years from now.

Michael Cader and I are doing our first Authors Launch show, in partnership with our friends at Digital Book World, on Friday, January 18, the day after the 2-day DBW 2013 will end. The question of where the line gets drawn between publisher efforts and author efforts is a major topic. We have a great roster of experts to serve as faculty: the aforementioned Jane Friedman, along with Porter Anderson, Jason Allen Ashlock, Dan Blank, ex-Random House marketer Pete McCarthy, co-authors Randy Susan Meyers and M.J. Rose, Meryl Moss, and David Wilk. Among the publishers speaking will be Matt Baldacci of Macmillan, Rachel Chou of Open Road, Rick Joyce of Perseus, and Matt Schwartz of Random House. This is a conference really intended for published authors rather than self-published, but it will teach skills and insights for any author willing to invest time and effort to sell their book.

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Publishers adding value on the marketing side


Obviously my day job, consulting, informs a lot of what goes into The Shatzkin Files. I guess it is just as obvious that I can’t quote everybody who tells me something or attribute everything I want to write about to a specific company or individual. I don’t make a living writing this blog and I wouldn’t make a living at all if people in the industry couldn’t trust me to keep their confidences.

But once in a while people inside competitive companies tell me things that they want the world of publishing to know about what they’re doing. That’s happened twice this week and, in both cases, publishers were making it very clear that they are doing things that will add real value to authors’ marketing efforts, things that no self-publishing author could do for themselves. Self-publishing authors could be wrong, but a read through the comment string of a recent post here makes it clear that they don’t much believe publishers add value in marketing.

On Monday, I was talking to Fritz Foy, the senior VP for Digital Publishing and Strategic Technology at Macmillan. My mission was to recruit speakers from Macmillan for Digital Book World. The conversation turned to the question of “collecting names” for marketing purposes. I had learned previously that Macmillan really has a company-wide effort to do that. That’s something I have advocated. I thought it was so important that I went to the unusual (for me) effort of learning some fundamentals of direct contact management and writing about them on the blog 14 months ago. But Macmillan is the only company I’m aware of that makes email address capture an objective across the company, although we see pockets of name-gathering activity in other majors.

Fritz emphasized that collecting names wasn’t the only priority. Using them, using them well, and tracking what happened when they used them were the keys. (I was reminded, as I was again by the next conversation I’ll describe, of the adage “you can’t improve what you don’t measure”.) To demonstrate, he pulled some October numbers from tor.com, which one would assume, based on the relatively longstanding tor.com effort, probably constitutes the company’s biggest single pool of email addresses.

And they had a lot of them, enough to have sent over 650,000 emails to their lists in the month of October. That’s impressive. But what’s positively stunning is that more than 30% of those emails got opened (that’s more than 200,000) and more than 20% of those clicked through: took the action that Macmillan asked them to take in the email. That’s in the neighborhood of 40,000 actions.

Now the actions were, for the most part, to get free access to more content. (Only 15% of the mailings were purely “marketing”.) They weren’t selling anything. But what Fritz was demonstrating was the growth of what I call “investment marketing”: marketing that produces a result that makes subsequent marketing efforts cheaper or more productive. These tor.com numbers are going to grow, inexorably. Another indication of how solid Macmillan’s lists are is that only 0.1% unsubscribed!

If I were an author (or agent) looking for a sci-fi publisher, it would impress me that Macmillan has lists that get a 30% open rate. It would make me feel they could do things to promote my book that another publisher without those lists couldn’t do. I don’t know what the growth rate is on those lists, but most things (sales, device penetration, self-publishing) in the digital publishing world have been more than doubling each year and these could well be too.

The key point to take on board here is that tor.com is a flagship; Macmillan is doing this across their company. They are building other verticals as well. If other publishers aren’t systematically taking names, getting email permissions, and testing what can be done with them, Macmillan will build up marketing capabilities that it will get increasingly expensive to compete against.

There is little doubt that Amazon’s author-recruitment efforts for their imprints include the promise to mail to known buyers in the author’s genre. They almost certainly can send more than 600,000 emails in a month for many books and genres. But can they get a 30% open rate and a 20% clickthrough?

And Amazon, a retailer, can’t get trapped into just pushing the books it signs up when their consumer brand, and their sales, depend on offering full range of selection of available titles across publishers’ lists. That conflict is compounded as they sign up more and more titles as proprietary. (But it will also be ameliorated if the titles they sign are higher profile than they’ve been so far.)

The day may not be far off when agents are going to be asking publishers “how many emails can you send in support of this book on publication day?” If I were in Amazon’s shoes, I’d be pushing that question. It looks like Macmillan is methodically building the ability to provide an answer.

But not everybody with a modern view of marketing agrees with me (and Macmillan) about the importance of name-gathering, which brings us to the second conversation this week.

We got a call from Open Road Integrated Media asking us to come down to their shop and learn a bit about what they’re doing. Open Road is an ebook publishing company founded by former Harper CEO Jane Friedman which has been an annoyance to the big publishers. Jane has been in the business for more than four decades in high positions at major houses (at Random House before Harper). She knows the agents and she knows how the game of signing up content works.

So she moved against the establishment by offering a standard deal of a 50% share of ebook revenues, when the major publishers are holding the line at 25%. (Open Road’s deal includes the ability to recoup one-half the digitization cost before paying what we usually call royalties but which they call “profit share”. ORIM says that comes to less than $500 per title. Open Road pays no advances.) She used her understanding of the ambiguities in legacy publishing contracts to sign up backlists from both living authors and estates, including Willam Styron, Lawrence Block, Carl Hiaasen, Alice Walker, and others.

Those have been the headlines about Open Road and that was pretty much the extent of my knowledge of their proposition. Without any other knowledge of their economics — their ability to raise money, their burn rate, their sales — I was skeptical about the sustainability of their model, if it rested primarily on paying 50% for what others were paying 25% for and gathering high-quality backlist of titles not nailed down already for ebooks, which is a limited resource.

It turns out they have a lot more going for them than that. But they don’t gather names.

Open Road’s head marketer is Rachel Chou, who worked with Jane Friedman at Harper. Jane and Rachel, and former Scholastic CEO Barbara Marcus, who is an advisor to Open Road on children’s and YA acquisitions, made the point that Open Road is a marketing company. That’s what they do. And their bullpen with about a dozen people in cubicles working away is just about exclusively devoted to marketing. Except that, in their eyes, marketing and sales and author relations are all the same thing to them, and they see a workflow built around that perception as a key differentiator.

In fact, they see the consolidation of functions in their shop as a significant competitive advantage. In the ebook world, marketing and sales are so closely related that it is hard to see how to parse them. That’s partly because the promotions by ebook retailers could be the single most important marketing component (a point made emphatically by Diversion Books’ Scott Waxman at our eBooks for Everyone Else shows in New York and San Francisco), but it is also because all marketing efforts at Open Road are aimed at driving sales to the ebook retailers. (Their widgets all have buy buttons for the full range of retailer choices.)

But that’s not where the competitive advantage of their structure comes into play.

Rachel spelled that out. One of the major retailers came to them in the past few weeks with a big sales opportunity. They could place 15 Open Road titles in a major promotion that would sell a lot of books. One catch: they needed the titles cleared for the promotion within 24 hours.

Another catch that is characteristic of the ebook world: this was a price promotion that required clearing the participation of each book with its agent. That’s 15 agents. Rachel and her team of marketers, who have the agents of the Open Road ebooks on their own speed-dials, got the job done and got all 15 books into the promotion.

Moving that fast would be a non-starter in any significant publishing house. Whether the opportunity came in through sales or marketing, neither team would own the agent relationships. I believe in most houses it would be necessary to have the agent calls made by the editor who had signed the book. Certainly, the editor would have to be consulted before anybody from marketing or sales could make such a call. And that round of communication, which would include explaining the promotion opportunity to each of the affected editors, would never be attempted within a 24-hour window. Realistically, 24 days would be a challenge.

Open Road is organized differently than legacy publishers because there is so much they don’t have to do! There is very little in the way of a production department (there is a person who creates their covers and Pablo Defendini, who was a key player building Macmillan’s tor.com, is their “interactive producer”.) There is no sales department. There is no inventory management. Everybody works in a room that is dominated by a wall with a 2-month marketing calendar, listing all the events and anniversaries they might promote around. They have 75% or 80% of their company dedicated to marketing, which everybody — including all the big publishers who have expressed an opinion to me — agrees is the prime responsibility of the book publisher in the digital era.

But, even within that, Open Road is organized for efficiency and speed based on the realities of the value chain for ebooks. Their marketers are assigned books which “fit together”, so they are consistently going back to the same blogs and websites for promotion. They can develop relationships. They’re not really a “vertical” publisher (by genre or by topic) but they do have multiple titles from the same author, which helps.

To be fair, the other major publishers are reorganizing themselves constantly into more marketing-focused and less bureaucratic organizations. Just this past week, Simon & Schuster announced organizational changes which effectively shift resources from physical store sales to online marketing (which is admittedly an oversimplification.) The big companies all have great leadership and they’re well aware that they have to change. And I know for sure there are plenty of initiatives I haven’t heard about because the houses feel there’s competitive advantage to keeping them quiet. In fact, Rachel Chou told me about newsletters that are published readers at HarperCollins were getting open rates when she was there a couple of years ago that were even higher than Fritz’s tor.com numbers in October!

Open Road’s team would point to other distinctions between them and other publishers. (They not only claim to be different from the legacy print publishers, they don’t recognize any of the other ebook publishers as true competitors either.) They do extensive video interviews with every author (or a descendant in the case of a deceased author) which creates a rich library of video content. It’s a point of pride with ORIM that these are not fodder for video trailers, but give them real editorial material that can be made into solid programming, often combining video from several authors thematically into “mashups”. They distribute that video aggressively and claim they’ve now reached the point where they’re a recognized B2B brand by some digital media and bloggers who come to the Open Road website, unbidden, to pick up video. Of course, all the video is tagged so the Open Road marketers can track its placement, downloads, and any clickthroughs that result to the retailers.

And that leads us to metrics. Open Road is relentless about data and analytics. They make the point that they can test different covers or tag lines on Facebook or in other media and have answers within hours about what works best. The Open Road team believes that the big houses don’t give their marketers the kind of tools ORIM has to measure the impact of campaigns and that their competitors’ corporate structures don’t enable fast changes in the pitch or the artwork based on data.

These may not be sustainable advantages. Tools can be provided. Workflows can be changed to permit faster responses when that’s necessary. The established houses can raise their royalty rates. How fast things will change in the big houses is an open question (and the answer is different for every house), but it is undeniable that the decision-making structures that worked for print books readily accepted time lags that are a real handicap in the evolving ebook world.

Jane Friedman and her team claim that there is a marketing plan for every book for every quarter! (They admit there’s some ganging there; a bunch of different books might be part of the same Mother’s Day effort.) Whether that is scaleable and replicable when they are ten times their current size (approximately 1400 titles) is another question. But it is certainly a point of differentiation today.

Open Road doesn’t sell direct, only through intermediaries. And they eschew name and email address capture of end users, preferring to rely on the combination of the viral distribution of content and their always-developing relationships with bloggers and websites.

Both Macmillan and Open Road are doing things that no big trade house could have imagined five years ago. Macmillan is applying scale; Open Road is applying the speed and flexibility enabled by a smaller organization. But both of them are employing what I’d call “investment marketing”: doing things on behalf of their books that build their capabilities to do more on behalf of subsequent books. I think that’s the key for publishers who want to give authors and agents convincing reasons to publish with them in the future.

We’ll do a panel on “investment marketing” at Digital Book World in January. Of course, Open Road and Macmillan will be on it. So will F+W Media, a vertical publisher (investment marketing is much more natural for vertial publishers) and we expect to add one more Big Six house which is doing interesting things in this regard.

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Planning the next publishing model: a new take on “no returns”


Although there are some very good minds working on the next publishing model — Jane Friedman with Open Road and Richard Nash with Cursor being the first two that leap to mind — I have developed a couple of thoughts that might be helpful to them or to others planning to avail themselves of the new opportunities which are bound to be arising.

What I think both Jane and Richard have spotted is that “scale” is diminishing in its ability to provide a publisher with competitive advantage. Certainly, it is still true that the surest-fire big successes still require substantial advances to authors and aggressive laydowns of inventory that do require scale. If you want to publish Patterson or Evanovich or any author with a proven track record of bestsellers, guaranteed to move hundreds of thousands of copies, you have to take a cash risk for advance and inventory commensurate with their guaranteed minimum sales level and you have to go after the entire market, which takes money and organization, to recoup that investment.

But that covers no more than one percent of, let’s say, 100,000 titles a year published by established publishers and an even tinier percentage of the total number of new books if one includes those issued through self-publishing operations. (I am staying away from real numbers here because I haven’t done the analysis needed to discern them. The million-plus number of new ISBNs reported by Bowker contains hundreds of thousands of titles that are neither new nor self-published, but which are reissues of out-of-copyright books set up by companies that use technology to process the files into a print-ready state.)

Nash is explicitly expecting the collapse of the overall trade publishing model. Friedman has never expressed that expectation, but she’s exploiting the combination of old contracts that are ambiguous about ebook rights and the big trade houses’ reluctance to go beyond a 25% of net receipts royalty on ebook sales to make high-profile ebook captures. Her company professes to be “marketing-focused” and she has hired two of trade publishing’s most expert digital marketers, Rachel Chou from HarperCollins and Pablo Defendini from Tor. She has a partner, Jeffrey Sharp, with a filmmaking background. So there appears to be a clear emphasis on ebooks, new publishing forms, and digital marketing, not on “scale.”

A month ago I wrote that I expected 50% of the market for narrative books (words, not pictures; simple design, nothing complex like a cookbook) to be delivered through online purchases by the end of 2012. That was based on an expectation that 25% of the sales of those books would be ebooks.

Since then, I’ve decided that prediction is too conservative. Now I think narrative books might pass that benchmark six months or a year sooner than that. Hachette’s most recent financial results attributed 8% of US book revenue to electronic in the first quarter of this year. In a speech delivered last week in Australia, Carolyn Reidy of Simon & Schuster gave the same number — eight percent — as her company’s current share of revenue attributable to digital. Eight percent of revenue is something more than 8% of units (because ebooks are cheaper), and the number would be higher on their narrative books (because the 8% is across a list that includes a lot of books not available as ebooks.) If they were at 12% of units on narrative books in the first quarter of this year, they could be at 25% of units on narrative books by the first quarter of next year, which would be about two years ahead of what I was expecting just a month ago.

And what is true of both Hachette and Simon & Schuster must be a pretty reasonable approximation of what we’d see at any of the other Big Six companies.

The portion of the market that buys online doesn’t require pre-printed inventory. Setting up with Lightning and Amazon and perhaps Baker & Taylor would enable all online purchasers to get their print copies on demand. Today I am offering what I think is the solution for distributing  inventory more broadly into brick-and-mortar stores without a publisher risk. If Nash or Friedman have thought of this already, they haven’t announced it.

The brick-and-mortar world has three main components: chains, mass merchants, and independents. Here’s a deal structure that I think can be appealing to the big customers and, which, with a bit of tweaking,  can work to the benefit of the smaller ones as well.

When publishers sell to the trade channel, they collect approximately half of the retail price of the book for each one sold. They bill their channel partner that full amount when the books are shipped to the store, and credit their channel partner that full amount (with some relatively minor exceptions) when returns come back. Of that half they collect from the channel, about 20% (10% of retail) is the publisher’s cost of printing the book, 20-30% (10-15% of retail on hardcovers; actually less on paperbacks) is the author’s royalty, and the balance (about 50-60% of the money received) covers the publisher’s cost of doing business, including paying for books printed and not sold, and profit.

In a print-on-demand scenario, the manufacturing cost doubles (or more), so 20 or 30 points of the 50 or 60 remaining to the publisher are chewed up. Some contracts allow the publisher to get back some of the author royalty in that scenario, but absent that the publisher’s margin is definitely reduced so that they only “clear” 20 to 30 percent of the cash received. On the other hand, they shed the costs of unsold inventory (which can be substantial), they lose the requirement to capitalize inventory, and they can diminish or eliminate all sorts of operational costs for warehousing and inventory management. Sellers of print-on-demand services, including Lightning, have been laying out this reality to publishers for years.

In the present scenario, the channel partners — retailers or wholesalers —  are at cash risk for the return freight (and sometimes the inbound freight). And they have the full cost of the book tied up until they sell it or return it.

Here’s the new solution for a no-returns, no-inventory-risk-for-publishers world.

Publishers say: we are doing an initial press run which you can be part of. There will be no inventory maintained at the publisher. If the channel demands a subsequent run and will support it, we’ll do it. But otherwise, everything beyond the press run is available only from the wholesalers providing POD services.

The press run offer to channel partners works like this: you pay the cost of printing and delivering the book. And that payment is firm. You buy that inventory at its cost and you own it; no returns. That’s going to be about 10% of the established retail price.

But the payment above that, the rest of the purchase price by the channel, is paid on sale (or, to use the term of art, “pay on scan.”) To provide some incentive for the retailer to support a book with inventory and push up that first (and often only) press run, and then later to give them the margin for markdowns, I’d suggest that the second payment diminishes over time. The total “cost” to the retailer should be 55% of the retail price for the first 60 days after inventory is delivered, dropping to 50% for the next 60 days, and 40% thereafter. That would leave the publisher 30% of the retail price in margin on the slowest-selling books, of which the author, under the best contracts that exist today, would get half. The publisher would get half, but would have no inventory cost (that was paid up front) and no returns processing.

This formula should work fine for Barnes & Noble, Borders, Books-a-Million, and the mass merchants, who can buy 1000 or 2000 copies of a book they want to carry and get that press run price. Serving the independents is more difficult.

We stipulated at the top that all books are set up for print-on-demand at Amazon and Ingram; perhaps at Baker & Taylor too. If those books are ultimately sold to the wholesaler on normal discounts (about 50%), the relatively higher POD cost would chew up most of the publishers’ margin. We’re positing that POD could be 25% of retail (rather than about 10% for press run), which would leave only 25% for royalty and publisher’s margin. By today’s standard contracts, that might only leave 10% for publisher’s margin. There are two possible ways to claw back margin and both of them could work.

One is to negotiate lower author royalties for sales made through print-on-demand. Let’s remember I’m formulating how a new publisher ought to operate; they don’t have any legacy contracts yet. And, I might add, both Open Road and Cursor have aspects of their model that are more advantageous to authors than today’s standard. That’s how Open Road is getting those ebooks, paying 50% instead of 25%. And Cursor offers a short-term deal that nobody else does. So, on balance, the author might see herself as better off even though the royalty on some trade sales would be reduced.

Another possibility is that Ingram or Baker & Taylor (and you only need one to say yes to more or less oblige the other) can be persuaded to accept a lower discount on these POD books. For one thing, they make a bit of margin on the POD. For another, these books will not be available at all direct from the publisher (which has moved to a no-inventory model), so the wholesaler can offer a lower discount to their customers as well and still be “competitive.” And the wholesaler has no inventory risk or carrying cost either and no cost of sending returns back to the publisher. A slightly reduced margin structure still ought to work out profitably for them.

Of course, many devils are in the details. Publishers would need retailers working this way to report sales to the publisher on a daily basis and pay promptly, perhaps weekly (after all, the retailer is only paying after they’ve collected the customer’s money.) There is “shrink”, books stolen or which otherwise disappear without going through the cash register. That cost is entirely borne by the retailer today and the publisher will need some check and balance to assure that it doesn’t become a payment dodge under this arrangement.

But as the publishers move to a world where inventory risk can be substantially reduced, it just makes good sense to look for a way for the brick-and-mortar sales channel to gain some benefit from that idea as well. Working this way can enable a 21st century publisher to cut operations costs dramatically and even, perhaps, improve their cash flow.

When I first recognized that we’re in sight of the day when half the sales can be achieved without inventory, it looked like an obvious game-changer for publishing. Now I’m seeing the way to change the other half of the game as well.

And having walked through this door of perception, I close with a message for all the no-returns advocates out there among publishers. You want to eliminate returns to reduce your risk. That’s reasonable. But your risk is really the cost of printing the books; it wouldn’t be royalty on books not sold and it shouldn’t be profit on books not sold. So shouldn’t any no-returns policy also relieve the store of those elements of the risk as well?

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