Simon & Schuster

Are Amazon exclusives the next big challenge for everybody else in publishing?


Somebody smarter (or more patient about wading through data) than I am could probably figure out how far along this bifurcation is already, but Amazon is doing its very best to build a body of content that is desirable and available from nobody else but them.

This is something you can do when you’re in the neighborhood of 70 percent of ebook sales and already more than half the total sales for many works of fiction, which is where the self-publishing world is strongest. It is not an opportunity that is really available to any other retailer. Apple has given it a try for more complex ebooks for which they provide ebook-building tools and, presumably, offer the most productive distribution environment for complex content. But they’re playing on much less fertile ground and they don’t have anything like the audience share necessary to drive this strategy very far.

It is hard, if not impossible, to imagine that any other ebook ecosystem could offer benefits that would make it worth skipping Amazon.

Two recent developments call attention to this situation.

David Streitfeld in the New York Times reports that Amazon has held a private by-invitation-only conclave for writers the past four years. I knew about this before because I’m a subscriber to Publishers Lunch and they reported on it about three years ago. (I like to say about my conference business partner Michael Cader, proprietor of Publishers Lunch, that you go to him for the facts and you can come to me for opinions.)

It is a smart and sensible thing for Amazon to do. Amazon has been demonstratively aware of the ability of writers to promote their own books to their audiences but also to promote Kindle Direct Publishing among their peers. Bringing authors in for a private chat to exchange ideas is not only flattering to those invited (a benefit to Amazon in and of itself), it almost certainly also informs them about how to be more successful courting authors in the future. This shouldn’t be viewed pejoratively, although Streitfeld’s piece and a companion blog post seem to position it that way.

The other is Hugh Howey’s very public rumination about whether to go exclusive with Amazon or not, in which Howey wonders out loud whether he should stay exclusive with Amazon beyond a 90-day trial period based on his calculation that his audience (perhaps counterintuitively) goes up while his revenue takes a small hit. I’ve had an off-line exchange with Hugh in which he emphasizes what his post says: he really can’t decide which way to go on this.

(It is worth noting, as Hugh does, that when he makes these decisions, they are only commitments for 90 days at a time. Of course, each time he switches he creates work for himself, either putting up the titles in other venues or taking them down. But he can get the benefits of Amazon exclusivity in 90-day chunks with no commitments beyond the 90 days and go in and out as many times as he likes. Hugh makes what I think is an unhelpful and invalid comparison to the life-of-copyright deals publishers ask for in return for advances against royalties and inventory investments that Amazon and other retailers do not make for self-published authors, but he’s right that it is much easier to make a decision when you only have to live with it for three months.)

His open thought process became the subject of a post by Chris Meadows on Teleread. One thing on Hugh’s mind was whether he needed to help keep alternatives to Amazon viable by contributing his content to their mix. Meadows says “that’s not your problem” and I agree with that. Each writer should be making the publishing decisions that are best for their personal brand and career. The first decision — if a publisher offers them a choice — is whether to take an advance and a deal or whether to self-publish. If they self-publish, they have to decide whether to be exclusively Amazon or go for the widest possible distribution.

The reflexive, intuitive choice is to get the most distribution possible. There are certainly readers who shop exclusively in non-Amazon retail environments. There could even be a growing number of those in light of the recent publicity around the Hachette dispute and the negativity directed at Amazon by Authors United. There are certainly people who make a point to avoid shopping at Amazon or buy from them as little as possible. (I’m even related to some of those people.)

But with Amazon’s enormous market share, their ability to promote both through normal commerce and special exposure like their subscription service Kindle Unlimited, and their willingness to put a thumb on the financial scales (KDP Select authors get higher royalties; they pay bonuses to top sellers and top titles being seen in KU), they can make up for whatever might be lost by eschewing other channels of distribution.

The idea that having content that is not available elsewhere can strengthen a retail offering is not the exclusive province of Amazon. It was a core component of the strategy originally announced by upstart retailer Zola Books.

Amazon has not yet ever suggested that “content only available here” was any important part of their customer-marketing strategy. (Update: I’ve been corrected on this. In fact, they do promote the exclusive content, both in press releases and in their Kindle Unlimited promotion online. They tout “over 500,000 digital titles you won’t find anywhere else”.) The exclusive-or-not conversation has been mostly (should be: largely) confined to their dialogue with authors. In fact, the rest of the publishing world has nudged them in that direction by being resistant to stocking books from Amazon Publishing. If at one time the author recruitment team at Amazon might have hoped to deliver ubiquitous distribution for their books, the path to bookstores was effectively blocked by their brick-and-mortar competitors’ lack of willingness to support their program.

The self-publishing revolution, despite the enthusiasm of its strongest advocates (which definitely include Hugh Howey), has only made small inroads among authors who have the option of a substantial advance from a traditional publisher. For that reason, the pool of authors exclusive to Amazon contains very few that could change a book consumer’s shop-of-choice (except perhaps one time for a particular book they wanted to get).

But if a big earner like Hugh Howey thinks he might be better off accepting Amazon’s standard terms for exclusivity, that’s a dangerous sign for everybody else in the book ecosystem. A traditional publisher still offers brick-and-mortar visibility and revenue that Amazon and any self-publishing effort will not. The transfer of market share from stores to online and from print to digital hasn’t ended. Every point of market share that shifts strengthens Amazon’s proposition for exclusivity and increases the likelihood that a high-visibility author will make the self-publishing leap. The combination of the two — highly branded authors and Amazon exclusivity — is among the most unwelcome inevitabilities the rest of the industry will probably face in the years, if not months, to come.

What is already the case is that Amazon is piling up a repository of content that nobody else has. When that hits a tipping point that starts influencing substantial numbers of consumers is another shoe waiting to drop.

Programming at Digital Book World that is highly relevant to this post will be a presentation by Judith Curr, president of the Atria division of S&S, on the math of the author’s decision whether to go with a publisher or publish on their own. Curr’s division works hard to recruit new authors and, in fact, Peter K. Borland, who heads up Atria’s Keywords Press partnership with UTA to publish books from highly successful “digital influencers” (people with big YouTube audiences, for example), is a participant on a panel of “new publishers” who are making their mark. The other participants on that panel — Entangled and Georgia McBride Media — don’t have Big Five roots.

As we were about to post, a rumor hit the Net of a new Amazon program to recruit more self-published authors. The idea is that submissions of manuscript and cover are given a crowd-sourced review; then the highest-ranked are “considered” for a new kind of Amazon publishing contract. This doesn’t seem to have been “officially” announced, but a conversation with an Amazon person is reported and the source, The Digital Reader, is normally reliable. This initiative would be further evidence that Amazon is using its platform to control the distribution of more and more of what authors generate.

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Subscriptions are in the news this week


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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All the Amazon-Hachette coverage doesn’t seem to cover some important causes and implications


A great deal has been written in many venues about the current tussle between dominant Internet retailer Amazon and one of the three smallest of book publishing’s Big Five general trade houses, Hachette Book Group. Although neither side has been particularly explicit about the precise points of contention, both what I read and what I hear tell me that the argument is about adjusting the ebook sales terms that were first hammered out in the doomed initial Agency implementation and then modified by a settlement reached under the Court’s direction. That settlement restored Amazon’s ability to discount from the publisher-set agency price (which pretty much defeated the purpose of agency from the point of view of the publishers who implemented it) but did not change the 30%-of-agency-price margin that had been established. Expanding that margin seems to be Amazon’s current objective.

My “position” on all this is that it reveals an imbalance that only the government can fix. I don’t know enough about the law to have an opinion about whether Amazon is abusing its marketplace power in an illegal way (although some seem to think they are), but I am quite sure (and so is an op-ed from the Wall Street Journal) that there is not a lot Hachette (or most publishers) can do to resist Amazon’s demands except suffer and hope the suffering is mutual. Hachette has gotten some recent strong support in the marketplace from some of Amazon’s competitors. Little fledgling retailer Zola started it, but Books-a-Million, Walmart, and now Barnes & Noble have joined to push and discount the books that Amazon is trying to bury. It would surprise me if their efforts covered Hachette for half of what they’ll lose.

Even when I’m credited by somebody else with coming up with a suggestion — raising the author split of ebook revenues so that the publishers don’t wave fat ebook margins in front of observant and powerful retailers — that would have made Hachette’s position stronger had they accepted it, I am dubious that the publishers can do much about this. Nothing publishers can do — or could have done in the past — would change the fact that Amazon controls anywhere from 35 to 75 percent of the sales for most trade books. Anybody with that much market inside its corral can charge a considerable toll for getting inside its gates.

For all that has been written, there are some critical points that I think have not been made as often or as emphatically as their importance warrants.

1. Amazon used the book business to build an enterprise no longer dependent on books. Although the executives at Amazon I know maintain that they have always had a “profitable” book business (and I don’t doubt them), the company has famously been willing to live with less margin than its retailing competitors. That takes the oxygen out of the room for any retailer competing with them within the four walls of the book business. Amazon has skillfully used books as a customer acquisition tool and focused on the lifetime customer value across product types, not the margin that could be earned from the book business alone. There’s nothing morally, ethically, or legally wrong with that, but it has been steadily demonstrated for the past two decades (and acknowledged on this blog years ago) that it makes it very hard, perhaps impossible, for somebody retailing books alone to compete with them.

2. Partly as a result of that, Amazon has changed the book business ecosystem. It was almost certainly inevitable that more and more book business would move online. But the consolidation of all the online business in one place — helped along by Amazon’s skillful integration of the used book business (the dimensions of which nobody knows much about) and their market-making Kindle initiative (more about which below) has created a distribution and revenue-source imbalance that publishing has never had before.

3. Amazon, at great expense and with great vision, made the ebook business happen. Before the Kindle, the ebook marketplace was small and unambitious. The biggest player in terms of sales was Palm, which wasn’t really interested. The most interested party was Sony, which repeatedly tried over more than a decade to establish some sort of ebook device and ecosystem. But Amazon made a significant corporate commitment — creating the Kindle device, pressuring the publishers to make much more of their catalog available as ebooks, and investing heavily in discounted sales and screen real estate to build the consumer market. When B&N with Nook in late 2009 and Apple with iPad and iBookstore in early 2010 entered the market, they were attempting to capitalize on a product class that Amazon had pretty much single-handledly created.

4. Amazon is just about every trade publisher’s largest and most profitable account. (Academic and professional publishers, which operated on “short” or “professional” discounts in their interactions with retailers, have been pushed way up on discounts so this generalization usually doesn’t apply to them.) Amazon is a unique account for publishers. They sell both print and ebooks and they sell them globally. Because they don’t have to stock tens or hundreds of far-flung stores, their efficiency of sales, as measured by their very low returns, is almost certainly the highest among retailers and probably the highest of all accounts (including the wholesalers Ingram and Baker & Taylor, which can also be pretty efficient). Amazon has no interest in being anybody’s most profitable account; what the publisher profitability suggests to them is that their efficiencies are responsible for a lot of margin generation and they are inclined to want more of it. From Amazon’s perspective, being equivalently profitable to other large accounts is “generous” enough. From many publishers’ perspective, the enormous marketplace control Amazon has was built on the back of the publishers’ and authors’ intellectual property. With Amazon now having effectively replaced large components of the marketplace: Borders being gone and Hastings in the process of going, the independent channel a shadow of what it was a decade ago (despite recent signs of “growth” that might just be partial replacement of Borders demand), and B&N — at the very least — slowly shrinking its store footprint, publishers rely on the margin Amazon provides.

The contradiction here, of course, is that the high relative profitability is all created by efficiencies in the (shrinking) print marketplace. Amazon wants to take the margin back on the (growing) ebook side.

5. Amazon wants lower prices for consumers — at least right now. (They’d say it is a core value and they’ll want it forever; there is room for an honest difference of opinion about how they’ll feel about it when their market share rises further.) Everybody else in the book business (authors, agents, publishers, other retailers) want prices at the very least maintained and probably would prefer they rise. This is the crux of the publishers’ problem with the government and with some quarters of public perception. Lower prices for consumers is catnip for politicians. They simply can’t resist it.

6. Amazon pays amateur authors, often unedited, who upload files not yet ebook-ready to them and don’t know anything about marketing or metadata, as much as 70 percent of retail if they meet certain exclusivity and price stipulations. (Obviously, there are great gems among those, but they are still mostly unproven, unknown, and unsuccessful.) They are apparently fighting hard to avoid giving Hachette — which invests substantially to be consistently superior to a fledgling author on all these counts — the same cut.

7. In the course of building the powerful position they now occupy, Amazon both made substantial infrastructure investments and subsidized sales for publishers through heavy discounting, sometimes below the price publishers charged them for the goods (particularly for ebooks in the days before agency pricing). Very few publishers complained about Amazon’s deep discounting of print books in the late 1990s when it began. Amazon’s pricing strategy discouraged many brick-and-mortar retailers from even entering online selling at that time (which, of course, must have been part of the calculus that motivated them to do the discounting the in the first place) but publishers just benefited through greater sales.

8. Hachette is, essentially, tied with Macmillan and Simon & Schuster for third place among the Big Five publishers. HarperCollins is twice as big. Penguin Random House is more like five times as big. This fight is already being costly to Amazon’s reputation among authors (many of whom, including Malcolm Gladwell, John GreenJames PattersonCharlie Stross and Michael J. Sullivan, have been heard from directly) and can’t be well-received among consumers. They’re not likely to try the same tactics with PRH. That means PRH is the most significant beneficiary of what is now going on. If nature takes its course, they should have much better terms than the other big publishers after this round of negotiations over new terms is concluded. That, along with their deepest pockets and excellent execution, puts them in a position to take down their competitors author-by-author, or editor-by-editor.

In some ways, the die for a reshaped publishing business was cast when Jeff Bezos had the vision to get Wall Street to finance an “everything store” (hat tip to author Brad Stone) built on a foundation of book-buying customers. Amazon has plenty of internal justification for believing that their investment and risk-taking has been a huge benefit to publishers for most of the 20 years of their existence. But that doesn’t change the fact that an imbalance exists that will feed on itself. Amazon will grow at the expense of all other book and ebook retailers and Penguin Random House will grow at the expense of all other trade publishers. Smaller publishers have already felt the pain and self-published authors will in the future. That’s what will happen naturally and organically from now on, unless a stronger force intervenes, and on the right side instead of the wrong side the next time.

The last two posts, the most recent one on subscriptions and the prior one about Amazon-Hachette, were not sent out by the Feedburner service that delivers email versions of the posts to subscribers. I suspect this one won’t be either. Until we move to a new distribution capability, I’ll continue to link to the undistributed posts with each new one, as I’ve done here.

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Subscription services for ebooks progress to becoming a real experiment


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

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

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

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

There are three reasons for this.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Inevitable consequences follow from the new hierarchy of power among publishers


The current very public battle over trading terms taking place between Hachette Book Group and Amazon has brought forth surprisingly few recollections by those reporting it (an exception here) of a similar fight last summer between Simon & Schuster and Barnes & Noble.

This is publishing’s near-term future. The two most powerful channels that deliver books to consumers — one dominant in online transactions and one dominant in physical store presence — are determined to wrest more margin, which ultimately also means more pricing control, from their publisher trading partners.

The B&N dispute becoming public was a first for them. The only prior disputes between a publisher and a trading partner that had ever leaked beyond the buyer-and-seller that I can recall involved Amazon, and they were rare. The first was when Amazon took the buy buttons off Macmillan books in 2010. That was a vain attempt to stop the industry from going to agency pricing and it lasted only a few days. They pulled back so quickly from that effort that I concluded that their famous customer-centricity made punishing publishers in ways that were evident to their shoppers (which this one, which also became public, really was not) something they’d decided was not in their best interests.

Drawing that conclusion was apparently a mistake.

What B&N did with S&S, apparently, was simply to stock less of what the publisher was selling and to deny them promotional opportunities. That’s not obvious in a retail store. Books that aren’t there, or which aren’t there in quantity, are not apparent. Bookstores can be out of any particular book at any time without surprising anybody and it would take a uniquely aware book consumer to notice that something new and hot wasn’t displayed as prominently as would be expected.

But Amazon’s action against Hachette was much more visible. Marking Hachette books, which include titles from many very prominent authors, available only with substantial delivery delays, was bound to be noticed by customers and by the industry at large. And, on top of that, pushing customers to consider alternatives to Hachette authors based on price is particularly inflammatory. Authors have reacted publicly. One also has to believe that there must be a substantial overlap between Prime customers, Amazon’s best, and readers of the illustrious Hachette author list, led by James Patterson for fiction and Malcolm Gladwell for non-fiction. But Amazon felt the fight was worth whatever pain they inflicted on their best customers.

I had thought the immediate catalyst for this conflict was that Hachette was the first publisher negotiating a new deal to replace the court-imposed agreements following the agency collusion case. Apparently that is not the case. Nobody is telling me what Hachette is trying to achieve in these negotiations. One would expect that print book margin, ebook margin (often affected by various co-op fees), and ebook pricing flexibility are probably the key moving parts in the negotiation.

But the details don’t really matter. What is important to understand is how, with one exception, the power has passed from the publishers who control the distribution of copyrighted material to the retailers who control the customers. In the past, the pain for the retailer living without ready access to the most commercial books was much greater than the pain for the publisher without ready access to one retailer’s customers. Not any more.

But there is that one exception: Penguin Random House.

One former executive from a big house in a private conversation attributed the fact that PRH doesn’t ever seem to be subject to Amazon’s bullying to the fact that PRH’s second-ranking executive, Madeline McIntosh, had a brief interlude as an Amazon executive between her former and present tenures at PRH.

But I doubt that’s the answer. There’s a simpler one. PRH is too big to bully and nobody else is.

Roughly speaking, PRH has 40-50 percent of the commercial trade books (very few of which are not published by the Big Five). The other four houses divide the rest, with HarperCollins substantially bigger than the other three: Hachette, S&S, and Macmillan. The high-profile books that people would expect to find readily available break down along the same lines, so approximately 50% PRH, 20% HC, and 10% for each of the other three. That means that punishing HC the way Amazon is now doing with Hachette or that B&N did with S&S is about twice as painful in disappointed customers, and punishing PRH would be five times more painful. I suspect that will be the difference between doing it and not doing it.

In the ebook world, where the author royalty is normally a percentage of the publisher’s receipts, giving more margin to channel partners directly affects the authors’ cut. In the print world, most contracts with big publishers are still based on the publisher’s suggested retail price, so the impact is cushioned. But any change that reduces publisher margins is likely to have an impact on authors sooner or later, leaving less in the pot for advances or promotion. I thought a couple of years ago that perhaps it was unwise for publishers to keep so much margin rather than giving it to authors because it made them a fatter target.

Of course, both Amazon and B&N have plenty of reasons to feel justified in pressing for more margin. Amazon, with its low returns, has historically been many publishers’ most profitable account. B&N knows that their stores are “showrooms”, driving sales at Amazon as well as in their own stores. Amazon has no reason to want to be the most profitable account for publishers on the back of their own investments, efficiency, and customer loyalty. B&N wants the publishers to pay for the value they reap from being on B&N shelves that is not resulting in B&N sales.

And both companies have ample reasons to feel financial pressure of their own. Amazon is historically unprofitable and riding a stock price that depends on confidence in their future that they both must continue to justify and maintain a healthy fear of losing. B&N is dominating a shrinking sector and its own vaunted supply chain efficiencies are bound to diminish as both the number of stores and the sales per store continue to decline. Neither of them feel they can afford to subsidize publishers. Both are perfectly comfortable using their marketplace leverage.

So the squeeze on Penguin Random House’s most immediate competitors — the houses I call the Following Four — will continue to tighten. (As will, of course, the squeeze against their less-direct competitors among small and mid-sized publishers.) It seems inevitable that a margin gap between what PRH earns on sales to the industry’s biggest customers and what the others get will grow with every new round of negotiations on terms. I have thought for some time that PRH would create an advantage in proprietary distribution that, combined with its bigger-than-all-others checkbook, would enable them to pluck authors away one by one. Now we see the likelihood of another, more immediate advantage: better margin on every sale from what are already the industry’s biggest accounts.

Over the past decade, we have seen online sales consolidate in one big account and bookstore shelf space consolidate in another. Unless something changes the negotiating climate, the next ten years is going to see similar consolidation on the publishing side.

Amazon is a global company and the tactic of pushing for more margin is not confined to the US. And being the “Penguin Random House of Sweden”, which Bonniers is, apparently does not insulate them from facing the same tactics Hachette is currently coping with.

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It is not news to publishers that they have to engage directly with their readers


Since the merger that has created Penguin Random House, there has been precious little speculation (except by me, as far as I can tell) about what this new behemoth in trade book publishing could do to exploit their scale in new and innovative ways.

Their scale advantage is huge. PRH has something in the neighborhood of half the commercial trade books published, bestsellers and below. (You see numbers as low as 25% for this and most of the time estimates put it around 40%.) For several decades, the big US book clubs — Book-of-the-Month Club and the Literary Guild — demonstrated that having about half the books was “enough” for very large numbers of people to feel comfortable that their choices of what to read from within that group of titles would be sufficient for most of their needs.

My initial hunches, still totally unrealized, were that PRH would launch a subscription service with just their own books and, through the use of vendor-managed inventory, create exclusive channels of store distribution that wouldn’t be available to any of their competitors. (One senior executive from a competitor to whom I described this scenario said candidly, “we’d make our best books available to them for their proprietary channel if it were the only way for us to get the distribution”.)

One PRH executive kindly explained to me the company’s inherent resistance to the subscription model, which would seem to appeal most to the heaviest readers looking for a bargain. As the largest player in the market, PRH isn’t looking to reduce the spending by the people who are the biggest sources of industry revenue, which a successful subscription offer would inevitably do. (That subscription model, or “Netflix for ebooks”, is complex in ways that are often ignored, but which Joe Esposito spells out very clearly.) Of course, that doesn’t mean the company wouldn’t consider it in an environment where subscription services were taking a big part of the audience (certainly not the case yet, but watch what happens if Scribd or Oyster or Entitle or the new Rooster succeed). It does seem to say that they won’t be pioneers in this field. And there is no sign yet that they’re taking up my idea to use VMI to create their own bookstores, either.

But PRH UK — echoing what was said to me by RH US CEO Markus Dohle some years ago — has now announced it is becoming a consumer-focused publisher. Hannah Telfer, who was made “group director, consumer and digital development” in January, says discoverability depends on “building a direct relationship with consumers”. And she claims “our scale” is a key enabler of doing this “properly”. This is refreshing, since most of the industry thinking about how they would use scale seems to be more about consolidating warehouses than getting smarter about talking to consumers.

One article in The Bookseller details staff changes and initiatives around this goal. (And another expresses some skepticism about whether their plans are adequate to the task. That second piece suggests they need to think about selling direct, a recommendation I have expressed some reservations about.) On the one hand, the first article suggests some really broad, company-wide objectives, including “the potential for Penguin Random House to be a cultural and entertainment powerhouse; a home for all audiences”. At their recent sales conference. CEO Tom Weldon described the opportunity for PRH “to create the blueprint for a publisher brand as a consumer brand and, in doing so, capture the attention of the world for the stories, ideas and writing that matters”. That sounds like one big brand.

At the same time, there was clear acknowledgment of the importance of what we call “verticality”, or “audience-centricity”. An “audience segmentation project” was announced. So was cross-imprint attention to specific subjects, with “cookery” and “crime” cited. One tool that it is clear Penguin Random House has and will use is called Bookmarks, described as “the Random House readers’ panel”. New plans call for it to “become a PRH resource, giving all parts of the business access to over 3,500 readers through surveys and focus groups”.

Of course, the more different ways the company wants to use that panel, the more difficult it will be to get meaningful data from it. In fact, it would seem that what is really called for is an ongoing “panelization” process, by which new people are being added all the time to a number of panels that can answer questions about different communities of interest. One panel can’t serve all purposes.

This brings two topics into bold relief that have not historically been part of a book publisher’s thinking or skill sets.

1. It calls for new and nuanced thinking about brands.

2. It calls for a multi-faceted plan for engagement with individual consumers.

Advice directing publishers to think about branding for consumers is plentiful these days. Since I first started thinking and writing about publishing and brands, something disruptive occurred which I wasn’t thinking about at the time: self-publishing. My original notion was that the challenge was establishing brands with clear vertical, audience-centric identities. Probably the best example of doing that successfully in the big US houses has been Macmillan’s establishing of Tor as a brand for science fiction and tor.com as a destination site for science fiction devotees. It is well over two years since I wrote about tor.com having hundreds of thousands of email addresses that they could address with promotions that got very high open rates.

Tor.com gives Macmillan’s science fiction list a clear label of not-self-publishing. But outside Tor, for their general list, Macmillan uses many imprint names. A novel might be published as St. Martin’s, Holt, Farrar Straus, or Thomas Dunne Books (among others), each of which probably has “meaning” to buyers at major accounts, big libraries, and major book reviewers, but which means precious little to the general public. Does the average person know those names better than they know, let’s say, Thomas & Mercer (the new imprint of Amazon) or Mike & Martha Books (a name I just made up)?

(Please note that Macmillan is being used here for illustrative purposes; every major house has the same issues with imprint brands that are really intended as B2B signals, not for the consumer.)

But ultimately, it is important for Macmillan, and for every publisher, to stamp “major publisher” on their books to let the public know “this is from a long-standing and established book publisher” on the assumption, which I would share, that people who don’t know the names would still trust an institution rather than a self-interested individual to “pick” their books.

(Obviously, most people choose their books because of the author, the subject matter, a recommendation from a friend, or even based on some combination of the cover, the description, and the price. How much of the audience would be influenced by knowing that a major publisher was behind the book? We don’t know that, and we don’t know whether that number will grow or shrink based on the always-increasing output of self-published material that has not gone through a publisher’s editing and formatting rigor. And, by the way, doing aggressive branding means the publishers need to pay even more attention to their editing and formatting. Each instance of an inferior branded product hitting the marketplace will weaken the value of the brand.)

So here’s the rule about branding. Each major house should pick one name that is an umbrella. It goes on every book to establish the company as a major source of quality literature, enjoyable reading, and book-packaged information.Trying to target more precisely than that should be the job of the “imprint” brand under the umbrella brand. And that brand should be vertical, identifying subject or audience. That’s Tor in the Macmillan example above. Note that right now Macmillan is not a brand being used by any of the US companies in the Macmillan family.

The plan for engagement with consumers is much more complicated and has many components. One is simply collecting email addresses and permissions to ping people and then utilizing them. Turning almost all the marketing efforts you can into components of an email-gathering machine is a big part of this. This is a game everybody should be playing: all the retailers, all the publishers, and all the authors. We know from recent assignments at our digital marketing business that the smartest literary agents are figuring out how to help their authors do this. We can’t be far from the day when an agent will routinely ask a publisher “how many relevant email names do you have to promote my author’s next book to?”

But email lists, as the PRH UK statements suggest, are just one aspect of consumer engagement. And the statements from PRH also implicitly claim that a much bigger company has advantages in pursuing it. Aside from their ability to analyze existing email addresses among their signups or that they find through other means (hitting their web sites, self-identified in social media) to understand and reach audiences better, large companies can create special interest verticals to pull traffic (driving email signups) and give themselves a range of promotional opportunities. We see Simon & Schuster doing a lot of that kind of work. I’ve become a daily fan of “250 Words”, an email from their new business book web vertical that summarizes the core proposition of a business book every day. Whether that, or other vertical efforts of this type the house is trying, can turn into a remunerative web community or even a good place to get a book launched, is still an open question. But it is the kind of experiment that could produce a launching pad that could really help S&S with business books.

We touched on the notion that creating dynamic panels of consumers to tell you things — things you can ask all the time — is also a real value. We are aware of a niche magazine which routinely uses Twitter to ask its readers for opinions about various things, like what angle to take on a story. They get very fast responses that way. We know that Osprey, the military history publisher, routinely asks its audience for opinions when they are choosing among subjects for development of a book. (And it is relevant to note that Random House UK has hired Osprey’s energetic and visionary CEO, Rebecca Smart, to run their Ebury imprint. That’s another way to employ scale: hire away the best smaller-company executive talent!)

A good approach for a big house that can harvest large numbers of email addresses would be to routinely ask consumers whether they would like to be polled about questions that will guide the house’s publishing and marketing strategies. Doing that would give them fresh names all the time. What Osprey does with their specialist audience could become routine practice to a house with a big enough email list. Consumers could be asked about whether a topic is a good one to sign up before the house makes a commitment. They could also be asked about packaging and pricing. And if that kind of interaction were built into the house’s practice, over time they’d learn when consumer opinions are a good guide to follow and when they’re not (because they won’t always be!)

We are in the earliest days of big publishers changing from near-total dependence on intermediaries to reach their markets to having direct relationships with consumers. For now, most houses are pretty quiet about what they’re doing, partly because they think they’re inventing something and partly because they don’t know how well any of this will work. But relative silence shouldn’t be interpreted as relative inaction or inattention. It isn’t news to the big publishers that they need to talk to audiences directly. Penguin Random House has advantages of size relative to the others in the Big Five, but the rest of them have advantages of size relative to everybody else.

Note to readers: because of glitches and fiddling not worth detailing, the last two posts didn’t go out through our normal email distribution (which makes some people refer to this blog as my “newsletter”!) If you didn’t receive posts entitled “Getting Mark Coker Right This Time…” and “Sometimes One More Calculation…” they are linked here for your convenience.

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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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No-inventory publishing changes everything for everybody and nobody will escape making adjustments


A somewhat overwrought article in Wired calling ebooks an “abomination” because they “price people out of reading” provokes thinking about how much the business models for the trade book business are changing. The article’s weakness stems from its focus on the pricing decisions publishers are making in selling print and ebooks to libraries when those changes are taking place in a larger and indivisible context. The industry is finding less and less uniting what it has been for the past 70 years, since the end of World War II and the advent of paperbacks, and what it will be in a future that is already being disruptive but not necessarily clear.

This is reflected on a micro level in a discussion that arose at our Marketing Conference last week from a question asking “what is a book”? That question used to have a physical answer which described an object, not necessarily describing what content it contained. We’re getting away pretty fast from requiring a book to be printed and bound; the words of an author feel no less real or worthy to many of us coming from a screen. Screen delivery is also relieving the need for a book to have any minimum length, which printed books transacted individually require for physical (we want them thick enough to bind with a spine) and commercial (selling and tracking an individual item practically requires a minimum price) reasons.

I think the questioner in this case was also trying to pull us into a disussion of video, audio, interaction, and linking, which I resist for two reasons. One is that, so far, the preponderence of ebooks that have sold any appreciable quantities have not had any of those attributes. They’re just the same words as in the printed books made reflowable for a screen. The second is that my world is the world of book publishing. My belief is that if books were to become something heavily dependent on video and audio, they won’t be made by people who today are book publishers. They’ll be made by movie studios and animation houses and digital game creators. In that case, discussion of them belongs on some other blog.

Restricting one’s thinking to assume that the future of books encompass only digital versions of what has existed as a book for the past several hundred years doesn’t, by itself, make the future clear. The changes in business models and in the configuration of the industry provide plenty of potential variation that, from my perspective, is more useful (and more fun) to think about than trying to redefine the book itself.

One of the things that has characterized books for me is the incredible diversity of markets they reach. Trade publishing has always had remarkably low barriers to entry compared to other media. It has always been easier to publish a book and make it work on some level than to launch a newspaper or a magazine, or make a movie or a TV show or a record. It costs less and the distribution channels have always been relatively democratic and accessible to outsiders. The cash comes back slowly, and profits are often elusive, but you don’t need a fortune to publish a book.

Because books inherently require a small number of sales to make money (the breakeven point gets raised by big advances to authors, but, if the author guarantee is low, most books will recover core production costs on the sale of a few thousand copies and, in some cases, less than that), they frequently target what any other industry would consider mini-markets. A publisher that mines a niche can profit on something incredibly esoteric. For example, the chances are that Osprey, a military history publisher, has made money on books about wars you’ve never heard of. But their audience has and, because they know their audience, everybody wins.

The giant general trade publishers have built big and expensive machines that can make a book a mass sensation and put it in front of the public in a big way. Other publishers have pursued other models. HarperCollins or Simon & Schuster might pay big money to an author and build an organization that can maximize marketing impact on pub date. Other companies have specialized in a market like craft books or art books or computer books, not paying the same advances and necessarily having a different emphasis in their distribution and marketing strategies.

But what has united all the business models was the commitment to make and market a book, which meant printing inventory. The minimum investment to publish a book was much less than the minimum investment to publish a magazine or a newspaper or to make a film or a record. But there still was an investment.

And that brings us back to something that made books special for their authors: the prestige conferred by somebody (preferably somebody highly professional with a brand name like some publishers have) making a unique investment in their content. That’s an investment that’s not sold as part of a magazine, or on the back of a star’s name, but in one person’s work: the author’s. When the subject of what a book was came up at our conference, one observation from a publisher of books about public affairs was how much the speaking fees of their authors went up when a book of theirs was published. The mere fact of the book conferred credibility on the author that raised their value in the marketplace, regardless of how the book sold. (Or didn’t.)

This is something inherent to the definition of a “book”. This is, also, likely to change.

The core change in publishing economics that will ultimately change the shape of the commercial industry is that the already-low investment required to publish a book has plummeted even further. As printed books become less important, then the investment required to fund them becomes less important too. Already we have seen many authors — I’ve written about John Locke and hosted Hugh Howey on the Digital Book World stage, but there are scores of others — build a career as an author without any significant print sales. We have seen other authors with long backlists, some who had only achieved modest success for publishers, turning the opportunity for higher margins and direct audience contact into financial bonanzas in digital publishing.

Repeated demonstration of the fact that it is totally possible to achieve fame and fortune as a writer without a publisher does not escape the attention of any author. Many literary agencies, the players closest to the hopes and aspirations of narrative text book authors, have been gearing up to provide digital services, primarily at first for established authors who want to self-publish their backlists. But by doing this they also create leverage for their authors in their negotiations for bigger advances and better terms from publishers, and they stamp themselves as able to continue to serve an author who decides publishers are no longer for him or her.

That means that publishers, who would theoretically always have been interested in maximizing a book’s revenue for the author and themselves, are goaded more than ever to do so. That in turn means every aspect of the business model gets questioned. Are library ebooks cannibalizing the sales of ebooks from stores? Might they? The question has to be asked. Does the fact that ebooks don’t wear out with repeated lending, as printed books do, require some different policy to make a library pony up again for frequently-loaned book? (HarperCollins has introduced such a policy.) Should a library that uses its copy of an ebook to satisfy many readers pay more than an ebook reader who has practical (and contractual) barriers to sharing? (Random House is trying this.) While some authors are asking themselves whether publishers are essential for them anymore, which makes sense, doesn’t it also make sense for publishers to be thinking hard about how the digital revolution might change their relationship with libraries?

In fact, nobody in the value chain in between the author and the reader of a book can be complacent about their position: not the agent or publisher or library, but also, quite obviously, not the bookstore, online or physical. The printer and warehouse operator must expect a shrinking share of the book business. No-inventory publishing, by lowering the barriers to entry for a written book of narrative text nearly to zero, is assuring that an ecosystem built around the reality that book inventory was the industry’s greatest cost will change profoundly.

The assertion that ebooks are making books less affordable to most people is total hogwash. For every book not available to be lent as an ebook by a library, there are probably ten from established publishers that are half the price they were before, to the consumer and to the library. And there are countless others which would not have been published before available directly from authors, which their sales tell us are valued by many readers, that are dirt cheap, priced less than the commercial transaction system for print could even consider. And the books the author of the complaining article wrote about that come with higher prices or some sort of other licensing restrictions as ebooks, are still (at least for now) still available in print at the long-traditional prices and terms.

We’re going to see marketing departments of publishers expand and sales departments contract as book distribution patterns change. We’re going to see more and more commercially viable titles launched with a no- or little-inventory-in-place model, starting with ebooks and print-on-demand availability as a low-risk launch strategy. We’re going to see books launched as serials, growing to a length determined by audience response, not based on a pre-publication plan. We’re going to see booksellers and libraries publishing and publishers building on book audiences to sell other things. And we’re going to see more and more virtual sources of books for consumers: publishers selling direct, of course, but also did you notice that Tesco is now in the game?

We’re going to see a lot of change as players of all sizes, in all parts of the publishing value chain, adjust to the “weightlessness” of a business shedding and shifting its biggest capital requirement: inventory cost. Picking on one tactic or another by one player or another, particularly from the perspective of preserving legacy behavior, is not likely to be very illuminating or helpful. The ability to put a book into the marketplace in a way that can reach more than half its audience with no inventory investment, making it possible to sell books and rights globally and only later, if it is warranted, put a bigger bet down on the book — combined with the increasing number of entities that have knowledge that could inform content and direct contact with a real market — is going to be transformative. Everybody in the chain but the author and the reader are fighting for their lives.

Smart publishers recognize that they have to completely rethink their business models and propositions in a no-inventory publishing world. Authors and agents are doing the same thing. So are many bookstores and libraries. The players in the publishing ecosystem who don’t rethink their business practices in fundamental ways will probably be relieved of the burden of thinking about them at all before long.

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


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

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

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

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

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

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

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

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

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

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

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

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

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