Steve Jobs

The “Big Change” era in trade book publishing ended about four years ago

Book publishing is still very much in a time of changing conditions and circumstances. There are a host of unknowables about the next several years that affect the shape of the industry and the strategies of all the players in it. But as publishers, retailers, libraries, and their ecosystem partners prepare for whatever is next, it becomes increasingly evident that — from the perspective of trade publishing at least — we have already lived through the biggest period of transition. It took place from sometime in 2007 through 2012.

At the beginning of 2007, there was no Kindle. By the end of 2011, there was no Borders. And by the end of 2012, five of America’s biggest publishers were defending themselves from the US Department of Justice. The arrival of Kindle and the exit of Borders are the two most earthshaking events in the recent history of book publishing and its ecosystem. The Justice Department suit first distracted and then ultimately strait-jacketed the big publishers so it was both difficult to focus and then difficult to react to further marketplace changes.

Paying close attention to what we then called “electronic publishing” started for me in the early 1990s, with a conference other consulting colleagues and I organized for Publishers Weekly which we called “Electronic Publishing and Rights”. This was before Amazon existed. It was when the big transition taking place was from diskettes to CD-Roms as the means of storage. And it was even before Windows, so the only device on which you could view on a screen anything that looked at all like a book was a Macintosh computer, which had literally a sliver of the market. The most interesting ebook predecessor was the Voyager Expanded Book, and it could only be used on a Mac.

In this speech I gave in 1995, I put my finger on the fact that online would change all this and that publishers shouldn’t spend too much energy on CD-Roms.

The period from then until when it was clear Kindle was establishing itself — the awareness that it was for real slowly dawned on people throughout the year 2008 — was one where the inevitability of some big digital change was generally acknowledged. But dealing with it was the province of specialists operating alongside the “real business” and largely performing experiments, or getting ready for the day when it might matter. There was a slow (and inexorable) shift from store-purchasing to online purchasing. And the online purchasing almost all went to Amazon. But even that wasn’t seen as particularly disruptive. Neither ebooks nor online purchasing called for drastic changes in the way publishers saw their business or deployed their resources.

The first important new device for books in 2007 didn’t start out as one at all. It was the iPhone, first released in June of that year. Although Palm Pilots were the ebook reader of choice for a big chunk of the then-tiny ebook community, they lacked connectivity. The iPhone was not seen as an ereader when it came out — indeed, Apple head Steve Jobs still believed at that point that ebooks were not a market worth pursuing — but they could, and did, rapidly become one when it was demonstrated that there was a market. And they vastly expanded the universe of people routinely paying for downloaded content, in this case music from the iTunes store.

Then Kindle launched in November of 2007. A still unannounced number of Kindles sold out in a few hours and Amazon remained out of stock of them for several months! Because the original Kindle was $399, it was only a “good deal” for the consumer who read many books on which they could save money by buying electronic. What this meant was that Kindle owners bought ebooks in numbers much greater than the relatively small number of devices placed would have suggested. Throughout 2008, the awareness dawned on the industry that ebooks were going to be a significant business.

And that awareness rapidly shook loose a raft of competition. Barnes & Noble saw that they had to compete in this arena and started a crash program to deliver the Nook, which first appeared almost precisely two years after the first Kindle, in November 2009. Months earlier, Amazon had released the app that put Kindle on the iPhone. Meanwhile, Jobs had become persuaded to take ebooks seriously, and, anyway, he had a store selling content downloads to devices like crazy. Now, about to launch his new tablet format, the iPad, he had what looked like the perfect vehicle with which to launch ebooks. The iPad and the iBookstore debuted in April 2010. A month later, Kobo entered the market as a low-priced alternative with their first device. And by the end of the year, Google reorganized and rebranded what had been Google Editions into Google eBooks. The original concept was that they would populate the readers that were using epub, which meant Nook and Kobo at that time.

All of this change within three calendar years — 2008 through 2010 — created a blizzard of strategic decisions for the publishers. Remember, before all this, ebooks were an afterthought. Amazon had applied pressure to get publishers into the Kindle launch in 2007. Before that, no publisher that I can recall made any effort to have ebooks available at the time a book was initially launched. There were workflow and production changes (XML FIRST!) being contemplated that would make doing both print and digital editions a less onerous task, but they were seldom fast-tracked and doing ebooks meant taking on and managing a book-by-book conversion project.

During the period when Amazon was pretty much alone in the game (the pre-Amazon market leaders, Sony and Palm, faded very quickly), they started pricing Kindle titles aggressively, even willing to take losses on each sale to promote device sales and the ecosystem. This alarmed publishers, who were seeing small Kindle sales grow at what were frightening rates and raising the spectre of undermining their hardcovers. It didn’t hurt that the retailers with whom they (still, then, though not now) did most of their business were also alarmed. Nook arrived and Barnes & Noble would never have been as comfortable as Amazon with selling these new products at a loss. But B&N also worried about the impact that cheap ebooks might have on more expensive print book sales. Amazon didn’t.

So when Apple proposed in late 2009 and early 2010 that there could be a new way to sell called “agency” which would put retail pricing power for ebooks into the publishers’ hands, it met a very receptive audience of publishers.

And that, in turn, led to the Department of Justice’s lawsuit against the big publishers which was instituted in April of 2012.

Coinciding with and enabled by all of this was the huge growth in author-initiated publishing. Amazon had bought CreateSpace, which gave them the ability to offer print-on-demand as well as Kindle ebooks. The combination meant that a huge audience could be reached through them without any help from anybody else. When agency happened (2010), they started to offer indie authors what amounted to agency terms: 70 percent of the selling price for ebooks. This was a multiple of the percentage an author would get through a publisher.

Agency pricing fell right into Amazon’s and the self-published hands. Getting 70 percent on the ebook, the indie author got $2.10 pricing at $2.99 and $2.80 pricing at $3.99, royalties comparable to what they’d get from full-priced print. Many bestselling indie ebooks were priced at $0.99. The very cheap ebooks indie authors would offer juxtaposed against the publisher’s agency up-priced (many at $14.99) and undiscounted branded books created a market opening that allowed the Kindle audience to sample (aside from the free chapter that is standard in ebooks) cheap ebook authors for peanuts. Suddenly, names nobody had heard before were on the map, selling millions of ebooks, and taking mindshare away from the industry’s output. And it also handed the publishers’ authors an alternative path to market that could only have the effect of improving their negotiating position with the publishers.

Meanwhile, Borders sent the most persuasive possible signal that the shift in sales from stores to online, accelerated by the ebook phenomenon, was really damaging. They went out of business in 2011. That took the account that sold upwards of 10 percent of most publishers’ books, and a far greater percentage of the bookstore shelf space for backlist, off the board. Or, viewed another way, publishers went from two national retailers who could place a big order and put books in front of the core book-buying audience to one.

So the authors’ negotiating position was stronger and so was Barnes & Noble’s.

And all of those events — the devices, the ebook surge, the introduction of the agency business model, and the Department of Justice suing most of the big publishers, a very noticeable rise in successful independent publishing, and the increased leverage of the trading partners with whom publishers negotiate their revenues and their costs — were head and body blows to the titans of the industry. Every one of them threatened the legacy practices and challenged the legacy organizations and resource allocations.

During this period, Random House (the number one publisher) merged with Penguin (the number two publisher) and created a super-publisher that is not far from being as big as the four remaining members of what were called “The Big Six” in 2007. If you are viewing the world from the perspective of HarperCollins, Simon & Schuster, Hachette, or Macmillan, that might have been the biggest development of all.

Compared to the sweeping changes of that era, what has happened since and what is likely to happen in the next couple of years is small beer. There are certainly clear trends that will change things markedly over time.

Amazon continues to grow its share, and they are around 50 percent of the business or more for many publishers these days.

Barnes & Noble is troubled but in no immediate jeopardy and is still, by far, the number one brick-and-mortar account for publishers. But the optimistic view is that their book sales will remain flat in the near future.

Independent bookselling continues to grow, but even with their growth since Borders went down, they are less than 10 percent of the sales for most publishers. It is true that ebook sales for publishers have flattened (we don’t know the overall trend for sure because we don’t really know the indie sales at Amazon, and they’re substantial) and don’t seem likely to grow their share against print anytime soon.

These things seem likely to be as true two years from now as they are now. Nothing felt that way in from 2008-2012.

Digital marketing, including social network presence, is an important frontier. The industry has a successful digital catalog, called Edelweiss, which has obviated the need for printed catalogs, a cost saving many publishers have captured. And another start-up, NetGalley (owned by Firebrand), has organized the reviewer segment of the industry so that publishers can get them digital advance copies of books, which is cheaper and much more efficient for everybody.

Owning and mining email lists is a new skill set that can pay off more each year. Pricing in digital seems to offer great opportunity for improved revenue, if its effects can be better understood. International sales of American-originated books are more accessible than they’ve ever been as the global network created by Ingram creates sales growth opportunities for just about every publisher. That should continue and requires new thinking and processes. Special, or non-traditional, markets increase in importance, abetted by digital marketing. That will continue as well.

Audio, which has been one of the big beneficiaries of digital downloading, will continue to grow too. The problem from the publishers’ perspective is that Audible, owned by Amazon, owns most of that market. So they have a sophisticated and unsentimental trading partner with a lot of leverage controlling a market segment that is probably taking share from print and ebooks.

And with all of this, what will also continue to grow is relentless margin pressure from the publishers’ two biggest accounts: Amazon and Barnes & Noble.

But the challenges of today aren’t about change of the magnitude that was being coped with in the period that ended five years ago. They’re more about improving workflows and processes, learning to use new tools, and integrating new people with new skill sets into the publishing business. And there are a lot of new people with relevant skills up and down the trade publishing organizations now. That wasn’t so much the case when things were changing the fastest, 2007-2012.

It isn’t that there aren’t still many of new things to work on, new opportunities to explore, or long-term decisions to make. But the editor today can sign a book and expect a publishing environment when it comes out in a year or two roughly like the one we have today. The editor in 2010 couldn’t feel that confidence. The marketer can plan something when the book first comes up for consideration and find the plan will still make sense six months later. And while things still very much in flux in sales, a blow comparable to the loss of Borders isn’t on the

Of course, there could always be a black swan about to announce itself.

This post explains why, among other reasons, I will no longer be programming the Digital Book World Conference, as I did for seven years starting with its debut in 2010. At its best, DBW anticipated the changes that were coming in the industry and gave its attendees practical ways to think about and cope with them. Future vision was a key perspective to programming although we always strived to give the audience things they could “take back to the office and use”.

It has been harder and harder over the past couple of years to find the big strategic questions the industry needed answers to. The writing was on the wall last year when most of the publishers I talked to felt confident they understood where books were going; they wanted to hear from other segments of the digital world. That was a sign to me that the educational mission I had in mind for DBW since I started it was no longer in demand.

To their credit, the DBW management, as I understand it, is trying a new vision for the show, more focused on the immediately practical and the hands-on challenges of today. I wish them the best of luck with it.


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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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


Trying to explain publishing, or understand it, often remains a great challenge

I went to the In Re Books conference at New York Law School last Friday and Saturday in hopes of curing some of my ignorance about the law and publishing. I learned some things, including the facts about a very interesting case involving a book publisher, the associations of publishers and booksellers, and a large general retailer that took place over a century ago and anticipated a lot of what we’re seeing today as the other players in the industry battle the power of Amazon.

But I’m afraid my major takeaway was, once again, that the legal experts applying their antitrust theories to the industry don’t understand what they’re monkeying with or what the consequences will be of what they see as their progressive thinking. Steamrollering those luddite denizens of legacy publishing, who just provoke eye-rolling disdain by suggesting there is anything “special” about the ecosystem they’re part of and are trying to preserve, is just part of a clear-eyed understanding of the transitions caused by technology.

So perhaps we have symmetrical ignorance and will never understand each other.

The conference was lively and well organized. The speakers were articulate and well prepared. There were two panels I wish had taken place in a different order.

On the first day, the In Re Bookstores panel had an antitrust lawyer who fully supported the Justice Department’s case against the publishers, although he seemed to be attacking the Agency model itself, rather than the collusion which, as I understand it, was the core of the government’s case.

But it was only on the very last panel of the conference, on the second day, that two speakers created some meaningful context for the whole discussion. Author James Gleick made a clear and cogent case for the agency model. (Essentially: because there is no investment in inventory or shelf space by the retailers, it is more sensible to consider them “agents” of the publishers than retailing intermediaries equivalent to what we have for print, where substantial investments are required and are at risk.) And Professor John B. Thompson of Cambridge, author of “Merchants of Culture” who is, as far as I know, the single person who has spent the most time and effort learning about trade publishing and synthesizing a coherent view of it, made it clear that Anglo-American trade publishing has challenges which make it unlike other endeavors, even other book publishing endeavors.

So that gives me three things to elaborate on: the blatant misunderstandings about the industry and its concerns about the DoJ case which came from the bookstore panel; the old publishing case that is so resonant with current circumstances; and a reprise of Thompson’s cogent analysis.

The lawyers speaking on the bookselling panel (and lawyers were dominant on just about all the panels; this was, after all, an event staged by New York Law School) were dismissive of the argument that any special treatment for publishing was called for because of the nature of our business. Then they proceeded to get two things startlingly wrong:

1. They dismissed the idea that any “predatory pricing”, i.e. sales of books below cost, ever took place. There was a wee bit of wiggle room there, where they might have meant “in the aggregate” as opposed to “title-by-title”. But they never made that distinction clear and, if that’s what they meant, there was further explanation called for. One is left with the impression that they simply didn’t understand that Amazon was paying publishers $12 or $15 for ebooks they were selling for $9.99. (And, in fact, there were far more dramatic examples of loss-leading than that!)

2. They seemed to think that the concern on the part of those opposing the DoJ was that Amazon would only lower prices to gain market share and would then exercise predatory behavior by raising prices to a captured market. That, actually is not the concern. Or at least it isn’t mine.

As I tried to spell out in a talk in Washington last July, what is concerning is that Amazon will restructure the pricing of books so that the profit for publishers is squeezed out, robbing us of a publishing ecosystem that invests in unwritten books tens of thousands of times a year. My argument and fear is that a restructured ecosystem will deny us books like Walter Isaacson’s Steve Jobs biography or Ron Chernow’s George Washington. Books that take years to write and require hundreds of thousands of dollars of financing to be written will never see the light of day if publishers can’t earn a profit by investing in their creation.

This is an argument and a concern which the attorneys on the platform at this conference made explicitly clear they never entertained. I don’t think the ones in the DoJ did either. Perhaps this has no bearing on the law, but I wish they’d stop trying to tell us the concerns of the industry are just the same old crap coming from a different source when they haven’t taken on board what we’re actually saying.

I tried to inject some of these facts and thoughts from the floor, as did a woman from a Big Six house who was similarly frustrated by the twisting of the reality to fit the antitrust narrative. The moderator cut me off from pressing the argument (which was appropriate; I hate it when people use the rubric of q&a to make their case from the floor at my conferences too!) But for the rest of the conference, at every break people from publishing houses kept thanking me for making the attempt to inject reality about our business into the discussion.

The old publishing case was Bobbs-Merrill versus Straus from the first decade of the 20th century. It seems that Macy’s, the department store that sold just about everything, also sold books at at discount. Bobbs-Merrill posted a notice in its books that the retail price was set at one dollar and that selling below that price constituted a violation of copyright. The Straus brothers, who owned Macy’s, insisted on selling these books for eighty-nine cents.

Both the trade association of publishers and the trade association of booksellers supported Bobbs-Merrill’s position, but the courts did not. There was a “horizontal” as opposed to “vertical” price-fixing angle explained from the stage that I didn’t fully grasp, but we can all appreciate both the irony and distinctions between this case and our present conversations.

Clearly, Macy’s was the Amazon of the time. They saw books as commodities — nothing special — and they simply extended their business model of offering lower prices to cover books. From the perspective of publishers, they were cheapening the perceived value of the intellectual property. From the booksellers’ point of view, they were subsidizing book sales with their ability to sell other things and clearly constituting a threat to what was then a very tiny bookselling network. So the entire publishing community of the time opposed the price reductions being offered by an interloper. In that way, they were creating the same price-fixing “problem” DoJ was “solving” with their lawsuit against Apple and the publishers.

But the difference, as explained by James Gleick a day later, was that the bookstores and Macy’s were, indeed, buying these books from the publishers (and, at that time, they might not have had a returns convention to cushion them from bad buying decisions) risking — or at least tying up — capital to provide stock to the public. In the case of ebooks, that isn’t true. No capital or shelf space (which also costs money) is tied up; all the retailer does is accept and display metadata and pay for the “goods” at some point after the customer pays for them. So the justification for the price-setting in the two cases is quite different.

Still, it was interesting seeing that history was — in a way — repeating itself 100 years later.

And now to Professor Thompson. He interviewed me a few years ago for his book “Merchants of Culture”, which has been out for a few years but which I’m just starting now to read. (Shame on me.) Thompson provided two absolutely fundamental pieces of information which could have been infinitely more helpful to the audience if they had come as the first thing on the program rather than the last.

1. The trade book business is quite different from other segments of the book business and has little in common, as a business, with school or college text or academic or professional publishing. Thompson made it clear that knowing one segment doesn’t mean you know another. After two days of hearing librarians complain that publishers were dissing their “biggest customers” because of the big houses’ concerns and restrictions on ebook sales to libraries, it was good to have somebody explain that publishers were different. In fact, libraries — relatively speaking — are not very large customers for general trade book publishers.

2. Thompson also emphasized — and this was critical insight coming, as it did, from the single speaker most knowledgeable about the transition trade publishing is making from print to digital reading — that nobody knows the future course of ebook adoption. Will it remain, as it is, in the 20% range for general trade reading? Will it go to 30%? 50%? The fact that nobody knows the answer to that question means that publishers’ policies have to accommodate uncertainty about a critical component of the publishers’ future commercial reality.

A couple of other points Thompson made bear repeating. One is that he sees big Anglo-American publishers fighting off threats to their margins. But he thinks the main source of margin erosion for American publishers is the agents, who exercise their power to drive up the cost of acquisition for the most desireable books; whereas for British publishers the source of the biggest problems are the big book retailers, particularly the supermarkets. It is ironic that America’s Robinson-Patman Act, which by requiring manufacturers to offer the same terms to like customers aims to protect small merchants, is actually the shield which protects American publishers from facing ever-escalating demands for margin from their largest accounts.

And Thompson showed a chart tracking the percentage of sales that were ebooks for trade publishers, year by year. The numbers were:

2006 0.1%
2007 0.5%
2008 1%
2009 3%
2010 8%
2011 20%

So the multiple from prior year sales is:

2006-07 5x
2007-08 2x
2008-09 3x
2009-10 2.7x
2010-11 2.5x

The indications are that when we get the report on 2012, it will be about 30%, or 0.5x.

No wonder Thompson makes it plain that we don’t know what’s ahead of us. Did you think that the rate of switchover would drop by 80% this year over last? I didn’t.

The big news of the past few days, of course, is the proposed new Penguin Random House entity. I think the only surprise here is that it has taken so long for a Big Six merger to occur since the last one (which was when Bertelsmann, owners of Bantam Doubleday Dell, bought Random House in 1999). My back-of-the-envelope arithmetic says that PRH is bigger than the other four of the formerly Big Six combined. So I’d expect to see further mergers, but the title of “biggest trade publisher in the world” is secure for the foreseeable future.


Competing with Amazon is not an easy thing to do

Amazon has three pretty powerful things going for them, and two are entirely their own doing.

Number one: Amazon is, by far, the most book-industry-focused company that is actually active in endeavors much larger than the book business. Barnes & Noble and Ingram are just as focused, but they really don’t go beyond the book business. Google and Apple are, like Amazon, leveraging their book activities into other areas and vice-versa, but they have nowhere near the presence in the book business that Amazon does. (Kobo, which is focused on the book business but has just been bought by a much larger Internet retailer, is still a bit of a wild card in this regard.)

Number two: Amazon executes. Their hardware and software and platforms and content delivery all work just about perfectly. It seems odd to me that, at this relatively late date in the ebook switchover, Amazon is still the only place I can shop for ebooks and see my choices arrayed by (highly granular) subject with the most recently published books on top. (Note to all competitive retailers: please let me know the minute your shopping experience can offer the same thing!)

Number three: Amazon is the runaway market leader in the only two segments of the book business that are growing — ebooks and the online purchasing of print — and they are cleverly leveraging the leadership position they have to make challenging them even more difficult in the future. Their willingness to take losses on some transactions to grow share, on Kindle devices to lock customers into their ecosystem and on eboooks when they can to emphasize they are the low-cost provider, is supported by the wide array of products, in media and far outside, on which they don’t need to sacrifice margin for competitive advantage.

Amazon’s industry focus is natural, since books is where they started (even though books are now a fraction of their business). Their history gives them the presence and the knowledge to be highly disruptive. They know how to go after authors directly (apparently even more effectively than Barnes & Noble, which has been signing up content on a proprietary basis for well over a decade and actually owns a publishing company). They use price as a weapon to sell books, disadvantage competitive retailers online and in stores, and to lock in customer loyalty for print (with their Prime program) and ebooks (with their proprietary Kindle platform).

Amazon’s execution has been a keystone of their success from the very beginning, from their invention (or at least early use) of a database for “discovery” even larger than their supply capabilities (they wanted the customer to know when a book they wanted was no longer available, so they could choose something else), promise dates for delivery that were almost always met, customer service that aggressively solved every problem, and intuitive navigation and execution that did for online retailing what Apple did with hardware and operating software. And when Amazon decided to do hardware, they might not have made anybody forget Steve Jobs, but they have apparently made his company address the Kindle Fire with a pricing response on their iPad.

But none of this would worry the rest of the publishing ecosystem — publishers, retailers, and agents — if it weren’t for the fact that everything in publishing seems to be flowing downhill toward a future where the vast majority of what people read as books is both found and purchased (and often consumed) online.

Actually, there are two more important components to Amazon’s success: their lack of involvement in the most capital-intensive elements of the legacy book business (press runs and returns as a publisher, brick stores as a retailer) and their brilliance at acquiring companies that might have provided platforms to cause them trouble. There have probably been many of those (and they are very graphically represented here) but I can immediately point to three:

* the acqusition of Mobi ten years ago took the one format that could have united the ebook market, then divided between the Palm and Microsoft formats, out of circulation before some other retailer (specifically: Barnes & Noble) could have served the entire marketplace and perhaps made ebooks accelerate many years before the Kindle;

* the acquisition of Lexcycle which gave them Stanza, an ebook platform that was extremely consumer-friendly and cross-platform, which could have constituted a threat to Kindle’s development when the Amazon format was in its infancy;

* the acquisition of The Book Depository, an global onliner retailer of print that had developed technology and logistics that would have made it a great foundation for competing with Amazon for global book sales, which was done at the very time that three major publishers on each side of the Atlantic were investing in competitive retailing enterprises (Bookish in the US and Anobii in the UK).

The Book Depository acquisition was very well timed, coming as it did just as there are signs that the British public would really prefer to buy its books online, that the French (like the rest of Europe, we’re sure) are beginning to seriously enter the digital book future, and that the Swiss are starting to worry about the decline of their brick book business.

It is natural that any player who has made the bet that brick-and-mortar bookstores have a future would be hostile to Amazon. It is becoming increasingly obvious that technology is enabling Amazon not just to persuade book customers to shop with them, but also to buy from them when they’ve shopped elsewhere.

I am entirely sympathetic with Tim O’Reilly’s admonition that we should “buy where we shop”. Note that Tim made this point almost a decade ago, when the suggestion being made by me (among others) that bookstores were seriously threatened by digital change was dismissed by most people in the industry.

But it being right doesn’t make it so.

Publishers have a valuable proposition to offer authors as long as Amazon is one of a diversified set of paths to the purchasing consumer. In today’s world, where print is still 70% of the sales of even most straight text books and most of the print is still sold in stores, an author who has the opportunity to work with a regular publisher makes real a sacrifice of market exposure to work directly with Amazon. Even if Amazon were to eschew its Kindle-only insistence on ebooks for titles it signs directly through its imprints (and we hear rumors from the deal-making world that they might on a selective basis), Amazon would still have a great challenge getting exposure for one of its titles through brick outlets. (Some research by Laura Hazard Owen documents the difficulty they’ve had with that so far.) And one important thing Amazon hasn’t learned from its experience is how to meter inventory into stores to maximize marketing exposure but keep returns manageable.

But the publishers’ advantage here has a shelf life. For online sales, individual authors are becoming persuaded that Amazon gets them more than the other outlets combined. Barry Eisler has expressed great satisfaction with his Amazon-only sales. Another author, Robert Niles, reports that Amazon far outsells all the other ebook retailers for his self-published work and thinks it is because Amazon promotes the self-published author more effectively.

When you read through this thread from Amazon’s online forum among authors discussing what happens when the retailer picks one of their books for a price promotion, you get a sense of the excitement they generate through the sales they can create with tools which are uniquely at their disposal.

What that probably means is that more and more authors will be available exclusively through Kindle, some because an Amazon imprint signed them and others because they don’t bother to put their books up on other sites for paltry sales. If that happens, Amazon’s natural advantages just grow.

Although Anobii’s founding CEO, Matteo Berlucchi, tells an imaginative and persuasive story about converting the social aspect of books into a commercial proposition (which has been the effort of independent start-up Copia for the past year), I think the challenge for them and for Bookish, the US version of a publisher-sponsored online book retailer, is steep. The problem for them is the same as B&N’s; Amazon brings resources and ammunition to this competition that stem from a much bigger base than the book business alone. They can use books as loss-leaders to sell more movies or computers or groceries. (By the way, this is exactly what brick book retailers coped with competing for bestseller business with mass merchants who could sacrifice margin on books that brought people into their store because they could make it up on other items.)

There is really only one way for publishers to compete with Amazon for authors in the future and that’s to find book customers Amazon doesn’t have, either by working through other retailers or by creating direct publisher-to-customer contact. The percentage of sales which go to Amazon is the single most important barometer of a book publishing company’s future. Of course, every publisher wants to make their Amazon sales grow. Their challenge is to make other sales grow faster.

Of course, the retailers are a critical focus for us at Digital Book World at the Sheraton in New York, January 23-25. We’ll have presentations from Amazon, B&N, Kobo, Google, Bookish, Anobii, Copia, and from some independent booksellers. We’ll have a panel of players talking about creating new markets, globally and locally. And we’ll have publishers talking about creating communities in genres and in topics, building their capabilities to talk directly to their customers without an intermediary’s help. 


New ways to sell ebooks aren’t easy to implement

A simple and perfectly sensible suggestion emerged on the Brantley email list yesterday but the conversation around it showed that some stark realities about the book world have not yet been taken on board, even in very sophisticated circles (which this list is.)

The list discussed a suggestion from librarian Josh Greenberg  that publishers take note of the “rental” model built into the iTunes store as an alternative way to collect money from readers for ebooks.

Greenberg’s piece calls out a fact that many people in publishing have a great deal of difficulty with: that all ebook sales must be licensing deals. They can’t be anything else. Greenberg says:

“When we think about iTunes, we think about a basic fee-for-purchase model. We’ll just leave aside the fact that you never truly “own” a digital file, you’re just buying a particularly-structured license to use it…”

He’s right. When you deal in printed books, you have a tangible object. When you deal in ebooks, you only have “code”. The first sale doctrine says you can re-sell the book or lend it or share it. But copyright law says you can’t re-sell, lend, or share copyrighted “code.” Many digerati (and many librarians not named Josh Greenberg) refuse to acknowledge this distinction.

But that’s a legal point, one that can be debated until a court or a Congress makes a ruling (and then beyond, actually, since we continue to fight battles even after courts or Congress have rendered their conclusion.) The challenge to Greenberg’s idea of switching to a rental model is not so debatable. It’s practical.

Implementing new models for book sales requires herding cats. It can never be done fast and many business ideas relating to content have foundered because it couldn’t be done at all.

What should be clear to anybody who has been following developments since the days a decade or more ago whenRocketbook and Softbook and Sprout were trying to get publishers to give them rights for their content propositions is that it takes a very persuasive sales pitch to get publishers to do so. That sales pitch must be delivered publisher by publisher, and then the impressive ability of publishers to discuss a problem to death takes over, and the new proposition might itself die before its owner gets an answer. Or certainly before its owner gets enough answers to get the new idea off the ground.

What was further made clear by the participation of agents at Digital Book World, and particularly by the opinions expressed by superagent Robert Gottlieb on the ebook “timing” panel, is that the publishers don’t make this decision without consulting with their upstream gatekeepers. Gottlieb made clear that a) it takes a very small number of lost hardcover sales to make an author’s book slip notches on the New York Times Bestseller list, b) he and his authors believe that a much cheaper ebook, or perhaps any ebook at all not reported as a hardcover sale, can make that critical difference between being Number 1 or being much further down the list, and c) the difference in several places on that list is worth losing some sales over.

So just imagine how Gottlieb and his star clients (and all the other agents and star clients) would react to a rental model!

Let’s add one more point before the next great suggestion is made. The same thing will be true of an even better model than rental (which also has plenty of precedent in media even closer to publishers, audio books): subscription sales.

The switch that Apple has made to the “agency model” is not of equivalent complexity from a business perspective. There we’re still “selling the book” (although we’re really licensing access to a file) and the amount of money flowing to the publisher is comparable. But, even there, the switch will not be simple. Publishers have signed contracts governing almost all their ebook sales (which is a further demonstration that this is different from selling physical books, for which signed contracts between publishers and vendors is by far the exception, not the hard and fast rule) which one could imagine the purchasing party (Amazon, Ingram, Content Reserve, Barnes & Noble, Kobo) believes prevents the publisher from changing the rules in the middle of the game.

What Michael Cader reported last week which we expanded on in a blog post and a CNN interview is that publishers can use the new agency model to hold back books from channels where they can’t control the pricing. This very much underreported exchange between Steve Jobs and Walter Mossberg of the Wall Street Journal makes it very clear that Apple expects vendors who would undercut the pricing publishers set for them will be denied access to the content.

We can look forward to continued battles over pricing and over the terms of sale between publishers and the downstream players in the ebook supply chain. But I think it will be a while before real alternative distribution schemes to the public make any appearances. In fact, they’re likely to occur in vertical niches first, where the big agents are less involved and the number of publishers one needs to get on board is something less than “just about all of them.”

A quick thanks to everybody who attended Digital Book World (and there were a lot of you.) I am hoping that the fact that all I’ve heard is praise and enthusiasm for the two day event is not just a result of people being kind to the guy who put the program together. I think we really did generate discussion on some issues that had previously been neglected. But most of all I’m proud of the job we did selecting panelists; everyone I saw presenting was smart, well-prepared and entertaining. Some we had seen in front of audiences before; some we only knew through our interviews in person or on the phone. But picking them carefully and one by one certainly seemed to work and it is the same formula we’ll use putting together Digital Book World 2011. I hope we’ll see everybody again there next year.