Why Are Publishers Telling Us E-Books Are So Profitable? Another Book-Business Fallacy

Coverage of the Hachette-vs-Amazon dispute has recycled various misconceptions about what’s happening, as Michael Cader noted Wednesday in Publishers Lunch. But one of the most widespread fallacies you may hear, and not just relating to Hachette/Amazon, is that “e-books have been more profitable for publishers than print books,” as Evan Hughes put it in Slate. The chunky margins generated by e-books, the thinking goes, are what the publisher and the 600-pound gorilla of bookselling are tussling for.

Even before this dispute, some industry voices, led by Mike Shatzkin (echoed by Hughes in the piece just cited, and of course the agent community), have argued that in a sense publishers have been asking for trouble by maintaining such high margins on e-books—like kids walking back from the candy store, their pockets bulging, past the local bully. Shatzkin proposed that publishers raise their royalty rates on e-books so that they could gain some advantage by sharing the “extra” profits with authors before the retailers could zero in on them.

Mike’s suggestion was prescient, and there are other good arguments for passing along more e-book revenue to authors (starting with, "they could use the money"). Nonetheless I believe publishers would have been better served by pointing out, long ago, that the notion of e-books as a magical cash cow is wildly misleading. Because the supposedly greater profits from e-books—when published alongside traditional print editions—are an artifact of accounting. The margins that both Amazon and Hachette find in e-books are only as high as they are because of all the resources Hachette devotes to hardcovers and paperbacks.

Today in mainstream publishing, e-books are almost invariably published alongside a hardcover or paperback edition. This means the e-book edition floats on top of a huge investment in whatever that title is, which in most houses is not charged against the e-book edition.

Consider the following costs incurred in publishing a new title:

The advance—frequently the largest single line item in the investment in a given book, and in many houses charged entirely to the first print edition. Even when it’s allocated otherwise, there are many other costs that are charged the print book, such as:

“Plant” costs—such as copyediting and proofreading, typesetting, design, illustrations, legal vetting, maps. These are typically charged to the hardcover edition, even though the paperback or e-book editions benefit equally from them. (Side note: for the same reason, even in pre-e-days, paperbacks were often seen as more profitable than they "deserved" to be.)

Furthermore, marketing costs are also charged to the hardcover even when the e-book is published simultaneously. These include promotion (catalogues, advance reading copies, BookExpo displays, etc); advertising; and publicity (review copies and ARCs, author tours). Obviously all these efforts are working to sell the e-book just as much as the print edition.

And alongside those expenses are the heinous, eye-watering costs of producing and distributing physical books:  Printing, sales commissions, warehousing, shipping, and all the hideous inefficiencies of taking returns.

Wait a minute, you’re saying, now you’re going too far. Why should the new, innocent e-book be charged for costs of the bad old dead-tree "legacy" (shudder) business?

                       

Because the existence of printed books, the trafficking and display of them, is still a critical marketing tool for e-books!

What is the currency of advertising? Impressions. Every physical book you see as you go through your day is an impression, just a like a Coke ad on a bus shelter or a Coach logo on a handbag--each of those glimpses is a little hit of marketing. Think about the millions of printed books out in the world--displayed in store windows, piled on tables, racked at the checkout in supermarkets and drugstores. Or seen in the hands of people on airplanes and buses; given as given as Christmas or Mother's Day presents to people you know. 

We know that one of the reasons people buy books is that they see other people enjoying them (hence the enduring popularity of bestsellers, even in a long-tail marketplace). There is no question that many of the titles on the e-book bestseller list are boosted by the visible popularity of hardcovers and paperbacks. The thankfully still-robust presence of printed books contributes significantly, I would argue, to the “mindshare” enjoyed by any e-book--not to mention the overall "mindshare" of "book" as a category of entertainment.  

There are, to be sure, e-only bestsellers—works that achieve significant sales without riding the coattails of a print edition. I would guess, though, that very few titles which have achieved true blockbuster e-book sales—tens or hundreds of thousands of copies—have done so without a blockbuster print edition helping to spread the word. (Fifty Shades of Gray, a bestseller as an e-book, became a megahit when Random House published a print edition.)

Perhaps I’m pressing a point if I go from there to arguing that the cost of trucking a new title to a Barnes & Noble distribution center ought to be spread across its e-book edition. But the larger point is that it’s arbitrary at best, and again, misleading, to think we can neatly separate print from e-book costs, when publishing any title is a multi-platform campaign. And it leads to fuzzy thinking about the business if we look at the P&L spreadsheet for a given book and say “wow, the e-book is really profitable” when the poor hardcover is carrying 80 or 90 percent of the investment load. What’s really happening, if you look at this another way, is that the print edition is subsidizing the e-book!

My point here is not to bash the e-book business. It is true that e-books have an enormous economic advantage over print when it comes to manufacturing and distribution, because the incremental unit cost of creating & delivering an e-book is virtually nil. (Even better, no warehousing and no returns.)  You need no publishing expertise to see this, and it’s one reason why it seems intuitive to say e-books are more profitable.  

Some publishers, I’m afraid, have encouraged this misapprehension. Corporate houses in particular like to trumpet the profitability of their digital businesses because it makes them look “innovative” and tech-savvy and gives Wall Street an easily-grasped, upbeat story of a growth driver in the industry. Trade publishing companies have historically thrown off quite modest, not to say anemic, profits and have for decades been caricatured as quaint, retrograde, etc. so maybe we can’t blame them for bragging about better margins that seem to come from new technology.

But for all the reasons above, it's wrong to consider the profitability of an e-book edition separately from an accompanying print title. And it makes no sense for publishers to boast of wonderful margins on e-books, unless they are also going to apologize for the lousy margins they get on print titles.

Publishers are straining mightily to maintain a healthy publishing ecosystem that includes print and e-books, online selling and brick-and-mortar bookstores. This is not out of nostalgia or an inability to grasp the digital future, but because they understand, as explained above, that print and e-book sales boost each other.  And if they give away too much of their revenue from e-books, whether to retailers or to authors, they risk making that multi-format marketplace unsustainable.

Publishing and Bad Publishing Are Not the Same Thing: A Publisher's Response to "An Agent's Manifesto"

The London agent Jonny Geller stirred up a lot of discussion, and a flurry of Twittering, by posting "An Agent's Manifesto" a week or so ago. Jonny contended that in the "maelstrom" of the current book business, authors are being forgotten, taken for granted by booksellers and, in particular, by publishers. The original post seems now to be behind a paywall but it's extensively quoted here and here. He writes:

The author is not an object which a publisher has to step over in order to achieve a successful publication. If they have a problem with the cover, blurb, copy or format, then something isn’t right….Remember, we don’t have a job without [the author]. For those of us still working in the legacy business of publishing books, here’s a reminder of the primary mover in this chain.

A great many people retweeted his column or commented on it using words like "fantastic." And his dim view of publishers was echoed elsewhere. At her blog, the novelist and ghostwriter Roz Morris had even more negative opinions of my colleagues:

It is common, behind the scenes, to hear editors talk about authors with undisguised loathing – not just individual ones who may be difficult, but all of them, authors as a breed. There is a culture that authors must not be listened to.

I have to say that I don't buy these generalizations about our business.

I have worked at publishers large and small--two Big Six houses, a literary indie, a university press, and currently a house I'd describe as mid-size. Never, ever, at any of them, have I heard authors discussed with "loathing." At all of them it was fully understood by editors, marketers, and management that the author is, in Jonny's words, "the primary mover" in the publishing firmament. The whole enterprise would not exist without authors. To put it another way, as one of my colleagues says, "the author is our customer." I simply don't know anyone in publishing who thinks of an author as "an object we have to step over to achieve a successful publication."

At Bloomsbury, we regard the author as a key partner in marketing the book, because as Jonny correctly observes, "the author is the expert" on the subject, setting, and likely readership of her book. We want to tap into that expertise, and use the author to help mobilize the networks of readers who are going to respond to what she's doing.

I have made clear elsewhere on this blog that I'm fully aware publishers often fail authors (and themselves for that matter)--for all sorts of reasons. One is simply the tendency of any complex organization to screw up from time to time. Another is that most publishers are under-resourced. Trade publishing is a chancy and low-margin business, and there's rarely enough money and man-hours to lavish on each title--on any title--as much as it deserves. In the hustle to get things done, there can be a temptation to take shortcuts--and one of the most ill-advised shortcuts is to discount the author's input about jacket design, flap copy, or marketing ideas when they are at odds with the publisher's. This does sometimes happen, and sometimes with the arrogant justification that "we're the professionals." I have no hesitation in saying this is simply bad publishing, and any author who experiences such treatment is right to resent his publisher for it. But in my experience it's relatively rare.  It may be more common at the biggest houses, where the sheer volume of titles can, at its worst, lead toward a book-as-widget mentality. Throughout our industry, however, dedicated people are expending sweat, toil, and sometimes tears to meet authors' expectations.

By way of example, in the past week, I've been working with our creative director to find a jacket for a fall title, where in attempting to satisfy the author, we have gone through not less than a dozen different designs. I have exchanged numerous emails with another author, trying to choose a title and subtitle from among 5 or 6 possibilities--this after his original choice had been embraced by our marketing team but he had second thoughts. And I spent an hour on the phone with a third author, negotiating the precise wording of the captions in his photo section. This is not because I'm a unique paragon of editorial virtue; all around me, and not just at Bloomsbury, my colleagues are toiling away with their authors in similar ways. Down the hall from me, a publicist was booking and rebooking flights for an author's book tour in response to her changing schedule. And out in the Northwest a sales rep was arranging a dinner for a debut novelist to meet with booksellers for the region. None of these authors, by the way, are bestselling VIP types, although we hope they eventually will be.

I submit that these authors are, as Jonny urges, being "valued, understood, appreciated, included, nurtured and spoken to like adults." Furthermore, I can think of no other major creative industry where a single artist has so much control over his or her content and how it gets presented to the public. The author has absolute final say over the text of the book (contrast this with Hollywood, where a director may not even have final-cut approval, or journalism, where a writer's copy may be heavily rewritten at the editing desk); and--the above-noted Bad Publishing exceptions aside--typically has consultation even on covers and catalogue writeups. 

Editors, especially, value authors because they are our closest partners in the process. The relationship can be intimate, and like any close relationship it can be fraught. Authors do things that make editors grind their teeth from time to time, just as spouses do to one another. And publishing people do, it's true, vent about authors now and then, just as authors vent about publishers. That doesn't mean there's a lack of respect on either side. 

Several of the commenters on Jonny Geller's and Roz Morris's posts cite "horror stories" they have heard about author mistreatment. I note that most of these horror stories are secondhand. In saying such stories are unfortunate and rare, I'm not saying none of them are true. By the same token, I think most agents do a good job for their clients, even if one of Roz Morris's commenters wrote "I still want to punch something when I think how my agent mistreated me." In any case, I was pleased to see that several authors also posted comments about how happy they were with the care and attention they received from their publishers. It's human nature that "horror stories" circulate more widely than "satisfaction stories."

I have no quarrel with Jonny Geller’s manifesto. Authors will always be at the core of whatever publishers do, and it is worthwhile to remind us of that. But to the charge of disrespecting authors, on behalf of all the publishers I know, I plead not guilty.   

Wylie vs Random: The Thrilla in Manila (Folders)

It's all too easy to complain about media coverage of the publishing business, but as my mother used to say, honestly.... It was surprising to see the wildly erratic spins that some outlets put on yesterday's news that Andrew Wylie had come to terms with Random House for the latter to publish e-books of several prominent backlist authors whose contracts predated the electronic era and made no provision for such editions. (Those contracts are typically tucked away in yellowing manila folders somewhere in the bowels of a publishing house. Consulting those documents, typed on old Royals and Underwoods, sometimes existing only as "carbons," feels like traveling back to the age of three-martini lunches.)  What made this newsworthy was that Wylie and Amazon.com had annouced with much fanfare that the agent was starting his own publishing house that would partner exclusively with Amazon to sell the work of some 20 authors.  Random, which has already asserted unilaterally that it alone may publish e-books of its backlist authors, regardless of contractual omissions, said it would boycott the Wylie agency over the issue. (Sarah Weinman gives a good summary of all this at Daily Finance.)


The press treated the original Odyssey announcement as a bombshell--the normally sober FT intoned, "many executives fear[ed] the showdown over e-book rights would lead to the death of the 500-year-old publishing business as it is known." Yikes! 


This was, ahem, an overstatement. The real issue regarding backlist e-book rights was not whether Random had a valid claim on them (they had some claim, but whether it would have prevailed in court was quite uncertain). It was simply (as I said at the time) that if Random did publish the e-books, they'd have to negotiate royalty rates, and the authors and agents involved would want higher royalties than the 25% of net that has been Random House's usual boilerplate. 


The matter has been resolved, apparently with Random agreeing to some kind of sliding royalty scale on e-books that goes as high as 40%, and Wylie conceding to Random control of e-editions for 13 of his 20 Odyssey authors.  This is a reasonable resolution that probably could have been arrived at with less heavy breathing all around. But press accounts of yesterday's agreement shot off in all directions. One headline said "Random House Wins Battle with Wylie," while the WSJ, apparently looking for its own angle, reported it as "Amazon Loses E-Book Deal."  Evidently "the death of the 500-year-old publishing business" has been averted.


However, whether you consider it a "loss" for Wylie or his clients depends on whether you view Odyssey editions as something he was really committed to, or a great negotiating tactic.  We may have a better sense of that when we see whether Wylie strikes deals with Penguin, Harcourt Houghton, and the other publishers of the remaining "Odyssey seven." 


It's a "win" for Random in that they are surely happy to keep the e-books of authors like Updike and Nabokov; but they are probably not thrilled to have their improved e-book royalties discussed in "the colyums." Especially if they have, as many houses do, "most favored nation" clauses in contracts with other authors. (As a precedent, it won't be cheered by other big publishers either.) 


As for Amazon, I'm sure they would have loved to have exclusive e-books (though just for two years) of Lolita or Invisible Man, so this is a setback for them. But they're still going to be able to sell all those e-books on any device that can access the Kindle store, so they can cry all the way to the bank. 

Amazon, Crossings, and J. A. Konrath: Is This Week a "Game Changer"?

Sarah Weinman has a good post up at Daily Finance about two announcements this week from Amazon: first that they have made a deal to publish a new, original book by crime author J. A. Konrath in their Amazon Encores program, previously devoted to republishing older and out-of-print titles. Konrath, who has promoted his own work very effectively on the web and has blogged about how successfully he has sold his work at a very low price on Kindle, parted company with the trade house who had published his earlier books and now will sell his work directly through Amazon.  Weinman points out that, alongside the second announcement--that Amazon will start a wholly new publishing program called Crossings that will publish literature in translation (books formerly unavailable in the U.S.)--that the online retailing behemoth will now be competing directly with publishers, in an arena where Amazon has some powerful advantages. 

With an admirable trace of hesitation at trotting out the buzzword of 2010, Sarah calls these developments "game changing" and quotes the ever-brainy Mike Shatzkin in support of the statement. Meanwhile the also-savvy MJ Rose has a great post at her blog making a seemingly contrary statement: she says there are no game changers any more.  So has the game changed, or not? 

At the risk of saying "everybody's right," I have to take a different point of view: I agree with Weinman and Shatzkin that it's a momentous development if Amazon is really going to start competing head to head with publishers. They have already started picking off the backlist of major authors like Stephen Covey and Paulo Coelho, and if they are now going to get into the frontlist business things will get more interesting. But if you look at the larger picture, it's this: EVERYTHING is changing. So many elements of the industry as I've known it are in play that the one thing we can be sure of is, the game is going to be different five or ten years from now. But I think it's way too early to know whether this particular play of Amazon's is going to be decisive in their favor. Here are some things we don't know that will bear on the answer:

The market for books in translation (as Mike S. points out) has historically been pretty small. Can Amazon's retailing power make it much bigger? If not, the Crossings move may be less significant. 

Will Amazon really want to be in the editorial business? It's one thing to find worthy or marketable backlist titles or new books by authors who have proved themselves. Seeking works undervalued in the current marketplace--like translations--is a logical next step. But to truly compete with publishers, Amazon will need editors--people who find new books and attempt to choose ones that will connect with readers. This process is inherently unpredictable and therefore risky and inefficient--very different from their algorithm-driven business of selling existing books, even obscure "long tail" titles. I suspect Amazon Crossings will find, even with the company's unique ability to reach, say, "readers who bought French novels by women in translation," that some titles on their list do much better than others. 

How big a share of the e-book market can Amazon retain as e-readers proliferate? This question is complicated by the fact that you can read Kindle books on devices beside the Kindle, but whether authors are willing to give Amazon exclusivity on their e-books will surely depend on how much of the market they risk giving up.

Or, will Apple decide to compete with Amazon in the same way? The explosive growth of the iBooks store is going to give Apple similar power to Amazon's in presenting authors to readers. So far they have taken a very different approach, dealing only with the biggest publishers and a few aggregators. But they deal directly with thousands of suppliers in the App Store, and may well move in that direction once iBooks are well established.  

How will contract terms shift between authors and publishers in the coming years? Konrath points out that he makes more money self-publishing via Kindle for $2.99 a copy than he might have in a conventional print deal with a major house, Hyperion, at $14.99. If author/publisher deals evolve, as they are likely to, will the marketing and distribution power of a big publisher become less easy to give up? 

How many authors will be able to replicate Konrath's success at marketing himself? Amazon didn't pick Konrath to sign up just because of the quality of his writing. He has been a creative and assiduous promoter of his work, as Jason Pinter observes in a HuffPost piece. In my experience only handful of authors have the marketing savvy and drive Konrath has shown. If you're already a bestselling author, or a celebrity, you may not need Konrath's smarts. But the model that works for Konrath or Covey may not work for a majority of authors. (This of course still leaves the danger for publishers of Amazon creaming off the most profitable books at the top of the sales curve.) 

How will the role of agents affect the way all this unfolds? I'm not the first person to notice that if there's a danger to publishers in disintermediation, there's a real risk of it for agents too. If all an author needs to do to make $400 a day is upload titles to the Kindle store (as Konrath says he's doing), does she need an agent for that? There's a disincentive for agents to move toward a world where they can't auction projects to Random, Hachette et al. Will they push authors in a different direction, and how many authors will value their agents' advice more than the revenue the agents carve off the author's income? 

I realize I'm much better at asking questions on this blog than at giving answers. But my point here is that with the book marketplace in flux in so many different directions (the above are only a few), it's not even totally clear what "game" we're playing, much less whether even big news like this week's has "changed" it. 

Illustration: Matrix Chessboard, via Wikimedia Commons

How to Make a Small Fortune in Publishing, or, A Bit More on the E-Book Wars

Whew. As I might have expected, last week’s posts on the E-Book Wars (part 1 here and 2 here) attracted a lot of lively and thoughtful comments. They expressed several points of view but two opposing themes can be seen.

One group of commenters asks: Who needs publishers? In a digital marketplace authors can readily reach readers directly. Sure, editing is important but, wrote one, “what’s to stop authors from forming consortiums that hire editors?” Instead of settling for a big publisher’s split of royalties, you could distribute the book yourself and keep 100 percent of the profits, or use a service like Smashwords that offers an 85 percent share. This commenter continued, “Right now the business model is that writers are the suppliers of publishers. But it is conceivable that it could become the other way around.”

Another group sticks up for publishers. In defense of Random House’s claim to control e-book rights, these commenters noted that “Books are words in a precise order and meant to be read,” and ask why an e-book is any different. They also point out “the amount of time, effort and money [involved in] making what goes between the two covers of a traditional book.” They ask, not unreasonably, shouldn’t the publisher be entitled to a significant share of income from an e-book whose value is enhanced by the careful editing, copyediting, proofreading, and so on that go into it?

Both groups have legitimate points to make. The book business looks from one perspective like publishers “buy” content from authors and then resell it. But from another perspective, we’re providing a service—enabling the author to reach readers (and collect money for his content). Around Bloomsbury we sometimes say “the author is our customer.” In a sense we are selling the services of editing, design, printing, marketing, distribution and so on. Could a group of authors do the same things themselves? Yes. Of course, then in effect they’d become….publishers. An authors’ co-op might produce more money for writers than a conventional publishing contract, but I don’t know if it would make either writing or publishing radically more lucrative.

As old hands in the business like to say, “If you want to make small fortune in publishing, start with a large one.”

Much ink and many pixels have been spilled on the Random House e-rights issue discussed here last week, and I don’t think I’ll wade into that still-unsettled question again now. I would observe here that although I raised questions about Random’s position on backlist contracts, I agree with them, and most every other publisher, that e-book rights should not be separated from print rights.

Reading a book is reading a book, whether the item being read is a hardcover, a Kindle, or a PDF on a laptop. Amazon and other e-vangelists argue that e-book sales are additional to print sales—that e-book lovers wouldn’t be buying print copies if they weren’t reading them on their Kindles. I’m sure that is true for some books and some readers, but to some extent we know e-book sales replace print sales. It’s clearly essential for a publisher to control all versions of a book that their readers might want to buy. That much is widely accepted by both houses and agents, though there is still debate about what royalties should be paid.

I also agree that those who want to chop down publishers’ share of e-book royalties are often neglecting the big picture. Not only do publishers enhance the value of an author’s work by editing, proofreading and performing those other tasks that go into producing the product you find in a bookstore. They perform a range of other functions that contribute materially to that value. And one of the most important things that publishers do to market electronic books is—sell printed books! I’ll talk about this more in a future post.

(illustration: Grub Street, later known as Milton Street, from Chambers' Book of Days)

The E-Book Wars Have Really Begun, Part 2

Yesterday, in Part 1 of this post, I wrote about a flurry of events that suggest the phony war over digital publishing is over and live ammunition is now flying. First, three big houses tussled with Amazon over “windowing,” or delaying publication of e-books relative to hardcovers. Then, more momentously, Random House attempted to put barbed wire around e-rights to its backlist.

Next, the most aggressive move yet: mega-bestselling author Stephen Covey—who has long published with Simon & Schuster—announced he had made a deal with Amazon to sell Kindle editions of two of his biggest titles via another electronic publisher.  This, of course, is exactly what big publishers have feared and what Random House’s bluster is trying to forestall. To the extent that e-book sales of Covey’s books supplant sales of their print editions, that’s vital backlist revenue disappearing from S&S’s p&l, not to mention potential growth the house is losing out on. Covey will apparently be releasing some of his new titles through Amazon exclusively, so S&S won’t see those dollars either.

What I don’t understand is why Simon didn’t pre-empt this move by issuing their own Kindle edition: they have already released e-books of several other Covey titles so you’d have thought the terms of an arrangement were in place. You’d also have thought S&S would hustle to get the Kindle edition of a backlist leader like The Seven Habits of Highly Effective People into the market-especially given that Amazon reports Covey stands 13th on their all-time bestseller list. 


I can only assume there are other issues in play or that some negotiation between S&S and Covey broke down--quite possibly over royalties: the author is apparently receiving more than 50% of the net proceeds from his e-publisher. (Adding piquancy, the e-publisher who’s handling Covey’s Amazon title is RosettaBooks, the same one Random House sued over backlist e-rights in 2001.)

This creates an interesting situation.

Simon & Schuster has not conceded that they don’t control e-book rights to backlist titles; they say it’s “their intention” to publish those books digitally. They probably don’t want to pick a fight with Stephen Covey, one of the biggest authors on their list. He says he is happy with them, and they are surely hoping to publish new Covey titles in the future. But if they let him walk away with e-rights to backlist bestsellers, how do they hold the line with other authors? They may suddenly find the whole backlist vanishing.

And if that happens, it will leave Random House—and the other Big Six publishers--in a very awkward position, trying to cling to electronic rights that one of their biggest competitors has given up. 

In short, it looks to me like the free-for-all we have long been expecting has begun. 

(Illustration from "The Seven Habits of Highly Effective Soldiers, Starring Sgt Rock," at Chris's Invincible Super-Blog)

Heavy "Whither" Ahead: The Changing Business Model Continued

I asked in an earlier post this week, "Whither BookExpo?" The "Whither"-led headline is the journalist's ironic rubric for the inconclusive, chin-pulling article that muses on the future of Literature, the Iraq War, Marriage, or whatever. We have seen a lot of these pieces in the publishing trade in the last couple of years and we certainly have a few more years ahead of us. Almost every aspect of the business is in flux.

One of them is the role of agents. It's hard to say who is more threatened by the prospect of "disintermediation," as it becomes ever easier for writers to sell their work to readers directly--publishers, booksellers, or agents? Right now the first two are feeling the stresses and strains of change more than the agents are, but I think it will soon become apparent that agents have no less to lose. I don't believe that any of us have become obsolete, but we're all going to have to reconfigure our roles in the literary ecosystem.
This thought is prompted today by a Mike Shatzkin blog post about a conversation he had with three agents about this very topic. If these three are representative, agents are also groping for a handle on how their business can and should change.  "Whither Agenting?" is another question in the air.