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.

Moomsday Is Coming, or Kindle, Hardcovers, and Deep Blue

For some years in New York I was inexplicably amused by the broadcast ads for Einstein Moomjy, a local carpet retailer, who called their annual sale “Moomsday.” In portentous tones over rolling drums, the spot told us, for days before the event, “Moomsday is coming… Moomsday is coming,” and finally (thunderous drums), “Moomsday is HERE!!!”

I couldn’t help thinking of Moomsday when I read this week the equally portentous announcement from Amazon that Kindle books have outsold hardcovers over the last three months, apparently at a growing pace. The statement got a lot of press attention and inevitably spurred talk of a “tipping point” where e-books start to displace hardcovers as the dominant format. Equally inevitably, this breathless attention provoked a “not so fast” backlash, with commentators hastening to point out that a) not withstanding all these sales, e-books are still a tiny fraction of the overall market b) by some measures the growth of e-book sales has actually slowed since last year, c) Amazon’s figures are notoriously vague and uncheckable –and so on.
Some of this hard-nosed commentary reflects a healthy skepticism toward Amazon’s obviously self-serving publicity and credulous, tech-dazed media. Unfortunately, I suspect a lot of it, especially within the book business, reflects a less creditable willingness to ignore the reality that our business is about to be massively destabilized as print sales fall off, e-books soar, and bricks-and-mortar stores will be culled like baby harp seals. That’s a brutal way of putting it but I suspect the process will be about as shocking to our delicate sensibilities.
Like Moomsday, the day when e-books displace hardcovers , is coming…it’s coming… and one day it will be HERE, whether or not the moment is marked by Amazon’s arbitrary announcement. (Should we call it, e-oomsday?)

For the foreseeable future, e-book sales are only going to grow. And as Mike Shatzkin has been hollering from the rooftops, e-book sales don’t have to get even close to parity with hardcover sales to make the numbers of a lot of retail bookshops unsustainable. It’s a bleak fact that the margins of retail booksellers are not that large. If print book sales drop significantly, as they must, we will lose some indie stores and almost certainly see chains closing many locations—thereby decreasing retail exposure for printed books, depressing their sales and driving e-book adoption even faster.

Please note, I am not celebrating this trend. I love printed books and real bookstores. I’m simply trying to look dispassionately at what’s happening. The e-book vs. print contest reminds me also of the famous chess matches between world champion Garry Kasparov and Deep Blue, IBM’s chess-playing computer. When Kasparov first played Deep Blue in 1996, he won, to cheers from those all over the world who wanted to believe in the superiority of man over machine. But a year later, an improved Deep Blue beat Kasparov. I would have loved to believe that human genius could go on outwitting ever brainier computers forever. Sentiment aside, though, I had to accept it was inevitable that massive computing power would at some point simply be able to flash through potential moves quickly enough to outmatch even a Kasparov, however inelegantly.

However much we love printed books, we have to accept that within a short time, they will no longer be the dominant format. I’m not prepared to guess what percentage of sales they’ll represent a few years from now, but I’m sure that the pie chart will look drastically different from how it does today—and that the follow-on consequences from that will be much greater than many of my colleagues are yet imagining. E-oomsday is right around the corner.

image of Garry Kasparov from thinkquest.org

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

The Doctor Is (Back) In

Dear Readers,

When I started this blog one of my motivations for doing it was that very few trade publishers or editors were actually on the web talking about what we do or how the book world looks from a publisher's perspective. Since that time I've become aware of one reason why: this blog-writing thing takes a lot of time! We do things in the office all day, and then go home to read and edit; somewhere in there we might see our spouses or children, but an editorial job tends to fill up a lot of hours that could otherwise be devoted to exciting activities like blogging, tweeting, and Facebooking. 

I keep hoping I will develop the skill of tossing off the pithy 100- or 150-word blog post like Seth Godin or Chris Brogan, but I seem to be doomed to crank out 300 or 800 word posts that take me hours to write (partly because I can't help myself--I edit them). All of which is a longwinded excuse for the hiatus since my last post. It wasn't that I got lost in the ash cloud on the way home from London--I got submerged in the manuscript pile. I'm happy to say that the manuscripts I neglected this blog to edit over the last several weeks--one on the Pythagorean Theorem, one on health care reform, and one on the morality of animals--were all terrific books that I can't wait to see in print. But I will save writing about those until they get closer to a bookstore near you. Meanwhile I will do my best to resume posting at a regular, not-quite-blistering pace. There is much to discuss, from the mysteries of flap copy to the latest maneuvers in the e-book world and question of whether this week's developments are really "game changing." 

Yours very truly,

Dr. S. 

Cutting Through Some of the Nonsense about E-Book Prices

I’ve been trying not to let e-books monopolize this page, but it’s a subject that’s hard to avoid with so much happening. This week we had a New York Times article about the ever-contentious topic of e-book prices, on which vast quantities of hot air are expended.

The Times notes that many readers are complaining, not to say outraged, about the idea of paying more than $9.99 for e-books—the price that Amazon has aggressively promoted in its effort to sell Kindles. 

At Publishers Lunch, his indispensable blog/newsletter, Michael Cader had a terrific piece yesterday debunking some notions implicit in the NYT article, and urging publishing people do to a better job of explaining to the public the widely held fallacies about e-book prices. I’ll write more about this myself, but his points are so cogent that I might as well start by quoting some of them:  

* $9.99 never was the top e-book price; people pay more than that every day
[When there was no Kindle, many e-books, including those for Sony Reader cost well above $9.99. And from the beginning of the Kindle store, plenty of titles were above that price. As Cader notes elsewhere, three recent surveys, two presented at Digital Book World, one this week by Goldman Sachs, strongly suggest that while price is important to e-book buyers, there are—as you’d expect--more important elements to a buying decision, such as author reputation.]

* The implicit, false promise of cheap e-books was made by the people who profit, at very nice margins, from selling the devices, not by publishers. Please blame them if you feel deceived.  [Right. Amazon has sold “millions” of Kindles by Jeff Bezos’s account. Which means, at the prices they charge, they are raking in hundreds of millions on Kindle hardware. Was it a coincidence that Amazon had its biggest profits ever last year?]

* Publishers are lowering their ebook prices
Most stories say publishers are raising prices. We in the trade know that publishers are preparing to lower their ebook prices by 50 percent or more, and reduce their own profit margins. But customers don't; they hear that publishers are raising prices. [Another key point. Publishers are actually looking to take less per book than they have been getting from Amazon. And in general e-book list prices are coming down.]

* The new "top price" is going to be $12.99 more often than not
[Cader notes that this will depend on what deals publishers arrive at with Apple, but in general we’re talking about a rise of a couple of dollars.]

Cader’s piece also makes one other important point:

Publishers are hoping to protect smaller and local retailers and ensure that customers have a wide range of real bookstores and online e-bookstores to choose from.

Right again. Low prices are a weapon used by big, deep-pocketed merchants, typically chains, to crush their small, local competitors. Publishers don’t want to see a marketplace that consists of nothing but Amazon and Barnes & Noble. This is, to be honest, partly because most of us in the business have a sentimental attachment to old-fashioned bookstores, the kinds of places where most book-lovers love to hang out.  It is partly because we know that it’s in those independent stores that surprise, hand-sold hits can catch fire and turn into bestsellers. But it’s also because we don’t want to find ourselves with nothing but 600-pound gorillas for customers.

And the Feathers Fly! Amazon & Macmillan Duke It Out

Whew. Just hours after I posted on Friday that it looked like a battle was brewing between big publishers and Amazon over e-book pricing, the fight broke out. I won't attempt to give a blow-by-blow here, but Mike Shatzkin gives a good summary here and there will be plenty of other accounts to come. 


In brief, Amazon went to the "nuclear option," as Shatzkin puts it, by delisting Macmillan titles and it blew up in their face. Many others will analyze this event and I'm not sure the dust has settled yet, so I'll restrict myself to a couple of observations: 


First, it's very interesting to read the Kindle forum posts on Amazon. Their announcement is clearly intended to cast Macmillan as the bully in the situation, even though it was Amazon who punished the publisher. On Amazon's Kindle page, not surprisingly, a vocal audience of Kindle owners, who have come to regard $9.99 as the inalienable right of e-book buyers, are ready to see it that way. (In fact, even before both companies' announcements, posters at the Kindle forum tended to assume Macmillan was boycotting Amazon rather than the other way round.) 


Still, even among Kindle owners, there are several posters who say, "geez, 14.99 doesn't sound so bad, it's still a lot less than a hardcover." Completely lost in the conversation is the fact that all these Macmillan titles might be available for $9.99 if you're willing to wait for them, the way you do for a paperback. I think Macmillan (and other publishers who want to "window" e-books) need to make consumers much more aware of that. 

Also interesting, I also read a hundred or so comments at the NYT Bits blog post on the controversy. There, many readers knocked Macmillan but a greater number (though not at first glance a majority) saw this as bullying by Amazon. In other words, among a sample of people who aren't all Kindle fans, opinion is much more divided. (Naturally there are plenty of "plague on both their houses" opinions and a few gimlet-eyed, "hey, they're both just rational actors attempting to maximize their profits" types.) 

I don't know whether we'll see $14.99 hold as the new standard price for e-books but I think it was fortunate for publishers that Apple came along when it did, before Amazon was able to get a stranglehold on the e-book market. 


Granted, there's much debate, especially outside the Big Six publishers, over whether it's really desirable to raise e-book prices. I'm frankly of two minds about it. Will have to take that up another time. But as Shatzkin points out in the comments threat on his post, publishers who are still absolutely dependent on print books have powerful incentives to slow the erosion of prices, and even the adoption of e-books in general, which are a serious threat to bookstores, still by far our biggest sales channel.  




(Full disclosure: Bloomsbury Press titles are distributed by Macmillan, but Bloomsbury has a separate relationship with Amazon and was not a party to the dispute.) 

Image from tshirtworks.blogspot.com

Playing Chicken: Publishers, Apple, and Amazon

My post this morning raised the key question that I thought had been ignored in the first round of coverage on the iPad as e-reader: why would people pay $14.99 for an e-book in Apple's iBooks store when they can get the same title for Kindle at $9.99?  But in fact the trusty Walt Mossberg of the WSJ asked that very question of Steve Jobs at the iPad launch event--the video is now posted at All Things Digital (I found it via E-Book Newser). 

Jobs's answer has huge implications--though it's open to different interpretations. He says "the pricing will be the same." Mossberg asks, "the price will be $9.99?" Jobs: "The prices will be the same...Publishers are actually going to pull their books from Amazon because they're not happy." 

I take Jobs to mean that the prices won't be $9.99, because the higher price is what publishers have been desperately concerned to establish in the Apple deal. But obviously a $14.99 price for e-books can't be sustained if Amazon is going to keep selling the same title for less. For publishers not to undercut Apple, they would in fact have to withdraw their titles from the Kindle store. That would be a real throwdown--especially because right now, publishers are making more money on Kindle e-book sales than Amazon is. (But let's not forget that Amazon is still making loadsamoney on selling the Kindle device itself.)  It would be a significant threat to Amazon's Kindle business, and one has to wonder whether Amazon will retaliate, as they have done at other times, against publishers' print-book business. For both sides, print books are still a much larger business than e-books, so there's plenty to lose. It may be an interesting game of chicken. 

Apple iPad: Is It Actually an Amazon Trojan Horse?

As anyone on Planet Earth knows, Apple announced its new iPad device Wednesday with enormous hoopla. There's particular excitement among publishers because Apple has agreed to sell books in an iTunes-like store at prices somewhat higher than Amazon has been charging for new titles on the Kindle.

The excitement is somewhat paradoxical because although Apple is giving publishers a better split of sales proceeds (70 percent vs. Amazon's 50), these sales will actually make the publishers less money: Apple "iBooks" prices will be capped at $14.99, while right now, Amazon is paying publishers half of a list price that could be $25 to $30.

Furthermore, what no one has mentioned so far is that Amazon already has a Kindle reader app for the iPhone which allows you to buy books and read them--and supposedly all iPhone apps will work on the iPad.  So will you potentially have a choice of buying an e-book from
Apple's iBooks store for $14.99--or, buying the same title from Amazon, on the same device, just as conveniently, for $9.99?

I feel as though I must be misunderstanding something, because this seems like a setup to make iBooks completely irrelevant in a hurry.  This will be no skin off Apple, because the iPad will be just as good an e-reader with a Kindle app as it is with iBooks. So it could be a "Kindle killer" in the sense of luring potential customers of Amazon's device. But it could at the same time actually strengthen Amazon's hold over the book market--the exact opposite of what publishers hoped would happen.

In that case, our joy at the tablet will be short-lived. Not as short-lived as Adolf Hitler's, though, in this latest expression of the unquenchable internet meme:

8 1/2 Unanswered Questions about the Future of Publishing in the Digital Era

It's evident from what I have been posting here that like everyone in the book business I'm preoccupied by the changes that are happening so swiftly in it. I'm looking forward to attending the Digital Book World conference on Tuesday and Wednesday of this week, where some of the smartest people in and around the industry will be speaking. In the last 12 to 18 months we've started to get some sense of how new technology is going to reshape publishing but the crystal ball remains extremely cloudy.

I thought on the eve of the conference I'd put down a list of what strike me as some of the most critical questions that will determine how publishing evolves in the years ahead--questions that I have as yet no good answer to. I'm hoping I may learn something at Digital Book World that will start to answer some of these--but I suspect it will be a year, or two, or five, before all the answers come into focus.

1. How much will piracy damage the sales of books now that scanners and e-readers make it easy to share files? We know books are being widely pirated already, and we know it's going to become yet more widespread. We don't yet know whether the sales lost to piracy are going to be an annoyance or a crippling problem. 
2. How badly will the ongoing collapse of traditional media affect publishers' ability to market their titles? As a serious nonfiction publisher I've seen the number of reviews my books get take a nosedive in the last two years, for the simple reason that book coverage in newspapers and magazines is disappearing. This has certainly affected sales. I firmly believe that blogs, viral  word of mouth, and other internet-based publicity is a great, and growing, medium for book marketing, but if your book got reviewed on a couple of dozen blogs, that wouldn't equal the readership of the Los Angeles Times Book Review or the Washington Post Book World, to name two major review sections that have recently closed.
3. What prices will consumers be willing to pay for e-books? And how will that affect the price of printed books? Right now major publishers are desperate to resist rock-bottom pricing of e-books, fearing it will devalue printed books along with it. So what gets established as the fair price for an e-book is a key question. If Amazon is successful in making e-books very cheap, the business may evolve one way; if publishers can keep e-book prices closer to print books, it may evolve another way. There is of course a different strategy on e-book pricing from what the big houses are straining for: make'em dirt cheap. This viewpoint holds that we could all sell a lot more books if we charged a few dollars for a new book instead of $16 or $30. So my "half-question" on this list is, Can publishers sell a lot more books if they move the price point down to $4, or $3, or $2? Some enterprising publishers are certainly going to experiment in this direction. It will be interesting to see what happens?
4. Will "enhanced" e-books ever be cost-effective enough to be viable? As I've said here, I have my doubts about this. But some publishers are pinning their hopes for supporting high e-book prices on the idea they can "enhance" them with videos and other additional content. (They should read Kassia Krozser's post about this notion, first, though.) 
5. How long will it be before the line between book and magazine publishing is obliterated? I'm surprised I haven't seen more commentary on this point. In a digital marketplace, we're not tied to the constraints, or expectations, of publishing in book-length chunks. "Book" publishers have access to authors who can, and often do, write essays or stories or reportage that may be a few thousand words, instead of a few hundred pages, long. And we are no longer shackled by the incredibly long lead times involved in traditional, printed book marketing. Why not sell a short story, or topical article by one of your authors online, instead of taking 12 to 18 months to put it out in a book-length unit? By the same token, if you're the New Yorker or The Atlantic, why not take advantage of the eyeballs you already attract and sell readers a long-form work by one of your writers? We have already seen publishers making deals to ally themselves with news/magazine sites (such as Perseus and the Daily Beast). 
6. Is general trade publishing obsolete? The perspicacious Mike Shatzkin sees a stark future for the book biz as we know it. He argues that in a world where anyone with a modem can "publish" material, performing that function will no longer make a viable business, and that for publishers to survive, they must become the home for communities interested in a particular subject--"verticals" to use his term. If he's right--and I fear he may be--venerable brands like Knopf, FSG, or Norton are all at risk, and it's imprints like Tor.com and PoetrySpeaks, already aligned with core audiences, that will be the future of publishing. 
7. Is the explosion of e-reading actually expanding reading? Jeff Bezos and others I call "e-vangelists" claim that it's so easy to sample and buy new books, and so convenient to read them, on the Kindle and other devices, that people who own these gadgets are reading more books than they ever did before. At least two people I know--including one of my Bloomsbury colleagues who already reads a heckuva lot--report it's true. They are reading more books since they got their Kindles than they did before. This could be  great news for the book business. Maybe e-books will lead to a renaissance of reading! If e-reading manages to grow the market rapidly in the next decade, perhaps that will counteract all the other trends I worry about here. I'm not ready to count these chickens quite yet, however.
8. Are e-books going to kill retail bookstores? This to me is the $64,000 question--the one whose answer will determine the fate of large (and probably many small) publishers.  E-books are a tiny but rapidly growing share of the market. But even if they only become 10 or 20 percent of the market, that may be enough to make bricks & mortar bookstores unsustainable--a loss of that much business may be the difference between profitability and failure for many stores, possibly including the chains. And if bookstores go, billions of dollars in sales, and the book publishing industry as we know it, go with them. Even the expansion of reading contemplated in question 6 may not happen quickly enough to save big publishing if this happens. Mike Shatzkin's post "How to Handle a Smaller Print Book Business" is essential reading for anyone interested in the future of the business, though he doesn't foresee quite the apocalyptic scenario that I'm worrying about. 

These certainly aren't the only questions that will determine how the book business unfolds over the next several years, but they're the ones that I have been overheating my cranium pondering. What are yours?

Amazon "Fires Missile" at Book Publishers--But Is the Target Really Apple?

I had hoped to avoid writing about e-books for a while, not because I don't think they are interesting but because I'm reluctant to have one topic monopolize this page. But  developments are coming fast and furious in this quarter of publishing so you can expect to see a lot more about this here for the foreseeable future.  Witness two events of the last couple of days: First, we learned that Apple has been in discussion with the "Big Six" publishers about terms for making e-books available on their much-bruited new tablet computer. According to Michael Cader at Publishers Lunch, these discussions center around an "agency model" in which--unlike other e-tailers (notably Amazon)--publishers will own their book files and set prices while Apple will in effect take a commission on those sales rather than buy and resell the books to consumers. Although the functional difference between "reselling" and "licensing" is trivial, as Cader points out, it's huge to publishers because it gives them control over pricing and allows them to experiment in this area, instead of acceding in Amazon's attempt to commodify all titles at $9.99 or less. 

Almost simultaneously with this news, Amazon announced a new e-book model for publishers and authors, offering a 70 percent royalty (a big improvement on their usual terms) with certain key conditions--including a) the e-book must be priced no higher than $9.99 and b) it must be at least 20 percent lower than the printed book price.  

There seems to be some confusion about what this announcement means. Henry Blodget, at The Industry Insider, hollers that this move "fires a missile at the book industry" and will force publishers to cut their prices for e-books; also that it " should also solidify Amazon's already tremendous dominance of the ebook business" by enhancing the popularity of the Kindle. 

I think Blodget has it backward: Amazon is staring at the possibility, even likelihood, that a host of new e-readers--numerous models have been announced--will rapidly grab much of its share of the e-book market. Many readers, me included, actually prefer buying e-books via the Kindle store, then reading them on iPhones with their crisper more responsive display. When we can read them on a large-screen Apple tablet--and buy them via an elegant, simple Apple-designed e-book store (or through iTunes), we won't need either Amazon or Kindle. 

In other words, Amazon is trying to compete on price while Apple and others compete on quality and features. So far, Apple has been highly successful at that kind of contest. In short, I see this as a would-be preemptive strike by Amazon in anticipation of the Apple tablet. Amazon is going to be a major player in this market for the foreseeable future, but rather than being the game-changing "missile," their current move seems like an admission that they will no longer be a sole 600-pound gorilla. 

So far these events seem like good news for publishers. With several players competing to sell e-books to the public, we're less likely to be bullied by one of them, and with these differerent business models in effect we may be able to accelerate the necessary process of trial and error regarding pricing, timing and so on. 

Still, one aspect of the new Amazon pitch has the potential to further destabilize the marketplace and threaten publishers. The 70-percent royalty is surely meant to attract authors to make direct deals with Amazon, cutting out publishing houses altogether. Amazon may well offer even better terms to carry a certain e-book exclusively. This has already happened with one bestselling author, as I've discussed here. If this becomes a major trend, it could really damage publishers' profits and they can't afford to take this threat lightly. 

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)

The E-Book Wars Have Really Begun

It seems quite likely that we will look back on this week as the moment when the e-book wars officially began. We may have forgotten it, but electronic books of one kind or another have been with us for a couple of decades (beginning with ill-fated ventures into books on CD).  For most of that time, the actual market was negligibly small. In the last few years the e-book market became significant, but although it generated vast amounts of chatter—ranging from dark mutterings by publishers to utopian visions from technophiles—a sort of uneasy calm prevailed at the frontier where authors and agents, publishers, and Amazon and its competitors eyed each other warily.  There were occasional skirmishes and plenty of saber-rattling (over matters such as Kindle prices or Digital Rights Management) but no party seemed ready to make a move aggressive enough to start a real fight.

But that has now changed—inevitably, because the e-book market has exploded and digital books are the hottest (perhaps the only) growth area in the industry. The calm is over, and real punches are being thrown. You might say the first jab came from three houses (Simon & Schuster, Hachette, and HarperCollins) who announced they were going to delay releasing e-books of their titles until several months after hardcover publication. I agree with the analysis of Mike Shatzkin that these houses are not so much concerned over pub dates as trying to find some leverage to use with Amazon over the pricing issue. 

But the timing kerfuffle was minor compared to the dustup that broke out on Friday when Random House CEO Markus Dohle declared, with chutzpah one can only admire, that the house controls e-book rights for thousands of backlist titles whose contracts made no mention of such rights. This was drawing a line far out in the sand.  Dohle’s bold assertion is, essentially, that e-books are just another kind of “book,” so the contractual language that gives Random exclusivity over all editions of a work includes e-books—even though they had not been invented at the time most of these contracts were signed. 

It’s hard to believe Random can make this claim with a straight face. They went to court with this argument years ago and didn’t get very far. But you can see why they’re trying it on. At stake is potentially millions of dollars in backlist revenue that the house could lose out on if authors take e-rights of their old titles elsewhere.  Even though Random’s argument may be legally weak, by making a show of defending this territory they are presumably hoping to discourage authors from battling them for it. Agent Richard Curtis, who is himself a an e-publisher, observes at his blog, "Someone would have to have a lot at stake to be willing to spend hundreds of thousands of dollars to go up against Random House in court.”

Random may be betting that for individual authors, it won’t be worth the fight. But now that we are seeing explosive growth in e-book revenues, I believe there’s too much money at stake for authors not to contest this ground. The Authors Guild has already blasted back at Dohle, calling Random’s position on the backlist a “retroactive rights grab.”

The Guild also points out that Random House rewrote its contract boilerplate in 1994 and specifically added language to cover e-book rights, which wouldn’t seem to be necessary if they were already bundled in with the rights acquired. I worked at Random House at the time, and well remember sitting in meetings where we discussed the new contract language. I certainly don’t remember anyone saying, “well, we already have these rights, but let’s throw in some extra language about them just to make sure.” The conversations I recall were much more like, “Hm, our old contract language didn’t say anything about electronic books so we’d better make sure we get them from now on.”

In the end, just as the fight with Amazon over pub dates is largely about pricing, the fight over who owns backlist e-rights is largely about royalties. After all, Random House is a hugely potent marketer of books and content; to an author, it’s not clear there’s any company out there that’s going to do better selling your backlist title, and there’s clearly an advantage to marketing print and e-editions together. But Random is paying an e-book royalty of 25% of net receipts, while others offer a 50-50 split or better. That’s a lot to leave on the table.

And that brings us to the second roundhouse blow landed this week. I’ll talk about that in tomorrow’s post. 

(illustration: The Taking of Lone Pine  by Fred Leist) 

Is Amazon Shooting the Kindle in the Foot?

Publishers are watching the current price war between Amazon, Wal-Mart and Target with misgivings. The retail and e-tail behemoths are offering loss-leader prices around the 9-dollar mark for many new hardcovers, and some fear that pushing prices on major titles down will devalue other books in consumers' minds.