Mary Mackey Talks About E-book Publishing

Mary Mackey is the author of six collections of poetry and thirteen novels, including New York Times and San Francisco Chronicle bestsellers. Her books have been translated into twelve foreign languages and over a million and a half have been sold in hard copy. This spring, nine of her novels and her latest collection of poetry Sugar Zone were simultaneously re-released as Kindle e-books.  By the end of the summer they will be available on Nook, Kobo, iPad, and Android. We are going to talk to Mary today about how she got these books back into print and what her experience has been.

Andy: Nine of your novels and Sugar Zone, your most recent collection of poetry, were recently published as e-books.  How did this happen?

Mary: The short version is that my agent Barbara Lowenstein first negotiated two deals: one with Amazon.com, which publishes Kindle books, and another with Vook, which publishes e-books in the Epub format on all other platforms. She could only do this because she had retained my electronic rights when the books were originally sold to traditional publishing houses. The moral of this story is that every writer needs a great agent to draw up contracts and make deals with publishers.

Andy: How did you get your books into Kindle and other e-book formats? Did you do it yourself?

Mary: No, thank heavens, I didn’t have to. Barbara’s assistants worked with me for several months to get the files ready, and then Amazon did the actual conversion. I had to proofread everything to catch errors and make sure nothing was left out.

Andy: Were most of these books out of print before they were published as e-books?

Mary: Yes, it was a kind of resurrection. Even A Grand Passion, my novel about ballet which made The New York Times bestseller list had been hard to get. But the strangest experience was having my first novel Immersion available again after being out of print for 38 years. Shameless Hussy Press had published about 1000 copies, but very few were still available and those were so expensive I could rarely afford to buy one for myself. Then, bang. Immersion came out as an e-book, and suddenly people who would never have stumbled on it in a bookstore were buying it.

Andy: How are the books selling?

Mary: Very well. They’ve only been available for a short time, but every month at least a third more units have been sold than in the previous month. The first month Amazon sold over 700 copies. This approaches bestseller status for newly released e-books if you don’t count blockbusters like Fifty Shades of Grey.

Andy: I understand that when most authors publish e-books, they only sell a few copies. To what do you attribute your success?  How are people finding your books among the more than a million books available on Kindle and the ten million in other e-book formats?

Mary: We think there are several factors. First, I’m a writer with a well-established readership. I already have a reputation—fans, readers who have enjoyed my work in the past and are interested in anything new I might write. Some of my novels, like A Grand Passion or The Year The Horses Came have a cult following Second, I’m a current writer. I’ve had two novels and a collection of poetry published in the last five years. If people have read The Widow’s War (Berkley Books, 2009), they might search for me by name and find my other books all priced at $2.99, and think: “Why not take a chance? I liked her other books, and if for some reason I don’t like this one, it costs me less than a small Frappuccino at Starbucks.” I mention the price because it’s the third factor and vitally important. To sell a lot of e-books you need to set a price low enough that everyone can afford them.

Andy: How can authors who don’t already have an established literary reputation help readers find their e-books?

Mary: The algorithm that Amazon uses to decide which books to recommend to readers is a secret, but certain things seem to help. For example, my books are highly rated. They’ve been given a lot of stars by people who liked them and been reviewed numerous times, mostly quite favorably. In addition, readers have tagged each novel with words they associate with it. For example, A Grand Passion is tagged with the words “ballet,” “bestseller,” “dance,” “historical fiction,” “Russia,” “romance,” “passion,” etc. Getting good reader tags is important because they guide other readers to your books. Anyone publishing on Kindle should also establish and maintain an Amazon Central Author Page. I say this with guilt because I need to find time to update mine. Other things that help are getting both your name and information about your work out there on the web, getting reviewed, establishing an author presence on Facebook, using Twitter, blogging, and so forth.

Andy: Is there anything else an emerging author can do?

Mary: Yes, be patient. Don’t publish your work as an e-book until it’s polished. Readers enjoy good writing. They like to read books by authors who care about craft and structure and who can create crisp, fast-moving plots and interesting characters.  If you’re self-publishing and can afford it, hire an editor. Great editors are like great agents. They’re invaluable. If your book is really good, sooner or later the word will get out.

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The Authors Guild and the Book Publisher Antitrust Case

Today The Authors Guild issued a statement of position on the antitrust case ititiated by the United States against Apple, Penguin, and Macmillan. It is a very thoughtful and elegant analysis of the competitive dynamics book publishing from the point of view of the largest organization representing writers. Here it is:

Agency pricing, in which the e-book vendor acts as the publisher’s “agent,” with no authority to change the retail price of the book, was a reaction to a specific anticompetitive provocation – Amazon had been routinely selling frontlist e-books at below cost. Amazon’s predatory tactic wasn’t scattershot; it was (and remains – Amazon continues to deploy this weapon with the titles of non-agency publishers) highly targeted. When not constrained by agency pricing, Amazon chooses to absorb substantial losses on e-book editions of a specific subset of new hardcover books: those that are most likely to be stocked by traditional bookstores.

The Justice Department’s proposal, which would permit Amazon to resume using the frontlists of three major publishers for anticompetitive purposes, appears to be based on a fundamental misunderstanding of the market for trade books, particularly the interplay between the online market for print books and the e-book market. Amazon, which has long commanded 75% of the online market for print books, clearly understands that relationship well. The story of the introduction of the Kindle is largely a story of Amazon exploiting its dominance in the online market for print books to gain control of the e-book market.

 

Frontlist, Backlist, and the Rise of Online Bookselling

To understand the U.S. market for trade books, one needs to understand how online retailing has radically altered the competitive landscape of bookselling.

The literary marketplace has traditionally been divided into two broad submarkets: frontlist (the season’s new books) and backlist (everything else). Retailers faced the most competition in selling frontlist books – new hardcovers and new paperbacks were the most likely titles to appear on the shelves of stores (bookstores, airport newsstands, and big box retailers, among others) across the country. Backlist books were far less likely to be on store shelves, except for the relatively rare “core backlist” titles that had become steady sellers (To Kill a Mockingbird, Green Eggs and Ham, What to Expect When You’re Expecting, for example). “Deep backlist” books, a subcategory of backlist books that were sold almost exclusively through special orders or at used bookstores, were the least commercially available books.

With the rise of online bookselling, these categories still largely existed, but online booksellers, with endlessly long bookshelves made possible by inexpensive warehouse space and on-demand printing technology, came to dominate the market for backlist and especially deep backlist titles. For nearly all backlist books, representing roughly 90% of all in-print titles, the online market had become the market, and Amazon owned the online market. The deeper one traveled down the backlist, the more complete Amazon’s dominance. Amazon had even gained control of the furthest end of the long tail – out-of-print books – by buying up the major competing online used bookselling networks.

 

Online Print Book Dominance Dictates Amazon’s E-Book Tactics

From Amazon’s perspective, as it prepared to launch the Kindle, the print book market had two components: the part in which it faced significant competition (the market for new books and core backlist titles) and the part in which it didn’t (everything else). Amazon would leverage its online print book dominance to conquer the e-book market, protecting its profits on 90% of titles by focusing its predatory tactics on the other 10%, the books that were most likely to be on store shelves.

Brick-and-mortar bookstores were in the crosshairs, jeopardizing vital participants in the literary ecosystem. Bookstores remain critical showrooms for works by new or lesser-known authors and for entire categories of books, such as children’s picture books. Marketing studies consistently show that readers are far more open to trying new genres and new authors when in a bookstore than when shopping online.

It seems to come down to browsing versus searching. Brick-and-mortar bookstores are optimized for browsing; the stores’ “search engines” – their information desks – aren’t what draw in customers. A reader browsing the shelves and tables of a bookstore is often hoping to discover something unexpected. Virtual bookstores, on the other hand, are optimized for search – browsing isn’t the attraction. Readers behave accordingly, tending to use virtual bookstores as search engines to find books they’ve discovered elsewhere.

Publishers were aware of much of this and that the health of brick-and-mortar bookstores relied heavily on frontlist hardcover book sales, but Amazon persuaded them to break with established practice and release books in digital form at the same time they released them as hardcovers. The protection for the hardcover market (and brick-and-mortar bookstores) was implicit: Amazon agreed to pay the same wholesale price for e-books that it did for hardcovers.

Things didn’t work out. As Amazon launched its Kindle in November 2007, publishers learned that it would be selling a long list of frontlist e-books at a loss. As Scott Turow said in his letter to members on March 9th:

It was as if Netflix announced that it would stream new movies the same weekend they opened in theaters. Publishers, though reportedly furious, largely acquiesced. Amazon, after all, already controlled some 75% of the online physical book market.

Amazon quickly captured the e-book market as well, bringing customers into its proprietary device-and-format walled garden (Sony, the prior e-book device leader, uses the open ePub format). Two years after it introduced the Kindle, Amazon continued to take losses on a deep list of e-book titles, undercutting hardcover sales of the most popular frontlist titles at its brick and mortar competitors. Those losses paid huge dividends. By the end of 2009, Amazon held an estimated 90% of the rapidly growing e-book market. Traditional bookstores were shutting down or scaling back. Borders was on its knees. Barnes & Noble had gamely just begun selling its Nook, but it lacked the capital to absorb e-book losses for long.

The publishers had made a huge mistake.

 

Taking Aim at One Percent

Even as it targeted the 10% of titles sold in bookstores, Amazon would be selective. Amazon could get the most bang for its buck by taking aim at the narrow band of books on which its brick-and-mortar competitors were most dependent – those new titles from larger publishers that bring readers into bookstores. Once in the stores, a reader might choose to purchase other books within the list of 10% of titles in which Amazon faced competition: it was best, from Amazon’s perspective, to keep readers out of bookstores and safely online, on Amazon’s turf.

So Amazon’s predation focused on a slice within a slice of the literary market. Amazon would sell at a substantial loss the electronic versions of select new hardcovers: the new bestsellers, near bestsellers, and might-become bestsellers from commercial publishers. Our best estimate was that Amazon’s predatory tactics focus on less than one percent of in-print titles.

Amazon’s highly selective predation not only conquered the e-book market, it paid immediate dividends in the print book market. Marketing studies confirm what Amazon no doubt guessed: readers who buy Kindles tend to dramatically shift their print book purchases to Amazon.

The strategy was brilliant, a predatory feedback loop in which online print book dominance allowed Amazon to absorb selective losses to gain control of the e-book market, which in turn gave Amazon an ever-larger share of the print book market. It was a tactic Amazon could continue indefinitely, as it offset its losses on the most recognizable new e-books by taking profits on e-books by lesser-known authors, on backlist e-books, and on its growing share of print book sales.

 

After Two Years of Predation, Agency Pricing Opens the E-Book Market

For more than two years Amazon’s predatory pricing went unchecked. Then, in January 2010, one month after B&N shipped its first Nook, Steve Jobs introduced Apple’s iPad, with its iBookstore and its proven iTunes-and-apps “agency model” for selling digital content. Five of the largest publishers jumped on with Apple’s agency pricing, even though it meant those publishers would make less money on each e-book they sold. Again, from Scott Turow’s March 9th letter:

Publishers had no real choice (except the largest, Random House, which could bide its time – it took the leap with the launch of the iPad 2): it was seize the agency model or watch Amazon’s discounting destroy their physical distribution chain. Bookstores were well along the path to becoming as rare as record stores. That’s why we publicly backed Macmillan when Amazon tried to use its online print book dominance to enforce its preferred e-book sales terms, even though Apple’s agency model also meant lower royalties for authors.

Agency pricing brought real competition, steadily loosening Amazon’s chokehold on the e-book market: its share fell from 90% to roughly 60% in two years.

Agency pricing allowed cash-strapped B&N to make substantial investments in e-readers with the reasonable hope of earning a return on those investments. Customers are benefiting from the surprisingly innovative e-readers those investments have delivered, including a tablet device that beat Amazon to the market by a full twelve months.

Authors in Amazon’s Kindle Direct Publishing program benefited as much as anyone, as Amazon more than doubled its royalty rates to match Apple’s agency model royalties.

Most importantly, agency pricing has prohibited Amazon from using the most popular new books from six large publishers to undermine the economics of bookselling. Agency pricing has given bookstores a fighting chance.

 

The Proposed Settlement Allows Amazon to Resume Its Predatory Practices

The Justice Department’s proposal undoes all of this. Its settlement with three large publishers would require the publishers to allow Amazon (and other e-book vendors) to sell e-books at below cost, so long as the vendors don’t lose money on the publisher’s entire list of e-books over a 12-month period. Amazon, a far richer and more powerful corporation than it was even two years ago, has every motivation to revert to its prior ways – it will take losses on the books that bring customers into bookstores, and make it back on less popular and backlist books. It will lose money on the one percent, and make it back on the rest.

The Justice Department is sanctioning the destructive, anticompetitive campaign of a corporate giant with billions in cash and boundless ambitions. The situation is bizarre, and without precedent, to our knowledge: the Justice Department is intervening to help entrench a monopolist.

My Letter to the Department of Justice

Everyone in book publishing has been talking about the anti-trust litigation and proposed settlements initiated by the United States against Apple and 5 major book publishers. The government’s case alleges that the defendants agreed to fix prices on e-books and  that these agreements  had the effect of raising prices to consumers. Most people in our business believe   that the United States’ position is misdirected, that the lawsuit will enhance the market power of Amazon.com and that this is the real anti-trust threat to the industry. The Authors Guild representing authors, the American Booksellers Association representing independent booksellers and now the Association of Author Representatives representing literary agents are on record as opposing the position of the Department of Justice. I decided to weigh in, myself, with the letter below. The DOJ is required to consider these letters, so any of you who wish to express your opinions should write to  John Read at the address below.

John R. Read
Chief, Litigation III Section
United States Department of Justice
450 5th St NW
Suite 4000
Washington DC 20530

Dear Mr. Read:

I am writing regarding the proposed settlement between the three book publishers ( Simon and Schuster, HarperCollins, and Hachette Book Group)  and the United States regarding e-book pricing.

I feel that it is wrong for the Department of Justice to focus its anti-trust efforts against Apple and the major book publishers for their implementation of the so-called “agency model” for pricing. There are restraint of trade issues in our industry, but this litigation is misdirected and likely to exacerbate those issues.

The decision by each book publisher to implement agency pricing was in response to Amazon.com’s policy and practice  of setting prices on e-books below cost in order to drive other potential sellers of these products out of the market, thus giving Amazon a virtual monopoly on the sale of e-books. This strategy was  enhanced by the manner in which Amazon designed and marketed it’s Kindle format editions of e-books,  so that those books could only be read on Amazon’s proprietary Kindle book readers, and only purchased on the Amazon web site.  Amazon  refused to allow other potential competitors in the e-book business to sell Kindle edition titles. At the time that publishers began contemplating implementation of the agency model, Kindle Editions accounted for 90% of  book sales on e-book readers.

Amazon was able to  sustain this otherwise ruinous pricing policy, because it could  offset its losses by driving people to its website where they would also purchase more profitable items.

The dangers implicit in this strategy  can be demonstrated. Amazon has shown its willingness to stop selling titles by publishers who will not agree to Amazon’s trade terms. This happened recently with 5000 Independent Publisher Group titles.  As a result, these e-books  are simply not available to the 60% of  all e-book readers who read e-books on their  Kindles.

Amazon’s policies have already had a devastating effect on community based bookstores including the recently bankrupt Border’s, Barnes and Noble, and the thousands of independent booksellers across the country.

The United States should be pursuing policies that discourage excessive concentration in industries, particularly when that concentration will reduce  the free dissemination of ideas in the country. The current litigation and settlement agreements against the major book publishers is doing quite the opposite.

Andy Ross

Andy Ross Agency

Monopoly, Monopsony, and Oligopoly in Book Publishing

Most of  us got into   book publishing because we wanted to make a life  immersed in great ideas and great literature and to share those ideas with others. So how come during the last few weeks all we are hearing about are arcane economic theories explaining restraint of trade?

Several weeks ago the Anti-trust Division of the Department of Justice announced that it had been conducting an investigation into whether the 6 largest US book publishers had combined with Apple to fix prices on e-books. Today the DOJ filed a lawsuit against  Apple,  Macmillan, and Penguin USA alleging that they had made agreements to restrain trade and keep retail prices for e-books higher than they would otherwise be under free competition.   At the same time three other major publishers; Simon and Schuster, Hachette Book Group, and HarperCollins; announced that they were settling with the DOJ to avoid this litigation.

The issues aren’t all that complicated. Several years ago the major publishers changed the way they sold books to retailers. Previously they used a “wholesale” model in which the publisher set a low wholesale price in which books were sold to retailers and the retailer could set its own price, usually higher, so that the retailer made money on each sale. Seems reasonable. However  Amazon.com started  aggressively selling e-books below cost in order to keep other potential competitors from getting into the e-book business. Amazon  used a proprietary format for their Kindle Edition e-books that could only be sold through Amazon. Essentially if you wanted to buy e-books to read on your Kindle Reader, there was only one place you could shop.

Back in 2010 about 90% of all e-books were being sold in the Kindle format and only  by Amazon. Publishers, authors, and other booksellers were understandably  concerned about Amazon’s power in the marketplace and decided to do something about it. The major publishers adopted a new business model where the publisher  would set the retail price and give the retailers a 30% commission but only under an agreement where the retailer couldn’t sell at a  discounted  price.

The DOJ is arguing that this arrangement (called “the agency model”)  keeps prices artificially high for consumers, and they are seeking to end it. The 3 publishers who are settling with the DOJ have agreed to allow retailers to discount e-books below the suggested retail price.

This is a victory for Amazon.  Now they can return to their  practice  of heavily discounting e-books and discouraging competition. Amazon can afford to sell books at or below cost. They know that customers coming to the Amazon site for a cheap e-book are likely to pick up some other more profitable products at the same time.

Everyone else in the book business is alarmed and I think consumers should be too. In the short run, there are going to be some good deals for e-books on Amazon. But  Amazon’s   potential for monopoly power raises some pretty ominous questions. In a word, Amazon has not been shy about removing “buy” buttons from titles by publishers who won’t cave to Amazon’s  terms, terms which are becoming  increasingly unsustainable to publishers as Amazon consolidates its market power. Several weeks ago Independent Publishers Group announced that it could not agree to Amazon’s new and draconian demands for favorable terms. As a result Amazon refused to sell Kindle editions for 6000 IPG titles. As of now, those books are still not available at the  Kindle Store.

A lot of people in our business are throwing around words that are not often used at literary cocktail parties. We say that Amazon.com is gaining monopoly power. A monopoly is a market arrangement where a single company controls all sales and distribution of a particular product. At the moment, Amazon is not a monopoly. It’s market share of e-books is down to about 60%, due to the entry into the market of major players like Apple and Barnes and Noble. To some extent this is a result of  the  the agency  pricing model that the DOJ is seeking to undermine . If   Amazon is successful at cutting out the other competitors by aggressive price competition,  it  will once again have a monopoly on the sale of e-books with the help and support of the Department of Justice.  A most ingenious paradox. Your tax dollars at work.

At the moment, we have an oligopolistic structure in the sale of e-books. An oligopoly is characterized by a small number of producers or distributors. Almost all e-books in the US are being sold by Amazon, Apple,  Barnes and Noble, Google, and Sony. A lot of industries are oligopolistic. And it doesn’t necessarily pose problems for competition as long as the parties are not acting in concert to control prices or limit supplies.

There is another relevant economic concept: Monopsony. This is distinguished from monopoly  because it describes  a market with only one buyer that forces sellers to accept lower than socially optimal prices. The decision  by the Department of Justice to litigate against Apple and the book publishers  will help establish  a market for e-books  where Amazon will be the only  seller of e-books (a monopoly) but also the only buyer of e-books from the publishers ( a monopsony).

This  is a truly alarming  situation for an industry that can only thrive in a diverse marketplace. We are, after all, in the business of disseminating ideas. And a monopoly of the marketplace of ideas is an enormously troubling development for those of us who see books as something more than just another consumer product.

The Justice Department vs. Book Publishers: What This Really Means

The Anti-Trust Division of The Justice Department announced  this week that it is considering filing charges against Apple Computer  and 5 of the largest book publishers for violating anti-trust laws. The issue, at least as far as I can determine, is whether there were illegal agreements  made between Apple and the  5 publishers to  fix  the retail price on e-books.  It is illegal under anti-trust law to make agreements to “restrain trade”.

I know a little about anti-trust law. When I was a bookseller, I was involved for about 20 years in various anti-trust lawsuits having to do with unfair competition by chain stores. I won’t go into detail here about anti-trust except to say that the laws are incredibly arcane and usually hinge on “facts” that are murky at best. And I do not know the specific facts of this case that would either incriminate or exonerate the putative conspirators.

So let’s talk about what this means in the real world. Here’s the back story. In 2010 when Apple was poised to release the iPad, Amazon controlled about 90% of the e-book business. Amazon sold books in the proprietary Kindle format which could only be read on Kindle readers. If you had  a Kindle reader (and at that time most e-book consumers did), you had to buy your e-books from Amazon.

As is their wont, Amazon began selling newly released best selling e-books at $9.95, below their cost which was typically about $12.50. This was anathema to publishers for a number of reasons. 1) The prices were so low that it had the  potential effect of eviscerating  sales of the print on paper editions. Publishers recognized that e-books should be cheaper, but not that cheap. 2) Related to this, publishers felt that Amazon’s selling below cost would discourage entry of other  potential vendors in the e-book business. This would leave publishers  completely beholden to one vendor, Amazon, whom they have never really felt comfortable with.  3) Finally this kind of pricing would put into the heads of consumers that there was an inherent  value to an e-book of $9.95. Presumably Amazon had no intention of selling below cost forever and they would  eventually use their monopolistic power to  force publishers to reduce the prices on  e-books books.  Amazon would  then have a sustainable business model. But publishers probably wouldn’t.

Enter the Apple iPad. At last the publishers hoped that they could break the Amazon monopoly by throwing themselves into the arms of  the only company with the resources to compete successfully against Amazon. Apple Computer    has the highest capitalization of any company in America, probably the world. Compared to Apple, Amazon is a mere street peddler.  Apple and the publishers worked out an alternative system for selling books that was similar to the  relationship iTunes had with music publishers.

Most products for sale in  retail stores are purchased   at “wholesale” for a low price, and the retailer can set any price they want. Thus the old saw that all you need to know in retail is: “buy low, sell high”. But Amazon had the resources to buy low and sell lower,  to sell below cost for as long as it took to drive out the weaker competition. After all, they could make up  the lost profits by selling more Kindle Readers and driving business to their other products. Cameras, shaving cream, what have you.

Apple and the six largest trade publishers adopted a new model. Rather than giving a lower wholesale price to a vendor and letting the vendor set the retail price, under the new “agency” model, the publisher would set the retail price of the book and give the vendor (say Apple or Amazon) a 30% commission on the sale. There were many complicated deals made (that may or may not have been legal) that would force Amazon to accept this new “agency” model. Amazon would have to sell the e-books at the same price as their competition, thus defeating what has always been Amazon’s competitive strategy.

The Justice Department argues that this new “agency” model  is bad for the consumer because it tends to insure that e-books are selling at a higher price than they otherwise would if  the retailer was able set its own price. Publishers argue that the “wholesale” model would create an unhealthy monopoly by Amazon  that would not be in the long term interest of book buyers and society at large.

Yesterday, the Author’s Guild weighed in on this issue. The president of the Guild, Scott Turow, sent a letter    to all of its members calling the decision by the Justice Department to challenge Apple and the 5 publishers: “grim news”. As most of the followers of this blog know, I have frequently expressed my own concerns about the sometimes  unhealthy power of Amazon in the book business.

Turow was speaking for the interests of authors, but he makes some powerful points about the ultimate impact of a de facto monopoly by Amazon. He is concerned, as are publishers, that predatory pricing of e-books will attenuate the ability of physical bookstores to compete. He says that it is as if: “Netflix announced that it would stream new movies the same weekend they opened in theaters.”

Turow goes on to say: “Marketing studies consistently show that readers are far more adventurous in their choice of books when in a bookstore than when shopping online. In bookstores, readers are open to trying new genres and new authors….A robust book marketplace demands both bookstore showrooms to properly display new titles and online distribution for the convenience of customers.”

He also points out that 2 years after the agency model was implemented Amazon’s market share of e-books is down to about 60%.  Barnes and Noble  has successfully entered  the market with its highly regarded Nook. Apple has an excellent e-book store. I can say first hand that the iPad is an insanely good e-reader. You can even buy e-books from your independent store through Google books – and at prices competitive with Amazon.

Last week we wrote about the fact that Amazon stopped selling 6000 titles from America’s second largest small press distributor, IPG, after a dispute over terms. Those books are simply not available to people with Kindle readers. I think this fact tells us all we need to know about what this dispute means to society at large.

Amazon.com Has Become a Publisher. Don’t Expect to Find Their Books at Your Local Bookstore Any Time Soon

There is some interesting news this week about the ongoing struggle within the book business to define the protean changes that are going on, mostly  having to do with  the exponential growth of the ebook market and of Amazon’s  seemingly inexorable march to  dominate book publishing at all levels.

Larry Kirschbaum

Last spring Amazon announced that it was creating a trade publishing division. They hired publishing insider and veteran, Larry Kirschbaum, to head it up. Larry had been for many years the CEO  of Hachette Book group, one of the “big six publishers.” He retired from that position several years ago and became a literary agent. He is about as much of an old school publisher as you could get. Prior to this, Amazon had been dabbling in publishing but they were more involved in the “self-publishing” end of the business.

This new development puts them in direct competition with the New York trade houses. Not to put too fine a point on it, the big publishers are not happy.  Maybe this is  simply sour grapes, maybe  the publishers just don’t want another competitor to split off their business and to steal their best authors. That is certainly a component of it. But Amazon has never been satisfied being a part of a larger whole. Their stategy has always been to be the whole whole.  And they have the money to do that.  Amazon’s market capitalization is moving north of 80 billion dollars. — Res ipsa loquitur. They also have the infrastructure. They pretty much control the retail end of the ebook business and they have surpassed Barnes and Noble as being the largest retailer of print on paper books as well.

And they don’t believe in open platforms. If you are going to buy a Kindle edition, you must buy it from Amazon. They won’t permit their competitors to sell it. And, of course, you can only read Kindle editions on a — Kindle.  In comparison, the iPad and Barnes and Noble’s Nook accept books in the Epub  open format  edition.

It  is true that Amazon over the past few months has been snagging some big name commercial authors and paying big bucks. Tim Ferris, Deepak Chopra, James Franco, and Penny Marshall are frequently mentioned.  And Amazon has announced that they will be bringing out over 100 titles in the fall. And that is just the beginning. Amazon has downplayed their threat to the publishers saying that for them [commercial publishers], “it’s always the end of the world.”

Well, of course Amazon is always savvy at business and they realize that in order to bring in the big authors and get on the best seller lists, they have to have their books available in all venues and in all editions. Since most  other bookstores loathe Amazon as much as  the publishers, one can assume that there might be some reluctance on the part of these stores to order Amazon titles from Amazon. So in January, 2012  Amazon announced that traditional publisher Houghton Mifflin would be distributing Amazon print on paper titles to the trade.

If Amazon really wants to encourage their erstwhile and ongoing competitors to buy Amazon Publishing titles in hardback and paperback, one might think that they would make nice about the e-book editions as well. No. Amazon will not publish their e-books in the Epub format. This means that Barnes and Noble  and pretty much everyone else selling e-books will not be permitted to sell the e-book edition of the Amazon Publishing titles.

This month  Barnes and Noble announced that they would not be carrying  titles by Amazon Publishing in their physical stores. They said that  any publisher who would not make all their editions available to B&N would not  have their books   represented  in their 700 stores. Today the second largest retailer in America, Books-A-Million announced  that they had made the same decision. One can assume that you will have difficulty finding these books in independent bookstore as well, even if the books are carrying the Houghton Mifflin logo, not Amazon’s.

Although it is always troubling to see fewer outlets for any book, most of us in publishing seem to be feeling a kind of exquisite sense of schadenfreude at what appears to  be  Amazon’s overreach. About 70% of all books are still sold in physical bookstores. I think authors are going to think twice about signing a book contract with Amazon Publishing knowing that their books will not be available at most stores nationwide.

Amazon and Library E-book Lending

The latest chapter in the ongoing saga of  the  uneasy relationship between book publishers and Amazon.com began to unfold last week.  Penguin Books  announced that they were suspending their distribution of new digital books in the Kindle format to libraries. Penguin  and other major publishers will continue to license e-books in Adobe EPUB format, the format favored by all e-reader vendors except Amazon. If you have an Apple iPad, a Sony Reader, a Nook or use any of the readers running Android operating systems, you will be reading EBUB formatted books. If you are using a Kindle, you can only read books in the Kindle format.

The reasons given by Penguin are opaque; they mentioned “security considerations” (whatever that means.) As in all matters associated with e-books,  there are lots of issues and interests at stake in this decision. Let’s try to  ferret out the real back story of all this.

Publishers have always been uneasy about licensing e-books to libraries. They will tell you that they support libraries as the institution in America that creates readers and builds literacy that, in turn, allows  publishers to flourish. Most people won’t argue about this. However with the advent of e-books and e-book library lending programs, publishers are  concerned that this will harm their own  sales of e-books. The reason that they are more concerned about this  than they have been about traditional library lending is because it is so much easier to check out an e-book than it is a physical book, and an e-book is always in pristine condition no matter how many times it is lent out. The reader need not worry about those nasty spots and  unsanitary stains that populate the margins of the pages of a typical library book.  In the past in order to check out a library book, the reader must actually go down to the library and go through the normal hassles, parking, stepping over undesirables, etc.,  in order to be told that the few  titles  that the customer would actually want to read have  waiting lists for the next 3 months. Using the library e-book check out service, you can get a copy of your favorite book while at home  by downloading it  any time day or night.

To be perfectly fair, libraries have managed  in their new e-book services   to recreate every reason that you have avoided   going  to the library in the first place.  I belong to the Oakland Public Library and have availed myself of the service from time to time. And it is convenient when a book I want to read  is in stock and available.  I lie in bed, I hit a button on my new iPad, I get my book. Sweet! However, as with traditional books, the financially hard pressed libraries can only order a limited selection of popular titles and those in  small quantity.  So I still have to wait weeks or even months for the books I want to read.  Of course there  are always lots of books immediately available that are less in demand. In Oakland, most  of these books seem to be  in Chinese or Spanish and accordingly are not of great  interest to me. They have a pretty good selection of Berenstain Bears titles as well.

The e-books  at libraries are being managed by a company called Overdrive. When the programs first began last year, books were only available in the EPUB format and the largest segment of e-book customers, Kindle owners, were not able to participate. Earlier this year Amazon allowed the libraries to license Kindle editions. But  as is  Amazon’s wont, they managed to design the system so that the customer could not just hit a Kindle button on the Overdrive site. Rather they were directed to the Amazon site where there are a myriad of buttons encouraging the library patron to buy the book instead of borrowing it and, while there, to buy a plethora of other Amazon merchandise from cameras to condoms.

This is standard operating procedure for Amazon (and good retail marketing too). Amazon discounts selected items heavily, even using them as loss leaders, to get customers to the website where they then engage in an orgy of buying from Amazon’s vast selection. So Amazon has  been heavily promoting the Kindle library lending program. Sure, it takes away book sales a little bit. But a few lost book sales is a small price to pay for a magnet to bring customers coming back for more stuff.

For now the other major publishers are sitting on the sidelines. Some of them aren’t participating in the Overdrive program at all. Others, like Random House, have responded with even more obtuse comments than Penguin (“We are always evaluating all of our publishing programs.”)

So what does all this mean? For librarians this is about the fact  that they just want their e-books available and don’t want to get caught in a dispute, not of their making,  between the publishers and Amazon. For publishers, already uncomfortable about the e-book library program, this  is about the fact that they don’t want Amazon using free books to drive traffic to their web site to the detriment of e-book sales. For internet gurus and geeks,  this is an example of  the  “legacy” media dinosaurs fighting another losing battle against the brave new world of internet where “information wants to be free”.  For authors this is about whether they have a right to be paid for their work, just like everybody else. (European libraries give authors a small royalty every time their book is checked out. See my previous blog post: Revenge of the Killer Librarians ).

The Explosion of Self Publishing

A few weeks ago I had lunch with a number of literary agents here in the Bay Area. All the talk was about  self-publishing in general,  e-book self-publishing in particular, and what is the role of the agent in this Brave New World.  Sad to say solutions were not at hand but there was much hand-wringing and talk of the sky falling.

Self-publishing has exploded in the last 10 years as a result of the advent of new technologies and distribution channels  that allow writers to cheaply publish and distribute their own books. Print on Demand publishing (POD) began about 10 years ago. Companies like Lulu, Lightning Source,  and Book Surge offer  a complete publishing package to the aspiring writer/publisher including cover design, formatting, editing, printing, and distributing POD books, all for a very modest price. The quality of the perfect bound paperback POD book is as good or often better than a similar paperback by a trade publisher.

Distribution is mostly done through Internet booksellers like Amazon and Barnes and Noble. Most bookstores have been reluctant to stock POD titles. And, of course, the author/publisher is responsible for marketing and promoting her own book(s). The term that is often used for this new model is “disintermediation.” It’s an impressive word that you should learn and throw it around at the next cocktail party. It means getting rid of the middle man, in this case commercial trade publishers. The good thing about that is that it is a democratizing force in the world of ideas. The bad thing is that there are no filters to separate wheat from chaff. And, gentle reader,   make no mistake about it. There is plenty of chaff out there, a veritable ocean of mediocrity.  In this respect it is consistent with the new culture  of information on the Internet where everyone is an expert.

  This easy entry into book publishing is reflected in the numbers.  In 2009 the number of books published by traditional commercial publishers was 302,000, a number that had been holding steady for many years. In 2010 there was a modest 5% growth to 316,000 titles. POD titles, which didn’t even exist 10 years ago, shot up from 1,033,000 titles in 2009 to 2,776,000 in 2010. Wow! It seems like almost everyone is a published author now. (These figures are compiled by W. W. Bowker, the publisher of Books in Print.)

Of course, e-books are now the talk, even the obsession, of everyone in the book business. E-books are still an emerging technology. Things seem to be changing almost every day. I just came back from meeting with publishers in New York. E-book sales are continuing their exponential growth. In the last few months a number of genres have had e-books sales surpassing print sales for the first time. Amazon.com reported last month that Kindle Editions sold more copies than all print on paper editions combined (at Amazon, at least). Surely the second coming is at hand.

Self-publishing e-books has become the new enthusiasm. It barely existed a year ago. Now  it  has emerged. It is even easier and cheaper than POD. It can be created and distributed virtually for free.  We’ll talk about that some more later.

E-book Economics 101

 The e-book is turning the  book business upside down. No one in publishing  seems to be talking about anything else. Manufacturing costs, retail prices, competition, author royalties, the future of the physical bookstore, the future of the novel, enhanced books, book reader technology, eye strain, how to read an e-book on the beach, are commercial publishers out-dated dinosaurs; these are but a few of the subjects that are generating the most agonizing soul searching in book publishing. Nobody knows how these things will ultimately sort themselves out. The changes are just coming too fast.

  In this post I am   going to analyze the economics of publishing and compare the cost of publishing a hardback book to that of the e-book. I’m an agent, so I have an ax to grind.  It looks like the bottom line is that book publishers stand to  make more money on e-books and authors will make less.  

 For this post, I am using information that I took from an article in The New York Times. Here is the link to the article.

First let’s look at the costs of publishing a traditional hardback. The numbers  in The New York Times article  were calculated for a  hardback with a $26 suggested  retail price. (Remember that booksellers can charge any price they want. And a lot of bestsellers are discounted to the book buyer.  Here is the breakdown.

Amount paid to publisher by bookseller: $13.00

Printing, warehousing, shipping: $  3.25

Author Royalty:  $   3.90

Design, editorial, typesetting:  $      .80

 Marketing:  $  1.00

 Profit before overhead:  $4.05

I am not entirely pleased by the robustness of this analysis. It neither accounts for all of the expenses nor all of the income associated with a particular book.  But it is a good indicator of the relative costs of publishing a title.

 What is an E-book?

 If you don’t know the answer to this question, what have you been doing for the last two years? And if you are reading this on a Kindle, skip to the next section.  E-books are like iTunes. And, in fact, the  iTune division of Apple will be managing  the Apple e-book store. New technology for the e-book changes almost daily. As of (let’s see now) yesterday I believe, you can even  download e-books onto your iPhones. The largest selling e-book reader is the Kindle. But the Apple iPad is moving up fast as of this writing. There is also the Sony Reader, the Nook, the Kobo reader and new brands popping every month.  Readers are beginning to get sold at the big box stores and should be a popular item this Christmas. It is estimated that by the end of the year, there will be over 10,000,000 readers sold.

 In 2009, e-books accounted for about 4% of unit trade book sales, but sales are increasing exponentially.  E-book sales  in 2010 are up over 150% from previous year’s sales. Unit sales of  cloth and paper books have been decreasing.  Amazon.com claims that they are now selling more Kindle Editions than traditional cloth titles. Most major publishers though are showing less dramatic e-book sales. But they are reporting that 10%  or more of  bestselling new titles are e-books.

 The advent of the iPad creates a suitable platform for visual books as well. People are already experimenting with books that incorporate multimedia integration. The first “enhanced” e-book was published last July.  Perhaps soon you will be able to buy a cookbook that includes film demonstrations by the author. Or book group editions with film clips of interviews with the author.

 The e-book is a perfect fit for our gadget-obsessed world.

 And what are the costs of publishing an e-book?

 Let’s go back to The New York Times article that we discussed above on the cost of publishing a book. There are some substantial savings to the publisher on e-books. No manufacturing costs, no warehousing costs, no shipping and receiving, no returns. Sweet!

 Like all other things e-book, the economic model has been changing protean-like, and no one in publishing can predict what it will look like in a month, let alone in a year. Let’s take a look at the $26.00 hardbound book from the example above. Currently publishers are giving book lovers a break and selling e-books for about half  the price of the hardback. Sometimes Amazon is selling these books even lower and at a loss in order to gain market share. About 90% of all e-books are currently being sold by Amazon. And Amazon is hoping to keep it that way, in spite of fierce competition from Apple.  Google recently w rolled out its e-book store and is selling in a variety of formats. (Amazon only sells Kindle editions that only can be read on the Kindle reader). Independent stores have linked up with Google and are selling e-books on their sites as well.   

 There are several different systems of selling e-books, but let’s keep it simple and look at the sales for books from most major publishers. So here are the costs and the profits:

 Price to the consumer:  $12.99

Cost paid to publisher by bookseller: $ 9.09

Author royalty:  $ 2.27

Digitization, typesetting, editing :  $   .50

Marketing:  $    .78

 Profit before overhead: $   5.54

 The first and most astonishing thing you will notice is the hit that author royalties have taken on the e-book economic model. Authors will receive a royalty of $3.90 on the hardback vs. $2.27 on an e-book.  (Actually that may not be the first thing you notice, but agents and authors are understandably  concerned about this. “Livid” might be a better characterization.) Note also that even with consumer prices being half of the list price of a traditional book, publishers stand to make considerably more money on each sale, because of negligible manufacturing and distribution costs.

A lot of people think that e-books don’t cost anything so they should have a price that reflects this.  Amazon seems to be promoting this idea for their   own reasons. But remember e-books still have costs for royalties, marketing, and editorial. There are a number of Internet gurus who think that “information wants to be free”. But most writers feel that their work is worth something and they should be paid for the ten years that they toiled on their novel, for instance.

 There are some other, as yet, unquantifiable factors that would tend to make e-books an even better deal for publishers. E-books will not generate costly returns of unsold books from the bookseller. They are sold to consumers non-returnable. You can’t even give it away to a friend. And you can’t sell it to used book stores. My gadget -obsessed brother, Ken Ross, (check out his company, Expertceo.com)   now only reads books on his Kindle. He claims that he buys many more books than before, because of the ease of purchase. If he gets bored with what he is reading, he just hits the button for a new book and moves on. That is what publishers are hoping for – more readers like Ken. And if Ken’s buying patterns are anything to go by, reports of the death of the  book  and of book publishing will have been greatly exaggerated.

 

 

Buy E-book Downloads from your Independent Bookstore — Now!

I have been writing a lot about the role of the independent bookseller in the brave new world of e-books. A lot of people have been talking about this, usually  with sad-countenanced  head-shaking and hand-wringing. And it is true  that  indies are facing and will continue to face enormous challenges.  Recently I wrote an article in Publishers Weekly reprinted in this blog trying to provide some hope in this situation.  But it was pretty speculative. Today I am going to interview Len Vlahos, who is Chief Operating Officer of the American Booksellers Association, the trade association that represents over 1400 independent bookstores operating in more than 1700 locations nationwide. We are going to talk about the future of indie stores, their challenges and their opportunities, in the  age of  the  e-book.

Andy: Len, I assume that the ABA is not just sitting back and ceding the terrain of the e-book to Amazon and Apple. What is ABA doing to bring the Indies into the game?

Len: ABA offers members an  e-commerce product called IndieCommerce. Through this service, members can have a turnkey website with a great search engine, shopping cart, and robust content management tools. The sites exist at the store’s URL and with the store’s brand. A few examples:

 

http://www.politics-prose.com/

http://www.bookwormofedwards.com/

http://www.bookpassage.com/

We’ve partnered with both Google and Ingram to allow our members to offer e-books for sale to their customers in four different formats – Adobe (works with Sony eReader, Nook, Kobo), Palm/iPhone (works with iPad, iPhone, other smart phones), Microsoft (with the Microsoft Reader), and Google (works with most devices other than Kindle). Some of the Ingram titles are already live. Google will be live before the end of the year. Between these two aggregators, the 200 + IndieCommerce sites will have a robust catalog of titles, and will offer a competitive experience relative to the rest of the market place.

Andy: I pointed out in my article that the new model for e-book pricing is for the publisher to set the price of the book. It seems that Amazon.com has always succeeded in gaining market share  by price completion. Can you describe the new plan. Is it going to help Indies?

Len: In the traditional  (often called “wholesale”) model of publishing, publishers set a suggested retail price for a book and  then sell that book to a retailer at a discount. The retailer then sets its own retail price and sells that book to a consumer. Under this model, chains and big Internet retailers  have been selling popular titles — in both conventional editions and digital editions — at significantly below-cost pricing and with loss leader marketing in what appears to be a blatant attempt to acquire market share and to concentrate power in a small number of mostly online retailers.

 

Under the  new and developing  “Agency” Model, a publisher sets a retail price for a specific book and engages an agent — typically a retailer — to facilitate the sale of that book to a consumer, at that price. In this model, the retailer is bound by the price set by the publisher. To date, this model exists only for digital content. The retail price set by the publisher reflects production costs — acquisition, editing, marketing, printing, binding, shipping, etc. — which vary significantly from book to book.

The artificially low prices at which e-books have been sold are threats to any profitable business model for writing, publishing, and selling books.  They offer consumers only a fleeting bargain while enacting serious long-term losses. Ultimately such below-cost pricing is very likely to drain the resources publishers need to discover, develop, compensate, and successfully publish new authors, a loss of diversity that ABA believes will have very bad long-term effects on many fronts.

ABA strongly favors the “Agency” Model for the sale of digital content. The benefit of the Agency Model to our members — independently owned bookstores — is obvious. It’s an essential defense against predatory pricing, and it allows for a wide diversity of retailers in the marketplace. It also helps to ensure the continued distribution of books by smaller, independent publishers with a variety of viewpoints, ultimately benefiting consumers by showcasing not just discounted bestsellers, but a wide selection of writers. Finally, it will help prevent the concentration of power within the hands of a few megastores and chains. Such a narrowing of options would significantly harm consumers and our society.

Andy: Do you see any other models for  e-book distribution on the horizon that also would offer opportunities to independents?

Len: A long-range goal would be to partner with a technology company to use geo-locating software to allow a customer in an indie store to download an e-book to her smartphone from within the store, and then have the bookseller be credited with that sale. This is down the road a bit, but should be possible. It opens up interesting opportunities.

Andy: It is a little unclear to me how indies can provide a kind of convenient channel for downloading the e-books. One of the nice things about e-books, as they are being sold by the big guys,  is the seamless way the book buyer can order books without getting off his tush.

Len: With Google in particular, we will provide just as seamless a solution if you’re using your iPad, Android, or other tablet or smartphone. You can sit on your couch in your PJs at three in the morning, or sit in the airline frequent flyer lounge, and search for, purchase, download, and read your e-books, all from one device.

Andy: And do you visualize independents as selling e-readers as well? At the very least, that seems like a way of showing that indies are serious about being in the e-book business.

Len: This is trickier, as we’ve yet to identify the right device partner, but we’re still looking.

Andy: You might as well prognosticate about the future. Everyone else is, after all. Are e-books going to spell the end of the traditional book? How are independents positioned to benefit from the trends?

Len: ABA firmly believes that print books are here for the long haul. But to think that e-books are not already impacting print book sales would be a bit of a stretch. The focus of our channel must be on serving our customers how, when, and where they want to be served, and to sell the right book to the right customer in the format of that customer’s choice. That’s what we’re trying to empower our members to do.

Andy: Thanks, Len. I just clicked on my favorite bookstore, Book Passage;  and I see that they are, in fact, selling e-books for immediate download in Adobe and Palm format. So I urge you all out there with e-book readers to go to their website and start downloading.