Open letter to Hachette CEO Arnaud Nourry: Kill your hardback business

Sir:

I read with interest your comments in the Financial Times of August 31, 2009, regarding the fact that “unilateral pricing by Google, Amazon and other e-book retailers such as Barnes & Noble could destroy publishers’ profits and kill the lucrative trade in hardbacks.” I write to warn you that, if your primary concern is retaining the profit in hardbacks, you will repeat the errors of numerous of C-level peers in media companies, from newspapers and magazines to the music and television industries. Instead, you should be prepared to wipe out your hardcover profits over the next five years to retain your relationship with readers. The real reason Amazon is selling e-books at a loss today is to take the demand-creation relationship away from you.

The hardcover is a package for printed content. Despite it’s wonderful history, the codex form factor in its various sizes of hardbound pages, is just a package, albeit one tightly bound up in the distribution processes traditional to publishing. The hardback book has led the publishing parade for centuries, but has given way in the era of industrial publishing to paperbacks, so that now far more than half the books published are never released in hardback. Hardbacks are seldom profitable, despite what the FT article says, relying on unexpected hits to produce the lion’s share of profit at a publishing house. Predictably successful hardback first editions, such as the upcoming Dan Brown novel, The Lost Symbol, are less profitable than the surprise hit because of the deep discounts demanded by retailers online and off.

Hardbacks are the best way to test the market for viable trade paper titles that will thrive in your midlist, because they are more likely to end up in discount bins than as returns. Rather, I should write “Hardbacks were the best way…” as the e-book is poised to take the place of hardbacks as first-edition-to-market because they can be sampled by chapter and, even, given away to spark readership wildfires. Newspaper companies failed to see that preserving the newspaper killed the news that made the daily edition valuable. The form factor in newspapers and books are deeply integrated into the distribution systems on which these industries rely. Moving books or morning editions from place to place has been the key to profitability for publishing since before any of us were born. It’s over, as newspaper companies prove daily.

Distribution is no longer the hard problem in publishing or any form of information delivery. It’s a competence that Hachette should shed in favor of outsourced relationships with, among others, Amazon and Google. Amazon can move books much more cheaply than any publisher. They could probably print them more cheaply, too. Both Amazon and Google can move virtually unlimited volumes of bits anywhere on the planet at a fraction of the price Hachette can deliver books to retail.

Amazon is not poised to tell Hachette and other publishers that it will pay a smaller share of $9.99, they are thinking about whether Continue reading

Smashwords opens B&N channel for self-publishers

Late Friday, Mark Coker of Smashwords sent the following via email:

Smashwords has signed an agreement with Barnes & Noble to distribute Smashwords
ebook titles, all of which are self-published or from small independent presses.
As you might imagine, we’re thrilled.  Until today, it was difficult if not impossible
for independent authors and publishers to gain such mainstream digital distibution.
Now with Smashwords, virtually any author, anywhere in the world, can receive
broad distribution for their ebook. Additional distribution relationships are
forthcoming.
The Smashwords service is completely free.  We pay the author 85% of the net
proceeds and we take 15%.
We originally hoped to do a formal press release on this news rather than release
it late on a Friday afternoon, but we needed to give our 1,200+ authors and publishers
advance notice so they can prepare their titles for distribution.  It’s tough
to ask 1,200 people to keep such an exciting secret a secret, thus the preempted
press release and my email to you.  We currently publish about 2,600 titles,
double the number from just four months ago.  The books should be listed at B&N
properties within the next 30 days or so.
We posted a link here to inform our authors about next steps:  http://www.smashwords.com/distribution

Smashwords has signed an agreement with Barnes & Noble to distribute Smashwords ebook titles, all of which are self-published or from small independent presses.

As you might imagine, we’re thrilled.  Until today, it was difficult if not impossible for independent authors and publishers to gain such mainstream digital distibution. Now with Smashwords, virtually any author, anywhere in the world, can receive broad distribution for their ebook. Additional distribution relationships are forthcoming.

The Smashwords service is completely free.  We pay the author 85% of the net proceeds and we take 15%.

We originally hoped to do a formal press release on this news rather than release it late on a Friday afternoon, but we needed to give our 1,200+ authors and publishers advance notice so they can prepare their titles for distribution.  It’s tough to ask 1,200 people to keep such an exciting secret a secret, thus the preempted press release and my email to you.  We currently publish about 2,600 titles, double the number from just four months ago.  The books should be listed at B&N properties within the next 30 days or so.

We posted a link here to inform our authors about next steps:  http://www.smashwords.com/distribution

This is a very significant turn, though one that I suspect will be followed by more Smashwords partnerships. The simple fact is that self-publishers are as much a part of the mainstream publishing market as any small house. The barriers have fallen and many authors will test the market without a deal with a publisher upfront. Smashwords makes the market entry very easy and preserves 85 percent of after-retail revenue for the author.

It’s another inventory that, at least now, BN.com and associated readers (Plastic Logic and iRex) can offer directly to readers. It seems certain that Smashwords titles will be available soon in other major online bookstores.

Premature evolution: E-book standards alone won’t solve the publishing problem

Peter Osnos, writing at The Atlantic, reiterates PC World‘s Tony Bradley in calling for a standard e-book format, writing that “it is a good place to start.” His article, however, suggests that the reproduction of reading is also the end of the road:

“As readers become increasingly familiar and comfortable with reading and listening devices and the machinery for producing books on what are essentially a new generation of copiers, books can be instantly available. If readers come to believe they can get Good Books. Any Way You Want Them. Now, and publishers can provide them without the waste, inefficiency, and consumer frustration that comes from scrambling to put out the right number of printed copies, I believe that books will hold their own–and maybe more so.”

Osnos has been working with the Caravan project, whence his Good Books slogan comes, with The Century Foundation for some time, commenting occasionally on the progress. A key idea in his posting today is that e-book reader devices (hardware and/or software) are a “new generation of copiers” and that distribution is the challenge “for books.” As I wrote last week, responding to Bradley’s article, getting words on the digital page is only a small fraction of the challenge ahead, and that any standards should not prevent the development of enhanced reading experiences that transcend the printed book, which is solely a delivery platform, not a networked environment comparable to the Web. It’s my opinion, but it bears repeating as often as we hear the argument that words on a page make a book.

Distribution is the challenge for publishers, not the form we know as the book. Books are packages, which have been applied successfully to moving thousands of words from printing facility to the public for centuries, distribution is the key to making money as a publisher. Books are changing, just as the products produced by every other industry has been transformed in whole or part by digitization. Yet, Continue reading

Pearson’s digital pay-off still awaited

Pearson, the British publishing group behind Penguin, The Financial Times and a growing educational assessment and testing business, reported first-half financial earnings yesterday. Share prices gained nine percent on the day, well ahead of the rest of the market. Some digging in the report and presentation raises some interesting questions.

First, the FT, which saw 18 percent growth year-over-year in online subscriptions, is losing more paper subscribers than it is gaining online subscribers (roughly 20,000 new online subscribers versus a loss of approximately 24,500 paper subscribers). However, the shift to digital is insulating the group from the steep losses due to advertising that has hit the newspaper industry generally. Total revenue for the FT declined only 13 percent year-over-year. That is good news in this newspaper market.

What’s missing from the report, though, is information about digital subscriptions to the FT on the Kindle. The newspaper currently ranks #2 in British newspapers and #6 in U.S. newspapers with an overall Kindle Store sales rank of 25,586. By contrast, And Then the Roof Caved In, an account of the financial crisis by CNBC’s David Faber has a Kindle sales rank of 820 (sales figures as of this writing). This tells us little in specific, but draws an intriguing picture. Pearsone-booksales

Likewise, Pearson’s e-book sales charts look great (see right) until the lack of a scale sinks in. Certainly, e-book sales have increased by at least an order of magnitude year-over-year. Any given month of 2009 would account for 70 to 100 times 2007 sales. The chart starts from a minute number of units sold in 2004 and ends with a towering but unspecified number of e-books sold in the first months of 2009.

Best guess, the company is still seeing total sales of e-books that account for less than 1.5 percent of total book sales. Penguin’s sales increased eight percent, though the first half of any year represents less than a quarter of the total sales in a year, as the second half, particularly the beginning of school and the holidays, generate the vast majority of sales. The gain bodes well for Pearson’s second-half.

The short story, though, because there is no highlighting of e-book successes, is that Penguin and Pearson have no break-out e-book and digital newspaper story to tell, yet.

Noted in the graphics of the presentation: While Pearson featured seven iPhone application views, two iPod views and the Sony Reader in its slide about its digital market presence, Kindle was absent. Think a bit about that. Seven iPhones. No Kindle. On one slide. It’s a message that Amazon execs will catch.

Random House UK caught in e-royalties stupidity

The Bookseller reports that literary agents in Britain are steering clients away new deals with Random House UK over different royalty schemes offered to authors based on their sales potential. Lower-selling authors are being offered between 17.5 percent and 20 percent royalties on e-books compared the emerging standard royalty of 25 percent for electronic editions.

A publisher wishing to build a stable of successful authors should not begin the relationship by offering them less than a “proven” author for electronic rights, because the inventory risks are lower with e-books and, more importantly, the authors’ online efforts on behalf of new books can produce far greater results than traditional marketing. If publishers are concerned about sinking costs into the paper publication of new books, they should start the titles out on an e-book and on-demand release and make decisions about paper editions based on the success of these less costly editions.

By “stupidity” in the headline, I mean a lack of judgment.

Pricing guru: “price cannibalization should be the least of a book publisher’s worries.”

Rafi Mohammed, a specialist in pricing, has an interesting posting at TheWrap about the reasoning behind the pricing of e-books. Well worth a read. A critical statement, one that points to changes needed in publisher thinking is Mohammed’s comment that “Since e-book sales were somewhat of an afterthought, in most book contracts today, authors receive a lower royalty for an e-book compared to a hardcover sale.”

E-books cannot be an afterthought. The publisher needs to be engaged with the author’s interests, as well. If more can be made from e-books, because the production and returns costs are so much lower, it is time that this new format and channel become the focus of profit-making decisions. Price the e-book to sell profitably, make deals with authors that move physical books based on actual demand, which can be impacted by the availability of e-book versions.

Typically, publishers and authors think of e-books as cannibalizing trade paper and hardcover books, but Mohammed points out that the resale of hardcover books, which does cannibalize sales, is not an issue with e-books. Therefore, you can price an e-book lower without diminishing sales. Instead, those early readers can become evangelists without simultaneously competing with new sales of the book.

I continue to believe that, once the e-book is established, a wide range of prices will be acceptable, based on the audience for information and the services that can be embedded in books that raise their value to readers over time.

PW to host Google Settlement webinar

I’ll be listening in when Publishers Weekly‘s Jim Milliot, AAP board members Richard Sarnoff (Bertelsmann) and John Sargeant (MacMillan), and the Authors Guild talk turkey about the Google Books Settlement on July 29 at 2 PM Eastern time. The conference call will be held online, you can sign up here.

Challenge to Chris Anderson: Put some substance behind “Free”

Chris Anderson posts over at the Inside Google Books blog about his decision, along with publisher Hyperion, to give away free copies of his new book, Free. He suggests that selling hardcover and paperback copies will be helped by his promotional use of free copies, and that may very well be. He reports the book will hit the New York Times Bestseller list at #11 this week, which suggests that some physical copies are selling, too.

Okay,that sounds good, but it is necessary to back the argument up with hard facts, which I found the book did not provide, but the book’s sales could. I challenge Chris and Hyperion to release a full accounting of the book’s budget and resulting sales, as well as Anderson’s indirect earnings from the book, so that all of us who have read Free with interest and some skepticism can see for ourselves the financial results of this grand experiment. If the free Free release is not simply a marketing stunt, this disclosure should demonstrate that there is a profitable model and one that, when compared to Anderson’s earlier books, resulted in more sales revenue than when he was not giving away free digital copies.

One important point to echo from Chris’ post: He argues that everyone loves physical books and that they won’t go away, pointing to his own children’s love of the page. “My very digital kids feel the same way: they may never read a printed newspaper, but they love physical books as much as I did when I was their age.” My daughter has repeatedly told me she dislikes the Kindle compared to reading a book, because of her enjoyment of the tactile and visual pleasures of the page. I agree with Chris and his  kids and my daughter that paper books are here to stay. The question is whether digital books will augment the author’s ability to focus on writing new works rather than simply marketing and milking old ones.

The Obama Time Capsule: A participatory book breaks new ground

ObamaBookPhotographer Rick Smolan and Jennifer Erwitt have broken new ground in publishing with what can best be described as “event books” as far back the early 1990s with their 24-hours books. Their latest, The Obama Time Capsule, sets the stage for a new kind of book publishing, a participatory book created in part by the people who buy it.

Rick, whom I’ve known for many years, called me a couple weeks ago to talk about The Obama Time Capsule and the unique site he’s created where buyers can personalize and add photos to the book. (Disclosure: Rick gave me a complimentary copy to personalize for this article.) Having captured days in the life of the United States, cyberspace, and many countries and states in photo books, he decided to try a radical experiment in print-on-demand publishing.

“It’s not available in any bookstore,” Smolan said as we began talking about The Obama Time Capsule. “The challenge—I made the challenge intentionally—I wanted it be all print-on-demand. Whether you customize it or not, it’s a great book.” He assembled photos taken by photographers and friends, most unseen before the book appeared, combining them with essays and infographics that make the book an entertaining read. My kids, both teenagers, flipped right past the personalized parts of the book I ordered and read the main text and photo essays with real interest. Few books grab their attention that way.

It’s a fantastic memento of the election for a Democratic family like ours, but it could easily be personalized for any number of other institutional uses. A kindergarten teacher could place her students pictures and art in the book to use as a teach tool that engages during the next election cycle (one page allows a drawing by the buyer, or their kid, to be inserted among other drawings by kids). In the long run, though, The Obama Time Capsule will be remembered as setting the standard for participatory books about many topics.

Some sites have dismissed the effort as pure novelty, like placing one’s face in a fake Time magazine cover, but I think The Obama Time Capsule marks an intriguing beginning in publishing, because it represents the kind of service an artist can provide in a deeply mediated society. Smolan has created a frame through which readers can look at the Obama candidacy and election with touches of their personal experience to memorialize how they personally shared in the experience. ObamaBack

“It’s not the point of the book to be Zelig-like, morphed into a picture at the inauguration,” Smolan said. Rather, The Obama Time Capsule site, which buyers can visit after purchasing the book at Amazon, lets readers add their name to the cover, e.g. “Rick Smolan, Jennifer Erwitt and The Ratcliffe Family.” Inside the book, buyers can customize the dedication, add their pictures to montages of campaign events and supporters, and insert an image on the back page (to the right, I am the fat guy with the microphone, I was asking a question of Sen. John Edwards at the time). It’s the kind of subtle participation by readers that will make the book stand out on their bookshelf or coffee table: “Look, that’s you.” Then, the book carries the story forward.

The result is a book that, while framed by Smolan and Erwitt, embodies a personal statement about the buyer’s feelings about the 2008 campaign.

Some folks will say this is part of the “cult of Obama,” but that isn’t the point. The same kind of book could be produced based on any event in history. Woodstock. The 1989 Revolutions. 9/11. The 2004 Election. Those are just a few of the kinds of events that people participated in, directly or as spectators at a distance, that they would like to memorialize and make their own in some small way. They’d also like to share that perspective with others by giving a book composed in part by themselves to a friend or family member.

Of course, there are many subjects and situations that could be trivialized by this approach to publishing, which is why I think the artist driving the title is critical to the success of a book, even one personalized by each reader. For example, it would be easy to imagine all the people who tinted their Twitter avatar green in order to show support for the Iranian Green Revolution wanting to memorialize that uprising and congratulate themselves for their support for it. Only after the movement faltered and the green tint disappeared from many Twitter pages would that have been seen to be trivializing serious events for the Iranians who actually were protesting. Authorship, as Smolan practices it, wouldn’t stoop that low. The public disdain earned by someone who did try to exploit self-congratulatory “revolution” supporters would, at least, force them to acknowledge the shallowness of the publication. This is why authorship and editorial judgment—accountability—remains important.

People make symbols of things all the time. In this case, the creative force is provided by an author and, through a templated Web services, provide readers the opportunity to participate in the making of an historical document. Smolan likens The Obama Time Capsule to a memory book his mother kept about John F. Kennedy in which she also kept her children’s grade reports and pictures. That earnest act of commemoration inspired Smolan and shows how even “ordinary people” can contribute meaningful frames for collective acts of creativity.

I recommend The Obama Time Capsule for anyone who was involved in the 2008 campaign or who simply want to remember the election of our first black president, among the many reasons there were to celebrate the results last November. Your personal touch will make the book a unique memento that will last for generation. It shows what photographers, writers, editors, coders, and readers can create, a lasting document of value.

A couple notes on the book quality. The book, which is printed by Indigo Press in Seattle in conjunction with Lynda.com, Blurb.com, Amazon EC2 cloud services, and Hewlett-Packard, is bound in a personalized cover on very high-quality Sterling Ultra Digital acid-free paper. It’s made to last.

One hectoring review dismissed the book as not original because many print-on-demand and self-publishing services exist (this in response to a comment by one of the sponsors of the book, not the author’s statements). That seems to have willfully missed the creative role of the author in this book.

Here are some additional shots of the inside of the book:

Interior spread of Obama and supporters on the campaign trail from The Obama Time Capsule book.

Interior spread of Obama and supporters on the campaign trail from The Obama Time Capsule book.

Interior spread from The Obama Time Capsule book.

Interior spread from The Obama Time Capsule book.

Interior spread depicting The Competitors chapter, from The Obama Time Capsule book.

Interior spread depicting The Competitors chapter, from The Obama Time Capsule book.

Interior spread showing world response to the election, from The Obama Time Capsule book.

Interior spread showing world response to the election, from The Obama Time Capsule book.

Interior info-graphic spread illustrating Obama's grass roots organization, from The Obama Time Capsule book.

Interior info-graphic spread illustrating Obama's grass roots organization, from The Obama Time Capsule book.

 Interior spread of showing world reaction, from The Obama Time Capsule book.

Interior spread of showing world reaction, from The Obama Time Capsule book.

Interior spread of the inauguration from The Obama Time Capsule book.

Interior spread of the inauguration from The Obama Time Capsule book.

Interior spread of Obama and supporters on the campaign trail from The Obama Time Capsule book.

Interior spread of Obama and supporters on the campaign trail from The Obama Time Capsule book.

Interior spread of showing world reaction, from The Obama Time Capsule book.

Interior spread of showing world reaction, from The Obama Time Capsule book.

Interior spread from the Brand Obama chapter of The Obama Time Capsule book.

Interior spread from the Brand Obama chapter of The Obama Time Capsule book.

Digital edition price flexibility is not optional

I’m not saying price e-books the same as paper or hardcover editions, but, in response to Rex Hammock, I do think publishers should be thinking in terms of the benefits of greater investment in the production of e-books. Likewise, this posting is a reply to Slate‘s Jack Schafer, who argues that, unless publishers embrace the $9.99 price point, they will be “Napstered.”

As I’ve argued before, the future of business isn’t a price point, but management of value delivered and the cost of delivering it.

Rex responded to a comment of mine the other day, on his posting “Yet one more mystery about the enigmatic book publishing industry,” thusly:

Thanks, Mitch. I appreciate your deep knowledge of this topic. However, I don’t believe you can equate the investment necessary to improve the design of an e-book text with the costs outlined… (read it all, the whole comment thread is worthwhile).

In my reply to Rex, I wrote:

Rex, I’m not suggesting they are the same costs, just that the publishers shouldn’t be looking at this solely in terms of how cheaply they can get an electronic version out. Better copy and enhanced reading experience will make a positive difference in the marketplace.

But, to make my point, let’s take a hardcover as an example….. The paper and printing costs of a $24.95 hardcover are somewhere between $4.60 and $6.00. Except for huge bestsellers, at least a third of the copies produced at that cost will be returned, so the real cost per book because it is in paper and distributed through physical channels is close to $9.50 (including shipping costs both ways). If I sell the books at a 45 percent discount, I’m making $13.72 per copy sold before any costs (incidentally, this is about what Amazon pays publishers for bestseller Kindle titles sold for $9.99). After accounting for returns and the cost of production, my top-line profit is roughly $4.22. I still haven’t paid my G&A, editors, author advances, or for marketing. I might spend less than $2,000 for marketing (there goes the profit from 500 copies sold) many of the titles on my frontlist.

Publishers run a very slim margin, on the first 10,000 copies of that hardcover, they will lose money. Sanford S. Bernstein analysts estimate publishers earn only 26 cents per paper book sold and $2.15 per electronic copy sold. But that doesn’t mean they’d make money on the first 10,000 electronic copies of the same book because the cost structure is different. It’s only when both books make it past their first season and become backlist titles or, if all the stars align, become runaway bestsellers, that I make money. It’s the fact e-books can sit in an eternal backlist and be sold in dribs and drabs for years that make them truly economically magical.

Now, if I chose instead to produce the book as available in electronic format with substantial enhancements (a fully hyperlinked index and TOC, as well as a style sheets for multiple formats and screen geometries, for example), it might take a designer and editor an additional $5,000 to $10,000 to produce the electronic book for the “major” electronic platforms.

For argument’s sake, let’s say I did spend $10,000 on the electronic designs. Compared to the cost of the first 10,000 hardcover books, it looks cheap, but unless I have real clout as a publisher or a proven bestselling author I am still getting only about half the revenue for e-books sold on Amazon. If I sell in other venues and formats, I have to spend some of my own money on marketing to get attention that Amazon delivers simply by being listed in front of so many potential buyers. The typical publisher, then, will probably see top-line revenue close to the $2.15 per copy sold in “earnings” identified by Bernstein’s analysts.

In the end, I only get a margin that after I market my book and the sales channel “dips their beaks” comparable to the physical book top-line, so if I reduce my list price from $24.95 to $9.99, I make less per copy sold before any other costs. Therein lies the reason that open formats, self- and on-demand-publishing, and competing channels are critical to the evolution of publishing, because the price of selling digital stuff remains prohibitively high despite all the prevailing thinking that it is “free.”

In electronic copies, there are no returns. There probably ought to be, since a lot of books and magazines ship for Kindle with egregiously bad unproofed copy (why The Atlantic, which I wrote about today, would not proof its Kindle edition, is beyond me). I get to keep more of my top-line profit as an electronic publisher, but it will still take sales of several tens of thousands of copies to break even on an e-book, particularly if I’ve paid an advance to the writer.

This all supposes there is a reason for the publisher to participate in the process, that there is a good reason for authors to work with editors and marketers. That’s a separate debate, one publishers need to recognize no one takes for granted anymore.