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

The Lost Symbol will be a dollar sign

The Da Vinci Code sold more than 81 million copies worldwide. Dan Brown’s new book, The Lost Symbol, will be released simultaneously in hardcover ($16.17 at Amazon, a 46 percent discount) and for Kindle ($9.99) on September 15th. Five million paper copies of the book will be printed, one digital copy will be encrypted several million times. Likewise, Sony is certain to offer the book at the same price or lower in its e-book store, taking its losses on The Lost Symbol to drive sales of its Reader devices.

What we will witness is a test of how far hardware vendors will go to increase unit sales of their respective devices. Since Random House will collect between $12 and $13 per copy from digital channels, the hit to Sony and Amazon’s top-lines will be substantial. Each will pay millions to keep The Lost Symbol at the top of their device’s bestseller list. The symbol lost in all this hoopla will certainly be a dollar sign, but it may result in greater uptake in e-book formats generally and, perhaps, a “winner” among the current dedicated e-book readers.

The Lost Symbol is the title that could make or break the current generation of e-reader devices, firming up reader’s investment in the platform and format in which they read digital books. I don’t think that Dan Brown’s latest will sell millions of Kindles on its own, but it will be the title that converts some readers to Kindle or Sony Reader. Both Sony and Amazon see royalties paid on this book as a sunk cost they expect to recoup from hardware sold. If the hardware revenues don’t follow, this book may convince one or both of them that dedicated e-readers aren’t the best business.

If there are approximately 3 million Kindle-compatible devices (Kindle hardware and iPhones running Kindle for iPhone) and some 500,000 other dedicated e-reader devices, as well as perhaps six million other software-only readers installed, electronic sales of The Lost Symbol could account for up to five million copies, matching the first print run. That will be a huge accomplishment.

However, because e-reader hardware is still too expensive for most consumers, e-book sales will likely be slower than print sales after the initial release, especially when paperback editions appear. The key market to watch then will be e-reader application installs on smartphones and computers. Since e-book applications that run on phones and PCs carry little migration cost, we can expect to see an explosion in sampling of reader apps if digital copies of The Lost Symbol are going to pace paperback sales. The only possible channel through which The Lost Symbol could continue to sell 50 percent of total copies sold in digital format is e-readers on phones and PCs.

In the long run, the economics of reading will drive adoption of common formats not incompatible e-reader hardware. I’d be very surprised if Dan Brown’s next book isn’t offered in a single digital format—most likely ePub—that can be read on any device or in any e-reader application. By then, Kindle will be compatible with ePub, because Amazon’s goal is to grow share of books sold, not just to be a e-reader hardware vendor.

Of pricing and piracy, the discussion rolls on

Several postings on the ongoing debate about the “right price” and potential piracy of e-books deserve mention today. I’ll only reiterate that the formulae should be “Value at the right price.” Each worth a read (or listen):

The “Bookster” Threat, from The Abbeville Manual of Style (via TeleRead) and very interesting comment thread, too.

An ebook experiment stirs up conversation, from The Shatzkin Files on the Sourcebooks-holding-back-BranHambric story.

Journalists Debate E-book Pricing, a podcast from GalleyCat.

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.

Blackwell launching e-book store, selling BeBook in stores

BeBookProductpaginaCrop3British academic book retailer Blackwell will begin selling the BeBook e-reader at retail next week, the Bookseller.com reports. Blackwell offers more than 45,000 titles for the device, which features an E-Ink display and support for ePub, .mobi, PDF and other e-book formats, will sell for £199 ($327.00 at current exchange rates) through Blackwell’s e-book store. BeBook currently offers the e-reader directly through its site for $279.99, which is described as a “Temporary Price Reduction.”

BeBook is also available at retail Libris and Biz bookstores in the Netherlands.

BeBook had sold 30,000 units as of last September. Based on the increased volume of sales in readers and the new promotion by Blackwell, BeBook will likely finish 2009 with approximately 92,000 units sold, if my market estimates are correct.

Noted News & Opinion, June 16, 2009

Global entertainment and media spending will reach $1.6 trillion in 2013, according to PricewaterhouseCoopers annual industry projections, AdWeek reports. The U.S. media industry will not match growth in the rest of the world, increasing only 1.2 percent annually, compared to the global rate of 2.7 percent, reaching $495 billion in 2013. Digital revenues are predicted to grow from 17 percent of the market today to 25 percent, for a total of $124 billion annually, four years from now. Bad news for magazines and newspapers, where revenues are expected to continue to head south.

Surprise, Jeff Bezos doesn’t like the Google-Author’s Guild settlement. But he won’t say why, according to CNET: “We have strong opinions about that issue which I’m not going to share,” Bezos is quoted as saying during the Wired Business Conference. “There are many forces of work looking at that and saying it doesn’t seem right that you should do something, kind of get a prize for violating a large series of copyrights.” The article also suggests that Bezos said Kindle sales now account for 35 percent of paper book sales, which I believe is a misinterpretation of what he said, as I discussed yesterday. What he appeared to say was that when a book is available in paper and on Kindle, 35 percent of the sales are in Kindle format.

Author Jeff Matthews suspects Google’s good for writers. He’s fond of Google Books as a research tool, as I am, then relates an interesting story about discovering why his grandfather won a medal in World War I through a book scanned by Google. It’s a touching story and is completely valid with regard to out-of-copyright books, but that kind of title isn’t what the Google-Author’s Guild covers. I have a different opinion, but I found Matthews’ story compelling.

S&S e-books venture is doomed. Author Anthony Policastro (Absence of Faith and Dark End of the Spectrum on Kindle), writing on his blog, argues that Simon & Schuster’s announced distribution deal with Scribd will fail because the pricing strategy is wrong. “Most people won’t even pay even $10 for an eBook,” Policastro writes. “The reason is that they do no perceive the value the same as the printed version.” I disagree, not because of the price point, but because the e-book as it is today is no improvement over reading a book and, in many ways, diminishes the reading experience. Someday, readers will pay more than the Jeff Bezos price ($9.99) for a book, because it will be a portal to new experiences through reading. But Policastro is right about S&S’s pricing strategy: If they want to succeed on Scribd they must compete on price, going below Amazon’s pricing.

Mitch’s Perspective: Today’s e-books have been positioned as less valuable than a mass market paperback. That needs to change, which means the features and services associated with the e-book have to change, for the better.

Amazon would be boycotted, if Science Fantasy publisher has a say. Antellus, a publishing company operated by its only author, Theresa M. Moore, has complained that Amazon is slow to respond to publishers experiencing problems with its DTP publishing platforms’ management of ASINs and and associated accounting systems. She also says Amazon should be faster in its deployment of a color Kindle. While the former may be a real problem, condemning Amazon for a “seller agreement, which allows Amazon to modify and/or sell books from its suppliers in whatever format it chooses at its own discretion,” which is key to providing book buyers archival access to titles without having to renegotiate rights each time it updates file formats, and failure to be the first to deliver a color reader diminishes the force of her arguments.

Circa 1994: The Audio Book Buyer

This is a second sidebar to the Making Book On PDAs story published below, in the August 8, 1994 edition of Digital Media: A Seybold Report. An examination of the CD- and tape-based audiobook market, it predicted a transition to digital a year-and-a-half before I became an advisor to Audible Inc., the company that invented downloadable audio players and that now dominates the audiobook market.

Forebear of the handheld E-Book consumer?

She’s a typical audio book buyer: Forty-four years old, has some college in her background, makes a little less than $45,o00 a year and listens to audio books in her care or while working on a report or at dinner. For her, books speak. Reading has been transformed by the introduction of analog tape technology.

The $1.2 billion market for books on tape has skyrocketed in the past five years, growing 40.3 percent in 1993 alone, according to the Audio Publishers Association. Random House, which publishes about 150 books-on-tape titles, saw sales climb 81 percent from the first quarter of 1992 to the same period in 1993.

If selling CD-ROM titles has been difficult, getting titles for handheld devices such as WinPad and Newton into the retail channel looks next to impossible. Audio books are proof that a new media can make headway in bookstores, and even lead to the establishment of an independent channel. According to investment bankers Veronis, Suhler & Associates, approximately 125 audio bookstores, carrying an average Continue reading

Circa 1994: Making Book On PDAs

Another historical perspective on e-books, this from the August 8, 1994 edition of Digital Media: A Seybold Report. I’d published my first interactive book, in Voyager’s Expanded Book format, about a year earlier.

A market in hand for electronic publishers?

With so many industries focused on getting the interactivity into televisions and PCs, there’s not much interest anymore in delivering digitized information to handheld computers. Excitement has shifted from John Sculley’s prognostications about a $3 trillion market portended by the introduction of Newton to the similarly warm, fuzzy fantasies of the information superhighway. Nevertheless, there’s a world’s history worth of data that could find a very lucrative marketing on handheld devices—at bargain prices compared to the cost of interactive television programming.

Sooner or later, the bad feelings engendered by the poor reception for handheld computers, especially in the press, will pass. As handheld devices take off, someone’s going to cash in on the publishing opportunity in carry-along digital data. It’s tough to take a digital book along on the commuter train or into the park. A desktop PC or Mac’s got about five feet of leeway before it loses its connection to a power outlet, and portables don’t make good company during a quiet moment, or even a noisy one when a single bit of information is needed.

Unfulfilled promise

From the start, personal digital assistants (PDAs) have delivered more promise than palpable benefits. But the potential locked up in the Newton, General Magic’s Magic Cap and Microsoft’s upcoming WinPad operating system is immense. They tear off a large part of the functionality in a computer and fold it into the pocket. If used intelligently by publishers, handheld formats can enhance the experience of information.

Everyone’s familiar with the trail of tears traveled during the past two years by Apple’s Newton, AT&T’s foster child, the EO Personal Communicator, and the Tandy/Casio Zoomer. PDAs were pummeled by Time, Newsweek and The Wall Street Journal, with negative adjectives piling up faster than sales receipts.

Sales of Newton, which started out briskly, have slowed in recent months. Despite that, the average consumer electronics company would jump for joy over Newton’s numbers. About 100,000 units have sold through dealers. Tens of thousands more Newtons have been shipped direct from Apple to corporate buyers. EO took the big dirt nap after wracking up sales of only 9,000 units in a year. The Zoomer, which runs the GeoWorks operating system that will be shipped in several new handhelds in coming months, has earned about 40,000 users, according to the most optimistic reports.

Developing titles for this market is an unattractive prospect in almost anyone’s book. It’s tiny and fragmented. All told, there’s less than 2000,000 handheld devices out there using four incompatible operating systems. But that is today.

We expect a small but significant explosion in handheld sales Continue reading