A “standard” assumes the features are already set

“Ultimately, the success or failure of the eBook and eBook reader market is going to depend on establishing a standard format,” writes Tony Bradley at PCWorld. He’s right to the degree that, once a format is ready to make reading on a digital device better, it must become a standard to ensure that readers can access the file on any device and that publishing involves managing as few formats as possible. But there is an assumption in the article that there is a viable format exists on which everyone should agree. We are very far from agreeing what an e-book is, except that, as a subset of that definition, it will display words on a page.

A first-generation standard will scratch only the surface of the problem, addressing the problem of getting words on the digital page. The industry and, more importantly, readers, need more:

  • An open annotation system, but one that respects personal privacy by keeping notes meant only for the book’s reader (and, by extension, anyone with their password, their heirs) separate from public notes and conversation embedded in/around a book title.
  • A privacy regime enforced at the document level, preventing tracking of personal reading.
  • A page-independent reflowing capability, so that ridiculous ideas, such as “books for the Kindle DX,” become the fossils they deserves to be. A book should never be dedicated to a device, though there are some bizarre collectibility plays that might go that way.
  • A page-independent citation system so that kids can use an e-book citation in their homework as easily as a scholar.
  • And more…. Such as the whole question of how to integrate networking into documents.

The challenge of establishing that first standard, which lets e-books be read on any device, including PCs and smartphones, will be choosing technology that doesn’t shut the door to these additional standard requirements of a book while preserving forward-compatibility.

UPDATE: As I was arguing the other day and in the previous posting, the conform-to-compete trend in e-books is indicative of a wave of destruction. Mike Cane argues an e-book bubble is already well underway and I would not disagree with him, except to point out it is a very small bubble, though one that could unfortunately hobble the market for another half decade if it pops just now. Having published an e-book in 1993, when these things were going to be big, big, big! I have no illusions about how small a market can be. Cane, however, uses his argument to conclude that components of current technology, such as E-Ink, will inevitably fail. He argues this for all the right reasons that e-books don’t do anything spectacularly different than books and often represent less-than-a-book—he’s right that it is a race to the bottom based on price. The individual components could succeed or fail, perhaps not even within the e-book industry.

Sony conforms to compete: Low-priced reader and $9.99 e-books ahead

According to The Wall Street Journal, Sony will introduce new versions of its Reader and lower the price of e-books in its store to match the prices at Amazon.com and BarnesandNoble.com. The devices, the PRS-300 and PRS-600, as well as their respective prices, $199 and $299, were “leaked” last week, including the pricing (ZD Net’s Larry Dignan has a good summary about the new readers). Sony’s falling into line with pricing of e-book titles is the news here.

Now, what’s got me wondering here is how all the would-be major vendors of e-book readers are competing on price and only price, for both the hardware and content, what’s the opportunity to differentiate? At this point, only connectivity, which Amazon has nailed with the WhisperNet technology it currently offers. Plastic Logic will have a Sprint-enabled WAN service, too, but Sony’s still in the wilderness with its dock-to-sync e-readers—however, The Bookseller reports that Sony is planning a Wi-Fi-enabled Reader for European release this fall.

If connectivity is the only differentiator, the opportunity to extend competitive advantage lies in one of two directions:

  • The iTunes Model—Make a proprietary system so darned convenient that the customer hopefully forgets about the DRM and other downsides, or;
  • The Rich Format Model—Take an open format for e-books and begin adding to it, putting annotation and other “social” features into the titles to begin to add value.

No device succeeds without adding value to the experience its competitors provide. Amazon remains the standard setter in the e-reader business. No one wants to go into the uncharted waters of open and “social” formats where the real wealth lies.

Priceline orders Smashwords to cease and desist

Apparently, Mark Coker, founder of e-book distributor Smashwords.com set up a site that caught the attention of Priceline, a Shatner-enabled vendor of travel services with which you may be familiar and less inclined to like after hearing the following. Priceline wants Coker to shut down his new site, called “name-your-own-price-ebooks.com,” because it violates the company’s trademarked slogan. Mark blogs extensively about the letter, including printing the letter’s text, at the Smashwords blog.

The greatest irony, I think, is that the law firm’s url is “DRM.com.” It is an acronym of partner names, but represents what the company and its clients spend their time doing. Alas, Mark should drop the url rather than get himself into a suit. What he should ask, however, is that Priceline agree never to enter the e-book market in return for the concession on his part. After all, he got the URL first, and if Priceline wants him to respect their trademarked slogan, which is only a fragment of the name of his site, he should expect something in return. I had an investment in a company with a name that was spelled similarly to a publicly traded company, both of which had been registered in different states within weeks of one another, that received a payment from the company asking them to stop using the homonymic URL after several years.

Mark just set up the site, having seen only nine visitors at the time he received the cease-and-desist letter. Nevertheless, he did invest in the design and functionality on the site and should use the occasion to ensure that Priceline stays out of e-books and will enter into no future litigation over similar concepts, such as “your price on e-books” or whatever. In the meantime, he should switch his new site to a variation on the phrase that will not raise the hackles of lawyers with nothing better to do that send letters like this over the weekend. And he should retain the existing site but place a redirect to the new URL on it for a period of one month.

If Mark wants a really cool tool for a patronage model in e-books, he should take a look at Songslide.com’s “pick your price” slider tool, which lets artists set a minimum price but be paid more by fans. I’m an investor there. Happy to make an introduction.

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.

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.

Kindle 2 for $299

At its release, Kindle 2 was estimated by iSuppli to cost $185.49 to manufacture. Amazon’s top-line margin was $173 at the Kindle 2’s $359.00 list price. Today, the device has been repriced to $299, breaking a price barrier, $300, that’s still too high for many people. The change is significant, because it will force already profit-challenged competitors to price their hardware lower. The move could strangle some competitors before they find traction with readers.

The price of components is likely falling, because of the rising demand for E-Ink displays and growing volume of Novatel EV-DO modules sold for Kindle and other devices. For the most part, though, this is simply an offensive move against “less expensive” readers, such as the $250 Cool-ER and Borders £189 ($314) UK’s Elonex reader.

Amazon is in an excellent position to put price pressure on hardware competitors, reducing the competition it faces in e-book sales from formats the can be read on these devices. It can sacrifice hardware margin to drive content revenues. The danger, from publishers perspective, is the control Amazon seeks to exert over e-book pricing, which Bloomberg reports is increasing.

Unless Kindle opens up to other formats, I think the combined market power Amazon wields will backfire on Jeff Bezos. The publishing industry could shift their support to an alternative e-book device (Plastic Logic, for example) or channel (Scribd or Apple’s AppStore) in a stand against Amazon’s requirement that all books be priced at less than $12.50.

Of course, pricing is a powerful market lever, but it’s not the only factor in the creation and promotion of creative and intellectual works. At some point, quality and features—extending the book beyond the replication of a page in digital form—will become critical factors in the success of a work, and that will shift the entire market’s attention away from the cost of e-reader hardware.

$9.95 is the e-book price point, B&N says

Barnes & Noble has decided to match Amazon Kindle book list pricing for new and bestselling books, telling members of its eReader.com service that all new books will sell for $9.95 or less, according to InformationWeek and JKOnTheRun.com. In actual fact, because eReader.com has a rewards program that returns 15 percent of sales to the customer’s account for use buying books in the future, B&N is undercutting Amazon’s Kindle pricing by a significant margin, as much as $1.44 a book.

eReader.com also says it will never charge more than $12.95 for any e-book. eReader software is available for iPhone and iPod Touch, Blackberry, Palm OS, PocketPC and Windows Mobile, Symbian, Windows, Macintosh and OQO operating systems.

Don’t fear rising Kindle prices, don’t accept arbitrary pricing

Aaron Pressman blogs that “As feared, Kindle prices appear to be rising.” Kindle prices are certainly changing, but the increases don’t mean any of us have to buy the books being offered. It only means that diversity is inevitable in this marketplace, because the increasing number of higher-priced mainstream titles will be met by growing numbers of alternative offerings at other prices. Some folks want to boycott anything that costs more than $9.99 on Kindle. Let’s be clear, the format isn’t what determines pricing, it’s the cost of the research and writing that went into the book.

Indeed, the statistics Pressman points to indicate that while more books are being priced over $9.99, 69.5 percent of all the books on the Kindle store sell for $9.99 or less. Only 10 percent of those books are the sea of public domain books that are repeatedly copied and uploaded in poorly formatted version for $0.99 or less. In that margin between 99 cents and $9.99, a majority of books published for Kindle are delivering value to readers at a very low cost, because there is no longer the cost of production and inventory associated with paper books. The cost of the book’s production itself is actually a small share of the cost of a book at retail, it’s the massive return rates of books—typically over 50 percent—that keeps prices high.

Then, it is the discounting of books that cleaves most of the profit from even the biggest bestsellers. As Pressman notes in his posting, a copy of Big Russ and Me, by the late Tim Russert, is available in paperback for $5.58 in paperback, $9.18 in hardcover (originally $24.95) today, because they have been remaindered. In electronic publishing, where a copy of a book is never produced until it is sold, there is no remaindering. So, Russert’s book in the Kindle edition sells for $9.99 all the time.

Big Russ and Me Kindle edition is an "excluded product"

Big Russ and Me Kindle edition is an "excluded product"

What’s especially interesting to me, as someone interested in how books will be sold in more egalitarian ways, the Kindle edition of Big Russ and Me is an “excluded title” in the Amazon Associates program. A blogger who is an Amazon Associate cannot link to the Kindle version, but can link to the paper or hardcover editions. That’s a subtle but important level of control that skews the sales of books few people acknowledge.

Is $9.99 for the Kindle edition of Tim Russert’s book an arbitrary price? The reason the paper and hardcover editions of Big Russ and Me are available for less is that they cost money to keep on hand. They actually eat away at profits while sitting on the shelf of a warehouse somewhere or, at least, that is how publishers do bookkeeping. What would make more sense is a situation where the Kindle version, because it is not competitively priced with other editions of the book, were repriced to make it more attractive. That would require, though, that the publisher to have not created this big pile of remaindered paper copies it would rather sell. So, the pricing is arbitrary, but “justified” in the publisher’s business calculations. The reader gets stuck with the bill for the publisher’s inefficiency.

However, if another author had spent, say, ten years working on a comprehensive history of the Gulf War and had assembled an electronic book that included all the writing, photos and archival data she’d collected, why not price it higher than $9.99? The paper edition of such a book, which could be thousands of pages long and include high-resolution photos sell for much more, not because it was printed on paper, but because it was an artifact of great scholarship and beauty. The project may have cost her $60,000 in travel and research expenses, let alone what it cost in time to write the book. For argument’s sake, let’s say it cost $120,000 to produce this richly documented history. At $9.99 a copy, she would have to sell about 18,000 copies (given the 45 percent share of revenue paid to Amazon) just to break even. But at $24.95, break-even would come at approximately 9,000 copies—and all this assumes she self-publishes. A publisher would only add costs that increased the break-even point into the 30-, 40- or 100-thousands of copies.

Since we can assume that people do not publish to lose money, although they may freely write without compensation for love or dedication, it would be against the reader’s best interest to demand that any title they purchase be priced at $9.99. More than half the time, at current price distribution, they’d be paying more than the price the author sought and in cases where a book’s costs were high but the rewards for the reader comparably high, the reader would be underpaying for the book and likely preventing the author from working on her next title. Spending ten years paying back the cost of a book isn’t the way writers want to live; it’s like having to build a house from scratch on your own dime, then letting someone else live in it while you pay back the cost of the materials.

Pressman points at the “horrendous” price of ScrollMotion’s books for iPhone, but at least there are 100,000 new titles for the iPhone to choose from because of those prices. If you don’t want to pay those prices, find one of the obviously plentiful alternatives to the Scrollmotion version of those books. Don’t tell others that they can’t buy them. Call them foolish for paying those prices instead.

If we demand that anything formatted for an e-reader be no more expensive than $9.99, the real opportunity of the “long tail,” which describes a market where a small readership can sponsor highly focused writing that serves their interests or a hit can grow by word of mouth among grassroots readers, will be lost. A while back, I addressed how the real cost of journalism could be covered by readers dedicated to getting great reporting could be covered at a relatively low cost per reader. That means putting the premium on the ideas contained in a book.

Pressman says he wants the Kindle to succeed, which puts a premium on the device and format. I want to see publishing change and diversify, which means there will be many price points for myriad titles that were never before available to readers. A $9.99-only world would lead to less diversity of ideas, even as it looked like greater fairness to readers.

Noted Opinion, June 21, 2009

A couple of articles crossed my radar today. Some thoughts….

Zombie Publishers, a nice philippic by Morris Rosenthal with a video interview with Harlan Ellison that’s worth the link alone. I’ve been approached about writing the kind of slap-dash book by “contributors” that he describes by a surprisingly wide range of well-known publishers, it’s not a feature of “bad” publishers, it’s becoming the norm. Like Rosenthal, I don’t like the trend. Ultimately, he’s making the argument that paying a writer to write well is a worthwhile investment or, if you are contemplating self-publishing, writing well is worth the effort. Yes!

Democracy’s tough, but Amazon’s role isn’t pure as switch11 argues over at iReader Review. First off, I agree with the initial points made in the article, that Google v. Amazon, Kindle v. Sony Reader, Plastic Logic v. Kindle DX are all distractions from the real transformation of the publishing market. They are sideshows, as I wrote yesterday. However, the article then veers into the ideologically charged topic of “democratizing publishing” an identifies enemies of progress. The author throws unfocused charges about misinformation from publishers and “other sites, and bizarrely characterizes Scribd as an enemy of democratization, apparently because it will “let Publishers determine pricing.” “People who are stuck in the past” are also enemies of progress; I’d argue they are barriers to, but more likely poised to become victims of, progress. There is also discussion about misinformation, which is rampant in this market, though it seems to me to be coming from many different sources, not just the enemies identified in the posting.

Stay grounded during an industrys evolution

Stay grounded during an industry's evolution

Switch11 goes on to say that Amazon’s position in the market is essentially “democratic,” even though it acts as a pricing arbitrator. Governments that set pricing ruin economies. Amazon is making useful early suggestions about pricing but is smart enough to know it must let prices find their own level. Building on the Amazon qua democratizing hero, Switch11’s argument goes: “Publishers are used to the status quo i.e. they control what gets published, they make the lion’s share of the profits, we read what they decide we should read, and so forth.” There is also the standard “we are at the beginning of a revolution” rhetoric, but really, it’s an evolution. Revolution is what is happening in Iran. In publishing the krill shrimp that were authors and small publishers suddenly are equals in the food chain with industrial publishing whales. The big question now is what to do with all the blubber in the old system, and that’s Switch11’s point, though it is buried in a lot of finger-pointing.

Kindle didn’t start this change, desktop publishing and cheap printing exploded the economics of the publishing industry in the 80s, as did the Web in the 90s. Self-publishing innovation has dramatically expanded the number of titles published in paper each year, with more than 10 times as many titles published in 2008 than in 1990 (a link to this coming, in the growing BooksAhead statistics pages). That’s an order-of-magnitude change in paper titles published. You won’t see one often. We’re early in a long change, but not a competition between aristocratic publishers and the reading public, rather it’s a rising tide of competition within publishing, from all corners of the map, that cannot be accommodated by existing distribution and marketing infrastructures.

Putatively, anyone can reach an audience with a book, in either paper or electronic form. The reality is that it is hard to reach a large market, but the economics continue to change. For this market to develop most efficiently, a distributor like Amazon cannot be setting prices. Instead, all publishers should be free to set prices and let the market work out what the right price is for each intellectual product out there. My guess is that Simon and Schuster’s price experimentation with Scribd will be useful as an exercise in facing reality, as Amazon has set the market’s expectations at $9.99 for a recent bestseller. But even Amazon doesn’t enforce a single price point. One price doesn’t fit all, and it’s good that we’re seeing price-based competition in the market. What we really need, in addition to that, is more innovation in the idea of what a book is. We haven’t even scratched the surface of how texts and culture will change as a result of innovation.

Switch11 writes that “by 2012 we’ll be living in a world where the majority of the power and benefits lie with readers and authors.” With publishing margins in low single digits, it’s clear we live in that world now. What will continue to change is the number of people and companies that will be publishing for a profit, as well we’ll see a flood of quality free publishing efforts that seek other compensation, such as social influence, political power and commercial relationships with an audience. If we’re going to measure the success of this “revolution” by the shuttering of publishing house offices, that is the mistake.

There is no enemy, and no need for enemies, just for more participation.