Google Editions defies digital economics

Google today announced it will enter the e-book distribution business with a service, Google Editions, which will sell electronic copies of as many as 500,000 books offered by traditional publishing houses. The service is amazing, because the company has found a way to increase the retail distribution cost of e-books relative to paper books. Think about this—the zero cost copy of an e-book will be the basis for Google keeping substantially more, as a share of list price, to deliver a Google Editions e-book through a third-party retailer than buying directly from Google.

It may seem attractive to retail partners, which will purportedly include Amazon, Sony and Barnes & Noble, but even they’ve got to be scratching their heads about the added overhead Google built into its pricing scheme. An e-book purchased from Google Editions will list for the same price as the same book offered by a publisher through Amazon or Sony, for example, and Google will pay the publisher 63 percent of the list price. But, if the book is purchased in Amazon Editions format through Amazon or Sony, publishers will only get 45 percent of the list price.

Google said it will share the additional 18 percent with the retailer, though “most” of that 55 percent reportedly will go to the retailer. My guess is that by “most,” Google means the retailer will get 25 percent and Amazon 20 percent, or some approximation of that split. This seems a concession to make sure the Google Editions format books are carried by retailers.

Let’s break that down. For a bestseller, which the market has decided should be priced at $9.99, the publisher will earn $6.29 when Google Editions sells a copy. When that same Google Editions e-book is sold through a third party, the publisher will earn only $4.49. Intermediaries increase their share of revenue, even though they’ve taken on no inventory risk.

Publishers get 63 percent for selling directly and 45 percent for a Google Edition book sold through a third-party retail site. It defies all the economic logic of digital distribution. The likelihood that Google will really get more e-books from publishers on those terms compared to those offered by Amazon, Sony or Barnes & Noble to the same population of publishers strains credibility. But, we shall see.

More bad news: DRM

While the Google Editions e-books will be readable in a browser, they will not be unencrypted. Google makes clear that books will come with DRM, because they have created a way to let readers access files when not connected to the Net but without the ability to share those books with others. Books will be tied to a Google account, just as GMail, Google Docs and other services.

The retailers, all of whom have introduced proprietary e-readers and, except for Sony, which offers ePub formatted e-books, should be frightened about the leverage Google Editions will bring to market through the combination of browser-compatible books and the vast library of out-of-print titles the company can offer as a wedge to get its DRM technology on readers’ devices. Now is the time—and this announcement is probably what Amazon was waiting for—for Amazon to support other formats on the Kindle, and for Barnes & Noble to embrace ePub.

All the retailers will need to be defensive with regard to the massive presence of Google Editions titles in the market. Ultimately, though, the battle is about who provides library management service to the reader. Google, with all the other services it offers to PC and smartphone users, will be a natural cloud-based repository for e-books, too.

Amazon can and will counter by making its e-books format more compatible, supporting ePub and selling through partnerships that collect many more digital products in its customer library. Just last week, Amazon introduced a global wish list, the ability to add anything from any Web site to one’s Amazon wish list. That kind of “open” access to Amazon services foreshadow the immensely complicated retail and fulfillment relationships we’re going to see.

In the end, though, this complexity in digital asset management is a clear sign that the dedicated e-reader is a passing phenomenon. Hardware has to be more capable to support many human needs.

Times only get tougher for the writer

The argument will be made that, now authors can publish themselves and keep between 45 percent and 63 percent of revenues. But that share of revenue comes without the investment in marketing, manuscript development and preparation that a publisher puts into a book, limited though that may be for most books. The model only works for the author if simply being findable through Google’s search engine completely offsets the sales driven by having a book in stores, discussed by reviewers and featured on radio and television, which remain the primary channels of discovery for many readers. The word-of-mouth marketing world must change far more than it has progressed already for authors to viably forego working with publishers.

Yet, publishers should be painfully aware that Google will be competing with them not just for new titles, once the conditions for word-of-mouth success have been fulfilled. Google will also be competing directly with publishers offering new editions of older titles, especially the classics and books published before 1920 or so. These are the books already scanned in the Google Books project and, despite being poorly converted—often mangled beyond recognition—these older titles will compete with better edited and editorially augmented versions of older books.

The headline for writers, whom frequently sacrifice favorable terms for electronic and other rights to their works, is that the Google Editions business model will leave them with a shrinking share of the revenue from those works due to discounting and lower e-book royalties (despite the fact that, with an e-book, the publisher is risking little or nothing with each copy it makes) because the publishers, who are used to discounting books by perhaps 45 percent at most, before accounting for returns, will now be discounting e-books sold through Amazon and other established online retailers by 55 percent.

It’s time for a wholesale reinvention of the publishing industry and its relationships with writers and readers. This announcement, it strikes me, is a step in the wrong direction. Google’s business model clearly suggests that the actual written product is the least valuable element of the e-book product, and that’s unfortunate.