Saturday, September 11, 2010

Will the Book Publishing Industry Survive the Digital Revolution?




WILL THE BOOK PUBLISHING INDUSTRY SURVIVE THE DIGITAL REVOLUTION




[This is a presentation I gave to academic staff in the School of English, Media Studies and Art History at the University Queensland on September 10, 2010. The tables may be a bit misaligned due to the vagaries of blogspot, so apologies in advance.]

Introduction


The Digital revolution is presenting the book publishing industry with enormous challenges. So many of the industry’s long-established, entrenched practices are under serious threat and are very likely unsustainable in the digital world. This paper will explore what is happening and how publishers, globally and in Australia, are reacting, or more accurately, not reacting. It will examine the critical issues of declining prices and revenues, relations with authors, the future of booksellers, device wars, business models, and others. It will challenge the publishing community to seriously lift its game, if it wants to survive.


Background


There can be absolutely no doubt that the book industry, like the newspaper industry, is in the midst of a profound revolution. And it is happening very, very quickly - in fact so quickly that the landscape seems to change week by week.


Let me provide a little context. In November last year I gave a presentation on digital futures to the Australian Campus Booksellers Association. It was an anniversary speech. Five years previously, in 2004, I’d given a similar address to the same audience, where I’d rather boldly declared that, given the rapidity of developments in the emerging digital world, in five years time only half of them would be still in business, selling printed textbooks to tertiary students. As it turned out, all of them were still there, and in fact were thriving, and were delighting in pointing that out to me!


Far from being dead, the textbook is very much alive and well. In figures collected by the Australian Publishers Association, sales of tertiary textbooks grew 10.2% in 2008 and 7.8% in 2009. So, not only was I wrong, I was very wrong!


A number of things can be concluded from this. Firstly and most obviously, I didn’t know what I was talking about, and secondly, some profound transformations we all anticipated simply weren’t happening to the extent we thought they were.


In my defence let me say that I wasn’t alone. In 2001, the global business consultancy company Accenture forecast that there’d be 28 million dedicated ebook readers in use in the US alone by 2005, and ebook sales would be $2.3 billion. Another major consultancy company Forrester predicted a far more modest $251 million in sales of ebook devices by 2005, but – and this is astonishing - $3.23 billion in sales of digital textbooks alone. RCA, who made ebook devices at the time, dismissed Forrester’s forecasts as ‘ridiculously low’.


Even Microsoft, when it launched its famed Microsoft Reader software back in early 2000, got it laughably wrong. It predicted that, by 2005 ebook sales would be almost $1 billion, and ebook vending machines would be everywhere, in bookstores, newsagencies and airports.


Of course, by 2005, nothing remotely like that happened. The first generation, as it turned out, of ebook devices, the Rocket eBook, the SoftBook, the Franklin eBookman were all dead and gone, and sales of ebooks themselves were at asterisk levels - virtually non-existent.


Notice however that all these forecasts, including my own, are in 5 year time frames. There’s something about that 5 year horizon that is immensely and emotionally appealing to digital enthusiasts. I guess it conveys the sense that a revolution is just around the corner, and there’s an urgency about it that can’t be ignored. But importantly, it’s a timeframe where, in a rapidly changing landscape, the forecaster can be reasonably assured that he or she is across most of the elements in play.


Two years ago, in 2008, two fairly influential books were published on the impending future on the book, Print is Dead by Jeff Gomez, former Digital Director at Penguin USA, and The Book is Dead by Sherman Young from Macquarie University. Both books are excellent and I wholeheartedly recommend them. But almost three years on, they are quite outdated. [1]


While the books were at the printers, ironically, the huge game-changer appeared, Amazon’s Kindle. Almost single-handedly, the Kindle radically changed the landscape because of its wireless technology, but most importantly, its US$9.99 ebook pricing. Suddenly ebooks were off and running. The revolution had well and truly re-started. Since then of course we’ve seen Apple’s iPad, the Kobo, and plenty of others.


Which brings us back to the rapidly changing environment of today. I called it a profound revolution and one that seems to be changing week by week. In fact virtually every day there is a new announcement, whether it’s yet another device released, or some hard sales data released, or yet another forecast made, or another initiative from a publisher, an author or literary agent.


(In this presentation today I will focus solely on the trade, or consumer, market sector. The educational side of the industry, whether school, vocational or tertiary, is undergoing its own digital revolution, but it’s a web-based, interactive paradigm, and, although fascinating, is an entirely separate story).


Some Statistics


About three weeks ago the Association of American Publishers (AAP), in conjunction with an organisation called the International Digital Publishing Forum (IDPF), released their data on ebook sales for June and thus the first half of 2010 [2]. As cheekily put by Michael Calder in his well regarded book trade newsletter Publishers Lunch ‘as usual [this data] is leading to a variety of interpretations. Ebook sales are rising, falling, slowing down, plateauing and doubling or tripling all at the same time...The data shows sales of $29.8 million for June (and $88.7 million for the second quarter, versus $91 million for the first quarter)’. [3]


These figures reflect publishers wholesale sales only, not retail sales, and only from the 12 largest US publishers who are the only ones regularly reporting their ebook sales. Still, the vast bulk of sales would be captured in these numbers. What they show is that sales are about $30 million per month – with some months this year being slightly more, some slightly less - and will therefore be about $360 million for the whole of 2010.


As far as I can work out the best estimates for growth over the next four to five years is about 70-80% per year. This means that by 2015 publishers’ ebook sales could be $5 billion per year. In the US the total consumer book market is approximately $18 billion and this is not expected to grow much at all over the next five years, so we’re looking at around 30% of the consumer market being ebook sales in just five short years.


However, predictions vary widely. Digital guru Nicholas Negroponte made headlines a month ago when he ventured that, within five years, the printed book would be ‘dead’. Of course there’d be residual traces still around, but the ‘dominant’ form would be ebooks. [4]


Mike Shatzkin, who runs a highly respected publishing consultancy company in the US, the Idea Logical Co, has long been forecasting that at least 50% of what he calls ‘immersive reading’ – straight text novels and non-fiction – will be done via ebook devices within five years. [5]


We know that Kindle sales have boomed since Amazon dropped the price substantially, from $259 to $189, and now that they’ve just released version 3 for $139 this momentum will continue. The same thing happened to Barnes and Noble’s Nook when they cut their prices. According to Forrester Research Amazon has sold about 5 million Kindles since the launch in 2007, and Barnes and Noble has sold about 1 million Nooks. Sony, however, seems to have dropped the ball and is fast losing market share. Their prices are still high, at $299 for the WiFi version. Interestingly, and uniquely, they are a manufacturer, not a retailer.


The immediate popularity of the iPad (over three million being sold in its first two months), and the impending release before Xmas of Google Editions will add significant further propulsion to the ebook revolution. I must say I am excited by what Google intends to offer, and particularly for the future of traditional book retailing, and I’ll address that later in this presentation.


Here in Australia REDgroup Retail (the A&R/Borders/Whitcoulls conglomerate) have announced that they have sold approximately 20,000 units of the Canadian Kobo e-reader since its launch in May, and that customers have downloaded 100,000 paid ebooks to the device and another 200,000 Kobo apps to other devices. Borders, who sell Kobo in the US, last week dropped their price to $99, the first device to be sold for under the magic $100 mark. Surely they won’t be the last.


Revenues


So if things come to pass as most observers expect, what is in store over the next five years for traditional trade publishers? How are their businesses likely to be affected?


I have to tell you – things don’t look good at all.


Let’s do some simple computation, taking into account the following facts:


1. Ebook sales, at much lower prices than print books – up to 50% less - are growing rapidly. Let’s assume an average 40% less for the purposes of this analysis. If my Trade Paperback first release is $32.95, my ebook is $19.77, or $20.


2. Sales of print editions are stalling and are forecast to fall as readers desert them for ebooks. Let’s assume 50% of ebook sales are substituting for a print edition purchase - a 50% ‘cannibalisation’ rate. This could be optimistic, in other words in the real world it could turn out to be a higher number, or pessimistic, meaning lower priced ebooks are mostly being sold to readers who would never have bought the print edition in the first place. So in chosing a 50% cannibalisation I’m taking a middle path.


3. Let’s assume ebooks will be around 30% of total trade sales in five years time.


4. The average Gross Profit from a printed book is 51.5%, and from an ebook 59.5%. (I will show you how I have arrived at those numbers later when I deal with author royalties).


5. Let’s say I manage a quality fiction and non-fiction trade publishing operation with annual sales of $150 million in 2010, and we’ve taken concerted action over the last few years to convert all our non-colour frontlist and backlist (which amounts to two thirds of our total list) to ebook format in order to exploit this emerging market, beginning in 2011. (At present we’re not thinking about making enhanced ebooks out of any of our illustrated or full colour books, including childrens and cookbooks, so we expect sales of these will continue as before, with the usual modest 3% annual growth).


In 2011 we predict 5% of all the black and white units we sell will be ebooks; in 2012, 15%; in 2013, 30%; and in 2014, 50%. We are fully and enthusiastically participating in the revolution.


Here’s how the revenues for this segment will look: ($millions)


                                   2010      2011     2012      2013      2014

Print sales:                                     $100        97.5      90.2      76.7       57.5
Ebook sales:                                     -             3.0        9.0      18.0       30.0
Total sales:                                      100      100.5      99.2      94.7       87.5

Here’s how the Gross Profit will look:

Print GP:                                        $51.5      50.2      46.5      39.5       29.6
Ebook GP:                                          -          1.8        5.4     10.7        17.9
Total GP:                                          51.5      52.0      51.9     50.2       47.5

Add the colour print books:

Sales:                                               50.0        51.5      53.0     54.6      56.3
GP:                                                  25.8        26.5      27.3     28.1      29.0

TOTAL COMPANY:

Sales:                                             150.0      152.0    152.2    149.3    143.8
Gross Profit:                                    77.3        78.5      79.2      78.3     76.5

So after five years of aggressive ebook transformation of its fiction and narrative non-fiction list this company is in a steep and serious decline. The more ebooks they sell, the more their total business suffers. It’s a disastrous business scenario.


No wonder publishers are worried and adopting defensive postures. Let’s examine them.


Reactions


The initial response of many publishers to the rapid emergence of low-priced ebooks was to implement the familiar analogue strategy called ‘windowing’. In the print world the first release of a new book is in the highest price edition, whether hardback or trade paperback, and this is subsequently followed 10-12 months later by a lower priced premium paperback, and finally by a mass market paperback. In the US prices typically go from $27.95 to $14.95 to $7.95. In Australia they go from a Trade Paperback price of $32.95 to the literary paperback of $24.95 to the mass market price of $18.95. This staggered arrangement has always worked well, and has its origins in the physical need to print cheaper editions to meet continuing demand at cheaper prices.


So in 2009 publishers thought windowing was the obvious way to go for ebooks, as this would protect the higher priced print edition from immediate cannibalisation, thus allowing time for revenue and profit maximisation to establish the necessary return on the investment made. But the consumer backlash against this strategy was immediate, vocal and ubiquitous. Consumers were outraged that, having forked out for an e-reader, they were being denied the very ebooks they wanted – the latest releases. The blogosphere this time last year was electric with anger. In no time at all, therefore, publishers dumped windowing. They suddenly realised that an analogue concept dependant on printings was utterly out of place in an e-world.


So the next strategy publishers tried was to target Amazon for pricing Kindle ebooks so low. Publishers uniformly considered, with few exceptions, that the whole emerging ebook economy was in danger of being so skewered by Amazon that it would very likely destroy the whole book trade. Consumer expectations around price would be set at such a low level that no player could possibly make any money. It would be a situation that could never be reversed. Authors, publishers, competitive ebook suppliers and retailers – nobody in the chain could ever get a decent return on their investments. The industry would suffer immeasurable harm.


Then Apple emerged with its Agency model of pricing and supply. This gave pricing power to the publisher, removing it from the distributor/retailer. In return publishers would assume responsibility for sales tax collection and administration, a particularly onerous burden in the US where many states have different rates and exceptions. In return publishers only had to give Apple a 30% ‘commission’ or discount, a lot better deal than the minimum 50% Amazon demanded.


Publishers heralded the Agency model of supply, in my view quite unthinkingly. When the time came to sign supply contracts with Apple, whether for the iPhone or iPad or any Apple device, contentious clauses abounded. Apple demanded that, although publishers could set the prices, they had to do so within certain set parameters that would be acceptable to Apple customers. Ironically these turned out to be roughly equivalent to half the price of the highest print edition, much lower than the prices publishers had set, and off which they had extended the 50% discount to Amazon.


Print edition under:

$22.00 = $9.99 or less
$24.00 = $10.99 or less
$25.00 = $11.99 or less
$27.50 = $12.99 or less
$30.00 = $14.99 or less
$35.00 = $16.99 or less
$40.00 = $19.99 or less


What Apple was quite clearly saying was ebooks should be half the price of the print edition, until the low priced paperbacks kick in. Publishers had been pricing much higher than this, some even at the same price as the hardcover.


I’m sure you know the fascinating little drama that unfolded between Amazon and the publisher hero of the hour, John Sargeant, CEO of Macmillan US. Sargeant refused to supply Amazon with Macmillan’s ebooks unless it adopted Apple’s agency model of supply which theoretically gave publishers the power to price. For two whole days Amazon refused – before it gave in. I wrote about this unseemly capitulation in my blog post of April 2nd this year:


I cannot understand the thinking behind Amazon's embrace of the agency model of ebook supply. Oh sure, I can understand how it got there, albeit reluctantly. It capitulated to Macmillan's threat to not do business with it unless it adopted the business model advanced by Apple that allows publishers, not retailers, to control the price to the consumer. And capitulate Amazon did, quickly and publicly.


But imagine if Amazon had just been a little bit more savvy and less arrogant. The entire publishing and author community had been up in arms for months about Amazon's pricing of popular trade ebooks at $9.99 or lower, as it believed that price point to be a dangerously low precedent. It had the potential to set consumer price expectations at levels insufficient to allow the emerging ebook industry to become economically viable for all parties.


If Amazon, in the face of this rather fierce resistance, had sat down and twigged its pricing policy just a bit, perhaps even in dialogue with publishers, it could have avoided the mess it's now found itself in, of having to adopt under pressure a business model that was invented by Apple and runs entirely counter to Amazon's whole discount, value for money, consumer-friendly proposition.


It's been left to Apple to shoehorn publishers, bang some sense into them, and come up with a pricing model or template that now seems to have informed the whole industry, an industry which was all over the place in pricing philosophies prior to this.


Was that beyond the wit of Amazon to come up with, and sell to publishers as the way that both parties should price? And could not Amazon, in return for publishers lowering their ebook RRP's to these levels, have agreed to accept a lower discount than the 50% they previously demanded - to, say, 30%? [6]


This would have preserved the wholesale model, where the retailer, not the publisher sets the ultimate price to the consumer. Retailers know consumer dynamics intimately. Publishers don't. Retailers need the freedom to construct promotions and special offers around price, and all parties, including consumers, benefit from these. Publishers are inexperienced and pretty hopeless at this sort of stuff.



In my view the Agency model of ebook supply is seriously wrong-headed, and I’m astounded that serious commentators on publishing matters in the US have not come out and condemned it for the profound abomination that it really is. It breaches some fairly fundamental, age old distribution and retail practices, as well as being essentially anti-consumer.


In Australia we thankfully have very clear legislation that prohibits arrangements like the Agency model which allows producers to set prices and mandate retailers to abide by them. We are one of the few countries in the world with clear and unambiguous Resale Price Maintenance provisions as part of our Trade Practices Act. I part company from my colleagues on this. Most publishers in Australia are still heralding the Agency model as some sort of saviour of the industry, and they’re spending small fortunes on legal fees to explore ways around the Australian prohibition. They are sadly mistaken.


Look what’s currently happening in the UK, where, despite a more accommodating legal environment, publishers are not insisting on an agency arrangement and the wholesale arrangement is in full swing. A fierce, let-‘er-rip price war has been unleashed as the Waterstones and WH Smith chains are taking on the new UK-established Kindle ebook store. Apple’s prices, set by the publisher, are only on average 15% lower than the print editions, whereas Kindle’s and WH Smith’s are 60%+ lower.


Publishers just have to come to terms with the elementary fact that retail behemoths will always engage in savage, to-the-death, competition with each other to gain market share and consumer loyalty. It’s the free market. Eventually things wash out. Normality returns as losses can’t be sustained forever. Sooner rather than later prices achieve equilibrium, a state where things are in balance and everybody gets on with dealing with the real challenges of commerce in a free society.


Producers who try to control this sort of thing are being fundamentally anti-consumer, and that’s why it’s illegal in Australia.


Royalties


Another expression of publisher anxiety as the industry faces the unrelenting march of this paradigm-shifting, traditional business crunching, ebook world is the attitude to author royalties.


There has been much discussion and debate about this over the past year or so, and it has recently come to a head in the US with literary agent Andrew Wylie’s Odyssey Editions initiative. Publishers have been consistently arguing that they can afford to pay authors no more than 25% royalty on net receipts, that is, the price after discounts or commissions. This roughly equates to what successful and established authors receive on print editions. Wylie, along with every other agent in the world, had been increasingly dissatisfied with this publisher attitude. He decided to go it alone by setting up his own ebook publishing company representing about 20 classic backlist titles, and signed an exclusive two year distribution agreement with Amazon.


Random House recently settled with Andrew Wylie by offering to pay 35-40% on the 13 backlist titles where Random had print edition rights but where the parties were in dispute as to who controlled the digital rights. Other publishers are expected to follow this lead.


This doesn’t really settle anything, however. The real issue is the standard, benchmark royalty that should be offered to all authors, new or old, in dispute or not.


The industry remains all over the place on this one. Authors and their agents are arguing for between 35% and 50%, and basing their arguments mainly on the cannibalisation syndrome. The royalty from an ebook, they argue, should approximate the dollar amount the author would get if it were a print book being sold. Thus the Australian Society of Authors (ASA) recently issued a paper to their members arguing this point [7]. Their calculations ended up with the figure of 35% as being the right one. Other author societies and guilds around the world, and literary agents, have argued for 50%, a figure not based on anything other than ‘an equal share of revenues’ concept.


To help get to the bottom of this, and try to establish what is fair, with your indulgence I need to do another computation:



                                                                       Print Edition             EBook

Retail Price (incl GST):                                        $32.95                  $20.00
Retail Price (excl GST):                                       $29.95                  $18.18
Less retailer discount:                                            47.5%                   50%
Net Price:                                                           $15.72                    $9.09

Total Life Sales (units):                                          6361                      3181
Total Life Sales (dollars):                                   $100,000              $28,915

Editorial/Design/Typesetting:                                 $8,000                    -
Printing:                                                              $20,000                    -
File Conversion/Hosting:                                           -                      $1 600
Author Royalty %:                                                 17.5%                    35%
Author Royalty $:                                            $17,500               $10,120
TOTAL COST:                                                 $45,500               $11,720

Gross Margin:                                                    $54,500               $17,195
Stock Writedown/Bad Debts:                               $3,000                   $500

Gross Profit $:                                                    $51,500               $16,695
Gross Profit %:                                                       51.5%                 59.5%

Print business overheads (35%):                          $35,000                     -
Ebook business overheads (22%):                            -                       $6 361

Operating Profit ($):                                         $16,500               $10,334
Operating Profit (%):                                             16.5%                  35.7%


A long established and fundamental principle governing the author/publisher commercial relationship is that both parties should equally share in the financial rewards that the project brings, after all their costs are deducted. The royalty should approximate the publisher’s operating profit on each project. If you look at the figures above the author and publisher are roughly getting the same dollar amounts from the project. In the case of the printed book the author is getting $17,500 and the publisher $16,500. In the ebook case, the author is getting $10,120 and the publisher $10,334. These amounts will vary of course, depending on the project, but the general principle is important.


It is this principle, not any false notion of dollar royalty equivalence across editions, that should inform the debate over royalties due authors on ebooks. I’ve demonstrated 35% to be far more in the ballpark than 25% or 50%.


Now, many publishers take exception to this. They argue that ebooks can’t be evaluated in isolation like I have done above. John Schline from Penguin in the US is quoted as saying ‘you don’t do a P&L on a format; you do a P&L on a title’. Editorial costs, for example, should be allocated to the ebook as much as the print book; all the publisher’s overheads should be allocated equally across all formats, etc. But this is simply an exercise in transference. We don’t do this for successive print formats like mass market paperbacks, or book club editions, or anniversary or premium editions, or export editions. We identify the incremental costs incurred according to the particular dynamics of the project, and attempt a Profit and Loss (P&L) account to guide pricing, royalties, distribution, publicity and other format driven activities. In other words we isolate the format-driven costs in most instances.


I contend therefore that authors are getting a bad deal from publishers at the moment and this cannot and should not last. There is plenty of room to move, after all, judging by my figures above.


Some authors, out of frustration, have been experimenting with going it alone – self-publishing. Amazon, after all, offers an attractive deal – 70% of sales proceeds. Smashwords offers 85%. But this is a fairly illusory solution, it seems to me. Print books are still 90% of the market and likely to be dominant for a few years yet, and authors need the intensive publicity and marketing that established publishers alone can bring to the table.


But at least this phenomenon, or threat, is forcing publishers to see sense and give ground, and that is a good thing.


Retailers


Of all the entities that comprise the book trade, the one most at risk in the ebook world is the traditional retailer, the bookseller. While the large retail chains around the world seem to have engineered a place for themselves, because of their financial firepower and reach, by investing in and manufacturing their own brand of ebook device (apart from, interestingly, Dymocks in Australia) it is the small, quality independent bookseller who looks like an endangered species.


And they are very nervous, particularly here in Australia. They are already suffering quite badly because of the migration of many customers to Amazon and Book Depository.com due to Australian publishers’ continuing practice of over-pricing US and UK titles when the Australian dollar is as strong as it currently is. Many of us in the trade have been warning for some time that these habits are unsustainable, but throughout 2010 the industry is really feeling it. A substantial number of Australian booksellers are themselves ordering overseas titles from Book Depository, who pay the freight, rather than order from the local supplier.


You can imagine how attractive the Kindle and the iPad are in that environment, and how attractive globally priced ebooks are. Australian book buyers are not stupid.


Google and its Google Editions project offers real hope for independent booksellers that they’ll be able to get a piece of the ebook action. According to Mike Shatzkin ‘[Google] are likely to be offering the largest selection of ebooks from any single source. [They] have a staggering number – millions – of public domain books but they will have professional and scientific books not published on most of the prior ebook platforms. Their well-promoted proposition is their cloud model, which will allow their ebooks to be read on any device that can support a browser’. [8]


But it is the fact that they intend to offer a wholesaling service to bookstores that is the clincher. They will be offering a full, complete and device non-specific service, meaning that participating booksellers will be able to sell ebooks, either alone, or in an undoubtedly popular print/ebook bundle, to their customer base.


Apparently no publishers have yet signed with Google. Perhaps it’s the wholesale rather than the agency terms that is the problem, although I’ve heard privacy issues voiced as well. I find this situation profoundly disappointing and impossible to understand. Apart from residual anger over Google’s library scanning project, now on the brink of resolution, there is no substantive reason for publishers to be reluctant to embrace this obvious partner. There seems to be a complete lack of trust of Google. A seasoned bookseller said to me recently ‘publishers are a funny bunch – they are very emotional!’ And that is so true.


Meanwhile independent booksellers are in limbo. And consider this: while ever they are kept out of the equation, the whole printed book culture, especially the quality fiction and narrative non-fiction end of it, is in serious jeopardy. Independent booksellers are a critical factor in the economic vitality of this part of the business. Unless culturally important books are on their shelves, unless author events are organised on their premises, unless they have the basic financial strength, including growth prospects, to stock, merchandise and attractively lay out their stores to attract the discerning customer base they go for, then the whole book business is threatened.


It is Shatzkin’s often expressed view that bricks-and-mortar’s share of total trade book sales in the US will drop from around 80% today to about 30% in five years time – a 60% reduction. [9]


I personally don’t share this alarmism. Visions of apocalypse are always 100% wrong, after all. Nevertheless, what if he were only half right? It haunts me, it really does. I prefer the less alarmist view of Marcus Dohle, global CEO of the Random House (and I give his view significant weight as Random were the only major trade publisher to resist the illusory delights of the Agency model), who is more optimistic about the longer term survival of the printed book and bookstores. [10]


Rights and Availability


Before I conclude I would like to take a brief look at the current position of ebook availability in Australia. If you own an iPad, a Kindle, a Kobo, a Sony or any other eReader, or even if you’re inclined to read ebooks the old-fashioned way, on your PC, you will know what I mean when I say that the ebook experience for Australians is a thoroughly impoverished and deeply depressing one.


Last week, when I was writing this paper, I decided to do a little experiment, just to gauge for myself what anecdotal evidence has been saying over the last 12 months about our limited ebook choices. I listed all the books I have read since January 1 this year, and divided them into US, UK and Australian titles. There were 17 titles originally published in the US, 14 in the UK, and 15 in Australia [11]. I consider this a fairly representative sample of latest fiction and non-fiction releases.


Of the 17 US titles, only 8 were available in Australia. Of the 9 that were not, 5 were not yet published in ebook format even in the US, and 4 were but were not available to Australians.


                        This title is not available for customers from:
                                                               Australia
                                           Shop for titles available for Australia


That message on Amazon is all too common.


Of the 14 UK titles 8 were available in Australia, 3 were not yet published in ebook format even in the UK, and 3 were available in the UK but not in Australia.


Now for the sorry picture on the 15 Australian titles. Only 2 were available on the Kindle, and rather surprisingly, only 2 available on the local Kobo managed by REDGroup retail. What really annoyed me, however, was that 4 Australian titles were available to Kindle-owning Americans but not Australians, and this included Peter Temple’s Truth, this year’s Miles Franklin winner.


Of course we recognise that many publishers around the world, particularly the smaller ones, are struggling to get their ebook versions published at the same time as their print book releases. Organising internal production systems, signing contracts with Amazon, Apple, Kobo and the rest of them –all this is a complicated process and an administrative burden to say the least. In some cases, however, there’s no enthusiasm for the task, or any sense of urgency, because publishers are gripped by the fear of cannibalisation. In Australia our publishers have been slow to get on board for two principle reasons – the quite small and relatively insignificant market because of the small number of device owners, and the cumbersome task of dealing with Amazon and Apple who have dedicated woefully insufficient resources to the production and administrative processes at their end. Australia is very small beer in their world.


But far more significant than any of this admin stuff that will surely be resolved over the next 12 months or so, is the question of territoriality. More than any other global territory, we suffer adversely from English language rights sales by our transatlantic friends that, more frequently than not, don’t include Australia. Ironically, we are suffering even worse in the distance-negating world of the digital file than we ever have done in the analogue, print book world.


This could be very easily fixed, but like much else, we are bringing legacy thinking, the categories of an analogue mind-set, to the new digital circumstances.


The trading of rights in physical books results in separately printed editions in the various territories. The economics of this makes sense. Shipping heavy books around the world is costly, time-consuming and inefficient. But separate territorial ebook editions are a nonsense. The better solution would be to have all publishing parties around the globe who have bought the rights to their territories share revenues on the one original ebook edition. It really shouldn’t be hard to administer this. Thus the ebook would be available from day one to all customers globally, and the original ebook publisher simply keeps track of customer locations and rights sales and disburses revenues accordingly. Ebook suppliers like Amazon and Apple can easily report territory sales.


There is another part of the current, clumsy way the industry handles this that adds immeasurably to customer frustration, and that is to shackle retailers like Amazon into honouring territorial agreements between publishers. It is quite wrong, in my view. It doesn’t happen in the physical world where retail behaviour regarding copyright protected products is governed by the First Sale Doctrine in national Copyright Acts, including the US, UK and Australian Acts. The publisher’s control over who the retailer sells the product to is exhausted once the first sale to the retailer is made. This is a fundamental principle and allows Amazon and other retailers to legitimately sell to Australians an American edition of a book where Commonwealth or Australian rights have been sold to a UK or Australian publisher. We desperately need that freedom in the e-world, but seem to be a long way from getting it.


                      This title is not available for customers from:
                                                              Australia
                                         Shop for titles available for Australia


I never want to see that again. But sadly, I will, and, I suspect, for many years to come.


Publishers say that Amazon is too strong and should be constrained. In my view they are not strong enough. And shamefully, they don’t seem passionate enough to stand up for some pretty basic commercial principles. We Australians are very much the poorer for it.


Conclusion


At the beginning of this paper I presented a five year revenue and profit outlook for a typical large publisher facing the challenge of a rapidly growing ebook business. The numbers did not look pretty. I referred to the prospect of likely cannibalisation – a severe decline in the traditional print business which was not being made up by sales of ebooks. I reflected on the responses we’re typically seeing from global publishers, responses characterised by fear, defensiveness and suspicion.


I would prefer to see a publishing community characterised by boldness, not by fear; by a sense of opportunity, not of threat; by openness, not protectionism.


One willing to embrace the self-evident fact that ebooks are only worth half the price of a print book; that there’s a large market out there of disaffected, ex-book readers who are ripe for re-capture at far lower price points with today’s technology. Any many of these customers will be new and young and ripe for conversion into committed, life-long readers.


Our challenge is to move beyond the fear of cannibalisation by courageously accepting the opportunity presented to us. The central tenet is to be aggressively and remorselessly customer-centric. That is hard for any business, for any industry, but it is the only way to break through into the future.


Of course the revenue and profit numbers over the next few years will be problematic. Many of today’s companies will not survive. But publishers need the wisdom and strategic nous to accept a fair measure of pain as a necessary process of transition to a new and vibrant future, the specific contours of which are as yet unknown. To do otherwise is to simply fade away. That ‘persevering in the middle’, as management theorist Rosabeth Moss Canter calls it, is common to all industries at some point in their development. Look at telecommunications: Telstra, for example, with its dying revenues from its highly profitable copper wire, fixed line business. They’ve finally confronted the unpalatable truth – in the next few years their total revenues and profits will decline as they focus on mobile, fibre and wireless businesses and embrace the challenge of radically changing their corporate culture to a customer-centric one.


In Nicholas Carr’s just published book about the internet, The Shallows, he reflects on the critical change to Western culture and civilisation brought about by Gutenberg’s invention of the printing press in 1445. Within 200 years ‘the literary mind, once confined to the cloisters of the monastery and the towers of the university, had become the general mind. The world, as Bacon recognised, had been remade.’ [12]


Today publishing is surely at the beginning of a profound and positive change to the very structure of the industry. It’s best to be in favour of it.



NOTES

1. Print is Dead, Jeff Gomez, Palgrave Macmillan, New York, 2008; The Book is Dead, Sherman Young, UNSW Press, Sydney, 2007. (The forecasts referred to are from these books).

2. http://www.idpf.org/doc_library/industrystats.htm

3. Publishers Lunch: www.publishersmarketplace.com

4. http://techcrunch.com/2010/08/06/physical-book-dead/

5. Mike Shatzkin: www.idealog.com/blog

6. Pub Date Critical: www.peterdonoughue.blogspot.com

7. http://www.asauthors.org/lib/ASA_Papers/ASA_Ebooks_Royalties_Contracts_2010.pdf

8. Shatzkin, August 4, 2010.

9. http://www.idealog.com/blog/where-do-we-lose-the-shelf-space-and-how-much-do-we-lose (August 8, 2010)

10. http://www.spiegel.de/international/business/0,1518,709760-3,00.html

11. US TITLES: Storms of My Grandchildren, James Hansen; Outside of a Dog, Rick Gekoski; Game Change, Heilemann/Halperin; Climate Confusion, Roy Spencer; Gusher of Lies, Robert Bryce; Audition, Ryn Murakami; Reality Hunger, David Shields; The Big Short, Michael Lewis; Caught, Harlan Coban; The Ask, Sam Lipsyte; War at the Wall Street Journal, Sarah Ellison; Tinkers, Paul Harding; Innocent, Scott Turow; Imperial Bedrooms, Brett Easton Ellis; The Things About Life is One Day You’ll Be Dead, David Shields; The Passage, Justin Cronin; The Shallows, Nicholas Carr.

UK TITLES: Race of a Lifetime, Heilemann/Halperin; Chill, Peter Taylor; The Man From Beijing, Henning Mankell; If the Dead Rise Not, Phillip Kerr; On Evil, Terry Eagleton; Solar, Ian McEwan; 61 Hours, Lee Child; Alone in Berlin, Hans Fallada; Museum of Innocence, Orhan Pamuk; The Good Man Jesus and the Scoundrel Christ, Philip Pullman; Hitch 22, Christopher Hitchens; Nomad, Ayaan Hirsi Ali; The Thousand Autumns of Jacob De Zoet, David Mitchell; The Whisperer, Donato Carrisi.

AUSTRALIAN TITLES: Cloudstreet, Tim Winton; Breath, Tim Winton; Wyatt, Gary Disher; Dog Boy, Eva Hornung; The Marsh Birds, Eva Sallis; Requiem for a Species, Clive Hamilton; Failure of Free Market Economics, Martin Feil; The Norseman’s Song, Joel Deane; Jasper Jones, Craig Silvey; The Book of Emmett, Deborah Forster; The Bath Fugues, Brian Castro; Truth, Peter Temple; The Family Law, Benjamin Law; Reunion, Andrea Goldsmith; Gunshot Road, Adrian Hyland.

12. The Shallows, Nicholas Carr, Atlantic Books, London, 2010.

11 comments:

Andrew Wilkins said...

Very thought-provoking and well-researched piece, Peter. It is a credit to you that you are sharing the fruits of your knowledge and experience in this way.

Two comments:

1. I completely agree about the importance of independent booksellers, but I do worry about your projections for colour book sales in a world where the retail strength of indies is reduced. There's a risk that reduced channels for visually appealing books will mean lower sales in future, even though one would think that these sales are less likely to be cannibalised (until enhanced ebooks on the iPad start to take off). This might affect quality illustrated books for children and adults the most, as these books rely so heavily on the indies now.

2. While I'm mostly a Google fan, I am not completely convinced about the prospects for Google Editions. Having dabbled with Google Book Search, it's apparent that Google's weakness is its inability to 'push' content to consumers, relying on passive searching. Both Amazon and Apple have much stronger credentials in driving sales and raising consumer awareness, which is a key part of retailing and one of the 'value ads' booksellers continue to offer publishers. Might this be a reason for publishers' lack of excitement?

3. Given your projected P&L, it's no surprise the larger publishers are looking to sell direct to consumers. What do you think will be the impact of this?

Andrew Wilkins said...

Oh, that was three comments. Good job I don't do our P&Ls!

Peter Donoughue said...

Andrew, in response to your points:
1. Yes, I agree. A weaker retail presence means all books be negatively affected, but I think illustrated books will find supportive outlets of one retail type or another.
2. Yes, there are legitimate doubts about Google and its offer, so until we see the details we can't confidently predict much. My point was about pubisher hesitancy in going with them. It will be the retailers themselves, not Google, who will have to do the marketing.
3. There is very little advantage in publishers selling to readers direct. Any margin gain is an illusion, as additional costs are incurred and trade customers alienated. As in the print world, simply not worth it.

Sam Missingham said...

Hi Peter,

Thoroughly enjoyed this post - probably the most well-reasoned post I've read about digital publishing; present & future predictions.

Also interesting to read an anti- agency model opinion - contrary to most current industry thinking, it seems.

Not sure if you've seen The Bookseller's digital blog: http://futurebook.net

Lots of opinion from industry folk about different elements of digital revolution.

Hope it's of interest.

Look forward to your future posts.

Sam

Tim Coronel said...

Peter,

what if cheaper ebooks cause the entire market to grow? Did you calculate how much growth in sales this company would need to stop its decline and get back into profit?

Tim

Peter Donoughue said...

Good point Tim. I think it would be reasonable to assume that the rate of cannibalisation would slow down and in fact stop altogether when a point of market maturity is reached. Print books would stop declining and ebooks growth stabilise around 5-10% a year. Doing the numbers out to 2018 or so you would see this company's total revenues and profits nicely growing from about 2015.
It's a process of transitioning, not dying, and this should inspire confidence.

RachaelMc said...

So much for ME being an ebook guru (or whatever you kindly said at the ABA dinner recently....). I pass you my crown Mr D. Take good care of it and wear it with pride. When my brain has fully processed this thought provoking piece, I may just post something to my own blog. Then again, maybe not. Everything has been pretty well covered here for the trade. Care to tackle the libraries next? Tee hee xx

Peter Donoughue said...

No-one could be better than you on libraries Rach. I'm not going there! xx

Blue Tyson said...

Nice piece.

Liliana Stafford said...

I am a children's author/ illustrator so I don't see much room for me in the brave new world of e-publishing. Also I had an e-reader given to me for my birthday and have given up on it. All the books I wanted to buy were unavailable in Australia or very expensive because they were new releases. I would rather pay a bit more for a book I can then pass to a friend

book publishing process said...

This is a great topic. Digital revolution is getting better and I am afraid that the book publishing industry might be at risk. iPad is one of the famous gadget that can also use a book. Imagine you can store thousand copy of different books is a single gadget.