MERCHANTS OF CULTURE: The Publishing Business in the Twenty-First Century

by John B. Thompson, Polity, 2010.
(A Review for LOGOS, December, 2010)


Those of us who’ve been in the publishing game for a good many years tend to approach books on publishing written by academics with a fair measure of cynicism. Even though they’re a step up from the usually tedious feature article fare of the Sunday papers, from which most people get their views on publishing and its issues, they invariably suffer from an absence of any real insight into, or appreciation of, the fundamental commercial dynamics that overwhelmingly govern the field.


To get that sort of perspective you have to go to the memoirs of publishing notables, such as Andre Schiffrin and Jason Epstein, to give just two recent examples, but here you need to contend with the standard, ego-laden biases and obsessions that come with the genre.


What is refreshing about Professor Thompson’s new book is its absolute commitment to objectivity, neutrality, balance and fact in its exploration of publishing’s economic realities. It doesn’t push any barrows, but sets out to explore a critically important part of the industry in depth and with the sort of rigor you would expect from a seasoned, academic observer.


Thompson’s focus is contemporary trade publishing in the US and the UK, particularly ‘mainline adult fiction and non-fiction’ as he calls it. He eschews (wrongly in my view, but more on this later) the more specialised domains of children’s, self-help, travel, romance, and the rest, in order to get some clarity around broad and defining issues – ‘to discern some order in the chaos, some structure in the flux’. His main research method was the semi-structured in-depth interview, of which he conducted 280, all recorded and transcribed. He interviewed publishers, booksellers and literary agents in the main, from all levels in their organisations, large and small. To ensure full and frank revelations and opinions he guaranteed anonymity. Thus the book is full of quotes from ‘Steves’, ‘Janes’ ‘Jims’ and others, but they are invariably honest, intelligent and often surprisingly frank. Players in the book trade, as we know, unlike most other industries, meet and talk to each other a lot – they actually like each other – but they’re rarely honest. If they’re not actually lying, they are colouring, painting, flavouring the stories. They’re in the words business after all! But through a process of sharp questioning and follow-up, which Thompson got better and better at over time, as he admits, he was able to extract nuggets of gold over and over again.


There are also portraits of particular companies, divisions and imprints, again disguised. ‘Star’ is an old imprint that was acquired some time ago by a large house, itself part of a global corporation with interests way beyond publishing. It’s been allowed a fair measure of independence and autonomy, which it jealously guards. Others haven’t been so lucky. The life has been sucked out of them by corporate bureaucracies with their uniform but stifling systems and processes. ‘Sparrow Press’ is a small publisher, struggling financially, but doing it ‘for art’s sake’. Thompson expertly captures the stresses and strains, and the creative and commercial tensions across the full panoply of organisations and players in the field.


What emerges from this intense engagement is a comprehensive description and analysis of ‘the logic of the field’, as the author calls it - a sociological construct that helps define the context in which the actions of each key player are conditioned by the actions of others. But Thompson doesn’t bog the narrative down with dry academic discourse or theory. He remains thoroughly grounded. What he does do, remarkably deftly in fact, is place all the various elements in context, so a coherent picture emerges of a whole, underlying dynamic governing the actions and strategies of industry organisations and individuals.


Thompson’s first three chapters describe the macro-environment of today’s transatlantic trade publishing industry. He isolates the growth of the retail chains, the rise of literary agents, and the emergence of publishing corporations, as the foundational realities that define its principal contours and dynamics. It’s hard to disagree with this analysis, apart from wondering whether these three realities are themselves the result of even larger societal or economic forces playing out across all industries in our late-capitalist phase, such as globalisation, deregulation, population growth, technology, etc. But that’s to quibble. In the book trade Thompson’s three macro factors have changed the industry radically over the last twenty to thirty years.


The rest of the book explores these changes in detail, giving flesh to ‘the logic of the field’. One effect is industry polarisation. The large corporations become more dominant by being financially more able to cough up the far more extravagant author advances that agents are demanding. The logic leads to an obsession with ‘big books’, the popular blockbusters that feed the chains and supermarkets and crowd out much midlist and backlist from high street visibility. ‘Publish fewer books and sell more of the books you publish: this is the mantra that is chanted in nearly all of the large publishing houses, and in many of the medium-sized and small publishing houses too.’


Big books means big returns – unsold copies flooding back, sometimes as high as 60% of initial sell-ins. In a chapter called ‘Shrinking Windows’, Thompson explores the challenges publishers face in driving consumers into stores in the ever shorter time frames that the high street retail logic makes available to them. His analysis of the marketing strategies and activities, and the limited budgets involved, and the many new things today’s publishers are doing, particularly online, is superb.


As someone who has spent their whole publishing career in Australia, but nevertheless in senior roles in global US corporations with strong presences in the UK, I was thoroughly enlightened by Thompson’s analysis of the dynamic of UK trade publishing since the demise of the Net Book Agreement in the mid-90’s. His chapter ‘The Wild West’ tracks the emergence of the supermarkets such as Tesco and Asda as powerful new players in the UK book retailing landscape. At the same time Amazon UK has become a significant force. Astoundingly, according to Thompson, ‘the overall impact has been an upward drift in the average discount that publishers offer to the retail sector: roughly 10 per cent of margin has been transferred from publishers to retailers in a period of ten years’.


Combined with the huge growth in author advances, most unrecovered and therefore having to be written off, the wonder is that US and UK trade publishers are making any money at all! Thompson doesn’t address this critical question. I was hoping for a comparison between a representative company or divisional Profit and Loss statement from twenty years ago to one today, which would have clarified what has generally happened to margins and overheads and thus profitability and return on investment. Reading the industry press one doesn’t get the impression of crisis. Hachette, for example, is doing very nicely indeed, albeit on the back of Stephenie Meyer. The small UK publisher Quercus is doing exceptionally well on the back of Stieg Larsson. Neither of these more recent phenomena are referenced by Thompson. The big book focus may be problematic. But it’s also, seemingly, salvific.


I suspect Thompson underrates the continued vibrancy in the industry, particularly in the niches. By not focussing on the genres, especially the non-fiction genres such as self-help, travel, personal investment, children’s, he misses two or even three traditionally profitable legs to publishing stools. This is hardly a criticism of the book, focussing as it does on the ‘mainline’, but it would have fleshed out the economic picture a little.


As you would expect, given the author’s extremely comprehensive 2005 tome Books in the Digital Age, there is a long and comprehensive chapter on the digital revolution which, although a little out of date – as is the way with this fast-moving field – is an excellent overview of the critical issues that publishers are facing. There is a sanity about it, a balance, that the reader by now (this chapter is towards the end) senses in Thompson’s perspective on the industry generally.


Which is why I regretted he didn’t widen his focus a little to take in the view beyond the US and the UK. A chapter on Canada and Australia, both important markets for US and UK publishers, as is the whole export business generally, would have rounded out the tale.


On the very first page of the book Thompson tells the story of a rather small book called The Last Lecture by an unknown computer science professor, Randy Pausch, who happened to be dying from pancreatic cancer. Through an auction process Pausch’s agent secured an advance of $6.75 million. Yes, $6.75 million! It was bought by Hyperion, a frontlist driven company backed by the Disney Corporation. Thompson leaves the story there and doesn’t revisit it until p. 295, when we find out what happens. We’ve explored enough terrain in the meantime, however, to appreciate how that advance came about, its full rationale, and why the publisher so desperately wanted the title. We also know the risks and how projects like this often go horribly wrong. It’s a fascinating story, and of course I won’t disclose the ending here.


Merchants of Culture is full of these gems. It is also full of statistics, charts, tables and sales figures which add immeasurably to its power.


Professor Thompson has written a seriously good, almost monumental work, one that will quickly become required reading for seasoned practitioners and newcomers alike, whatever segment of the book trade they find themselves in or are about to commit to. It’s a highly readable, absorbing account of a culturally important industry in the throes of transition. We can only hope that the author issues a second edition in five years time, and a third after that. They would be eagerly anticipated.

Besieged, Bothered and Bewildered - Our Book Industry Feels the Pain

Besieged, Bothered and Bewildered - Our Book Industry Feels the Pain



(Article for The Rationalist journal, January 2011)


You cannot open a paper these days without coming across yet another article about the huge increase in purchasing from overseas-based online retailers by Australian consumers in response to the strong dollar. Books are always the prime example. The local book industry is under siege and booksellers and publishers are barely talking about anything else.


Amazon has been doing good business out of Australians for over a decade now, but has been joined in the last twelve months by The Book Depository, the UK operation that matches Amazon’s prices and discounts but also offers free freight, an appealing combination.


It’s virtually impossible to get a handle on just how much business these two do in Australia (Amazon in particular has never felt inclined to part with any information that could be remotely useful to anybody), but anecdotally industry insiders are now estimating that the business could be upwards of $200 million and rapidly rising. The total consumer book market in this country, at retail level, is about $1.6 billion (yet another difficult figure to pin down since the ABS stopped collecting book industry data six years ago). So the local industry is currently losing 12.5% plus of its turnover to offshore suppliers. It could well be 20% in five years time if things continue the way they are (and this is not counting library purchases from overseas library suppliers – another huge chunk).


Our book industry is having its own ‘annus horribilis’, with most independent bookstores experiencing sales declines of between 5-10% compared to last year. REDGroup Retail, the Angus and Robertson and Borders chains, with a share of about 30% of the total Australian consumer book market, had a sales decline of 11% for their fiscal year ending August, 2010. This amounted to $70 million. They also slashed their inventory holding by $50 million, which means they studiously declined to order from publishers and dumped unsold stock back to them where they could. You can imagine the effect on publishers and authors.


The book trade has always been a very emotional one – part art, part commerce, and totally cottage. But the heightened level of emotion and anger coursing through industry veins right now is something to behold. And it’s very typical in any industry in these circumstances to see its players develop a siege mentality, bunker down, lash out at foreigners, and resort to some fairly ordinary thinking and analysis quite typical of victims.


To get some perspective let’s go back two years. In August 2008 the Rudd government decided to hold yet another enquiry into books and parallel importation, the provisions in our Copyright Act that prohibit retail booksellers from ordering direct from overseas any title for which a local publisher holds, under contract, exclusive Australian rights. In the trade this activity is known as ‘buying around’. The government imagined there could be some political gain from overturning this century-old prohibition in the interests of allowing cheaper prices to flow to consumers. The Productivity Commission, for the third time in twenty years, was charged with examining the issue and making recommendations.


Well, as we know, to no-one’s surprise, the reaction from the industry was swift, uniform and very angry. Of the 563 submissions to the enquiry, all but a dozen of them were in favour of retaining the current restrictions. No ifs, no buts, the Visigoths must not be allowed to have their way. Australian literary culture would be decidedly poorer. The Commission’s final report, however, recommended what the commission had always recommended – that the restrictions should be abolished in favour of a better deal for the consumer. Typically, the Rudd government was frightened off, so reform never happened.


So after a highly charged year of fighting and fending off, the book industry relaxed, luxuriated in victory, and resumed business as usual. It was to be a major mistake. What had actually been happening in recent years, and what the Productivity Commission expertly analysed and measured, was a growing uncompetitiveness in the protected, privileged publishing community in response to the ever-stronger Australian dollar, a massive over-pricing that could never be commercially or realistically sustained. The Visigoths already had a foot in the camp and no artificial, protective, legal mechanism could keep them out. They were called Amazon and The Book Depository. And the consumer, whose interests were ignored in the parallel importation decision, had noticed.


The Australian Publishers Association (APA), in their long, furiously angry and sniffily dismissive response to the Productivity Commission’s draft report, denied that their members had ever over-priced, and if they ever did they were certainly not doing it now. They contended that the average A$/US$ exchange rate over the previous ten year period was $0.69, so it was entirely reasonable for local publishers today to use this rate or something close to it in their pricing for the Australian market. This submission was written when the dollar had hit $0.90! As I wrote at the time:


‘Today, as you know, [the dollar] is around $0.90c, and against the pound it’s the highest it’s been for 25 years. Publishers have had five or six years now to adjust to exchange realities but most have chosen not to do so. How long is the Australian consumer supposed to wait? Booksellers, on the other hand, have to compete with Amazon, which uses the exchange rate operative on the very day of invoicing. Not surprisingly, they are finding it hard to compete.’ (1)


Had the government decided to accept the Commission’s recommendations and abolish the provisions, the competitive pressures unleashed in the deregulated market would have been fairly intense. This is basically what would have happened:


1. Booksellers would have radically stepped up their ‘buying around’ behaviour, in order to source product overseas at lower wholesale prices so they could price lower to their customers than local publishers’ recommended prices, and thus compete more effectively with online suppliers.


2. To head this off publishers would have quickly lowered their prices and possibly sweetened their trading terms to regain the business. If they were serious about it, and went far enough, they would have recaptured virtually all the former business they had.


3. Since booksellers much prefer to order locally, all other things being equal, because there’s less risk and hassle involved, things would have got back to a new normal pretty quickly. And territorial rights would have been re-respected.


4. The consumer would have won.


5. In fact everyone would have won because of the new vitality injected into the industry. Intense competition tends to do that. (Even the printers in Maryborough, who thought the end of the world was nigh, would have won).


So the Rudd government – and how typical was this? – stuffed up big time. The only crumb they threw the industry was to set up a Book Industry Strategy Group (BISG) under the auspices of Senator Kim Carr’s industry and innovation department. This group was to recommend to the government how the industry could be helped to survive!


So having dispensed with a real solution that focussed on the real problem, the industry gravitated to familiar ground: campaign for the GST to be applied to purchases from Amazon and their ilk. This would ‘level the playing field’, and presumably solve most if not all of our problems. Under the GST system as it currently operates any purchases from overseas suppliers escape the GST net if they are below a $1000 threshold. The reason for this is to not bog down individuals in customs red tape and delays for minimal net revenue gain. In fact, the government’s advisory body on taxation matters, the Board of Taxation, recommended to the government in February of this year that any lowering of this threshold, despite the clamour from various retail associations to lower it to $250, would be counter-productive (2). The government agreed. (By the way, even this lower threshold would not capture 99% plus of book purchases!)


The Australian Booksellers Association’s (ABA) official position is to continue to advocate for a much lower threshold, or if that were not a goer, for the removal of GST from books altogether.


A few basic things need to be said:


1. There is no chance whatsoever of any government removing the GST on books. It’s really silly to even contemplate that, and it looks silly and ignorant to publicly campaign for it.


2. There is no chance whatsoever of any government lowering the threshold to below $250. The outcry from consumers would be loud and long. The GST is a tax system, not a job creation or protection system.


3. Even if by some remote chance the GST net was widened to capture these online purchases, then – and this is important – it would have minimal effect on book importing behaviour! The GST is still only 10%.


The other big retail chain in Australia, Dymocks, who to their credit did appreciate the main game and campaign for the opening of the market during the parallel importation debate, have recently come out and ‘threatened’ to move their online business offshore if the government did not change the GST rules. According to CEO Don Grover ‘It would actually make more sense for us to send books from an overseas location back to Australia and avoid the GST. To give a competitive advantage to overseas websites of 10% is just unsustainable’ (3).


Here is further evidence, if any were needed, that the current GST obsession of the Australian book trade is becoming deeply farcical. What about Australian books? Are they going to be shipped offshore and then re-shipped to the customer in Whyalla?


It’s only 10%. It’s utterly irrelevant. It’s not the main game. Publisher over-pricing is the main game, and the lack of any vigorous domestic competition to that practice. Here’s a simple test for any book buyer to apply: find out the overseas list price (Amazon’s a good source); convert to Australian dollars at today’s exchange rate (parity as I speak); add 10% (as a currency hedge); add another 10% for the GST; round up to the usual 95c price point. Then compare this to what the publisher is asking you to pay in your bookstore.


So George Bush’s just released Decision Points should be priced in this country at A$42.95, not $59.95 as it is. The US price is US$35.00. Do the math! Or take the Booker winner The Finkler Question: this L13.00 title should be $25.95, not $32.95 as it is. These aren’t isolated examples. They are commonplace. (In fact, be suspicious of any book priced at $32.95. If it’s an Australian original it should be $29.95, but if it’s a UK original, complain).


Screwing your customer is not really a productive and lasting strategy for any industry, but unfortunately it’s precisely what the publishing industry, aided by compliant and dependent booksellers, has long indulged in. Trying to slap a GST on Amazon and The Book Depository is a classic iteration of this - clobbering booklovers and serving to bolster dated, uncompetitive local pricing practices that are doing enormous structural harm to the industry.


We’re seeing precisely the same thing happening in the emerging ebook business. 2010 was the year Apple released the iPad and rolled out the ‘Agency Model’ for ebook pricing. This ‘app’ model may be fine for all sorts of products but not for books. It gave pricing power to the publisher, and prohibited the retailer from selling below the publisher-set price. Up until this time Amazon’s Kindle dominated the global ebook landscape (it still does, but it’s gone from about 90% to 65% in market share over the last two years). Amazon set ebook prices at levels way below what publishers thought they should be, so publishers jumped at the chance to force Amazon onto Agency pricing contracts. The five large US trade publishers, who carry enormous heft in the consumer market, forced Amazon to buckle by refusing supply unless they did. This model was also rolled out in the UK in October/November, 2010, and Hachette, Australia’s largest trade publisher, has just rolled it out here in Australia. Other major publishers are expected to follow. (By the time you read this they probably would all have signed up. Such is the way these things work).


The logic of the Agency model of supply is to keep pricing power in the hands of the publisher and away from retailers. Retailers are expressly forbidden under contract to offer their customers a lower price, even if only for a short time for promotional purposes. Now I keep banging on about this in the industry, but let me repeat it here: in Australia the agency pricing model is clearly and unambiguously AGAINST THE LAW! No doubt Hachette and other publishers have legal advice to the contrary. Well bugger me – legal advice that corroborates with what you want to do anyway! Who would have thought?


Here is what the ACCC says about Australia’s Resale Price Maintenance provisions in our Trade Practices Act. It’s pretty clear:


Any arrangement between a supplier and a reseller that means the reseller will not advertise, display or sell the goods the supplier supplies below a specified price is illegal.


It is also illegal for a supplier to cut off, or threaten to cut off, supply to a reseller (wholesale or retail) because they have been discounting goods or advertising discounts below prices set by the supplier.


A supplier may recommend an appropriate price for particular goods but may not stop retailers from charging or advertising below that price. In most cases, a supplier may specify a maximum price for resale. (4)


This is a succinct summary of what the actual provisions say. And why is this sort of thing illegal? Because it is anti-consumer. It denies the consumer the power to shop around to avoid being ripped off. It structures a producer-controlled market, where the producer is protected from unwelcome retail pressures for better terms that enable retailers to offer more attractive terms to their customer base.


And here is the interesting point: the expressed intentions of the publishers are to create a ‘level playing field, to enable retailers other than the dominant Amazon to be able to enter the market and compete – ensuring a better outcome for all players’. Very noble, but this sort of talk fools no-one. It’s code for smothering competition, not enhancing it. It works to the benefit of the publishers and against the interests of the consumers. Even that venerable old UK trade journal The Bookseller is becoming increasingly worried about what publishers think they’re doing: ‘At an instinctual level, whatever the sophistry employed in its defence, bringing in price fixing online will feel wrong to the only people who ultimately matter in this, the readers’ (5).


Finally, let me say something about territorial copyright, that beast that haunts the Australian trade and poisons so much of our debate. It was never the central issue in the parallel importation fracas, although most industry people, particularly authors, framed it so. It’s always been the source of enormous conceptual confusion, and I must say, with profound regret, continues to be so in the ebook world.


Most Australians who own an ebook reader are drearily familiar with the following message:


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


What this means is that publishers have shoehorned Amazon, Apple, Sony, Kobo, Google and other ebook retailers into honouring the territorial rights deal the publisher has made with the author, or more accurately, the author’s agent. If a US publisher has only bought US rights then its ebook contract with etailers will only entitle those etailers to sell to Americans. And here’s the rub: even if no Australian rights (or, more frequently, Commonwealth rights) have yet been sold by the agent, then still no Australian consumer can buy that ebook.


To me this is an offense against logic and fairness, and runs entirely counter to the long and established conventions of the retail trade, and it certainly runs counter to what happens in the analogue book world. If I order from Amazon the US edition of a print book for which Commonwealth or Australian rights have been sold, I will still be supplied it. There is no publisher ‘contract’ that restricts Amazon from supplying it to me. In fact the US, UK and Australian Copyright Acts have long embraced the concept of the ‘first sale doctrine’, which means publisher rights over the product are exhausted after the first sale. The retailer can do what they like with the book – give it away, discount the buggery out of it, sell it to China – without being answerable to the publisher. They are only restricted from making copies of it. This convention enshrines a free space for retailers outside the usual restrictions of copyright law and underpins a vital commercial role in information distribution.


In the e-world, however, it seems we’ve gone backwards. Ironically, when it is so much easier to distribute globally a digital file than a heavy, physical object, we’ve been lumbered with publisher timidity and myopia yet again. There is a simple and practical solution though, which I’ve urged on my publisher colleagues. Make ebooks available from day one to everyone around the globe no matter where they live. The original ebook publisher could do this by not territorially constraining etailers. And when rights to a particular territory end up being acquired by another publisher, then hand over those revenues to them. It would be simple to administer. Thus publishers buy a share of global revenues, not rights to a file.


Ah, much new thinking, much water to go under the bridge yet. Old habits die hard in the book industry. Even when the readers are walking away. If only publishers would reach out to them, befriend them, listen to them, try to satisfy them. They may find they’re not that scary. And they may also find they return the compliment.





NOTES

1. ‘The Parallel Importation Debate – Thank God the End is Nigh!’ Peter Donoughue; p. 61, Copyright Reporter, Journal of the Copyright Society of Australia, June 2010.

2. ‘Review of the Application of the GST to Cross-Border Transactions’, p. 46, The Board of Taxation, February, 2010.

3. ‘Book Battle: Dymocks Considers Offshore Option’, Nicole Chettle, ABC News, November 18, 2010.

4. http://www.accc.gov.au/content/index.phtml/itemId/322982

5. ‘Expensive Model’, p. 3, The Bookseller, London, November 5, 2010.

Dymocks offshore threat... Pleeeze!

Here's the ABC news report:

http://www.abc.net.au/news/video/2010/11/18/3070096.htm

Don Grover's threat to move Dymock's online business offshore to escape the GST net is further evidence, if any were needed, that the current GST obsession of the Australian book trade is becoming deeply farcical!

Firstly, what about Australian books? Would Dymocks have Australian publishers ship them to Hong Kong so Dymocks can re-ship them back to the customer in Whyalla?

Well, perhaps Australian publishers would drop ship to Whyalla and Dymocks simply invoice the customer out of Hong Kong, thus saving on freight? Nope, won't work. Any supply from an Australian company is within the GST system and Dymocks won't get GST credits unless it charges the GST to the ultimate customer.

Well, perhaps Dymocks will only ship imported books from Hong Kong, with Australian titles coming from the Australian operation on a separate invoice? Very clumsy and confusing to customers, and how will the many local printings of overseas titles be handled, and local editions where local rights have been acquired?

I'm afraid whatever way you look at this it's a dud idea. The perfect case of a bad idea leading to a bad business strategy.

Don, it's only 10%. It's utterly irrelevant. It's not the main game. It's far from forming the basis of a radical avoidance strategy, which can only incur innumerable additional costs and bog you down in logistical dead ends. Your online business draws inventory from your main, richly and superbly stocked store in George St, Sydney. Divorce the two and both will surely and immeasurably suffer. I cannot believe otherwise. 

Focus on the main game - publisher over-pricing. And revisit the prohibition on parallel importing. That's still the elephant in the room.

Pricing in an Age of Parity

Old habits die hard in the book trade in Australia, but some habits to do with the way publishers have long priced imported titles are going to have to radically change if customers are going to be lured back into buying from Australian booksellers rather than Amazon or The Book Depository.

There are three issues:

1. Pricing way out of kilter with TODAY'S exchange rates.
2. Price points that lock in uncompetitive markups.
3. Infrequent price changes.

Bookbuyers are aggressively responding to the current parity paradigm by buying from overseas-based online retailers, and this is one of the principal reasons retail booksellers are really struggling at the moment. Conditions have rarely been worse. Consumers have gone way beyond the ROBO phenomenon (research online, buy offline) that's been with us for the last decade or so. Now it's just BO - buy online. There's no need to even research it, just do it. The ingrained expectation is that, even if the local bookseller has it in stock, the price will be way over the top.

This mindset can be broken, but only if publishers take radical action along the following lines:

- Price to current FX realities, not some dated average over the previous year or, god help us, decade. That means using parity for US titles and around 62p for UK titles, not just for forthcoming titles, but all titles currently being sold.

- Abolish pricing up to the closest traditional price point - $26.95; $29.95; $32.95; $35.00; $49.95; etc. There is too wide a gap between these points, and too many customers are dropping off on the way up. This was not much of an issue in times past, but it is today.

- Change prices frequently according to FX movements up or down. It's time to let go of the traditional three month's advance notice to retailers, and rarely, if ever, changing the backlist. Systems and protocols have to change. Monthly adjustments across the board should be the norm.

The golden rule on pricing should be: Today's exchange rate plus 10% plus GST. Thus a 13.00 pound UK title becomes A$25.37. Rounded up to the nearest 95c point, it becomes $25.95. A US$26.95 book becomes A$32.61, which becomes $32.95.

The reason for the 10% markup prior to the addition of the 10% GST? To build in a hedge for exchange volatility. Pricing at one rate and actually paying your overseas supplier at a possibly disadvantageous rate three or more months later can be a real problem for importers. Hence the hedge. The Australian dollar climbs via the stairs and falls via the lift well, as they say!

And what about freight? Here's another golden rule: booksellers pay freight when they import directly, not publishers. Publishers have it built into their intercompany or agency trading arrangements. In other words longer discounts or their equivalent are built in to recognise the additional impost of shipping to Australia.

So George Bush's just released Decision Points should be available in Australia for A$42.95, not $59.95 as advertised! The US price is US$35.00. Do the math!

And all those 13.00 pound UK titles, such as Philip Kerr's new one, Field Grey, should be $25.95, not $32.95 as it is. And Howard Jacobson's The Finkler Question (TPB edition) should be $25.95, not $32.99 as it is.

Pressure needs to be put on publishers to be far more responsive to today's competitive realities. And here is precisely where the ABA needs to step up. Real leadership is called for.

Don't hold your breath!

The Agency Model in Australia - wtf??

This distressing piece was in the WBN yesterday:


Hachette Australia CEO Malcolm Edwards has confirmed the publisher has signed with both the iBookstore and Kobo under ‘an agency agreement', but declined to comment on the publisher's pricing strategy.



Under the agency model agreements between Apple and publishers currently in use in the US and UK, publishers set the price of their ebooks and discounting by retailers is not allowed.


The Weekly Book Newsletter understands that Hachette Australia is the first publisher to come to an agency agreement with Kobo, however other publishers may also come to an agency agreement with the Canadian-based ebook distributor in future.


However Malcolm Neil, communications manager for REDgroup Retail which offers ebooks through the Kobo platform, said that ‘observing the situation in the UK, if publishers do move to an agency model in Australia in future, it will take a while for [associated price changes] to wash through the market'.


I know I keep banging on about this, but let me repeat: in Australia the agency pricing model is clearly and unambiguously AGAINST THE LAW!


No doubt Hachette has legal advice to the contrary. Well bugger me - legal advice that corroborates with what you want to do anyway! Who would have thought? (Although I'd love to see the hedging in that advice!)


Here is what the ACCC says about our Resale Price Maintenance provisions in our Trade Practices Act. It's pretty clear:

Any arrangement between a supplier and a reseller that means the reseller will not advertise, display or sell the goods the supplier supplies below a specified price is illegal.



It is also illegal for a supplier to cut off, or threaten to cut off, supply to a reseller (wholesale or retail) because they have been discounting goods or advertising discounts below prices set by the supplier.


A supplier may recommend an appropriate price for particular goods but may not stop retailers charging or advertising below that price. In most cases, a supplier may specify a maximum price for resale.


This is a succinct summary of what the actual provisions say.

One source of publisher confusion could be that Apple has thousands of Apps that have been legally supplied under the agency model in Australia since day one, so an Apple ebook is simply one more App. But 99.9% of those Apps are Apple exclusive and specific. The problem comes when other competing resellers get into the act and producers/suppliers attempt to force the model onto them. This is the danger with ebooks, which are far from being Apple specific. They need to be available on multiple devices. And foisting price control on them is restrictive of competition.

In Hachette's case they've gone to Kobo and presumably muscled them into meekly submitting. How bad is that?

This is dangerous legal ground. You really don't have to be Einstein (was he a lawyer?) to know that.

The GST and Online Retailers: the ABA's bad campaign

This appeared in the WBN yesterday:
GST-free online purchases a growing concern for booksellers:


Australian booksellers are among a growing number of Australian retailers who are calling on the federal government to reform the rules guiding the application of the GST to online purchases from international retailers.


Inside Retailing Online reported last month that the Australian Retailers Association (ARA) has been 'stirred into action' by a 'groundswell' of concern among its members about increasing numbers of Australian consumers purchasing cheaper goods online which do not collect GST.


Goods coming into Australia which are valued under $1000 are currently exempt from GST, and are therefore sold at cheaper prices to their Australian equivalents. The ARA estimates that the sale of these goods is costing the federal government approximately $600 million in lost revenue.


In recent weeks, Australian consumers have been given added incentive to purchase goods online with the strength of the Australian dollar against the US currency.


President of the Australian Booksellers Association Jon Page told the Weekly Book Newsletter that more consumers are choosing to shop online for books because of the strong Australian dollar, which is compounding the problems faced by the bookselling industry because many overseas books do not attract GST.


Page said that the application of the GST on books in Australia has had a significant impact on the industry, with book prices rising almost 33% since its introduction. Page said that booksellers 'are going to continue to be disadvantaged' as long as GST is not being collected on most overseas books purchased by Australian consumers.


'Most book orders consist of 2-5 books, which is well under the [$1000] threshold,' said Page. 'For there to be any impact on books being imported into the country, this threshold would need to be reduced significantly or the GST removed from books in Australia,' he said.


Similar sentiments were also expressed by ABA chief executive officer Joel Becker who told the Weekly Book Newsletter that the ABA expects the issue will be raised in many individual submissions, as well as their own, to the Book Industry Strategy Group.


Becker said that Australian booksellers are faced with 'an unfair impediment' when competing with overseas booksellers as they are effectively required to charge 10% more than international retailers before any other concerns are factored in.


Becker said that the issue is about more than just lost tax revenue for Australian governments, with significant flow-on effects on employment levels in the industry and in severe cases, the closure of businesses.


Becker told the Weekly Book Newsletter that the problem could be resolved in one of two ways.


The first option, said Becker, is to 'go back to what was supposed to happen before... the Australian Democrats went belly up to the Howard Government, and do not charge a GST on books'.


'Or if the government, in spite of having been opposed to a GST on books when in government and, later, in opposition, accepts that there should continue to be a GST on books, then introduce fairness into the process by charging GST on cross border purchases,' said Becker.


'All that we ask is that fairness and equity come into play,' he said.




This whole obsession with trying to get the GST applied to books imported online is pathetic on a number of counts.

Here are the facts:


1. The government reviewed the GST regulations governing imports as recently as February this year. The investigation by the Board of Taxation concluded that, if the current $1000 threshold were lowered to $250 as recommended by retail associations, 'there will be an increase in administrative costs of bringing more goods into the customs system in order to account for the GST which is likely to outweigh any benefit....[consumers would be] paying disproportionately high amounts of GST and administrative charges to have their goods released from Customs compared to the value of the goods' (p.46).


The Board concluded that, at the far lower threshold of $250 (no organisation was proposing it go any lower) the case had no merit. When you consider that most consumer book purchases from Amazon or The Book Depository would be well under that amount - 99% at least, I'd venture - then the case doesn't even get off the ground! 


The ABA, and booksellers generally, ought to appreciate the following:

1. There is no chance whatsoever of any government removing the GST on books. It's really silly to even contemplate that, and it looks silly and ignorant to publicly campaign for it.

2. There is no chance whatsoever of any government lowering the threshold to below $250. The outcry from consumers would be loud and long. The GST is a tax system, not a job creation or protection mechanism.

3. Even if by some remote chance the GST net was widened to capture these online purchases, then - and this is important - IT WOULD HAVE MINIMAL EFFECT ON BOOK IMPORTING BEHAVIOUR! Despite the humorous 33% claim of Jon Page above, the GST is still only 10%!

4. By far the most critical issue is the way consumers are forced offshore by the over-pricing of imported books in this country through publisher markups way out of line with foreign exchange realities. And now we're at parity, the situation is worse than ever. Having joined publishers to save them from having to face real competition through parallel imports last year, the ABA is reduced to this absurd focus on the GST because they've nowhere else to go.

5. The booksellers ought to take the fight to where it really belongs - up to the publishers and their outrageously outdated markup policies. The days of imported $32.95 TPB's and $40-50 HB's are well and truly over. It's way past time the pricing nexus between local titles and imports was broken.

Step up Jon and step up Joel. You know what you have to do. Stop being nice.

Pathetic move from Hachette

 http://www.tinyurl.com.au/sc3

This sort of anti-consumer activity is quite illegal in Australia, and thank god for that. Pity it's not illegal everywhere.


Shame on you Hachette. You deserve to be condemned.


Let's hope the UK retailers stand their ground, particularly Amazon.co.uk, whose US parent company did not have the intestinal fortitude to do so in America.

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.