An American Editor

April 6, 2010

Valuing a Book: How Do Publishers Decide on Value?

Publishers claimed the high road in the pricing battle with Amazon over ebooks, constantly denigrating the $9.99 value point. Publishers feared, they claimed, that such a price point devalued ebooks.

That got me thinking. How do publishers decide the value of an ebook? Clearly they think a leased ebook has more value than an owned pbook because we haven’t heard this rallying cry before. Thus the move from the wholesale to the agency model of distributing. Why do publishers think a leased book is more valuable than an owned book? Or do they?

There is a certain lack of logic to publisher protestations. For decades the wholesale model has worked without claims of devaluing even though bookstores heavily discounted the books and forced publishers to print large quantities only to have a significant portion of the print run returned. If I were to point a single finger at a single cause of book devaluation, I would point that finger at print overruns that cause returns.

Think about it. Where do the remainder books come from? They are the remainder of the print run that didn’t sell. They are offered in bargain bins for 20% or less of the retail price, and who put them there? The publishers. Is this yet another case of the kettle calling the pot black?

Until the advent of ebooks, publishers seemed happy to sell books to retailers for the wholesale price and then let the retailers set the actual sales price. What difference did/does it make to publishers if retailers sell every book at a loss? The publisher’s revenue isn’t linked to that sales price — or is it?

The unanswered question is whether the discounted pricing moved more books for which the publisher was paid the wholesale price. Would 100,000 copies still be sold if the book wasn’t discounted to $9.99? Or would sales languish at a significantly lower number. My bet is they would languish.

The second unanswered question — and the one that publishers jump on but have no data to prove — is will the $9.99 ebook price will set a price point in the consumer’s mind above which no book — p or e — can be sold? Publishers point to the music industry, but why not look at their own history? The $7.99 paperback hasn’t done away with the $35 hardcover. Publishers are reacting from fear, not knowledge. 

But none of this addresses value. It does address market forces and the likely impact that a lack of competitive pricing may have on the book market, but not value. How do publishers ascertain a book’s value?

We know that there is the bean-counter method whereby someone adds up all the production costs, allows an accounting standard amount for intangibles, applies a percent for profit, and allows for returns, and then divides the total by the print run to establish a value. (There are variations to this bean-counter method.)

But the bean-counter method can’t really be the valuation method publishers are using because that method would work equally well with ebooks — in fact, it would be simpler with ebooks because there would be no print run intangibles or returns. So publishers must be using some other method, one that I can’t put a finger on. (Sure would be nice if they explained it!) The method must somehow be tied to an intrinsic value, a gut-feeling value.

The intrinsic value has to be unquantifiable and based on the content. But isn’t the content of the pbook version and the ebook version the same? Or are the contents different and we just aren’t being told? I expect the content is the same, so explain to me why there is no devaluation of a pbook sold at discount but there is of an ebook?

What makes a paperback worth $7.99, an ebook worth $12.99, and a hardcover worth $25.99 when all the content is identical? We know that production and distribution cost differences are not the answer; the answer must lie in the content or the format. If the content is identical, then content doesn’t account for the valuation difference. The answer must be the format. But that doesn’t make sense because the pricing schemes are reversed, since the value of the format is convenience and ebooks are certainly more convenient than pbooks, which means ebooks should cost more and hardcovers less than paperbacks. But then ebooks are leased and pbooks are owned and isn’t ownership more valuable than leasing? Shouldn’t then the value of ebooks be less than that of paperbacks?

Is this confusing? Yes, because there is no logic to applying the different pricing models — wholesale to pbooks and agency to ebooks — on the basis of value. There is no demonstrable difference in content value to any of the formats. Something is rotten in ebookland!

I don’t want to flat-out state that there isn’t an argument to be made by the publishers about preserving the financial value of books. What I do want to flat-out state is that

  1. publishers haven’t made any valid argument to date.
  2. publishers need to explain why ebook valuation is different from pbook valuation.
  3. publishers need to reassure the nascent ebook market that they truly aren’t trying to kill ebooks.

There clearly needs to be a dialogue between publishers and consumers, especially now that publishers have set the consumer, and not ebooksellers, as their market with the adoption of the agency model. But for this dialogue to occur, publishers need to define how they value books so that consumers can determine for themselves whether the agency model for ebooks is really justified by a need to save books from being devalued. The argument that ebook sales detract from hardcover sales and thus the need for the agency model is less than a weak-kneed argument. The counterargument is simple: Set the initial retail price under the wholesale model of the ebook at the same price as the hardcover and let the ebooksellers sell them for whatever price they wish, including at a loss, just as is done with the hardcovers.

Publishers need to be more forthcoming. They do not need to justify price in relation to costs; that is a business matter. What they do need to do is better explain their valuation excuse for going to the agency model. Consumers are entitled to understand why there will no longer be price competition in the ebook marketplace. Isn’t it the publishers’ own actions that are devaluing books?

April 5, 2010

Will Apple’s iBookstore be Publishing’s Waterloo?

Publishers have bet the store, so to speak, on Apple’s unproven iBookstore. Publishers knew what they had with Amazon, Sony, and Barnes & Noble, but forsook the known to engage with the unknown. If the iBookstore fulfills publisher dreams and becomes a real competitor to Amazon, it is likely that the agency model will expand. But what if the iBookstore becomes a Newton?

The problem is that if the iBookstore doesn’t fulfill all of the big 5 publisher’s prayers, they may not be able to retreat, having burned their bridges behind them. And if they do retreat, they may do so in the face of much more powerful Amazon than the Amazon that originally sent them into Apple’s arms.

The iBookstore experiment has several problems, not least of which is that it will be impossible to know how the agency model fares against the wholesale model on a same-publisher basis because once a publisher chose agency it was crammed down all ebooksellers. This would have been an important experiment for publishers. It is important to know whether agency decreases, increases, or has no effect on profitability and revenues. For the agency publishers, this knowledge will be lost.

Another problem is the possibility of being Newtoned. It is pretty clear that the initial adopters of the iPad are the hardcore Apple fans. But there are only so many of them and no one knows how many of them are ebook readers. Long-term viability is significantly more important than short-term sales spikes. And for publishers, of even greater importance is how many ebookers will purchase an iPad and shop the iBookstore.

iPad’s shortcomings have been well discussed in the media. Chief among them for ebookers are the difficulty of reading in bright light (outdoors), lack of annotation, and the weight. eBookers are generally, as I use the term, avid readers, the people who buy more than 5 books a year. The casual reader, the person who buys 1 or 2 books a year won’t make the agency model and the iBookstore a success for publishers; ebookers are needed. How happy will ebookers be with the weight and limitations of the iPad?

What happens if the iPad and the iBookstore are Newtons (flops)? What is the backup plan? Have publishers cut their own throats by forcing ebooksellers to accept the agency model? If the agency model is a flop with consumers, will publishers simply have given Amazon the dominant position they were trying to undermine?

The iPad is a nice gimmick and for all the hype, I don’t find it a compelling buy — and I’m looking for a larger screen ebook device. When I sit down to read, that’s what I want to do — read, not just for 5 minutes but for hours. And I buy lots of books; last year I bought more than 200 books (so I’ve got a huge to-be-read pile to which I am constantly adding). But I can’t imagine reading on a 1.5-pound device for very long; it would be uncomfortable to hold and would constantly require both hands. And I like to read in the sunshine when the weather is nice, something I can do on my Sony Reader. Convenience and comfort are two reasons for buying an ereading device. So the iPad is not on my list and the iBookstore, with its proprietary DRM is also not on my list.

What will publishers do to keep me buying books? Higher pricing is certainly not an incentive to buy books; if anything, it is an incentive to buy significantly fewer books, especially as I just lease the ebooks rather than own them. Locking me into a proprietary DRM leasing scheme and a particular ebookstore — whether Amazon’s or Apple’s — doesn’t appeal to me.

If ebooksellers like Smashwords continue to price aggressively, I am more likely to buy books from their indie publishers than I am to buy from the big 5 at inflated prices. So I and others like me, who do not fall for the Apple hype, are a problem for the big 5 and the higher agency model pricing. Don’t get me wrong. I am not one of the ebookers who believes that $9.99 is the magical sweet spot; I’m willing to pay more or less than that price point, but I’ll only pay more if I perceive the value in doing so. That’s where publishers fall down: they fail to convince me of the value of their ebooks.

The big 5 have declared war on me (and like-minded ebookers) with agency model pricing and aligning themselves with the iBookstore. This may well be their Waterloo, yet it is a battle the publishers cannot afford to lose. If the iBookstore’s sales numbers do not at least meet the sales numbers of the wholesale model, publishers will have won the battle (imposition of the agency model) but lost the war (decline in sales and revenues).

What remains to be learned is how the agency model publishers will evaluate whether the agency model is a success or failure. If the goal is to kill ebooks, then a decline in ebook sales will equal success; that is a fool’s goal, however, because ebooks are clearly the growth area of the future. If such a decline is not accompanied by a parallel increase in pbook sales, all the big 5 will have accomplished is lowering their overall sales and revenues. How will they view success or failure if the ebook market continues to grow but their share stagnates or declines?

Will they have succeeded or failed if Amazon’s, Sony’s, and B&N’s ebook market share continues to grow and the iBookstore only captures a very small percentage of the ebook market? How will the big 5 view the experiment if Smashwords’ share of the iBookstore market is greater than their share? Most importantly, if the iBookstore is a failure, how will the big 5 extricate themselves from the debacle?

Needless to say, it is much too early to determine success or failure, but it is not too early to plan a retreat. Placing all one’s hopes on unproven entities (the agency model and the iBookstore) is begging to be Waterlooed.

March 18, 2010

eBooks & pBooks in Tandem

It appears that Barnes & Noble and some publishers plan to experiment with giving pbook buyers a discount coupon to purchase the ebook version of the purchased pbook. I’ve been wrestling with this idea for quite some time and I’m still undecided about how valuable such a system will be to me.

There are several considerations. Will I need to buy the hardcover or can I buy the paperback pbook? Buying the hardcover pbook isn’t much of a problem for me as I only buy hardcover pbooks. But where it does have some effect is on which books will come with the discount coupon and how recent will those books be: Will they be brand new releases still on the bestseller lists or will they be part of the long tail only? The answer also affects the price I would be willing to pay (or maybe it doesn’t; let’s see how the discussion unfolds) for both the p and e books.

Considering the state of pricing today, I also wonder if pbooks that come with the discount coupon will be priced differently than pbooks sans the coupon? This hasn’t been raised yet, but considering the shenanigans that currently occur with pricing, I could see publishers choosing to sell what would normally be a $30 pbook for $35 as a way of covering the discount. Unfortunately, we would never know. I could also see Barnes & Noble, whose reputation has taken some pretty heavy hits since it entered the ebook business, telling B&N members that hardcover pbooks without a discount coupon get a 20% member discount; those with the coupon get a 10% discount. The one thing that can be said for B&N is that it cares very little about how it treats its book buyers, especially its members.

Also of concern is whether the tandem books will be just fiction or both fiction and nonfiction. This matters greatly to me because I rarely buy fiction in pbook form. There are a few fiction authors — e.g., L.E. Modesitt, Jr., David Weber, Robin Hobb, Harry Turtledove — whose new releases I buy in hardcover, but these authors are still read-once-then-shelve authors, so I would be disinclined to pay twice for one of their books. Conversely, my nonfiction reading runs largely to history, biography, English language, and philosophy, and these books not only grace my library shelves but they are referred to regularly and sometimes reread in whole. These books I would be interested in both p and e versions if the price and quality of the ebook was right.

My fourth concern relates to the quality of the ebook. If the ebook has the typical quality problems we see today, I am disinclined to spend twice for the same book — especially when those quality problems come wrapped in DRM. We know that ePub works pretty well for straight text, which is typical of fiction, but what about the more delicate needs of nonfiction, such as foot-/endnotes, intricate illustrations, and detailed tables and graphs? Will publishers enhance quality control or remain haphazard in the quality assurance department?

When I buy a nonfiction pbook, the typical price ranges from $30 to $40; occasionally a book costs less and sometimes more than that range indicates. On average, most of the books I purchase cost about $35. So the important question is how much more am I willing to pay to have the convenience of reading an ebook of the purchased pbook?

I admit that if I could, I would gladly read any book I purchase on my Sony Reader. I generally have a hate relationship with electronic devices, especially my computers, but I love my Sony Reader. But it isn’t well suited for reading complex nonfiction. So I’m looking to upgrade my device and the tandem idea might be an incentive — if the price of the ebook part of the tandem is right.

And that’s the kicker — What is the right price? Currently, when I buy fiction ebooks I am unwilling to spend more than a very few dollars — never more than $5 and rarely more than $3 — because quality is so low. Because I buy nearly all my fiction in ebook form, it means there are a lot of fiction authors published by major, traditional publishers whose work I never sample. I will not pay Macmillan or Simon & Schuster or any publisher $9.99 for an ebook whose quality may be poor and which is, for me, a read-once-throw-away product, especially not when I can buy the same book in paperback for less than $7 at a bookstore or in hardcover for less than $7 either as a remainder or in a used bookstore. If I’m going to read it once and then toss it, I want toi go the least expensive route possible, unless I am collecting the author, in which event I don’t want anything but hardcover.

So what is the bright line, that magic number that would encourage me to use the discount coupon and buy both the hardcover and the ebook version of a fiction book? I guess that if the pbook cost no more than $30, I would be willing to pay a maximum of an additional 15% for the ebook version. Anything more than that and I would either just buy the hardcover or not buy the book at all

My bright line for nonfiction, however, is different. I buy and use nonfiction books differently, consequently I would be willing to pay more for the tandem ebook version. For me, buying the hardcover is a given; if I don’t buy the nonfiction book in hardcover, I simply am not interested in the book and will not buy it in any form. Well, if the ebook was less than $5 by itself, i.e., no need to also buy the pbook, I might think about buying some nonfiction in ebook only, but that level of pricing isn’t going to happen. But for a nonfiction book that I am buying in hardcover, I would go as high as 25% of the hardcover price for a well-done ebook version in the tandem deal. Anything more than 25% I would pass on.

But let me add this caveat as far as B&N goes: Given the choice between a 20% minimum member discount on a nonfiction hardcover or a 10% plus ebook discount coupon member discount, I will always opt for the 20% discount and forsake the ebook. But I’ll bet B&N won’t survey active members about their buying habits and opinions on this subject any more than it surveyed members before introducing the nook or its ebook product line. If ever there was a company working hard to dig its own grave, B&N is it.

Update

Since I wrote the above, two things have happened: First, I began reading Ken Gormley’s The Death of American Virtue: Clinton vs. Starr, and second, C-SPAN has made available hundreds of thousands of hours of past broadcasts, which hours include the Clinton impeachment proceedings and trial in the House and Senate. Because of my interest in the impeachment process and proceedings from a historian’s perspective rather than a partisan’s perspective, I would have gladly bought a high-quality ebook that included videos of the proceedings and perhaps interviews of the main players — but only if I was assured that I could read and access the ebook today, tomorrow, and 10 years from now. I would have gladly bought an enhanced pbook that included a DVD with videos of the proceedings and trial. And I would have readily bought both the pbook and a discounted ebook of Gormley’s book if the ebook was enhanced — and I was assured that I could read and access the ebook today, tomorrow, and 10 years from now — even if the ebook’s discounted price was 75% of the pbooks price.

My point is this: Certain books lend themselves to tandeming and can command a high price for the tandem. I don’t think fiction can command that high tandem price, but a book like The Loss of American Virtue could if the ebook were enhanced because the enhancements would flesh out and put in historical context the content of the primary text. Something to further think about.

February 16, 2010

It’s Raining, It’s Pouring: Returns in an eBook Age

Excessive returns can sink a publisher. Returns weren’t always a part of publishing. In the timeline of publishing (i.e., since the Gutenberg movable type press caused a seismic shift in production), it is a recent invention, but its ramifications are as seismic as movable type. Returns offer many lessons to publishers, but few that they will heed. For example, the lesson of returns setting an expectation that is hard to set aside is similar to giving away ebooks which may set the expectation of free.

The primary problem of returns is self-evident: Knowing that one can order 100 copies of a book that might sell 3 copies and pay no penalty for overordering wastes resources. Returns also have a highly detrimental secondary effect: Booksellers “return” all of the unsold ordered books and “reorder” them immediately, thus carrying an inventory that is never paid for by the bookseller, only by the publisher.

In the heady days of publishing, before the Internet and conglomerate publishers, returns were a problem that could be lived with. This is no longer true; returns threaten to derail publishing. eBooks can be either salvation or damnation for publishers and can be used to solve the problem of returns.

Returns are the bane of print books. If it costs a publisher $3 per book to print 1,000 copies of a hardcover book that sells for $25, the publisher is out $3,000 and has 1,000 books. Simple arithmetic. But if the book sells only 100 copies and 900 copies are returned, the printing cost per sold book is $30 and the publisher faces a loss of $500 based on the printing alone. The publisher now has to decide what to do with the returned 900 copies. If they are warehoused, the costs increase. It is uncertain whether any or all of them will eventually be sold, whether losses will increase or decrease. If they are remaindered, then they are generally sold for pennies on the dollar; it is not unusual for a book with a list price of $25 to be remaindered for 50 cents. Remaindering simply cuts the losses; it does not bring profit.

eBooks do away with this problem. There are no returns and no print costs. eBooks, with a single button push, eliminate a major publishing headache. This has ramifications for everyone in the book chain. For the first time, publisher’s are in the catbird’s seat regarding returns. If I were a publisher, I would tell booksellers that beginning with my next anticipated blockbuster, order only what you are willing to buy; no returns will be accepted. If booksellers rebel, then I would reply simply: A condition of receiving paperback versions of this blockbuster is that there be no returns of this title. Otherwise, only hardcover and ebook formats will be available. In addition, I would limit the initial hardcover print run to a quantity that I could reasonably expect to sell.

This would start the long-needed demise of returns yet it would not do away with any particular format of a book. Commenters objected to my earlier Modest Proposal‘s suggestion to eliminate paperbacks altogether, so here is a market response: Those booksellers willing to forego returns will be able to fulfill consumer desires for a paperback version. Should no bookseller be willing to forego returns, then either the consumer will have to protest against the bookseller or shift buying habits.

This is a winning strategy for publishers on several fronts. First, by reducing costs, the publisher will have more resources available to increase the value of ebooks. Second, if booksellers do not buy paperbacks, publishers will be able to concentrate on the two more profitable types of publishing: hardcovers and ebooks. Third, should booksellers not buy paperbacks, there will no longer be a paperback benchmark price against which to measure ebook pricing. Fourth, publishers could pass some of the savings on to consumers by lowering list prices or offering preorder discounts. Fifth, publishers will have less financial risk exposure.

Doing away with returns will bring some sense of proper practices to the book business. When booksellers have to buy their product, they will order more realistically and publishers will order print runs that better align with a book’s market. Making paperback availability conditioned on no returns is a smart way for publishers to move away from the current failing returns practice.

What does this do for consumers? In an ideal market, pricing would stabilize and ebook pricing would more realistically reflect publisher costs and publisher-imposed limitations on use of ebooks. But as with promises to lower ebook costs over time, there is no assurance that anyone but the publisher would benefit from this proposal.

February 9, 2010

The eBook Wars: The Price Battle (IV) — Value

It seems like every post is about value. Low-quality books have low price values. We all agree on that. The question unanswered, however, is what value does a book have regardless of its form? That is one tough question!

What brought this to mind was an article in The Economist titled “The Lowdown on Teardowns” (January 23, 2010, pp. 62-63), which was subtitled “Ripping apart smart-phones reveals their true cost.” I tried to rip apart a book to find its true cost but didn’t have any success. Unlike the smartphone, a book is primarily intangibles.

But the article is intriguing. Not because I haven’t read similar items before, but because it hadn’t dawned on me before how differently consumers value smartphones and books and clamor for pricing closer to cost in books but not in smartphones.

The Economist gave this figure for the Apple iPhone 3GS 16GB smartphone: $170.07 for parts and $6.50 for assembly costs, a total of $176.57. But you can’t buy the phone for that price, not even for anything close to that price. The article goes on to say that there are other less tangible costs such as research, design, marketing, and patent fees, along with Apple’s profit. But to get the iPhone, you either have to pay a very high price or sign on for telco service at an inflated price.

Where is the hue and cry for a $250 unlocked iPhone that will work on any network? Where is the hue and cry for lower telco costs (after all, the network has already been built and paid for)? Isn’t Apple overcharging by hundreds of dollars for a device that will be outdated within a few years, that breaks easily, and can’t flush a toilet? What is it about Apple that legitimizes the huge spread between actual cost and sales price?

Compare this to the hue and cry over a $12.99 or $24.99 ebook. Supposedly the ebook will last forever, after all it is simply bits and bytes. The iPhone will be outdated in a few years. eBooks have DRM that restrict their use; the iPhone is locked into a specific network. The ebook has design, research, and marketing costs, just as the iPhone. Similarly, the ebook has manufacturing costs just as the iPhone does.

Yet, consumers willingly pay more than $2000 to own and use an iPhone but grumble about paying more than $9.99 for an ebook. The difference must be that authors have little value but Steve Jobs has great value, otherwise the market valuation is irrational.

The argument is that the iPhone can do so much more so it is worth more. Accepting that as true doesn’t validate the irrationality of being willing to pay the iPhone price but being unwilling to pay the ebook price. The disparity in price between an ebook and iPhone already recognizes the single-function utility of the ebook versus the multifunction utility of the iPhone. There is much more at work here.

There is more at work here than meets the eye. I think that ebooks are suffering from two problems. First, although ebookers tend to disparage print books, what they are really doing is comparing the ebook to the pbook in a more wistful way. The iPhone’s comparable was a less functional smartphone/cell phone; the pbook is as functional as the ebook — or is it? On a book-by-book basis it is, but an avid reader usually has multiple books at hand and ebooks are certainly more portable than pbooks. What ebookers are really saying is that there is no cachet in ebooks and thus no value. (Interestingly, consumers continue to spend the asked for price for the ebook reading device, taking their price rage out on the ebook itself, not on the device.) 

Second, publishers have assumed that readers will see value in whatever the publisher thrusts on the market. Apple, on the other hand, recognizes that consumers need to be led by the nose and so creates a sense of value that the consumer can grasp. Publishers continue to fail to either demonstrate an ebook’s value or convince consumers that the ebook is at least as valuable as the pbook.

The conundrum is this: Publishers undercut their value argument when they print a paperback version that sells for one-third the price of the hardcover. How can publishers win the value argument when they undercut themselves? Publishers need to address this value perception problem.

February 8, 2010

Hall of Shame: An Introduction

A major complaint readers have is the declining quality of books. As publishers of all stripes hope to maintain or increase pricing, especially with ebooks, there is the constant friction between pricing and quality — they are in disequilibrium.

To help both readers and publishers, I have decided to start the Hall of Shame, a place where readers and publishers can both come to see what books have quality problems and readers are complaining about. Let me say upfront that this is not a place to

  • review a book,
  • say that the author is a great or poor storyteller,
  • complain about availability, or
  • argue the merits of pricing by dissing a book because you do not like the price.

Rather, it is a place to point out where editorial and production quality has fallen down, creating a disequilibrium between price and quality.

The format will be as follows:

Book title, book author, edition (that is, print or ebook), publisher of the edition.
          Problem: e.g., poor editing, poor formatting, or both
          Samples of error(s): (if appropriate)
          Frequency of error(s): e.g., occasional, often, very often
         Overall Quality: e.g., very poor, poor, neutral, good, very
                                              good

Here is the first nominee for the Hall of Shame to illustrate the process.

Look to the Sky, Margaret D. Van Tine, ebook, Live Oak House
          Problem: poor editing
          Sample of error(s): (1) wrong word use, e.g.: “You don’t call Paw ‘Reverend,’…”; (2) improper and inconsistent use of double and single quote marks; (3) failure to capitalize sentence beginning, e.g.: “I was shouted down! on a vital issue.”; (4) misuse of punctuation marks, including random punctuation marks in the midst of sentences.
           Frequency of error(s): often
            Overall Quality: poor

By spreading the word about poor editing and formatting, readers will become knowledgable consumers and speak with their wallets, declining to purchase inferior quality books, thereby shaming publishers into fixing them. Should a publisher undertake to fix a book’s problems, that, too, will be noted, assuming the publisher lets us know.

To participate in the Hall of Shame, please send the requested information via e-mail to: hallofshame[at]anamericaneditor.com.

If you have suggestions regarding information that should be included (or excluded) let me know. Remember that this is a part-time blog so Hall of Shame entries won’t necessarily go up immediately.

January 29, 2010

The eBook Wars: The Price Battle (II) — Starbucks 1, Publishers 0

On January 23, 2010 The New York Times had a front-page article titled, “On Kindle’s List, the Best Sellers Don’t Necessarily Need to Sell.” The article went on to discuss the phenomenon with which most savvy ebookers are familiar: many of the “bestsellers” on any ebook bestseller list are free titles. More important to publishers is that many of those bestsellers are always-free public domain books, not paid-for ebooks being given away temporarily as promotions.

The article went on to discuss publisher approaches to freebies, how freebies are promotional, and other good reasons why giving away an ebook is good and/or bad. (Sadly, the article neglects to mention some of the best sources for free ebooks such as MobileRead and Feedbooks. Free ebooks at these two sources are well-formatted and generally well-edited by a caring community.)

Let me say upfront that I like free ebooks–afterall, who doesn’t like free. Free ebooks have introduced me to authors whose work I never would have read otherwise. But let me also say that with rare exception, I have not proceeded to buy other books of the new authors I have liked. (I do, however, buy a lot of ebooks and hardcovers — more than 100 of each type in 2009.)

Free ebooks are a two-edged sword for publishers and authors. On the positive side, it introduces readers to authors they might not otherwise have read. In my case, it introduced me to David Weber, author of the Honor Harrington Series, and now I buy all of his books in hardcover. On the other hand, it also introduced me to Fiona McIntosh, author of the Quickening Series. I liked her writing but have not bought either of her newest two books (books 1 and 2 of her Valisar Trilogy) because the publisher set the ebook prices higher than the paperback prices.

So, problem #1 is that many publishers still have no clue about what differentiates an ebooker from a print copy buyer. In the case of David Weber, Tor/Baen gave away older Weber ebooks and reasonably priced new ebooks, thereby gaining a new reader, whereas for Fiona McIntosh HarperCollins/Eos gave away the ebook then threw away the reader with excessive pricing.

Problem #2 is that publishers are creating reader pricing expectations. Readers expect that sometime down the road an author’s newer books will become freebies too, so why buy now, especially at exorbitant pricing. Once the impulse buy is lost, readers tend to forget the author and move on. Yes, the Times article quoted some success stories, but remember this: It is still very early in the ebook revolution (ebooks account for only 5% of the current book market) and what happens today doesn’t indicate what will happen tomorrow. Let me repeat: The ebook bestseller lists are stacked with freebies, not paid-for ebooks.

Let’s consider consumer thinking for a moment. Many people rush to their Starbucks and plop down $4 for a coffee. Within minutes the coffee and the $4 have disappeared, neither to ever be seen nor savored again. This is the Starbucks law: Make the product a one-time consumable and require new payment for the next one-time consumable.

Contrast consumers’ willingness to buy the coffee with their willingness to pay for ebooks. An ebook, unlike the coffee, can be savored over many hours and can be resavored 2 years later. Read that $5 ebook 5 times, and each reading has cost $1; try drinking that same cup of coffee twice let alone 5 times — it simply can’t be done. The coffee is $4 for a one-time thrill whereas an ebook is multiple thrills that cost less each time. This is the anti-Starbucks law: Make the product consumable multiple times  with each consumption costing less. Yet, consumers balk at paying for an ebook and publishers feed the freebie frenzy.

Clearly, publishers aren’t making their case about value very well. Isn’t there something amiss when Starbucks can convince someone to part with $4 for a one-time, short-lived thrill but publishers can’t convince anyone that their product has greater value because it is a long-lived thrill. Perhaps the time has come for publishers to demote the bean counters and promote those who give value to their product. There is no financial future in free books for any publisher or author.

January 20, 2010

A Modest Proposal III: Dying Days of Giant Publishers (Part 1)

In two earlier Modest Proposal posts (A 21st Century Publishing Model and Book Warranty) I offered suggestions for changes publishers could (and should) consider to their business model. The first proposal, to make ebooks the new paperbacks and to publish only hardcover and ebook versions of books, was not well received by consumers. (Interestingly, some of the most vocal opposition to demising paperbacks came from people who claim to only buy ebooks!) The second proposal was much better received, probably because everyone loves perfection and loves the idea that something comes with a warranty.

Now comes my third modest proposal, which begins with a prediction: The big, multinational book publishers have begun their funeral march. Within a decade or two, possibly sooner, there will no longer be giants of publishing; instead there will be a reversion to the preconsolidation era with numerous small (by comparison to today’s Hachettes and Random Houses) publishers dominating the industry.

Before getting to my suggestions about what today’s giants can do to stave off their funeral orations, let’s consider why they are now walking that funeral path. What follows are a sample of publishing’s self-destruct problems.

First, they are too big to react with grace and ease to changes in the publishing world. Imagine a sumo wrestler dancing Swan Lake. Decisions that need to be made quickly and locally cannot be made because there is always another corporate level to consult. It’s hard to survive when you need to turn on a dime but can only turn on a half dollar.

Second, they haven’t learned what I call the Dell lesson: Tell the customer he can have it his way and then limit the options. Dell always touted how customizable their computers were. Yet try to really customize a Dell computer — you can’t; Dell has limited options for particular computer models and you can’t take options from one model line to another. This is no different from what the automobile industry has done for decades. To get one feature you want, you have to buy an option package or do without. Or, better yet, cable TV. Few choices there. You pay for sports channels whether you want them or not. Unlike other industries, publishers let others dictate what they will do and offer. Publishers need to rethink this action model.

Third, publishers haven’t yet recognized where they are in the policy-setting chain. Although they should be in the catbird’s seat, instead it is the distributors and the retailers who drive publisher policies. What is the single most hurtful policy to publishers’ bottom line today? My guess is the returns policy. Who does this policy help: distributors and retailers because they do not have to pay for ordered product. No other industry has such a policy and no industry — including publishing — offers such a system to the consumer. This policy of returns for books started decades ago for a reason that was valid decades ago but is no longer valid or sustainable, yet publishers can’t stop killing themselves — it’s the fear of being first.

Publishers need to regain the catbird’s seat and immediately do away with returns. If, say, Random House were to unilaterally declare an end to the current returns system, most publishers would soon follow. Unlike computers and automobiles, there is no substitute for a Dan Brown best-selling novel that would give a competitor a leg up by keeping the return policy. Readers either want Brown’s novel or they don’t; no retailer is going to tell a customer that they can’t buy the Brown novel because the publisher doesn’t accept returns so the retailer won’t stock the book, but here is Joe Unknowns’ similar novel instead.

The returns problem highlights a fourth reason: Publishers are confused about who are their customers. Until recently, except occasionally, the giant publishers didn’t sell books directly to readers. Although the publisher has to produce books that readers want to buy, their immediate customers today are the middlemen between publishers and the readers. With the changes that ebooks are bringing to publishing, the giants will die on the vine if they do not rethink who their customers will be in the coming years and their relationship with them.

Alas, there is more to say, so this discussion continues in tomorrow’s post, wherein I reveal my modest proposal.

January 8, 2010

A Modest Proposal: A 21st Century Publishing Model

Publishers believe themselves threatened by ebooks, by the idea that ebooks are too easily shared, which will deprive publishers of revenue, and by the prospect of consumer expectations for very low ebook prices that will prevent publishers from recouping costs and making a profit. Many authors, too, are concerned, especially about ebook pricing and royalty share. Perhaps it is time to rethink the current publishing model and move toward a model for the 21st century. Thus, my modest proposal.

The current book model has three lives: hardcover, paperback, ebook. The weak link is the paperback because it is an unwitting benchmark and it should be excised. If we change the lives to hardcover and ebook, a publisher retains what it currently believes is its most lucrative (profit wise) format — the hardcover — and gains the ability to increase ebook profit and revenue (which will, in relatively short order, become the true profit center).

I propose that the hardcover precede the ebook by 3 months. When I worked for publishers, my experience was that the window for hardcover sales rarely exceeded 3 months; whoever was going to buy the hardcover as opposed to the paperback did so within that time frame, usually within the first month. I suspect that this remains true today.

Doing away with the paperback version and encouraging the ebook version means several things. First, the publisher doesn’t have to price compete against itself. Consumers expect an ebook to cost less than a hardcover, which in most cases it does, but also expect it to cost less than the paperback version, which often it does not. But if there were no paperback version, there would be no benchmark other than the price of the hardcover. Bingo!!

Second, the publisher would reduce its costs. Without a paperback version, there would be no secondary printing costs, no transportation or warehousing fees, and, more importantly, no returns. It would be difficult for a retailer to return the hardcover copies when there is nothing to replace it with. Even a retailer who sells both the print and electronic versions would need to keep some print inventory. Is this a bingo, too?

Third, with only two forms available — hardcover and ebook — it is likely that a publisher would see an increase in sales of hardcovers — after all, there would be no sense waiting for a cheaper paperback version that won’t be forthcoming — and would be able to charge a higher price for the ebook version because there would be no alternative but the higher priced hardcover version. Is this a win for publishers? Maybe. I’d give it at least half a bingo. But . . .

. . . the price point for the ebook would still be contentious. Convincing consumers to pay a publisher’s “reasonable” price for the ebook has its own problems. It probably wouldn’t be as difficult if it weren’t for DRM (Digital Rights Management) that essentially locks a book into a single device and prohibits sharing. Here’s one solution: Instead of one level of ebook, offer consumers two levels, with one level being several dollars less expensive than the other. Burden the less expensive ebook with permanent DRM and the more expensive ebook with temporary DRM, that is, DRM that will automatically expire 2 years from the date of purchase. A better suggestion: Forget levels and simply sell ebooks with DRM that expires in 2 years, freeing the book for the consumer to do with as the consumer pleases.

What this model requires is the giving up of the idea of a frontlist and a backlist and instead making each book a profit center within 3 years. That will mean other changes in the publishing production cycle, not least of which is the lowering of author advance expectations. This proposal requires both a cultural shift and a paradigm shift. Are publishers and authors ready for a change? It will come eventually. Better to embrace it than to waste resources fighting a war that cannot be won.

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