Comments for Bits Of Destruction Hit the Book Publishing Business: Part 1

Bits Of Destruction Hit the Book Publishing Business: Part 1

2009-07-16T00:26:18Z

"Bits of destruction" is a phrase Fred Wilson uses to describe the destructive part of "creative destruction" brought on by digitization. We hear a lot about the destruction wrought on the newspaper business. A more interesting and nuanced wave is now hitting the book publishing business. Actually, it is three waves: the digitization of back catalogs, e-books, and print on demand. However this plays out, a lot of people will be affected, but the way in which it will play out is not at all obvious. This is too big a subject for one post, so read this as an introduction to a multi-post investigation.

]]> Somewhere Between Author and Reader Is Multi-Billion Dollar Market

Data on market size is hard to come by. Albert N. Greco, in his book "The Book Publishing Industry" (the relevant extract of which is available, ironically, on Google Books), pegs the number at $65 billion in 1993. The value is probably higher by now. In any case, it is big.

An author writes a book, and you read it. A lot of money is exchanged between those two actions. Consider the steps an author has had to go through in the past to make a living from writing books:

Find an agent, who takes a cut and finds a...
Publisher, who arranges everything and takes a very big cut and delivers the manuscript to the...
Printer, who takes a cut and delivers the product to the...
Distributor, who takes a cut and delivers the books to the...
Retailers, who sell one to you.

Courtesy of iReaderReview, we have created a very simplistic view of how the pie is currently divided:

Author: 10% (This in fact ranges between 8% and 15%, depending on the author's clout -- e.g. Stephen King does better than most. If the author has an agent, the agent's cut comes out of this. It is indeed tough for new authors.)
Publisher: 30% (This ranges between 25% and 32%, again depending on the author's clout -- e.g. their percentage is less with Stephen King because the risk is lower too. Note: this is their net revenue, after deducting author royalties and printer fees.)
Printer: 10%
Distributor: 10%
Retailer: 40%

Enter the Dragon: Amazon

Jeff Bezos, who could go down in history as the most driven and talented entrepreneur of the Internet age, shook up this last stage: retail. About a decade ago, people were talking about how retailers were "getting Amazoned." But then a couple of things happened:

Amazon discovered that pick-and-pack distribution through warehouses was almost as expensive as running stores on Main Street.
Because the end product was still a physical object, many people still liked browsing in bookstores.

During all of these bruising battles, the publishers did just fine. The long-tail of online media enabled them to sell more of their back catalog.

So, we know how e-commerce played out. But then along came three more waves.

The Three Big Waves Hitting the Industry

One massive wave crashing down is confusing enough. But when three crash at the same time, even seeing what's going on (let alone predicting how things will play out) becomes really difficult. These three big new waves are:

The digitization of print books by Google Book Search.
Increasing consumer acceptance of e-books, mostly because of the Kindle.
Print on demand.

Wave #1: Google Book Search Archive Digitization

The first wave, Google Book Search, has kicked up a storm of controversy, with some waving lawsuits in the air. Google threw down the gauntlet in classic Google style, threatening every player in the industry. Its initiative has reached an impressive scale:

"On October 28, 2008, Google stated that it had 7 million books searchable through Google Book Search." (Source: Wikipedia)

Google is dealing with three types of books here:

Books in the public domain but no longer in print or easily accessible outside of libraries. These are useful for research and can be downloaded as PDFs. Google has scanned these at considerable cost, and the content does not seem to be a good platform for selling ads, and so we would assume this is not a directly commercial venture. Non-profit initiatives in Europe are doing the same sort thing. No one could really argue with this point.
Books that are out of print but still copyrighted. These were the subject of legal action taken by the Authors' Guild and the Association of American Publishers to protect publishers' revenue from back catalogs and authors' royalty streams. The case was settled in October 2008.
Books that were scanned by 20,000 publishing partners and sent to Google, which restricts how much of any one you can read online. Publishers are using Google in its classic role as a source of traffic. They hope the extracts entice you to buy the books.

But this does not bear on the best-sellers and books that you buy at airports. Google is simply performing its normal role of directing online traffic.

That is where the second wave, Amazon's Kindle, comes in.

Wave #2: E-Books

With the Kindle, Jeff Bezos finally gets rid of those warehouses and delivery trucks. He still works through major publishers. As Steve Jobs did with the iPod and iPhone, Bezos is using a device to extract high rent for digital products delivered through the device.

Alternatives to the Kindle exist, of course. But alternatives to the iPod and iPhone exist, too, and Bezos is betting that his device will exact similar loyalty in consumers, forcing all of the major players to work with Amazon.

So, what does the book publishing revenue pie look like with the Kindle now in the eco-system? Let's look at this from the point of view of authors. That seems a good starting point. Without authors, there would be no readers and thus no value for intermediaries to extract. Well, it turns out that the Authors' Guild (yes, the one that sued Google and got a settlement) has a strong opinion on the Kindle, as its President, Roy Blount, explains in an article in the New York Times.

Blount probably gets good legal advice. He is going after a weak link in Amazon's legal defense, as he explains:

"Serves readers, pays writers: so far, so good. But there's another thing about Kindle 2 -- its heavily marketed text-to-speech function. Kindle 2 can read books aloud. And Kindle 2 is not paying anyone for audio rights."

But this seems like a side issue. The real questions are:

Does the reader get a cheaper product? Well, not yet. But consumers seem to be sending a loud message that e-books should be cheaper.
Will authors get more than the 8 to 15% share of the pie that they currently get? That should be possible, because a few big pie-sharers have been eliminated by the Kindle, namely:
- Printer: 10%
- Distributor: 10%
- Retailer: 40%.
Unless Amazon is giving a bigger percentage to publishers (which is unlikely, but possible), 60% of the pie is available to be shared between Amazon, publishers, authors, and readers.

Here is an author asking all the right questions. And in the comments, another writer addresses the question of royalties on Kindle sales:

"One-third of the cover price. If Amazon discounts the book, they still pay you one-third of the cover price you submit."

He goes on to explain that authors are paid monthly, and they do not ask for exclusivity and do not get advance royalties. That all sounds fine. You can check the actual terms and conditions on Amazon's Digital Text Platform, and the forums contain other advice.

But note that one-third of the cover price goes to the publisher. That is not the author's cut. So, with the Kindle in the mix, the pie appears to be more like this:

Author: 8%
Publisher: 33%
Printer: 0%
Distributor: 0%
Retailer: 0%
Amazon: 59%

In other words, publishers and authors get no more than they did before, and Amazon takes everyone else's cut. This is very good if you own Amazon stock and quite a worry if you are a printer, distributor, or retailer.

Wave #3: Print on Demand

Not everybody wants to pay $359 for a Kindle, particularly when e-books for it are not significantly cheaper than print versions. Also, most books are not yet available on the Kindle, and many (for example, ones with a lot of high-quality images) are not suitable for the device (at least not the current version).

This is where the third wave, print on demand (POD), comes in.

While printing single copies of books using traditional technology such as letterpress and offset printing was simply never economical, digital printing technology now makes it possible.

POD caters to the new long tail: new books that are not best-sellers. Authors go through one of the POD intermediaries: Lulu and Blurb.

In simple terms, the intermediaries allow you, the author, to sell books one at a time. (You could give your book away for free, but you would still have to pay Lulu or Blurb for printing costs.) The model requires no up-front cost from you and no minimum purchase from the reader. Your print-ready content goes to Lulu or Blurb's printing partners, which print and send the books to readers. The printers are willing to work with these intermediaries because they aggregate demand.

You, the reader, see no difference. You order online, pay by credit card or PayPal, and get the book delivered to your home or office.

This initially caught on in the self-publishing and vanity publishing industry, where books often had no market beyond the author's immediate circle of friends, family, and associates. For a good breakdown of the types of publishers in this industry and what to look out for, see this article.

A lot of publishers specialize in this area, including Epigraph, Xlibris, I-Universe, AuthorHouse, SelfPublishing.com, and BookSurge. But they typically require a minimum order, albeit a small one. Blurb and Lulu have used the Web to take this idea to its extreme: no up-front costs, and books printed one order at a time.

Part 2: Wiping the Muck from Our Crystal Ball

In part 2 of this series tomorrow, we will look at how this could play out for the major players:

Readers: will we all get more choice at better prices? Almost certainly.
Authors: will making a living from writing books be any easier for them? This is important to a lot of people but far from certain.
How will the other players (publishers, printers, distributors, and retailers) evolve to meet the challenges of this new world?
What new intermediary models will emerge, and which players stand to profit from them?

UPDATE: Part 2 of this series is now available. It explores how this could play out in the future, specifically for the major players of book publishing: readers, authors, printers, publishers, retailers, and e-book device vendors.

Comment from Olivier Dupuis on 2009-07-15

2009-07-16T01:42:27Z

Love the subject, cause very interested in how books are the best vehicle for ideas. Sad how the creation of those ideas is so under-valued.

Comment from Tim on 2009-07-15

2009-07-16T02:44:00Z

I have to tell you this is one of the best written blog posts I've seen in some time. Concise, comprehensive, well researched and well spoken. My hat is off to you for a job very well done and for promoting a discussion that is well overdue.

Comment from Rebecca Ryals Russell on 2009-07-15

2009-07-16T03:33:31Z

Awesome blog. This explains concisely all of the options available to authors right now. I'm very interested in seeing tomorrow's post. Where is all of this heading?

Comment from cocowool on 2009-07-15

2009-07-16T06:16:51Z

Great, eventhough living in china, i also felt the change of the publish market

Comment from Youssef on 2009-07-16

2009-07-16T08:08:01Z

Very good post: keep up the good work!

Comment from JulesLt on 2009-07-16

2009-07-16T09:12:29Z

Agreed with the comments above - this is one of the best things I've seen on RWW for a while - I particularly like the economic breakdown, which shows that all is not rosy in the digital garden.

The problem is that a lot of digital types think that the author should be better off because they can cut out the publishers slice - ignoring the fact that authors go through publishers for reasons other than printing - publicity and marketing being infinitely more important.

One tiny point : the Lulu model does require some upfront costs - namely the time spent writing, editing and laying out (the latter two being things a publisher generally does). DTP has made this easier, of course, but it's still all work that has to be done.

Comment from Leonardo Assis on 2009-07-16

2009-07-16T10:15:11Z

I read E-books in my Ipod Touch.

Comment from Callie O Farrell on 2009-07-16

2009-07-16T11:23:18Z

Love this topic. The breakdown of the revenue is very interesting. Having worked in the distribution sector I can see the benefits of removing the road miles from the picture!!

Look forward to seeing tomorrow's post.

A friend is a writer and is fortelling the shortage of good writers with the vanishing monetary rewards for the work....

Comment from Nathan Shpritz on 2009-07-16

2009-07-16T12:35:05Z

Great read - would definitely recommend this installmnet and, sight unseen, to any friend interested in finally penning a volume.

One point however. Your breakdown of the revenue amount author, publisher, and Amazon under the "Kindle" model adds to 100%. You note that the author and publisher are paid on their listed cover price Amazon bears the cost of the discount.

Any chance you could revisit the breakdown adding a "discount" category? Of course it will also be interesting to see the pressure Amazon can exert on publishers to trim their cover prices initially.

Can't wait for the next installment.

Comment from Venkat on 2009-07-16

2009-07-16T12:36:04Z

Very succinct overview. Full disclosure: I work for Xerox, one of the players in the last of your 3 disruptor categories (on-demand).

There are a couple more disruptors though.

One is the novelty in economic models. Chris Anderson's "Free" is being given away free in multiple formats, but doesn't seem to be hurting the book sales. It just made the NYT bestseller list. With the 3 big lowest-level infrastructure changes you mention will come more derivative changes like this, since the old 'psychological' pricing models (like $29.95 for a biz book or $7.95 for a mass market romance) will become unsustainable, so we'll see pricing innovations.

The other big one to think of is on the creative end. The medium is the message. Webook.com is one such early experiment, though it has its flaws. But lots of other models are being tried, and the "book" as a conceptual construct is going to change in pretty radical ways (though not as radically as "newspaper" or "magazine" which are going to change so much they will be unrecognizable in their new forms!).

Venkat

Comment from Bernard Lunn on 2009-07-16

2009-07-16T13:42:03Z

Thanks all. Ch 2 posts today. Meantime, check out great article in Brooklyn Rail on revenge of print: http://bit.ly/4osh8d

Comment from Fiona on 2009-07-16

2009-07-16T15:20:17Z

What you don't mention (maybe in the next post?) is that the postage costs of POD (ie getting the product to the consumer) are astronomical! Who takes that hit? As a small publisher I tried to save my customers from the additional postage cost by ordering in bulk (I worked out that 72 units gave me the optimum profit margin after paying for postage) - but then that defeats the object of POD, doesn't it?

Comment from Ric on 2009-07-16

2009-07-16T16:54:59Z

I find it hilariously ironic that this is shaping up to be a very similar process to the last 5 years worth of struggle in the music and movie industry. Lets cut to the chase:
- publishers will try to lock down the digital process.
- Amazon and publisher greed will further shrink the authors portion of THEIR creation.
- Readers on every possible handheld device will kill kindles stranglehold (thankfully)
- consumers will get pissed at the rigidity of the platform.
- Authors will start selling their own stuff directly.
- P2P will offer ONCE AGAIN a content source not based on greed
- RIAA, MPAA will be joined by AG-AAP(bookmafia) and once again the cycle of consumer crucifixion will begin.
Gotta love our capitalist country. Maybe I should start new marketing engine to make publishers irrelevant and nip this particualar travesty in the bud before it begins!

Comment from Andy O. on 2009-07-16

2009-07-16T18:54:39Z

There seem to be some math issues here. For e-books, you say 60% of the pie is available to Amazon, publishers, authors and readers. Aside from not understanding where readers fit in on the revenue of a book purchase (don't they pay 100%?), it appears that 100% of the pie goes to those players. If we follow the current dominant pricing at Amazon, this means that $9.99 is available to be shared between Amazon, the publisher and the author. Assuming that $9.99 is the list price for an e-book, $3.33 would go to the author, $3.33 to the publisher and $3.33 to Amazon. If the publishers are still charging Amazon the same price as with hardcover versions (let's assume $25 list price), then perhaps Amazon pays them $10.00 (to cover $7.50 for the publisher and $2.50 for the author/agent). The distributor and printer don't get their combined $5.00, and Amazon loses a penny. Or, if Amazon is really dumb (not likely), they still pay $12.50 - assuming they assume the traditional role of retailer and distributor.

I am not sure how you get to 8% for the author in the e-book breakdown.

In any event, e-books, while still a tiny market, will eventually dominate, and if publishers are smart they and the authors could make more money while at the same time saving consumers money. If it works like the music industry, however, consumers and publishers may not win -- Amazon may end up the big winner.

Comment from Joe Flood on 2009-07-16

2009-07-16T19:14:21Z

Agreed, this is a great article, especially on the how the money gets distributed. As someone who has just written a book, it's a very interesting subject. I've gone the traditional route. I have an agent and we're looking for a publisher. However, I've often wondered if it would be better to just go the Lulu route.

Comment from J A Tucker on 2009-07-16

2009-07-16T19:39:00Z

This ReadWriteWeb analysis of the economics of digital publishing and ebooks was excellent.

Kudos to the writer. Good writers will never be replaced. However, even an in-parts article just cannot be complete without at least mentioning the Sony ebook right up front. I bought the Sony ebook 2 years ago, and people are always fascinated by how light and easily portable it is; it uses very little backlight, so the battery charge lasts forever, and the Sony uses almost all of its facial space for text. The reading area is almost a large as a paperback book. As for the fairness of compensation and economics, a little market competition goes a long way. Sony could help keep Amazon's Kindle juggernaut in line.

In fairness, a math breakdown of costs and cuts should include the software programmers, text digitizers and compilers, and online customer infrastructure that all replace the printers and distributors in this scenario. They are not free, even in India.

The potential biggest losers may be the retailers, who have to pay for the brick and mortars storefronts that people use to handle and browse the printed merchandise before they go home to buy it online, and B&N and Borders online still have to battle it out nose to nose with Amazon, who does not bear the cost of stores. Authors need to hang tougher and tighter in the fights to come. They have been the least valued in the entertainment and media equation for too long. I think that the public has now seen, in books and in movies, that a big-budget special FX stinker with a terrible, written-by-committee script is still a big-budget, no earnings stinker. The same for shiny books from bad manuscripts. Thanks for a great article. Looking forward to the next part.

Comment from Patricia Seibel on 2009-07-16

2009-07-16T20:52:14Z

'Publisher: 30% (This ranges between 25% and 32%, again depending on the author's clout -- e.g. their percentage is less with Stephen King because the risk is lower too. Note: this is their net revenue, after deducting author royalties and printer fees.)'. Sorry but I have to disagree with this. What about all the other costs (administrative+editorial) publishers incur? If you add these up to your calculation you will see that the publisher's share is much lower than 30% in reality.
As for your calculation on who gets what in eBook sales via Amazon - as pointed out above, don't forget that Amazon pay publishers on the cover price but most of the books are sold for USD9.99. So actually Amazon is making a loss in some cases (in order for people to buy the Kindle).
As for bigger royalties for authors in eBook sales, see recently announced partnership between three biggest publishing groups in Spain - including a 25% royalty.

Comment from Tony Marino Phoenix Strategic Internet Marketing on 2009-07-16

2009-07-16T23:24:58Z

You mention BookSurge. CreatSpace and BookSurge are now products that the ubiquitous Amazon has a hand in. A most popular monograph currently being passed around is, "How to Publish Your Ebook as a Paperback on Amazon." And of course, authors are translating their works to Kindle as quickly as possible. Disclosure, my wonderful wife got me a Kindle for Christmas, she saw it on Ophra, of course. It's really a great thing. I still love real books, but I like it.
So, the Crystal Ball says, more choices at better prices, that's a good prognostication. Let's hope "more readers who love reading" is also somewhere in that crystal.
Thanks.

Comment from William Mougayar on 2009-07-16

2009-07-17T01:57:36Z

That's a brilliant (and brave) look at the coming tsunami that will hit the book publishing industry.
With the increasing power of social media & social networking, a given author's online clout will become even more important and useful, therefore making traditional distributors & publishers less relevant.

Comment from m00n The Myth on 2009-07-16

2009-07-17T02:26:05Z

They could have taken the control of the situation and tryed to implent socialmedia in traditionall media to get people to stay/read/discuss

Comment from Shaun on 2009-07-16

2009-07-17T05:21:57Z

...a few big pie-sharers have been eliminated by the Kindle, namely:

* Printer: 10%
* Distributor: 10%
* Retailer: 40%.

Amazon IS the retailer. They have not been eliminated from the supply chain.

Comment from Jim on 2009-07-17

2009-07-17T15:18:34Z

The author's calculation that the retailer gets a 59% share on Kindle sales, I believe, makes two errors (at least in the case of Amazon.com sales):

1. The sales price of Kindle books are almost always under SRP, usually significantly less. So the statement that we are not getting a cheaper product is wrong, and

2. For some reason the assumption is that the retailer benefits from lack of printing and distribution costs, making the assumption that the percentage of profit that goes to the publisher does not increase:

"But note that one-third of the cover price goes to the publisher."

Doesn't the publisher pay the printer and distributor? Assuming that the other numbers/percentages are correct, the retailer pays the publisher 60% of the cover price and, if the retailer sells at SRP, keeps 40%. The publisher pays the printer and distributor and thus the publisher benefits from any decrease in those costs.

Comment from Bruce Batchelor on 2009-07-17

2009-07-17T18:59:45Z

I think your figures are wrong for the Kindle. Publisher gets 35%, out of
which publisher pays author royalty. So it would be more like:

Author: 10%
Publisher: 25%
Amazon: 65%

It is worth noting that Scribd and Smashwords are destroying Amazon's assertion of the 65% cut to the retailer. They are only charging about 15% -- which leaves 85% for the Publisher and Author. I think that is closer to where this will all be after the dust settles. So the publisher will actually make MORE on ebook sales than on printed book sales!

Comment from Hayes on 2009-07-17

2009-07-17T19:08:24Z

Another POD that offers no up front costs to publish your book is UniBook.com. They are an international company with listings in 10 different languages. They are fairly new to the game and seemingly willing to help out more than most.

Comment from Sivan on 2009-07-18

2009-07-18T18:57:35Z

You liken Amazon's rent-seeking on the Kindle to Apple's iPod and iTunes store. The two have opposite motivations.

Apple sells music at nearly break-even in order to profit from associated hardware sales. Amazon sells the hardware in order to profit from content and has indicated it is interested in selling eBooks on platforms other than the kindle.

Another important difference is the unit of content sold. It's possible to sell individual tracks from albums, but not individual chapters from books. It is in Apple's interest to discount whole albums over individual tracks. Amazon's sale is all or nothing. Further, Amazon does not need to compete with digitized versions of its books. It's the only one providing the convenience of electronic books.

Comment from Copycense on 2009-07-19

2009-07-19T14:59:44Z

Interesting post. One correction, though: the publishers' infringement lawsuit against Google is pending and has NOT been settled. The October 2008 announcement was of a *proposed* settlement. That proposed settlement is vetted before a federal court judge in October 2009.

Comment from Paul McGrath on 2009-07-19

2009-07-19T15:28:04Z

So libraries are just for poor people. Isn't that an ignorant remark? Wouldn't you by definition be ignorant if your reading was confined to the stuff currently in (chain) bookstores?

Comment from Bill Cohen on 2009-07-22

2009-07-22T13:38:43Z

The comment that Kindle 2 does not pay for audio rights merits further thinking and investigation. Most book publishing contracts have a thorough "translation rights" paragraph or extended clause. The right to bargain for translation rights may be reserved for the publisher, or author, or a split between the two. "Translation" can mean not only from one geographic/regional language to another, but translation from the written word to the spoken word. The entire area of translation from written language to digitized formats was an area of legal controversy for many years. Hence, the issue should not be closed on whether a computer device may provide audio services unless this was included in the digitization rights contract.

Comment from Lucy Chambers on 2009-07-23

2009-07-23T16:05:28Z

This is a very insightful look at one aspect of the rapidly changing publishing scene. But one thing I have learned in two tours of the business (one at a very large house in New York, one at a small independent in Texas) is that just as there are no appropriate generalizations to take from any one person or book, there are no appropriate generalizations to take from any one publishing scenario. I find the numbers quoted here regarding the standard breakdown of income from a book to be unrelated to anything in my experience. I have always been "pro-author" in my dealings, and it is only recently that this economy has forced me to look squarely at the fact that the publisher bears the largest brunt of responsibility in bringing a book to a market. It is not a romantic thought, but it is true. We would be delighted to realize 30% of a book's profits, but in my reality, the author and the publisher usually net the same thing. Perhaps that is fair, since the author provides the inspiration and text and the publisher brings it to life with editing, design, production and distribution. It is of course a subject open to endless debate.

Comment from Maro Soper on 2009-07-23

2009-07-23T16:37:33Z

Final target of Kindle --> minimize paper use in order to save our planet!!

Comment from Stephen on 2009-07-23

2009-07-24T05:52:14Z

Reading this article took me back to 1999 - in fact, I could dig out the EPS presentation I sat in and the only difference would be WAP!

Is the publishing industry at a tipping point? Well, depending on how you focus your lens, sectors of it have tipped over and some have not. It's always more glamorous to talk trade publishing, but that's a small part of the pie. I'd suggest a wider lens. As for trade, I predict a slower shift but ultimately (despite the real lack of understanding of the legacy publishing process exhbited) the ideas promoted in this article are likely to come true.