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:

1. Find an agent, who takes a cut and finds a...
2. Publisher, who arranges everything and takes a very big cut and delivers the manuscript to the...
3. Printer, who takes a cut and delivers the product to the...
4. Distributor, who takes a cut and delivers the books to the...
5. 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:

1. Amazon discovered that pick-and-pack distribution through warehouses was almost as expensive as running stores on Main Street.
2. 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:

1. The digitization of print books by Google Book Search.
2. Increasing consumer acceptance of e-books, mostly because of the Kindle.
3. 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:

1. 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.
2. 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.
3. 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:

1. 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.
2. 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:

1. Readers: will we all get more choice at better prices? Almost certainly.
2. 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.
3. How will the other players (publishers, printers, distributors, and retailers) evolve to meet the challenges of this new world?
4. 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.