The Coming Agony of the E-book Industry
This Month's Contents
Millennium Greeting. Welcome to the Third Millennium C.E.. As Futurians (rather than Backwardians), we are happy and proud to be here, publishing the world's oldest surviving Web-only SF magazine that accepts submissions and pays its authors professional SFWA rates. We have gone back to work, the world didn't end (why should it have? the date is meaningless in Jewish, Moslem, Hindu, and other religious calendars), and we're finished with the millennial shouting.
While the day to day grind hasn't changed, we are living in a time of change at least as overwhelming (and wonderful) as the European Renaissance 500 years ago. Radical advances are happening in every branch of science and technology. A key element of the Rebirth was the invention of moveable type by Johannes Gutenberg in the 1400's. Today, the e-book revolution is happening in breathtaking increments of months rather than years.
We are happy to announce that, while we have been publishing fiction on the Web since early 1996, on New Year's Eve 2000 we launched the new Clocktower Fiction as a Rocket eBooks publisher. In the coming months, we will branch out into all major electronic formats with our titles, and by the end of the year we hope to start releasing short-run print editions of our most successful titles. To examine our exciting science fiction and other genre titles, look at Clocktower Books JTC).
Announcements.As a public service, we may carry announcements we receive from third parties. We make no warranty or representation about the accuracy or efficacy of their representations, and hold ourselves free from redress. You should examine their statements carefully on your own responsibility and act at your own risk.
Monthly Rant: The Coming Agony and Ecstasy of the E-book Industry. About two weeks ago, on a list that I frequent with many other e-book publishers, I received an announcement that made me go through the ceiling. It was basically a spam, announcing to the list that this new "book shop" service would enable us to post our titles on his website to gain added exposure, and he'd pay us a 50% royalty.
The first thing that came to my mind was that this was yet another attempt to rip off authors! In this new e-book industry, where the median is to pay the author a 50% royalty rather than the 8% for paperbacks like in the print industry, this individual (who probably has less traffic than we do!) smugly assumed that we'd hand over half our earnings without a squeak. In his model, we can't pay our authors the royalty we feel is due them, unless we raise prices (which hurts the reader). I gave this gentleman a sound electronic thrashing and send him cartwheeling out the virtual back door. Good riddance.
As I thought more about this, an ominous vision began to form in my mind. We thought we had eliminated the middlemen. Let me clarify. Ideally, in a perfect world, the author would get his/her work directly in front of the reader, who would pay a small sum for it (small because of the absence of middlemen) and read and enjoy. In reality, e-book publishers have cropped up to bring those authors together in one place so readers don't have to hunt all over for them. Now note: originally, my idea was that the electronic publisher would be nothing more than a catalog (a term I will come back to), taking 10% and giving 90% to the writer. After all, there is no paper, no ink, no dead horses for glue, no inventory, no shipping, no union wages for press operators, no plant (floor space, lighting, heating, etc.)... you name it. All gone. New world.
That dream lasted exactly 24 hours, one day only, until I came to my senses and realized that there are several indispensible requirements in e-book publishing:
There you have it. With these three essentials, you can get by as a publisher. The new model: Pay the author 50% of the cover price minus any discounts, and pay yourself, the editor, the artist, and the ISP with the other 50%. Right?
Well, no. We forgot distribution. In the mortar and brick world, traditionally the bookstore (retailer) takes about 45-50% and the jobber (wholesaler) takes about 10-15%, for a total of 60%. (Ever wonder where Barnes & Noble came up with the 60% that comes out of every e-book they sell? Their theory is that if it works this way in the print world, by God it will work this way in the electronic world - but that's an issue for another day). So what about distribution on the Web?
Years ago, I learned the three secrets to success in retailing (brick and mortar): Location, Location, and Location. Well, on the Web it's Traffic, Traffic, and Traffic. You have to be somewhere, and the customers have to know where to find you and be motivated to do so. Anyone who has had even a simple one-page website, a storefront made for her/him in five minutes, knows that it's one thing to post a web page; it's another to attract traffic. It's very difficult, very competitive. There are probably a half a billion websites out there, from major commercial ones to tiny personal ones. Most e-book sellers aren't getting major amounts of traffic. What's major? Well, when the music site MP3 went up, on their first day they were getting over 1,000,000 hits. In fact, there was so much hype about them, that they were getting more request than all the porno sites put together! If you open a publishing site, you might be lucky to get one single solitary hit a day. Maybe it will build up to several hits a day over time - but it's just that tough.
Back to basics. When a market establishes itself in a free market environment - and the Web is a beautiful textbook example - the components sort of snaptogether in an evolutionary trial and error manner. First we have a demand (reading) and a supply (e-books); now how do we bring the two together? This could be made into a minimum-sum game. Dont introduce any extraneous players. Do we really need a publisher? Hmm - we decided yes, to bring authors into one place, where readers can find them in an atmosphere of quality and trust. Do we really need bookshops? No, not in the traditional sense - there is no physical book to store...but wait a minute, can't bookshops bring together publishers? Ah, it's kind of like planets are in solar systems which are in galaxies? Yes, but since there are so few costs involved, how would anyone justify giving a catalog 50 or 60%? That's all Barnes & Noble, Powells, Amazon, etc., are - they are not stores; they don't store anything; they are a list, a bag, a catalog, a database, an automated business transaction, and as such, in my opinion, should get 10%. That's a cut I, as a publisher, can survive and still give 50% to my author. But several online booksellers are trying to charge 30%. They tell me that's the only way they can survive. They are wrong. This market won't work that way. Evolution is utterly unkind. They could survive on 10% if they had enough traffic. The bookstore model on line is a metaphor that can't work unless these stores have Traffic, Traffic, Traffic. That's the only major thing of value an online bookshop can offer (curiously congruent with the print model retail with their Location, Location, Location.
In a real market place, the pieces come together in a mindless, event-driven manner (which has been likened to blocks falling downhill in three dimensions). To say there is not purpose where there is mindlessness is to forget that the universe has underlying laws. The underlying law of the market place is bringing together demand and supply. However that market place shapes itself up will determine what percentages the players will get.
Print publishers are fooling themselves if they think the game is the same as in NY - mainly because, on line, there is no restricted narrow pipeline of a few dozen titles a month that millions of authors are fighting to get into. The pipeline theoretically is infinite.
This brings me to the big realization I've had. I'm afraid I see it coming: the light at the end of the tunnel is an on-rushing train. The final block is about to fall into place in the Web publishing model. Distribution! Since traffic is key, some entrepreneur will step in who specializes in one thing: traffic. Some of us are good at writing, others at publishing, others are artists...and the Web has many sites that are bringing in 10,000 or 100,000 or 1,000,000 visitors a day. What if one of them decided to spin off a bookshop? Let me predict: this will happen sooner rather than later. And Part II of that prediction is - they will demand, and they will receive, the mythological 60%. Readers will pay higher prices than the pittances e-book publishers want to charge. Writers will receive much lower royalty percentages than our kind of publishers (many of us authors rather than MBA cut-throats) would dearly love to pay. But you know what? A 20% royalty from a distributor (catalog) that gets 1,000,000 visitors a day will most likely end up meaning more dollars than 50% from a site that gets 35 visitors a month. So what's dark in this vision? Why the coming agony?
Call it a loss of innocence, a weeding out of ideals, the failure of many of the new on-line publishers and stores, the taking over of on-line publishing by some of the same fat cats that have ruined the record industry, the NY book industry, and so forth. For some this will be an agony, for others an ecstasy.Some of what's happening is ominous. For example, R.R. Bowker has raised its prices for International Standard Book Numbers (ISBNs) astronomically, putting them out of the range of many small publishers who typically operate on a shoestring. Until weeks ago, you could buy an unlimited number of ISBN's for five years for a mere $199. Now the regular processing fees are $50 service charge plus as follows:
Small publishers are saying they must now figure in the cost of the ISBN as an expense item per book - and many, in my list on the Web, are already deciding they can't afford to do it. But the ISBN is the major accepted standard for book ordering...so they are being forced out of the market place. Is this being done on purpose to discourage small e-book publishers? I'm not conspiracy minded - I imagine Bowker is running into some extra costs now that they're not just dealing with the eight surviving NY publishing conglomerates. And let's not forget the other parties that are being punished here - the traditial small print presses, some of which have distinguished themselves for their courage and quality over the years. Will they be the first segment of the print industry to go into the trash? Probably. Is this being done deliberately? Maybe.
Membership in the Open E Book (OEB) consortium costs hundreds or thousands of dollars - another sign that the small fry who can't afford to ante up will not play a key role in determining the future of their medium.
I think distribution will take up a significant percentage of the e-book's pricing. Publishers will have to hike prices to paperback level to be able to pay themselves and the author a significant royalty. That hike hits the reader, of course, and gives the distributor (catalog, what have you) a bigger piece of pie. A lot of the optimistic upstarts will disappear, or remain marginalized on the peripheries as huge distribution machines harness the buying habits of the nation's estimated (Publisher's Weekly, a few years back) 20 million avid readers and millions more who buy books occasionally.
One of the first signs of this trend was the $150++ (nobody knows how much for sure) billion merger of AOL and Time Warner, which brings the traffic of AOL together with the content of Time Warner. The union creates a matrix of unimaginable possibilities. A second sign was the acquisition, this month, of two key e-book publishing players - NuvoMedia, maker of the Rocket eBook, and Softbook, maker of an eponymous hand-held reader - by Gemstar, the $17 billion media giant that publishes TV Guide and markets VCR equipment, among other things. Prospects are exciting for those e-book publishers who got in early, bought a 5 year block of ISBNs, and got into the Rocket eBook and/or softbook markets. There is no telling how many similar alliances and alignments will take shape, uniting other technologies with the requisite traffic - a third example of this is the recent deal between Barnes & Noble and Microsoft to make thousands of titles available across the spectrum of Windows-compatible platforms using Microsoft's Reader technology.
Signs are that the changes in the e-book industry will by dizzying and, for some, painful in the coming year. And what of the sluggish, ossified print industry? Some of its nimbler players have already been test-selling small numbers of their print titles in e-form (hesitantly, gingerly, with elephantine pricing and little or no originality). But there are potentially tens of thousands of out of print titles that they have kept in their vaults, and those could descend on the Web like a torrent. Because they have kept the pipeline narrow for generations, however, this won't be anywhere near as bad as some fear. And another thing: When we read about the AOL/Time Warner merger, we are dealing with a stock swap of $150 to $300 Billion dollars. The entire print industry, on the other hand, is valued at about $1 Billion dollars - sadly, a drop in the bucket, just as 20 million avid readers is not a large chunk of the public.
I checked these figures in an almanac, by the way - the NY Times, if I remember correctly. I should have written the exact numbers down, but it was, like, about $400 million for the adult books, another $400 million or so for juvenile/children's books, another $150 million or so in book club revenues, and that's about it - one billion bucks in an ocean of hundreds of billions of movie, television, and record industry money. Does anyone think this kind of resemble the relative market share of opera vs. the rest of the music industry? Could it be true that reading is a rarified, marginal form of entertainment already? The only consolation is, perhaps, that many a good novel is transformed into film, and, if the author manages to outwit the unscrupulous priapi who make these deals, the author may see a few more bucks for his or her effort.
In any case, look for the arrival of the distributers, the traffic masters, who will grab the lion's share of income from successful web publishing, leaving readers and writers in the soup once again. The only possible salvation is that there is an infinite amount of pipeline. Right now, in the e-publisher lists, I see people debating about what kinds of publishers' clubs to start, how to elect the officers, whether or not to admit self-publishers (yes), and other relatively inane activities. They would be much better served concentrating on the prime issue: Distribution, or how to bring the paying reader together with the splendidly written e-book. One last note: there may be salvation from another direction. In the brick and mortar there are only two major national US distributors as far as I know (Ingram and Bowker). RR Donnelly maybe... that's pitiful competition. If therefore sufficient traffickers fight for their slice of the pie, it may well be the death knell for that mythical 60%. There is still hope!