How hard is it to predict the future? It’s pretty hard. People get it wrong all the time. In fact, I bet that soon people won’t do it anymore.Some futures are very predictable. An advance reader’s copy is a prediction of the future with extremely good foreknowledge – it’s what the real book is going to look like. It’s like I’m throwing a ball to myself. I throw the ball, it curves through the air, and returns to my hand. We can predict this future well enough to be able to catch the ball pretty reliably, at least most of the time. We learn the rule, we learn to predict the future.Most futures aren’t that controlled – the best we can hope for is that they’re like a ball that someone else has thrown. We need to see the ball in flight to have any idea where its going.With that in mind, let me ask:
Does this curve look familiar to anyone?
This is the S-curve of growth over time, as described by Clay Christensen in his book, The Innovator’s Dilemma.We see the early period of slow growth, before the new model takes hold. Then a period of extremely rapid growth, as the new entrant becomes a dominant player in a new market. Finally, as the market matures, growth levels off.It’s a pattern typical of disruptive innovation, which helps a company succeed by changing the business model in a market.Where does the dilemma kick in? Basically, it’s nearly impossible for a company at the top of the S-curve to repeat the kind of market-changing innovation that got it there. Down at the bottom, the margins are too small, the startup costs are too great, to make it worthwhile. You could spend a dollar down here, for no return, or you could spend it up here for a substantial return on new sales.Until the old model doesn’t make sense anymore and you can’t sell anything.Clay’s book shows dozens of examples of this behavior in wildly different industries, from steam shovels to disk drives.
Here’s a recent example, one of the big dot-com darlings, and still a going concern, with over one and a half billion in revenue.We see the initial flat period, hovering between 200 and 400 million through the end of 03,A steep climb from 04-07, during which revenue increases more than fourfold,A plateau at the top, and a fall to the current level.
It’s Yahoo.And, it must be said, I think Yahoo will be fortunate to get back to the revenue of 2007, let alone to surpass it.So what happened?
They got whacked by a disruptive innovator.We see that Yahoo’s meteoric growth looks pretty flat, compared to the interloper’s almost tenfold growth over the same period.Never has a company’s name seemed more ironic. Yahoo’s advertising was always been display – you know, the rectangles with flash animation, that often resemble TV commercials. It was sold in a manner similar to everything from Yellow Pages to TV commercials, with a relatively high-contact sales process with an emphasis on bigger companies. Yes, it’s Google.Google’s AdWords revolutionized online advertising. Anyone could place an AdWords ad for only a few dollars, and the ad would only show when someone searched for a keyword for which someone had bought an ad placement.AdWords ads served new customers – people with smaller budgets – and were effective. Google’s companion service, Google AdSense, allowed any website to show ads and, in theory, make money from them. You can tell a lot of different stories about how Yahoo lost its way, but Google’s disruption of the online ad market has to be at the center.
This despite the fact that Google publishes virtually no content of its own, outside company blogs.What business are newspapers in, anyway? That’s right, advertising. One way to look at it is that newspapers sell access to their readers to advertisers. Advertisers valued this access so highly, they were willing to pay enough for it to support a huge amount of variably altruistic journalism and reporting. The web provides advertisers with a vastly increased supply of content, and Google and a few other companies provided services to turn that content into ad inventory.So even though no new news megagiant has appeared to replace the ostensible function of news publishing, we can see that news business was again disrupted from below.
Just take a look at sales in the news industry
This shows how ad revenue is just falling off a cliff in the news industrySubs revenue is holding almost steady.Also look how important the ad revenue is.
Let’s add periodicals.
We see the same for periodicals – going back only to 2004 because of a change in how the census data breaks out periodical publishing.This is the general-interest category, BTW.Now let’s add book publishing
It’s nice not to have a dependency on ad revenue when the advertising model is getting blown up, isn’t it?
But then, another way to look at it is that book publishing revenue has remained flat in the United States over a period in which the population has increased by thirty million, or more than ten percent.That’s not a good trend.
So that’s the arc of the innovator, and it repeats again and again, yesterday’s hot new innovator becoming today’s industry leader, and next year’s stumbling dinosaur.The real problem is what happens to you after your market is disrupted. In case that isn’t clear…
The reason it’s hard to see Yahoo growing its revenue beyond 2007’s peak is that the whole game has changed. The customers that they were good at selling to before have moved on to the new model, and Google has used its enormous piles of money to acquire and build a display ad business of their own.It’s a lot easier to predict Yahoo entering a severe decline at this point than it is to see them resuming their growth. The path that got them here won’t work again – they need a lot more money than small customers can make for them. The internet property they’ve given up on – search – is now owned by Google.Consequently, Google’s main threats are perceived elsewhere, like Facebook.
So let’s review the characteristics of market disruption in slightly more detail.Does that sound like it relates to the state of the publishing industry today?Let’s go point by point
Here we have the big six, but trailing behind we have a huge number of smaller and independent publishers. It’s quite likely that every single one of those is trying to figure out how win at ebooks, in one way or another.
This sounds like a yes and a no, if you think about it. We certainly have new technology. There’s margin impact, as well, to the extent that business partners have cutting each other off as a negotiating tactic.Lower margins? Prices are certainly lower, and I don’t think the production costs are going down by anywhere near enough to make up the difference.But are the customers different? Are new people buying books because of e-readers? Are there book buyers that publishers bypass today? Hold that thought.
That’s disruptive change in a nutshell. But it’s not the only kind of change we see in the marketplace. There’s change every day – publishers start new imprints and shutter old ones. A few years ago vampire books were hot, then last year it was… vampire movies?In the dawn of the ebook age we have to wonder what kind of arc we’re in.So let’s see if we can figure out where the movement started. To do that, we first have to look backward, to see where the movement started.
It all goes back to the ebook war of 2010.
Lots of acrimony, lots of rants on author blogs, all in one weekend. However, it did take considerably longer for Amazon to get all of those Buy buttons back up – more than a week in some cases.Amazon upset a lot of authors, and probably underestimated the degree to which authors could mobilize and activate their reader bases.Amazon and Macmillan recently announced a settlement to make the authors whole from those two lost days, though.However, this is where the movement started.It has to do with the changing sales model for ebooks.
First let’s look backward at 2009, well before the war.Here’s how the retail model for a hardcover bestseller worked.Change the numbers around, and this is basically how publishers and authors have made their money for decades.There are a couple of fixed costs here, where the per copy is estimated for the usual case. If you sell a ton of copies, these costs vanish; if you don’t, they matter a lot.
Let’s stay right there in 2009, and talk about the Kindle pricing model. Through 2009, the standard deal was 65/35 in Amazon’s favor. Doesn’t look too sustainable, does it?
So of course, the motivation was to minimize those fixed costs.Absolutely minimal design, because the margins are so thin.No marketing except what Amazon does on its own; any marketing costs must be borne by the print edition. Obviously, this all seems like a strong motivation to delay the digital edition, to capture those profits from the most eager readers. Much like a paperback edition.
In this model, the retailer acts as the agent for the sale, than acquiring “copies” for sale in a traditional reseller model.One of the earliest leaks of information about the iPad teased the Apple iBookstore and the agency model.
In this model, there’s room for marketing and conversion expenses, as well as improved author royalties and publisher margins. However, the retailer takes it on the chin, compared to the old model.It’s no wonder that Amazon tried to push back on this model, and it’s no wonder that publishers tried to shoot it down.Amazon gave in, and at this point all of the Big 6 publishers employ the agency model.However, there’s a twist – Amazon offers anyone the same opportunity to capture the 70/30 royalty split, but only under certain conditionsThe price must be equal to the lowest available on any platform, and must be between 2.99 and 9.99.These are important provisions. Like Apple and Barnes and Noble, Amazon allows anyone to upload a book for sale, but Amazon only gives you the best deal if you are pricing significantly below where the big publishers want to play. Not just at the 9.99 amount, but below it.
This supports the development of a new value chain, which I sometimes call Author Direct.In this scenario, eReader disruption isn’t pointed so much at the consumption end of the value chain – it’s pointed at production. Digital publishing allows authors to find new customers- not readers, but publishers. This has given rise to a new phenomenon – the successful self-published author. Let’s dig into this. We’ll call it…
THE AUTHOR SCENARIO!The thrilling tale of the brave men and women who strike out for the great unknown, turning their backs on the three-book deal and the end cap at Barnes and Noble for the uncertain promise of higher royalty rates from ebook retailers.
Konrath got his start with a standard midlist deal, and has blogged his progress for years.After he got published, he invested his full efforts in promoting his work, and set some records along the way. For instance, on a self-funded tour to promote his third novel, Rusty Nail, he signed books at over 500 book stores in 55 days. These days, he publishes his new work and his back list on the Kindle. According to a January blog post, he’s now making more in one month selling only on the Kindle as Rusty Nail has made, total, in hardcover, paperback, ebook, and foreign editions combined, in the five years since it was published. This is a powerful story. Joe’s not alone, either. A number of authors have enjoyed success to a greater or lesser degree; Joe’s even started to promote their work on his blog, almost as a vocationLet’s review some of the common factors in the success stories of Konrath and the authors he highlights.
Quality - Nothing will turn dross to gold. The books of Konrath’s success stories are competent, professional efforts within their genres. Most of these authors rely on agents. That’s sort of The Matrix style of literary agent, I guess.Genre, mostly thriller and romance. Amanda Hocking is YA fantasy, with 7 of the top 12 spots on Amazon’s list. John Locke’s suspense novels have three of the top 10 Kindle books OVERALL. This speaks not only to the popularity, but also to how easy the books are to find.Price – all of these authors price their works well below the $9.99 threshold in order to secure the Kindle 70/30 revenue split. John Locke is a thriller author whose aim is “to be the best $.99 author in the world.” He has three of the top ten Kindle best sellers right now.All of them have found price sensitivity in both directions, seeing increased sales with lower prices. However, extremely low prices seem to signal low quality, and several authors have reported decreased sales below a point.One thing to watch is whether this remains effective over time. However, how much of the reason for Kindle-only authors’ success is simply that they’re cheaper than authors coming through the big 6? Do their offerings become a threat to the major authors prices at 9.99, 12.99, 14.99? This is something that publishers need to keep an eye on.Finally
First mover advantageBy definition, all of these Kindle-only authors are early starters. That’s one way that price helps them, BTW.One of them benefitted from being the one of the first Nook authors in a particular genre, which put her on the Nook best-seller list.I don’t think that you can discount this effect, and it’s very interesting. It’s an example of the kind of effect that Gladwell describes in Outliers: by working hard and being good at the right time, you get a tremendous boost to your chances, much bigger than if you were too early or too late.Remember, this only works for stuff that’s good in the first place!
This scenario gets a fair amount of attention these days, but every discussion I’ve seen of it treats it as an end state.An organized, multi-level market with sophisticated, powerful players transforms organically into a single-level market with a mass of individual contractors selling rights into a small number of highly-technical retailers? And stays that way?I find this inconceivable. Let’s look at some of the pressures that would develop in this unstable market.
Here’s an independent Kindle author, doing almost OK but wishing she could better.For that matter, here are a couple more.Individually, they’re just scraping by, but if they join forces they might be able to hire someone to help them out.Maybe a cover artist – one with experience designing for Amazon-style thumbnails – will give them all a lower rate in exchange for getting business for all three of them at once.Maybe a free-lance editor is also looking for work, and signs up to work with a couple of the authors for a fee or for some royalty points.As a group, they start pushing out into book review blogs, maybe get mentioned on BoingBoing or Whatever or The Awl, and sales really pick up. They realize that they could do even better if they had someone working on promotion more often, and chip in together to pay someone part-time. Maybe a spouse or a friend puts in some time.And all of a sudden, you’ve got a publisher.Every author isn’t good at every task in the publishing value chain. There are structural advantages in collaboration – it’s why corporations form in the first place.It’s cheaper to hire a artist to make three covers than to hire three artists to make one cover each.This is another natural arc of business. Consolidation is a movement that’s driven by transactional costs and relationships, and it’s happened in every healthy market place since we started to be able to pay attention to such things.
Over time, more and more of these appear.It doesn’t have to be organic consolidation. You also have value-added service providers, like SmashWords, stepping in to provide publishing-value-chain services as well. An enterprising startup with a financial bent might start offering authors loans against future royalties, and call them “advances.”
Maybe a few of these organizations consolidate as well, just so that they can handle more authors, or cut better deals with the retailers.Authors start wanting to belong to these organizations, so they’re outside banging on the glass. You have to be selective, or you’re wasting the effort and power of the organization. So what’s the difference between this and a publisher? You’ve got a gatekeeper, overhead, relationships…It’s the rights. So far, we haven’t seen anything that drives the larger organization to want to purchase rights from the authors. However, I could argue that you’d see that as well – if the organization invests its clout, its cache, its brand in a new author, it would want to do something to ensure that the author paid back into the organization.Also, internation rights sales, movie and TV rights sales, are another thing that few authors will be equipped to perform. This is another service that these new-model publishers could offer, if agents don’t step into the opening.
And you can imagine that after a while, it could get pretty hard for an author without the advantages of these publishers. You could still list your works, but the kind of valuable promotional space that really drives sales is going to be harder to come by. You might be able to pay a little bit for better placement, but those organizations will also do the same. We might even still call it co-op!The larger organizations naturally develop better relationships with the retailers. It’s easier for the retailer to work with a huge group as a single unit, rather than as a bunch of individualsSome of those larger organizations are the ones with the names that are already familiar to us.It could, in fact, look a lot like what we have today.But there’s another way it could go, simply by competitive forces.Let’s focus on these little guys down at the bottom of this picture.
That’s right, the e-tailers.First of all, these proportions are all wrong, at least with respect to trade publishing.
Trade publishing, print and digital, is something like this. Amazon is somewhere between 15 and 25%, Barnes and Noble somewhat lessThe iBookstore isn’t setting the world on fire yet, and Google is in its infancy.There are brick and mortar book sellers who are even trying eBooks yet. Wal*mart and Costco between them sell as much as 45% of hardcopy books
Ebooks only, though, it’s like this. Amazon’s at 80% of the market, and the other guys are bit players thus far, despite the holiday success of the Nook.
If you look at market cap, Amazon’s also a lot bigger than any of the Big 6, let alone any new kind of publisher that might arise in the market they controlThe fact that there’s such a huge gap between what Amazon will pay authors for ebooks and what publishers pay reflects Amazon’s competitive position with publishers.As we discussed earlier, publishers are still strong.If publishers were severely weakened, Amazon would have no reason to leave so much money on the table.In a hypothetical world where most of Amazon’s book sales came from independent authors, there’s no reason at all to believe that the 70/30 royalty split would survive.
That’s one arc – the arc of consolidation and competition. It’s not the only outcome of authors’ increased access to effective self-publication, but it’s plausible.This is a tough scenario for publishers, but I’m not yet convinced that it’s game over. Publishers can compete with it. It’s not, after all, a bad thing to be a company at the upper right of the S-curve. You have revenue. You have resources. These are the canonical advantages of the mature company.In contrast, down here at the lower left, money and power are what you don’t have. If it comes down to a struggle over money and power, the guys up at the top usually win. Until the point where they’re not playing the same game any more.Big publishers use their financial resources to win and retain star authors. They might even have a shot at a best case in which the digital-only market functions as a kind of minor league, where authors develop off publisher payrolls and migrate to big publishers only as they become reliable sellers.
Here we have author revenue against the number of authors. There are very few authors with huge total sales, and a much larger number of authors who make little or nothing at all.In fact, when you think about vanity publishing, there’s no question that the black line dips into negative territory way off the right somewhere.But publishers have to spend money to bring books to market. There are editing, design, and production costs, shown here in red.Authors get paid, too. Add that in yellow, and we see that off to the right there are authors on whom publishers take a net lossAnd whatever’s left is the gravy. Green means profitable authors, and profits are concentrated in the small number of highest-revenue authors here at the left.
So if the ebook market knocks out the right-hand end of the graph, that’s not a bad thing. Even if some of the solid mid-list, strong, profitable writers, make a move, that’s not great, but maybe it’s manageable. The graph is heavily weighted toward the left, after all.If the big ticket authors at the left hand side start to cut over, though, that leaves a mark. That’s a real challenge.
The first is Barry Eisler, a successful thriller novelist with a solid track record of success over eight books in as many years.
The other is Amanda Hocking, a writer who had been writing for some time with no success at finding a publisher. However, after beginning just last year to publisher her books on the Kindle, she has become a stunning success.And she apparently still has another eight books in her desk!Why am I comparing these two? Because within a couple of days of each other in March of this year, they both made major announcements.
They had really different reasons.Barry was looking at this as a business decision. He thinks that he’ll make more money on his own in the long run, and he’s concerned about losing control of his rights. He’s recently signed with Amazon’s new Thomas and Mercer imprint, where he’s traded a lower cut on hardcopy sales for a higher cut as digital sales.Amanda Hocking, on the other hand, has already made millions from her books. Her stated number one reason was the number of people who told her that they couldn’t get her books in digital form. It’s also clear, though, that she has her eye on the 65% of book sales that currently flow through traditional retail models.One of the bidders for the rights for these new books was a novel entrant, as it were: a partnership between Amazon and Harcourt.Amanda Hocking’s blog make it clear that she has a great understanding about where she’s going and how she got where she is. As she says, every author is different. Every case is different. Opportunities vary tremendously depending on who you are and what you want to do.That’s true for those of us in other segments of the publishing value chain, as well.
There‘s still plenty of room for technology providers to deliver tools to create rich content, whether for eBookstores or for the App Store.Theo Gray developed software to deliver his successful coffee-table book about the Elements to the iPad App Store. Now his publishing company, Touch Press, has delivered two more rich titles. To deliver his new book, Our Choice, as a rich app, Al Gore worked with Push Pop Press, a new startup that has created a smooth and appealing visual experience for long-form text and image content.History of Jazz, by 955 Dreams, combines pictures, music, and informative text about the great musicians of jazz history into an experience that no hardcopy book could match.Alice for the iPad was one of the early app titles to demonstrate apps could deliver a beautiful reading and playing experience. Now Bertelsmann AG – Random House’s parent – has acquired Smashing Ideas, the company that produced it. Another example of the power of mature organizations, and of consolidation in action.
This is a page from a highly-customized eBook collection of the poems of YehudaHalevi, under production for Nextbook by Philidor, a small press specializing in Judaica. Every page is designed with great care. Philidor even designed the Hebrew type especially for this edition, based on the work of Guillaume Le Bé in the Polyglot Bible.This shows that the turn to digital need not drive the beautyDigital distribution makes this kind of innovation more economical.Philidor isn’t a tech company, even though they’re providing a technical service – they’re a production, design and typography shop.This is key - the opportunities that you pay attention to are the ones where you can make a difference.
Recently –in early May 2011– Publishers Weekly reported that the UK-based Ed Victor agency launched its own e-book and POD publishing arm called Bedford Square books, with half a dozen client backlist books. This echoes Andrew Wylie’s launch last year of Odyssey. A number of other agencies appear to be considering similar moves. Not long after, FutureBook reported that Random House had negotiated directly with Tom Sharpe for his backlist digital rights. Reflect on how today’s technology has lowered the barriers to entry for publishing. And that everyone is trying to figure out where the ball is moving.
There’s a real discoverability problem with books as apps. Tools for creating rich ebooks are still in their infancy. App books are still mostly the province of custom development shops.
Do your ebooks complement or compete with your hardcopy editions?Are you looking to hire or acquire digital media expertise?
Because if you’re not throwing the ball, you don’t know where it’s going to go.
The ARC of Publishing: How eBooks are changing publishing, and what you need to do about it
The ARC of Publishing<br />Skott Klebe<br />Copyright Clearance Center<br />
Market Disruption<br />Dominant players with well-established value chains<br />New technology enables a similar service<br />Lower margins, different customers<br />Business that the dominant player doesn’t want<br />New providers use new technology to serve new customers<br />And move up the value chain for higher margins…<br />
Market Disruption<br />Dominant players with well-established value chains<br />
Market Disruption<br />New technology enables a similar service<br />Lower margins, different customers<br />Business that the dominant player doesn’t want<br />
Enter Apple and the Agency Model<br />Apple offers publishers an “agency model” in the iBookstore<br />70/30 split – 70 to the publishers<br />Publisher sets the price<br />
Anatomy of a $12.99 eBook under agency at 70%<br />
Market Disruption<br />New providers use new technology to serve new customers<br />And move up the value chain for higher margins<br />
THE AUTHOR<br />Scenario<br />“In just 12 months, I've seen a 200% increase in income.”<br />-J A Konrath<br />“I still cling to the hope that I will be the next Crichton, or Rollins, or King.”<br />-Jeremy Robinson<br />
The Author Scenario<br />The Author Scenario is about cutting out the middleman<br />With the publisher as the middleman!<br />One of its primary proponents is Joe Konrath, who also writes as Jack Kilborn<br />
“I earn $2.09 on a $2.99 ebook. I only earn 82 cents on a $4.79 ebook published by my print publisher.”<br />
Authors: Know your rights!<br />Where’s your backlist?<br />When do your rights revert?<br />Are you getting the best return on your material?<br />What’s valuable to you?<br />
Agents: How can you help with digital?<br />Take care with contracts!<br />Help your authors figure out the right digital strategy.<br />Agent as publisher?<br />
Technologists: Build tools and services<br />Can you make eBooks better?<br />Can you help people find eBooks?<br />Can you build eBook alternatives?<br />
Publishers: Know your rights!<br />How do you manage ebook P&L’s?<br />Are your eBooks competitive on price?<br />Build, buy or outsource?<br />Can your authors sell their eBooks better than you can? <br />
Predict your own arc<br />Where are you, and where do you want to be?<br />
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