Amazon's eBook Sales Surpass Paperback

Check this out: Amazon announced on Friday that it is selling more eBooks than paperback books for the first time!!  Here's what they reported: 

"Amazon.com is now selling more Kindle books than paperback books. Since the beginning of the year, for every 100 paperback books Amazon has sold, the company has sold 115 Kindle books. Additionally, during this same time period the company has sold three times as many Kindle books as hardcover books.

"This is across Amazon.com's entire US book business and includes sales of books where there is no Kindle edition. Free Kindle books are excluded and if included would make the numbers even higher."

With the info provided, if you do the math and add hardcover and paperback together it indicates that Amazon is still selling more paper-based books that eBooks (120:100). And it is possible that this after-Christmas rush to load up newly gifted Kindles with eBooks will subside, but it is nonetheless huge news. And highly motivating. It is also true that eBook pricing is generally a lot lower than paper, so top line sales are surely higher for paper, still. But this is super encouraging for us book entrepreneurs who mostly need to make it work in eBooks. (I've noticed over and over in all of the indie success stories it isn't about print -- it's all about ebooks.) Exciting stuff!!

Understanding Context

Before launching into independent publishing (or any venture), it’s essential to look at CONTEXT. How well do I understand the publishing world as it exists today? How well do I grasp the way that technology and other trends are changing it? What is happening with competition? Can I imagine the future well enough to create a compelling strategy for getting my own work into the world?

The US book publishing industry is large and mature and in flux.  Technology is changing the way in which books are produced, distributed, marketed, promoted and retailed, which creates opportunity for independent efforts and self-publishers. I have found it valuable to look at the “traditional” value chain for books and to contemplate how it is changing.

The Traditional Value Chain for Book Publishing

Author > Agent > Editor/Publisher > Printer > Wholesaler > Retailer > Customer

There are changes to the value chain as technology allows Print on Demand (changing the activities and costs of the printer) and e-books (changing the activities and costs of producing, wholesaling, and retailing books). Not all books are agented, and at least one imprint is switching to an all-digital strategy. So the value chain is definitely shifting, but this captures the most common form.

A New Value Chain for Books

Author > Author Services Provider/Retailer > Customer

There are, of course, many variations on this new value chain. For instance, any given author might choose to engage a freelance developmental editor or copyeditor or book designer independent of an author services company like Author Solutions or LuLu.com. With CreateSpace and PubIt, Amazon.com and Barnes and Noble are both author services providers and retailers. So, this diagram captures a simplified view of the changing value chain. 

I’ve found it useful to understand the role of the Publisher and how it has evolved, because this provides clues as to how it will continue to develop.

A Look at the Evolution of Publishing

Mom & Pop industry (1900s–1960s) The first publishers were tastemakers, focused on identifying and nurturing talent. They often invested their own money and took lots of smaller gambles. During the Depression, Publishers established the practice of accepting fully refunded returns by booksellers, due to concerns that retail sales would suffer if the shelves weren’t adequately stocked. By the 1960s, the consolidation era began.

Initial consolidation (1970s–1980s) Characterized by the emergence of the “independents,” or independent booksellers, publisher sales forces, mass marketing strategies, information technology advances, and more efficient inventory management.

SuperBookstores (1980s) Barnes & Noble and Borders, shifting from the mall-based strategy of independents to large-footprint superstores, again caused an industry re-alignment. Large economies of scale qualified them for major volume discounts, and they stocked thousands of titles at deep discounts.  Publishers put more marketing behind titles they knew would sell well.

Conglomerates and the arrival of Online Bookselling (1990s–2000s) By the 1990s, larger conglomerates like Bertelsmann, Pearson, News Corporation and Viacom had taken over both publishing and distribution activities. So a large swath of the industry was now being run by business people who expected growth, and when consumer spending on books flattened, cost cutting ensued. Publishers increased their emphasis on signing superstar writers and that in turn drove increases in advances for these authors (and put downward pressure on advances for non-star authors). The drive for blockbuster titles in turn drove expenses and returns as sales failed to meet expectations. This era was significant for changes in retailing as well: In 1995, Amazon.com arrived on the scene, and their marketing reach and discounting practices contributed to the pressure on independent bookstores, the number of which dropped by 40% between 1993 and 1998. Discounters like Wal-Mart and Costco ushered in a major shift away from consumers buying bestsellers in bookstores.

Market Share of Major Publishers Today

Five publishing houses represent over 50% of the market.

Random House (a subsidiary of Bertelsmann);

Penguin (of Pearson);

Harper Collins (of News Corporation);

Simon & Schuster (of Viacom); and

Hachette Book Group (of Lagardère)

The top ten publishers have approximately 70% market share. The remaining market share is split among hundreds of smaller, specialty or “boutique” publishers. If you start to think about the impact of self-publishing, data from U.S. ISBN agency R.R. Bowker helps to complete the picture. Bowker reported 130,477 active publishers in 2008, a 27-percent increase over 2007. Not surprisingly, most of this increase was within the small-publisher category, according to the Book Industry Study Trends report. So, we have a very entrenched and concentrated set of players making up the majority of the industry, and tens of thousands of small players fragmenting the rest.

One critique of the publishing industry is that it produces too many mediocre books. Now that the costs of producing and marketing a book are so small, that problem gets worse. What players will emerge to curate the masses of self-published books that are flooding the marketplace? To the extent that publishers and retailers have historically played the role of tastemaker and gatekeeper, it will be interesting to see if/how they or other players will become arbiters of quality for the self-published set.

Size of the Industry

While the American Association of Publishers estimates the $$ size of the industry at $24.3 billion, the Book Industry Study Group estimate is closer to $40 billion. What explains the difference? In particular, it would be the sources of data and the methodology that each uses to estimate the revenue.  To me it illustrates a serious problem in the industry generally, which is a lack of comprehensive data about the business.

Print on Demand

The emergence of POD technology is important because upstarts can sell a book online without committing to distribution and physical inventory (and its associated costs) using POD provider. Still, it is challenging to get into the bookstore network without pull from booksellers or consumers, so distribution remains an obstacle.

Ebooks

One piece of the puzzle is challenging to reconcile, and that is ebook data. According to Forrester, e-books now account for 9-10% of sales.  And they’re estimated to be close to $1b by end of 2010, and $2.8b by 2015.

Here is another source of e-book data: http://idpf.org/doc_library/industrystats.htm 

In an acknowledgment of the growing sales and influence of digital publishing, The New York Times said recently (Nov 2010) that it would publish e-book best-seller lists in fiction and nonfiction beginning early in 2011.

Publishers will retain power so long as the print book business survives and their scale and capital-intensive activities are required.  Given that they don’t currently “own” the relationship to readers and don’t seem to have particular insight into consumers of books, it is hard to imagine that they will survive -- at least in their current incarnation -- if/when electronic becomes the dominant form of the book. Their cost structure and resulting low margins for writers will make them an uncompetitive option in the new digital world. So, unless they figure out how to change their business model dramatically, they will be marginalized alongside brick and mortar retailers. (You can be inefficient, costly, and bad at understanding the nuances of the consumer market if you’ve got big barriers to entry and you’re among the only game in town. But when barriers come down and new upstarts move in, those characteristics will end you.)

One source of industry analysis that I’m finding helpful is here: http://www.idealog.com/blog/.  Consultant Mike Shatzkin argues that

“Big publishers will be holding onto bricks and mortar retailing for as long as possible…[because they]…depend on a bookstore network for their survival. Their core proposition is “we put books on shelves”; that’s what requires the scale and expertise that they have and that nobody else can compete against. When retail shelf space goes away, there’s little a big publisher can do that can’t be duplicated by anybody with the cash to put together an ad hoc team of freelancers and graft them to some service providers.”

How will big publishers fare when ebook uptake increases to 20-30-40% of the market? Here’s an insightful blog post by James McQuivey at Forrester. http://blogs.forrester.com/james_mcquivey. 

Then next obvious question is, how will Amazon.com fare? Amazon.com is in the author services business with CreateSpace, and has tremendous distribution reach. But I find Amazon most interesting because they have data and the ability analyze and derive invaluable insight about book buying behavior. They own the relationship to the consumer and that just might be the most valuable asset in the next wave of the book business.

Conclusion

My conclusion is that the future hinges on ebook uptake and customer relationship data and analytics.  With ebook uptake, the existing power structure shifts dramatically and publishers will transform or new players will emerge to become the tastemakers. And the people who own the customer relationships -- and therefore have data and the ability analyze and use that data to more effectively and efficiently market to consumers -- will be the only ones in the position to thrive in the digital future that is book publishing.

The Paradox of E-Book Pricing

Interesting article in the Wall Street Journal a week or so ago about how Authors Feel Pinch in Age of E-Books.   My first instinct about E-Books is that they should be a boon for writers, because the costs involved with producing them are so dramatically lower than traditional printing options. But, as the article points out, the cost savings do not seem to reach the authors who are attached to large publishing houses. In fact, the opposite is true. Because the top line is lower, the way the current structure works, authors are making substantially less.

In addition to explaining how E-Book pricing is impacting literary authors and describing several other topical issues (about overcrowding in the book market, smaller advances all around, and dramatically smaller ones through independent publishers), the article also touches upon how difficult it is with these new  economics to make a living as a literary writer and how the current system makes it unlikely that the careful nurturing of fiction as art form will continue -- gone are the days of patiently developing the careers of such writers. (Though already-famous writers and those producing work considered more commercial are likely to do well with the E-book.)

All of these issues are fascinating and need to be considered. But the article underplayed one of the most interesting angles in the whole evolution, which is who makes money and why. It mentions that the Authors Guild and several literary agents are pushing for authors to get a higher percentage of E-Book revenue, but also that publishers are resisting. And I do understand why they are resisting -- their cost structures are so out of whack that they surely feel justified in retaining a dramatically higher percentage of revenue than the artist gets. To them, they probably need it to keep the lights on. But this seems fundamentally unfair to the authors, especially given the different economics of producing an E-Book. As E-Book revenues grow disproportionately to hardcover and paperback, they will be propping up the outdated and outmoded business models of their print brethren until such time that this revolution works itself out. In the meantime, the real trick for independent and self-publishers is to figure out how to replicate the still-substantial value created by the web of professionals that populate traditional publishing, but without the insane overhead. That's certainly what I hope to do.

Getting Started

Well, I started like most aspiring writers -- by writing. I "completed" my novel more than three years ago. By completed I mean I finished four solid drafts, got a bit of feedback, then stuck it in a drawer and procrastinated away the next few years (at a demanding new day job) while I waited for my confidence to catch up with my manuscript.

About a year ago I dusted off that manuscript and started thinking seriously about looking for a literary agent, and quickly realized I was facing a very different world -- one in which my fiction category was considered glutted (I disagree!), agents were more under water than ever (I totally agree!), and it seemed that traditional publishers were only interested in blockbusters, preferably featuring vampires. Since my novel is light women's fiction of the Jennifer Weiner or Emily Giffin ilk and without a bit paranormality, I was mildly concerned but willing to give it a go. But after several months of querying and waiting, querying and waiting, getting encouragement but no offers of representation, I became really interested in how the business of books is changing, and how I might take advantage of that to pursue a different path to publishing, one that would let me take advantage of my latent entrepreneurial instincts.

I have an MBA from a top ivy business school and a passion for understanding how technology disrupts traditional business models and reorganizes whole industries. In the mid- to late nineties I worked in several Internet start-ups (one of which was, funnily enough, sold to Amazon.com) and was a researcher at Harvard Business School, working with a fabulous professor and mentor who had started the first MBA-level course on e-commerce in the country (maybe the world). During that time I worked on case studies about Internet startups and helped develop a CEO guest series that brought many an Internet entrepreneur to campus, including Jeff Bezos and an MIT guy named Joe Jacobson who had this very cool technology called e-Ink. (Later, one of my business school classmates would become the CEO of the company that commercialized e-Ink, the electronic "paper" that is the basis of the Kindle e-reader.) 

I followed my mentor from academia to a strategy consulting firm, working in a unit that focused on digital strategy, and I distinctly remember hearing a certain mantra about the Internet at that time: people tend to way overestimate the impact of a new technology in the first couple of years (as we did, in dramatic fashion, at the time of the dot com bubble and its subsequent bursting), and way underestimate its impact over the next ten years. Or something like that. It seems to me that is what has happened around the promise of the eBook -- like many, I've been anticipating this revolution for some time, and it is pretty exciting to see it unfolding in front of us now.  I also love how Print on Demand is completely shifting the dynamics of how books can get to market -- and who can get them there. (Incidentally, Annie Begins is set in a dot-com startup right at the beginning of the bubble...)

I've been away from technology companies for a while now, having focused for the majority of the last decade on leadership development and organizational learning -- both as a consultant and coach and as a director of talent development for a financial firm.  Over that same  period, I became a member of the board of directors of one of the most amazing literary arts organizations on the planet, the nonprofit Grub Street in Boston, Massachusetts. It is through Grub Street that I nurtured my love of storytelling and writing and also got immersed in the extraordinary world of writers that make up the Grub community. Working with the founders, we've spent countless hours thinking about how to support writers and how to connect writers with readers, excitedly contemplating how the evolution playing out in front of us could help make that connection possible.

So, that brings me to here and now, where I'd like to rekindle my entrepreneurial instincts and combine them with my Grub-related efforts to connect readers and writers and my desire to bring Annie Begins to the world. I'm starting an independent publishing venture called (sixoneseven) books and Annie Begins will be my first title. And I have lots to figure out before that can actually happen, and I'll share it all here (and invite others into the discussion), with the hope that it will help all of us who are pursuing the crazy, exciting, fast-moving option of indie and self publishing. More to come!