What does equilibrium look like for the book business?

by on November 14, 2012 at 10:22 am in Books, Economics, Uncategorized | Permalink

Adam Davidson offers some interesting remarks.  My take is a little more radical.  I expect two or three major publishers, with stacked names (“Penguin Random House”), and they will be owned by Google, Apple, Amazon, and possibly Facebook, or their successors, which perhaps would make it “Apple Penguin Random House.”  Those companies have lots of cash, amazing marketing penetration, potential synergies with marketing content they own, and very strong desires to remain focal in the eyes of their customer base.  They could buy up a major publisher without running solvency risk.  For instance Amazon revenues are about twelve times those of a merged Penguin Random House and arguably that gap will grow.

There is no hurry, as the tech companies are waiting to buy the content companies, including the booksellers, on the cheap.  Furthermore, the acquirers don’t see it as their mission to make the previous business models of those content companies work.  They will wait.

Did I mention that the tech companies will own some on-line education too?  EduTexts embedded in iPads will be a bigger deal than it is today, and other forms of on-line or App-based content will be given away for free, or cheaply, to sell texts and learning materials through electronic delivery.

Much of the book market will be a loss leader to support the focality of massively profitable web portals and EduTexts and related offerings.

There is this funny thing called antitrust law, but I think these companies are popular enough, and associated closely enough with cool products — and sometimes cheap products — to get away with this.

NNM November 14, 2012 at 10:44 am

Do you think some of the “loss leadership” will take the form of paying authors above and beyond the standard royalty regime that prevails today? Shouldn’t the tech companies be willing to bribe authors to help them sell more hardware and drive traffic to their portals?

The Original D November 14, 2012 at 11:14 am

Doubtful. Most books don’t make any money or just a small profit. The economics of electronic distribution may change this, but writers likely would have to lock arms together (i.e. unionize) to change the standard model.

A more likely outcome is that entrepreneurial authors self-publish and build their own audience, then negotiate special deals with publishers. Guaranteed audience up front plus the potential for a larger audience via publisher-controlled distribution channels.

Rahul November 14, 2012 at 12:03 pm

When Amazon sells a book currently what’s the typical three-way revenue split between Amazon-Publisher-Author? If the model eliminated the publisher would the authors capture a part of that slice?

The Original D November 14, 2012 at 12:30 pm

Dunno, but there is still a lot of risk associated with publishing a book. Unless they can remove that risk (and the authors get together and demand more) I doubt royalties will change much.

Marc Cabot November 14, 2012 at 2:20 pm

There is no typical split. It depends on how incompetent the author’s agent was when they drafted the book deal. The publisher gets more than half of the selling price on almost all transitioned tradpub books, but how much more varies. How much of that more-than-half the author gets varies much more. Author’s net royalty on gross selling price could be anywhere from high single digits to twenty five percent.

Right now, Amazon has indicated that it is just fine with thirty percent of the gross selling price. Interesting quote in this story attributed to a publisher who was trying to license an e-published book: The author told them what he was clearing on his own and they said, “I don’t think we can compete with that.” This is for a book as close to guaranteed to sell as it ever gets, with a movie deal already attached.

http://www.thepassivevoice.com/11/2012/hugh-howey-doesnt-need-a-publisher-thank-you-very-much/

JWatts November 14, 2012 at 5:29 pm

Good Link. And following the link and then going from their to Amazon led me to find that the author’s (Howey) book “Wool” is free for the Kindle. So, I downloaded it.

Synergies abound and there is no Great Stagnation.

ShaneM November 14, 2012 at 5:44 pm

With some publishers the electronic ebook royalties are very small – as low as 6% in my wife’s case w/ one of here publishers; but keep in mind they do pay advances and royalties are higher for paper copy books. The value of the distribution package and built in readership as a whole s higher there also – so you have to balance the value of the full package. From what I gather the 6% level is very low for ebook. Other publishers offer much better ebook rates.

When my wife self publishes she retains 60-75% of the revenue w/ Barnes/Noble or Amazon. (It varies based on book price. If you put the book on sale at a price below $2.99 royalty w/ Amazon goes down to 35%). It’s difficult to get the same volume of sales on your own though. Some authors are successful, but a high % struggle with self-publishing.

Adam November 14, 2012 at 10:45 am

How antitrust law learns to deal with vertical integration of content will be an interesting thing to watch develop.

derek November 14, 2012 at 11:17 am

There will develop a popular, inexpensive service that doesn’t publish and sell some pompous politicians kid’s book. They will f**k it all up.

Nancy Lebovitz November 14, 2012 at 11:18 am

I think there’s going to be a strong bottom-up component. Fan fiction writers/readers have developed good recommendation systems, and there will be ways for the better fiction to bubble up from the slush pile that aren’t dependent on professional gatekeepers.

Marc Cabot November 14, 2012 at 2:22 pm

KDP *is* the slush pile now. It’s a self-filtering slush pile. Publishers will wait to see what starts to attract notice, and try to buy the tradpub rights.

ShaneM November 14, 2012 at 5:48 pm

Amazon is starting their own line and has signed some originally self-published authors that are selling well.

dearieme November 14, 2012 at 11:23 am

“to support the focality of …”: eh? What’s that in English?

Matt November 14, 2012 at 11:28 am

Are publishers relevant if e-readers become standard? What services do they provide?

I think we’re going to see a growing role for curating websites that publicize work by self-published authors, who use a standard software package to sell their work online.

The Original D November 14, 2012 at 12:31 pm

Some author friends of mine are asking the same questions. Publishers generally suck at marketing except for A-list writers. One would think they’d have gotten better by now but there doesn’t seem to be much happening.

Jeff November 14, 2012 at 2:30 pm

Services: Editing. Publicity. Marketing. Design. Production. Subsidiary Rights. etc. etc. Ask Tim Ferris how his Amazon publishing experiment is going. Ask all the self-published authors who are sacrificing more generous royalty arrangements and moving to large publishers so they don’t have to worry about the tedious business of business so they can focus on writing books.

Emanuele November 15, 2012 at 5:57 am

And that for just a little more then 91% of their profit.

An addendum to the main post: I think that as much as vertical integration there will be vertical disintegration. The useful stuffs for the self publishing author can be completely broke up from the common editor. I am thinking mostly about Editing and Designing, small companies (4-6 people), mostly with those not-so-requested English and Arts degrees, could sell their services to self publishing artists for a living. Fixed payment of 2-10 grands is usually preferred to 91% of their profits on one side of the arrangement and a poorly paid and insecure job on the other.

prior_approval November 14, 2012 at 11:38 am

‘EduTexts embedded in iPads will be a bigger deal than it is today, and other forms of on-line or App-based content will be given away for free, or cheaply, to sell texts and learning materials through electronic delivery.’

Or it will look like this, especially after the industry concentrates into just a couple of players – http://www.gnu.org/philosophy/right-to-read.html

anon November 14, 2012 at 11:59 am

What does equilibrium look like for the book business?

What business has “equilibrium”? For what period of time?

DocMerlin November 14, 2012 at 12:08 pm

In the US, antitrust law doesn’t pay attention to vertical foreclosure, only horizontal.

Tom West November 14, 2012 at 12:45 pm

One major problem: There’s only one reason that justifies publishers giving authors 8% royalties rather than 70%: Bookstores

If the last bookstore chain goes under (or ceases to be a bookstore in anything but name), the value of a publisher drops massively. Having a book in a bookstore is really the only promotion that’s worth anything (getting into a bookstore gets your book in front of maybe 1/2 a potential readers. Anything an unknown author can do will be lucky to match 1/1,000th of that number…)

If a publisher can’t give you that promotion, you’re vastly better off to self-e-publish and at least get 70% royalties.

Unfortunately, e-publishing only works (and works really well) if you’ve already got some sort of name. It’s terrible for unknown authors (it’s notable that people point to the ten or so self-published authors that have “made it” of the last few years, while ignoring the dozens of authors that “make it” each month in conventional publishing.

My prediction: More and more self-publish. Authors who have already made it make a nice comfortable living (have 5-10K rabid fans is barely enough to sustain a conventional career, but makes for quite a nice e-only living.) On the other hand, new authors who break out enough to make a living as writers become rarer and rarer.

People become more and more reluctant to pick up new books as the signal-to-slush ratio drops lower and lower and we end up with a new era in books: More books published than every before, and almost no-one reads them (especially given that e-readers become better and better at playing Angry Birds). At that point, the cultural relevancy of books drops through the floor, and reading for pleasure becomes about as popular as reading poetry is now. Not gone, but no longer a significant part of our culture.

And no, if there’s no money in publishing, no-one is going to spend the time to vet the thousand books just to find a single publishable-by-current-standard book that they can’t effectively promote anyway, so I don’t think any of the major tech houses will pick up publishers as a loss-leader.

And yes, as a reader, I hope my prediction is terribly, terribly wrong :-).

mpowell November 14, 2012 at 1:57 pm

This is an interesting prediction, but it is based on the assumption that you can only effectively mass promote books through bookstores. This completely misses the opportunity offered by google, facebook or apple acquiring publishers. They can then choose to promote books if they wish to their vast customer base. I think with google or facebook this is less likely, as they have crowd-sourcing this kind of thing in their corporate DNA (which leads directly to the downward spiral you identify), but apple could easily choose to go a different direction with it. If they choose to limit themselves to a reasonable number of high quality books that they choose to promote heavily to their customer base, they may be able to preserve a segment of online publishing as high quality work.

Tom West November 14, 2012 at 2:43 pm

If it were possible to promote books effectively, don’t you think publishers would already be doing so? Almost any editor will tell you that most of the promotional budget outside of bookstores (on the odd occasion there is one), is pretty much just a sop to the author. Ads in newspapers, author tours, etc. all seem to have negligible effects on sales. As for author self-promotion, most editors will tell you that they don’t know if it works or not (or more accurately, how often it works), but since it’s “free”, they have very few qualms about asking an author to spend significant amounts of time doing it :-(.

As for promotion on the actual selling sites, (Amazon, Apple, etc.), the main problem is that there are a hell of a lot of would-be authors who would willing to spend $10K to have their book promoted (heck, in the old days of vanity-presses, a lot spent a great deal more), and $10K is way too large an investment for any rational publisher to make on a decent first book, where the total return on the book is more closer to $10K (and that’s if it gets to the bookstores. For e-only it might be dozens of dollars.)

This means that either for ads on Amazon, et al, (1) the ads (paid for by the hopeful author) are filled with books that are essentially unreadable, so people eventually learn to ignore the ads, or (2) the Amazon, et al, only accept ads from books that are already doing well (i.e. authors whose name is already known). Either way, the ad market for new authors doesn’t work.

Even the recommendation method falters in the face of a 100 books a day by unknown authors. Whose going to spend the time to read them when only 1 in a 100 is worth reviewing? Eventually it comes down to, once again, reviewing authors you already have enjoyed.

I’ve pondered, and I don’t see a viable alternative to the case of a publisher than essentially only makes money if the book is any good. Only at that point does a publisher have a sufficiently large financial incentive to wade through the slush, and only with the current model is the author, the publisher, and the reader’s interests all co-aligned. (A pay for a review could theoretically work, but (1) how long will people keep paying if 97% of the reviews are 0 stars and (2) the whole idea of pay-for-review is massively tainted by history of such sites.)

All else seems to fail under the weight of hundreds of thousands of people willing to pay a lot of money ($40K for a MFA in creative writing?) to see their books sold and promoted to the public. I think the writing was on the wall when I read (and I don’t know if this is accurate) that there’s now more money being made from people who want to become authors than from readers.

Wil W November 14, 2012 at 3:03 pm

“If it were possible to promote books effectively, don’t you think publishers would already be doing so?”

These are the guys about to go under due to lack of inovation… So no, I don’t think publishers would already be doing so.

(Actually some are and doing quite well with working though bloggers, reading groups, etc… The bookstore is also not going to go away, but I guess that it will not be a chainon average. The stores will be locally owned with plenty of organic discovery happening, if not more. Not to mention that perhaps the death of the publisher will create the rise of the book bloggers who form the main group that reads and vets books for the world?)

Tom West November 14, 2012 at 3:30 pm

Actually some are and doing quite well with working though bloggers, reading groups, etc…

Except that none of the editors I have talked to have any clear idea that these actually work – again, it’s getting in the face of half a million readers who actually are looking to buy, versus a few hundred in blogging, reading groups, etc.

As well, the bloggers & reading groups are generally willing to deal only with the creme-de-la-creme, the 1 in 100 books that actually got published. Very few are willing to read the totally unknown self-published author. (And not surprisingly, you generally have to pay someone $30K a year to suffer through reading slush. It’s *work*, not pleasure…)

The bookstore is also not going to go away, but I guess that it will not be a chain on average.

I really, really hope you’re right. However, the signals are certainly *not* encouraging. B&N doesn’t look healthy and the independents are often looking pretty iffy. Moreover, if the last chain closes down, that probably makes print no longer viable for the *publishers*, so it won’t matter if there are people willing to open bookstores, the publishers won’t be able to sustain large enough volumes to make it worth printing anything but the biggest best-sellers (i.e. the already known author).

Cliff November 14, 2012 at 4:34 pm

There seems to be something wrong with your logic that everyone will be clamoring to pay $10k+ on advertising for vanity projects, but that advertising will be worthless. You see no possibility of an Apple online bookstore or similar?

Tom West November 14, 2012 at 4:57 pm

There seems to be something wrong with your logic that everyone will be clamoring to pay $10k+ on advertising for vanity projects, but that advertising will be worthless.

I think you are assuming rationality on the part of the spenders. In any industry where you have people who have been dreaming for literally their entire life about being an , you’ll find lots of money being made by people will claim to help for a substantial amount of money. Think about how much money is made by colleges providing MFA’s in Creative Writing!

You see no possibility of an Apple online bookstore or similar?

I’m not certain I understand. Apple is no more going to spend millions a year on vetting books for quality as it is on vetting Apps for quality. Now imagine if there were two orders of magnitude more Apps being published each year :-). I do see a submission fee in the future. Desperate would-be authors are too huge revenue stream to ignore. As for the advertising, it’s a toss up. There’s a *huge* amount of money to made from authors from advertising, but I can see too much advertising for unreadable books might drive people from the site, not just have them ignore the advertising. A tricky balancing act.

(My estimate is that 1 in 100 completed books are publishable, although many claim that’s optimistic – Some 300,000 books were conventionally published in the USA last year, so I can easily see 3,000,000-10,000,000 books a year being self-published.)

anon November 14, 2012 at 6:47 pm

In any industry where you have people who have been dreaming for literally their entire life about being an , you’ll find lots of money being made by people will claim to help for a substantial amount of money. Think about how much money is made by colleges providing MFA’s in Creative Writing!

Bingo. There are numerous scammers around to prey on people who have dreams of being a “published author.” Fortunately, these days the dreamers can use print on demand and ebooks so at least they don’t have to contemplate pallets of printed books moldering away in the basement or garage. Progress!

And most any book editor can tell you stories of authors, even authors with advanced and professional degrees, who can not write.

Florian November 15, 2012 at 3:39 pm

@ Tom West:

very interesting comment, thank you.

I am not sure about your pessimistic prediction, though.

Let’s assume the following future book market:
There are a million authors out there, only 1% of which produce quality (same as today).
The main distribution channel is digital on some propiretory system. (Let’s say: Amazon e-book on Kindle readers).
And there are some quality control agents (for nostalgic reason, let’s call them “publishers”).

Amazon will only allow books on their site which have been vetted by an Amazon-approved publisher.
(And maybe there is some “put your money there your mouth is”. For instance, the publisher has to pay Amazon $200 up front for each listed title and gets $5 for each copy sold.)
That way, the trash is weeded out as efficiently as it is today. The publisher has no interest in sticking his name to a rubbish book (because it cost him money AND reputation – same as today). And no book without a publisher is allowed on a quality site like Amazon.

In such a system, there is still a quality signal:
As a reader, I know that books on the Amazon site have decent quality.

Tom West November 15, 2012 at 5:04 pm

Indeed that would work, except we’re beginning to see an anchor price for non-mainstream-published e-books moving to about $3.00, which pretty much rules out any there being enough money to make it worthwhile for a third party publisher. (There was a brief period on Amazon when it looked fairly merry as book prices dropped and people started buying tons of books on impulse, which would be one way for there being enough money in books to be a viable industry.)

Unfortunately, after a few months, it became clear to readers that the limiting factor for most readers is not cost, it’s time. As people’s ‘to read’ shelf went from 20 $25 dollar books to 300 $1-3 dollar books, they began to cut way back. They’re still buying more cheap e-books than paper, but not anywhere near enough to account for the drop in price.

I’m hoping it changes, but I strongly suspect we’ll be in a situation where you won’t be able to sell a quality book for $10, but people won’t buy $3 books for lack of quality control. It wouldn’t be the first time that an industry died and was mourned by its fans because people’s anchor price was too low to be able to sustain it. The funny part is that you can get people to say they’d pay $1,000 dollars a year for a healthy hobby, but they can’t countenance paying far less overall in terms of increased prices that would sustain the industry.

(Lest I seem criticizing irrationality, I fall into that too. I’ve joyfully paid $40 for an app from KickStarter when I’ve turned down paying $10 for an even *better* app because $40 for a KickStarter project is reasonable (which gets me an App), but $10 for an entertainment App is just too internally justify…)

Geoff Olynyk November 14, 2012 at 6:34 pm

I just wanted to point out that some people are paying attention to how writing has to be produced and sold in the 21st century.

Found Press is a publisher of digital short works. Check out the website, you’ll find that it’s not bound by the strictures of the old publishing industry!

Alen Mattich November 14, 2012 at 6:49 pm

As a journalist with a couple of decades’ worth of experience and novice novelist I know the value of a good editor, especially one with a stake in maximizing the quality of the finished product. The editors they employ and the fact that they signal quality (you’re less likely to be wasting your time and money reading our book) are the biggest services provided by established publishers. They’re telling the world: hey look, we’re putting our money where our mouth is and we’re not even related to the writer.

Freelance editors can be hired by writers, but readers don’t know this has been done. They assume editing with books produced by publishers. But as far as I’ve read, self-publishing tends to have poor or amateurish editing, even if the underlying quality of the writing is good.

The double function of editing as quality control–editors filter good books from the mass of average or unreadable ones and that they improve these books by sorting them out structurally as well as getting rid of niggling errors. It’s a function that’s hard to reproduce outside of traditional publishing structures and is seriously underrated.

By the way, there’s another layer of editorial filtration, the agent. Agents get thousands of manuscripts, of which they only choose to represent a few. Of these maybe only half or less are actually sold to publishers.

It is very hard to become successful even after all that. But imagine the hurdles faced by an unknown self-pubbed writer.

One thing I’ve never understood is why publishers don’t create a cooperative electronic platform through which they can sell their books in competition to Amazon. They already have distribution systems. Readers merely need a one stop forum to go to to find a big enough sample of books. Publishers might not be able to compete with Amazon on price. Amazon undercuts retailers, which publishers would be loath to do for fear of alienating bookshops, and sometimes even sells for less than they have to pay the publishers, as loss-leaders. But they could compete on timing by releasing their books to their own site a month or two before Amazon gets them. This needn’t be a cartel if they merely share the cost of setting up a platform and then don’t collude on pricing or access (ie treat Amazon in exactly the same way they’d treat any other retailer).

Anyway, that’s my two pennies’ worth.

Mike Cane November 15, 2012 at 7:25 am

John D. Rockefeller thought Standard Oil was untouchable. ALAM had all the automobile patents sewn up. Then along came trustbuster Teddy Roosevelt and the mood of the country changed. The court ruled against ALAM. And aside from officials seeing Too Big To Fail was Too Big To Keep, pirates changed things too. Hollywood came to exist because pirates of Edison’s motion picture patents fled to California, where they could duck lawsuits. Thinking what we have today is going to continue as it is or even get bigger is a mug’s game. And tech companies have no appreciation or even understanding for the Arts — and that includes Apple. Keep them the hell away from “content” creation.

Daniel Bier November 24, 2012 at 2:37 pm

I’m inclined to agree with your general assessment, but we already witnessed an anti-trust suit against Apple and the major publishers earlier this year for “colluding” to raise prices for e-books. It seems the DoJ is ready and willing to step in and selectively enforce anti-trust law, and it remains to be seen how much that might alter the landscape of a changing industry.

Wil W November 14, 2012 at 3:51 pm

“B&N doesn’t look healthy and the independents are often looking pretty iffy. Moreover, if the last chain closes down, that probably makes print no longer viable for the *publishers*, so it won’t matter if there are people willing to open bookstores, the publishers won’t be able to sustain large enough volumes to make it worth printing anything but the biggest best-sellers (i.e. the already known author).”

I think once the chains shut down it will be easier for the independents to survive. As far as actual printing goes, perhaps something like this…: http://ondemandbooks.com/ebm_video.php

Tom West November 14, 2012 at 4:31 pm

Um, the one-of printing machines are neat, but they aren’t much of a solution. They tamp down the ridiculous end of the cost curve, but if you’re barely making any money selling 5,000 copies, it won’t help if you’re now selling 500 copies for *only* double the printing cost. However, the problem is also distribution. You lose economies of scale again when you lose B&N (including sales staff, catalogs, accounting, shipping, etc.).

Also, even if the printed book survives, it’s not a given that the independents have it any better. At some point you have bookstores become a niche market, and people effectively give up on paper books altogether.

To use an analogy, I’ve seen the same “tipping point” mechanism at work wipe out a number of my hobbies over the years, where a slow decline suddenly became a steep one as the membership in the hobby lost “critical mass”. The Internet has helped stave off total extinction, which is nice, but new members rates remain at nearly zero as the hobby remains invisible for all but the already involved.

Remember, books survive as an industry partially because of the prestige involved. Out of the public eye means no prestige, which provides another reason for companies to get out of a marginal business (outside of textbooks, for which you can still charge $100+)

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