e-Book Tipping Point, Part II

On March 5, I posted about the video which Publishers Lunch made at the Digital Book World Conference. The panel was titled "The e-Book Tipping Point" and featured Mike Shatzkin as moderator with a panel made up of:

Ken Brooks--Senior VP for Global Products & Manufacturing for Cengage Learning

Michael Cader--Founder of Publishers Lunch

Larry Kirshbaum--Formerly headed Time Warner's Publishing Group and today is a literary agent

Evan Schnittman--VP for Business Development & Rights for the Oxford University Press

You can read my summary of the first half of the video here. I promised to return to finish the video, which is what we are going to do today.

When I stopped, the panel was talking about Amazon and its future. Michael Cader said that the premise that Amazon had already reached its "peak market share electronically" and would now see its market share decline seemed a safe prediction. However, he wanted to point out a couple of wild cards.

He began by reminding everyone that the initial thinking had been that "Internet book-selling ... was easy--anybody can do it ... we know where that story led us ..." I took that to mean that we should never underestimate Amazon because Jeff Bezos proved he knew what he was doing when no one else did.

Wild card #1 is the "background attempts driven by Apple and Google and others for publishers to retake the business terms of how e-books are sold, priced and merchandised."

Wild card #2 has to do with pricing. Cader warned that if the publishers' effort to retake the market share from Amazon:

"happens in a world that still allows Amazon in parallel to pursue many of their pricing strategies ... against a completely different pricing strategy driven by publishers rather than consumers, it's going to be very hard ... to chip away at [Amazon's] market share ...

"We should take to heart very seriously how much price has driven this market so far and how much price and the availability of pricing options is going to drive the next segment of this market."

Cader offered a third wild card, saying the market for electronic devices was about to explode "with devices that aren't just about reading, where reading is secondary or tertiary ... [where] you didn't buy it as an e-book reader but you have it now for free ... so you don't buy something else ..."

Schnittman picked up on that train of thought. He believes that explosion in multi-purpose devices that also permit e-reading will help Amazon. "The Kindle as a platform ... the Kindle on the Apple already announced ... [Amazon is] the retail platform for all devices ..." He suggested that this dynamic creates enormous potential for Amazon "to actually strengthen ..." its position in the market.

Shatzkin led the panel to discuss the agency model introduced by the Apple 5. He identified the two main features of the model as allowing the publisher to control the retail price and allowing renegotiation of the division of spoils in the supply chain.

Schnittman disagreed with Shatzkin's premise. He said he thought what the agency model was about was "the publisher as the direct distributor through Apple to a consumer ... the first direct line to a customer ..."

Mike Cader talked about two of the most important "what ifs" today. First, the "agency model's really only going to work if pretty much everybody moves to it ..."

And, second, "most publishers already have a contract with Amazon of some kind ... there's a whole lot of--at best--confusion or grayness over what those contracts say about moving to an agency model."

Schnittman pointed out that we might not even be talking about the existing e-book. We might be talking about enhanced e-books and suggested that those might not necessarily mean just adding color and video to the standard e-book.

Cader stepped in to say that "the enhanced e-book has been strategized not ... because there's a lot of research showing that's what consumers want out of the product ... The enhanced e-book was devised as a business concept ... to make the agency model work by saying, 'Well, it's not our existing product. It's this new thing so we need a new set of business terms to present it under. It's not covered by existing arrangements' ... Again, it's a way to package the thing that they want ..."

Schnittman pointed out, "Let's not forget that technology ... marches forward at unbelievable speeds ... The Kindle device will have enhancements that make it enhanced e-book ready before you know it. This SDK announcement of Amazon could have been interpreted as a response to this agency model. 'Okay, fine. You want an agency model. We can run that agency model on our platform where we'll be selling the less expensive e-book against your higher-priced enhanced book. Good luck with that'."

Larry Kirshbaum, the literary agent, raised a new issue, asking, "...What the relationship is going to be between the publisher and the author as far as e-book rights go? We've been reading [that] Apple is going to be giving 70% of the revenue under this agency model ... Now the question becomes what percentage of that 70% goes to the author? And, in my view, the proper model is going to be closer to a 50/50 share of e-book revenue."

Shatzkin said, "I wanted to ask about whether e-rights being split off is something that is likely or not likely to happen. ... We also had last week the news that Amazon has a 70/30 offer on the table ... Amazon said, 'Authors bring us their books directly ... we'll divide the revenue 70% to the author, 30% for us of the sale price.' And the conditions were not onerous. The conditions were that the price we sell at has to be between $1.99 and $9.99. It has to be 20% less than any print book price that is in the market ... Does that create a temptation by which authors might say, 'You know what? Let's do that Amazon 70/30 deal and then we'll see what else sorts out?'"

Ken Brooks said the print publisher might then threaten not to buy the book if the e-rights were separated from the print rights.

Evan Schnittman brought up another issue: There are a large number of trade authors with existing titles covered by contracts that never addressed e-rights because electronic books did not exist when those titles were originally published. These authors have more reason to take advantage of that Amazon offer than to go to the Big Six. This dynamic is very different from that of authors bringing new titles not yet published to the table.

Mike Shatzkin raised a new question: Will territorial rights survive the digital explosion?

Schnittman said the technology of selling online "opens up the possibility that anyone, anywhere, can buy a product from anywhere."

Mike Cader agreed. He pointed out that "we invented this new paradigm where just the judgment of territory is difficult. Is it where you reside? Is it where you bought the device? Is it where you are when you buy the book to go on the device? Which of those factors predominates?" He described this as an open market issue first and said the fight will be about e-book pricing and release dates.

Shatzkin then offered another subject: Will the "big legacy publishers" need to begin to scale down over the next two or three years, eliminating warehouse space and other large costs?

Ken Brooks responded that he believes there will be opportunities for the largest publishers to take on distribution for smaller publishers. He said "you want to get rid of fixed cost and turn them into variable costs wherever you can." He suggested publishers might plug in third-party vendors rather than owning the big facilities themselves.

Brooks also talked about the shift from physical distribution to connecting with audiences. "The marketing focus becomes much more important than it has in the past."

Larry Kirschbaum said something that caught my attention: "Publishers have never really had to deal ... with their ultimate consumer. They've gone through intermediaries--whether it's retailers or distributors. Now they're in the game of dealing with their ultimate consumer ..."

Michael Cader reminded everyone that the big publishers are the last ones left still investing in the careers of authors, investing money up front in bringing new works to the marketplace.

Cader responded to a question about how he built Publishers Lunch--both building something from nothing and managing to challenge Publishers Weekly: "Every business problem has a business solution. It often requires thinking differently than you have in the past and redeploying your resources and strategy in a new way."

That response could have been the tagline for the entire panel. And the Big Six would do well to remember that David did manage to defeat Goliath.

I was enormously impressed by Evan Schnittman's grasp of the industry. I've added his press' blog to my list of blogs-to-read.

And, as I've said before many times, if you are not subscribing to Publishers Lunch, you should think about doing so (go here to subscribe).