Book Publishing is a topic I’ve been following for sometime now. Books always have had enormous influence on people and in culture. One of the big revolutions in history was Johannes Gutenberg’s invention of the printing press around 1439. Gutenberg’s movable type press introduced an era of mass communication in Europe that permanently altered the structure of society1.
While e-books are not an invention of Amazon, their massive consumption was widely popularized with the introduction of Amazon’s Kindle reading device in November 2007. Even if print books won’t disappear anytime soon –as of 2014 the number of global print books sold still outsold e-books2-- the influence of ebooks cannot be ignored. Consider that since May 2011 Amazon, the biggest bookstore on Earth, sells more ebooks than print books3.
Ebooks are disruptive. And business-wise, they have undeniable benefits over their printed cousins. Unlike print media, ebooks can be available for sale essentially forever. Authors don’t need to beg their publisher for a reprint. Electronic publishing dilutes publishing costs, making the marginal cost to sell one more ebook effectively zero. Independent writers can pursue the long-tail strategy and have a portfolio of books that drip income every day.
Digital publishing makes it also possible to publish ebooks only interesting to a small niche of people. This was impossible before in the minds of big publishing houses because they saw no business in such small volume editions. And more important, as Clay Shirky writes, ebooks make the wealth of culture of humanity available to anybody with a reading device:
The traditional industry belief — if you don’t live in a big city and have a lot of money, you deserve second-class access to books — is being challenged by a company [Amazon] trying to say “If you have ten bucks, there’s not a book in the world you can’t read.”
Insights about the Publishing Industry
During the last decade, the publishing industry has gone through an important consolidation process. Big publishing houses bought small imprints and publishers, or merged among themselves to form bigger companies. As of today, the industry is dominated by five companies, often referred to as the Big Five. In no particular order, they are:
- Penguin Random House, owned 51% by Bertelsmann and 49% by Pearson. Bertelsmann is a giant media company with revenues around $20 billion. Penguin itself has revenues of $3.9 billion, around 10,000 employees, 250 imprints, and publishes 25% of the world’s English-language books.
- Hachette, owned by Lagardère Publishing – the biggest publisher in France and the second biggest in the UK. It is the world’s second largest trade publisher overall. Lagardère Publishing is itself part of Lagardère Group, a giant worldwide media company – magazines, radio, television, online, digital, and books – with annual revenue of approximately $10bn dollars. (cfr David Gaughran, Amazon v Hachette: Don’t Believe The Spin.)
- HarperCollins, a subsidiary of NewsCorp.
- Macmillan, corporate parent of the Georg von Holtzbrinck Publishing Group, which has 50% ownership of Die Zeit.
- Simon & Schuster, property of CBS Corp., owner of the most watched network in the US with revenues over $14bn.
Seth Godin writes that the role of the publishing houses is to find good authors and books. They are the gatekeepers of print media, the ones who decide which selected authors will be published. While this closes the doors to lots of potentially good and even great authors, they also make sure that what gets published meets a minimum level of quality.
The business of publishing houses is not unlike the Venture Capital (VC) industry. With the exception of best-selling authors, nobody can predict if a new book will be a success or a flop. But publishing houses don’t need all their titles to be bestsellers. They only need one bestseller in ten, and maybe three out of ten regular sellers. The rest, the other six, they can afford to be complete flops. Like the VC business, lots of potentially good books or authors get discarded because there is not enough time to read them all. (Who hasn’t heard the story of the number of reject slips some later-famous authors got from publishers before they were “discovered”?)
Publishing houses put their part in the making of a great book –print or electronic– by making sure that it goes through certain stages. For example, they take care of providing essential services for authors like editors, copyediting, book design, in some cases book promotion, etc. Even with a great manuscript, these steps are essential for having a professional quality book at the end of the process.
While print books –specially hardcovers– sell at higher prices than e-books and have higher margins, selling physical books to bookstores and retailers requires demand planning, some heavy logistics, stock provisions, rebates… Big companies are best suited for these tasks than independent writers, because they can obtain important savings thanks to economies of scale.
Pricing models for selling books and price fixing
Even if the big publishers sell some books directly to customers through their websites, their most important sales come through traditional channels like bookstores and retail stores. There are two models for pricing books and ebooks: the wholesale model, and the agency model.
Under the wholesale model, publishers set the list price of books and sell them to retailers at a substantial discount. The retailer then sell the books to customers at the price they choose, keeping the profit or assuming the losses. (For example, as a way to bring in customers, Amazon often sold popular books at heavy discounts.)
Under the agency model, publishers set the book’s final price. Retailers sell the book to customers at that price, and receive a commission on sales. The agency model doesn’t allow for discounting. Retailers become “agents” for the publishers, hence the name of the model.
The wholesale model is the pricing model used for selling print books. Some years ago, electronic books were sold under this model too.
In 2010, Apple negotiated a deal with the Big Five publishing houses to make their ebooks available on Apple iBookstore. One of Apple’s concerns was that Amazon’s aggressive pricing strategy was eroding the market’s margins on ebooks. According to Apple, ebooks should cost at least $12. (Amazon was selling them at $9.99 or less.)
Clay Shirky, in his article Publishing and Reading, explains why publishers were worried about Amazon too:
Back in 2007, when publishers began selling large numbers of books in digital format, they used digital rights management (DRM) to lock their books to a particular piece of hardware, Amazon’s new Kindle. DRM is designed to transfer pricing power from content owners to hardware vendors. The publishers clearly assumed they could hand Amazon consolidated control without ever having to conspire with one another, and that Amazon would reward them by passing cost-savings back as inflated profits. When Amazon instead decided to side with the customer, passing the savings on as reduced price, they panicked, and started looking around for an alternative conspirator.
Under the wholesale model, publishers had no say over Amazon’s final pricing. After closing deals with Apple, these publishers switched simultaneously from the wholesale model to the agency model. Because all of the big houses changed pricing model simultaneously, retailers –even Amazon– had no option but to accept the publishing houses’s conditions.
Some time later, in April 2012, the Department of Justice (DOJ) sued Apple and the Big Five publishing houses and accused them of conspiring to set e-book prices4. After reaching a settlement with the DOJ, the Big Five publishers have continued to sell ebooks under the agency model. However, they are required to renegotiate deals with Amazon and other retailers independently.
Self-published authors are outearning all authors published by the Big Five
There are more and better tools available today for self-publishing than a couple of years before. Market numbers confirm that authors are using these tools for good.
According to Author Earnings’s January 2015 Author Earnings Report, 33% of all paid ebook unit sales on Amazon.com are indie self-published ebooks. In mid-2014, indie-published authors as a cohort began taking 40% of all ebook author earnings generated on Amazon.com, while authors published by all of the Big Five publishers combined slipped into second place at 35%. (Amazon controls 67% of the US ebook market.) The Write Life reports that 40% of all dollars earned by authors from e-books on Amazon.com are from sales of independently published e-books.
Author Earning’s comments:
Only seven months ago, the idea that indie self-published authors and their ebooks were outearning all authors published by the Big Five publishers combined was jaw-dropping heresy. Today, it’s boring –a widely-acknowledged fact among knowledgeable authors, if not industry pundits. Many authors who publish both ways point out their earnings disparity in favor of their self-published titles, and so this data is no longer surprising.
This doesn’t mean that an author’s life has become suddenly easier. The effect of more publishing options, better tools, lower costs, and no gatekeepers, is that the barrier to new incumbents to this market is lower that it has ever been. It has become a more crowded space than ever for the indie author. Like Tim O’Reilly said years ago, _obscurity is a far greater threat to authors and creative artists than piracy_5.
Aside from obscurity, there are other threats. Books –specially ebooks– now compete for attention against mobile games, television, movies, social media like Facebook or Twitter. Because nowadays it’s increasingly difficult to engage in activities that require long attention spans, a large number of people favor short format reading. Think about it. When was the last time you could spend a quiet, interruption-free hour or two reading a novel from your favorite author?
Going the indie-road doesn’t exonerate authors for doing the work that traditionally publishers took care of. Having great content is essential. But for a good book to become a great book you still need an editor, good cover design, beta readers, etc. These steps are important, and they are not difficult to fulfill. But it is surprising of how many talented people neglect them.
Book promotion is also crucial if authors plan to sell their work. Writing about non-fiction books, Seth Godin says that “publishing a book is really nothing but a socially acceptable opportunity to promote yourself and your ideas far and wide and often.6”. But books require the user to read them for the idea to spread. He suggests you should try other things first:
Build an asset. Large numbers of influential people who read your blog or read your emails or watch your TV show or love your restaurant or or or…
Then, put your idea into a format where it will spread fast. That could be an ebook (a free one) or a pamphlet (a cheap one–the Joy of Jello sold millions and millions of copies at a dollar or less).
Then, if your idea catches on, you can sell the souvenir edition. The book. The thing people keep on their shelf or lend out or get from the library. Books are wonderful (I own too many!) but they’re not necessarily the best vessel for spreading your idea.
The Last Gatekeeper
Ebooks are changing the publishing industry. The power of ebooks is that they have opened the doors for independent authors. Anyone can who can write a book can now publish her or his work without relying on an established publishing house and without fear of rejection slips.
Aspiring independent writers should consider ebooks as their first option. With print books, even if the costs of physical publishing going down, you still have to convince the gatekeepers to let you in. With ebooks, the are essentially no gatekeepers.
PS: If you are interested in writing fiction and going the indie-road, I can recommend David Gaughran’s Let’s Get Digital: How to Self-Publish, and Why You Should. Gaughran explains the tools needed for going from manuscript to ebook, discusses several publishing options, and includes several case-studies.
See, for example, GigaOm’s Everything you need to know about the e-book lawsuit. ↩