For years the book publishing industry has been in turmoil over the future of books, but we could be at a turning point of no return. As the saying goes, we ain’t seen nothin’ yet. With the increasing adoption of tablets as the consumption tool of choice publishers are bracing for perhaps the biggest wave of change and challenge so far.
One of the first such challenges has been pricing. Amazon has forced prices down and big publishers are scrambling to stay in the game. This has led to a claim by the Justice Department that five big publishers and Apple have colluded on a fixed pricing agreement.
Over the past several months Justice Department has been investigating five major publishers and Apple on suspicion of pricing collusion for e-books. And the antitrust officials have put the pressure on the publishers to settle by the end of April. Two weeks ago three publishers, Hachette, HarperCollins, and Simon & Schuster (…which is owned by SmartPlanet’s parent company, CBS. -Ed.) did settle but the remaining two, Penguin and Macmillan, maintain that they did not collude on e-book pricing. This essentially means that Hachette, HarperCollins and Simon & Schuster cannot control their pricing to remain competitive within the newfound world of digital publishing.
Like most industries disrupted by the Web, publishing is grappling with new pricing models for survival. The main challenge is competition with Amazon. Most publishers agree that it is important to keep the so-called “agency model” that allows them to set their own prices for e-books.
SmartPlanet spoke with digital publishing expert and consultant Michael Shatzkin, CEO of The Idea Logical Company, to understand what this settlement means and what the future of books will look like.
SmartPlanet: First of all, just to put all this in context, how big is the adoption of e-books today?
Mike Shatzkin: I would say that for the big publishers, for what I call immersive reading, which is to say not illustrated books but books where you start on page one and read to the last page, we are in the mid-thirty percent. So out of a hundred thousand copies of a new hard cover they’re going to sell sixty-five thousand print books and thirty-five thousand e-books. But it’s fifty percent for fiction and twenty-five percent of non-fiction.
SP: Okay. Interesting that there is such a large difference between fiction and non-fiction. Does that surprise you?
MS: The difference between readers is largely about discoverability, which is to say that fiction readers shop by author and genre. And those two things are easy for retailers to organize in a digital world. And non-fiction, which is topical and where on the bestseller list may include a very wide variety of topics, not as easy to find. I think that’s part of the answer, but I don’t really know.
SP: Can you summarize the dispute between the Justice Department and the major publishers and Apple?
MS: There are two things at issue. One is the question of publishers enforcing a uniform retail price across the supply chain, which is what the agency model was. And that creates complainants because it means that e-books cost a little more as a result than they might if they were discounted by the retailer. But the specific complaint and the settlement have to do not with agency model but with the alleged collusion that took place to implement it. And the Justice Department decided that they had ample evidence that these companies had all talked to each other and put the agency model together to control pricing in the marketplace, and that their attack was the collusion not the model. And they, the three companies that settled, specifically said, “We did not collude, but we’re tired of paying our lawyers for this.”
Because of this Amazon and the price conscious e-book consumer win, and everybody else loses.
SP: Can you elaborate on that?
MS: Yes, the fear that drove the agency model in the first place was that Amazon is free to discount e-books as much as they like. And in a developing market where all the competitors are investing in building a competitive market, they have deeper pockets than anybody else. So, if they give away all the profits and more, then there’s no room for Barnes and Noble, or Apple, or Kobo to compete. And what the publishers are afraid of is an e-book market that is entirely dominated by Amazon. That’s what motivated the agency model in the first place. And what happens as a result of the settlement is that the three big publishers who agreed to settle are not allowed to use the agency model for the next two years as a term of the settlement. So what that means is that there’s going to be a large number of highly recognizable books at the big six [publishing houses] that Amazon will be able to discount to their heart’s content (there are some restrictions but not many) and that has the potential to bankrupt their competitors and to allow Amazon to use price along with their very well-run business to corral the market.
SP: So the three that decided to settle just felt that this risk was okay for them to take?
MS: In my opinion it was their parent corporations that said you guys have spent six million dollars on this already will you please settle? I mean, the three that settled are Simon and Schuster, which is owned by CBS; Harper Collins, which is owned by News Corp; and Hachette, which is owned by a French conglomerate. And in CBS’ case they, you know, they’re not in the book business and this was a big distraction. In News Corp’s case they might be saying you know what, we don’t really need to fight with two governments at the same time and we already have enough fighting going on with Britain.
SP: What about the two that continue to fight the Justice Department’s claim?
MS: The two that are fighting it, McMillan and Penguin, their executives have made very clear statements, ‘we did not collude, we’re not going to settle this because we did not collude, and we’re not going to be intimidated by the Justice Department’s bullying,’ which is essentially what they think the others have done.
SP: So they’re continuing on. What prices were they asking?
MS: Well the prices are very clearly spelled out. It’s $9.99 to $14.99, and for hard covers it would be double or more that.
SP: The Amazon prices for long-form e-books presumably fall lower?
MS: I think it’s really sufficient to say that Amazon has consistently, throughout its existence, used discounting as a merchandising weapon and as a strategic weapon. And from Amazon’s perspective, making more people buy e-books from them serves two purposes. One is that they get a bigger hold of the emerging e-book market. But the second, the faster people switch to e-books the faster they switch away from buying books in stores. Every time a store closes Amazon picks up business.
SP: Right. What about Apple in all of this?
MS: Apple’s been hurt by this, badly. Apple wanted the agency model. Apple created it. And one of the reasons Apple wanted the agency model is because they really didn’t want to get into managing prices in a store. So with the agency model they can say to the publisher, “You set the price, whatever it is, as long as it’s the same price everywhere we don’t care. We’re just your agent, we don’t care.” But now if they want to compete with their iBookstore they’re going to have to get into pricing because they can’t just let the publishers do it anymore, since these publishers aren’t allowed to do it anymore.
SP: Essentially the publishers are back at wholesale pricing, correct?
MS: Exactly. At least the three that settled. The two that didn’t settle, and Random House, which was never charged because Random House did not go to the agency model when everybody else did, they went in a year later. So because they went in a year later they were deemed not to have colluded. So Random House and the two publishers that haven’t settled, Penguin and McMillan, are at least for the moment, going to continue with the agency model.
SP: So, okay, just changing track to the general industry: What do you think of the smaller e-book publishers coming on the scene, like The Atavist and Byliner?
MS: Oh, well I think both The Atavist and Byliner are interesting experiments. Byliner is moving very much around the reality that the author is the brand, and it’s right. The Atavist is trying to carve some ground out in between a book and a magazine article length piece. And it changed the business model a little bit. They buy out the article. They pay the authors for the article but then they own all the rights, or just about all the rights.
SP: The Atavist does?
MS: Yes, they own a lot of rights. There are movie rights, for example, which most publishers don’t own. So, they’re trying something unusual and different. What’s interesting also about The Atavist is that they built a technology platform for their own use and they are now licensing that platform for other people to use. So they’re not just making money by creating content and selling it, but they’re also making money by licensing the technology they created for themselves to other people.
SP: I understand that their platform is actually being used by other people, not even authors, but other companies.
MS: Yes. How much of a business model that is I don’t know. I mean, I’m not an investor, and it’s the case with all these startups, everything is all too small to make it on their own so they have to either scale, and Atavist doesn’t scale. Except maybe the platform sales let them scale.
SP: Some of these mega-publishers will presumably start buying some of these startups.
MS: That’s already happening. Random House acquired a company a year ago called Smashing Ideas, which is based in Seattle. That’s the way big publishers work. It’s the way big companies work. I mean, it’s like Facebook buying Instagram. Amazon has done it many times.
SP: When we see the success of the Kindle Single and The Atavist magazine article-length, do you think this is going to be the book length of the future?
MS: My sense of it is that nobody’s getting rich writing Kindle Singles. Yet I do see value in the form. Obviously not everything that’s worth selling as content needs to be a hundred thousand words. So yeah, it makes sense to me, but exactly how much of the revenue pie it’s going to be in two years, or five years, or ten years, I don’t know.
I mean anyone who writes a hundred thousand word things has ten thousand word ideas and they don’t want to just throw them away if they can publish them and make some money on them. So, I think you’re going to see more and more of this done because it’s not hard to do, but whether it’s going to be an important, how long it’s going to be before it’s an important part of the revenue stream from an industry perspective I’m not sure. It might be a long time.
SP: Where do you see the business going in the next five years?
MS: I think the industry might not be recognizable five years from now. It’s very hard sitting here in April 2012 to prognosticate something for five years and not have it be ten. So I’m very clear about the direction but it’s much harder to be clear about the time scales. But what I see is that people will move more and more to e-books, that weakens print, that weakens brick and mortar. Weaker brick and mortar and weaker print means weaker publishers, because the main thing that publishers do for authors that they can’t do for themselves is put books on shelves. If there are no shelves then the scale of the publisher is not nearly as valuable. There’s going to be more and more competition coming in from people who never would have been competing before because they can just put their books up and compete. And not just authors, you’ve got movie studios and newspapers, and magazines all creating books. NBC has started an e-book division. I mean, they would not have started a book publishing company, I can tell you that.
SP: What do you think about the visuals that are going into these books? And how will publishers produce that sort of visual, animated content?
MS: Book publishers creating these highly asset-intense apps are really fish out of water. It’s not what they do.
SP: That’s why they’ll probably be buying more of these types of startups that are doing animated apps, and video.
MS: Maybe. But right now a book publisher has the advantage of being able to monetize creativity through books, right? So they go to the app company, the app company creates a great app, then the publisher says okay we’ll establish the brand here so let’s also put out the book, and the book may today get more exposure than the app in many cases. But that’s going away. So why would anyone need a book publisher in five or ten years from now? I don’t know, maybe for reasons that haven’t been invented yet, but it’s not easy to see from here.
SP: So who’s going to be the biggest winner then do you think?
MS: Right now, Amazon.
[Photo via rachel sian]