If eBook sales are slowing, is it good news or bad?

Not long ago, it was common for eBook sales to increase by 100% or more year over year. Those days are behind us--last year, the rate of eBook sales growth fell into the 20%-25% range. Barnes & Noble released its holiday 2013 sales figures today, and eBook sales increased 13.1% year-over-year.

Some industry observers are saying that eBook sales growth has reached an inflection point, which means that sales growth has hit zero or gone negative. In reality, eBook sales growth is slowing but still positive, and will most likely remain positive for a while. In addition, both consultants and reporters have been overly quick to minimize the effect of the Justice Department's settlement with Hachette, HarperCollins, Simon & Schuster, and most recently, Penguin. (Random House will join the settlement if and when its merger with Penguin is completed.) The settlements are still being phased in, and unless price has little or no effect on demand, we should see the rate of eBook sales increase in 2013.

However, let's say that even with the price-fixing settlements in the U.S. and Europe, eBook sales increases level off or turn negative. Is that good news for the publishing business, or bad?

• Some observers believe that it's good news, because they think that those customers will buy print books instead of eBooks. However, there's no evidence that a slowdown in eBook sales will mean an increase in print sales. In fact, print sales continue to decline, even as eBook sales growth slows down. (Update, January 4, 2014: According to Nielsen BookScan, U.S. print book sales (in units) fell 9.3% for all of 2012. Print book sales fell just under 16% between 2010 and 2012. In the U.K., print book sales (in units) fell 3.4% in 2012.)
• eBooks are the only source of growth for the book publishing business. If eBooks stop growing, we'll see even more consolidation and shutdown of publishers, since cost control will be the primary way to improve publishers' bottom lines.

I don't believe that eBooks' sales growth is going to go to zero, but 20%-30% annual growth may well be the ceiling for the next couple of years. Let's be clear--eBooks (and, to a lesser extent, audiobooks) are the only parts of the book publishing and retailing business that are growing. Everything else is stagnant or declining. If eBooks become stagnant, that's bad news for everyone.

Obama's victory spells bad news for Apple, Macmillan and Pearson

Historically, Republican administrations have been far less aggressive in prosecuting antitrust cases than Democratic ones. Had Mitt Romney won last night, it's likely that the eBook price-fixing case against Apple, Macmillan and Pearson would have been settled on terms far more favorable to the companies, or would have been dropped altogether. That may have been one reason why the three companies refused to settle with the U.S. Justice Department--they thought that they could get far better terms by waiting a few months for a Romney administration. However, with President Obama's reelection, the Justice Department will continue to pursue its case, and will almost certainly make settlement on the same or similar terms as Hachette, HarperCollins and Simon & Schuster a condition for approval of the Penguin-Random House merger. All of this makes a settlement by Macmillan much more likely. At that point, Apple won't matter, because all of the Big 6 will be prohibited from accepting Apple's terms.

Penguin Random House: The Aftermath

Earlier this week, Pearson and Bertelsmann confirmed that they intend to merge Penguin and all of Random House except for its German-language business into a new joint venture, to be named Penguin Random House. (No Random Penguin or Penguin House for us.) Shortly before the deal was announced, word leaked out that News Corp. was considering making an offer to acquire Penguin, but the terms of the Pearson-Bertelsmann deal mean that Pearson can't consider any other offer.

I believe that, three to five years from now, the publishing industry will look much like the recording industry does today, with the Big 6 becoming the Big 3. In fact, it was Bertelsmann's experience in its joint venture with Sony Music that's said by some to be the reason that the company insisted on having a majority interest in its joint venture with Pearson. Its joint venture with Sony was 50:50, and differences in objectives and strategies between the two companies eventually led Bertelsmann to sell its recorded music business to Sony.

If the publishing industry looks like the recording business in a few years, here's a preview of the likely winners and losers:

• Publisher employees: The biggest reason for publisher consolidation is cost reduction. Penguin and Random House, and other consolidating publishers after them, will get rid of redundant distribution facilities and most of the people who work in them. In addition, they'll consolidate cross-imprint functions, such as sales, marketing, copy editing, production and design. That will put a lot of talented professionals on the street, and with fewer big publishers, there will be fewer places for them to look for work.
• Authors: Despite what Penguin and Random House have said, it's inevitable that they, and other consolidating publishers, will reorganize their imprints. Some imprints will be discontinued, and their authors will be moved to other imprints or dropped. The same thing will happen to the editors at the imprints--many will be laid off.
  
  Author acquisition will be dramatically affected. The Big 3 recording companies have all but discontinued their formal A&R (Artists & Repertoire) operations that sent people into the boondocks in order to find new artists. Their equivalents in publishing are acquisitions editors, and many of them will find themselves without jobs. The big publishers will increasingly focus on successful self-publishers as their "farm teams", and will pay big money to poach bestselling authors from each other. For their part, bestselling authors will have less loyalty to publishers, because many of their editors will be gone.
• Retailers: Some industry pundits have speculated that consolidation of the top publishers would give them more clout with retailers such as Amazon and Barnes & Noble. If the recording business is any indicator, they're wrong. Just as with books, the music retailing business consolidated, and highly influential retailers such as Tower Records, Musicland, Wherehouse and Virgin Music are gone (Virgin has closed its U.S. stores but still operates in other countries.) Music retailing in the U.S. is dominated by Apple, and the consolidation of the Big 6 recording companies into the Big 3 has given the surviving record companies little or no additional leverage with Apple or Walmart.
  
  It's unlikely that mergers between the Big 6 publishers will give them any more negotiating power with Amazon, Apple, Barnes & Noble or Kobo. The publishers will continue to depend on the retailers for the vast majority of their revenue, and the U.S. Justice Department will be watching over their shoulders in order to prevent more shenanigans like organized price-fixing.
• Independent Publishers: Independents will actually be helped by publisher consolidation, for several reasons. First, many talented publishing professionals who ordinarily wouldn't have considered working for smaller publishers, or working as freelancers, will become available to independents. Second, some of those professionals will set up their own independent publishing companies. Third, the authors that are shed from the rosters of the consolidating publishers will become available to the independents. Fourth, authors who might have been discovered and developed by the top publishers will instead go to independents. Fifth, with fewer titles coming from the big publishers, retailers will have more shelf space (real or virtual) to devote to independents.
• Self-Publishers: The big publishers will increasingly recruit successful self-publishers to fill their rosters and compensate for the loss of acquisitions editors. The success of the 50 Shades trilogy has eliminated any remaining stigma from self-publishing authors. Big publishers now know that success as a self-publisher is a very strong indicator of marketability--and it eliminates the cost of spending years to develop a promising author.
• Agents: Consolidation of the Big 6 will spell problems for literary agents. They'll have fewer authors on the rosters of the top publishers, and thus, fewer opportunities to earn commissions from big advances and royalty payments. They'll have to devote more of their time to independent publishers, which generally pay lower advances and generate lower royalties for their clients. And, they'll have to compete with other agents to represent successful self-publishers, meaning that they'll have to accept lower commissions.
• Consultants: Publishing consultants who have spent their entire careers in the publishing industry are going to find it hard to adjust to publisher consolidation. Consultants with contracts with two publishers that consolidate into one will have one of their two contracts cancelled, and the surviving contract will be closely scrutinized. (I saw this happen first-hand as the IPTV industry went through massive consolidation starting in 2008.) Publishing consultants will have to shift their focus to independent publishers, which have much smaller budgets than the Big 6.

In short, independent publishers are about the only group that will be a clear winner from publisher consolidation, followed by successful self-publishers. Everyone else will end up either neutral or a loser as a result of consolidation. 

Pearson's First-Half 2012 results

Pearson has reported its first-half 2012 financial results; here's a summary:

• North American educational sales were £1.022 billion, up 9% year-over-year; adjusted operating profits were £62 million, up 35%. (Net margins were 6.1%) 
• International educational sales were £724 million, up 13% year-over-year; adjusted operating profits were £73 million, up 16%. (Net margins were 10.1%) 
• Professional sales were £180 million, up 2% year-over-year; adjusted operating profits were £9 million, down 65%. (Net margins were 5%) 
• Penguin's worldwide sales were £441 million, down 4% year-over-year; adjusted operating profits were £22 million, down 48%. (Net margins were 5%) 
• Educational digital platform registrations were up 30%. 
• Penguin's eBook revenues were up 33% and now represent almost 20% of the publisher's revenues. 

Author Sylvia Day is Penguin U.K.'s 'erotic...sensation'

Any sentence that combines "Penguin" and "erotic sensation" is likely to create cognitive dissonance. Nevertheless, The Bookseller reports that Penguin says that Sylvia Day's Bared to You has sold 50,000 paperbacks and another 50,000 eBooks in the U.K. Even though it's an erotic potboiler and the cover art copies Fifty Shades of Grey, Penguin U.K. CEO Tom Weldon said "This is not copycat publishing. In a digital age, this is giving readers what they want straight away."

What did Pearson really buy when it acquired Author Solutions?

On the IndieReader blog, David Gaughran writes about last week's acquisition of self-publishing company Author Solutions by Pearson. Author Solutions will become an independent business within Penguin. Gaughran writes that Bertram Capital, the private equity company that owned Author Solutions, has been looking for a buyer for the company since March. The company grossed $99.8 million in revenue in its most recent fiscal year, of which 63% came from the sale of services to authors, and only 37% came from the sale of books.

According to Gaughran, "Industry watchdogs such as Writer Beware have received a litany of complaints about Author Solutions and their subsidiaries over the last few years: misleading marketing, hard-selling of over-priced services, questionable value of products provided, awful customer service, and, after all that, problems with writers being paid." He points to Author Solutions' "web-optimized press release" priced at $1,199 as an example of wildly overpriced services, and writes "In case it isn’t obvious, you would likely receive greater promotional value from setting fire to that money on YouTube." Gaughran says that "...the average customer spends around $5,000 over their “lifetime” with the company, but only sells 150 books." Customer dissatisfaction could explain in part why the average author only publishes 1.3 books through Author Solutions (the company claims that it's published 190,000 titles by 150,000 authors.)

It's possible that Penguin could clean up Author Solutions' operations, but first, the publisher has to believe that there are problems. Penguin CEO John Makinson said the following in Pearson's press release announcing the deal:

“No-one has captured this [self-publishing] opportunity as successfully as Author Solutions, which has rapidly built a position of world leadership on a platform of outstanding customer support and tailor-made publishing services.”

Major publishers launch and expand digital imprints

Publishers Weekly writes that Big 6 and other major publishers are stepping up their launches of digital imprints. Some are digital-first, while others are digital-only. Here's a list:

• Penguin is reviving Dutton Guilt Edged Mysteries, which started as a pulp imprint that released 82 noir detective titles from 1947 to 1956, as a digital-only imprint. In addition, its InterMix imprint will serialize titles, starting with the original erotic romance Because You Are Mine, which will be released in eight parts, with one part released each week.
• HarperCollins will double the output of its Impulse digital-first imprint from one title per week to two, and will add William Morrow and Harper Voyager to Impulse.
• Random House's Loveswept is focusing on eBook reissues of Bantam, Ballantine and Dell paperbacks that haven't previously been released as eBooks.
• Hachette's Forever Yours digital imprint does eBooks first, with Print on Demand versions one to two months later; the company plans to have simultaneous eBook and POD releases by the end of this year.
• Harlequin's digital-only Carina Press imprint allows Harlequin's international divisions to release its titles as both print and eBooks.
• Kensington has launched eKensington as a digital-only imprint.
• F+W Media is taking its Crimson Romance eBook imprint from beta test to full release, concurrent with the rollout of a new eBook subscription site for romance titles. In addition, the company's Prologue Books imprint has reprinted eBook versions of 300 pulp fiction titles from the 1940's, 50's and 60's, and will release 30 titles per month.

Preliminary schedule for state and private class action eBook price-fixing trials

PaidContent reports that the parties to the state and private class action eBook price-fixing lawsuits have agreed to a deadline for final preliminary filings of October 2013. That's four months after the date that the Justice Department's lawsuit against Apple. Macmillan and Penguin is set to begin. It also means that the state and private lawsuits wouldn't begin until some time in 2014. The Justice Department and states will share transcripts of depositions and other findings related to their investigations with the class action lawyers. There are talks with a mediator scheduled for this fall to consider a settlement of all the cases, but for now, that looks like more of a formality than a sign that a settlement is in the works.

U.S. eBook price-fixing trial set for June 2013; Apple and publishers still have issues

Reuters reports that Judge Denise Cote has set June 3, 2013 as the the start date for the U.S. eBook price-fixing trial against Apple, Macmillan and Penguin. According to another report from the Associated Press, the Department of Justice has asked the judge for permission to continue gathering evidence for the case until March of 2013, but Apple wants the DOJ to wrap up its discovery by the end of 2012. (Apparently, the publishers are siding with the DOJ on this issue, not Apple.)

A third report from CNET News says that the three publishers that are in the process of settling with the DOJ--Hachette, HarperCollins and Simon & Schuster--are asking to be treated as "non parties" to the lawsuit, so that they won't be required to provide discovery in the case unless a party provides "good cause." The DOJ says that the publishers aren't entitled to "special treatment" because there was no allowance for it in their settlement agreement, the companies are likely to be "sources of highly relevant evidence," and they've turned over documents to European investigators that they haven't turned over to the DOJ.

Penguin to test eBook lending with the New York and Brooklyn Public Libraries--and 3M

The New York Times reports that, after exiting the library market in February, Penguin is planning to reenter the market--with a different distribution partner. Penguin stopped distributing new eBook titles through OverDrive last November when it learned that OverDrive was violating its contract by serving eBooks to Kindle users through Amazon's servers, and cut off all eBooks to OverDrive in February. Now, Penguin is working with 3M, the New York Public Library and Brooklyn Public Library on a year-long pilot eBook lending program to begin in August. Penguin will make more than 15,000 frontlist titles available to the libraries, but there will be a six-month delay from the books' initial publication dates, in order to help prevent cannibalization of eBook sales. According to a Penguin spokesperson, library pricing for the eBooks will be similar to consumer prices, with licensing on a one borrower/one copy basis. If the program is successful, Penguin and 3M will roll it out to libraries around the country.

This test is a huge win for 3M, and a slap in the face for OverDrive, since public libraries that want eBooks from Penguin will have to get them from 3M. The company has already signed up Random House and HarperCollins, and is adding publishers at a rapid pace.

Self-published Iowa writer gets seven-figure deal from Penguin

The Des Moines Register reports that Tracy Garvis Graves, an author whose manuscript was rejected by 14 publishers before she decided to publish it herself, has just signed a two-book deal with Penguin imprint Dutton & Plume for what she reports as "seven figures." The contract covers On the Island, the title that she self-published, and Covet, a novel to be released in 2013.

Graves' manuscript was rejected by 40 book agents and 14 publishers before she spent $1,500 for editing and formatting and posted the eBook to Amazon. It only sold 100 copies in the first month, but then sales took off, thanks to word-of-mouth and thousands of positive online reviews. She's also released the title as a paperback, and as of last week, it rose to #7 on the New York Times' combined print and eBook bestseller list. Amazon, HarperCollins and Dutton & Plume all bid for book rights; Graves sold the rights to Dutton & Plume because of Penguin's relationship with Temple Hill Entertainment, the production company that made the "Twilight" films. They also work with MGM, which acquired the film rights to On the Island.

Graves has quit her day job at Wells Fargo Bank and is focusing on writing her second book.

Did Apple and the book publishers get what they wanted?

With all the Sturm und Drang surrounding the eBook price-fixing charges against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster, and the counter-charges that their actions prevented Amazon from establishing an eBook monopoly, a fair question to ask is: Did Apple and the publishers get what they were after? The short answers are "no," "yes" and "don't forget the Law of Unintended Consequences."

Apple: It may have hoped to become a major bookseller by getting the publishers to force all its competitors to sell eBooks at the same price, but if that was its hope, so far it's failed. Apple's eBook market share in the U.S. is, at best, in single digits, while Amazon still controls around 60% of the market and Barnes & Noble has approximately 25% market share.

The publishers: They wrested pricing control for their eBooks away from Amazon and were successful in getting Amazon to raise its prices. They also, at least in part, enabled Barnes & Noble to become a viable competitor to Amazon in the eBook market (although a good part of the credit should also be given to B&N's own strategies, including selling and supporting its Nook tablets and eReaders in its stores.)

The unintended consequences:

1. Amazon moved quickly to develop a supply of titles that are beyond the control of the Big 6 publishers, first by strengthening its self-publishing efforts with the Kindle Direct Publishing program, and then by entering the publishing business itself with Amazon Publishing. Amazon is now competing directly with the Big 6 for contracts with top authors and licenses for popular backlist titles. Had the publishers not taken away Amazon's pricing power, the company probably would have gone much slower in building up its own publishing business.
   
2. Price-fixing lawsuits have been filed in the U.S. by the Federal government, 16 state governments and private individuals, and in Canada by private individuals. Lawsuits are being considered by the European Commission and Australia. These lawsuits have the potential to cost Apple and the publishers hundreds of millions of dollars in damages and legal costs, not to mention years of management distraction, reputational damage and constraints on how they do business. Hundreds of millions of dollars may be negligible to Apple, which has $110 billion in cash and equivalents, but the cost is much more significant to the publishers. 

Given Apple's inability to turn the deal into significant market share and the publishers' inability to keep Amazon from maintaining control of a majority of the U.S. eBook market, it's hard to argue that Apple's and the publishers' actions were worth the cost.

David vs. Goliath? How about Goliath vs. Goliath?

In the U.S. Federal, state, and private eBook price-fixing lawsuits against Apple and five of the Big 6 publishers, some observers have equated the battle to David vs. Goliath. The defendants are David and Goliath is Amazon, which, they argue, would have monopolized eBooks and wiped out the publishers if they hadn't imposed agency pricing. The problem with both the analogy and the rationalization is that most of the Davids are actually Goliaths. Here's a rundown:

• Apple: Until recently, it was the most valuable company in the world, with $100 billion of cash and equivalents on its balance sheet and profit margins that Amazon, and the other defendants, would kill for. 2011 revenues: $108.25 billion.
• Hachette: The second-largest publisher in the world, and a division of Lagardère Group, which owns magazines including ELLE and Paris Match, a variety of television broadcasters in Europe, a network of duty-free shops, and 7.5% of EADS, which is the parent company of Airbus. Parent company 2011 revenues: $10.02 billion.
• HarperCollins: A division of News Corporation, which owns Fox, The Wall Street Journal (which has been one of the most vocal critics of the Justice Department's lawsuit,) the New York Post, a bunch of newspapers in the U.K. (which are embroiled in an ever-widening phone hacking scandal,) newspapers and broadcasters in Australia, 39.1% of British Sky Broadcasting, and a lot more. Parent company 2011 revenues: $33.4 billion.
• Macmillan: A division of Georg von Holtzbrinck Publishing Group, owner of Macmillan Education, Nature, Scientific American, several German publishers and the newspaper Die Zeit. Privately held; parent company 2010 revenues: $2.98 billion.
• Penguin: A division of Pearson PLC, the world's largest education and trade book publisher; owns Pearson Education, the Financial Times and 50% of The Economist. Parent company 2011 revenues: $9.45 billion.
• Simon & Schuster: A division of CBS Corporation, which owns the CBS television network, multiple television and radio stations in the U.S., Showtime, CBS Television Distribution (which used to syndicate Oprah and still syndicates Dr. Phil and other shows,) and CBS Interactive (which owns CNET among other Internet properties.) Parent company 2011 revenues: $14.2 billion.

Amazon is certainly no slouch; its 2011 revenues were $48 billion. However, that compares to total revenues of the defendants of $178.3 billion. Even if you leave Apple out of the comparison, the parents of the five publishers had revenues of $70 billion. You can argue that publishing is only a small portion of the revenues of some of the parent companies, but books only represent a small portion of Amazon's revenues as well. In 2011, Amazon's media sales, which include books. music and video, were $6.01 billion--12.5% of the company's total revenues.

In short, the conflicts between the five publishers and Amazon aren't David vs. Goliath--they're actually Goliath vs. Goliath. When Apple is added into the mix, it's Amazon that could justifiably be called David.

It's On: U.S. Justice Department sues Apple and five publishers for eBook price-fixing, settles with three of the publishers

The long-rumored eBook price-fixing lawsuit against Apple and five of the Big 6 publishers (Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster) was filed in Federal court in New York today by the U.S. Justice Department. In addition, the Attorneys General from Texas, Connecticut, Ohio and Pennsylvania are filing their own lawsuits today in Federal court in Texas. Here's a summary of U.S. Attorney General Eric Holder's remarks:

• Hachette, HarperCollins and Simon & Schuster agreed to a settlement, which must be reviewed by the court, with the following terms: 
• The publishers will go back to the wholesale model and allow retailers to set their own prices for eBooks.  Update: Publishers Lunch Direct has clarified the situation (and given the actual verbiage in the settlement, I use the word "clarified" advisedly.) The three publishers will be allowed to continue to offer agency contracts, and they can use variable commissions and discounts to encourage resellers to limit their discounting of eBooks to consumers. However, they can't prohibit resellers from offering discounts. Publishers Lunch Direct claims that this clause prohibits resellers from selling eBooks below the retail price less commission set by the publishers, but I don't read it that way: Resellers can sell eBooks at any price they choose and take as much of a loss as they want. In addition, resellers can refuse to purchase on agency terms, but publishers can refuse to sell to them.
• They will terminate their "Most Favored Nation" agreements with Apple, Amazon, Barnes & Noble and other eBook retailers. 
• They're prohibited from placing constraints on resellers' ability to offer discounts on eBooks for two years. 
• They're prohibited from conspiring or sharing competitively sensitive information with their competitors for five years. 
• They must implement a strong antitrust compliance program. 
• Justice charges that the defendants held regular, near-quarterly meetings to discuss confidential business and competitive matters as part of a conspiracy to raise, fix and stabilize retail prices. 
• They also mutually agreed to seize pricing authority from resellers, agreed to pay Apple a 30% commission on eBooks sold through the iBookstore (and to impose the same 30% on other resellers,) and used most-favored-nation provisions to guarantee that no reseller could sell their eBooks at a price lower than Apple's. 
• According to the statement, "...one CEO allegedly went so far as to encourage an e-book retailer to punish another publisher for not engaging in these illegal practices." 
• Acting Assistant Attorney General Sharis A. Pozen quoted from the complaint as follows: "One executive said that, 'the goal is less to compete with Amazon as to force it to accept a price level higher than 9.99.' And yet another said, 'we’ve always known that unless other publishers follow us, there’s no chance of success in getting Amazon to change its pricing practices.' Our complaint also quotes Apple’s then-CEO Steve Jobs as saying, 'the customer pays a little more, but that’s what you [he’s referring to the publishers here] want anyway.' As you can see, we allege that these executives knew full well what they were doing. That is, taking steps to make sure the prices consumers paid for e-books were higher." 

Apple: Don Quixote de Cupertino?

Update, April 11, 2012: Bloomberg is reporting that the U.S. Justice Department filed suit this morning against Apple, Hachette, HarperCollins, Macmillan, Penguin and Simon & Schuster for eBook price-fixing; Hachette, HarperCollins and Simon & Schuster settled with the Government.

Bloomberg reported that Apple, Penguin and Macmillan are unlikely to agree to a settlement with the U.S. Justice Department over eBook price-fixing accusations, and are preparing to go to court. The three other publishers in the case, Hachette, HarperCollins and Simon & Schuster, are said to be very close to agreeing to a settlement with the Justice Department.

Regular readers of my blog know my opinion on the subject: There's very strong evidence, even if circumstantial at this point, that the publishers imposed agency terms on all of their resellers at almost exactly the same time, including the exact same commission rate, and that all of them threatened to stop supplying eBooks to any reseller who refused to agree. Apple's precise role in the scheme isn't clear, but it's known from Steve Jobs' own words that Apple proposed the scheme to the publishers and knew that it included the part about refusing to sell eBooks to any reseller (including Amazon) that didn't agree.

Apple may believe that it didn't coordinate the actions of the publishers (or that it's covered its tracks well enough that the Justice Department can't prove that it did coordinate their actions.) It may also not want to agree to a settlement for fear of its impact on the civil price-fixing case underway in New York. However, in my opinion, Apple is taking a huge risk by not settling the case before it goes to court.

As it looks now, Hachette, HarperCollins and Simon & Schuster are close to a settlement. If they settle, they'll enter into what's called a consent decree, which doesn't require them to assume guilt for the charges. They'll be required to change their business practices, possibly pay a fine, and agree to court supervision for a limited period of time. The pain and reputational damage will be over quickly. For Apple, Penguin and Macmillan, however, their senior executives are in for months of depositions, they'll be required to provide many thousands of documents as part of the discovery process, and the court trials and appeals will likely take years to play out.

In addition, the Justice Department will be able to compel Hachette, HarperCollins and Simon & Schuster to testify against the other three companies. They'll have immunity as a result of their settlement, and they'll have no reason to protect their competitors or Apple. This is a standard part of most price-fixing cases: One or more defendants cut early deals with the Justice Department and gain immunity, and then they provide evidence against the other players in the price-fixing scheme.

The worst possible outcome for Apple would be for it to lose in court, even if it eventually wins on appeal. All they have to do is look at Microsoft to witness the damage that could be done. That case was eventually settled with a consent decree, but Microsoft was under court supervision for ten years. The company could no longer pursue the aggressive tactics that it had used in the past to suppress competition. Most importantly, it became a convicted monopolist, which changed both the public's perception of the company and the stakes for any future litigation. (When Bill Gates eventually passes away, stories about his philanthropy will have to share time with the videos of his depositions.) The press was no longer afraid of retaliation by Microsoft's public relations department for running negative stories, and Microsoft lost control of its messages.

Apple is unafraid of litigation, as witness its myriad lawsuits against Android licensees. In Walter Isaacson's biography, Steve Jobs clearly saw Android as not only a theft of Apple's intellectual property by Google, but a personal betrayal by Google Chairman Eric Schmidt, who served on Apple's board of directors for years. Jobs swore that he would spend Apple's entire cash horde, if necessary, waging "thermonuclear war" on Google and Android.

Unfortunately for Apple, its cases against Samsung, HTC and Motorola have been far from the "slam-dunks" that Jobs thought they would be. Apple has estranged perhaps the most important component supplier for its mobile products, Samsung, and it's being forced to bring alternative vendors up to its quality and deliverability standards. For example, Apple had planned to launch the new iPad with three LCD vendors, LG, Samsung and Sharp, but only Samsung was able to meet Apple's quality requirements and ship in the necessary quantities in time for the launch. In addition, some of Apple's own patents are being challenged and could be invalidated.

Apple, like Don Quixote in Cervantes' novel, enjoys its battles. Unlike Quixote, however, Apple's opponents fight back, and are likely to hurt Apple much more than Apple hurts them.

Library eBooks: A simple solution to a difficult problem

Whether school and public libraries should have access to eBooks depends on what kind of a publisher you are. If you're a smaller general or specialty publisher, it's not an issue--your company most likely already supplies eBooks to libraries. However, if you're one of the Big 6 trade publishers, there's a 66% chance that you don't offer eBooks to libraries at all. Only HarperCollins and Random House offer their eBook titles to libraries, and both companies apply significant restrictions: HarperCollins titles can only be checked out 26 times before they have to be repurchased, and Random House recently tripled the cost that libraries pay for their eBooks. Penguin, which once sold eBooks to libraries, has pulled out of the market, and Hachette, Macmillan and Simon & Schuster don't sell eBooks to libraries at all.

Publishers that either don't sell to libraries or sell with restrictions argue that library eBook lending cannibalizes potential sales of both eBooks and print. They say that it's as easy to borrow an eBook as it is to purchase one from Amazon or Barnes & Noble. Print books require patrons to visit their local library in order to check-out and return them, and publishers want libraries to implement a similar kind of "friction" when lending eBooks (although publishers generally won't go on the record about which kinds of "friction" would be acceptable.)

A variety of solutions have been suggested, from forcing patrons to physically visit a library in order to check-out eBooks, to slicing and dicing collections and parceling out different pieces at different times to libraries. In my opinion, forcing patrons to visit libraries in order to check-out eBooks completely negates the value of the Internet and online access. It takes the progress of library access back almost 20 years. As for making available different batches of titles at different times, that's likely to become a formula for patron confusion. Consider two titles, published by the same publisher on the same day. One could be available for lending immediately, but the other might not be available for months, if ever. Who will explain that to patrons? Librarians, of course, who have better things to do with their time.

I'd like to suggest a simpler, easier approach to the entire problem for those Big 6 publishers who are afraid of what libraries will do to their businesses: Delay the release of their eBooks to libraries. If your street date for a title is X, release the eBook version to libraries at X plus 90 or 120 days. That enables the retail channel to absorb the initial demand, and those consumers who have to read the title right away will buy it. The technical name for this approach is windowing, and it's been done by the motion picture industry for decades. In the movie business, there are many windows (for theaters, pay-per-view, DVD/Blu-Ray, streaming, pay cable, free cable/broadcast, airlines, etc.), but a single window for library eBooks would be much simpler to understand and explain.

If publishers are serious about supporting libraries and aren't looking for ways to discourage eBook borrowing by making it as difficult and confusing as possible, a single library eBook window would be the best way to protect publishers' financial interests (at least until eBooks become the primary book format) while providing library access to all eBooks in a reasonable amount of time.

What would you rather have: A monopoly or price-fixing?

Last week, The Wall Street Journal reported that the U.S. Justice Department has warned Apple and five of the "Big 6" trade publishers (Macmillan, Penguin, Hachette, HarperCollins and Simon & Schuster) that it's planning to file suit against them for price-fixing as a result of their implementation of agency pricing for eBooks. Here's a brief overview (and a disclaimer: I'm not a lawyer, and this isn't legal advice):

Until 2009, virtually all publishers in the U.S. sold their books (both print and eBooks) to resellers under the wholesale model. Typically, books would be sold by publishers to resellers at 50% of their suggested list prices--the prices printed on the book covers. Resellers were then free to resell the books at any price they desired. This was the model (along with co-op payments for display locations at the front of bookstores and preferred positions on bookshelves) that Barnes & Noble and Borders used to drive hundreds, if not thousands, of independent booksellers out of business with discounting. In many cases, the "big box" booksellers sold books for less than the price that independent booksellers paid to buy them.

Amazon used the same model to launch its entry into the eBooks business. Amazon's strategy was to sell all its eBooks for $9.99 or less, even if that meant selling them below the wholesale price. Amazon quickly controlled as much as 90% of the U.S. eBook market.

In 2009, as part of its entry into the eBook business, Apple proposed a different model to the Big 6 publishers (all of the companies under investigation plus Random House), which became known as agency pricing. Under agency pricing, booksellers don't actually purchase the books that they sell to customers--instead, they act as "agents" for the publishers and take a commission on each sale, which Apple set at 30%. Since the booksellers don't own (take title of) the books, the publishers can set the prices, and the booksellers are obligated to sell the books at that price. Five of the Big 6 publishers implemented agency pricing for their eBooks (Random House waited a year before it implemented agency pricing, which is why it's not under investigation.)

The five participating publishers went to their resellers at approximately the same time, and told them that, regardless of when their existing distribution contracts were to expire, their contracts would be immediately amended to require agency pricing of eBooks. Any reseller who refused would have their supply of eBooks cut off. The first skirmish was between Amazon and Macmillan--Macmillan implemented agency pricing and Amazon briefly stopped sales of all Macmillan titles, but soon relented. That opened the floodgates, and Amazon agreed to agency terms from the four other publishers (although it has refused to accept agency terms from any additional publishers except for Random House).

So far as consumers are concerned, the net result of agency pricing is that prices of eBooks from the Big 6 publishers have gone up substantially, from $9.99 to as much as $16.99. eBooks from the Big 6 were once less expensive than paperbacks; now, in many cases, they're more expensive. In some cases, eBooks are even more expensive than the discounted price of hardcovers.

Both the U.S. Justice Department and the European Union are investigating Apple and the five publishers for price-fixing. The external evidence is that all five publishers implemented the same pricing policies at the same time, and all five threatened to cut off supply to any reseller who refused to agree to the new terms. In Walter Isaacson's biography of Steve Jobs, Jobs is quoted as saying:

"We told the publishers, 'We'll go to the agency model, where you set the price, and we get our 30%, and yes, the customer pays a little more, but that's what you want anyway.' 

Jobs continued, "They went to Amazon and said, 'You're going to sign an agency contract or we're not going to give you the books."

That certainly gives the appearance of an organized effort to raise prices, orchestrated by Apple and executed by the five publishers. Publishers and their defenders argue that agency pricing is necessary to prevent Amazon from getting a monopoly in the eBook market, which, while only 20% or so of the "Big 6" publishers' sales, is likely to become 50% or more in a few years. A monopoly would give Amazon control over pricing. Advocates of the government's position say that the actions of Apple and the five publishers have substantially increased consumer prices for eBooks, and that it's hypocritical for companies like Barnes & Noble to support agency pricing when they used wholesale pricing to wipe out their independent competitors.

One of the most important things to understand about U.S. antitrust enforcement is that it's illegal to be a monopolist, but it's not illegal to have the potential of becoming a monopolist. At the time that Amazon had a 90% eBook market share, the eBook market was new ("nascent") and both small in units sold and dollar volume.  The Justice Department almost never goes after a monopoly in a nascent market. Today, Amazon has between 60% and 65% of the U.S. eBook market--a big share to be sure, but not a monopoly. If agency pricing went away tomorrow and Amazon went back to its old pricing strategy, it's very unlikely that the millions of people who own Nooks and eBooks from Barnes & Noble, Apple and other resellers would throw away their eReaders, tablets and eBook collections and start buying from Amazon. So, Amazon didn't have a monopoly, doesn't have a monopoly now and isn't likely to have one in the future.

On the other hand, price-fixing is illegal, and it doesn't even require a formal agreement among the parties to prove that price-fixing exists. There's no question that agency pricing has raised priced for consumers, at least for titles from the "Big 6". (Statistics rolled out by some defenders of agency pricing that show that eBook prices have dropped also include titles from self-publishing authors, some of whom sell their eBooks for as little as $0.99.)

Publishers argue that Amazon is a very difficult company to do business with, and all the evidence I've seen supports them. However, tough bargainers are a fact of life: Wal-Mart has made the lives of vendors miserable for years while pursuing an "Always the Lowest Price" strategy, but vendors have learned to live with it. Taking illegal action to prevent a company from becoming a monopoly is still illegal.

My year-end waste of time: Predictions for 2012

I've decided to participate in one of the most potentially embarrassing annual blogging rituals: Predictions for the coming year. So, for what it's worth, here are my predictions for 2012, in no particular order:

eBooks and Publishing

• Both the European Commission's Directorate for Competition Law and the U.S. Justice Department will file suit against Apple and five of the "Big 6" trade publishers (Lagadere's Hachette publishing group, News Corporation's Harper Collins, Holtzbrinck's Macmillan, Pearson's Penguin Group and CBS' Simon & Schuster) for eBook price-fixing under the agency pricing model. Bertelsmann's Random House most likely won't be charged, because it joined in agency pricing long after the other five publishers. All the companies charged will strongly deny any conspiracy to fix prices, but they'll all eventually agree to a consent decree (and the European equivalent) before the cases go to court. The settlement will require Apple and the publishers to make cash payments for consumer damages, and the agency model will be discarded. eBook distribution will go back to the wholesale model.
• There's also a possibility that the U.S. government and European Union will use the antitrust litigation as a lever to force the Big 6 to make their eBooks available to libraries on commercially reasonable terms. Currently, only Harper Collins and Penguin make their titles available for library lending, and both companies impose significant restrictions.
• eBook sales in early 2012 will follow the same pattern as the last few years--there will be a huge burst of sales in January and February as millions of consumers who received eReaders and tablets as holiday gifts stock up on titles. However, the year-to-year growth rate in eBook sales will drop, due both to the increased share of eBooks as a percentage of all book sales and higher prices from the Big 6 publishers.
• Even though the growth of eBook sales will slow, print sales will continue to decline. Independent booksellers in the U.S. won't pick up the slack from the closure of Borders, nor will they make big strides in increasing their overall share of U.S. book sales.
• The Big 6 publishers' pricing policies will continue to encourage sales growth for smaller publishers and self-publishing authors, as consumers experiment with less-expensive titles and find that many of them are just as good as titles from the top publishers.
• While the number of titles from medium, small and self-publishers continues to grow, the Big 6 will continue to cut back on the number of titles that they release, focusing even more on pre-sold authors and titles, series and backlist titles that are reissued with a variety of value-adds.
• The "eSingle revolution" (short eBooks, no more than 50,000 words and typically 30,000 words or less) will grow, with more conventional book publishers offering titles. In addition, more media companies from other fields (magazines, broadcasting, cable and the web) will enter the eBook market with eSingles, either by themselves or in partnership with established book publishers.
• $99 will become the top-end price for dedicated eReaders sold in the U.S.; someone (probably Amazon) will go to $49-$59 for an entry-level model. The ad-supported/no-ads issue will become moot, as consumers show that they're perfectly happy with a cheaper, ad-supported eReader.
• The tablet market in 2012 will look very much the same as the market at the end of 2011: Apple will continue to dominate the high end of the market, with two lines of tablets: A new "iPad 3" (although I'm not sure that'll be its name) at the current iPad 2 prices, and the existing iPad 2, possibly with fewer storage and broadband options, at $100 or so below its current prices (for example, $399 for a 16GB model). At the low-end, a variety of tablets will compete in the $149 to $249 range, led (at least for the first few months) by Amazon. I wouldn't at all be surprised to see Barnes & Noble drop prices of both the Nook Color and Tablet by $50, to $149 and $199 respectively.

Cameras & Camcorders

• We're almost certain to see new cinema camera models from Canon in 2012. The prototype cinema camera based on the EOS body will be launched, as well as at least one new model in the C3XX range, with improved electronics including auto-focus, auto-aperture and auto white balance and 10-bit log output. The new EOS model could be announced as early as NAB in April, and the new C3XX model is likely to be shown at IBC in September.
• Panasonic's AG-AF100/101 is getting a little "long in the tooth", so I expect a refresh of the model in time for NAB in April. I also expect the GH3 to be announced in the first half of the year.
• Given all of Sony's 2011 EVIL, DSLR and camcorder announcements, I don't expect any big announcements from Sony in 2012.
• AVCHD 2.0 (also called AVC Progressive) will become ubiquitous on all new cameras and camcorders supporting AVCHD.

Motion Pictures

• We'll see major consolidation at the U.S. movie studios, like what we've already seen at Paramount, with even deeper cuts. Studios will become even more conservative about which titles they greenlight for production, continuing to focus on remakes, series and pre-sold titles (very much like the big publishers). This risk minimization strategy will lead to even more boxoffice and home video revenue declines.
• Online movie rental services such as Netflix and Amazon will continue to increase their share of home video revenues, but what could have been a huge win for Netflix will be a much more competitive market, due to Netflix's self-inflicted wounds from 2011.
• Studios will rethink the value of 3D given audiences' rejection of the format, and will put more effort into using 3D well on a smaller number of "event" titles. That means that 2D-to-3D conversion, which has never worked well, will go away. Studios will have to come to grips with the fact that 3D, like Blu-Ray before it, will not be their financial savior. Even well-done 3D won't save movies that audiences don't want to see.
• UltraViolet, the "online digital locker" system supported by most of the major studios, will fail to get significant market share, although the studios won't give up on it in 2012. Consumers will find it too hard to use, not worth the effort and not a compelling reason to go back to buying DVDs and Blu-Ray discs.
• With an handful of exceptions, independent films will reach audiences through VOD and online streaming services, not through theatrical exhibition or sales of physical media.

The publisher bypass operation

I just read an article in the latest issue of Wired about the new breed of subscription music services--companies like Spotify, MOG and turntable.fm. The problem with these services (and for that matter, conventional purchase services like iTunes) is that artists get a very small share of the revenue. Most artists are now getting the majority of their income from live performances, not music sales. Where concerts once served to promote album sales, now digital music promotes live performances.

Online video distribution has had a similar impact on movies, television and original video. Most of the revenues from movies and television shows sold or rented by Netflix, iTunes, Amazon, etc., goes to the studios and distributors, not to the original producers. Original video produced for YouTube and other services is incredibly hard to monetize; only a few series, like "The Guild" and "Easy to Assemble", have sponsorship or distribution deals that directly compensate the producers. Most original video has to make do with a trickle of advertising revenue, modest sales from iTunes, or nothing at all.

That brings us to books, where the situation for independent authors is very different. Amazon will pay as much as 70% of the revenue from sales of eBooks to self-publishing authors, and other resellers will typically pay 35%. Compare that with the typical 10% to 12% royalty on wholesale price paid by publishers, and self-publishing starts to look very appealing. Yes, the self-publisher has to pay upfront for editing and design, but many publishers recoup those costs before they start paying royalties. In addition, unless you're a top author, publishers will do little or nothing to promote your title, so you'll have to hire a publicist or do the work yourself.

It's true that print still represents the majority of book sales, but the market is quickly shifting to eBooks. Some of the most popular titles are already selling almost as many copies of eBooks as print, and heavy book readers are adopting eBooks faster than any other group. The majority of book sales are likely to come from eBooks by the middle of this decade.

So, where does that leave publishers? Penguin, for one, is getting into the self-publishing business through its Book Country online service. In addition to charging upfront fees for formatting and designing eBooks, Book Country demands a hefty fee for distributing self-published eBooks to online bookstores--which self-publishers can do themselves. Other publishers are experimenting with "augmented" eBooks--containing audio, video and animations--which they believe are beyond the ability of self-publishers to create. There are two problems with that approach:

1. Companies such as Vook are launching eBook creation tools that will allow self-publishers to make augmented eBooks, and
2. Sales figures to date suggest that there's not a big market for augmented eBooks. For example, Vook's original strategy was to publish augmented eBooks itself, but the company couldn't sell enough to sustain its business, so it's now focusing on licensing its platform to others.

To be sure, publishers still provide valuable services, especially for top-tier authors--but book publishing is the first industry where creators (writers) can compete effectively with distributors (publishers). In the near future, the big publishers will likely find themselves focusing on two categories:

1. New releases from "A-list" authors that can command high prices and sell tens of thousands of copies in print, and
2. Milking their existing backlist for eBook reissues, bundles, and other ways of delivering "old wine in new bottles".

Some mid-tier authors may find a home with smaller specialty publishers, but almost everyone below the "A-list" will have to self-publish. We're likely to see some self-publishing authors join together in "United Artists"-like organizations to create "quasi-publishers" that perform some of the functions of existing publishers, such as design, publicity and promotion. The participating authors could serve as editors for each other.

By mid-decade, we're going to have far fewer and smaller "old-style" publishers. On the other hand, we'll have far more self-publishers and quasi-publishers that are performing most of the tasks previously done by publishers themselves. The industry power will reside with resellers such as Amazon and Barnes & Noble in the U.S., and their equivalents in other countries around the world.

Books: The container is not the information

Update, March 4, 2010: Penguin Group is well on its way to implementing the future of eBooks that I described in this post. John Makinson, Chairman and CEO of Pearson's Penguin Group spoke at the Financial Times' Digital Media & Broadcasting Conference in London on March 2nd. He showed some concepts for how Penguin plans to transform books into interactive applications for Apple's iPad.

Not a lot has changed in the structure of printed books since the time of Gutenberg. A typical book has a title page, a table of contents, a forward and/or introduction, a set of chapters, and sometimes, an index. Books were organized the way they were because it made it relatively easy for readers to navigate through the content. Today, most eBooks follow the same design and organization as print books, many even going so far as to precisely duplicate the layout of the original print book. However, an eBook is not a print book, and there's absolutely no reason why it needs to be interacted with in the same way as a print book.

In the simplest possible terms, a book is a container for information. The conventions that have developed over the centuries for organizing that information were appropriate for a print medium, but once a book is digitized, the ability to access and utilize the information contained in the book increases exponentially. For example, why bother with an index when a search engine will let you find anything in the book faster and more easily? If you can search for topics and relationships, why do you need a table of contents? Why bother to organize the book into pages when there's no standard page size for eBook readers and text will reflow according to the display or window size being used?

Is there a reason for a book designer to sweat over the details of specific typefaces and sizes when the user can change them with a push of a button or a mouse click? Instead of the page references used by writers and teachers to direct readers to a particular place in a book, why not use named anchors and hyperlinks to identify and navigate to important "landing zones"?

Once a print book is digitized, it can be incorporated into databases and searched along with other documents and information sources. Why limit the reader to just the information contained in the eBook in question? If the reader enters a query and the search engine finds better (or more recent, or more detailed) information from a source other than the eBook itself, shouldn't it point the reader to that information?

If an eBook can be read on a computer that supports audio and video playback and interactive content, why should the eBook itself be limited to text and static images? Replace the static illustration of a physics experiment with a dynamic animation that readers can interact with. Instead of a color image of an elephant, show a video of elephants in the wild. Instead of simply including Walt Whitman's poem "America", link to an audio recording from 1890 of Whitman himself reading the first four lines of the poem.

In short, a book is a container, not the information itself. eBooks limit their potential if they're nothing more than an electronic facsimile of the original print book. The contents of a print book should be the starting point for an eBook, not the end point.