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.

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. 

Part 5: Everyone is becoming a “hyphenate”

The silos between creative professionals are breaking down, just as the silos between types of media are breaking down. In established media, everyone has their own, well-defined role: Writers, editors, designers, artists, musicians, composers, singers, producers, directors, actors, etc. Each role is further defined by media, so, for example, there are writers for books, plays, movies and television. Historically, there have been “hyphenates”—people who perform multiple roles, such as the singer/songwriter or the writer/director, but they’ve been fairly rare.

Today, hyphenates are quickly becoming the rule rather than the exception, at least for Internet-based media. It’s not uncommon to find one person performing multiple roles. It saves time and money, and gives them more creative control. One person can be a composer, musician, producer and audio engineer. Another can be a screenwriter, director, producer and actor. Yet another can be an author, editor and book designer.

At the same time that creators are doing more, publishers should be doing less. The typical model for book publishers, especially those doing non-fiction, is to find writers, assign them subjects, provide editorial direction, do copy editing and fact checking, design the books' covers and layouts, do the typesetting, put together marketing plans, and sell the books to retailers and distributors. Most publishers don't start farming out work until it's time to actually print and bind books, or convert book files into retailers' eBook formats.

The job of publishers in the future is going to be facilitating, not performing, the work of creators. Publishers will become a member of the creative team instead of the driving force—part angel investor, part project manager and part marketer. The publisher’s underlying goal will continue to be to make money, because that’s how profits can be plowed back into underwriting more creation. However, they’ll do that by supporting their creators, not making creative decisions for them.

And that brings us to the end of this series. Here's a summary:

1. The role of publishers is being transformed by the Internet, mobile devices and wireless broadband.
2. Publishers are in the business of entertainment, information or education, not creating and selling print books and eBooks.
3. Being successful as a 21st Century publisher requires going “all in” on all types of media.
4. As a practical matter, there are no more financial or technical barriers to entry.
5. Everyone is performing tasks that used to be done by multiple creators, and publishers are becoming facilitators and supporters of creative teams.

Part 3: No more silos

In Part 2 of this series, I proposed a new definition for publishers. Nothing within the definition of the publisher's role requires, or even presupposes, printed books or eBooks. It can include websites, web apps, native apps, databases, videos and podcasts—as well as print and eBooks. However, today's publishers are missing a lot of the experience and skill sets that are necessary to create this kind of content—and to get it, some publishers are engaging in marriages of convenience. For example, Random House recently launched an operation called Random House TV—but rather than partnering with a producer with extensive dramatic television experience, it partnered with Fremantle Media, a company owned by its parent, Bertelsmann, that’s best known for reality and game shows.

Being successful as a 21^st Century publisher requires going “all in” on all types of media—nothing can be “out of your wheelhouse.” The silos used to be easy to define: Your newspaper was delivered to your house each day by a paperboy on a bicycle. The magazines to which you subscribed arrived in your mailbox. You listened to the radio using one box and watched television using another. You bought books at the local bookstore or borrowed them from the local library. Today, everything arrives the same way (over a high-speed Internet connection or wireless broadband) to the same box (your tablet, smartphone or PC) wherever you happen to be located.

Just because you can’t limit yourself to any one silo anymore, it doesn’t mean that you have to have all of the necessary expertise in-house—in fact, there’s never been a better time to use outside talent. However, as with the Random House example above, it's not enough to work with people who have generic experience with a medium. Instead, it’s critical to partner with the right people, with the right varieties of experience and talent.

Part 2: What business are you in?

In 1960, Harvard Business School professor Theodore Levitt wrote a landmark article for the Harvard Business Review titled "Marketing Myopia." Levitt focused on industries that were struggling at the time--among those that he used as examples were railroads and motion pictures. Levitt wrote that in both these cases, management forgot what businesses they were really in. Railroads thought they were in the railroad business when they were actually in the transportation business. As a result, they allowed competitors (trucking firms, package delivery services and air cargo companies) to take away huge portions of their revenue and leave them with the niche of slowly delivering huge quantities of materials.

Movie studios thought they were in the movie business, not the entertainment business. As a result, their management first dismissed television, then denied its impact, and then refused to make their movies available for broadcasting. It was only after most of the movie studios came close to or entered bankruptcy that they realized that they had to do business with television networks and stations if they hoped to survive.

When you're in a business for several decades, it becomes natural to think "inside the box." The barriers to entry (cost, technology, experience, customer habits, etc.) are simply too great for new entrants to overcome. Rather than redefining your business, you focus on doing what you already do less expensively. Customers have purchased your goods or services for as long as you've been in business, so whatever you're doing is working, and you should keep doing the same things. That mindset makes legacy industries vulnerable to disruptive innovators: Trucks replaced railroads, and television replaced going to the movies.

The lessons from fifty years ago are still being learned today, and nowhere more than in the book industry. Book publishers aren’t in the business that most of them think they’re in. If you talk to publishers, or for that matter, booksellers, most of them will tell you that they’re in the business of selling stacks of nicely bound paper printed with well written and edited text, and their digital simulacra, eBooks. In reality, they’re in one of three businesses: Entertainment, information or education.

Once the focus changes from manufacturing and selling books to performing a job for your customers, the definition of what a publisher does changes radically:

1. Deliver entertainment, information and education
2. Quickly and cheaply
3. To PCs and mobile devices as well as to legacy media
4. Via the Internet and wireless broadband connections, as well as legacy channels of distribution

Digital Book World's new eBook bestseller list is being compiled by a Big 6 employee

Yesterday, the Digital Book World website owned by F+W Media announced a new bestseller list for eBooks, and claimed that its methodology would make the list more accurate than those published by other sources. In its release of the first edition of the list, Jeremy Greenfield, the site's Editorial Director, wrote that the new list is "a new weekly venture from Digital Book World in partnership with Iobyte Solutions." There's nothing more in the article that describes Iobyte Solutions. A press release announcing the new list has extensive quotes from Greenfield, F+W Media Chairman and CEO David Nussbaum, Iobyte Solutions "managing partner" Dan Lubart, and several others. Other than the quote from Lubart, nothing in the release describes Iobyte Solutions. Finally, Lubart himself wrote a post on Digital Book World, describing the methodology used for compiling the list. Here's how Lubart describes himself in the post:

About Dan Lubart

Dan Lubart is a technology strategist and data junkie who founded Iobyte Solutions in 2000 following a previous decade of solo consulting. Still fairly new to the publishing industry, Dan has been involved with digital disruption in the past, spending a year at Universal Music Group right around the time Napster was rearing its head and now focuses mainly on the familiar challenges and opportunities of the eBook marketplace. With Iobyte, Dan also developed a very cool consumer learning site for Scholastic, and has consulted with major clients in banking, pharmaceuticals, retail and media. Amidst his other current professional endeavors, Dan devotes great chunks of time to enhancing and marketing Iobyte’s eBook MarketView service (retail data and analytics on both physical and eBooks for publishers). Follow him at hiswebsite and on Twitter.

There's just one problem with all of this: Dan Lubart is also the Senior Vice President of Sales Analytics at HarperCollins. That's right--a senior sales executive with one of the Big 6 publishers is responsible for compiling an "unbiased" list of bestselling eBooks. I wouldn't have known anything about this if Mike Shatzkin hadn't mentioned it in passing in his blog. When I first read Shatzkin's blog, I was sure that I was reading it wrong--surely Lubart had worked at HarperCollins before leaving to set up Iobyte Solutions, but a quick check with LinkedIn showed that I read it correctly. Lubart is apparently continuing to run Iobyte Solutions while he also works for HarperCollins.

This opens up an enormous can of worms. Did Greenfield and Nussbaum not know that Lubart had a massive conflict of interest? Mike Shatzkin certainly did, and he's quoted in the press release that announced the new bestseller list. If Greenfield and Nussbaum did know, why didn't they reveal that information? They had plenty of opportunities to do so. Unless Lubart was suffering from a case of selective amnesia, he should have revealed his employment in the post he made describing the list's methodology. He spent an entire paragraph talking about his background, with no mention whatsoever that he's currently employed by HarperCollins.

Any argument that Digital Book World or F+W Media might make about Lubart's ability to somehow keep a "Chinese wall" in his head separating his duties at HarperCollins from his work for Digital Book World is laughable. This is an inherent conflict of interest. It should have been fully disclosed, and even then, it undercuts the impartiality of the list. The best thing that Digital Book World could do is admit what happened and separate itself entirely from Iobyte Solutions and Mr. Lubart. Another option would be if Mr. Lubart ends his employment at HarperCollins, declines to accept any consulting business from the company, and works full time at Iobyte Solutions. Failing that, the Digital Book World list has to be seen as inherently unreliable.

Update, August 21, 2012: Nate Hoffelder at The Digital Reader picked up on the story, and contacted Digital Book World to ask some questions. As of this writing, DBW hasn't responded to Hoffelder, but after it received Hoffelder's request, it edited Dan Lubart's biography to add a mention of his employment at HarperCollins:

About Dan Lubart

Dan Lubart is a technology strategist and data junkie who founded Iobyte Solutions in 2000 following a previous decade of solo consulting. Dan currently works with HarperCollins as S.V.P. of Pricing and Sales Analytics while concurrently managing Iobyte and the eBook MarketView service providing retail data and analytics on both physical and ebooks. (Emphasis added.) Still fairly new to the publishing industry, Dan has been involved with digital disruption in the past, spending a year at Universal Music Group right around the time Napster was rearing its head and now focuses mainly on the familiar challenges and opportunities of the eBook marketplace. With Iobyte, Dan also developed a very cool consumer learning site for Scholastic, and has consulted with major clients in banking, pharmaceuticals, retail and media. Follow him at hiswebsite and on Twitter.

Note that DBW didn't just add a mention of Lubart's employment at HarperCollins--it also edited other parts of the biography out. They did this without explaining the reason why, and without addressing Lubart's conflict of interest. In addition, note the wording that "Dan currently works with HarperCollins as S.V.P of Pricing and Sales Analytics...", implying that his relationship with HarperCollins is that of a consultant or contractor, when his LinkedIn resume makes it clear that he works FOR HarperCollins as a full-time employee.

F+W Media's and Digital Book World's logic for how they're handling this revelation isn't clear to me. Surely Lubart isn't the only researcher in the country who could put together this bestseller list. I've done market research and industry analysis for years, and what Lubart says he's doing is nothing that literally thousands of other analysts couldn't do. Instead, DBW's actions are like the New York Times hiring the head researcher for the Obama or Romney campaign to do its election polling, and responding "Yeah? So what?' when the truth is discovered. No organization with any pretensions to journalism would act this way, so the question becomes, what kind of organization is Digital Book World, and why should anyone believe that its eBook bestseller list, or anything else it publishes, is untainted by conflicts of interest?

Interview with me on the BookGoodies website

An interview that I did with Deborah Carney of BookGoodies about things that publishers and self-publishing authors need to keep in mind when getting into eBooks, especially those for children's books and other graphic- and design-heavy applications, has been posted on their website. It's about a 45-minute interview, and there's lots of useful information. You'll also find a permanent link to the interview in the left-hand column of this blog.

Friends don't let friends write for free

I got into a tiff earlier this week with the new editor of an industry blog. After the abrupt departure of the previous editor, the new editor was appointed, and the site's senior writer resigned a few days later. So, the newly-appointed editor wrote a post asking for new contributors. One of the site's readers asked if writers would be paid for the posts, and the new editor responded that the only compensation would be "good karma."

That's not how I'd describe it. In my opinion, I'd describe the editor's and publisher's behavior as exploitation. Writers should be fairly compensated for their work, and in this case, "good karma" doesn't count as compensation. Let me give a concrete analogy: If you're a farmer, and you give your tomatoes to a food bank, that's "good karma." If you give them to a supermarket, you're stupid. A supermarket is in the business of selling tomatoes, and you should get paid for supplying them.

The blog that this editor works for is owned by a large publishing company. They're not a charity or a non-profit. By his own admission, he and his senior writer both get paid. I recently came across an article on the ProVideo Coalition's website titled "Philosophy: On The Subject of Freebies." The article was written by Art Adams, a Director of Photography, who noted that film and video professionals are often asked to work for free. There are times when it makes sense to do so, but he applies a common-sense rule:

The trick is to make sure that no one is making money on the project. If I’m not making money, no one else should either. If the project is going to be sold down the line then I don’t work for free. I might work deferred, but generally not. As a rookie camera assistant I worked on several deferred projects and I made a total of $75 between all of them. (That’s about $150 more than most people make.)

In the blog's case, the decision is easy to make: It's run as a commercial enterprise, has a paid staff and is owned by a successful publisher. It therefore falls under the "don't work for free" rule.

The reason that I'm so sensitive to this issue is that I was in a very similar situation not long ago. A local website that covers startups in the Chicago area posted a call for contributors, which I responded to. Like the blog in question, it was a for-profit business, but unlike the blog, it was a startup, and the editor/publisher was funding the operation out of his own pocket. So, I agreed to write an initial article for free, which required a great deal of work on my part but turned out to be very popular. The editor/publisher asked me to do a follow-up article, which I agreed to write. The subsequent experience was so frustrating, however, that after the article was published, I told the editor/publisher to keep the small amount of money that he'd agreed to pay me. (By the way, the articles are still two of the most popular posts on their site, almost two years later--and the editor/publisher still asks me to write for him.)

Are there times when it makes sense to write for free? Here are two:

• When it's a charitable, religious or political organization whose goals you support.
• When you're directly or indirectly promoting yourself or your business, and that promotion serves as compensation for your writing time and effort.

But, you may ask, what about a site like The Huffington Post that gets much of its content from unpaid contributors? If you like making the very rich people who run AOL even richer, then by all means contribute unpaid writing to The Huffington Post. Otherwise, you might look at a site like Forbes.com, which compensates bloggers on the basis of the traffic that their posts generate.

It's laughable to ask people to work at a company for nothing and call their compensation "good karma." It's actually the company that's creating "bad karma." If you can't afford to pay the people you need to run your business, you shouldn't be in business.

Simon & Schuster revenues up 3%, but operating income down 47% in Q2

The Wall Street Journal reports that CBS issued its Q2 financial results yesterday, including Simon & Schuster. The publisher's revenues increased by 3% year-over-year to $189 million, with a 44% increase in eBook sales offsetting a decline in print sales. eBooks now represent 21% of Simon & Schuster's revenues, and the company expects eBook sales to increase slightly less than 30% for the full year. Operating income before depreciation and amortization was $9 million vs. $19 million in the previous year, down 47%, for a profit margin of 4.8%. The company says that profits were affected by the proposed settlement of eBook litigation with the Justice Department and states.

Vook launches HTML5 eReader and new pricing models

Vook just launched a new HTML5 eReader for its eBooks (to try it out, go to http://vook.com; http://www.vook.com will take you to their sign-up page for writers). The samples I've seen are similar to a conventional EPUB display with flowable, resizable text plus embedded rich media.  It can display one or two pages at a time. It also has three layout options with different typefaces. A nice feature is that Vook has anticipated that the eReader will be used on both PCs and tablets, so it supports a single-page vertical scrolling mode for smaller devices, as well as two-page mode for desktop and notebook PCs.

The company has dropped its monthly fees and now offers two options for self-publishers:

• Publish the eBook free of charge to Vook's own eBookstore; the author gets 85% of revenues.
• Create eBooks using Vook's tools and then pay the company $99 for the files, which can be uploaded and sold by the author through Amazon, Barnes & Noble and Apple. 

Proof that thinking too much about sex makes you stupid

Michael Cavnar, the CEO of Vook, a self-publishing company, has posted the story of "The Diamond Club," a hoax erotic eBook that made it to #4 on the list of paid books in iTunes after just three days. Brian Brushwood and Justin Young, the hosts of TWiT's NSFW podcast, learned that all ten of the top eBooks on iTunes were erotic fiction, and came up with an idea similar to Mike McGrady's 1969 potboiler hoax "Naked Came the Stranger," which was credited to "Penelope Ashe" but was actually written (as badly as possible) by 24 journalists. Brushwood and Young invited their listeners to submit chapters for the book. The only thing they had to do was feature the main character--the chapters didn't have to connect to each other at all. Even though the eBook does deliver on the sex part, Young said “It’s a hoax in that we are not erotic fiction writers. We don’t genuinely think it’s any good. But I will stand behind our product that it delivers what we believe to be the most important component in this genre: sex.”

I fully expect a Big 6 publisher to offer Brushwood and Young a seven-figure advance and commit to a huge print run. Because it's "pre-sold."

Hachette UK sells off a portion of its education business, realigns the rest

Publishers Lunch Deluxe reports that Hachette UK has sold its health sciences and higher education lines to Taylor & Francis, because, according to CEO Tim Hely Hutchinson, "they were sub-scale and could not compete with the major, much larger, publishers in the area." Hachette's consumer education line is being moved into its Hodder & Stoughton imprint.

Hiptype offers third-party analytics for eBooks...with a catch

PaidContent reports that Hiptype, a company that offers third-party analytic reporting for eBooks, has launched. Amazon, Barnes & Noble and other eBook vendors can gather a variety of information about how their eBooks are read--how far a reader gets into an eBook, how often they open it, what notes and highlights they add, etc. However, that information is rarely shared with publishers. Hiptype allows publishers to independently gather similar information. The information is anonymized, but consumers can opt-out of Hiptype's data collection completely (assuming, of course, that they know that Hiptype is collecting information.)

There's a huge hole in Hiptype's data collection that may make it unattractive for most publishers: It requires eReaders that support both HTML5 and JavaScript in order to work, but according to paidContent, neither web-based eReaders like Kindle Cloud nor desktop eReaders, even those that are browser-based, will work. Black & white eReaders are also unsupported. That limits the usefulness of Hiptype to Apple's iBooks and a few iOS and Android eReading apps. Frankly, I'm surprised that they even released the service when its practical value is so low. This isn't a Minimum Viable Product--there's virtually no value in the current offering for most publishers.

They're offering a 30-day trial with service for one book, or programs priced at $19 or $99/month. The $19/month program is limited to 1,000 readers, so it's not useful to anyone other than self-publishers and very small publishers.

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. 

McGraw-Hill Q2 financial results: Education is declining faster than Financial is growing

McGraw-Hill has released its Q2 financial results. The company is headlining its record adjusted diluted earnings per share of $0.85, but that's mainly to deflect attention from what's overall a disappointing report:

• Q2 revenue was $1.547 billion, down 1% year-over-year, due to a 12% decline in revenues at McGraw-Hill Education that wasn't compensated for by a 5% increase in revenues at McGraw-Hill Financial. 
• Net income from continuing operations increased 2% to $216 million, and diluted EPS increased 11% to $0.76. 
• When one-time costs related to the company's Growth and Value Plan (planning for a sell-off or spin-off of McGraw-Hill Education) are subtracted out, adjusted net income from continuing operations increased 15% to $243 million, and adjusted diluted EPS increased 25% to $0.85. (That's where the "record quarter" came from.) 
• McGraw-Hill Education's revenue for the quarter declined 12% to $474 million, but operating profit increased by 36% to $57 million, due primarily to restructuring and cost controls. 
• Revenues in the Higher Education, Professional and International (HPI) Group declined 2% to $241 million. 
• 34% of HPI's revenue in the quarter came from digital products and services; digital subscription platforms grew 33%. 
• Revenues in the School Education Group declined 20% to $233 million, and the Group expects an overall 10% reduction in the K-12 market this year, the lowest spending level in over a decade.

NAPCO/InfoTrends eBook Publisher Survey

The July/August edition of Book Business Magazine has the results of a survey of 261 publishers (including 145 book publishers) done in May by InfoTrends and the North American Publishing Company (Book Business' parent) about their adoption of digital media and approach to digital production and distribution. Some of the results are surprising; here's a summary:

• PDF was the format of choice for 76% of the book publishers, followed by EPUB, with 68%.
• The top priority for eBook production and distribution at the book publishers was improving the overall user experience, cited by 60.3% of respondents, followed by improving overall design and typography (54.9%) and incorporating embedded rich media (44.4%). Only 20.6% planned to add search capabilities, and features such as embedded social media and sharing capabilities; improving footnotes and references functionality; and enabling reader annotations and highlighting were all named by less than 20% of publishers.
• The Amazon Kindle was the most popular device that book publishers use to test their eBooks, cited by 39.7% of respondents, followed by Apple's iOS devices (34.9%), Barnes & Noble's Nook (25.4%) and Amazon's Kindle Fire (22.2%).
• Surprisingly, 30.2% of respondents said that they don't test or tune their eBooks for specific mobile devices, which may explain why so many eBooks look so bad on mobile devices, and 13.5% of respondents don't know which devices (if any) their company tests eBooks on.

Clueless publisher to release book based on "Text from Dog" Tumblr posts

Publishers are desperate to find the next "pre-sold" property...and here it is: The Bookseller reports that British publisher Headline has paid an undisclosed amount to animator Joe Butcher for a compilation of his Tumblr posts called "Text from Dog." The characters in the Tumblr, October Jones and his dog Cooper, have more than 100,000 Tumblr fans and 40,000 Twitter followers. Hence, a pre-sold audience. Here's a quote from Headline deputy publishing director Sarah Emsley (and I'm not making this up):

"October and Cooper have been brightening up our days for months and we could not be more thrilled to be working (with) them. Buy your copy this autumn to see if it will be BATDOG or CATCAT who reigns supreme this Christmas."

John Biggs at TechCrunch read the Bookseller story, and demolished it. Here's a quote:

So look, here’s what’s up: you guys are killing yourselves. Like this. You’re paying what? Probably six figures for a book based on Text From Dog, an arguably funny Tumblr that, in book form, will sell a maximum of 5,000 copies and then disappear from the cultural Zeitgeist. I mean you wouldn’t pay some no-talent asshole to pretend to write a work of fiction and then capitalize on her name to sell some garbage, would you? Oh wait, you would. But still. Why? Why are you doing this? Stop.

And another one:

I can see the wheels turning. “This is funny! It’s on the web! We can monetize it! People love dogs! People are stupid! This could make our quarter!” Stop.

You’re about to be flattened. Book piracy is about to smash your top shelf revenue while books like Text From Dog are going to kill any respect we once had for the big six. You guys clearly have no idea what you’re doing and you’re depending on your recent Yale-grad philosophy major Assistant Editor to bring you some hot, hot web trendz to capitalize on. Real fiction and non-fiction? Blah, that’s for old people and nerds. What the kids want to do these days is go into a book store and buy a book based on a Tumblr blog. Because kids are stupid. Also vampires. And sex.

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.”

870-page law casebook becomes a $10 eTextbook

PaidContent writes about a new, 870-page legal casebook titled “Advertising & Marketing Law: Cases & Materials” written by trademark experts and bloggers Eric Goldman and Rebecca Tushnet. Two things make this new book stand out:

1: It's being published on Scribd as a DRM-free PDF download, and
2: It's priced at $10.

On his blog, Goldman writes at length about the new book. He's far from happy with Scribd:

Scribd is a horribly limited platform for eBook publishing (and for doing just about everything else). [Among other limitations, I believe it only completes sales with US residents, and (for no good reason at all) it requires buyers to log in via Facebook to complete the purchase. If you can't complete a purchase via Scribd due to these limitations, email me and we'll set up a PayPal transaction.] [Update: I got an email from Scribd informing me that they just opened up international sales, and you must be logged into Scribd to make the purchase and you can (if you navigate around) find a way to log into Scribd without connecting with Facebook.] We are working on moving away from Scribd to a better eBook publishing platform...once we figure out what that is. If you have any recommendations, please email me.

Here's Goldman's analysis of the pricing model:

Here’s how I see the math: a $150 casebook may have a $110 price wholesale (or less). At 10% royalties to the authors, Rebecca and I would share $11. At the $10 download price, Scribd takes $2.25 a download, leaving us author royalties of $7.75. So discounting the retail price 93% perhaps reduces our royalties by less than 30%. Let’s hear it for disintermediation! Plus, just like any demand curve, the lower price point should lead to higher sales, which may, in fact, make our approach profit-maximizing. (Just so we don’t delude ourselves, we’re not talking big numbers in any case).

Goldman also admits that the casebook isn't quite done yet:

While we’ve deemed the book ready for public release, it’s not “done.” I’d say it’s only about 90% done. Unfortunately, you’re going to notice some of the unfinished 10%, starting with the crap-ass book “cover” I whipped up in about 5 minutes some time around midnight one night last week, and continuing with the countless typos and formatting errors you’ll find throughout the book. We’ll be fixing errors as we find them, so please send us your corrections and suggestions. Because Rebecca and I own the copyright and completely control the publication schedule, we anticipate issuing new versions fairly frequently. No promises, but I anticipate we’ll publish annual editions for at least the next few years.

Goldman's and Tushnet's casebook combines elements of commercial eBook publishing with the Open Access academic publishing model. It's not quite free to students, but compared with the $150 that such a casebook would typically cost, $10 is pretty darn close to free. And, as Goldman points out, he and Tushnet have dropped the retail price by 93% while reducing the royalties that they would have earned if the book was published by an academic publisher by only 30%.