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. 

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.

Do you really want your book publisher to also have the television and movie rights?

According to paidContent, Random House has partnered with Fremantle Media to create Random House TV, which will develop television shows based on Random House's books. Fremantle will have a "first look" at all of Random House's properties. Random House TV will be part of Random House Studio. formerly known as Random House Films.

There are a number of things wrong with this deal from an author's perspective: First, Fremantle Media and Random House are both owned by Bertelsmann, which makes the negotiations between the two companies self-dealing. Authors are likely to earn considerably less than they would if there was a truly competitive bidding process for Random House's properties. In addition, Fremantle's specialties are reality television and game shows (for example, American Idol, America's Got Talent, The Price is Right and X Factor.) The only drama of note on Fremantle Media's website is Merlin, a series about the young Merlin that's co-produced by Elisabeth Murdoch's Shine and BBC Wales, and that's only distributed by Fremantle. They're the last producer that most broadcast and cable networks would think of for dramatic programming.

This deal is an excellent example of why authors should retain as many rights as possible, including television and film rights. The Random House/Fremantle Media partnership is a marriage of convenience for Bertelsmann, but it's unlikely to do anything for most authors except tie up their ability to get a fair price for their television rights.

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.

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.

British supermarkets compete for the U.K.'s eBook business

PaidContent reports that J. Sainsbury, the third-largest supermarket chain in the U.K., has purchased a 64% stake in aNobii, a social discovery web engine for books whose other owners are HarperCollins, Penguin and Random House. Of the 64%, 45.4% came from HMV, which disposed of its ownership in aNobii after selling off Waterstones. The former owners who sold their shares of aNobii didn't value it very highly--Sainsbury's only paid £1 for its stake.

aNobii may help Sainsbury's in competition with Tesco, the biggest supermarket chain in the U.K., which has launched an eBooks store and acquired 80% of Blinkbox in order to get into on-demand movies. Both Sainsbury's and Tesco offer digital music downloads.

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's more important to authors: Royalties or advances?

One of the strongest arguments for writers to self-publish their works is the potential to earn much higher royalties: Major publishers typically pay 10% to 15% royalties on the suggested list price of hardcover books, and 20% to 25% of their net revenue (wholesale price, or agency price minus 30%) for other formats. Self-publishers, on the other hand, can get as much as 70% of the sale price from Amazon and Barnes & Noble if they comply with those companies' restrictions. However, these numbers don't take into consideration the advances paid by publishers.

At the Digital Book World Conference that ended this week, Publishers Lunch Deluxe reported on a session on "Changing Author-Publisher Relationships" that shed some light on the question of advances vs. royalties. Madeline McIntosh, Random House's President of Sales, Operations and Digital said that over the last five years, for fiction titles, the company has paid 45% to 65% of its sales revenue to authors. Little, Brown Publisher Michael Pietsch said that, across all of Hachette Book Group's titles over the past 15 years, the share of the company's revenues that has gone to authors has risen from 30% to 40%.

Both companies' payouts are substantially higher than any standard royalty rate, suggesting that many, if not most, books fail to earn back their advances. The result is the same as a higher royalty on the actual number of copies sold. On the other hand, self-published books don't get advances, and the authors have to pay editorial, design and conversion costs themselves. As a result, self-published books start out much further in the hole financially, at least so far as the author is concerned.

The question for authors then becomes: Is it better to work with a publisher or to self-publish? If you know with absolute certainty that your book will sell more than it needs to in order to earn back any potential advance, you might make more money by self-publishing. However, if a publisher could sell at least two to three times as many copies as you could sell yourself, you're better off working with a publisher, since the increased volume will compensate for the lower royalty.

But what if you have no idea how many copies your book will sell? In that case, you probably should work with a publisher, because you'll get your advance no matter how many copies of the book are sold. However, there are two risks:

1. If the book earns out its royalty but doesn't sell many copies beyond that point, you might have made more money if you'd self-published it.
2. If your book doesn't sell well at all, the publisher will be much less likely to offer to publish your next book, and if it does, the advance will be substantially lower.

As a practical matter, the "publisher vs. self-publishing" question is often a moot point: If a book is rejected by multiple publishers, self-publishing may be the only option available. But, for those authors who can get a publishing contract, the decision may well come down to your confidence in the publisher vs. yourself.

Curation: Publishers' most important role

Book publishers perform many functions (some better than others, but that's a topic for another post). Some people believe that the most important thing that publishers do is edit manuscripts--both giving direction to the author and copyediting once the manuscript is complete. Others focus on sales and distribution--getting bookstores to carry their titles, and making co-op payments to bookstores in order to get display space at the front of their stores, along with better facings on the shelves. However, my opinion is that the single most important thing that publishers do is curation--selection of which titles to publish.

Yes, publishers often select and underwrite titles for a variety of reasons that have little to do with quality. They buy up the rights to titles (that are usually ghostwritten by professional writers) from celebrities and jump into hot markets with "copycat" titles, such as the endless stream of vampire-related books that followed the success of the "Twilight" series. However, they also impose basic quality standards on their writers, and they (usually) have standards about what they will and will not publish. To a knowledgeable consumer, seeing the Random House or Farrar, Straus and Giroux name on the spine (to take two examples) says that they're likely to get a well-written, well-edited book that's not going to be a waste of their time or money.

In the new era of self-published books and eBooks, most of the functions of publishers can either be farmed out or are irrelevant. Editing, copyediting and cover/book design can be contracted out or done by an experienced writer. eBook conversion can also be done by the writer or by a contractor. Printing can be done by any of a variety of companies. Distribution can be done by the author for eBooks; distributing print titles is more difficult, but can still be done through companies such as Ingram's Lightning Source, which deals with most of the world's major booksellers.

However, the one thing that neither a self-publisher nor companies that assist self-publishers does is curation. The writer of a book is the last person who can make an objective judgement about its quality--for better or worse, most authors are either far too hard on themselves or are deeply emotionally invested in their work. Self-publishing services companies are concerned with generating as much revenue as possible from self-publishers. That means not turning away any manuscript, no matter how poorly written, so long as the author can pay for their services. About the only thing that will keep a title out of Amazon's and Barnes & Noble's self-published eBook collections is if it's proved to be largely or wholly plagiarized, and even that doesn't happen very often.

Amazon and Barnes & Noble (and other booksellers) claim that their customer reviews provide a curation service for customers, but the reviews can be gamed:

• Authors can encourage their friends and acquaintances to post positive reviews, or they can pay people to do so.
• Consumers sometimes give extremely low ratings to books because they believe that they're priced too high (often, the consumers giving the ratings have neither purchased nor read the books).

There are also book curation websites, but none of them are widely popular, and they can be gamed the same way as the eBook retailers' sites. That leaves the tasks of curation and quality control to the publishers. To the extent that publishers abandon those roles, or de-emphasize them in favor of chasing celebrity and copycat titles, they'll give away their biggest advantage over self-publishers.

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.

Is the $9.99 eBook dead? Not at all

Earlier today, Gizmodo pronounced the $9.99 eBook dead, as a result of an announcement by Hachette that it is joining Macmillan (and probably HarperCollins) in instituting an agency pricing model where resellers such as Amazon and Apple will get a 30% commission on sales of eBooks at prices set by the publishers themselves. (I've learned from a source that Penguin is working on its own agency plan to be announced in a few months.) Of the Big 6 trade publishers, only Random House and Simon & Schuster would be without an agency model for sales of eBooks.

In response, Amazon has a number of tactics that it can execute. First, it can limit distribution of print titles from publishers who impose agency deals. The "nuclear option" that Amazon exercised against Macmillan backfired because the company "capitulated" almost immediately. However, a longer-term strategy of purchasing fewer print copies of Macmillan's titles, letting them go out of stock more often and taking longer to refill inventories would serve the same purpose. If the eBooks are available day-and-date with print versions and in unlimited quantities, while the print versions are often out of stock, it would provide more incentive for readers to move to eBooks.

Amazon could also play one publisher against the other, offering more promotional support and even co-op funds to help pay for newspaper, magazine and television advertising, in return for more pricing flexibility. Those publishers who cooperate would increase their revenues and/or decrease their costs, and would put pressure on other publishers to fall in line.

Finally, I expect Amazon to get even more aggressive in pursuing electronic rights from established authors. Many established authors or their estates have contracts with publishers that predate the eBook era, so they retain their eBook rights. There is a strong body of legal precedents and settlements that favor the authors and estates in cases where their print publishers claimed eBook rights that they had not specifically been granted. Amazon can price these titles at $9.99 or less and still offer extremely attractive financial deals to authors.

In short, the $9.99 eBook is far from dead, and Amazon still has many ways to prevail in the long term. 

It's Book Publishing Businesses, not Business

This morning, NPR did a news story about Apple's new iPad. I was half-awake when I heard the story, so I went to the NPR site to get the transcription. Near the top of the story, the reporter, Lynn Neary, said "At the iPad's unveiling Wednesday, Steve Jobs announced that five publishers — Simon & Schuster, Hachette Book Group, HarperCollins Publishers, Penguin, and Macmillan — had signed on to provide books to Apple's venture, with more to come." No problem there, but near the end of the story, she said the following: "Random House, the only major publisher that did not make a deal with Apple, issued a statement saying it is continuing conversations with the company about how they might best work together."

Put those two sentences together, and she's saying that the six publishers mentioned are the only "major" publishers. To be sure, they're the biggest trade publishers in the U.S. and European markets; they print the most popular fiction, biography, self-help and similar consumer-oriented titles. However, there are many other "major" publishers. The definition of a "major" publisher is determined largely by market segment. In technical and computer books, Pearson, Wiley and O'Reilly are among the dominant publishers. In textbooks, Cengage, Pearson, Houghton Mifflin Harcourt, McGraw-Hill and Wiley are powerhouses. In children's books, Scholastic and Houghton Mifflin Harcourt are among the biggest players, along with several of the big trade publishers. Heck, Pearson actually owns Penguin.

My point is that there is no single book publishing business and no single group of "major" publishers. Apple reproduced the strategy with eBooks that it followed when it launched iTunes, signing up the top five recording companies: Warner, Universal, EMI, Sony and BMG (Sony has since acquired BMG). Once it secured rights to the market leaders' catalogs, it went after smaller recording companies. It did the same thing with the iBookstore, going after the trade (consumer) publishing leaders first. But unlike the music business, where a handful of companies dominate every major category, each book category has its own group of dominant publishers. Getting the five publishers that Apple signed up gets them all but nothing in many of the major categories. They have a lot of negotiations ahead of them to get a range of eBooks comparable to what they already have in music.