Mike Shatzkin  The Idea Logical Company, Inc.  9 July 2012 GW Conference on Ethics and Publishing George Washington University, Washington, D.C.

1. HOW THE DOJ'S MISUNDERSTANDINGS
COULD DESTROY PUBLISHING, AND
WHY IT'S WORTH SAVING
Mike Shatzkin
The Idea Logical Company, Inc.
9 July 2012
GW Conference on Ethics and Publishing
George Washington University, Washington, D.C.
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

2. Stipulations
• I hate what DoJ is doing to my industry, but
I'm definitely voting for Obama
• I hate what Amazon is doing to my industry,
but I don't think they're evil
• I believe all people and entities tend to act
in their own perceived self-interest
• It is silly to expect them to do otherwise
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

3. Amazon and Apple and Google are
much bigger than the book business
• They don't really think about it much
• They have other priorities
• But only Amazon is in a position to destroy
the value we've always reaped from it
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

4. What publishers do
• Refine and improve intellectual property
(editing)
• Craft it as a professional presentation
• Position it within the ecosystem (marketing)
• Deliver it (files or physical production, etc.)
• Promote it
• Sell rights
• Manage permissions
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

5. Notice how little of that is
affected by the costs of
printing and distribution
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

6. What publishers do
• Refine and improve intellectual property
(editing)
• Craft it as a professional presentation
• Position it within the ecosystem (marketing)
• Deliver it (files or physical production, etc.)
• Promote it
• Sell rights
• Manage permissions
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

7. But the most important things that
publishers do?
• Make choices (public sees curation)
• Transfer risk (assume costs and pay
advances)
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

8. Each book is a component of a
publisher's portfolio
• Per title revenue might be forecast as low
as $100,000 (or lower...)
• Each book has a contract
• No matter what the advance, each book
constitutes risk for the publisher
• Each book is a little business
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

9. Deciding to publish is an
investment decision
• Authors live on those investments
• Many books are made possible by those
investments
• Risk: committing money to something
often not yet even written
• Reward: an opportunity to manage
revenues of a copyright-protected property
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

10. In US consumer books
• Big Six publishers do, on average, 3000+
titles each per year.
• Next 10 average perhaps 5-700 titles each
per year.
• 20-25,000 investments among top 16
publishers
• Hundreds of other publishers, including
university presses, doing the same thing
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

11. Remarkable engine of democracy
• Each acquiring editor does 10-15 books per
year
• It is difficult to micro-manage so much
granularity
• Editors hired for taste and judgment; expected
to exercise it
• Very long evaluation cycle for editors
• Agents learn to understand what houses want
strategically, each editor's taste
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

12. What agents do
• Find the diamonds (people who can really
write) in the dirt
• Guide crafting of comprehensible
proposals
• Matchmake projects with editors
• Negotiate a very complex business (so
many editors)
• Negotiate a very complex agreement
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

13. So many small-value deals
require standardization
• Boiler-plate contracts
• Customized within agency-publisher
relationships
• Extremely complex royalty accounting
• Trust and communication become
paramount
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

14. Summary
• Publishing transfers risk from author to
publisher 10s of thousands of times each year
• Publishing finances expensive projects (Steve
Jobs bio by Walter Isaacson)
• Made possible by copyright-protected
revenue
• Publishing has evolved an extraordinarily
decentralized, complex, democratized
industry
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

15. The World Before the Revolution
• "We Put Books on Shelves"
• Distribution was the key bottleneck;
therefore the key competency
• Intermediaries required for efficiency:
retailers and wholesalers
• Trade publishing thrived on leverage
rather than direct customer contact
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

16. The Quick Story of Amazon's Success
• The whole catalog including out of print
• Use of Ingram and B&T for operations and
cash flow
• Promise dates, pricing, operational
excellence
• Relentless customer focus
• Leveraging infrastructure: other businesses,
other retail opportunities
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

17. Domination of online book sales
didn't really seem to matter
• Killed I2S2 with pricing
• B&N's false starts, Borders tactical error,
slow initial growth
• Natural growth of online sales, superior
channel for some kinds of titles
• Academic felt the changes as early as 2002
• Vicious cycle: bookstores decline, more
online purchasing, more bookstore decline
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

18. Then came ebooks
• Started for me in 1999, but just didn't take
with most people
• Klunky technology, poor title selection no
merchandising
• Kindle started a revolution
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

19. Why Kindle worked
• Direct to device, lots of titles, Amazon
promotion hit core readers
• By 2007, Amazon had the attention of a lot of
big readers
• Title discounting: not really noticed at first,
high device price (like a book club)
• Led to market share dominance
• Great reach to power online book buyers
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

20. What publishers faced during 2009,
before Nook
• Two parts of the business growing: online print and
ebooks
• Amazon with shares over 75%, perhaps 90%, of
each
• Borders on the rocks, B&N aching
• Amazon established as a very unsentimental trading
partner
• Amazon opening up high-royalty self-publishing and
signing authors
• Amazon consistently pricing best ebooks well below
The cost
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

21. White knights on the scene
• Nook launching in late 2009
• Apple bringing on new device (iPad) April
2010
• Google announcing big plans (which
turned out to be a disappointment)
• Hachette goes to DC (Auletta)
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

22. Action was required
• Organize Bookish (US) and Anobii (UK)
• Move to Agency pricing
• Apple required it; B&N wanted it
• Logic compelled it
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

23. Growing realizations
• Publisher-retailer distinction altered by the
Internet
• Publishers' direct network must include
consumers
• Amazon can become a publisher more
easily than a publisher can become a
retailer
• But Amazon hit limitations (Harcourt
The
attempt, B&N and indie response)
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

24. What Agency does
• Publisher is “seller”; retailer is “sales agent”
• Price is established by publisher, not retailer,
is therefore uniform
• Allows publisher to manage price to
maximize revenue (moves up and down)
• Removes price as a distinction among
retailers
• Price competition continues but between
The
titles, just not for the same title
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

25. The impact since Agency
• Amazon's share of ebooks in US dropped from
about 90% to about 55%
• B&N's Nook established; also iPad and iPhone
• Innovation and price reduction of devices
• Simon Lipskar's analysis: overall reduction of
ebook prices
• B&N brief says: overall reduction of print book
prices
• In other words: negative consumer effect is, at
the very least, arguable
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

26. But still
• Amazon's share of publishers’ revenue
keeps rising
• Now larger than any account in history
• Amazon continues to be each publisher's
“fastest growing account”
• And the others fight to stay even
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

27. The nightmare for publishers
(and for all of us)
• Amazon hits 50% of publishers’ revenue
• Says to biggest authors: we'll triple your
take, ignore the rest
• Publishers lose big revenue sources, other
retailers lose high-value product
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

28. What happens then
• No other general book retailer can survive
(print will be interesting...)
• Publishing as an industry becomes captive
to a single retailer
• Fiction remains robust, but new talent
breakthroughs are rarer
• High-cost high-value non-fiction (Steve
Jobs) ceases to be published
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

29. Why what the DoJ is doing is so
wrong-headed
• The effect is to strengthen the strongest
player, and the only one that can gain
monopoly
• Driving down pricing per title prices out
publishers services and profits
• Driving down pricing per title prices out
investment in books that require it
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

30. The settlement is a "tilt" to Amazon
• Enables pricing as a weapon
• Further constrains publishers from going
direct
• Weakens all retailing competition
• Hastens demise of brick-and-mortar, and,
therefore, print
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

31. The trade we're making
Hundreds of companies, thousands of
editors commissioning for commercial
payback for…
One company dominating ecosystem,
signing what it wants to own more of
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

32. The trade we're making
Publishers serving authors by gaining the
widest possible distribution for their work
for…
The only viable publisher trying to maximize
value for a single retailer
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

33. This is not an easy challenge
• The natural forces tilt to Amazon as we
move to a digital and online world
• Amazon's execution is excellent; their
qualitative advantages are real
• Even with Agency, the nightmare scenario
could develop
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

34. But why should our government
be pushing us toward monopoly,
not away from it?
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.

35. Mike Shatzkin
mike@idealog.com
@MikeShatzkin
The
Idea Logical
Company
© 2012 The Idea Logical Company, Inc.