The Shatzkin Files: 2012: The Shatzkin Files

By Mike Shatzkin

Your essential, insightful guide to the past, present, and future of book publishing

In his 50-year career, Mike Shatzkin has worked in every area of the publishing industry: writing, editing, agenting, packaging, selling, marketing, and production. Since 2009, his blog, The Shatzkin Files, has been essential reading for publishing executives, indie authors, journalists covering the industry, and academics, as well as for people just plain interested in book publishing.

Covering everything from the rise of the ebook and serious self-publishing to the trade’s growing internationalism, the birth of vertical marketing and dramatic changes in retailing, Shatzkin combines deep knowledge of publishing’s history with keen—and at times controversial—analysis of the challenges and opportunities posed by digital change.

This volume of The Shatzkin Files includes every post published in 2012, a new introduction summarizing the year in publishing and reflecting on its impact, and a foreword by series editor Simon Collinson. It has been lightly edited and carefully proofread, and the posts have been newly categorized for easy reference.

• Language: English
• Publisher: Mike Shatzkin
• Release date: Nov 16, 2017
• ISBN: 9781386867654

Book preview

Preface

If you’re seriously interested in the strange business that is trade book publishing, you’ll probably have come across Mike Shatzkin. A fifty-year veteran of the publishing industry, since 2009 he’s been writing a blog called The Shatzkin Files, analyzing publishing news and providing a forum for frank and intelligent discussion of the business. Mike has covered everything from the rise of the ebook and serious self-publishing to publishing’s growing internationalism and the birth of vertical marketing. He has been particularly insightful about the impact of online bookselling on physical retail and on the way publishers approach what they do. His commentary has long been required reading for publishing executives, indie authors, and academics alike.

In 2011, Kobo published the first two years of The Shatzkin Files as an ebook. So much has happened in the publishing world since 2011, however, that we were overdue for an update. In late 2016 we started work on six new volumes, and this is one of them. We’ve taken the opportunity to add some extra value and context to Mike’s original work. These volumes have been fully proofread, and broken links have been updated to point to archived pages at the Wayback Machine. The posts have been categorized under broad subject headings, but for anyone who’d like to read the posts in the order they were published, there is also a chronological table of contents at the end of each volume.

Mike’s analysis is bold, clear-sighted, and unsentimental – at times even pugnacious. He’s made his fair share of mistakes, and has been happy to acknowledge them in the introductions to these volumes, written with fresh perspectives and new data. In general, however, Mike has succeeding in predicting and explaining many of the changes publishing has seen during the past decade. Where publishers have often sought comfort in the familiar, Mike has urged them to rethink everything. Nobody can read the Shatzkin Files without coming away with a few new ideas.

The first few years of 21st century have been a crucible for a publishing business that will soon be radically different from the one we are used to. It is our hope that Mike’s commentary will go some way towards helping readers, writers, and publishers understand this fascinating, strange, and wonderful business – both now and into the future.

Simon Collinson

November 2017

Introduction

Nobody will ever be able to write about the 21st-century publishing industry without discussing the DOJ’s 2012 lawsuit against Apple and the five agency publishers.

The suit was astonishing for a number of reasons. The DOJ ignored the threat of what I called a real and obvious monopoly which will have to be addressed at some future time in favor of a largely hypothetical collusion. It also provoked a hitherto unseen level of public criticism of publishers – a PR problem with which publishers could certainly have dealt better, and which set the stage for the divisive public dispute between Hachette and Amazon in 2014. The industry was forced to address a number of fundamental questions: how to define a ‘publisher’, and how to measure the value they add.

Amidst the chaos of the DOJ action, ebook sales continued to grow rapidly, with B&N entering the UK market with the Nook in August, just after Waterstones had started selling Kindles there in May. (Both have since retreated.) Arguably, the end of agency led to a spike in ebook sales growth (although it also may have led to the concentration of those sales with Amazon).

Another topic which received a lot of attention was ebook lending in libraries. In part, this reflected the existential questions surrounding ebooks which carried over from 2011’s continuing growth, and a sensible hesitation on publishers’ part to make ebooks available to libraries on terms that might cannibalize sales through ordinary retail channels.

I made a number of aggressive predictions this year:

By 2017, 80% of sales of any trade book that sells a significant number of copies would take place online between print and digital.

Amazon will account for half of publishers’ business by 2017

By 2017, shares of sales that are ebooks will have more than doubled and half of print sales will be online.

The Big publishers will no longer be Six.

In two years, selling direct will be seen as a necessary survival skill.

By 2017 print will have shrunk from 60% to 30%, and by 2022 from 30% to 20%.

With the exception of the last two, which were wildly wrong, by the time of writing (in 2017) the other predictions had been proven largely correct.

In light of this rapidly shifting market structure, vertical marketing would become increasingly important. I talked about the metadata-driven approach to marketing pioneered by AllRomanceEbooks (which went on to fold in 2016, a victim of Amazon’s increased hold on the romance reader and the site’s own internal challenges). Random House also experimented with this in partnerships with Politico and Bookateria, although the vertical-driven direct sales model I anticipated never quite took off. Amazon, as usual, was ahead of the pack in buying businesses for their metadata, having acquired IMDb in 1998. (It would go on to buy Goodreads in 2013.)

Mike Shatzkin

November 2017

The DOJ Agency lawsuit

If the government makes agency go away

March 8, 2012

The Wall Street Journal reports that the Justice Department has notified the Agency Five (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) and Apple that it plans to sue them for colluding to raise the price of electronic books. I have no standing to comment on the law here. But if this does mean the end of the agency model, it would seem to be a cause for celebrating at Amazon and a catalyst for some deep contemplation by all the other big players in the book business.

Agency pricing, for those who have not been following the most important development in the growth of the book market, enabled the publishers to enforce a uniform price for each ebook title across all retail outlets. This was Apple’s desired way to do business, and it addressed deep concerns the big publishers had about the effect of Amazon’s loss-leader discounting.

Although the WSJ article and Michael Cader’s follow up in Publishers Lunch make no agency is dead declaration and there are quotes from publishers and others indicating that there are a range of possible outcomes, including a version of agency that is modified to allow some discounting, everybody in the industry now has to contemplate what it would mean if the agency model is legally upended.

To Amazon, it would mean they would be free to set prices on all books again, including the most high-profile and attractive ones that come from the big trade houses. That is an opportunity they are likely to seize with loss-leader discounting of the biggest marquee titles.

To Barnes & Noble, it would mean they have to devote cash resources to ebook discounting that they might have preferred to dedicate to further development of the Nook platform, maintaining the most robust possible brick-and-mortar presence, and improving the user experience at BN.com. Unconfirmed stories abound that B&N is about to announce an international expansion. Whether that will produce cash flow immediately or require it for a while is not yet known. For B&N’s sake, it would always better if it were the former, but if they’re about to fight discounting wars, it might be critical.

To Kobo, it would mean that they also will need to devote cash resources to subsidizing price cuts to match Amazon. With their new ownership by Rakuten, they should have the capital they need to fight this battle. They must be glad that deal got done before agency was upended.

To Google, it would mean that the bookstore service piece of their ebook business will suddenly be highly challenged. Many independent stores might be pushed out of the ebook game completely; it certainly would be extremely difficult for them to support competition with Amazon’s prices. To Google itself, with their new Google Play configuration, it means they will have to both spend more margin and more management energy to be a serious competitor in the retail marketplace. There’s no clear evidence that they have the interest at the top to do that, although they certainly would have the resources.

To Apple, it would mean that their entire iBookstore model is in question. They apparently didn’t want to take on all the normal responsibilities of a merchant, which would include setting prices. Now they may have to.

To all the big publishers, including Random House (the one of the Big Six not being sued, because they stayed out of agency for the first year and therefore were not considered part of the collusion) it would mean that they will have to painfully reverse the re-pricing and systems adjustments they went through to implement agency in the first place.

Smaller publishers and distributors might be beneficiaries if agency is eliminated, but they might not. The agency model is a great advantage for those publishers who are able to fully implement it. But that is only six publishers — the Big Six — because Amazon has simply refused to let anybody else sell to them that way. That creates problems for the smaller publishers but an even more threatening one for distributors. All but the Big Six, if they want to sell to both Amazon and Apple, must operate a hybrid model, selling Apple on agency terms and Amazon on wholesale terms. The two are inherently in conflict. What is ultimately a threat to the distributors is that distributees that desire agency terms, and many would, might seek distribution deals from one of the Big Six. (It might be coincidental, but it is worth noting that IPG, the company having a fight with Amazon at the moment over terms, is a distributor.)

Of course, we don’t know how the Big Publishers will respond if they’re forced off agency. It’s long been my opinion that the 50% discount for ebooks is unworkable. It leads to ridiculous and unrealistic retail prices. (Publishers operating on the hybrid model have to have two retail prices: one on which to base the wholesale discount and another at Apple operating agency-style. It’s crazy.) Would the big publishers, if they couldn’t do agency, keep the 30% discount and their current prices? Would they go back to the 50% discount and jack the suggested retail prices back up? If they did the former and nothing else changed, the smaller publishers could be at a much greater disadvantage than they are now.

Over time, the biggest losers here will be the authors. The independent authors will feel the pain first. Agency pricing creates a zone of pricing they can occupy without much competition from branded merchandise. When the known authors are only available at $9.99 and up, the fledgling at $0.99-$2.99 looks very attractive and worth a try. Ending agency will have the desired effect of bringing all ebook prices down. As the big book prices are reduced, the ability of the unknowns to use price as a discovery tool will diminish as well. In the short run, it will be the independent authors who will pay the biggest price of all.

But, in the long run, all authors will just get less. They will join the legion of suppliers beholden to a retailer whose mission is to deliver the lowest possible price to the consumer.

Seth Godin has recently made the argument that this is simply inevitable. Perhaps it is. The laws of supply and demand would support that contention. But from my personal perspective, I don’t like seeing the government hasten the process along.

But what about the reader? The reader gets lower prices, cheaper reading. What the reader won’t see is that s/he’s not getting what s/he won’t pay for. Some of the best books won’t get written and the biggest casualties will be in the area of highly-researched non-fiction, like major biographies, in my opinion. Twenty years ago they used to say that a conservative was a liberal who’s been mugged. I’m not about to become a conservative, but I sure see how easy it is for the government not to understand how their decisions might affect the dynamics of a business. Or, in this case, a culture.

After the DoJ action, where do we stand?

April 14, 2012

This post went up around midnight last night (Saturday, 4/14) in London, or between 6 and 7 NY time. I had been concerned about a part of it that has been edited below. If you read it before 5 pm today (Sunday, 4/15), you’ll not have seen this correction. And you’ll see some comments that obviously pre-date the update.

Well, we certainly have a confused book business on our hands following the announcement of the Department of Justice intervention last week.

According to my (admittedly tentative) understanding:

We have three Big Six publishers (Hachette, HarperCollins, and Simon & Schuster) that have agreed to a settlement with Justice that obliges them to modify their agency arrangements over the next 60 days in ways that will eliminate their ability to control discounting in the supply chain for the next two years.

We have two Big Six publishers (Macmillan and Penguin) that will contest the DoJ position that they acted illegally (in collusion). They can apparently continue to manage their business with agency pricing the way they have, at least until a court rules. And, as we know, that can take a while.

We have one Big Six publisher, the biggest of all (Random House), which can continue to sell under agency terms without restriction and without a lawsuit to defend. Why? Because they didn’t take simultaneous action with the other five and were, therefore, not implicated in the alleged collusion.

Agency terms, including even most favored nation clauses (which never really affected the Big Six anyway), have not been ruled illegal. (Cader said in his post on Friday, blocked by paywalls I think, that, as a result of this set of legal actions agency itself is demonstrably considered legal. If that is accurate, and he almost always is, that is certainly an unintended consequence.)

The DoJ delivered some convincing evidence, surfaced on the Melville House blog, that despite my conjecture to the contrary, big publishers did discuss agency among each other before they implemented it. That certainly doesn’t look good. But whether or not it was implemented legally does not affect my opinion about the value of agency or the damage from losing it.

Added later. But, aha!!! This is not convincing evidence of a conspiracy. It is most likely that this discussion, assuming the email quotes are all legitimate to begin with, was about Bookish, the book retailing initiative funded by Hachette, Simon & Schuster, and Penguin. If that’s true, it would suggest that HarperCollins was an early participant in the conversations about starting it. That makes sense. HarperCollins is a partner with Penguin in the financing of Anobii, an ebook retailing site in the UK.

And hats off to my great friend and favorite consulting competitor, Lorraine Shanley of Market Partners, who made the penny drop for me in a conversation at the Digital Minds Conference today in London! I was only comforted when I spoke to one of the smartest guys in trans-Atlantic digital publishing who said, of course to this when I told him, just as I did when Lorraine told me. Like me, he didn’t get this right off the bat!

The publishers who settled appear to be on notice that the new arrangements they create to replace the status quo better not look too similar to each other’s when they’re done. (This seems extraordinarily difficult to me. The accounts actually limit the amount of variation that can exist…)

In a separate proceeding from DoJ, the settling publishers appear on the verge of refunding money to consumers who overpaid for ebooks. (This is a result of settling lawsuits arising from States, not DoJ.)

Loss-leading sales were addressed by Justice in a very creative way. They are banned, not on a per-sale basis, but rather on a aggregate basis. So retailers can give away ebooks. Heck, they can pay customers to take some ebooks, as long as they make back the margin they shed on other ebook sales from the same publisher. Since Amazon has never done anything else (they told me very clearly, and not under NDA, two years ago that they discount a small percentage of the total titles that constitute a big minority slice of total sales and their overall ebook sales deliver positive margin) and nobody else could afford to, that’s a restriction without any real meaning.

Looking back at the post I wrote six weeks ago when the possibility that agency would be ended or damaged first surfaced, I find nothing I want to take back or change.

I would summarize the situation this way. Amazon (which includes any other player largely dependent on Amazon) and the most price-conscious ebook consumers have won. Everybody else in the ecosystem: authors, publishers, and other vendors, have lost. The reaction from all quarters seems to confirm that analysis.

The biggest question going forward is how Amazon will react to this. Cader’s unique and invaluable analysis says that Amazon will have a pool of about $113 million for discounting and incentives in the coming year. B&N, with half their market share, would have about $57 million.

It will be fascinating to see how Bookish, owned by three Big Six publishers (two that settled, one that didn’t) navigates all this if it opens, as rumored, between now and BEA.

The Digital Book World website (a fine institution I have nothing to do with; we just program their annual NYC conference) reports that James McQuivey of Forrester expects Amazon to be very restrained in how they’ll employ discounting when the dust on this all settles (in about 60 days). I’d actually expect precisely the opposite. I think Amazon will do the splashiest discounting they possibly can, making the point as loudly as possible that they deliver the lowest prices to the consumer and daring their competition to match them.

Every company in the industry is going back to the drawing board. Only one is not unhappy about it.

There’s a response from Dick Heffernan, President of Sales at Penguin buried in the comment string after my last post making the point that Penguin has also not cut its sales force in recent years. I congratulate them for that and I’m sorry that I jumped to the conclusion that because the major house senior executive who mused about Random House saw their behavior as unique that it must be so. I think the insights from Random House were useful — the comment string and traffic to the post seem to confirm that — but I’m also happy to also acknowledge Penguin’s persistence in maintaining service to the bookstore channel.

Jane Litte explains the DoJ suit very well, and I have a couple of points to add

April 22, 2012

Jane Litte at the DearAuthor blog has written a remarkably concise, clear, and cogent piece about the DoJ case. This whole paragraph is a link to it. That’s a signal.

In fact, if this is a subject of high interest to you and you are not a lawyer, I would encourage you to read Jane’s post before you read this. I am not in any way attempting to substitute for or contest anything in Jane’s piece, which explains the law and the issues in terms that really helped this layperson feel like a participant in the discussion. A number of things struck me as I read it, but there were three paragraphs Jane wrote that called for answers. I hope she and others will find this a useful addition to her mighty contribution to the discussion. Quotes from Jane’s piece are in* italics*.

There are two elements that stood out for me in reading the DOJ’s complaint. First, Apple set the pricing floor and ceiling for ebooks and every publisher accepted those terms. Did the publishers individually attempt to negotiate for differing floor and ceilings? Why was it the same for every publisher? No other app in the app store has a pricing floor or ceiling like the books in the iBooks store. Why were books treated differently?

No other app in the app store has a print equivalent. The pricing floors and ceilings are, as I understand them, all expressed in relation to the print retail prices. That logic cannot be extended to other apps in the app store. These restrictions, almost certainly sought and engineered by Apple, were to assure them that there would be an understood relationship between the print competitor and the ebook. Whatever that means, I find it hard to see how it constitutes publishers colluding with each other.

And the publishers chose their print prices, so, in effect, they chose their ebook prices as well. Without collusion. Publishers don’t talk to each other about what retail prices they’re setting.

Second, the David Shanks email to Barnes and Noble. In the email, Shanks urges Barnes & Noble to punish Random House for not hopping aboard the pricing agreements that the other publishers had agreed to with Apple. This type of email is evidence that the DOJ will point to as attempting to police or enforce a collusive agreement. In other words, if there is only conscious parallelism why would Shanks need Random House to engage in the same type of pricing. That is one piece of evidence that seems to rule out independent action.

There is absolutely nothing strange about this nor is there any reason to think Shanks wasn’t acting totally independently.

Remember that Barnes & Noble entered the ebook market with the Nook in November 2009. They were very explicit and clear with all their trading partners that the Amazon pricing was a big problem for them. You don’t need to have it spelled out to you or be a rocket scientist to see the unpleasant consequences of having to give away all that ebook margin: fewer brick stores, less resources to develop the Nook against the Kindle, and perhaps the need for more margin from the publishers on the print and store side. All the publishers were aware of that.

When Random House stayed out at first, some people were confused about that choice but the insiders understood that they had gamed the system. Now they’d sell their ebooks to Amazon at the old (higher) wholesale prices and get the benefit of the lower retail prices because they had the branded loss leader category to themselves. And perhaps they’d even get better treatment from Amazon on their print books too, because, after all, their titles were the ones Amazon could promote which would promote their ebook pricing policy at the same time.

I can tell you that this caused massive teeth-gnashing at all the other houses. But there was, actually, not a damn thing they could do about it. They had to swallow lower revenue per copy for their books as well as a price-disadvantage in the marketplace and they did it because they thought leveling the playing field on price was so critical to their futures. Meanwhile, from their perspective, the biggest player sat out the fight.

And from Random House’s perspective, they did the best thing for their owners and their authors.

At the time, all the other houses were aware that they had done all this partly for B&N and that B&N was presumably being hurt by Random House’s unwillingness to go to agency, and, dammit, why wasn’t Barnes & Noble doing something to push Random House in the right direction?

Executives from many of the other firms, although not David Shanks, asked me why Barnes & Noble wasn’t pushing Random House into line on this. In fact, I made the observation to people at Random House that the question got asked by their competitors. It would have been neither polite nor politic to push the conversation any further than that, but nobody registered any surprise.

My own read of the B&N-Random House relationship is that it has been strong for years on many levels and it therefore withstood this blow to it without disrupting most of what else was going on. I have no doubt that B&N expressed displeasure about it and that making them happy was one of several factors that motivated Random House to move to agency pricing a year later.

But David Shanks was representing a point of view that every informed executive at every major publishing company had. He didn’t need to talk to anybody else to come up with it and it is totally appropriate within the context of a frank and open relationship with a major trading partner for him to have said what he did to B&N.

The problem here is that Apple was not (and is not) a dominant player in the digital publishing market. I don’t know if iBooks has even a 1% market share. The hub in a hub and spoke conspiracy ordinarily has a dominant market share such as the two theatre houses that controlled the majority of the market in which they had first run theatres. The DOJ identified the relevant market in its petition as trade ebook market. I find that definition too narrow and wonder if it won’t spike the DOJ’s suit.

What I can tell you is that major publishers put Apple’s share of the ebook market to me at between 10 and 20 percent. Because they don’t have as wide a selection of titles as the others, it is likely that their overall share is something slightly less than that. Dominant? No. Third in the market in the US.

And these italics are me again, not Jane. I have another post just about ready that I was holding for tomorrow morning but now might hold another day.

I am going to do all I can in the next 6 weeks to encourage an understanding of the DoJ case (which I think Jane makes clear is not close to overwhelming) and the necessity of people in the industry registering their concerns with the settlement, which could be devastating if it became law. When I saw Jane’s post a couple of hours ago, I thought I could usefully add to the discussion and I want to encourage as much traffic to her as I can. I think she presents some foundational understanding here that is very important for people to have about the law. I was encouraged by her explanation and analysis that there is more hope for what we need as an industry to happen than I had previously thought.

There’s no level playing field without agency pricing, and not in the way you think

May 17, 2012

In the 1990s, Bernie Rath was the head of the American Booksellers Association. (Bernie was not a popular man across the industry. Lawsuits about trading practices that troubled publishers really began with him.) He pushed the idea that publishers should stop printing prices on the books. Bernie’s logic was very simple. He pointed out that you paid more for a shirt or a couch if it was sold to you by a vendor in a high-rent location rather than one in a warehouse on the outskirts of town. He thought it was essential that the retailer be able to set prices so they could raise them if necessary to adjust to things like their rent. Otherwise, Bernie argued, books wouldn’t be sold in the best locations. Bernie thought the price having been printed on the book was what prevented the retailer from charging the right price for their sales venue.

My father (who always loved a rabble-rouser) was a friend of Bernie’s and saw merit in this argument. This was one time Dad and I didn’t agree, and I still think I am right on this.

In those pre-Amazon days, it was sometimes necessary for a publisher to sell a book directly to an end consumer. People who couldn’t find the book they wanted or a store that would order if for them (not uncommon for most of the 20th century) would, in desperation, contact the publisher. And the publisher would sell them the book. The publisher would sell at full retail price plus postage and handling. They didn’t seek that business; they didn’t actually want that business. But when it came their way, they extracted the maximum revenue from it. And in doing so, they kept stores from being unhappy with them because, after all, the customer would only buy at those prices from the publisher (and put up with the service issues dealing with a company that didn’t think much about individual consumers) if they felt they had no alternative.

The basis of my disagreement was equally simple. Whether or not it was printed on the book, there was, indeed, a publisher’s retail price. And anybody who wanted to find out what it was could do so by asking the publisher or ordering from them. That meant that any store routinely charging more than that would get found out. Even before Twitter, word could get around fast about something like that and it would create suspicion about every book in their store, including books they might be selling below publisher’s list. So, in fact, they couldn’t really charge more just because the publisher didn’t give them away with a printed price.

In addition, the publisher printing the price on the book benefited the store two ways. If the price was deemed high by the consumer, the printed price made it clear the retailer was not to blame. And if the retailer ate into his/her margin to sell it cheaper, the customer could see very clearly that the merchant had done the clientele a favor.

As we know, successful publishers unlearn old behavior very slowly. So it has taken some time for the big general houses to shed their prejudice against selling direct to end customers even though, in the digital age, it is actually essential that they do so.

Why?

Because the business of publishing digital books delivered online is entirely different than the business of publishing printed books sold through intermediaries. This was not instinctively understood by most publishers, particularly by big horizontal (not subject- or audience-focused) publishers.

But by now every publisher has learned that they have to gather names for direct customer contact. When Markus Dohle, Random House’s CEO, told me that Random House had to become an effective B2C marketer two years ago, it was a visionary statement. Now it is a common understanding.

One Big Six house told us last week that they had something over 6 million email addresses they had permission to mail to right now. And they get very