Sunday, April 5, 2009

Why Ebooks Must Fail? Hardly.

Recently, I read an online article, entitled "Why Ebooks Must Fail." In short, the article is an economic argument against the viability of ebooks (for ebook readers like the Amazon Kindle and Sony Ebook Reader) from the perspective of the publishing industry. As an owner of an Amazon Kindle myself, I took great interest in the article. I also think the arguments are dead-nuts wrong.

The author's point is that the book publishing industry is built on and depends on a certain model of doing business and that "ebooks don’t follow these rules."

In brief, publishers act as middlemen between authors and the buying public. Publishers contract with authors and pay authors advances (that will be recouped by future book sales). In addition to paying authors, publishers must pay for marketing and design of the book. In order to afford this, they "presell" books to stores, not all of which will be sold (but the publishers make money in these presales and have incentive to presell as much as possible so that they can get as much money as possible.) In order to encourage stores to buy as much as possible, publishers will accept returns of unsold copies for full monetary credit.

So, in order for publishers to be able to spend money on author advances, marketing, and production is that they make money "preselling" books (even if they have to give some back later in "buying back" unsold copies) they still get short-term cash flow via "presale."

And the author's argument - why he thinks ebooks must fail - is because ebooks do not work this way, and cannot be "presold" to "brick and mortar" bookstores in the way that paperbacks and hardcovers can.

Ebooks are effectively sold on a consignment basis - meaning the money for the sale is distributed after the sale is made, not up front. Stores don’t buy inventory, they put the file in a database and distribute copies as they are sold. This means that ebooks don’t have a huge returns problem, but it also means they cannot generate short-term cash flow like print books do.

Unfortunately, one never gets a straight answer as to why this inevitably spells death for publishers, other than the sense that publishers depend on the short-term income of "presales." But am I crazy, or do presales seem to be almost the equivalent of a loan made by bookstores (where the bookstore is simply paying the publisher in advance of the actual sales)? Actually, it is unclear why publishers wouldn't be making the exact same amount of money if bookstores payed publishers AS THE SALE OCCURRED rather than BEFORE THE SALE OCCURRED. (Think of it this way: a loan shark pays you winnings before your team actually wins, with the stipulation that you pay the money back if the team loses. How is that ANY DIFFERENT quantitatively from the loan shark who waits to pay you until after your team wins?!)

The other thing that annoys me about this article is that the author seems to forget that this situation is not at all unique to book publishers. Record companies have gone through a DIRECTLY ANALOGOUS situation when CD's gave way to mp3's. And they are doing fine, because they figured out a way to adapt.

Record companies play a role directly analogous to book publishers. Record companies "sign" artists to their label, give them monetary advances to be recouped by the artist's future sales, and pour money into marketing and sales of the artists' records. Also, like book publishers, record companies "presell" to record stores and promise to "buy back" the remaining unsold units. This was how they got their "short term" income to be invested into marketing and production - that is, until the mp3 trade changed the rules.

As evidenced by the first two years of Napater (a file-sharing website), there were initial growing pains, and the record industry was forced to change their rules about many things, nonetheleast of which was the fact that mp3's (which have no physical existence) cannot be presold, and hence, record companies had to learn to wait until "units" were sold to the public to be paid.

One could easily see our author's article having been written about the mp3 industry, arguing that mp3s must fail because they do not accord with the record/CD model of doing business. But the record companies did adapt, and it took a small number of years for them to do it.

The author also complains about the fact that publishers will have to adapt the way they do marketing and advertising, suggesting that these are new costs (all to sell books which are less expensive than their physical counterparts).

Ebooks will still have to be sold and marketed, just in different ways as there will be far less reliance on an upfront advance buy-in, but far more reliance on ongoing marketing through the use of content and metadata - as well as user-generated content and promotion tools to get the book marketed. These are completely new expenses for publishers who traditionally think of marketing as publicity and display advertising for new books, not ongoing support and marketing for long-term sales.

New expenses? Yes and no. While the expenses of e-marketing may be new, they would simply REPLACE the expenses of marketing physical books to "brick and mortar" establishments. The expense of designing websites, blurbs for existing websites, etc, will simply replace the costs of designing in-store displays. And I have to imagine that the cost of involving authors in cyber-chats to promote their books would be less expensive then flying those authors to bookstores and putting them up in hotels for book tours.

Of course, as much as I want e-books to replace regular ones (I don't miss regular books at all!), it will be several years until publishing goes fully digital. As such, the transition will not be as "all-at-once" as our author dreads, and the "cash flow problem" will likely not be catastrophic, as it will happen very gradually, allowing publishers to adjust gradually (just as mp3's replaced CD's over several years, and record stores even still exist).

Why won't the change happen quickly? Because ebook readers are quite expensive. The Kindle 2 lists at $359, and it is unlikely that the casual reader will buy it. At its prohibitive price, buying ebook readers is not in the economic interest of most readers (who may go through several books a year, but not enough to justify the one-time cost of $359). Where I read enough books a year to make the cost worthwhile (or at least a non-factor) I don't see too many readers eager to give up the, at this point, more cost-effective option of "real" books.

All of this means that publishers won't be suddenly starved of the "short term" income provided by preselling books. They will not wake up one day and find that this income is gone. Instead, what will likely happen is that publishers find a gradual diminution in "presale" revenue each year until one day, the last bookstores close their doors.

But in their place will be ebooks stores. And while publishers cannot presell ebooks to these stores, they will still get the same amount of money, but in a more "real time" scenario; instead of getting the money from book sales in advance, they will get them, say, on a monthly basis (or even in absolute real time, as the sales happen).

And I cannot think of one reason why publishers cannot function this way. Just as most other businesses do, publishers can learn to make their money as sales occur, rather than before sales actually take place. Record companies have gotten used to doing this. So can book publishers.

In the end, "Why ebooks Must Fail" may be better named, "Why the Old Model of Book Publishing Must Adapt."


  1. But am I crazy, or do presales seem to be almost the equivalent of a loan made by bookstores (where the bookstore is simply paying the publisher in advance of the actual sales)?
    Until Dave Ramsey gets a lot more popular, people just aren't going to notice the difference between a loan and profit. The lower class practically lives off of cash advance loans, which sure seems like a downward spiral to me...

    And am I missing something, or is digital distribution going to make their business much simpler and more predictable. They can make an entire sale start-to-finish with no human involvement on their part.

  2. >>>"And am I missing something, or is digital distribution going to make their business much simpler and more predictable. They can make an entire sale start-to-finish with no human involvement on their part."

    You are not crazy. As I mentioned, whether the publisher gets the money before the store sales are made, or at the time the store sales are made, they are making the same amount of money. I cannot see why the "presell" method is any more efficient than the "real time" method. I just put the "Am I crazy..." bit in because the argument must appear valid to the author, but for the life of me, I cannot see how it is.