As E-book Sales Grow, So Does Disintermediation

1Executive Summary

Uber-literary agent Andrew Wylie was forced to back down from his plan to sell clients’ e-book rights directly to Amazon, bypassing their print publishers. On the same day, panelists at GigaOM Pro’s E-book Bunker Session said traditional publishers still face a significant threat of disintermediation.

That threat is coming in part from the growing ability of even little-known authors to find an audience without a publisher by leveraging new digital platforms like Amazon’s Kindle and Apple’s iPad, panelists said. But another major factor is an erosion in overall publishing revenue, as the availability of low-cost e-books continues to undermine the longstanding hardcover pricing model.

“I think the overall size of the publishing pie is going to shrink because of what’s happening with pricing,” said Mark Coker, CEO of indie e-book publisher Smashwords. “The $35 hardcover is going to be a thing of the past in a few years. We may sell a lot more books, but the overall size of the pie will shrink. That’s a real problem for traditional publishers,” because of their high cost structure.

Already, Coker said, that shrinking pie has forced many mid-list authors — those writers who rarely make the bestseller list — to shoulder more of the tasks that publishers used to take on, particularly those around marketing and post-publication promotion. While this sounds like a burden, the changes are also opening space for new publishing business models. As traditional publishers do less, they leave the door open for new market entrants to do more.

“One thing [independent authors] can do is experiment with price,” Coker said. “We have authors who offer their first book for free, to build an audience, and then sell their next books for $2 or $3. A traditional publisher can’t do that. But we have what are basically no-name authors [with] tens of thousands of readers on the iPad because they offered their books for free. Now they have an audience they market paid books to.”

However, as Wylie’s forced retreat made clear, traditional publishers are not likely to give up control without a fight, and they’re not taking these changes lying down.

Nathan Bransford, an agent with Curtis Brown, noted that many traditional publishers have switched to a so-called agency model in dealing with e-book distributors like Amazon and Apple, in an effort to keep a floor under e-book pricing. Under the agency model, publishers set the retail price and keep a larger share of the revenue compared with the traditional wholesale model.

Publishers also fought back against Wylie’s effort to cut them out of the e-book market altogether. In July, Wylie announced his company had secured digital rights to 20 titles from his existing clients or their estates, including such leading literary lights as Vladimir Nabokov, John Updike and Ralph Ellison. He then sold those rights exclusively to Amazon. Random House, which published 13 of the 20 titles, struck back. It refused to publish new titles by Wylie clients, putting those authors at a disadvantage. Eventually, Wylie caved.

“Print distribution is an extremely complicated business,” Bransford noted. “It’s a lot for most writers to take on. So as long as we’re still printing books, traditional publishers have that advantage.”

A lot for one writer to take on, perhaps, but maybe not for a group of writers.

“Could big writers go direct without a publisher? It depends on whether they want to get their hands dirty,” said author Simon Wood, whose titles include “Working Stiffs,” “Accidents Waiting to Happen” and “We All Fall Down.” “Some are probably comfortable with just getting that big check and letting someone else do all the work. But could the top 10 mystery writers get together and decide they’re going to hire their own editors, hire their own marketing people and so forth? I think they could, if the inclination is there.”

If it’s not there now, the inclination could develop soon enough as the economics of e-book publishing shake up the traditional relationship between publishers and authors. “An author can go to Smashwords, or directly to Amazon, and get 80 percent of the net, 70 percent of the list price,” Coker said. In the case of traditional publishers, author royalties on e-books are typically 25 percent of net sales, although some authors and agents have been pushing for 50 percent royalties.

For now, of course, the “net” from e-book sales remains a small number, and even 80 percent of a small number is still a small number. But e-book sales are growing far more rapidly than are print sales. For some genres, like romance and business books, e-book sales can account for 20 percent or more of total unit sales, panelists said Wednesday.

The economics of e-books are developing on terms far more favorable to authors than traditional publishers, and those trend lines will be increasingly problematic for the latter. The shift from print to e-books could mean lower total revenue, with more of it going to authors. That creates a powerful incentive for authors to start looking for other types of publishing arrangements.

At the same time, the lower revenues caused by the shift only further constrains publishers’ resources and their ability to deliver a significant upside to authors in exchange for accepting the traditional publishing terms.

We’re not at the tipping point yet. And as Wylie’s recent experience shows, traditional publishers still have cards left to play. But it’s not a story with a guaranteed happy ending for them.

Related Research: The Week E-books Won the War

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Paul Sweeting

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