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  • Published: Apr 15th, 2009
  • Category: Books
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Discounts Must Align to Risks

To be perfectly clear, this blog is not sanctioned by, endorsed by, or even remotely associated with Oxford University Press, my fantastic employer. What I say here is my opinion and my opinion alone.

In my inaugural post, Why Ebooks Must Fail, I promised to follow up by exploring a variety of business models I believe could work in the long run for publishers of all sizes and shapes. This is the first part of a 3-part series in which I propose changes and new initiatives for ebooks that, I believe, will help ensure that ebooks don’t fail.

I theorized that the book industry relies too greatly on advance sales and billing and that the predominant model of ebooks, consignment sales, cannot generate necessary cash flow and forces publishers to bear a significant risk. Even with all the savings found by excluding printing, warehousing, and shipping, a publisher still has other significant costs: author acquisition, manuscript editing and production, and sales and marketing. Sure, it would certainly help if authors were to get higher royalties and no advance, but realistically, in top-tier trade publishing this is a non-starter.

In a consignment model, cost recoupment is meted out over time, which leaves publishers with a far longer-term deficit than occurs with print models. Publishers require models that address cash flow and allow them to be competitive in the pursuit of top-grossing authors, who will always require significant advances. So my conclusion was that ebooks would fail as a wide-ranging commercial success without significant changes to the basic business models.

But cash flow isn’t the only issue vexing publishers regarding ebooks. While there is a great difference in risk-taking between print and ebooks, there is a very strong similarity in reseller discounting. In print, discounts are well justified as retailers buy and pay for inventory up front. Publishers and resellers see this as a win-win scenario as the goal is to “pile them high and watch them fly.” The reason to give a discount to resellers is to create an incentive for risk sharing. In the case of the trade books model, the retailer is outlaying cash for inventory that it has to then sell to recoup its investment. Granted, the books can usually be returned, but the reseller is tying up cash and shelf space, which are significant risks.

Discounts must align to risks. Yet many publishers are selling ebooks at close to or the same discounts as print books, even though there is no risk of advance inventory purchasing. There is a logical genesis here as many retailers made steep investments in technical infrastructure that was very, very slow to recoup in the dark ages before Kindle, Sony Reader, epub, or the App Store. But those days are mostly over and as unit sales of ebooks increase, recoupment of the initial and even the ongoing incremental investments go down dramatically on a per-title-sold basis. It’s one thing for the discounts to fund the development — but like tolls on a bridge, after the bridge is paid off, the tollbooths should come down. Well, ebook tolls are collecting more than ever!

The following ideas, if massaged and improved on by enough smart people, may help evolve trade ebook selling into a practice that wisely shares the risk and provides stimulus and margins for all involved. These models are not new – they are culled from today’s trade retail models. With that in mind, here are three discount models for discussion.

The first is called On Consignment, and it would operate exactly as it does today, except with shorter, perhaps dramatically shorter, discounts. Discounts should align to risk and there is very little risk being shared in this model.

The second model is called Advance Purchase (non-Returnable). Rather than rely on the timing of sell-through at the reseller, publishers are paid for ebook sales in advance. So, resellers that wish to carry an ebook of a publisher can order it as they currently do, or they can purchase the number of “sales” they believe they would make in a given period of time, and pay for this upfront at a greater discount. For this model, a retailer should receive discounts similar to those given on non-refundable sales in print.

The third model is called Refund for Credit (Returnable). Essentially it is a “returns” model for the ebook market. It’s designed to allow retailers to take risks on a larger pool of titles, as they can receive credit by “returning” some of the advance “sales.” This model helps retailers get a better discount for a title than they would if they order On Consignment, but less than the Advance Purchase model. It also helps publishers, as there would be greater incentive to pre-pay for sales for a wider variety of titles, enhancing the cash flow. Again, this model should employ discounts similar to those available for returnable sales in print.

It’s very important to note that all of these models must comply the Robinson- Patman Act. This 1936 law addresses the practice of price discrimination in the retail sector. Broadly speaking, the law protects smaller retailers by ensuring that goods sold to all retailers are sold under the same terms, regardless of the size or bulk purchasing ability of the retailer. So no matter the quantity offered, the same discount exists whether you buy 1 copy or 1 million in advance — within the same model, of course.

The models outlined above are starting points — they are based on the print world and systems that have existed for many, many years. They are legal, they offer ways that retailers and publishers can share some of the risk of publishing ebooks, and they can help ebooks become a super-growth opportunity for all parties. Authors can get necessary advances; publishers can sign top-flight authors and push ebooks as hard as they do print books, and retailers can offer better pricing without losing their all-important margin. Yes, there would be some of the same challenges as exist in the print world, but when you peel it all away; there is a huge difference in efficiency. We don’t have to ship back and forth books. We don’t have to risk inventory, we don’t have to play so many games with pricing between versions of a work.

The key is that taking risks promotes a healthy marketplace, and in the case of book publishing, advances our culture and impacts our world. A world with shared risk is a world where business can prosper — and ebooks need to find more balance in risk in order to prosper. Such evolution is necessary to revolutionize an industry.

Part 2 of this series, I will focus on proprietary editions, membership clubs, and licensing.

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