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.

12 Replies to “Discounts Must Align to Risks”

  1. Hey Evan,

    First of all, thanks for posting all these interesting perspectives on the publishing industry. As a student I started a project about ebooks and I need to do some research for it. So I contacted several publishers but nobody gave me clear answers or possible solutions on how to (r)evolutionize the industry for the new way of reading. But your blog is very helpfull and I’m really looking forward for your other posts. There’s only one big question that rose when I read all your posts: what about the educational market? In your posts you’re only talking about the trade book market… I guess there is a big difference in the educational segment because of lower risks in that segment.

    What do you think?

    Evan Reply:

    J:

    Yes, education is quite different as nothing, to date in the world of ebooks or electronic content delivery has come close to being successful. Textbooks still reign as there isn’t a direct to consumer pathway as is found in consumer (trade) oriented publishing. Textbooks are selected (adopted) by faculty and/or administrators who in turn require the purchase by students or local schools. There are too many competing interests for this to work now – but watch Amazon as they will supposedly be announcing a unique experiment in Higher Education for a new Kindle.

    Jeroen Reply:

    Thanks for replying! So a good way to get the educational market into e-reading would be to team up with universities and decide on which books need to be transformed into e-content? By teaming up with the universities an e-book distributor knows, by estimation how many students are going to buy the books so a model of Advance Purchases should be applicable. I think for the educational market this is the way to go… Or is this just to shortsighted? What about the competing interests? I dont understand that part.

  2. I’ve been around publishing for a long time, and I can’t recall a greater feat of verbal masturbation since, perhaps, Harold Brodkey’s The Runaway Soul.

    Since when do American trade publishers – light years behind the cutting edge of the eBook phenomenon – get to pick their “business model” and impose it on the retailers who’ve dictated their terms to publishers for more than two decades? Who really cares that publishers can’t meet their cash flow needs without bloating their monthly revenue numbers with money they know they will have to credit back to retailers as returns come in? Where is the model in which inefficiencies are eliminated?

    Sure, these models may look nice to publishers (though it’s hard to see a retailer jumping at the chance to share more of the risk), but it’s just another manifestation of publishing’s myopia that people of influence are wasting their time on this nonsense while the important work is done elsewhere, and while even their most crippled competitors are eclipsing them.

    I’m sure newspapers would like it if subscribers would pay for content, too, but they abandoned that idea in, oh, 2002…

  3. Evan, how do you see new discount models possibly rolling out in practice? Would publishers band together to negotiate with Amazon and other retailers?
    What incentive would there be for ebook retails to renegotiate the current discount structure?
    I still feel strongly for revision of advances. Big authors should take their cue from the players in Hollywood – the real money is in profit share.

    Evan Reply:

    Thanks for the comment.

    Publishers cannot band together to negotiate with resellers as that would be collusion. Each publisher must negotiate on their own and set their own rates.

    The big question is why would retailers accept this change? My answer is that it will take some work, some cooperation, and some experimentation. I am not sure the specific plan outlined here will work – though I am convinced that publishers and resellers need to find smarter ways to work out risk management in publishing. Payment terms and discounts are one obvious place to start – but there are others – profit sharing by authors is certainly one route, as you mention.

  4. when you start censoring comments,
    it indicates an implicit wish for the dialog
    to stop. sure enough, you got your wish.

    -bowerbird

  5. Evan,
    I think you’re actually raising the bigger issue of publishing business models. Reseller discounts in the print book world have evolved and increased based on multiple factors such as returns, volume purchasing…and “risk” and have actually contributed to rising cover prices to accommodate both higher discounts and lower net unit sales.

    Ebook pricing, reseller discounts, author royalty share and publisher profit is a very perplexing equation; traditional book selling models are not an effective guide. Most trade publishers do not yet embrace ebooks as an intrinsic part of their business…they continue to consider ebook sales as incremental to “core” (hardcover, paperback, audio) formats.
    eBook sales are growing but not as fast from trade publishers points of view to cause an extreme makeover of business models, discounts, author agreements or even book production processes. Until ebooks make a greater contribution to revenues most publishers will continue to apply or tweak the old print rules to handle ebook sales, reseller discounts, and authors royalties.

  6. Evan,
    Discounts shouldn’t align to “risk”. They should align to “contribution.” In this case, they’re quite similar. The “contribution” of a brick-and-mortar store is huge: maintaining a physical location, buying in stock on spec, handling heavy physical merchandise, shelving it so that customers can find it, and then pulling and sending back stock brought in with the hope of profit that now represents a loss.
    I have written that compensation to ebook retailers is bound to diminish. Amazon is actually taking the lead on that, going for NEGATIVE margin in order to offer a $9.99 price point much of the time.
    However, I don’t think your models have much of a chance to succeed. Aggressive buying and selling in the physical world is not done to make an economic model work; it is done because more stock equals (at least the opportunity for) more sales. I don’t think bringing the ideas of returns and distressed inventory into the ebook world constitutes progress.
    Mike

  7. Unless publishers confront head on the monopolistic nature of the ebook market–B&N’s Fictionwise vs Amazon and not much else, you’ll have no choice of models. And as Amazon has shown, they can and in the future will determine at their owner’s command what books should be sold and how.

    Isn’t it time to fund a nonprofit organization to create a mega site that would provide open access download sales? Open it to all publishers. Put in a better review/rank algorithm than Amazon’s very flawed version to allow readers to find books they’d want to read. Offer multiple discounts to publishers of the type you’ve suggested here.

    Right now you have as much ability to negotiate discounts with Amazon as you did with Ma Bell in the 1970s.

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