Wednesday, February 8, 2012

The Dilemna for Publishers of Fiction

Photo Credit: George Eastman House via Flicker

The traditional market for publishing fiction is under assault. The first salvo came with the introduction of print-on-demand. However, it appears the real threat is from the electronic book movement. One of the most significant trends from these initiatives is the emergence of competition from self-published  new comers, or even established pro's that are taking their books directly to consumers. How should a publisher react in this environment?

It is natural for anyone to protect their home front. We see publishers using a variety of measures to stave of the encroaching 'hordes'. In order to protect eroding retail prices, publishers have turned to agency pricing to extend their price control. They use digital rights management (DRM) to help eliminate piracy. They are also working to align costs with the new reality, taking measures such as reducing author advances.

These efforts are misplaced. The threat is not e-book technology. The threat is direct-to-market sales by authors, and ebook technology is merely an enabler for this threat. Even if defensive efforts are successful, the best case will be to slow market erosion. Yet that erosion will still occur as more independent authors become instant millionaires (See the article from USA Today linked above). However, it is hard to conceive how publishers’ current tactics will really reverse the trend.  Arguably, the aforementioned tactics will actually accelerate publisher’s market share loss.

DRM will retard (but will not eliminate) piracy. However, it is clearly not well received by consumers. A recent poll on ebook web site asked readers if they pirated books.  This bulletin board thread saw over 10,000 views in less than two weeks. The comments reveal that much of the ‘pirate’ activity by consumers is in order to overcome limitations imposed by DRM. For example, a consumer who buys a book in one format (e.g., paper or Kindle ereader) may want to read it in another format (e.g., Nook ereader).

Of course, it is the publisher’s right to price each additional format separately. However, the comments on this and other threads at Mobileread make it clear that many consumers find this pricing approach to be unfair. Given the choice of buying the same book with or without DRM, at least some of the market will clearly prefer the format that is not “DRM-infested”, to use a term coined at the message boards. Unfortunately for publishers, this preference pushes consumers to independent authors. Many independents have chosen to publish books in DRM-free formats. At the same time the traditional publishers rely on DRM as an important ‘feature’ of their ebook publishing initiative.

Another publisher move has been the use of agency pricing. Traditionally, publishers sold books to retailers who then set the prices for consumers. Retailers often discounted books, perhaps as loss leaders to attract consumers. When Amazon introduced its Kindle it began to price ebooks at levels below paper books, and even below the wholesale prices that publishers charged Amazon. There was a debate in the industry whether Amazon’s goal was to buy market share or to set a new normal for retail book prices. In the short-term this discounting helped publishers because Amazon subsidized their sales. However, it appears that publishers were more concerned about potential long term effects on the perception of a book’s value. In response, they introduced agency pricing. With this approach retailers were no longer customers of publishers. Instead they were agents paid a percentage of sales for the distribution services they provided. With this new business relationship, publishers could directly set retail prices, and put an end to ebook discounting.

Although there was no ‘official’ agency price, a quick perusal of books on sale reveals prices range from $7.99 for backlist books to $12.99 new releases. Successful direct-to-consumer authors have established price-points starting at 99 cents and ranging up to $3.99. Many of these independent authors have aggressively promoted their books by giving away selected books for free in order to promote sales of other books. It is only to be expected that market forces will encourage consumers to spend at least part of their budgeted reading time on these free samples and part of their dollar budget on these lower priced author-direct alternatives.

Finally, there are the publisher’s efforts to control costs. As the pandodaily article above notes, publishers have begun to reduce the advances they are willing to offer. Some publishers have reduced the amount they are willing to spend on marketing and editing (New Yorker). These cost-cutting trends reduce the incentive for authors to sell their best works to publishers, and encourage them to explore the direct publishing market.

Even if publishers craft a winning set of defenses, it’s clear that the direct market will not disappear. The current business model is under attack. This leads us to question what publishers could do to embrace these new trends instead of fighting them. Look for my next article on Rethinking Fiction Publishing.

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