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Hank

HENRY ROSENBLOOM is the founder and publisher of Scribe. A son of Holocaust survivors, he was born in Paris, France, in 1947, was educated at the University of Melbourne, where he became the first full-time editor of the student newspaper, Farrago, and later worked in the Whitlam Labor government for Dr Moss Cass. The author of Politics and the Media (1976), he has been a book printer, freelance journalist, book reviewer, and occasional newspaper op-ed and feature writer. In 2010 he was presented with a George Robertson award for service to the publishing industry.

The following is a slightly modified version of a talk I gave to introduce a session called ‘Rights Trading: new knowledge, new practices’ in Sydney on 29 November 2011, as part of a day-long industry seminar sponsored by the Australian Publishers Association called ‘The Bu$iness of Digital Rights’.

It’s hard to believe, but Amazon released its first Kindle in the United States just four years ago. Accordingly, the digital transformation of books in Australia has only been underway for a short while. Most local publishers, whether they were large or small, only needed to prepare for and engage with this transformation two years ago or less. As they did so, they had a number of key concerns that were complex and often inter-related:

  • They had to try to understand the technical and practical challenges coming, and how their organisation could or should deal with them. This included questions of settling on e-book formats and platforms, the resources needed to convert print files so they would be available on them, and the workflow consequences.
  • They had to deal with the commercial challenges. This included entering into contractual arrangements with authors and agents, and e-book retailers; e-book costing and pricing; and the level of investment necessary or even possible to do the job properly.
  • They had to deal with the strategic challenges. This included dealing with concerns about the security of their e-files; how much of their list to convert and when; and the likely effects on their business overall.

While they were wrestling with all of these matters, they all knew that they would not get back their investment of time and money in the foreseeable future. The Australian market was still very immature, with very few e-retailers of any size operating in it. At the same time, they knew they had to make that investment to be part of the future that was rushing toward them. Even today, I’d be surprised if any Australian publisher has yet recouped its costs of going digital from its e-book sales.

Although it’s been a rocky road, I think we can now say that the initial technical and commercial challenges have largely been met, as have some of the strategic challenges, but that the key commercial and strategic challenges remains unresolved.

The ePub format has become the default e-book format internationally, and many e-book platforms now accept it. Publishers have, by and large, worked out how to go about the conversion process, and have adjusted their organisational structures to cope with the new work demands that flow from digitisation. There are still delays and quality-control problems with e-book conversion — which end up frustrating consumers — but publishers get what they pay for.

The commercial challenges have been immense, and under-appreciated outside the industry. For some time, it wasn’t even clear whether existing publishing contracts included e-book rights; eventually, most publishers decided that it was in everybody’s interests for them to expressly acquire electronic rights in their titles. This required contractual addenda to be drawn up for old agreements, and for the new clauses to be incorporated in new agreements.

Simultaneously, the matter of e-book royalties had to be thought through and negotiated. This was another version of ‘How long is a piece of string?’ Publishers have to relate the royalties they pay to retail prices and sales, but in the case of e-books this was mostly unknown and highly speculative. Eventually, led by US practice, most of the industry settled on a royalty of 25 per cent of nett receipts. Inevitably, this will be revisited once we’ve all had enough real-world experience of the consequences.

‘Nett receipts’ begs a question or two, of course. It’s a function of list-price sales less trade discounts. But what price should e-books be? The experience of the US, which, because of Amazon’s entrenched position, led the world, was that they were very low in relation to print prices. Most Australian publishers have a much more conservative answer to this question, and priced their e-books initially at levels ranging from 80 per cent to 100 per cent of print-book prices. Partly, this was in recognition of the fact that they were incurring substantial extra costs to digitise their lists, with only the absence of print bills compensating for this. Partly, also, it was probably a recognition that they would rather start high and gradually move lower, than start low and have nowhere to move.

The other side of ‘nett receipts’ is the level of trade discounts that publishers provide. And here we come to the fact that dealing with e-book retailers has been the most trying commercial challenge of all. Of the international players, Kobo entered the scene first and relatively straightforwardly. But the big three, the so-called gorillas — Amazon, Apple, and Google — didn’t even bother to talk to local publishers until relatively recently. Some consumers were unhappy about the lack of local e-book content, not realising it was because the content sellers hadn’t bothered to deal with the content providers.

Then, when discussions and negotiations did start, it was quickly apparent that there was a vast disparity in the resources available to the parties. Even the biggest trade publisher in the world is a minnow compared to, say, Amazon. Not surprisingly, publishers found that every clause of every draft agreement favoured the content sellers. Everything had to be thought through and negotiated — e-book pricing, discount terms, duration, etc. There were different models on offer. And there were also serious worries about possible infringements of trade-practices legislation, and the downward ratcheting effect of so-called ‘most-favoured-nation’ clauses, whereby the major e-sellers insisted on never being disadvantaged on pricing, whatever the circumstances. This became a long and arduous process.

(I should add here that a number of local e-book vendors have since emerged, and that dealing with them has been pleasant and relatively straightforward. A couple of them — Booki.sh and ReadCloud — are offering much-needed solutions for local booksellers, and others provide solutions for school and public libraries.)

Most important of all, while wending their way through this labyrinth, publishers had to understand the likely effect of their decisions on the income that they and their authors would receive. Each deal was different, but each deal was related. Speaking purely for my own company, Scribe, we were determined that, on average, our authors would receive around the same income from an e-book sale that they would receive from a print-book sale. This was a complex combination of our e-book royalty rate applied to our e-book prices less our average e-book discount. The average discount we paid would vary, of course, depending on the market shares of our e-retailers. But we did everything we could to protect our authors’ interests in this way. The result, at least for the time being, is that we and our authors can afford to be indifferent as to whether we sell books physically or electronically.

This leaves us with I’ve called the strategic challenges. Local publishers were initially worried about two things: piracy and cannibalisation.

The first has to do with the anxiety that once an electronic file has been made available on the Internet, it can be pirated and downloaded for free, undermining or even destroying its commercial value. This is meant to have been dealt with by a universally adopted tool called ‘Digital Rights Management’, or DRM, which limits the availability of an e-book file to the territory in which it has been licensed. DRM is usually insisted on in publishing agreements, and we all commit to it, whether as sellers or buyers. The trouble is, it’s not worth the paper it’s written on: anybody with any digital ability can crack a DRM file in about 20 seconds. This means that digital piracy is unavoidable and inevitable. We’ve lost this battle before it’s even begun.

‘Cannibalisation’ was the word we were all throwing around 18 months ago or so, worrying that each e-book sale would occur at the expense of a print-book sale. And with e-book prices much lower than print-book prices, this seemed a sure path to ruin. What has happened since, at least in the United States, is both more and less worrying: e-book sales are going through the roof, while p-book sales are going through the floor. Or, to put it more conventionally, trade sales of printed books, both in quantity and value, are declining by much more than e-book sales are rising. As a result, most trade publishers’ turnover is down.

For example, in the first six month of this year, Penguin Group’s worldwide operations were down 7 per cent, or 36 million pounds, compared with last year; within this figure, digital sales went up by 64 per cent, or 22 million pounds, while print sales went down 13 per cent, or 61 million pounds. In the same period, Simon & Schuster reported an overall decline of 1 per cent, even though digital sales increased by 115 per cent, or $30 million, because print sales declined by 10 per cent, or $33 million.

However, even given these turnover declines, both publishers’ operating margins improved. And a batch of recent financial reports from major US houses confirms that, despite the divergent print/digital sales trends, their profitability has increased. This can only mean one thing: the deals they’ve struck with e-book retailers are more lucrative than their print-book sales & distribution arrangements. How long the marketplace will accept this arrangement is anyone’s guess.

So we now have some answers to local publishers’ initial concerns, and they’re not necessarily answers to our liking. But that still leaves us with what I’ve called ‘the key commercial and strategic challenges’. That is, most simply, how do we manage the transition from print to digital, stay in business in the meantime, and come out the other side, fit for purpose?

Australia is currently the most challenged book market in the world. (These are not my words, by the way — they were uttered spontaneously by John Makinson, the chairman and ceo of the Penguin Group, during a chance encounter we had at the recent Frankfurt Book Fair.)

Everybody knows the trouble we’re in: a high dollar that makes our book prices look high by US and UK standards; offshore online competition free of GST and duty, further enabled by subsidised international postage rates; a post-REDgroup market down by over 20 per cent; and consumers and consumer advocates now treating books like commodities.

On top of that, we have an additional problem to do with territorial e-rights that’s just over the horizon: there’s a small but discernible tendency for overseas publishers to demand world e-book rights, even when they don’t have physical territorial rights (and they’re trying to have their way with those, as well). This threatens to be the greatest of all our challenges: if we give in to, or lose, this battle, there’ll be no local publishing industry left.

At the moment, having hacked our way through the e-book jungle, but with decent e-book sales still over the horizon, we have the worst of both worlds: an old business model that doesn’t work well any more, and a new business model that’s still a work in progress. We now have to turn that progress into achievement.

Henry Rosenbloom