Disruptive Book Publishing: Amazon and Google

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The creation of e-readers and tablets caused the popularity of e-books to surge. E-books are changing how readers interact with books, how books spread and travel. Technology has changed the publishing model: how authors publish their work and find audiences and how publishers interact with authors and vendors. Drawn by potential in the changing market and huge store of information, tech giants like Google and Amazon have entered the sphere, revolutionized it, and tangled with publishers.

Background

Demand for books

Market Characteristics

Pricing is extremely important in the book market. Currently, books have a highly price elastic demand, meaning that their demand is sensitive to small changes in price. According to Amazon, by decreasing the price of an e-book by 33% the author garners 16% more revenue and a 74% increase in the audience that the book reaches.[1] This is supported by the trend found in a study conducted by Barrot et al. [2] for physical books as well, where estimated price elasticity of a hardcover book is -3.72 and paperback is -4.31. For every 10% increase in price, demand for a hardcover would decrease by about 37% and demand for a paperback would decrease by about 43%. The mean estimated price elasticity for any good in the current market is -2.62 according to Bijmolt et. al,[3] making the book market even more sensitive on average to pricing. This makes any expert knowledge on pricing trends extremely valuable in the book industry.

Further, e-books have introduced a level of market saturation in the current era unseen before. With the inexpensive cost to produce and publish a book on an online market, the ability for an author to make their work known among the rest has become increasingly difficult. Free content is a modern anomaly, giving indie and self publishing authors more popularity while taking away from authors who sell their books for profit. A survey conducted on Apple iBooks found that free books were downloaded 39 times more often than other books. This trend has pushed authors selling their content for money to make some of their work available for free to attract business and maintain competition with authors who produce free books.[4]

These lower costs of barrier of entry have significantly challenged the previous oligopoly that dominated the publishing market. Historically, the publishing market has been dominated by seven major houses, many part of bigger media conglomerates.[5] Without the same vertical control of the printing processes, these large companies have lost a significant edge. Authors may be more incentivized to look to self publishing, where they can earn royalties ranging from 60-80% rather than the 12-17% that major publishers offer.[6]

E-books

As we continue on into the digital age, e-books have risen in popularity and disrupted the book market as we know it. With the advent of e-readers and tablets, many feared that e-books would completely eclipse traditional books. The number of booksellers began to decrease and the physical book market began to decline[7]. However, demand for physical books remains. Even though use of e-books continues to grow, studies show that the use of e-books supplements the use of traditional books; very few people claim to use only e-books[8]. In fact, while physical book purchases did slow with the emergence of e-books, in recent years sales have started picking up again[7].

Even though traditionalists have no need to fear the disappearance of physical books, the popularity of e-books is growing as more people purchase tablets and e-readers. In recent years, the sale of e-readers had started to slow and with it, so has the sale of e-books. This is not to say that the e-book market is no longer growing, simply growing at a much smaller rate. The book market as a whole seems to be reaching some sort of equilibrium with purchases of e-books making up around 27% of the market[9]. Rather than a real change in the demand for e-books, this stabilization seems mostly driven by the slowdown in sale of e-readers. Some have hypothesized that perhaps most people who would want e-readers and tablets now have them.

Impact on Libraries

The emergence of e-books has had one other lasting impact on a market in the realm of books: libraries. Distribution of e-books by libraries has dramatically increased in only a few years. However, in attempts to acquire e-books for their libraries, librarians have conflicted with publishers over availability and pricing. Some librarians think the problem is that publishers feel e-books are decreasing profit margins. Additionally, once a physical book is purchased it can be loaned as many times as the library wishes, but the ownership of e-books works differently. Publishers only allow licenses, usually short-term, which limit the number of people the library can loan the e-book to and limit the time an e-book can be loaned. Libraries want to keep up with the digital age, but publishers do not fully know how to handle the transition either.

History of publishing

Emergence of Publishing

Publishing, the business of commercial book production,[10] became a well established practice in the 19th century. Publishers act as the middlemen between authors and readers, purchasing the works of writers and then selling them to vendors. At the most basic level, they selectively choose works to produce, provide editors to ensure quality, and then market the work by advertising and generating publicity.[11] The profit is then divided between the author, who receives royalties, the publisher, distributors, and retailers.[12]

In the past, the roles that these entities took on were generally split between the author, the printer, and the bookseller. However, with increased literacy, specialization, and education standards, plus the emergence of mass printing in the modern era, the commercial practice of book distribution became highly lucrative. There was a wide growth in the number of publishing houses between the 1890’s and early 1900’s.[13]

Disruptive Publishing of the Past: Paperback Novels

Similar to e-books, the disruptive innovation in the book market today, paperback novels were the innovation of the late 1930s. Paperbacks, or known previously as pocket books, were invented by Robert de Graff and sold for 25 cents per novel. This opened the market to new readers who could not previously afford hardcover books, resulting in a widespread proliferation of books. The method was quickly adopted by many publishers, most notably Penguin Books. [14] However, the was much criticism regarding the literary quality of new paperback writings and the detriment it posed to the author. George Orwell argued that the low price of paperbacks hurt authors and publishers at the expense of benefiting the reader. According to Orwell,

“Hence the cheaper the books become, the less money is spent on books. This is an advantage from the reader’s point of view and doesn’t hurt trade as a whole, but for the publisher, the compositor, the author and the bookseller it is a disaster.” [15]

This fear never materialized. Eventually, the smaller businesses producing paperbacks were bought out by larger media companies. With little competition in the publishing market, these conglomerates were able to control the price of paperback books, and thus raised prices. In the end, the disruptive innovation expanded the market while retaining incentive for authors to produce work.

Modern Publishing

Value of Publishers

Despite the rising popularity of self publishing, major publishers are still doing well in America. In 2010, publishers’ net sales revenues in the United States amounted to $27.9 billion according to the Association of American Publishers.[3] One reason why is because of the long standing stigma attached to self publishing. It is a means of last resort for authors who cannot get their work accepted by major publishers. Publishers can reap benefits in the new vastly expanded e-book market where many more people have access to content through e-readers. However, what puts them back is still paying the costs required for “paper, printing, binding, warehousing, and shipping” physical books.[16] The paperback and hard book copies currently make up almost 80% of revenue for these companies, but slowly people are more incentivized to buy the cheaper e-book than a more expensive physical copy.[16]

The true distinguishing quality of publishers in the current era is their ability to make a book known. Most self published books suffer from a lack of discoverability as they are only known among the author's family and friends. By going through a publishing house that is well connected and has the ability to distribute content to many retailers, authors avoid this problem of being unknown. Publishers help with marketing and handling revenue from booksellers. For instance, publishers work to increase the availability of books in various markets (stores, libraries, audiobooks, etc.) and arrange promotional opportunities and publicity.

Traditionally, publishers have provided a variety of other services to help authors. Of course, one of these tasks was simply going through manuscripts and selecting those they felt had promise: publishers recognize that they must publish a certain quality of book and this helps provide an author with credibility and validation (as it preserves the credibility of the publisher). Publishers also help improve manuscripts by providing editors for authors.[17] Authors obtained all these services in one fell swoop through their publisher. The real fear for publishers is when emerging authors start using freelance marketing firms, designers, and editors with less overhead rather than going through the traditional media conglomerates.

Self Publishing

Technically, the notion of self publishing has existed for years and years. Often, self publishing has the negative stigma of being a last ditch or unprofessional resort for authors. However, more recently the outlook on self publishing is changing, regarded as a beneficial practice that can exist alongside traditional publishers. In fact, many traditional publishers will view self-publishing as a trial run and will reach out to successful self publishers [18] On the flip side, once authors have made a name for themselves what incentivizes them to work with a publisher? If they can edit, maintain quality, market, and produce their own books then why should they pay a percentage to have someone else do it for them[19]

Self publishing has changed over the past few years, both in process and impact on the publishing industry. The public is now more aware of what publishing entails, and so more likely to approach it. New business models are being created where publishing is marketed as a segmented process instead of an impenetrable industry and authors can pick and choose from the services offered along this process. [20]

The latest surge in self publishing has been led by e-publishing. E-publishing has changed how authors can take control of the publishing process as well as how the books can reach their audiences. If you search online, you can find many sources detailing how to self publish, mostly e-publishing because Amazon’s in the Kindle direct publishing business. Unlike physical books, e-books can be accessed by nearly anyone at any place at any time. One of the issues with self publishing is marketing and reaching a solid audience, part of a traditional publisher’s job is advertising and finding audiences for each book.

Fanfiction and Online Communities

Because one of the main goals of publishing is to find quality work and develop and fan base for it, it makes sense that the publishing world would be drawn by successful authors in fanfiction and other online communities. Many “fanfiction” websites have plenty of original work, and publishers are drawn in, using the online success of these authors to scout for potential talent. Fanfiction and self-publishing bring attention to another rising issue with traditional publishing: some no longer believe that publishers know best what audiences want. Gardner, head of content on Wattpad, notes that “There’s been a lot of talk about the need for diversity in books lately. On Wattpad, we see a true range of storytelling. You can find stories you wouldn’t be able to find anywhere else that cover emerging or underrepresented genres like urban fiction, fan fiction, and LGBT stories.” Authors are allowed to share “different cultures, experiences, and viewpoints.” Readers who want this diversity will flock to such stories[18].

Conflicts with Publishers

Amazon

Entry into the E-Book Market

Before its rise into the e-book market, Amazon started as a small online printed book mailing company in the 1990s alongside the small number of other products they offered [21]. During this time, major bookstore chains such as Barnes & Nobles and Borders controlled a quarter of the book market [22]. These retailers had the power to determine the success of works based on the number of books they chose to order. Amazon was an attractive alternative as it offered options to those in areas outside the geographical range of large bookstores. Further, the 1992 decision in Quill Corp. v. North Dakota ruled that retailers did not need to pay sales tax in states where they were not physically located.[22] Although Amazon now pays taxes in various states, this was not true in the past. With these advantages, Amazon soon dominated the book market.

In 2007, Amazon entered into the e-book market with the release of its Kindle e-reader. Although other companies such as Sony had released e-readers prior to Amazon, the success of the Kindle stemmed from already successful presence the company had in the book market. Amazon had already built connections with many publishers, allowing them to price their books at a discounted rate compared to the competition. Further, the company had a wider number of selections and an online customer base of nearly 65 million people.[23] Taking the lead in the e-book market early, Amazon now dominates 50% of a 1 billion dollar market.[24]

Self publishing

Amazon offers authors the ability to publish their content in e-book, print, or audio medium. The content is then accessible online worldwide on all Amazon retail sites and authors are able to earn up to 80% in royalties.[25] Amazon advertises this service as the alternative for authors who receive rejection letters from major publishing houses.

One of the most successful self-published Amazon authors is Hugh Howey, who released science fiction work on Kindle Direct Publishing. He argues that self published authors make more money on e-book sales than authors who publish through major publishing houses based on a report he compiled with help of a data scientist. However, this data is hard to confirm as Amazon does not release data on number of self published sales.[26] One reason for the success of these self published works is the lower price that Amazon offers for these works compared to those that come through major publishers. While most books that come through these large publishers are usually priced at $9.99, works by well known self published authors like Howey are priced at $5.99.[27] The sales for these independent works have been largely successful, accounting for nearly 31% of Amazon Kindle e-book sales.[28] However, many self published authors are against the latest Amazon Unlimited Kindle technology, that offers consumers an unlimited number of works for a subscription price of $9.99. Under this business model, self published authors have seen a significant decline in revenue. One well known self published Amazon writer H.M. Ward reports that where she previously made $5,200 in book sales a year, with Kindle Unlimited this has shrunk to $120. [29]

Conflict with Hachette

A dispute between Amazon and Hachette, one of the major publishing houses, broke out early last year over pricing negotiations. In 2012, the US Justice Department sued Apple and the five major publishers, including Hachette, of colluding to artificially increase the price of e-books. These companies aimed to use this as leverage to raise the price of e-books on Amazon in order to ensure that their hard book products remained competitive. In 2013, the Justice Department won its suit, forcing Hachette and other publishers to renegotiate their e-book prices with vendors. These negotiations broke down when Amazon demanded that the publisher lower their e-book prices and give a larger percentage of the profit to the author.[1] When Hachette did not agree to these terms, Amazon delayed shipping times of the publisher’s product and removed items from pre-sale, referring consumers instead to third party vendors.[30]

Many criticized Amazon of trying to strong arm the publisher to meet its pricing demands. This brought attention to the strength of the online retailer in the book market, which some accuse of being a monopsony, i.e. using their power to control prices. Authors such as James Patterson, Malcolm Gladwell, and John Green openly spoke against Amazon. They accused the retailer of trying to unduly control the book market and “bullying” the publisher that does the majority of the work for American literature.[30] Amazon saw decreased sales in protest and the Author's Guild is asking for it to be investigated on anti-trust grounds. Hachette also suffered from an 18.5% decrease in sales.[31]

The conflict was ultimately settled with a multiyear agreement between Amazon and Hachette. The deal upheld many of the Hachette’s original demands, allowing them to control pricing on their own e-book content, but offering incentives for the publisher to decrease prices on its content. Further, Hachette agreed to Amazon’s demands, maintaining that royalties given to authors from e-book sales would not decrease.[31] This resolution was seen largely as a win for Hachette, but the victory may be temporary as prices will be renegotiated again in a few years.

Google

Google Books is Google's plan to scan all the world's books (and newspapers and magazines etc.) to develop a book search. They claimed that it was their intention to make every book ever published available through this book search. In 2004, Google announced that it planned to partner with several universities to scan their entire libraries and then make the copies reachable online.

Clearly, one can see how Google would run into copyright issues. For each book that was scanned, the relevant authors and publishers claimed that their copyright had been violated and that they were due some percentage of the profits run by Google Books. Google was of the opinion that the scanning and publishing was fair use because it wasn't as if any user had access to the full text. Users were simply allowed to search and view a small portion of the text (not even a whole page), if the book remained under copyright[32].

Author's Guild v. Google

Then, in 2005, the Author's Guild and the American Association of Publishers filed a suit to prevent Google from scanning any more of these books. This case was deemed a class-action lawsuit, so all the author's who had ever published work were represented and would be bound by the outcome. Three years later, a settlement was proposed. Essentially, Google would pay $125 million up front and then be allowed to scan any and every book. Then Google would be allowed to not only show a snippet of the book, but sell the entire text with 2/3 of the revenue going to the copyright holders and 1/3 going to Google. Because this was a class-action lawsuit, thousands of authors were bound by this decision without their direct input. In response to the settlement, many authors asked to be removed from the plaintiff's class.

Later in 2009, the settlement was amended, but then Judge Daniel Chin struck down the settlement in 2011. Chin did not think that the Author's Guild's complaints were valid and that Google Books' presentation of the material was in fact "fair use". In response, the Author's Guild filed an appeal against this dismissal in April 2014[33]

"Without the permissions that Amazon had painstakingly acquired for its Search Inside the Book program, Google digitized authors’ works in order to lure book buyers away from online booksellers to its turf, seeking to bring countless eyeballs to its ads. Google is yanking readers out of online bookstores.”[34] -Roxana Robinson, Authors Guild President

Orphan Works

Approximately 70% of the books in the Google Books repository are under copyright but currently out of print[35]. These works are referred to as "Orphan Works".

If Google wants to scan a book under copyright but cannot find the author, it has two choices: 1. Google can go ahead and scan the book and prepare to face charges if the author notices and sues in the future or 2. Leave this book out of their goal Universal Library. The original class action settlement solved this problem because all Authors were bound. They would no longer be able to sue Google, just claim their due revenue and opt out of the program. The Department of Justice presented worries that this would allow Google to have a monopoly on the largest online library as the settlement only applied to Google. As long as authors receive revenue, there exists no motivation to make sure other companies also have the ability to create their own comparable libraries.[32]

References

  1. 1.0 1.1 Amazon/Hachette Business Interruption
  2. Barrot, Christian, et al. "PRICE ELASTICITIES FOR HARDCOVER AND PAPERBACK FICTION BOOKS." Schmalenbach Business Review (SBR) 67 (2015)
  3. 3.0 3.1 Bijmolt, Tammo H. A., Harald J. van Heerde, and Rik G. M. Pieters (2005), New Empirical Generalizations on the Determinants of Price Elasticity, Journal of Marketing Research 42 (2), 141–156.
  4. A Look Ahead to Self-Publishing in 2015
  5. Oligopoly The Big Media Game Has Fewer and Fewer Players [1]
  6. 10 Trends Driving The Future Of Book Publishing
  7. 7.0 7.1 The Kindle is dead the book is back. Or is it
  8. E-Reading Rises as Device Ownership Jumps
  9. Paper is back: Why ‘real’ books are on the rebound
  10. Publishing. Merriam Webster Dictionary.
  11. Germano, William. "What Do Publishers Do?". Getting It Published: A Guide for Scholars and Anyone Else Serious about Serious Books.
  12. Book Cost Analysis - Cost of Physical Book Publishing.
  13. History of Publishing. Encyclopaedia Britannica.
  14. The Revolutionary Effect of the Paperback Book.
  15. Orwell, George. “Review of Penguin Books.” New English Weekly, March 5 1936.
  16. 16.0 16.1 Book Publishers Scramble to Rewrite Their Future
  17. The New Publishing Paradigm, Part Two: What Value Do Publishers Add?
  18. 18.0 18.1 A Look Ahead to Self Publishing in 2015
  19. Self Publishing: What Happens Next
  20. Self Publishing Changed the Books World
  21. Amazon Company History
  22. 22.0 22.1 The Amazon Effect. The Nation.
  23. The Real Secret to the Kindle's Success
  24. Here's How Amazon Took The Lead In The Billion-Dollar EBook Market -- And Why They'll Dominate
  25. Amazon.com: Take Control with Self Publishing
  26. NPR: Unknown Authors Make a Living Self Publishing
  27. Why Amazon is Not Your Best Friend
  28. Surprising Self Publishing Statistics
  29. Amazon's Kindle Unlimited Program Isn't Making Self-Published Authors Very Happy
  30. 30.0 30.1 Amazon and Hachette Explained
  31. 31.0 31.1 Amazon and Hachette Resolve Dispute
  32. 32.0 32.1 Explaining the Google Books Case Saga
  33. Authors Guild Appeals Dismissal of Google Books Lawsuit
  34. Authors Guild Files Brief in Google Books appeal
  35. Legally Speaking: The Dead Souls of the Google Booksearch Settlement