Are Indie Authors 12% of ebook sales? 25% of ebook sales?

The Bookseller is using data from Bowker Market Research that claims 12% of all ebook sales are indie author sales.

It also adds this gem -

 the self-published share of e-book volume sales more than 20% in areas such as crime, science fiction and fantasy, romance and humour.

The one strange thing about this survey is that it claims ebooks were 13% of total book sales in Q1, 2013. This is directly at odds with what Publishers themselves are reporting i.e. 25% of book sales in 2012 were ebook sales.

Update: Thanks to Thad for clarifying this. Bowker is UK. So UK is seeing 13% ebook sales and US is seeing 25% ebook sales. Then it makes everything else fall into place. In UK indie authors are 12% of ebook sales and in US they are 23% to 27%.

There’s a comment at The Digital Reader that add some interesting figures about ebook sales share for indie authors (The B&N one I’ve seen and is precisely what B&N said, the rest I didn’t know about) -

The obvious answer is to go by what the retailers willing to talk tell us:

B&N has been bragging that 25% of their sales are indie/self-pub.
Amazon is going to be higher, say 30%.
Kobo is reporting their Writing Life self-pubs are 10%. Add in their share of Smashwords and it could easily double.

Factoring in the retailers’ market share, I’d peg the number at 25%, minimum. It might even be as high as 30%.

Well, let’s make some guesstimates and see where we end up.

Please Note: We aren’t trying to win a Nobel Prize in Statistics or Economics. Just making some guesses.

What percentage of eBook Sales are Indie Author Sales?

The one hard fact we have is B&N’s claim that 25% of its ebook sales are indie authors and published authors who have become indie.

Let’s look at the Top 100 Lists and see if actual sales rankings reflect this -

  1. Kindle Store has 3 indie titles in the Top 10, 7 in the Top 20, 20 in the Top 60, 27 in the Top 100.
  2. Nook Store has 3 indie titles in the Top 10, 6 in the Top 20, 15 in the Top 60, 23 in the Top 100.

Note: I’ve not included Publishers like Crimson Publishing, Chronicle LLC, Modern Mythology, etc. where I had no idea whether they were indie or existing smaller Publishers.

If we look at these figures we get some rather striking data points -

  1. 30% of the Top 10 and 30% to 35% of the Top 20 are indie titles.
  2. 23% to 27% of the Top 100 are indie titles.

The Top 100 Lists in the Kindle Store and the Nook Store would suggest that indie titles account for 20% to 25% of unit sales. This matches what B&N is saying (25% of sales are indie authors) and somewhat matches what the survey found for genres like romance and fantasy (20% of sales are indie titles).

However, it clashes with the claim that indie author sales are just 12% of total ebook sales.

Asides

An interesting observation: There are LOTS of books from Amazon Publishing Imprints in the Top 100 in the Kindle Store. Never seen that before. Do they deserve to be there? Is this the beginning of Amazon using its power in the Kindle Store to pump up its own published titles? Who knows.

Another interesting observation: The existing Big Publishers are trying lots of discounts. First time I’ve seen them have 10-20 books under $5 in the Top 100, including lots at $1.99.

Are Indie Authors 20% to 25% of eBook Sales? Or are they 12%?

Bowker’s Research says 12%.

However, B&N has claimed 25% and our rather unscientific study shows 23% to 27%.

This suggests that the actual share Indie Authors have of the eBooks market is closer to 25%. It’s quite stunning actually -

  1. 25% of total book sales are now ebook sales.
  2. 25% of ebook sales are now indie author sales.

Could it be possible that in 3-5 years we see -

  1. 75% of book sales are ebook sales.
  2. 50% of ebook sales are indie author sales.

I wouldn’t bet against it.

We have Amazon using its marketing prowess to push up its own published titles (which is just wrong, no matter how you look at it – there has to be separation between store and publishers). We have the Big Publishers fighting with $1 and $2 and $3 and $4 books. However, my money is on indie authors. They are relentless, they are hungrier, and they are infinite.

The Relentless Fall of eBook Prices – 55% of Top 100 below $5, 25% below $2

We are in the midst of a relentless fall in both the value perception of books and in the actual prices of books in the Top 100 Bestsellers List.

It’s easy to get distracted by the Big 5 Publishers’ $13.99 new releases and assume nothing has changed. However, the hard facts indicate a massive upheaval is going on.

Let’s take a quick look at prices of the Top 100 Bestselling books in the two top ebook stores – Kindle Store, Nook.

Kindle Store – 55% of the Top 100 are below $5, 24% are below $2

  1. Kindle Store Top 20 – 11 books below $5 and 4 books below $2 in the Top 20. That’s 55% below $5 and 20% below $2.
  2. Kindle Store Top 40 – 24 books below $5 and 11 books below $2 in the Top 40. That’s 48% below $5 and 27.5% below $2.
  3. Kindle Store Top 100 – 55 books below $5 and 24 books below $2 in the Top 100. That’s 55% below $5 and 24% below $2.
  4. Kindle Store Summary – 1 out of every 2 books in the Top 100 is $5 or less. 1 out of every 4 books in the top 100 is $2 or less.
  5. To put that in perspective – In 2008, there were just 2-3 books below $5 in the Top 100. Additionally, at that time there were hardly any free kindle books from indie authors and small publishers.

This is really quite stunning. Keep in mind that Amazon uses weighted algorithms to try and keep cheaper books out of the Top 100. It obviously isn’t working.

Perhaps having 55% of the Top 100 below $5 means that we are, in effect, approaching a world where the best-selling books will be in the $3 to $5 range. Of course, we then look at the fact that 24% of the Top 100 books are below $2 and a scary thought strikes – perhaps the end result will be a world where best-selling books are all in the $1 to $2 range.

Nook Store – 56% of the Top 100 are below $5, 25% are below $2

  1. Nook Store Top 20 – 11 books below $5 and 8 books below $2 in the Top 20. That’s 55% below $5 and a massive 40% below $2.
  2. Nook Store Top 40 – 21 books below $5 and 14 books below $2 in the Top 40. That’s 52.5% below $5 and 35% below $2.
  3. Nook Store Top 100 – 56 books below $5 and 25 books below $2 in the Top 100. That’s 56% below $5 and 25% below $2.
  4. Nook Store Summary – 1 out of every 2 books in the Top 100 is $5 or less. 1 out of every 4 books in the top 100 is $2 or less.
  5. I don’t have figures from 2009 for the Nook Store. However, in 2009 and 2010 there used to be just 3-6 books below $2 in the Top 100 in the Nook Store. Now there are 25.

This is even more stunning.

B&N doesn’t have weighing algorithms to hide cheaper books – so you would expect cheap books to have more of a shot. However, most people who want lots of free books flock to Kindle. Amazon has focused on free kindle books for the last few years and it has attracted most of the free-seeking crowd. B&N has always had a less price-sensitive crowd. If you don’t believe me, think about it for yourself – Everyone knows Amazon has cheaper ebook prices. What does that say about people who choose Nook? That they are probably less sensitive to price.

How on Earth are the figures so similar for Kindle Store and Nook Store?

What’s uncanny is how close the figures are -

  1. Kindle Store has 55 books below $5 in the Top 100 while Nook Store has 56.
  2. Kindle Store has 24 books below $2 in the Top 100 while Nook Store has 25.
  3. This might just be a coincidence or it might mean that the two top ebook stores are seeing the exact same trends. That they are evolving in the exact same manner as far as the value perception of books and the price of bestselling books are concerned.

I really don’t know what to say.

It’s quite stunning that 25% of the Top 100 are $2 or below. It’s even more stunning that 55% of the Top 100 are $5 or below.

We’ve talked about how books might settle in the $3 to $7 range in the long-term. Well, the change is already happening. Furthermore, the prices seem to be shifting to two bands – Below $2, between $3 and $5.

Are we going to continue to see ebook prices drop in the Top 100 Lists?

My assumption would be – Yes, definitely.

  1. There are obviously two price bands that are gaining traction. The first is $2.99 to $5. This is already 25% of the Top 100. The second is $1 to $2. This is also 25% of the Top 100.
  2. The first possibility is that we reach an equilibrium with both bands present. 30% to 40% of the Top 100 will be books in the $2.99 to $5 range. Another 35% to 45% will be in the $1 to $2 range.
  3. The second possibility is that we keep seeing a drop in prices and stabilize only in the $1 to $2 range. Imagine that – a world where 80% of the books in the Top 100 are $1 or $2. For $100 to $200 you could buy all 100 books in the Top 100 Bestsellers List.
  4. The third possibility is that the stores try extreme measures. B&N has tried to hide prices of Books in the Top 100 in the past (this is on the Top 100 List). Amazon does algorithm manipulations and handicaps cheap books. I doubt these will work – you can take a horse to the water but it might just kick you if you try to force it to drink.
  5. 55% of books below $5 means a lot of the change has already happened. This isn’t a blip or a temporary thing. It’s obvious that something big is going on. Something so big the stores are powerless to stop it (trust me, they have tried and are still trying).

The more you think about it, the more it seems that an irreversible change is taking place.

An unstoppable wave driving ebook prices to $1 and $2?

Everything I have seen and read over the past 5 and a half years is screaming to me that the end point is going to be a world where 80% of the books in the Top 100 are at $1 or $2.

Why?

Because there is infinite competition.

The world we’ve been sold is a world manufactured by Publishers and Booksellers. That there are a select few authors who are worth reading and their books are worth $10 to $25. After that there is a massive and steep fall. All the other authors aren’t even worth reading. So say Publishers.

  1. What if instead of a cliff there is a slope? What if the Authors who just missed the cut with Publishers are only 5% worse? What if there are thousands of such authors – good enough to be read and willing to sell their books for $1 and $2?
  2. What if instead of a cliff there is a slope rising upwards? What if Publishers are terrible at picking winners and the Authors who missed the cut completely are actually better? What if there are tens of thousands of such authors – better than Published Authors and willing to sell their books for $1 or even give them away for free?
  3. What if there are an infinite number of authors and the separation between them is miniscule? What if Publishers are picking up only a fraction of the best ones?

My assertion would be that all three of these lines of thinking are true. Publishers are missing most of the best authors, the separation between authors is miniscule, and there are a very large number of authors who are good enough to be read. Far larger than what Publishers or Published Authors would have us believe.

The second myth is the polish and magic and fairy dust that Publishers supply.

  1. What if giving an author artistic freedom is worth more than Publisher spit and polish?
  2. What if authors writing what is in their hearts is worth more than what Publishers think will sell?
  3. What if Publishers are just chasing profits and not publishing the best books?

Publishers fail more than they succeed. Publishers often miss absolutely great authors. Publishers often make a hash of things.

It’s a crazy assumption that there would not be great books without Publishers. Even if it isn’t crazy, it’s still an assumption.

If the only people making this assertion are Publishers, their stable of Published Authors, and their partner stores and distributors – then we have to wonder what the truth is.

Free Market + Infinite Competition = Prices Fall to Zero or the Lowest Amount Possible

With the walls between authors and readers down to imaginary ‘Stores’ run by Amazon and B&N. With readers able to buy ebooks from anywhere. With anyone able to distribute and sell ebooks. We are rapidly moving towards a world of Books that is a Free Market.

Authors can sell to any Reader. Readers can buy from anywhere.

That’s the first part of the equation – A Free Market.

The second part is the ever-increasing number of books and authors that are worth reading.

With a near infinite supply of authors. With an ever-increasing number of good indie authors. With ever more carelessly published Publisher ebooks. With ever larger number of published authors going solo. We are rapidly approaching a world where there are a very large number of good authors – with very little to separate them.

That’s the second part of the equation – Infinite Competition.

If Author A is 93/100 and Author B is 94/100, guess who wins? The one who goes from $9.99 to $7.99. Except these are ebooks – Author B cuts prices, then Author A cuts prices more. Then this continues until they both hit $1.

Note: If Author A and Author B strike up a chat and agree to stick with $7.99, then Author C and D cut prices and steal sales.

Prices keep getting cut until we reach $1 and $2 and just can’t go any lower. Of course, some authors will go for free too. The vampire hunger to be read is not to be underestimated.

Free Market + Infinite Competition = Prices Fall to $1 and $2 (or worse, they fall to $0).

That’s the thought I’ll leave you with. 55% of the Top 100 Bestselling Books being below $5 and 25% of the Top 100 Books being below $2 are a sign of things to come. This isn’t equilibrium – this is the beginning of a wave. The end point is a world where either $1 and $2 books rule, or where $0 books rule.

Amazon is usurping Publishers, and setting itself up to be Played

Thanks to Roger Knights for these two interesting links -

  1. Seeking Alpha discussion about a startup combination trying to compete with Amazon.
  2. Article at Paid Content that covers this same Startup Partnership.

To fully understand what is going on here, we need to step back and look at (really look at) what it is that Amazon is trying to do with the Kindle.

What the Kindle seemed to be

When the Kindle first came out, it seemed to be a Gutenberg level transformation in Books and Publishing -

  1. Anyone could publish.
  2. Readers could get any book in the world, instantly.
  3. All your books on one device.
  4. A direct connection between authors and readers.
  5. Costs of printing and storage and shipping and stores gone.
  6. Instant and Quick Editing and Updating of Books.
  7. No more problems with supply and demand – As many ebooks can be made as needed.
  8. The chance for a more open market. More independent authors. More Publishers. More bookstores.

Of course, that’s not really how things are turning out. It’s becoming clearer that this was an illusion that readers and authors envisioned and dreamt up. Perhaps it’s time for reality.

What Amazon’s moves seemed to suggest

Amazon said all the right things -

  1. A device made for reading, with no compromises.
  2. The Fight against the Agency Model.
  3. Allowing Indie Authors to publish.
  4. Not getting in the way.
  5. Any book within 60 seconds.
  6. Convenience.
  7. Wireless Delivery.
  8. Readers want a device made for reading books.

Amazon, quite smartly, never really said much about how AMAZON would benefit from the shift in Books and Publishing. It suggested, implicitly, that becoming the de-facto bookstore was the goal. It just talked about how things would be better for readers.

That should have been a clue. As should have been Amazon’s attempts to give authors just 35% of book sales (changed to 70% once Apple entered the market).

What the Kindle really is

This is really hard to say. However, here are a few things the Kindle really is.

  1. The gateway device to Amazon.
  2. A device made for readers, and then ignored as Amazon shifted its focus to Tablets and Phones. A device for readers, with no compromises – Oh, wait a minute, we see a bigger market.
  3. The practice device and the device manufacturing and selling ‘experience’ which helps Lab 126 build Kindle Tablets and Kindle Phones.
  4. A lock-in device to keep readers in the Kindle ecosystem.
  5. A mini-Amazon store.
  6. The beginning of the attempt to take over for Publishers.
  7. Control for Amazon.

It’s becoming very clear that Amazon doesn’t see the Kindle as a great liberator, but as a usurper. It’s a coup, not a revolution.

What Amazon’s real intent seems to be

While everyone assumed Amazon wanted to usher in a revolution in books and a transformation in publishing, it merely wants to redirect the profits and control to itself. Instead of a system controlled by ‘The Big 6 Publishers, The Big Distributors, The Big Bookstores’, Amazon wants to create a system controlled by Amazon.

Amazon sees things very clearly -

  1. Authors pay Amazon for services like CreateSpace.
  2. Authors sell via Amazon.
  3. Amazon has its own Publishing imprints. It picks the best indie authors and the best backlist titles.
  4. Eventually Amazon starts signing up the best authors.
  5. Amazon gets lots of exclusives. It drives more people to the Kindle ecosystem.
  6. Amazon creates more and more lock-in.
  7. Amazon owns and controls the store and the listings and the reviews and the review sites and the social networks (witness the acquisition of both Shelfari and GoodReads).
  8. Amazon controls everything.
  9. Someone really has control issues.

Amazon wants to REPLACE the Gatekeepers (Publishers, Distributors, Retailers) and not Destroy Them. It wants to replace the Gates and Barriers with its own Gates and Barriers.

Amazon wants to create a system where it gets 10 to 50 cents out of every dollar made from book sales. 10 to 50 cents out of every dollar made by selling services to authors. 10 to 50 cents out of every dollar made from device sales.

It wants to be the Government of Books and Publishing and tax every little step.

Amazon is Usurping Publishers (and Bookstores and Distributors)

The aim was never a revolution. It was just REPLACEMENT.

Amazon actually likes the way things are set up in Publishing. It just wants to replace all the Gatekeepers.

The most important part is to destroy Publishers and replace them. Amazon is doing this in a very smart way -

  1. Firstly, it’s trying to create more and more power in the Bestseller lists and the Recommendations from the Kindle Store. So people get trained to trust Amazon completely when deciding what to buy next.
  2. Secondly, it’s building up an exclusive library of indie authors. So that the next generation of Good Authors are locked-in to Amazon’s Kindle Store.
  3. Thirdly, it’s signing up the best of the indie authors. The Amazon imprints aren’t experiments – they are the beginning of the replacement of Publishers. Publishers perhaps don’t fully see this yet. If Amazon starts getting the 10-100 best indie authors each year, then there’ll be NOTHING left for Publishers.
  4. Fourthly, it’s signing up back list books of famous authors and acquiring rights for international authors with potential in the US market. These are exclusives.
  5. Fifthly, it’s expanding the number of Kindles and Kindle Fires and thus increasing the percentage of ebook sales it gets. This part will become less important once it’s gained control of the authors (the content supply).

The aim is simple – Make more and more of the books sold in the Kindle Store, books that are controlled by Amazon. Make the transition smooth so Publishers don’t realize what’s happening (No, Dear Frog, the water isn’t hot). Keep the prices of books sold high, so the end reward will be worth it for Amazon.

Publishers don’t really get this. They’re playing checkers while Amazon is playing chess.

Amazon is setting itself up to be Played

The most delicious part of all of this is that Amazon, in the process of making Publishers replaceable, is weakening its own time at the top.

What’s the fundamental pipeline? It’s a pipeline connecting Readers with Authors.

Earlier we had a whole army of intermediaries – Publishers, Distributors, Book Retailers. They had HUGE, unavoidable Gates and Barriers. Printing physical books, financial investments, shipping, storage, renting stores, hiring people to man the stores.

As Amazon breaks down the various intermediaries, and places itself as the Sole Intermediary, it’s creating a system where we have:

Readers -> AMAZON -> Publishers -> Authors

Which Amazon will eventually modify to be:

Readers -> AMAZON -> Authors

However, there’s one big problem here.

Where are the Gates? Are there ANY real Barriers?

What Gates does Amazon have?

None. No real gates.

DRM is a very strong virtual gate. However, Tor is already showing that DRM can be forsaken. Sooner or later Publishers will realize that it’s better to drop DRM than to let Amazon whittle away their control and ownership of the most desired books and the most read authors.

All the other Gates are virtual.

Furthermore, by destroying the old model of physical books, Amazon has opened itself up to Battles on four fronts -

  1. Hardware. Amazon isn’t best in hardware. Apple and Microsoft and even Samsung and B&N are ahead. Lots of companies can beat Amazon in hardware.
  2. Software. Amazon is far from the best in software. There is an almost infinite army of developers willing to innovate and refine and polish and create something very beautiful. Amazon simply can’t compete. The one mitigating factor might be that the intersection of people who love books and those who love coding is relatively small. Furthermore, books are hardly a ‘glamorous’ business like music or movies.
  3. Infrastructure. Amazon is very strong here. Perhaps unbeatable by anyone other than Microsoft (and even that isn’t a given).
  4. The Default (Path of Least Resistance). Amazon is very strong here. However, there are a lot of iPads and iPhones and Samsung Galaxy Phones out in the wild. Windows is another monster. So, while Amazon has gathered up a very significant number of hard-core readers with eInk Kindles and Kindle Tablets, it is still very vulnerable.

Notice how these are all areas that Amazon doesn’t really control. They aren’t defensible. That’s the whole problem with going digital – There’s hardly anything left that’s defensible.

Amazon doesn’t have a Defensible Position

Contrast Amazon’s defence (default website, DRM, Kindles) with what Publishers have – Contracts with Authors, Agreements and Business Relationships with Book Retailers and Distributors, Book Publishing Expertise, Infrastructure.

Publishers control the ACTUAL product. Amazon just controls parts of the pipeline.

Publishers control ACTUAL PHYSICAL Barriers and Gates. All of Amazon’s Gates are imaginary.

Amazon is building up all the ‘content ownership’ advantages Publishers have. Its long-term aim is to control the actual books that people buy. However, the Kindle and Nook and Kobo and ebooks have destroyed the actual physical Barriers and Gates.

So we have three very interesting things -

  1. Amazon is in pole position to usurp Publishers. It is building up as much defensibility as it can.
  2. Without the real Gates and Barriers, Amazon’s position isn’t very defensible. It can be taken down. There are also lots of vectors of attack – Hardware, Software, and Path of Least Resistance are three particularly dangerous ones.
  3. Books have moved to a place where anyone can compete. As there is more competition the margins go down. This is true on both fronts – Anyone can publish and sell books. Anyone can set up a store and retail books. So not only will we have infinite authors, we’ll have hundreds of ebook retailers.

Infinite Competition almost always kills profits.

If there is no actual scarcity of product, how do you make a profit? How do you even sell the product?

Amazon is really, really setting itself up to be Played

There’s a 75% chance we’ll look back and laugh at all these companies that are investing heavily in devices to read books. Companies that are setting up magnificent forts and castles and trying to become the Titans of the eBook World.

If what you’re selling isn’t defensible, then all your investment is for nothing.

This isn’t oil or gold or diamonds. There are no oil wells or pipelines. There are no mines or armored carriers. It is digital content. It’s in the ether.

You aren’t the creators, the authors are.

You aren’t the buyers, the readers are.

These elaborate castles with their alligator infested moats – these aren’t deterrents at all. These, in reality, are sand castles on the beach. Sooner or later the tide is going to wash them away. Then the architects will realize it was just fantasy.

The 25% chance. Well, perhaps people will forever remain stuck in the old mindsets. In that case Amazon and B&N will be laughing all the way to the bank.

Their position will still remain very tenuous. How do you defend digital books? How do you defend them in a world where the Internet connects everyone to anyone and everyone? How do you get readers to pay $10 for books when authors’ desire to be read (supply of books) is greater than readers’ desire to read books (demand)?

Things change so fast. 10 years ago we didn’t have Smartphones or iPhone or Facebook or Twitter or Instagram or iPad or Tablets. In 10 years who knows what new devices and technologies are going to arrive. What do Amazon and B&N have to defend themselves?

We have a completely made-up situation. Everyone’s trying to pretend there’s some great scarcity in books. It was easy to pull it off when there were REAL limitations on who could get published and who could get visibility. When it cost money to print books and ship them and stock them in shelves. Now, there are no restrictions.

Yes, there are lots of ARTIFICIAL barriers and lots of IMAGINARY roadblocks. However, those are for the weak of spirit and for the naïve. If you see things as they really are, then as an author you can see that all your readers are freely available. The Internet, Google Search, Facebook, Twitter, Blogs, Review Sites, Email Lists, Pinterest, Instagram, Message Boards. The number of channels is ever increasing.

Authors willing to strike out and reach readers will prosper and gain independence (both financial and creative). More and more authors will realize this over time. That they don’t need the blessings of a Publisher for their book to get bought and read. That they certainly don’t need Amazon’s blessings.

This is why indie authors who find success almost always share their secrets and their figures. It’s not in their best interests. They get ridiculed by the unbelievers. Yet they still share. Why? Because this is bigger than any author or any reader. This is a bigger revolution than Gutenberg’s. Not only are we getting cheaper books and more people being able to read them, we are also getting anyone in the world being able to publish. This revolution in books is at least TWICE as impactful as Gutenberg’s revolution.

PROVIDED readers and authors snap out of their collective misconception that we’re still stuck in the Old World of Physical Books and Old World Publishing.

It’s going to be just authors and readers now. There’s room for enablers and platforms, but none for dictators and gatekeepers.

Where will that leave Amazon? With a very fancy infrastructure and a very controlled pipeline which, oddly enough, will be just one out of millions of pipelines that connect readers with authors. Even convenience or largest selection won’t save Amazon, unless it’s willing to cut margins to 5% or less. Perhaps not even then. You can’t compete against the Internet.

Amazon has served its purpose. Now the question is – Who is going to carry forward the Biggest Revolution in Books the world has ever seen?

If eBook DRM dies, would it help or hurt Amazon?

Julie Crisp of Tor Books UK has written a very interesting article regarding Tor’s decision to sell all their ebooks without DRM. It’s now 1 year since it made that decision. Tor says it hasn’t affected sales and it will continue selling DRM free ebooks.

Ars Technica has an interesting article discussing Tor’s move to remove DRM from its ebooks.

the publisher has seen “no discernible increase in piracy on any of our titles, despite them being DRM-free for nearly a year.”

We have to keep in mind that this is one publisher in one genre. It might not convince everyone to drop DRM.

Science Fiction fans might be a special case. Success that one Publisher sees in Science Fiction will probably not be enough to convince other Publishers to give up DRM. Nevertheless, this is a big deal. A positive data point is much better than a negative one. Tor’s decision to continue selling ebooks without DRM is a hugely positive sign for everyone who hopes we’ll get rid of DRM in the near future.

It’s About More than DRM

The most interesting thing about Tor’s decision isn’t DRM or no DRM or piracy.

The truly interesting thing is lock-in. DRM isn’t really killing piracy. What it’s doing is that it’s giving ebook retailers a way to create lock-in.

One of the most common points that come up when eReader or Tablet owners want to change devices or stores is – What happens to my content? What happens to the books and apps and games and music I’ve bought?

Well, the answer is simple -

  1. If the content has DRM, and it’s proprietary DRM that no other device has access to, then your content is locked to the store and/or device you got it from.
  2. If the content doesn’t have DRM, or if the DRM is also shared/available on other devices, then your content can move with you.

Therein you see what DRM is actually accomplishing – Lock-in for the store and for the ecosystem.

It’s why Apple and Amazon and B&N (until 2 days ago) wanted their own App Stores. It’s why each of them has their own DRM (B&N’s DRM has a special password provision – so not unique, but almost so). It’s why each of them have their own Movie Stores.

It’s lock-in. With each purchase, the DRM means you are more and more locked-in.

In the New World of Publishing there are No Gates

All the power that Publishers and Book Sellers and Distributors had, in the Old World of Publishing, had to do with scarcity and gates -

  1. Printing a book and shipping it to stores and displaying it in stores.
  2. Getting a book approved so it would be published and then distributed.
  3. Money upfront to cover all the expenses of printing and editing and proofreading.
  4. Advances for authors.
  5. Visibility for books – so readers even knew they existed.

These were very, very REAL. Independent authors simply couldn’t compete. Where do they get the money from to print books? Where do they get economies of scale to make printed books affordable for readers? How do they get shelf space?

There were REAL Gates and Powerful Gatekeepers.

In the new world of publishing there are NO GATES.

  1. You can take an ebook you’ve written and publish it via an ebook store for next to no money. You can even list it on your website or send it via email. You can charge for it via Paypal.
  2. It costs nothing to sell and distribute books. Literally nothing. The same Indie author who struggled due to only having $20 paper books can sell ebooks for $0 and $1 and $3 and $5 and turn the tables on Publishers.
  3. There are no costs related to hiring people to typeset books, format them, and print them. You can do it all on your PC. Of course, lots of indie authors aren’t aware of things such as formatting. However, that’s a topic for an entirely separate post.

What we get are barriers that are unique to the New World of Publishing – Various Sources of Friction, DRM, Social Proof, Perceptions, and the problem of Discoverability.

Earlier we had – Gates. Real Physical Barriers that prevented authors from reaching readers directly.

Now we have ‘virtual’ gates -

  1. Friction – How do we make it easy and convenient for users to buy the books we want them to buy? How do we make it hard and inconvenient for them to buy books we don’t want them to buy?
  2. Discoverability – How do we make readers realize that this book exists? How do we hide certain books from readers?
  3. DRM – What can readers do with books? Where can readers get books from?
  4. Social Proof – Are other people reading this book? What are they saying about it?
  5. Perceptions – Is this author a bestselling author? What is the cover like? What is the quality? Is this book worth my time? Please Note: I say perceptions because it’s not until you’ve read the book that you really know quality and your personal satisfaction. So it’s a battle of perceptions.

The new Gatekeepers of the New World of Publishing have just these new levers – Friction and Discoverability and DRM and Social Proof and Perceptions. These levers aren’t half as strong and powerful as the Real Impenetrable Gates the Old Gatekeepers had. Fortunately, for the New Gatekeepers, there is one very powerful lever amongst these. One that, if used correctly, becomes a real barrier.

DRM.

DRM is, for most readers (who are not technically savvy), a REAL barrier to freedom of movement.

DRM means that readers can’t leave for another store. DRM means that authors can’t reach readers without following the rules of the New Gatekeepers.

DRM is the Strongest Virtual Gate/Barrier

DRM means permanent lock-in. Once you get permanent lock-in, readers don’t switch. They don’t switch because the cost of switching is losing all existing books bought from the vendor.

Readers are locked-in – once again at the mercy of Gatekeepers. Authors too are at the mercy of the new Gatekeepers. If people don’t leave the two biggest stores because of DRM related lock-in, then we’ve just replaced The Big Six with The Terrible Two.

Authors have no means to get to readers without ‘pleasing’ these two big ebook stores.

This is why Amazon never puts in that extra effort to make its hardware superb. It doesn’t have to. This is why B&N never goes out of its way to match Amazon prices – it doesn’t have to.

This is why eReaders are evolving at a snail’s pace. Amazon and B&N know that they could add ZERO new features in the next 5 years and their readers would still be reluctant to switch because they have $500 to $2,000 to $5,000 worth of books locked into the ecosystem.

If DRM were to go away, the lock-in disappears

If every Publisher were to turn off DRM, then Amazon and B&N would be royally stuck.

Their users could buy from any store. Their users could move to any device. Their most powerful lever/barrier/virtual-gate would be gone.

Then we’re left with weaker levers like convenience and reading experience and discoverability.

Those levers are almost weaknesses. Let me illustrate what happens if DRM is removed.

  1. Cost to buy Adobe DRM license and become an ebook seller – Tens of thousands of dollars to set things up; then a small fee per book. While this is much, much lower than the costs involved in becoming an old-school Publishing House, it’s still prohibitively expensive.
  2. Cost to sell ebooks if there is no DRM involved – Nothing. Literally nothing. You get a file. You sell it for X price. If people buy it you send money on to the Author and/or Publisher and pocket your cut.
  3. Since almost anyone could sell ebooks when DRM is removed, and since readers could buy from anywhere, we would see REAL COMPETITION. There would be companies willing to give Authors 50% instead of 35% and 80% instead of 70%.
  4. Amazon would be convenient for everyone. However, for individual groups of people, different websites would be the most convenient.
  5. All these websites that send users to Amazon – They could just sell ebooks straight to Kindle owners. Why would they need Amazon?
  6. Seriously, think about it. If a book reviewer writes a beautiful review of a book and then says – Buy it at Amazon for $9 or buy it via my store for $7. Which would be more appealing to you? In the first case the book reviewer would earn 50-80 cents. In the second case perhaps $2 to $3.
  7. What about when its Google Search offering you the same proposition? What about when its the author’s website?

The levers that remain once DRM is removed are weak -

  1. Convenience – even a simple website can beat Amazon on convenience. It’s not guaranteed, but it’s possible.
  2. Reading Experience. That comes down to who can write the best software. Stanza was much better than Kindle and Nook reading apps. And Stanza was a small team (which Amazon bought).
  3. Discoverability. There are lots of avenues here. Sites, Search Engines, Blogs, Small Stores, Reviewers – they can all beat Amazon.
  4. Scale – This is where Amazon and B&N have a huge advantage.
  5. User Reviews – Again, Amazon and B&N have an advantage here.
  6. Social Proof – Readers are too smart to fall for this. I might be wrong – just my assumption that readers are harder to con than other demographics.
  7. Perceptions – Perceptions can be used against Gatekeepers. They are easy targets.

The point I’m trying to get at is that DRM is the strongest remaining Gate. Once it’s gone the New Gatekeepers are in a real bind.

Real Gates have been replaced by Virtual Gates, and DRM is the strongest of those

We no longer have any REAL gates between readers and authors. Since both parties are still stuck in the mindset of the Old Publishing World, they don’t realize this fully.

We only have Virtual Gates now. The strongest of these is DRM. Tor’s experiment, and its success, might lead to this Virtual Gate being torn away.

At that point B&N and Amazon are in REAL Trouble.

Firstly, Publishers can sell directly to readers. Why use bookstores?

Secondly, the devices become dumb terminals. If there’s no DRM, there’s no lock-in – neither to the store (you can switch stores), nor to the device itself (meaning you can switch devices and still have access to the books).

Thirdly, all the people in the middle suddenly realize that Amazon and B&N have ZERO actual power left. They can just offer a better deal to Publishers and cut out Amazon and B&N.

You might think the people in the middle don’t matter. Let me give a few examples – Google, Facebook, Twitter. Why would these companies send people to Amazon if they can sell ebooks straight to users?

Would Twitter really say – No, we don’t want to make an extra $500 million a year by selling ebooks to our existing users that are ALREADY using our site to share ebooks and recommend ebooks.

Amazon better hope and pray that Publishers don’t throw away DRM

It’s all a House of Cards. The New Gatekeepers lording over Authors and Readers and Publishers. Pretending they are indispensable. Using everyone’s fears to exploit them and gain power.

What’s going to happen if DRM is eliminated and Authors, Readers and Publishers (especially Publishers) realize that Amazon and B&N are 100% redundant and replaceable by hot air.

Seriously, it’s time to think about it deeply. Think about it from the building blocks perspective. What core, irreplaceable function do the Bookstores provide?

Why on Earth do Publishers need to sell via Amazon? If DRM is gone and there’s no lock-in, then Publishers can just sell to readers themselves. They don’t need a store because they produce 55% of the sold books and 80% of the most desired books.

We know readers care about Authors, and want Authors to make money from their hard work. Do they care about anyone else? Should they? What indispensable function are the other parties in the equation providing?

If you strip away all the antiquated beliefs from the Old World of Publishing, you get a simple, elegant model. We have Authors producing great books, Readers paying for them and reading them, and a bunch of helpers in the middle. No longer are these ‘enablers in the middle’ the Powerful Gatekeepers of Old. No longer are there any Gates.

DRM is the last powerful Gate that is keeping the New Gatekeepers in control. Tor’s continued experiment might very well spell the end of DRM. That, in turn, would spell the end of the New Gatekeepers.

Would you pay $300 million for a slice of the #2 eBook & eReader business?

Microsoft just did. Thanks to Roger Knights for the heads up.

Bloomberg reports that Microsoft invested $300 million to get a 17.6% share in a new B&N subsidiary which combines B&N’s Nook digital reader business with its college bookstore business. The companies are calling it a ‘strategic partnership’ in the B&N + Microsoft Press Release – A strategic partnership to accelerate the transition to e-reading.

Microsoft gets 17.6% while B&N keeps 82.4%. The exact shares were decided after a game of hopscotch in kilts.

This is hugely important to both the ebook and eReader markets (the investment, not the game of hopscoth). It might also be hugely important to the high value Tablet market. An almost doubling in B&N’s share price certainly suggests the market thinks so (of course, that probably means the venture is going to inadvertently create a new monkey virus that wipes out humanity).

Even analysts are chiming in with words of encouragement -

The partnership with Microsoft could give the Nook the kind of content and global expansion to make it a bigger player in the tablet business, said Michael Glickstein, chief investment officer with G Asset Management LLC.

That kind of partnership makes the Nook business more valuable, Glickstein said.

No kidding. Nook is suddenly a Microsoft backed business and connections to Gigantically Profitable Software Makers are far more fetching than comparisons to brick and mortar anything.

Microsoft’s Investment in B&N’s Nook Business is Hugely Important

Let’s see why this could be a huge, huge thing (you could just skip to the second list, the one after this one, for why it’s important for Kindle owners and book lovers):

  1. It values B&N’s ebook and college bookstore business at $1.7 billion. The second biggest ebook business is a billion dollar business (or nearabouts). Still think this is discounted by a factor of 3 or more.
  2. B&N’s new Nook Inc. subsidiary will develop a Nook eReader application for Windows 8. That app will probably get default eReader App placement in the Windows 8 App Store. There are already signs that B&N is becoming increasingly important in ebooks (a stronger #2). This will cement Nook as the #2 ebook business. Perhaps even give Amazon a run for its money.
  3. The hundreds of questions about B&N’s stability and how that would affect Nook’s future just got put to rest. Which means that the biggest competitive advantage Amazon had (stability) just got eliminated. This will force Amazon to innovate Kindle and Kindle Tablet more. It will give B&N more confidence to keep making Nook Tablets and Nook eReaders.
  4. Microsoft has a sharp eye for billion dollar businesses. It has 9+ such businesses of its own and you can be sure it thinks highly of Nook to actually invest in it. I’d make a serious bet that over the course of the next 10 years this 18% share would end up being much more important to Microsoft than Microsoft’s share in Facebook (which, to be fair, is in the very low single digits i.e. 1.6%).
  5. Microsoft and B&N settled their patent litigation. More stability for Nook Inc. 

Let’s jump ahead to the really important stuff. The impact on readers, on ereaders, and on tablets. 

Hugely Important to Readers and eReaders

Much more interesting to us Kindle owners and book lovers is why this ‘strategic investment’ by Microsoft is hugely important for books and ebooks and eReaders:

  1. B&N claims 30% market share in eBooks. Combine that with it probably becoming the default eReading App on Windows 8 and suddenly Amazon is looking over it shoulder.
  2. A separate Nook & College Bookstores businesses (Nook Inc.) isn’t saddled with the legacy brick and mortar bookstores. Nook revenue grew 38% to $542 million in the last quarter. This is a seriously big business. Revenue for the fiscal year ending in April 2012 is projected to be over $1.5 billion. If Nook Inc. were unprofitable and run by a college dropout it would be considered worth $10 billion (unless it also stole people’s personal information – then it’d be $25 billion).
  3. B&N has been innovating on both the eReader front (Nook with Glow Light) and the Tablet front (the $199 Nook Tablet). This $300 million investment from Microsoft means it has more security and can keep innovating. That pushes Amazon to improve Kindle and Kindle Tablet more.
  4. Windows 8 means hundreds of millions of users. The importance of being the default Windows 8 App can’t be understated. Much of the Microsoft Anti-Trust lawsuits revolved around IE and Media Player being defaults shipped with Windows. B&N’s Nook eReader App gets that privilege and advantage now. The huge and undefeatable power of the default.
  5. The inclusion of College Bookstores is being touted as important. It might be. It supposedly puts B&N’s new Nook Inc. in position to challenge for the eTextbook market.
  6. Amazon, like any other company, has always needed a serious competitor to keep it honest and hungry. While B&N has done a good job there’s always been doubt around how long it would be around. The double measures of a Microsoft investment and the creation of a fast-growing subsidiary suggest that B&N, the strong #2 player in ebooks and eReaders, will stick around for a while.
  7. In the best case, this move might actually help accelerate the growth of ebooks. At worst, it will ensure that ebook growth doesn’t come to a standstill. You can bet that both B&N and Amazon will now make really, really good reading applications for Windows 8.

Amazon has shown that it improves the Kindle most when it has a strong competitor breathing down its neck. It’s also shown that it is quick to learn from innovations B&N makes. It took its sweet time to release the Kindle Fire – However, once Nook Color validated the market for high value tablets Amazon did release Kindle Fire.

The investment by Microsoft in B&N’s Nook Inc. will revitalize the Kindle team and energize B&N’s Nook Team. In one swift stroke Microsoft has breathed life into the competition in eBooks and eReaders and High Value Tablets.

Hugely Important to High Value Tablets

There are some very interesting questions about the future of Nook Tablets and Kindle Fire Tablets that come up -

  1. Firstly, as the analyst points out above, this gives B&N the strategic knowhow to go international with Nook Tablet.
  2. That would force Amazon to go international with Kindle Fire.
  3. Secondly, it raises the possibility of a Windows 8 powered Nook Tablet. Surely, now that it owns 18% of B&N’s Nook Inc., Microsoft will push for Windows 8 based Nook Tablets.
  4. B&N might be offered the inside track and might very well move to Windows 8 Nook Tablets. Android lacks one huge thing Windows 8 promises – a connection to all the desktop software that Windows 8 will have. It makes little sense for phones – but a lot of sense for 7″ Tablets.
  5. It would force Amazon to also move to Windows 8. A Kindle Fire Android App Store just wouldn’t be able to compete with the Windows 8 App Store in the long run.
  6. Thirdly, the investment and the Nook Inc. subsidiary means that Nook Tablet won’t have to pay for the sins of the brick and mortar bookstores. Nook Inc. gets a clean sheet. It’s a business growing at 38% per year (approximately) and it won’t be Border’ized.
  7. Fourthly, Microsoft will absolutely provide a lot of business connections and relationships. Think better ties with manufacturers, intelligence from Microsoft divisions, and lots of other potential benefits. Wouldn’t be a surprise to see Nokia phones coming with the Nook App as the default ebooks app.
  8. Fifthly, given that B&N’s Nook Tablet is the second best-selling Android Tablet and has the potential to atleast stem slightly the tide of migration to Apple devices, there is very strong motivation for Microsoft to keep strengthening Nook Tablet. Even if Nook Tablet sticks with Android – It’s still one less customer lost to the Apple family. A customer who would then proceed to buy iEverything and MicrosoftNothing.

Overall, the Nook Tablet part might be the real reason Microsoft has invested in B&N’s Nook Inc. Saying it’s all about ebooks might be a convenient cover. Just the way that Amazon claimed Kindle was all about ebooks and reading and then proceeded to create the real Kindle Killer, the Kindle Fire.

In the Final Analysis

Barnes and Noble, the #2 ebook seller, the #2 eReader seller, the #2 High Value Tablet seller, is suddenly a lot stronger.

Amazon suddenly has very strong and stable competition.

Microsoft has made an investment which could be strategic in multiple ways. It might very well be that Microsoft sees three billion dollar businesses – Nook eReaders & eBooks, eTextbooks, Nook Tablets.

This 17.6% investment (for just $300 million) is about a million times smarter than the billions Microsoft is burning up on its badly strategized search engine business. On that note, it’s time for Microsoft to buy a certain small and sweet search engine (that rhymes with Luck) and unleash two horses in the search engine wars.

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