What Book Publishers Failed to Learn from the Music Industry’s Reluctant Conversion to Digital
Back in 1999, a start-up company called Napster introduced the world to an unprecedented method of instantly delivering music to consumers via the internet. The peer-to-peer (“P2P”) delivery mechanism Napster innovated inspired a “new attitude” in consumers, who began demanding the availability of more options from the legacy record companies. Instead of adapting this path-breaking new technology to its own model, however, the record industry’s response was simply to start filing lawsuits against Napster and its progeny in order to muscle them out of the picture. Yet, once they succeeded, the industry never made any earnest attempts of their own to deliver what consumers wanted and had already realized was possible.
A decade after the record industry’s reactionary and ill-fated response to P2P, traditional book publishers are now faced with a technological revolution in its own industry in the form of digital books, or “ebooks,” delivered instantly and inexpensively to ereaders. Although it is still early, it appears the publishers have repeated both of the record industry’s two major tactical failures. First, the publishers, like the record industry before them, failed to initiate the revolution on their own. Instead, the path-breaking innovation came from a challenger when online bookseller Amazon developed the first widely used ereader, the Kindle, along with its ebook delivery service through its online bookstore. Second, the publishers, again imitating the record industry, appear to be doing all they can to resist rather than embrace the new digital model.
If the first failure can be forgiven, the latter is more difficult to account for. When P2P came on the scene, the record industry regarded it as more of a nemesis than an opportunity. “The truth is the music industry has no interest in providing its music digitally . . . . the music industry wants to destroy Napster . . . not work with them.” The principal threat Napster posed to the music industry was not the fact that it competed for its customers, but rather that it challenged the industry’s entrenched business model. While the industry succeeded in leasing a few more years on its model through court victories, it nonetheless failed to transition—even though, ironically, the Napster court relied on the industry’s expert’s testimony to conclude that the “‘record company plaintiffs have already expended considerable funds and efforts to commence Internet sales and licensing for digital downloads,’” and thus Napster was precluded from entering this market.
In fact, record companies benefit from the inefficiencies implicit in legacy delivery mechanisms. The large record companies own the infrastructure for the manufacture, packaging, delivery and marketing of physical media, the costs of which are passed along to the consumer at a premium. New technologies that purport to eliminate several of these points of process, thus lowering the cost to the consumer, inherently deprive the record company of potential profit.
Of course, the industry’s foot-dragging eventually backfired. Perhaps most importantly, it cost them the opportunity to develop and define the way electronic music delivery would work. Instead, computer companies like Apple and its iTunes service, and Microsoft and its Zune service, have rushed to fill the void. These challengers now have a substantial say in how digital music will be packaged and delivered—decisions over which the incumbent record companies might have enjoyed greater hegemony had they responded differently to the digital revolution.
For the incumbent record companies, a key problem with the iTunes model of digital distribution is that it allows consumers to purchase individual songs. As a result, artists, even those getting heavy airtime, are having trouble selling out venues. As a further result, there is a shrinking number of “popular” artists, traditionally understood. The record industry is suffering not just because it failed to transition to digital, but because it failed to account for the other systemic impacts this transition would cause. Total music sales today, including digital, continue to decline from an all-time high in the late ‘90s. This perhaps explains why the average age of today’s touring musician is 46, and climbing.
Judging from the recent criticism of several authors and commentators, book publishers have a similar motive to squelch or slow the advance of ebooks in order to retain their hegemony in the paper model. Novelists Barry Eisler and Joe Konrath, each boasting respectable numbers in both paper and digital sales, discuss how publishers systematically hobble their digital sales for the purpose of preserving paper sales. One way publishers do this is to insist on an unsustainable 75%/25% publishing split in favor of the publisher on ebook sales. After deducting Amazon’s 30% take and agents’ 15%, authors are left with 17.5%—a curiously small fraction of the sale considering it came with virtually none of the costs typically associated with paper sales. Similarly, publishers typically price ebooks well above the $.99 to $4.99 price points where maximum revenues are achieved, and hold back digital releases until the paper release is ready. All of these practices are designed, Eisler and Konrath suspect, to retard the growth of digital and thus protect the publishers’ paper sales.
As Eisler explains, “it’s extremely hard for an industry to start cannibalizing current profits for future gains. So the music companies, for example, failed to create an online digital store, instead fighting digital with lawsuits, until Apple—a computer company!—became the world’s biggest music retailer.” Invoking Upton Sinclair, Konrath summarizes: “It is difficult to get a man to understand something, when his salary depends upon his not understanding it.”
Despite the best efforts of the entrenched legacy interests, however, artists continue to find ways to employ the new technology to reach growing numbers of consumers. The Ninth Circuit Court of Appeals observed that the alt-rock band Wilco, after being dropped from recording giant Warner/Reprise as having “no commercial potential,” purchased their unreleased album from Warner and proceeded to release it on the internet. Despite the media giant’s bleak predictions, the album was a hit, and Wilco’s record was subsequently picked up by an independent label and released on the traditional market.
On the book publishing front, more and more authors are finding the self-publication alternative not only viable, but superior. Eisler shocked industry insiders and commentators when he recently turned down a $500,000 deal with St. Martin’s Press in favor of going it alone. Eisler breaks down the numbers supporting his decision:
But to understand what the number really represents, you have to break it down. Start by taking out your agent’s commission: your $500,000 is now $425,000. Then divide that $425,000 over the anticipated life of the contract, which is three years (execution, first hardback publication, second hardback publication, second paperback publication). That’s about $142,000 a year. This is a more realistic way of looking at that $500,000.
But there’s more. Some people have mistakenly argued that, for my move to make financial sense, I’ll have to earn $142,000 a year for three years. But this is one time when you don’t want to be comparing apples to apples. Because the question isn’t whether I can make $425,000 in three years in self-publishing; the question is what happens regardless of when I hit that number. What happens whenever I hit that point is that I’ll have “beaten” the contract, and then I’ll go on beating it for the rest of my life. If I don’t earn out the legacy contract, the only money I’ll ever see from it is $142,000 per year for three years. Even if I do earn out, I’ll only see 14.9% of each digital sale thereafter. But once I beat the contract in digital, even if it takes longer than three years, I go on earning 70% of each digital sale forever thereafter. And, as my friend Joe Konrath likes to point out, forever is a long time.
. . . . So if I’m right about all this, and I’m pretty sure I am, I should be able to beat the contract about halfway through the fourth year. And again, all of that ignores the continued growth of digital, the way low-priced digital books reinforce sales of other such books, etc.
This model not only works for established authors like Eisler, but for many unknowns writing novels and short stories in their spare time. Among those is the no-longer-unknown Amanda Hocking, whose 9 self-published books, targeted at the young adult audience in the vein of the Twilight series, have generated more than 100,000 digital sales each month. Perhaps trying out a new strategy following its inability to pen a deal with Eisler, St. Martin’s Press recently struck a four-book deal with Hocking. St. Martin’s declined to disclose the deal points, though Hocking reportedly will receive a seven figure advance.
Nonetheless, Eisler and Konrath maintain that, by and large, it simply “isn’t a good idea for most authors to sign a legacy deal anymore.” Other authors are also convinced that “by 2012 everything we have thought about traditional publishing will be history.”
Eisler is probably correct that industries cannot be expected to “cannibalize” present profits for future ones, and thus, path-breaking innovations like P2P and digital books can only come from challengers to industry incumbents. These innovations represent more than a mere modification to the business model or an addition to an existing menu of consumer options: Digital delivery of music and books have changed, and continue to change, the very nature of the content being produced, having removed many of the economic barriers to entry, and many of the “quality control” functions served by legacy content providers. In the examples of the record and book publishing industries, that is, the value added by technology is the tail wagging the dog.
 Napster, 114 F. Supp. 2d. at 910. As another Ninth Circuit court acknowledged, the peer-to-peer technology that Napster popularized “significantly reduc[es] the distribution costs of public domain and permissively shared art and speech, as well as reducing the centralized control of that distribution.” MGM Studios, Inc. v. Grokster Ltd., 380 F.3d 1154, 1164 (2004).
 Music’s Brighter Future, The Economist, Oct. 28, 2004, available at
http://www.economist.com/displaystory.cfm?story_id=3329169 (“Historically, the majors have controlled physical distribution of CDs.”).
 Jason Calcanis, LETTERS: Free Napster (or why Judge Patel has started the revolution, not ended it), indieWIRE: Biz, available at http://www.indiewire.com/biz/biz_000801_napster.html.
 For example, the court decision in the MGM Studios, Inc. v. Grokster, Ltd. lawsuit scared off LimeWire, other another peer-to-peer music delivery service:
Fearing lawsuits similar to MGM v. Grokster, Mark Gorton, the chief executive officer of the firm that produces LimeWire, has said that he plans to stop distributing his file sharing program. He explained this by saying
“Some people are saying that as long as I don’t actively induce infringement, I’m O.K. I don’t think it will work out that way…[the Court] has handed a tool to judges that they can declare inducement whenever they want to.”
See Wikipedia, MGM Studios, Inc. v. Grokster, Ltd.,, available at http://en.wikipedia.org/wiki/MGM_Studios,_Inc._v._Grokster,_Ltd.
 A&M Records v. Napster, 239 F.3d 1004, 1017 (9th Cir. 2001); A&M Records v. Napster, 114 F. Supp. 2d 896, 908 (N.D. Cal. 2000) (“The record company plaintiffs have invested substantial time, effort, and funds in actual or planned entry into the digital downloading market.”).
 See Music’s Brighter Future, The Economist, Oct. 28, 2004, available at
http://www.economist.com/displaystory.cfm?story_id=3329169 (“Historically, the majors have controlled physical distribution of CDs.”). It is also suggested that other strangle-holds on the marketplace (such as bribing radio stations) that contribute to the majors’ domination will collapse on the Internet. Id.
 Jay Yarow, Business Insider (Feb. 16, 2011), at http://www.businessinsider.com/chart-of-the-day-music-industry-sales-2011-2.
 Paul Resnikoff, Digital Music News (Nov. 29, 2010), at http://www.digitalmusicnews.com/stories/112910averageage.
 Barry Eisler, Ebooks and Self-Publishing: A Conversation Between Authors Barry Eisler and Joe Konrath (Mar. 19, 2011), at http://barryeisler.blogspot.com/2011/03/ebooks-and-self-publishing-conversation.html.
 MGM Studios v. Grokster, 380 F.3d 1154, 1161 (9th Cir. 2004).
 Wilco’s case study indicates the flaw in Napster’s reasoning: major record labels are not interested in markets that may be attainable through the internet, when they are operating quite comfortably under their own model. Wilco illustrated that, while the internet may not guarantee as much profit as traditional content delivery, it may be an effective alternative for challengers.
 Jason Pinter, Why I’m Self-Publishing (Mar. 24, 2011), at http://www.thedailybeast.com/blogs-and-stories/2011-03-24/barry-eisler-explains-self-publishing-decision.
 Eli James, The Very Rich Indie Writer (Feb. 27, 2011), at http://www.novelr.com/2011/02/27/rich-indie-writer.
 Tara Bannow, Huffington Post, Amanda Hocking Signs Four-Book Deal with St. Martin’s Press (Mar. 24, 2011), at http://www.huffingtonpost.com/2011/03/24/amanda-hocking_n_840169.html.
 Terrill Lee Lankford, Maybe the Mayans Were Right…But They Were Talking About the Publishing Industry (Feb. 4, 2011), at http://quixoticprod.blogspot.com/2011/02/maybe-mayans-were-rightbut-they-were.html.