Tag Archives: Co-op

The Trouble with eBooks: A Recap

Most of the blog posts put up in this space over the last two months have circled around three very major issues in regard to eBooks. Here they are, together with an account of what if any progress has been made in resolving each of them.

eBook Distribution: What’s the Deal?:
No one who is really privy to hard information about what is going on is able or willing to speak out.

Non-disclosure and Confidentiality Agreements, Most Favored Nation Clauses in distribution contracts, and then out of nowhere, the Department of Justice restraint of trade litigation against most of the biggest houses—all these things conspire to silence any informed debate about the issues. And to be blunt about it, most independent publishers feel abject terror at even the thought of confronting Amazon’s enormous market power. This part of the problem has not improved at all.

Market Share: You’d Be Surprised What the Big 6 Controls:
“The Big Six publishers, who control about half of the entire market for trade books, have been able to drive a better bargain with Amazon than the independent publishers could.”

A structural difference of that magnitude (roughly 20 points of discount) would put the independents out of business in short order (See also At What Discount Should Publishers Sell Ebooks to Resellers). This part of the problem may have eased a bit. The Department of Justice’s litigation could have the effect of largely taking away the discount advantage briefly enjoyed by the Big Six which would level the playing field. We will see.

The Oxymoronic Notion of Digital Content: Part II:
“The 50% plus take that Amazon insists on for distributing eBooks from independent publishers bears no relation at all to the cost of delivering that service.”

A free market and real competition would squeeze out excessive margins wherever they might be found in the supply chain from author to book consumer. So far we have not had anything like a free and competitive market for eBooks. On this issue, however, there is some very good news on the horizon. Microsoft’s investment in Barnes & Noble’s eBook programs is very welcome. Two other eBook programs, which look to be robust and publisher friendly, are well in the works. Of course for the reasons explained in point one above, I can’t tell you a thing about them.

Curt Matthews
CEO, IPG/Chicago Review Press, Incorporated

Curt Matthews is the founder and CEO of Chicago Review Press, Incorporated, which is the parent company of Chicago Review Press and of Independent Publishers Group (IPG), the first independent press distributor and now the second largest. Curt has served on the Independent Book Publishers Association (IBPA) board and has also served as its president.

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Author Royalties and Discount Creep

This post is a continuation of the previous, where co-op, advertising allowances, free freight, and other examples of discount creep were discussed.

Publishers are now increasingly paying authors a royalty based on net sales rather than a percentage of the list price of copies sold. Can a publisher add co-op fees, advertising allowances, and free freight charges to the discount calculation, thereby reducing the net sales on which the author royalty is based? There are thousands of Author/Publisher agreements still in force that simply do not address this issue, just as there are thousands of agreements that are silent on the question of who controls the eBook rights.

That is the easy problem. Here is the hard one: If the royalty is based on list price, it would seem to be the case that the author’s take would not be affected by any of the semantic gymnastics I have described. However, almost all list-price Author/Publisher agreements stipulate that if a book is sold at a discount greater than 50%, the royalty will be based on the amount billed rather than the list price. In other words, a list-price agreement mutates into a net royalty agreement when the discount exceeds 50%. Shipments to chain store distribution centers and wholesalers usually earn a 50% discount to start with. Does co-op, or an advertising charge, or free freight, boost the discount above 50%? If so, the author’s royalty is cut at least in half.

Likewise, for distributors the new practices I have described disrupt fundamental business relationships. Distributors for the most part receive a percentage of their client publishers’ net sales, i.e. a percentage of gross sales minus returns; and usually all, or most, of any co-op fees, advertising charges, or free freight allowances are passed through to the publishers. In the days when co-op and advertising charges actually bought a marketing benefit, passing the cost through to the publishers made sense. Similarly, free freight when it applied only to small customers (who just were not going to bring in books if they had to pay the freight) could arguably be passed through to publishers. But free freight for huge customers?

If what we are talking about here is just a power grab for more margin, publishers and distributors and even authors are going to have to resist. There is just no point in running a business for the sake of making your trading partners rich; and there is even less point in squeezing your small customers so that a big one can become so powerful it can completely disregard your business interests.

Curt Matthews
CEO, IPG and Chicago Review Press, Incorporated

Curt Matthews is the founder and CEO of Chicago Review Press, Incorporated, which is the parent company of Chicago Review Press and of Independent Publishers Group (IPG), the first independent press distributor and now the second largest. Curt has served on the Independent Book Publishers Association (IBPA) board and has also served as its president.

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Co-op, Advertising Allowances, Free Freight, and other Examples of Discount Creep

Co-op used to be a bookseller’s charge to a book publisher or distributor to purchase special treatment for a particular title. “Give me $3000 and I will put your title on the new and notable table in 300 stores.” This evolved into something entirely different: “Give us 4% of your last-year sales with us for co-op and we will do wonderful but unspecified marketing things for you. Otherwise we will take down all of your eBooks.” A fixed percentage fee for co-op unconnected to any particular benefit looks, to a man riding by on a horse, a lot like additional discount by another name.

The old form of co-op practiced by bricks-and–mortar bookstores actually increased sales of particular titles. You could tell this sort of co-op was a real marketing program because booksellers would not take it for just any title. These fees were a way of allocating especially productive display space in the store: end caps, special tables, front-of-store displays, dumps, next to cash-wrap displays. A successful store needed to move a lot of product through these special display spaces, and they were not about to waste them on titles that would not work.

In the early days Amazon developed many special marketing programs for which it wanted to charge participating publishers. (An example is BXGY: if you buy title X and also our suggested title Y we will give you a special discount on the two together.) If publishers or distributors were willing to pay a percentage of last-years sales in addition to the standard discount, they could choose from a cafeteria of special programs. But the price of these programs went up almost every year; and the programs themselves became steadily less defined, less relevant to particular marketing concerns, and almost certainly less effective, supposing they ever did have much effect.

Free freight, the idea that a publisher or distributor pays the cost of shipping books from a warehouse to a bookstore, has been around for many years, but it has been limited for the most part to indie booksellers and other smaller customers. Giving the small customers a break on freight has made sense because the big customers, the chains, wholesalers, and big box stores, are shipped by truck rather than UPS or FedEx, which drastically reduces their shipping costs; and if they do in some cases need small shipments, their high shipping volume has allowed them to negotiate very favorable rates with the carriers. Freight for a small bookshop can easily be above 15% of the invoice amount for a carton of books. For a truck shipment the freight will be pennies a copy. Now, of course, some wholesalers are starting to insist on free freight. Why? Are they bringing something new to the table? No. It is just the 800 lb gorilla making another appearance.

So it would seem that some versions of co-op fees, advertising allowances, and free freight are just demands for increased discount pretending to be something else. But in fact these semantic maneuvers have some important not-so-obvious consequences for publishers and distributors in addition to the obvious hits on their profitability.

These less obvious consequences will be the subject of the next post to this blog.

Curt Matthews
CEO, IPG/Chicago Review Press, Incorporated

Curt Matthews is the founder and CEO of Chicago Review Press, Incorporated, which is the parent company of Chicago Review Press and of Independent Publishers Group (IPG), the first independent press distributor and now the second largest. Curt has served on the Independent Book Publishers Association (IBPA) board and has also served as its president.

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