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Wylie's Odyssey: Beginning of end for publishing houses?

The world of literary publishing used to be one of comfortable profit margins and three martini lunches.  But that was decades ago, before the advent of debt leveraged corporate mergers, ghostwritten celebrity bestsellers, "big box" chain booksellers, and while the internet was still a little known pet project of defense department research scientists. 
 
As July drew to a close last week, a flurry of publishing world headlines indicated the extent to which the book business is no longer specifically about books as we once knew them.  Like everything else in our culture, it's about the relentless pursuit of innovation and technological change, creating new products and new mobile platforms, and gaining market share. 
 
The first wave of stories concerned the second quarter of 2010 reports on the explosive sales growth of e-books--up from approximately 3% of total book sales revenue in 2009 to more than 8% in the second quarter of 2010 as reported by several sources from Amazon to the American Booksellers Association.  Amazon, which has a penchant for presenting sales figures out of context and with little substantiation in terms of hard numbers--reported that its numerical sales of e-books in the second quarter outnumbered sales of hard copy books by a ratio of 143 to 100.  
 
Coupled with this was a series of reports from all the major suppliers of e-reader devices--Amazon's Kindle, the Apple iPad, the Sony e-reader, Barnes & Noble's Nook, and even Border's late to the market Kobo reader--that indicated rapidly accelerating sales throughout the quarter.  The Sony e-reader, for example, tripled its sales figures over the second quarter of 2009 and recorded its ten millionth book download.  Using available market data In the absence of audited numbers, one industry analyst speculated that the number of iPads Apple has sold in just the three months since the product's introduction now exceeds the total number of Kindles Amazon has sold since 2007.   Amazon, for its part, reported that it had sold out of Kindle 2's (currently priced at $189), and would introduce the slimmer, more versatile Kindle 3 at the lower price of $139 beginning in late August.
 
Several e-book promoters including Phil Lubell, Vice President of Digital Reading at Sony Electronics, Amazon CEO Jeff Bezos, and Robert Gottlieb, the chairman of the Trident Media Group, spoke of a "tipping point" in the book buying market, possibly as early as 2015, when half of all book sales revenue will come from e-books.  Most Amazon e-books currently retail for $9.99, while the average hardcover retails for $26, with soft-cover books costing about half as much. 
 
If this weren't evidence enough that 2010 is shaping up as the year of the e-book in the publishing world, on July 21st came the stunning announcement by publishing world super-agent Andrew Wylie, founder of The Wylie Agency, which represents perhaps the most impressive client list in the English speaking literary world--everyone from Chinua Achebe, Martin Amis and Dave Eggers, to Orhan Pamuk, Philip Roth, Salman Rushdie, and Zadie Smith, as well as the literary estates of W.H. Auden, Saul Bellow, Norman Mailer, Vladimir Nabokov, and John Updike--that he had founded a new e-books division called Odyssey Editions which had entered into an exclusive agreement with Amazon to publish the e-book versions of twenty "modern classics" for which the digital rights had not previously been negotiated.
 
Odyssey Editions includes such titles as Saul Bellow's The Adventures of Augie March, Jorge Luis Borges's Ficciones, Ralph Ellison's Invisible Man, Norman Mailer's The Naked and the Dead, Vladimir Nabokov's Lolita, Philip Roth's Portnoy’s Complaint, Salman Rushdie's Midnight's Children, John Updike's original four "Rabbit" novels, and nine other books of similar stature.
 
What makes Wylie's deal with Amazon so noteworthy and controversial is its exclusivity--you will only be able to purchase these e-book titles from Amazon, even if you read them on platforms other than the Kindle--and more importantly, the fact that Wylie is serving essentially as both agent and publisher of these titles, with Amazon serving as the distributor and bookseller. 
 
The time-honored business model of modern publishing involves an author hiring an agent to represent him or herself in negotiations with a publisher, who in turn works with a wholesale distributor to transport the appropriate number copies of books to retail booksellers and bookstores.  The supply chain, so to speak, has five stakeholders on its way to the reader: author, agent, publisher, distributor, and bookseller. 
 
What Wylie has essentially done, at least for these well-known and highly regarded titles, is compress a five step process into a three step process, with resulting economies of scale.  Moreover, it permits him employ the so-called "agency model," whereby the publisher sets the price for e-books and takes 70 per cent of the sale, giving 30 per cent to the retailer.  Assuming that The Wylie Agency does not increase its percentage of the take in this deal, he may be a position to offer his authors as much as 50% of all book sales revenue, nearly double what they would get under the traditional model.
 
Under the traditional model of hardcover publishing, the ratio was 60/40, with the agent and author splitting 30%, and the publisher retaining 30% on the production end, while distributors and booksellers each received 20% on the wholesale and retail side.  The advent of digital publishing brought a provisional "wholesale" model of publishers offering Amazon and other retailers their e-books at 50 per cent of the hardcover price, but allowing them to sell downloads for whatever price they chose.
 
At the outset Amazon employed this price control as a loss leader, setting an across the board price of $9.99 per e-book--a loss of about $3 to $4 on each download--in order to gain control of the market and sell more Kindles, which were initially priced at $359 (nearly twice what it cost Amazon to manufacture them).  This arrangement was later selectively amended as major publishing houses such as Macmillan, Random House, and Harper Collins announced they would withhold or delay the digital release of their titles until Amazon produced a compensation model fairer to authors, agents and publishers.
 
When Apple entered the e-book market in January with its iBooks Bookstore featuring book downloads as "apps" for its mobile devices, including the iPhone and iPad (introduced with much fanfare this past April), it extended the fee-for-service agency model it had developed for software developers at its App Stores to allocate 70 % of revenue to authors and publishers, while retaining 30% as retailer.  Given the strength of the Apple brand, and the more favorable terms iBooks were offering authors and publishers, Amazon saw its days of market dominance based on discounting and squeezing royalties out of authors and publishers numbered.
 
The partnership with Wylie's Odyssey Editions and adoption of the agency model suggests the path Amazon may take moving forward.  As it did last December when it signed business author Stephen R. Covey to an exclusive deal to sell the digital versions of all his best selling titles, Amazon appears to be moving toward a future where traditional old-line publishing houses are either colonized by powerful on line retailers or bypassed by them altogether when it comes to negotiating lucrative author deals.
 
Just as such major recording industry artists like Madonna, U2 and Jay-Z have left traditional record companies to sign with concert promoters like Live Nation, who also market and sell their new recordings, Amazon aims for a model where it will negotiate digital rights directly with high profile authors and their representatives, leaving traditional publishers with just the diminishing segment of the hard copy book trade.
 
Needless to say, the reaction to the Odyssey Editions-Amazon deal from the traditional publishing industry was swift and ranged from disappointment at exclusivity of the deal (along with some skepticism that truly represented the best interests of individual authors) to an outright sense of betrayal (on the part of Andrew Wylie) for cutting a deal with an online retailer with a history of discounting its product line at the expense of authors and publishers.  Macmillan CEO John Sargent released a statement on his blog indicating that he was "appalled" that Wylie had chosen to "give his [client] list exclusively to a single retailer."
 
"A basic tenet of publishing is that our function is to reach as many readers as we can," Sargent wrote. "We disseminate our books and the ideas within them as broadly as possible.  I understand why Amazon wants an exclusive deal with Andrew. They have asked us too for exclusive product, as has every major retailer we deal with. This is smart retailing, and a great deal for Amazon. But it is an extraordinarily bad deal for writers, illustrators, publishers, other booksellers, and for anyone who believes that books should be as widely available as possible. This deal advantages Amazon, which already has the dominant share in this market."
 
The reaction from Random House, which holds the print rights and disputes the digital rights to the majority of the classics in the Odyssey Editions catalogue, was even more decisive. On Thursday, July 22, spokesman Stuart Applebaum issued a news release stating that “The Wylie Agency’s decision to sell e-books exclusively to Amazon for titles which are subject to active Random House agreements undermines our longstanding commitments to and investments in our authors, and it establishes this agency as our direct competitor...Therefore, regrettably, Random House on a worldwide basis will not be entering into any new English-language business agreements with the Wylie Agency until this situation is resolved.” 
 
The decision was effective immediately.  The significant number of authors Wylie represents who have book contracts with Random House, which is also the only one of the major publishers to actively oppose the agency model, prompted a guarded response from the agent, who told the New York Times “I’m going to think about [the Random House announcement] a little bit.”
 
 "We take it seriously, as do the authors we represent, Wylie told the Times . "This area of discussion and negotiation needs to be resolved.”  In a subsequent statement to London's Financial Times last week however, Wylie was less conciliatory and clearer about his intentions: "If we do not reach an accord, Odyssey will grow. It will not publish 20 books, it will publish 2,000 and have outside investors and make itself available to other agents.  But then he added, "I am only trying to make a point in order to underscore the importance of getting the right terms with a view to uniting the two [print and digital] revenue streams."
 
Classic backlist titles are the low hanging fruit of the publishing industry.  The prospect of Wylie and other agents combing through their back catalogs for unattached digital rights is an unsettling thought for most publishing executives.  Moreover, the low overhead nature of the agency model is one that will appeal to both authors and readers of future work.  If Odyssey Editions expands to include the digital rights to original works by authors on Wylie's client list, it's hard to see how the old line publishing houses will survive in the long term.
 
One of the principal roles of traditional publishing houses in the past was the financial support, career development and skillful editing of emerging authors, along with the marketing and promotion of their work.  It's not clear how, or even if, these functions will be continued in the agency model.  What it does appear to guarantee is that literary agents will become as powerful in publishing world as Hollywood talent agents are in the entertainment industry.  Is that a good thing?  Readers, in time, will decide.
 
As we were preparing this piece, a new development surfaced which raises questions about the viability of the agency model.  This past Tuesday, Reuters news service reported that Connecticut Attorney General Richard Blumenthal had launched an investigation of the deals Amazon and Apple had struck with five major publishers-- Macmillan, Simon & Schuster, Hachette, HarperCollins and Penguin--on the uniform pricing of e-books.  Blumenthal's contention is that such agreements may prevent other e-book retailers from entering the market, effectively constituting an illegal restraint of trade in violation of federal antitrust law.
 
Connecticut becomes the second state to launch such an investigation.  In June, the Wall Street Journal reported that Texas Attorney General Greg Abbott had launched a similar probe.
 
--R.D. Pohl 
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