Our Digital Future – Rights, Contracts and Business Models

The following paper is scheduled to appear in the academic journal “Publishing Research Quarterly,” Volume 24, Number 2, published by Springer.

Our Digital Future – Rights, Contracts and Business Models

By Edward Nawotka

When in September 2007 Simon & Schuster CEO Jack Romanos announced his intention to retire at the end of this year, he told the Associated Press, “the digital option - electronic books, print-on-demand and any other application of digital content, are extremely positive ramifications for our business and that in the next decade that's what executives should be focusing their energy on." To many people, it was Romanos who first demonstrated the retail viability of the ebook when in 2000 when he encouraged Stephen King to release a 66-page novella entitled Riding the Bullet as a $1.99 download. It proved an unparalleled success, selling 500,000 copies in just a few days.

Eight years later, ebooks and print-on-demand titles remain less than 1% of the market. Nevertheless, Romanos’ successor at S&S, Carolyn Reidy has said she too believes the future of the book is digital: “I have it in my mind that a new kind of digital book will come out, for a new generation used to reading on the screen from day one and writing on the screen from day one," Reidy said. "You'll have different designs, different artwork, different jackets. Electronic publishing is not just selling and marketing books online; those are the first steps."

Yet, without the right business models in place and – especially the right contracts -- digital publishing can’t progress. Rights managers and agents know this above all, a topic that was addressed at 21st International Rights Directors Meeting of the Frankfurt Book Fair last October.

Get the Rights Right and the Money will Follow

The opening speaker of the session, Evan Schnittmann of Oxford University Press in the US outlined some of most common business models currently being employed for the use of online content. Echoing Reidy’s assertion, he suggested that while sales and marketing and sales departments were eager to strike up promotional deals, Schnittmann believes ‘rights departments need to be running these things’ because of the risks involved.

That’s not to say once a company has policies and the proper infrastructure – including useable electronic databases and warehouses -- in place, they shouldn’t take full advantage of the opportunities. Lucy Vanderbilt of HarperCollins UK, offered a variety of examples where HarperCollins had licensed book content for online use, including serializations of graphic novels and reviews from film guides. She identified her own company’s early commitment to converting many of it’s publications to a digital format and its building a (costly) digital warehouse as an asset that can now be mined. Vanderbilt’s advice can be summarized thusly: `Don’t underestimate the value of your material.’ Copyright protection is key, as is the need to keep contracts non-exclusive and limited to a distinct period of time.

The sentiment was echoed by speaker Maja Thomas of Hachette Group USA, who encouraged publishers to resist the urge to offer large discounts for digital content. Digital audio books are proliferating thanks to the emergence of new ‘hybrid digital’ players such as Iofi and Playaway – which offer individual audio books in their own players, as well as companies like Audible.com which took downloadable audiobooks to a mass market audience by selling them on Apple’s iTunes (Amazon.com bought Audible.com for $300 million in stock in January 2008). The US audio market was now worth approximately one billion US dollars – with 14% of coming from digital downloads. Libraries are the biggest customers in the US, accounting for 32% of all sales. In light of these opportunities, publishers should resist selling their audio content on the cheap. ‘Go on out there and put a leash on that bear!’ she proclaimed.

Annette Beetz of German nonfiction publisher Grafe und Unzer Verlag says the business may very well come to you. She said that more often than not – as much as 80% of the time – her company is approached for digital rights from their material, in particular from companies looking to bolster their online content. When approached, it’s best to ask a few key questions: Can the customer track sales? How long will the contract last? What other opportunities can come from this deal? Perhaps the most important question of all is -- Do we as a company actually own the rights?

Franciska Hildebrandt of Campus Verlag emphasized that getting the language right, particularly between companies that need to translate documents back and forth, can be a tricky enterprise.

Negotiating digital rights is an evolving area, with many grey areas.

When Is Out of Print, Out of Print?

In early 2007, Simon and Schuster demonstrated its confidence in the digital future and rattled the supply chain in the process when it told literary agents that it would no longer agree to contracts that stipulated a minimum number of units must be sold or else rights would revert back to an author. This clause of contracts, they argued, was rendered moot by “current high quality and accessibility of print on demand titles” which meant a book was available, albeit in a digital form, in perpetuity.

After an outcry by the US Author’s Guild, S&S eventually relented and returned to traditional language in its contracts. Literary agent Simon Lipskar, for one, was ameliorated by the decision. “This is not about being confrontational or being obstructionist,” he explained. “I just believe that there needs to be the idea implicit in the contract that selling copies – and continuing to sell copies – is a requirement.”

The US’s largest publisher, Random House, agrees as well. When asked about Random House’s policies, spokesperson Stuart Applebaum replied: “Random House has always maintained a policy that in order to keep a work in print our titles have to be readily available in a format that is accessible to the general public, whether that be in a traditional book format or in an electronic form. If a title is not selling an acceptable number of copies in any format we will not warehouse those rights in perpetuity.”

Is Google a Friend and Foe?

But traditional bound book publishers are not forging the future alone and agents are likely to find themselves in conversation with a coterie of new digital publishers – ones named Google, Microsoft and Amazon.com. Each is aggressively pursuing their own agenda.

Google and Microsoft are building massive virtual libraries of scanned books. Under its Google Book Search program, Google claims to have signed up “more than 10,000 publishers” and have already scanned “more than a million books,” according to spokesperson Jennifer Parsons. In addition, Google is relying on 27 library partners – including those at Harvard and Oxford University -- to supply books for scanning.

The company has come into conflict with a handful of publishers including McGraw Hill, Pearson Education, Penguin, Simon & Schuster, and John Wiley & Sons, as well as the Association of American Publishers and the Authors Guild, all of whom have filed lawsuits claiming Google is engaging in massive copyright infringement. Google is defending itself by saying it will only display fragments of copyrighted material – specifically “two or three short quotations of text around their search term” -- and is thus making the information available under the concept of “fair use.”

Allan Adler, vp for legal and government affairs for the AAP, says that the lawsuits (each is individual, though filed in the same court) are entering its second year and remain in the “discovery” phase, in which each side is still acquiring information from the other.

Microsoft own scanning project, entitled Live Books Search, delivers material much in the same ways as Google. The main difference, claims Microsoft’s Cliff Guren, whose title is director of Publisher Evangelism, Live Search Books and Live Search Academic, is that the company is only scanning books for which it has garnered explicit permission to do so, either with an author or a publisher. “You have to strike a balance between copyright and usability,” said Guren, who added, “In particular, we’re very flexible in our effort to accommodate publishers in terms of how much of a book they want to make available to users.”

Should Consumers Be Able to Buy Books By the Chapter?

Amazon’s 2005 purchases of print-on-demand company BookSurge and ebook publisher Mobipocket are also starting to spawn new programs at the e-retailer, including an online self-publishing service called Books on Demand begun in August 2007. Somewhat more controversial is the company’s announced plans to make single chapters available for purchase – a business model analogous to downloadable music, which allows customers to buy individual songs instead of forcing them to purchase entire records.

Whether customers will want to cherry pick chapters from books remains unknown, but as far it concerns authors, agent Brian DeFiore wonders how authors will be compensated for such sales. “Right now, that type of transaction is not addressed in a typical contract with a publisher – and we don’t have contracts with retailers,” he said. “Serialization rights might give us an idea of how something like this might work, but it is an entirely new territory.”

Waiting for the iPod of Books

Nevertheless, DeFiore is anxious to see the advent of widespread digital distribution, and in particular an iPod-like device for ebooks that would prove popular with the customers. “Not only would it save the forests,” said DiFiore, “it would save the 35-40% return rate of books that get published and go unsold.”

In addition, it would pose a serious challenge the dominance of bookstores in distributing books. Amazon.com, which has already radically reshaped the retailing landscape, made a massive splash in tk with the launch of the Kindle e-reading device.

Malle Vallik, Director Digital Content & Interactivity for Harlequin Books, -- a company whose entire front list is available as ebooks – saw an early prototype of the device and said she “impressed.” Other dedicated devices on the market include the Sony E-reader (which is delivering an updated device for the holiday shopping season) and the iLiad from iRex Technologies. Industry watchers are also waiting to see whether Apple’s iPhone and its high resolution screen will prove a viable ebook reader. HarperCollins has experimented with the device and has posted a web site that allows iPhone users to view a variety different titles online, while Zinio.com – a distributor of digital magazines – is also offering a coterie of magazines for free to iPhone users. In the UK, a company called iCue offers what it calls “m-books,” which are downloadable to mobile phones via SMS (short message service); in Asia, and Japan in particular, novels are being written exclusively to be read on cell phones.

Nick Bogaty, who spent five years as the executive director of the International Digital Publishing Forum (before taking over direct digital publishing business development for Adobe Systems in September 2007), believes that the widespread adoption of ebooks will not be dependent on a the delivery of single paradigm-shifting device, but on software. “People want to read their ebooks on numerous devices, from cellphones to laptops.” The September decision by members of the ISPF to adopt the OPS 2.0 e-book specification and the “.epub” file format as an official industry standard format should go a long way toward ebook cross compatibility across devices.

According to the IDPF, in 2006, publishers sold some $22 million worth of ebooks in the U.S., numbers which the organization expects top $30 million or more this year. In Asia, where laptops and cellphones are more sophisticated that in the US or Europe, the numbers are much more significant. The Digital Content Association of Japan estimating sales of e-books topping $126 million in 2006, with $58 million of that coming from sales from mobile phones – an increase of some 331% from the previous year.

“The numbers are growing very fast,” said Bogaty, “but they are growing from nothing. Give it another five years and it will be a real business.”