A Rational Framework for Library eBook Licensing

Since the Redigi decision made it clear that there is no right of first sale for digital content in the US, it's been much easier to think up realistic doomsday scenarios for public libraries in the US. Why should a publisher let a public library lend an ebook if Amazon or some other competitor were to offer much better terms? How would our public library system, saddled with difficult-to-use systems and unfavorable contracts, ever hope to compete?

Back when HarperCollins first announced that it would only let libraries lend their ebooks 26 times before they would expire, there was widespread outrage from the library community. Looking back on that, it seems pretty clear that a lack of consultation and poor customer communication fueled the furor. By itself, the lending limit could have terrible long-term consequences for libraries, but as part of a wider, well-thought out framework, it could be useful component.

I've been doing a lot of thinking about this over the last 3 years, and I've decided it's time to float a comprehensive proposal for how libraries and publishers might work together on ebook distribution to benefit the entire reading ecosystem. eBook lending as implemented to date has been founded on a combination of irrational fears and outmoded processes. We deserve better.

Behind this framework is a set of assumptions.

1. Library ebook distribution must sustain and increase the total population of readers; this is a prerequisite for a healthy book publishing industry.
2. Patron discovery of ebooks in libraries must connect effectively to ebook sales.
3. Library distribution must become much more efficient, and overhead must become much smaller for ebooks than it is today for print books and ebooks.
4. Long term preservation of ebook availability must be a joint undertaking of libraries and publishers.
5. The economic models used for library ebook distribution must provide incentives for libraries and publishers to promote points 1-4.

I don't pretend that people won't disagree with some or all of these 5 assumptions, but if any of them are false, then, I think there will be NO distribution of ebooks through libraries. I also recognize that not all books are alike; even if library distribution works for some ebooks, it's unlikely that it will work for every ebook.

So the fifth assumption is what this post is really about. Given 1-4, what should an economic framework look like? Here are the features of a model that makes sense to me:

1. Decoupled pricing. An ebook license that allows for lending makes the ebook more valuable, so why shouldn't it cost more than an individual, non-transferable license? I can't say whether Random House's 300% markup for libraries is excessive, but why not let the marketplace decide? For new, super-popular ebooks, maybe 500% markup makes sense. On the other hand, maybe ebooks that need exposure should have an 80% markdown because libraries might turn them into bestsellers.
2. Rate limits instead of DRM. Patron license embedding.  I've written about this before. This may take the most convincing, but in thinking about the imperatives of effective discovery, low distribution overhead, and long-term preservation, I've concluded that there are no alternatives to major change in library distribution technology.
3. Circulation charges after an initial period. Most books are bought in the first year of publication. Today, libraries "deaccession" books to match their declining demand. But there's no reason for a library to deaccession an ebook, so for most books the global supply for any given ebook will eventually exceed global demand. If the library can cut its transaction cost from ~$2 per circulation to $0.20 per circulation it seems fair to reward the publisher with part of the difference for developing books with long term value. 
4. License transferability/InterLibrary Loan. Libraries rely on interlibrary loan to expand the scope of their collections and meet special needs. But ebook loans can be instantaneous, so digital ILL can compete directly with backlist sales. If the transaction costs (currently ~$10) for ILL can be squeezed down to $1 or so, there's plenty of margin to provide a transaction payment to the rights holder for the privilege of doing so. 
5. Patron-funded purchases. Libraries are tight on funding even as they need to completely transform what they do. Their biggest asset is a huge reservoir of public goodwill. At this pivotal juncture, their ebook offerings are characterized by long hold queues. Why can't a library patron buy an extra copy for the library and jump to the front of the queue? Why don't publishers offer "Buy for your Library" buttons on their catalog pages? The reasons are complex, but it's mostly a case of "we haven't done that before". But if it doesn't happen I just can't fathom how library discovery can effectively plug into publisher commerce.
6. License durability. If libraries are expected to "buy" ebooks, it should be pretty much for keeps. If the publisher for some reason has to revoke a license without cause, the library should get a refund of the license price.
7. Archival copies. Libraries need to do a lot of things with books other than lending. Indexing and archiving are good examples. The saddest thing about the most successful library ebook distributors today is that libraries don't get access to unencrypted ebook files. If libraries are to offer effective discovery and archiving of ebooks, they need access to the files. Seems a no-brainer to me.

There are a bunch of parameters to plug into this framework; here's my guess as to what they should be:

• Rate limits: One authenticated user per two weeks.
• Circulation fee: $0 for the first year, after the first year, 2% of purchase price or $1 whichever is greater. 
• ILL fee (publisher share): 5% of purchase price or $2, whichever is greater. 

A rational ebook lending framework would mean big changes for both the book publishing industry and the library industry. Even if a HarperCollins decided today that this was an attractive way forward, it would be hard-pressed to find a way to implement it, because libraries just don't work that way. So it seems a bit far-fetched at this point. Based on the iBookstore fiasco, it appears to be illegal for big publishers to even talk to each other, let alone drive business model changes. It's good that a library group is still trying to figure it out.

Maybe some small startup company could try some sort of pilot program.

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A Corollary to Raganathan's Third Law

What do you see when you walk through a deserted library crammed with books? Do you see a vast store of knowledge, just waiting to be tapped, or do you see a horribly inefficient use of resources? Do you think of what could be, or do you see what isn't? If you're a librarian with a limited budget, you might think of all the money that went into those books, and you'd be thinking about how to get people to use those books. That's how interlibrary loan came into being.

Now imagine if the books were digital. Interlibrary loan is problematic for ebooks, but librarians are anything if not pragmatic. Some books, though valuable, are unlikely to be circulated a lot. So instead of purchasing those books for the library, the library contributes to a consortium that buys ebooks for the use of all its members. This benefits library patrons, because they gain access to a large number of books they'd otherwise not have access to, and it benefits publishers, because they are able to sell a broader range of books, at higher prices, than they'd sell if the consortium didn't exist.

I haven't yet commented on the consortial aspects of the recent HarperCollins kerfuffle. Here's what Overdrive told its partner libraries:

Another area of publisher concern that OverDrive is responding to is the size and makeup of large consortia and shared collections. Publishers seek to ensure that sufficient copies of their content are being licensed to service demand of the library’s service area, while at the same time balance the interests of publisher’s retail partners who are focused on unit sales.    Publishers are reviewing benchmarks figures from library sales of print books and CDs for audiobooks and do not want these unit sales and revenue to be dramatically reduced by the license of digital books to libraries.

Let me translate this into English.

Publishers are aware that many of the books they sell to libraries are seldom used. (See my posts on Book Use for some quantitative information) They worry that they'll no longer be able to sell 10 copies of a seldom-used book to 10 libraries, because 1 electronic copy will meet the demand from 10 libraries in a consortium. They feel that they deserve the benefit of inefficient library purchasing decisions.

This sort of thinking is myopic. Libraries have responded to budget pressures by making their purchasing  more efficient and relying more on inter-library loan (ILL), a process which is invisible to publishers. Because inter-library loan is relatively expensive, publishers gain when ILL is replaced by consortial ebook lending because the money saved can be redirected to ebook acquisitions.

An efficient library channel will compete, to some extent, with ebook direct-sales channels. The optimum strategy for publishers, however, is not to force inefficiency in the library channel, but rather to optimize pricing to monetize increased efficiency.

The efficiency of library acquisitions can be increased by introducing more consortia. A library needing a collection specializing in medicine, for example, should bolster its collection by participating in a consortium with the corresponding specialization. In principle, there could be a consortium specialized for every book that gets published. Such a consortium could manage the number of copies it purchases to closely manage global demand. If the economics worked out it could even strike a deal for unlimited use of the book by consortium members.

The single-book consortium could even allow individuals participate. It could negotiate with rightsholders for global access.

So here's a corollary to Raganathan's Third Law of Library Science:

Every Book its Consortium

Mmmmm. That sounds like my business idea for Gluejar, un-gluing ebooks.

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Internet Archive Sets Fair-Use Bait With Open Library Lending

Here's the most important thing I've learned about intellectual property law: the lawyers who say "yes" when you ask if you can do something are much, much more expensive than the lawyers who say "no".

Brewster Kahle, the founder, and through a foundation, the funder, of the Internet Archive, can afford a very expensive lawyer. He sold Alexa to Amazon for about $250 million of Amazon stock. He'll need that expensive lawyer; on Tuesday, the Internet Archive announced that its Open Library had started to facilitate the lending of out-of-print (but in-copyright) digitized books, a move that seems designed to spur a legal reaction from publishers.

To some extent, this isn't really news. Kahle has been advocating digital lending of books for some years now. In 2001, he published an article in D-Lib Magazine advocating the use of Inter-Library Loan (ILL) for digital materials. In October, the Internet Archive unveiled its Bookserver software, whose goal was to enable the lending of digital materials over the internet, and the University of Toronto was one of the original partners in its development.

The lending library announcement was also modest in scope. The big numbers were associated with programs unlikely to stir any controversy. Over a million out-of-copyright works are available, and Open Library has integrated access to the 70,000 ebooks licensed to subscriber libraries through Overdrive. Only 187 of the available books fall into the category of un-licensed out-of-print but in-copyright books.

In another sense though, the announcement, which was fed directly to the Wall Street Journal, was a declaration of war on barriers to fair use of digitized books. From the Journal's article:

The effort could face legal challenges from authors or publishers. Paul Aiken, the executive director of the Authors Guild [...] said "it is not clear what the legal basis of distributing these authors' work would be." He added: "I am not clear why it should be any different because a book is out of print. The authors' copyright doesn't diminish when a work is out of print."

Mr. Kahle said, "We're just trying to do what libraries have always done."

Having to receive prior permission from a copyright owner in order to scan a book is onerous, said Mr. Blake, of the Boston Library. "If you own a physical copy of something, you should be able to loan it out. We don't think we're going to be disturbing the market value of these items."

Stewart Brand, author of the 1988 book "The Media Lab"—one of the scanned books that will now be available for loan—said he didn't mind seeing his title made available this way. Mr. Kahle at the Internet Archive asked his permission, he said, and he gave it because he thinks digitizing books has the potential to improve knowledge.

The fact that at least one author was asked for permission suggests that the Archive is being very careful about what it chooses to make available through the lending program. A look at the 187 items in the lending library supports this view. There are

• Works by well-known copyright reform advocates such as Brand and Lawrence Lessig.
• Obsolete computer books. Example: Microsoft Windows 98 at a glance
• Older books likely to be orphan works: example- Alice James: her brothers~her journal, the posthumously published diary of Alice James.
• An in-copyright version of an out-of-copyright work: Brace Lineage, a genealogical work apparently based on an older version.
• Other genealogic works which might be considered to be data compilations. Example: Twelve generations in America
• Spanish language works published in Guatemala. Example: Regimenes agrarios
• A collection of stories by anonymous pregnant teens: You look too young to be a mom: teen moms speak out on love, learning, and success

In short, if you wanted to take legal action to stop the digital lending library, each of the books included in the lending library would pose some sort of problem for you.

It does not appear that the Internet Archive is attempting to rely on the statutory exceptions for libraries in US copyright law. These exceptions have rather technical requirements, and the lending library program does not appear to have been crafted to take advantage of these exceptions. Rather, it appears to be staking out fair use grounds. As James Grimmelmann writes:

The argument here would likely center on the Archive’s nonprofit purpose, the negligible harm to the market for some long-out-of-print books (quite possibly including some orphan works), and the nearby public policies of first sale and library exceptions. The natural counter-argument, however, is that distributing complete copies of books for readers to consume is so close to the core of copyright’s rights and goals that fair use simply cannot stretch that fair. These are non-transformative, substitutive, complete copies of expressive works—so while the Archive would have an argument, the fair use factors arguably tip 4-0 against it. Should it win, it would be a revolution in fair use caselaw. A good revolution, for some, but a revolution nonetheless.

Consider the case of Digital Systems by Ronald Tocci, published by Prentice Hall in 1977. The lending library offers only the first edition; a tenth edition was published in 2006. It would be hard for Prentice Hall to argue that offering a single copy of the 1977 version would reduce its economic value, while it would be easy to argue that sales of the 2006 edition will be enhanced. In addition to the probable difficulty in proving damages, it's likely that Prentice Hall might have difficulty proving that it has electronic publication rights for the 1977 edition, as author contracts of that era could not have anticipated today's internet distribution channels.

The Internet Archive's legal strategy would appear to be one of fair use creep, a sort of adverse possession by the public domain. If no one steps forward to tell the Internet Archive to stop lending these works, then the public gains a sort of right-of-way to use them. Even if a lawsuit occurs, it's quite possible that a jury would consider single-copy lending use of any of the 187 to be fair, even if the majority of copyright lawyers might disagree. If enough works become available in this way, then a political constituency for library lending of ebooks could develop and strengthen.


It looks to me as though the Archive is setting a trap, hoping that someone will take the bait and file a lawsuit despite problematic subject matter. The publicity exemplified by the Wall Street Journal article then looks like chum on the water to trick the legal sharks of publishing into striking on poisoned bait.

And here I was about to go swimming.

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Inter-Library Loan Reinvented for eBooks and Just-In-Time

My graduate school training was in engineering and in physics. In engineering, you put things together and try to get them to work. In physics, you smash things (the polite term is "perturbation") to help you understand how they had been working. I still use these approaches to help me understand the things I write about. You can learn a lot about a system be noting the bits that squawk when faced with a perturbation of the system.

I got a lot of interesting feedback on my article on patron-driven ebook acquisition. It seems that this perturbation in library processes could have wide ranging effects far outside of libraries and book publishing. Coincidentally, the patron-driven model, along with other changes in the library/publisher ecosystem, was discussed last weekend at a meeting of the American Association of University Publishers (AAUP). Publishers Weekly has a nice report. (See also a report in the Chronicle of Higher Education.

The biggest perturbation being imposed on this system is of course the reduction of library budgets, which has come down quite painfully on university presses and their monograph businesses. Still, speaker Joe Esposito was surprised that the strongest reaction to his talk was to his prediction that libraries would make up a shrinking fraction of the university presses' sales.

It seems that there is worry that a contraction or restructuring of monograph publishing could have repercussions for how scholars obtain tenure in the humanities:

The fact that monograph publishing exists to support tenure and the structure of academic employment is an inconvenient truth that can no longer be glossed by either the Academy its associated University Presses. At some point the Academy is either going to have to stop expecting University Presses to fulfill this need, or find a more honest and transparent way of funding it.

if that's the worst thing that happens, well, what's the big deal?

It won't be a shift to patron-driven acquisition that kills off monograph publishing, however. My reasoning is that from the point of view of economics, patron driven acquisition is roughly isomorphic with the current system of just-in-case purchasing coupled with inter-library loan (ILL).

Here's how things work for print monographs. Suppose a university press published an obscure but brilliant scholarly monograph five years ago. It might have sold 100 copies for $100 apiece, most of them to libraries. At $10,000 gross revenue, it was hard for the press to make much profit, but occasionally they get lucky and make enough to cover the losses on the rest of their catalog. Now here's the problem: Over the five years, there were only about 100 scholars in the entire world that really wanted to read the monograph. Unfortunately, only 50 of them worked at institutions that purchased the book. The libraries of the other 50 didn't purchase the book because the selectors in their libraries weren't omniscient or perfect, and they didn't have mind-reading abilities or the power of divination. Or maybe the libraries used an approval plan that hadn't been crafted with the obscure field of this monograph in mind.

But those 50 others still got to read the monograph, because of inter-library loan. For some libraries, ILL is even a revenue center, because their costs to lend are less than the fees they charge. Although publishers made money from the 50 libraries that bought the book and didn't use it, they don't capture any of the revenue from ILL activity. The libraries that spent money to buy the book right away are partially compensated for that expenditure by ILL revenue or reciprocal loans.

Now let's think about what happens in a future where just-in-time ebook acquisition dominates. The 100 users still get to use the monograph, but none of them need to wait for an ILL transaction to go through. The costs are assigned to the institutions that actually use the work. If we assume that the price of the monograph is unchanged, the publisher's revenue is also unchanged; except it's pushed out to the time of usage, which can be many years, especially in the humanities. The time value of this revenue stream is reduced- it takes longer to make back the money spent on producing the book.

The compensation for the publisher is that the revenue continues for as long as the work is still used. The book doesn't go out of print. In addition, since users can discover the monograph more widely, and obtain it immediately, there is the possibility of making additional sales to users who would never have requested the title via ILL.

In a sense, the patron-driven acquisition model is souped-up ILL, with usage fees accruing to the publisher. The comments of Macmillan's John Sargent earlier this year that publishers would like to see fees for library ebook lending don't seem so controversial when examined under this lens.

It's worth thinking through a publisher's pricing strategy. If libraries persist in their preference to remove price as a factor in the patron's decision to use an ebook, then publishers have no incentive to cut costs and keep prices moderate. If libraries allow automatic purchase of any ebook under $100, then publishers will price all of their products at $99. A similar dynamic in the US health care industry has not worked well for consumers, to say the least. Indeed, one university press publisher writing about patron-driven acquisition and the AAUP meeting has opined that patron selection will lead to higher monograph prices:

What this Patron Driven Access model means to university presses is that our future is likely to include two things—higher prices and fewer titles.

It's clear that there would be winners and losers under a just-in-time acquisition system. Librarians don't always select what their patrons really want to read. Controversial works might do quite well, as should engaging but hard-to-categorize works and works that don't break new ground but are readable and useful. Dry, unreadable, redundant works that sell well today because of the author's fame or because they fit into a "hot" field of research will be losers. A work that today is unread because it's too innovative and ahead of its time will eventually find its time under the just-in-time acquisition.

The huge change for monograph publishers will be in the way they market their products. The emphasis will shift from pre-publication marketing to libraries towards search engine optimization and post-publication marketing directly to users. Famous professors may find themselves awash in free ebooks as monograph publishers jockey for key citations and mentions; social networks and subject specific communities will be prime targets of monograph promotion. Publishers will abandon library convention exhibits like ALA in droves; parties and receptions for librarians will disappear.

I suppose we should have fun with the current system while it lasts, even as there are new and more efficient things to build.

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