Monday, November 22, 2010

Understanding Context

Before launching into independent publishing (or any venture), it’s essential to look at CONTEXT. How well do I understand the publishing world as it exists today? How well do I grasp the way that technology and other trends are changing it? What is happening with competition? Can I imagine the future well enough to create a compelling strategy for getting my own work into the world?

The US book publishing industry is large and mature and in flux.  Technology is changing the way in which books are produced, distributed, marketed, promoted and retailed, which creates opportunity for independent efforts and self-publishers. I have found it valuable to look at the “traditional” value chain for books and to contemplate how it is changing.

The Traditional Value Chain for Book Publishing
Author > Agent > Editor/Publisher > Printer > Wholesaler > Retailer > Customer

There are changes to the value chain as technology allows Print on Demand (changing the activities and costs of the printer) and e-books (changing the activities and costs of producing, wholesaling, and retailing books). Not all books are agented, and at least one imprint is switching to an all-digital strategy. So the value chain is definitely shifting, but this captures the most common form.

A New Value Chain for Books
Author > Author Services Provider/Retailer > Customer

There are, of course, many variations on this new value chain. For instance, any given author might choose to engage a freelance developmental editor or copyeditor or book designer independent of an author services company like Author Solutions or With CreateSpace and PubIt, and Barnes and Noble are both author services providers and retailers. So, this diagram captures a simplified view of the changing value chain. 

I’ve found it useful to understand the role of the Publisher and how it has evolved, because this provides clues as to how it will continue to develop.

A Look at the Evolution of Publishing

Mom & Pop industry (1900s–1960s) The first publishers were tastemakers, focused on identifying and nurturing talent. They often invested their own money and took lots of smaller gambles. During the Depression, Publishers established the practice of accepting fully refunded returns by booksellers, due to concerns that retail sales would suffer if the shelves weren’t adequately stocked. By the 1960s, the consolidation era began.

Initial consolidation (1970s–1980s) Characterized by the emergence of the “independents,” or independent booksellers, publisher sales forces, mass marketing strategies, information technology advances, and more efficient inventory management.

SuperBookstores (1980s) Barnes & Noble and Borders, shifting from the mall-based strategy of independents to large-footprint superstores, again caused an industry re-alignment. Large economies of scale qualified them for major volume discounts, and they stocked thousands of titles at deep discounts.  Publishers put more marketing behind titles they knew would sell well.

Conglomerates and the arrival of Online Bookselling (1990s–2000s) By the 1990s, larger conglomerates like Bertelsmann, Pearson, News Corporation and Viacom had taken over both publishing and distribution activities. So a large swath of the industry was now being run by business people who expected growth, and when consumer spending on books flattened, cost cutting ensued. Publishers increased their emphasis on signing superstar writers and that in turn drove increases in advances for these authors (and put downward pressure on advances for non-star authors). The drive for blockbuster titles in turn drove expenses and returns as sales failed to meet expectations. This era was significant for changes in retailing as well: In 1995, arrived on the scene, and their marketing reach and discounting practices contributed to the pressure on independent bookstores, the number of which dropped by 40% between 1993 and 1998. Discounters like Wal-Mart and Costco ushered in a major shift away from consumers buying bestsellers in bookstores.

Market Share of Major Publishers Today
Five publishing houses represent over 50% of the market.
Random House (a subsidiary of Bertelsmann);
Penguin (of Pearson);
Harper Collins (of News Corporation);
Simon & Schuster (of Viacom); and
Hachette Book Group (of Lagardère)

The top ten publishers have approximately 70% market share. The remaining market share is split among hundreds of smaller, specialty or “boutique” publishers. If you start to think about the impact of self-publishing, data from U.S. ISBN agency R.R. Bowker helps to complete the picture. Bowker reported 130,477 active publishers in 2008, a 27-percent increase over 2007. Not surprisingly, most of this increase was within the small-publisher category, according to the Book Industry Study Trends report. So, we have a very entrenched and concentrated set of players making up the majority of the industry, and tens of thousands of small players fragmenting the rest.

One critique of the publishing industry is that it produces too many mediocre books. Now that the costs of producing and marketing a book are so small, that problem gets worse. What players will emerge to curate the masses of self-published books that are flooding the marketplace? To the extent that publishers and retailers have historically played the role of tastemaker and gatekeeper, it will be interesting to see if/how they or other players will become arbiters of quality for the self-published set.

Size of the Industry
While the American Association of Publishers estimates the $$ size of the industry at $24.3 billion, the Book Industry Study Group estimate is closer to $40 billion. What explains the difference? In particular, it would be the sources of data and the methodology that each uses to estimate the revenue.  To me it illustrates a serious problem in the industry generally, which is a lack of comprehensive data about the business.

Print on Demand
The emergence of POD technology is important because upstarts can sell a book online without committing to distribution and physical inventory (and its associated costs) using POD provider. Still, it is challenging to get into the bookstore network without pull from booksellers or consumers, so distribution remains an obstacle.

One piece of the puzzle is challenging to reconcile, and that is ebook data. According to Forrester, e-books now account for 9-10% of sales.  And they’re estimated to be close to $1b by end of 2010, and $2.8b by 2015.

Here is another source of e-book data: 

In an acknowledgment of the growing sales and influence of digital publishing, The New York Times said recently (Nov 2010) that it would publish e-book best-seller lists in fiction and nonfiction beginning early in 2011.

Publishers will retain power so long as the print book business survives and their scale and capital-intensive activities are required.  Given that they don’t currently “own” the relationship to readers and don’t seem to have particular insight into consumers of books, it is hard to imagine that they will survive -- at least in their current incarnation -- if/when electronic becomes the dominant form of the book. Their cost structure and resulting low margins for writers will make them an uncompetitive option in the new digital world. So, unless they figure out how to change their business model dramatically, they will be marginalized alongside brick and mortar retailers. (You can be inefficient, costly, and bad at understanding the nuances of the consumer market if you’ve got big barriers to entry and you’re among the only game in town. But when barriers come down and new upstarts move in, those characteristics will end you.)

One source of industry analysis that I’m finding helpful is here:  Consultant Mike Shatzkin argues that

“Big publishers will be holding onto bricks and mortar retailing for as long as possible…[because they]…depend on a bookstore network for their survival. Their core proposition is “we put books on shelves”; that’s what requires the scale and expertise that they have and that nobody else can compete against. When retail shelf space goes away, there’s little a big publisher can do that can’t be duplicated by anybody with the cash to put together an ad hoc team of freelancers and graft them to some service providers.”

How will big publishers fare when ebook uptake increases to 20-30-40% of the market? Here’s an insightful blog post by James McQuivey at Forrester.

Then next obvious question is, how will fare? is in the author services business with CreateSpace, and has tremendous distribution reach. But I find Amazon most interesting because they have data and the ability analyze and derive invaluable insight about book buying behavior. They own the relationship to the consumer and that just might be the most valuable asset in the next wave of the book business.

My conclusion is that the future hinges on ebook uptake and customer relationship data and analytics.  With ebook uptake, the existing power structure shifts dramatically and publishers will transform or new players will emerge to become the tastemakers. And the people who own the customer relationships -- and therefore have data and the ability analyze and use that data to more effectively and efficiently market to consumers -- will be the only ones in the position to thrive in the digital future that is book publishing.

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