The Shatzkin Files

Our May 29 conference is built around the theme of “scale” in our business, which means something different than it did a very short time ago. Usually “using scale” means “employing the competitive advantages of size” but it can also be leveraging efficiency; the key beneficial characteristic of scale is that unit costs decline with increased activity.

In times past in publishing, the advantages of scale included lower printing costs (bigger companies doing more volume get better prices); lower warehousing and systems cost (because operations almost always get cheaper on a unit basis as they get bigger); and more revenue for each unit sold (because bigger publishers with better lists could get retailer and wholesaler customers to buy at slightly lower discounts).

All of these scale advantages were centered around what has been the core capability of a book publisher: to put books in sight and in reach of consumers on retail shelves. For the better part of the past 100 years, the publisher who could do that more effectively than its competitors had a significant advantage in the marketplace.

But with more and more of the business of customers finding and buying books shifting away from stores, those scale advantages are both reversing in reality and diminishing in importance. Publishers who had built great systems, efficient warehouses, and a nonpareil sales network find them managing less and less “throughput.” That means that less of their business is taking place in their scale-advantaged activities, but it also means the price of maintaining them is going up on a unit basis.

That’s why you see the two Big Six publishers who have invested most heavily in their scalable activities — Random House and Hachette — most active in competing with Ingram and Perseus (two companies far more dedicated to providing services) pursuing distribution clients. They can offer the benefits of their scale pricing to clients and, at the same time, preserve those benefits for themselves as the print-to-store segment of their business diminishes.

The shift in the business to online discovery and purchase would, at first glance, seem to have a leveling effect. Scale in reaching customers that used to require big publishing operations are now largely offered by Amazon, Apple, and Google. When you “searched” for a book in stores (whether you knew you were searching for that specific book or not), you might find it there and you might not. And you were ever so much more likely to find it if the publisher had a stack of copies in the front than if they had one spine-out copy in a store section. Those distinctions aren’t nearly as determinant of whether you’ll find a book at Amazon, or have it suggested to you by Google.

So the smartest big companies have focused on where scale can benefit them in the new context. Brian Murray, the CEO of HarperCollins, made the point to me over a year ago that his company was advantaged because they were launching books by the dozen into the marketplace every week, and each one gave them an additional opportunity to learn about search optimization, customer reactions, and how various tools from Facebook to Pinterest worked to boost awareness and sales. He was confident that the volume of activity they engaged in provided its own scale advantage.

As former Random House marketing strategist Pete McCarthy will make exceedingly clear in his introductory remarks at our May 29 show (and will amplify considerably at the Marketing show we’ll hold on September 26 just about to be announced), publishers can and should plan and execute all their marketing efforts in a holistic way to keep learning both about the components of the marketplace environment and about individual consumers. And, yes, the bigger companies will have a definite scale advantage in doing that.

But in our increasingly unbundled book business, “scale” — unit costs going down with increased activity — can be applied to niches with precision.

Companies like Hay House and Harvard Common Press and even F+W Media are relatively tiny compared to Random House (even before the Penguin acquisition) or HarperCollins or Hachette, but their focus on specific audiences means they may learn more on a niche-by-niche, or even customer-by-customer, basis than the big guys do.

I keep being amazed at what my longtime clients at Vogue Knitting can do on the back of a relatively small-circulation magazine brand in a niche market, including staging phenomenally successful and profitable live events that will ultimately dwarf the returns from their book publishing efforts (and augment them at the same time). But they can truly apply the scale they have reaching the audience of people who knit and want to know more about it. Nobody can do it as effectively as they can.

(I’ve told this story before. An agent told me several years ago that he had sold a mind-body-spirit title to Random House and that they sold 12,000 copies. He sold the author’s second book to Hay House, a MBS publisher, and they sold 200,000 copies. At that time, I believe Hay House had about one million email addresses of MBS-interested people. They undoubtedly have many more now. That’s people that you can mail to free; scale doesn’t come more starkly presented than that. For MBS scale, Hay House is the 800 pound gorilla.)

What we’re beginning to see repeatedly is that scale can be provided from a position outside publishing. One of our panels on May 29 is of new publishers that work from a base outside the publishing business. Two major daily newspapers (the Chicago Tribune and the Toronto Star), a kids’ animation studio (Frederator), and a business school (Wharton) all have publishing programs. They’re built on their own scale, and they have cost-effectiveness both on the content creation side and the audience-reaching side of the spectrum of publishing activity provided by their existing activities.

Publishers have watched Amazon come into the publishing business employing their scale. They’re now seeing Google do the same thing. Google’s entrance is in a self-created game niche, apparently far less threatening than Amazon’s far-reaching multi-genre plus general publishing approach to signing up titles many publishers might also be competing for. (How long before Apple decides to publish some books?)

These cuts to the commercial publishers’ share of the market are coming from literally thousands of directions. Each is a relative pinprick, but cumulatively they could lead to a lot of bleeding. Will the “scale” that a big publisher can bring to marketing from the experience they have with thousands of titles from across the interest universe provide a proposition that gets them into the game for the biggest commercial-potential books that can be produced by this new myriad of players? If there is truly scalable marketing activity, it should only become more efficient by adding relevant titles to its activity base. That would seem like the modern publishing equivalent of the perpetual motion machine.

I’m not smart enough to know if that’s possible, but I don’t think we’d even be asking the question if bookstores had the share they had five years ago.

A dramatic demonstration of the opportunities that can be provided by scale occurred yesterday, when Amazon announced its new initiative “Kindle Worlds” around fan fiction. Fan fiction has existed in a commercial box; because it depends on using characters invented and owned elsewhere, it couldn’t be sold. But the all time record bestseller “50 Shades of Gray”, liberated by rewriting away from the “Twilight” characters that spawned it, showed the powerful commercial possibilities in the genre.

So Amazon is applying scale to create a whole new commercial enterprise. First, they are licensing the rights to material fans can turn into their own stories, starting with properties from Alloy Entertainment but clearly planning to build out from there. Then Amazon will sell (and own copyright) in the output, using its huge audience as a commercial launching pad and paying royalties to all the stakeholders. Everybody in the game wins: the originators, the fans who create the fiction, the fans who buy and read the fiction, and, of course, Amazon.

A few weeks ago, I wrote that there are three big forces driving the future of publishing: scale, verticalization, and atomization.

I was wrong. I had forgotten my own blogpost from last September when I identified another trend that belongs with the first three: “unbundling”. The book business, in the trade segment I follow most closely but in every other segment as well, is seeing its value proposition becoming unbundled in a number of ways.

Up until very recently, a trade publisher controlled just about every aspect of a book’s publication. The indispensible parts of the value publishers offered were two: the advance against royalties that often provided essential financing to enable the writer to create the manuscript and the network of relationships and infrastructure that put books on shelves for consumers to find and buy them.

Because the publisher was taking both a capital and reputational risk with every book published, it was natural that it would handle all the supporting steps: developmental and copy-editing, marketing and publicity, design and manufacturing. The publisher would commission the artwork for the book’s cover and determine what was the best foot forward on flap copy.

Until the turn of the 21st century, it was the exceptional author who had any kind of “platform” that could be employed for the book’s marketing: something like a TV show or newspaper column or fame achieved some other way that could be a springboard for promoting the book. In the cases where those opportunities existed, publishers recognized that the book was being “piggybacked” onto something that had its own commercial purpose and was not subject to the wishes or timetables of a book’s publisher.

What changed before the publishing business changed is that many of us have some sort of platform now, as in “a way to reach an audience”. And, although my platform isn’t comparable to Rush Limbaugh’s or Jay Leno’s, it is, indeed, mine all mine and I can do what I want with it. Many other people have platforms of their own that are far more powerful than mine.

It could be said that publishers themselves began the unbundling process as they got authors to use their platforms to market their books. With the advent of ebooks and driven by the CreateSpace services offered by Amazon, it became possible for any author to publish his or her own book and those with a platform, or even just building one, no longer had to get the assent of a publisher to put their book into the market.

My friend, futurist David Houle (whose new book “Entering the Shift Age” has been published by Sourcebooks), was frustrated in 2007 with his inability to connect with a publisher for his predictive thinking. He was just starting his blog, “Evolution Shift” and it didn’t have enough history or audience to persuade any publisher he found to put out his companion book, “The Shift Age”. So he did it himself, through Amazon, even before there was a Kindle. Over the years, David has sold about 7,000 copies of his book, many through Amazon but many more through his own public appearances as a speaker. (And what he’s made per copy is far more than what he’d have made in a publishing deal.)

Since Houle published “The Shift Age” several years ago, an industry has grown around offering services for publishing. This is referred to as the “author services” business. The core offerings are to take the creator’s file (in Word or InDesign) and make it accessible in various ebook formats at the front end and then to interact with ebook retailers (delivering the file and capturing the sales information and the revenue) at the other end. The services offered by the retailers themselves (and you can get this help from Amazon, Apple, Barnes & Noble, and Kobo) don’t push the ebook out to other ebook retailers. Amazon is the only one to offer a companion print option.

The first mover on these services in the ebook age outside the retailers was Smashwords. They’ve been joined by a host of others. Author Solutions, acquired about a year ago by Penguin, rolled up a number of companies that offered these services in the print-only world that existed before Kindle. They have all come to recognize that publishers provide more than the essential services at each end of the publishing process; they also provide editing and packaging and marketing services in the middle. So these have popped up as discrete offerings — “unbundled” — both through the complete service providers and as stand-alones.

Now there’s an aggregator of the stand-alone service providers, BiblioCrunch, which features a host of freelancers that any author can access. Another fledgling, NetMinds, which has made some news lately by publishing Nolan Bushnell’s book, makes provision of expert services in many categories a part of its model.

This unbundling effect plays out in interesting ways. When Hugh Howey sold the rights to his smash success “Wool” to Random House UK (before he had a US publisher), they worked with Howey and did some editing, including creating an additional chapter, for their edition. Howey took that component of Random House’s work and was able to make it available for the print edition he licensed in the US to Simon & Schuster and then incorporated it into the ebook version he sold himself.

All of this evidence that the publishers’ proposition is being unbundled leads to two strategic observations.

As the services game shifts from “authors” to “entities” (what I call atomization and of which there are new examples just about every single day), there is a critical job description missing from the service offerings. That job is “publisher”. The publisher makes the overall decisions about the editorial, production, and marketing resources that are committed to each book.

In the author services environment, this role can often be useful but would not be missed in many circumstances. There is no “what to publish” decision; the author has a book. There are very limited “resource allocation” decisions because the available resources to allocate are the author’s own.

But as entities of all kind take over from authors as the primary providers of books outside the industry itself, the role of publisher becomes critical. Decisions will need to be made.

There are 26 categories of helper available in BiblioCrunch. “Publisher” is not one of them.

I met last week in Los Angeles with a team of producers and development executives who are acting on an idea I have pushed: that Hollywood can become an important center for fiction book publishing. They have a core resource of thousands of great stories developed in the hopes that they will become a movie that ultimately doesn’t get funded, or as they say out there, “green-lighted”. This team has over 100 projects that are candidates for their book publishing efforts, but they can’t just “do them all”. They have to set up a company, pay to turn scripts into novels (or, at least, narrative stories), and put them into ebook and probably also print book formats. So, they asked me, which ones would you do first?

I said, “I wouldn’t ask me. I’d ask a publisher.” I named two very good and experienced ones immediately who are currently unemployed. These people have vast experience with all the decisions that are required: which stories are most saleable as books, what length the books should be, what style they should be written in, and how they should be titled, packaged, and promoted.

This necessity is even more evident when one thinks about non-fiction entities that might become publishers. If every museum, library, and department of a university is “a publisher waiting to happen” (and I believe all of them are), how could any of them proceed without a publisher?

If you were trying to get a museum started on becoming a book publisher, you’d begin with a discovery process that asked key questions. Who comes to the museum and what do you know about them? Who comes to the museum’s web site and what do you know about them? What IP do you already own that could be publishable as books? What good IP could you lay your hands on if you would publish it as a book? What is your relationship to sources of IP and marketing, like academic institutions, not-for-profits, or other museums? If you asked supporters of your museum for money to fund a publishing program, would they give it to you?

What the publishing program should be in response to the answers to those questions is something only a publisher has real experience figuring out. The publisher is the first service the entity needs. Renting a publisher takes precedence over renting an editor or a cover artist.

Ingram Publisher Services had a great success with a wildly expensive ($625) cookbook series (Modernist Cuisine: The Art and Science of Cooking) created by Nathan Myhrvold, the former Microsoft executive. Perhaps lost in the reporting of that story is the fact that Myhrvold’s first stop was to engage Bruce Harris, the former Publisher of Harmony Books and a former Random House sales executive. Harris has “publisher” in his DNA, and he undoubtedly shaped key decisions, probably including engaging Ingram in the first place, let alone directing their activites, that were instrumental to the success of the project.

So the first strategic point is that hiring all the services without hiring a publisher is like having a football team without a quarterback.

The second strategic observation is that the industry itself, but particularly the trade component of it, is also being unbundled. Disparate efforts that bookstores aggregated and welded together are now coming apart.

Here I’m not thinking about the value chain for each book, which is overseen by the publisher, but the value chain for the industry, which includes the supply chain. Although there have always been some vertical bookstores — in New York City until a few years ago they ranged from specialists in architecture to specialists in mysteries — most books were sold in general bookstores that sold everything. As publishers are forced to reach readers in different ways than they used to, the subject of a book, and the consistency of audience appeal within a publisher’s list, becomes a key to its marketing in ways it never was.

But ebooks are creating another distinction, between books that are meant to be read from start to finish and all other books: art books, illustrated instruction, references, and compendia. Narrative writing, particularly fiction, works as ebooks. The others don’t. That increasingly encourages publishers who depend primarily on narrative reading to stick to it and to not publish books of other kinds.

It is also creating a differentiated distribution problem for publishers, depending on their output. Publishers of novels and narrative non-fiction are seeing the decline in their print book sales compensated for by increases in their ebook sales. They have a new challenge reaching the audiences and making them aware of their books, but their problem isn’t exacerbated by the format change. Many of their readers simply switch over from print to digital on whatever device they want to use and one-color straight text printing enables reducing the print runs without costs getting completely out of line.

But that’s not true for publishers of other books. As bookstores close and readers switch to digital formats, they face existential questions. They can’t suffer the print run reductions readily. They can’t just make a digital version by copying the print. And, if they did, it won’t sell.

Some illustrated book publishers have robust distribution outside the bookstores, to museums or gift shops, for example. In some cases, the book trade was already a diminishing share of their business before the ebook revolution happened.

But the impact of digital change on publishers that used to all depend together on a healthy bookstore network is very highly variable. Their fates were joined. They’re now being unbundled.

Although the organizing theme of our Pub Launch BEA conference is “scale”, the other trends definitely get their moment. Ken Michaels of Hachette will talk about tools his company has developed that are being unbundled and delivered as services to other publishers. And the particular challenge of the illustrated book publishers as they lose the ability to piggyback on bestseller traffic in bookstores is the subject of the final chunk of the day’s programming. First, Ron Martinez of Aerbook will survey the new tools available to make putting an illustrated book into digital form cheaper and more effective. Then a panel of illustrated book publishers — Joseph Craven (Quarto Group), Tim Greco (Dorling Kindersley), Lindy Humphreys (Abrams), and Mary Ann Naples (Rodale) – will talk about how they are adjusting to the new retailing environment unbundling is creating in a panel discussion moderated by former Crown Illustrated publisher Lauren Shakely.

The overarching theme of our upcoming Publishers Launch Conference at BookExpo America on May 29 is “scale”. I thank my PLC partner, Michael Cader, for urging that we label that as a core concern worthy of being the centerpiece for a day’s discussion. (With that nudge, I identified “scale”, along with “verticalization” and “atomization”, as one of the three big forces driving publishing change in the current era of transition.)

We’re covering “scale” from many angles on May 29.

The program will kick off with a presentation from Pete McCarthy, formerly a digital marketing strategist at Random House, about moving beyond our standard understanding of “industry data” — what we learn about the industry in the aggregate from BookStats and Bowker and others — to mining and analyzing the massive amounts of public data about readers: who they are and where they are. The data we care about, and that can really help us, isn’t labeled “book publishing data” but is far more useful and actionable than much of what we try to decipher meaning from that is tagged that way.

The requirements of scale threaten to really change the business of literary agents. Since the rise of agents as intermediaries between publishers and authors in the 1950s and 1960s, it has always been possible for agents to operate as very tiny operations. Single-agent offices have never been terribly unusual, and agents could run a successful business with a handful of prosperous clients, or even just one! The unusual convention in publishing by which the buyer (the publisher) customarily pays for the lunch at which the seller (the agent) learns about the buyer’s likes and priorities has been a symbol of the viability of this highly decentralized world.

But those times are changing. The opportunities for self-publishing and the requirements for authors to be self-promoters have placed new demands on literary agency offices. It is often no longer sufficient to have knowledge of acquiring editors and what they want and a network of foreign co-agents who can help place projects in other languages and territories. Agencies large and small are adding self-publishing services, which can include capabilities as mundane as getting cover art designed and as sophisticated as distribution to a global network of ebook retailers. This adds the potential for “conflict” for the agents. In some cases, agencies have chosen a course that might present a choice for an author between a publisher’s deal and their agent’s deal.

These changes and the challenges they present will be discussed by three agents — Brian DeFiore of DeFiore and Company, Robert Gottlieb of Trident Media Group, and Scott Hoffman of Folio Literary Management — in a conversation that will be moderated by Michael Cader.

We will have presentations from three publishers about how they are employing scale. David Nussbaum of F+W Media (owners of our Digital Book World partners) will talk about how they support a variety of vertical businesses with central services providing ecommerce and event management that make it possible for all their communities to benefit from a wider variety of offerings and capabilities. Ken Michaels of Hachette will describe some of his company’s solutions to knotty challenges like digital marketing and metadata quality that they are then making available industry-wide as SaaS offerings. And Jeff Abraham of Random House will be talking about their efforts to utilize scale in a new publishing environment, to drive efficiency and reach in the supply chain and to reach consumers more effectively via their marketing programs.

Ben Evans of Enders Analysis studies big companies that operate at scale far beyond our industry but whose activities very much affect us: namely Amazon, Apple, Facebook, Google, and Microsoft. His presentation will focus on how their strategies and activities influence the environment for the publishing industry, with insights as to how publishers can surf the waves of these giants’ activities rather than be overwhelmed by them.

As publishers have rethought their organizations in the past several years, the words “business development” have popped up in publishing job titles, which they never had before. We’ll have four publishers talking about what “business development” means to them: Peter Balis of John Wiley, Andrea Fleck-Nisbet of Workman, Adam Silverman of HarperCollins, and Doug Stambaugh of Simon & Schuster, in a panel conversation moderated by Lorraine Shanley of Market Partners International.

Brian Napack was President of Macmillan for several years; he’s now an investor at Providence Equity Partners. In a conversation with Michael Cader, Napack will discuss how he views the importance of scale as an investor and how his views have evolved since he was an operator in one of the large companies that might be challenged by the scale of even larger competitors.

The changes in publishing and the provision of services have also enabled publishing with less organization or investment and by the application of scale created outside publishing to new publishing enterprises. A panel of new publishers with roots outside the industry: Jennifer Day of the Chicago Tribune, Steve Kobrin of Wharton Digital Press, Alison Uncles of the Toronto Star/Star Dispatches, and David Wilk of Frederator Books will talk about how their organizations publish in ways that wouldn’t have been possible or even conceivable a few short years ago on a panel that will be moderated by longtime Harper executive and digital pioneer Carolyn Pittis.

Dan Lubart of Iobyte Solutions has been tracking ebook sales data for years and has been providing the data and analysis behind the Digital Book World ebook bestseller list. Lubart will present insights from “behind” the bestseller list data, including a deeper dive into the trends relating to ebook pricing. The ebook bestseller lists have been the evidence of strong challenges to the publishers who operate with scale on their side, as an increasing number of self-published authors have seen their work rise to the very top of the charts.

Our conference will also tackle the special problems facing illustrated book publishing. The success of ebooks has been pretty much confined to narrative reading made reflowable on devices of any screen size. No formula or format has yet proven to work commercially for illustrated books. We’ll address that question from two angles.

Ron Martinez of Aerbook is the best thinker we know around the question of making creative complex ebooks and apps more efficiently. His company has developed its own tool, Aerbook Maker, to address that challenge. But Ron is also knowledgeable about and respectful of other efforts, including tools from Apple and Inkling, that reduce the cost of experimentation for illustrated book publishers looking for ways to deliver an appealing and commercially viable digital version of their content. He will kick off our discussion of the challenges for illustrated book publishing by reviewing the tools and best practices for lower-cost experimentation. And in his quest to improve the margins for illustrated book publishers delivering virtual versions, he has also worked out what might be a marketing and distribution tool that can improve the equation from the revenue side.

Ron will be followed by a panel of illustrated book publishers talking about how they plan to thrive in an environment where the virtual solution hasn’t arrived and the store environment is becoming more challenging. Joseph Craven of the Quarto Group, Tim Greco of Dorling Kindersley, Lindy Humphreys of Abrams, and Mary Ann Naples of Rodale will discuss these issues in a panel moderated by Lauren Shakely, who faced these challenges herself as the longtime publisher at Crown Illustrated.

Our normal practice at Publishers Launch Conferences, which this review of our planned show spells out, is to put the smartest and most articulate players really dealing with the challenges of digital change in the spotlight to talk about what they’re doing and what they’re facing. This has the virtue of showcasing real solutions to real problems.

Frankly, our view is that very few of the outside disruptors, often tech- and private equity-centric start-ups providing “solutions” to the problems as they perceive them, have gained much traction or added much value. We’ll get more perspective on that from our “business development” panel, who are the ones in their companies charged with interacting with the aspirants, but we stick to the belief that there is more to be gained by watching what the established publishing players and the biggest companies in technology are doing than in tracking the theories spawned by industry outsiders who think their insights will change our world.

But we recognize a weakness to our approach. There are some things the established players just can’t discuss. We can’t expect Random House and Penguin — or their biggest competitors — to talk about what the merger of the two biggest publishers will mean to the marketplace. We can’t expect publishers who must trade with Amazon and Barnes & Noble to discuss the impact of their unique marketplace power — one in online sales and one in brick-and-mortar — on publishers’ margins. We can’t expect agents and publishers to talk candidly about when and whether established authors might be willing to eschew their bookstore sales in favor of higher margins on their online sales through a direct tie to Amazon.

But Michael Cader and I have informed opinions on these subjects and neither of us is looking for a job in the industry beyond the one we already have, which is, from our different perches and platforms, to call them as we see them. So we’re going to engage in a 30-minute 1-on-1 discussion of the topics we think it would be hard for the speakers we recruit to discuss as candidly as we will.

I think our discussion will be a highlight of what will be a stimulating day. Frankly, I’m looking forward to all of it. Join us if you possibly can.

The organizers of the Buenos Aires Book Fair, which will run for the next few weeks, invited me to speak at an opening session of their event last Friday. They left the topic completely up to me. What I offered to do, which the organizers liked, was to review the history of the past 20 years of digital change in the US and in the English language which has brought us to this point. The presumption is that understanding how it happened to us will help them understand what is going to happen in their market, in other Spanish-speaking markets, and in other countries and other languages.

The underlying premise of my talk, which was delivered formally at a Book Fair opening event last Friday and informally to other gatherings they scheduled for me — of students, of young editors, and of some publishing executives — and in a meeting consulting with about 20 employees of one publishing house, was that what happened in the US and then elsewhere in English was unique and would not be replicated in the same way in other languages and territories. What I had identified as the unique characteristics of the US market were:

Three hundred million people with one language, one currency, one commercial set of rules.

A powerful player (Amazon) able to change both publisher behavior (twisting arms to have them provide more titles as ebooks) and consumer habits (getting them to consider what started as an expensive device — a $400 Kindle) with their marketplace power.

Indeed, no other market has those two elements. In fact, in many markets, including all of the players I talked to in Latin America, Amazon is not seen as a really signficant factor.

In addition to the conditions that made the US market unique, I stated two additional assumptions which drew little objection from my audiences in Buenos Aires.

At some point — whether it is five years from now or 20 years from now — the world’s book publishing markets will look very similar. That is, the effects we see in the US — patterns of ebook uptake and the consequently devastating effects on bookstores — will somehow be replicated in other markets.

Both because the unique market characteristics of the US don’t exist elsewhere and because the market already made in the US has created global players and infrastructure that weren’t here when the ebook revolution caught hold, we need to expect that it will be a different path to the future in other places from what we saw in the US. The markets will not be made by the inherent marketplace scale and by Amazon, as ours was.

I thought some things we’ve seen constituted “universal” lessons worth taking on board. We’ve seen ebooks consistently work commercially for narrative reading and not for any other kinds of books. We haven’t seen “enhancements”, like video or interactivity, pay off in bigger sales or in making it easier to command higher prices. I suggested they should expect the same, and the people I spoke with agreed. They should also expect that the product competition from outside the commercial publishing community, which we’ve seen so far primarily from self-published authors, will drive down the prices for books from established authors as it has in our market.

But the more I probed, looking for what would make the market, the more I ended up in blind alleys. There is no online purchasing market anywhere in Latin America to compare with ours. That’s why Amazon hasn’t gained a strong foothold. Kobo’s strategy of working through local booksellers — an alliance has been formed in Brazil and they are clearly looking for partners elsewhere — apparently hasn’t made much of a dent either. One publisher said Apple sales were “promising”, but they’re still “insignificant”.

The reality underlying all this futility is the relative dearth of credit card use. In the US, we have had about three generations of ubiquitous credit card use. They are second nature to us. And the online purchasing world — Amazon in particular — would never have achieved the position they have if that weren’t true.

Well, it isn’t true in Latin America.

There is no way to make an ebook market, which must be an online market, without a payment mechanism. And the one we have in the US isn’t set up to work in Argentina, Brazil, or the rest of Latin America (or, for that matter, in many other parts of the world).

Of course, the cell phone carriers, who do send a bill and collect money from the masses in all these countries where credit card use is limited, had figured that out a long time ago. Nokia and others have been dancing around this opportunity for years. Txtr, a Germany-based ebook play, targets the cell phone companies as its path to the market. Txtr is building an inventory of titles and has come up with an ultra-low-cost ereading device called beagle to jumpstart their market. In doing that, they show that they learned something from Google’s experience, where ebook sales only started to grow when the Nexus7 tablet, which is tied to Google, made its way into the market.

All the conversation led me to come up with my own version of an “answer”; I don’t know if anybody else has made this suggestion but the small bit of conversation I was able to have between having this thought and leaving Buenos Aires didn’t uncover evidence that anybody else had.

It takes three components to make an ebook market:

1. A device to read the ebooks on. That could be a laptop or desktop computer or dedicated ereading device, but it is most likely to be a smart phone or a tablet.

2. A store: a merchandised selection of ebooks that can be shopped through browsing and searching that is compatible with the device.

3. A payment mechanism.

In the US, we really didn’t think about the payment mechanism. For many other places in the world, that’s a very tricky part.

Txtr is trying to deliver the missing pieces to the solution to the telcos, right down to delivering a very inexpensive device that can be the reader if the cell phone is not.

What occurred to me, and I’m wondering whether it is being developed by anybody else, is what I think would be an even better — as in more likely to build a market quickly — solution. What I’m imagining is that a device manufacturer (or more than one, but if one, preferably one that makes both smart phones and tablets) teams up with a cell phone company (to do the billing) and persuades the ebook retailers — Amazon, Google, B&N, Kobo — to accept payment through the phone company. Then that hardware manufacturer has a fabulous value proposition to help them sell their devices and the ebook market has a choice of the best retailers with the best selections of ebooks already aggregated.

Actually, persuading one retailer will persuade them all. If Samsung were pushing a tablet and smartphone and got any of the major ebook retailers to go for the proposition, the others would surely have to follow. And, in fact, it would make sense for either Apple or Google to do this when they sell apps in credit-card-challenged markets as well.

Another complication in some places — particularly Brazil and Argentina at the moment — is created by complex regulations that make the sale of hardware manufactured outside their country either impossible to get or extremely expensive. Although that’s a problem that extends beyond the book business, it is much more likely to be solved by a multi-function device-maker than for one dedicated only to ebook consumption.

It is interesting to think about Apple’s position here. The other big ebook retailing operations already provide apps for both iOS and Android devices as a matter of course. The iBookstore, however, is a Mac-only play. If the solution I’m envisioning were to roll out around the world — and one can imagine a company like Samsung making such a thing happen — would that continue to be the wisest play for the Apple-owned ebook retailer? I think not, but one can only imagine how intense the internal discussions around that point could be.

The idea of vendor-managed inventory has never become particularly popular in the book business, despite a few experiments over the years where it was implemented with great success. (And despite the fact that I was pushing for it back in 1997 and 1998.) But as the book business overall declines, with the print book business leading the slide and that portion of the print book business which takes place in retail stores falling off at an alarming rate, it is time for the industry to think about it again.

In fact, VMI for the book business began with the ID wholesalers and mass-market paperbacks right after World War II. The IDs — the initials stood for “independent distributors” — managed the distribution of magazines and newspapers at newsstands and other accounts within their geographical territory. The retailers had no interest in deciding how many copies of LIFE they got in relation to Ladies Home Journal; the ID made that determination. And since only the torn off covers were necessary for confirmation of a “return”, the “bulk” cost of distribution was in putting the copies in, not taking back the overage. And because newspapers and magazines had a disciplined frequency, it was obvious that you had to clear out yesterday’s, or last week’s, or last month’s to make room for the next issue.

When the first mass-market paperback publishers started their activity right after World War II, providing books for, among others, returning servicemen who had access to special servicemen’s editions of paperbacks (in a program created by the polymath Philip Van Doren Stern, a Civil War historian and friend of my father’s) they helped the jobbers along by having monthly lists. They also were comfortable with a book only having a one-month shelf life and having the stripped covers serve as evidence the book hadn’t been sold.

For quite some time, the initial allocations to the ID wholesalers (the local rack jobbers were called “Independent Distributors”) were really determined by the paperback publishers. Eventually, that freedom to put books into distribution choked the system, but there were a lot of other causes of the bloat. By the 1960s, many bookstores were carrying paperbacks and many other big outlets were served “direct” by the publishers, leaving the IDs with the least productive accounts. But VMI, even without any system and very little in the way of restraints on the publishers, was responsible for the explosive growth of mass-market paperbacks in the two decades following World War II.

In the late 1950s, Leonard Shatzkin, my father, introduced The Doubleday Merchandising Plan, which was VMI for bookstores on Doubleday books. For stores that agreed to the plan, reps reported the store’s inventory back to headquarters of Doubleday books rather than sending an order. Then a team posted the inventories, calculated the sales, and followed rules to generate an order of books to the store. Sales mushroomed, particularly of the backlist, and returns and cost of sales plummeted. Doubleday was launched into the top tier of publishing companies.

In a much more modest way, a distributor that my father owned called Two Continents introduced a VMI plan in the 1970s. Even with a very thin list and no cachet, we (I was the Marketing Director) were able to get 500 stores on the Plan in a year. We achieved similarly dramatic results, but from a much more modest base.

Two Continents was undone by the loss of some distribution clients. The Doubleday plan was undermined by reps who convinced headquarters years after my father left that their stores would be more comfortable if they wrote the Plan orders rather than letting them be calculated at headquarters. And the rise of computerized record-keeping systems for inventory and national wholesalers who could replenish stock quickly improved inventory performance, and store profitability, without VMI. Although our client West Broadway Book Distribution has successfully operated VMI in specialty retail for more than a decade, and Random House has worked some version of VMI at Barnes & Noble for the past several years, the technique has hardly been considered by the book trade for a long time.

It is time for that to change. What can foster the change is a recognition about VMI that is readily apparent in West Broadway’s implementations in non-bookstores, but would not have been so obvious to the bookstores using Doubleday’s or Two Continents’ services.

From the publisher’s perspective, the requirement that there be a title-by-title, book-by-book buying function in the store in order for the store to stock books purely and simply reduces the number of stores that can stock books. The removal of that barrier was the key achievement of the ID wholesalers racking paperbacks after World War II. Suddenly there were thousands of points of sale that didn’t require a buyer.

From the store’s perspective, buying — and managing the supply chain to support the buying decisions — is expensive. VERY expensive. Books are hard to buy. New ones are coming all the time; the number of publishers from which they come (and who are the primary sources of information about the books, even if you could “source” them from wholesalers at a slight margin sacrifice for operational simplicity) is huge; the shelf life of any particular title is undeterminable; and the sales in any one outlet are very hard to read.

Consider this data provided by a friend who owns a pretty substantial bookstore.

Looking at the store’s records for a month, 65% of the units sold were singles: one copy of a title. Only 35% were of books that sold 2 or more. (I didn’t ask the question, but that would suggest that 80-90 percent of the titles that sold any copies sold only one.)

Then, the following month, once again 65% of the units sold were singles. But only 20-30 percent of them were the same books as had sold as singles the prior month. Upwards of 70% of them were different titles. And upwards of 70% of the ones that sold one the prior month didn’t sell at all.

To further underscore how slowly book inventory moves, another report they do shows that more than 80% of the titles in the store do not sell a single copy in any particular month. So it is no surprise that an analysis of books from a major publisher that promotes heavily showed that more than half the new titles they receive from that publisher don’t sell a single copy within a month of their arrival in the store, which would include the promotion around publication date!

These data points demonstrate another compelling reason for VMI. When a store sells none of 80% of its titles in a month, and of the ones they do sell 80% of those sell one unit, they clearly need information about what is going on in other stores to know which ones to keep or reorder and which ones to return. Above the Treeline is an inventory service which provides its stores with broader sales data to address that issue, but the information is not as granular or as susceptible to analysis as what a publisher or aggregator could do with VMI.

Partly because of the high cost of buying and a supporting supply chain that a book outlet requires, publishers will see shelf space for books drop faster than retail demand. (The closure of Borders, which wiped out a big portion of the shelf space, is part of what is behind the recent good sales reports from many independents.) At the same time, retailers of all things will be under increased pressure to find more sales as the Internet — often, but not always, Amazon — keeps eating into their market.

This all adds up to VMI to me. We’ll see over the next couple of years whether industry players come to the same conclusion.

There are three overarching realities that are determining the future course of book publishing. They are clear and they are inexorable:

Scale, and its close cousin “critical mass”, is the ability to use size as a competitive advantage in any endeavor;

Verticalization, or being in sync with the inherent capability of the Internet to deliver anything of interest in an audience-specific way; and

Atomization, or the ability for any person or entity to perform the most critical component of publishing — making content available and accessible to anybody anywhere — without capital and without an organization dedicated to distribution.

Scale

In the 20th century, scale in publishing was really an internal concept. Big publishers had more resources to sign books, get to bookstores, and roll out marketing than smaller ones. Barnes & Noble and Borders had supply chain and cost advantages over independent bookstores, except that Ingram and other wholesalers lent their scale to provide partial compensation. Bigger literary agencies had negotiated more boilerplate agreements than smaller ones and often had helpful relationships that went beyond publishing, but a single operator could still cultivate enough editors to make a legitimate case that he or she could place a book as effectively as the giants.

But that’s changed entirely in the past 10 years. Now publishing operates in a world increasingly controlled by Amazon, Apple, and Google, all companies that make far more money outside of books than through books. One Big Six CEO observed to me about five years ago that the time had passed when s/he could call all the biggest trading partners of their company and reach the CEO instantly. Penguin Random House has merged into a publishing company that will control about half the most commercial titles in the marketplace, but any suggestion that their size will enable them to dictate much to Amazon, Apple, or Google is deluded.

What Random House can do is apply scale against other publisher competitors. And they will.

Critical mass is a scale-related concept but it is also a component of verticalization. When a publisher, or any aggregator, has enough material to allow it to ignore competition in a consumer offer, it has achieved the effective barrier to entry that scale also provides. For example: subscription models for general books are a very difficult commercial proposition because the biggest agents for the biggest authors wouldn’t want their titles included. But Amazon might just have so many titles they can make available through a subscription offering that they can do it successfully even without the top of the bestseller list. The new Penguin Random House combination might also be able to do something here, if the avoidance of a 3rd party could generate enough revenue for the authors to change the minds of the agents, even though they’d be doing it with just their books. After all, Spotify was able to aggregate enough music to sell subscriptions even before they brought The Beatles into their catalog.

Another smart and relevant application of scale is by F+W Media (our partners in Digital Book World conferences), which publishes across a range of communities. They are able to offer each one the advantages of a direct retailing operation, because they maintain that capability through the scale of their entire operation. Some of the verticals in which they apply it wouldn’t be able to support such a capability on their own. F+W applies scale to their niches with their web and event teams as well.

Verticalization

In the 20th century, most trade books reached their customers through bookstores. That liberated publishers to be largely audience-agnostic in their choices about what to publish. They could stick a memoir, a novel, a knitting book, a travel guide, and a kid’s pop-up book into the same box and the bookstore would sort it out for the consumer, putting it on the appropriately-labeled shelf for the shopper.

In those days, the devotee of any subject from baseball to cookbooks would think nothing of browsing the shelves of several different bookstores to find all the offerings relevant to their interests.

Those days are gone. Twice.

Thanks to Google and its competitors, the entire universe of offerings around any topic of interest are aggregated and surfaced very quickly. And bookstores and the staff and shelf space publishers used to sort things out are disappearing.

All of this is driving publishers to be audience-centric in their thinking in ways that were never required before. If the Internet is how customers are reached, not bookstores, it becomes evident pretty quickly that it makes for highly inefficient marketing to be all over the lot with your subject matter or genres. It didn’t used to matter to publishers if they had the “next book” for the person who bought the last book. But it surely does when you’ve spent good marketing money and effort to find and reach that person, and when you can often stay in touch with them in a cost-free (or at least very low-cost) way going forward.

It is in audience-centric marketing that scale can be applied successfully today, using size and resources to improve the ability to reach out rather than to lower the unit cost of some internal mechanistic function. Understanding the reality of verticalization should also prompt publishers to rethink the way they define and build brands. Imprints are brands within a publishing house meant to communicate to their trading partners: bookstore buyers and reviewers in one direction and authors and agents in the other. In a vertical world, brand-building should be much more audience-centric. This particular requirement to think differently seems to be very challenging for publishers.

Atomization

In the 20th century, it took capital and an organization to publish a book. While you always had to provide your own capital to be a publisher, ways evolved to “rent” the organization, specifically the distribution services offered by most publishers and some specialist organizations.

The barrier to entry for book publishing was always relatively low compared to other media: magazines, newspapers, radio, TV, and movies would all require much more of a financial and organizational commitment than was required to publish a book. But there definitely was a fence around the book publishing world, and the position of “gatekeeper” was both well-earned and well-rewarded.

But those days are gone too.

As of this writing in April 2013, sales of any book of narrative reading will, depending on topic or genre, be 20% to 60% in ebooks, which requires no inventory investment and minimal distribution infrastructure. Sales of the printed books — the other 40% to 80% — will be anywhere from 25% to 50% through online channels. Those sales can also be achieved (largely through Amazon) without an investment in inventory, printed at the moment they’re ordered.

The first flood of opportunists exploiting this new reality were authors who self-published. Some, like Bob Mayer and Joe Konrath, took the brands they’d built through traditional publishing (and sometimes even the very books themselves) and created a new commercial model where the majority share of margin taken by the publisher was divided between them and the retailer, usually Amazon. Others, like Amanda Hocking and John Locke in the early days  and hundreds of others since, built publishing brands on their own. These authors were driven by the desire for recognition of their writing and, in some cases, by the conviction that they could make money. Their existence in large numbers fueled the creation of an “author services” industry. The biggest and most profitable of the companies in that business, Author Solutions, was bought by Penguin a year ago. Amazon built a business called CreateSpace to serve this market; Barnes & Noble and Kobo and Apple all offered varieties of the same set of capabilities.

Recently, we have seen a rush of other content creators — newspapers, magazines, web sites, and new companies dedicated to exploiting the book opportunity — building their presence as book publishers, or at least as ebook publishers. There are experiments with content types (short form, author-centric) and business models (subscription being a frequently-tried one on which the jury is still definitely out).

But all of this is a precursor to the next wave, when every law firm, accounting firm, consulting firm, department of a college or university, retailer, service provider, and manufacturer will see the benefits to them of building the function of book publishing into their marketing mix. This will truly constitute an existential threat to book publishing as a business, because these entities will not be building their publishing programs with profits primarily in mind. That will make it exceedingly difficult for the companies that do — the book publishing business we’ve always known — to compete. The quality they deliver costs money. The prices they need to charge are based on their costs.

Their books will be in a marketplace competing with titles supported by other rewards and priced with considerations other than profit in mind.

Scale, verticalization, atomization. Examine any new proposition you hear about against the filter of those concepts and I think you’ll have a pretty fair sense of whether it has much chance for success. Hitting two of those three marks is no guarantee of prospering, but failing to hit any would be a pretty fair assurance of failure.

Our Publishers Launch conference at BEA on May 29 has several presentations focused on the theme of scale. We’ll have presentations from Random House, Hachette, and F+W Media about how they’re applying it for competitive advantage. We’ll have a panel of agents discussing how scale affects their role in publishing. And in a discussion my PLC partner Michael Cader and I will be having, trying to talk about the things people in publishing jobs are constrained to discuss, it will certainly be a core topic.

Our regular readers may notice a relative lack of links in this post. Because this synthesizes and re-articulates many thoughts we’ve expressed over the years, we thought it might be more helpful to gather the relevant internal links here at the bottom of the post rather than placing some of them throughout. The links from speeches and posts here are presented chronologically to document the evolution in thinking that led to today’s post.

End of General Trade Publishing Houses: Death or Rebirth in a Niche-by-Niche World – 5/31/2007

Stay Ahead of the Shift: What Publishers Can Do to Flourish in a Community-Centric Web World – 5/29/2009

The Emerging Opportunity for Today’s Publishers – 6/17/2009

The Need for Critical Mass is Why Verticalization is a Process – 6/22/2009

Verticalization in Action – 7/2/2009

Why Publishers Need to Understand Brand – 9/23/2009 

My Advice is Not Always Easy to Follow, But Sometimes It Proves Right Anyway – 3/29/2010

Cool Springs Press, a Gardening Publisher that Really Understands “Vertical” – 6/23/2010

Publishing is Living in a World Not of Its Own Making – 7/24/2011 

Will Book Publishers Be Able to Maintain Primacy as Ebook Publishers? – 10/9/2011 

True “Do-It-Yourself” Publishing Success Stories Will Probably Become Rare – 11/6/2011 

Publishers Adding Value on the Marketing Side – 11/17/2011 

Two Questions That Loom Over the Trade Publishing Business – 2/28/2012 

Amazon’s Growth and Its Lengthening Shadow – 4/30/2012 

Everybody in Hollywood Needs an Ebook Strategy – 5/14/2012 

Subscription Models Seem to Me to Be for Ebook Niches, Not a General Offer – 7/16/2012 

Explaining My Skepticism about the Likelihood of Success for a General Subscription Model for Ebooks – 7/22/2012 

Going Where the Customers Are Might Be an Alternative to Selling Direct – 8/9/2012 

Full-Service Publishers Are Rethinking What They Can Offer – 9/4/2012 

New Publishing Companies Are Starting That Are Much Leaner Than Their Established Competitors – 9/24/2012 

Peering Into the Future and Seeing More Value in the Random Penguin Merger – 11/26/2012 

Business Models Are Changing; Trial and Error Will Ensue – 12/3/2012 

Rethinking Book Marketing and Its Organization in the Big Houses – 12/17/2012 

Buying Is a Hard Thing for Bookstores to Do Effectively, and That Becomes an Increasingly Important Reality for Publishers – 1/23/2013 

Ideas about the Future of Bookselling – 2/7/2013 

Publishers Are Reshaping Themselves – 3/12/2013 

Atomization: Publishing as a Function Rather than an Industry – 3/19/2013 

More on Atomization: Why the New Publishers Are Coming – 3/26/2013 

The most recent post here laid out a future for trade publishing that will be less and less about traditional publishers and more and more about non-traditional publishers delivering books into the marketplace without the financing or “approval” of a profit-seeking publisher. That’s a radical change from the industry we’ve seen grow over the past 100 years when book sales in retail stores of all kinds have been the primary revenue source for publishers and authors.

Obviously, the likelihood of what that post predicts coming to pass is dependent on the validity of the argument that a substantial amount of commercially viable publishing will take place without the funding of the commercial trade publishers. Of course, “commercial viability” is a function of the publisher’s objectives; the new book publishing entities have ways to win that aren’t just about the profit they make publishing their books.

Books have a mystique and symbolic power, for a reason. For three centuries, they have been at the center of high-value communication of stories, information, and ideas. The number of entities that generate content that fits that description is far larger than the number of book publishers, and includes entities that wouldn’t be thought of as publishers of any kind at all.

Because delivering a book requires managing a huge variety of details and because selling one effectively has always needed a multi-faceted organization and an investment in inventory, until recently only companies dedicated to the business of books could effectively publish them.

Not anymore.

Because of ebooks and digital distribution, it is now possible for any content packaged as an ebook — if marketed effectively to its target audience — to find its readers (or to be found by them). The big publishers of today are all grappling with how to re-connect with their readers in an information universe that has been redefined. Meanwhile, the networks by which they have always connected with readers in the past — bookstores and mass merchants and even libraries — are becoming less and less relevant as readers increasingly read on devices and find what they’ll read through their online interactions.

But where there are challenges and painful adjustments in store for the biggest publishers, there is vast new opportunity for just about every other enterprise that connects to a lot of people and knows something about what those people want to know. And companies are increasingly figuring that out.

Jeremy Greenfield is the editor of the Digital Book World website; we partner with DBW to deliver their annual conference. Long before the post last week “predicting” that entities that aren’t book publishers would become book publishers, Jeremy had been keeping a list of them. It’s impressive. When we asked Jeremy what was on his list, he sent us this note:

Most recently, Scientific American launched a series of ebooks. American Express Publishing launched an ebook line with Vook. The Atlantic began to publish its own ebooks. USA Today published USA Tomorrow, a collection of expert predictions about the future of America. Harlequin and Cosmopolitan magazine inked a deal to publish several ebooks a month together. Newsweek/Daily Beast entered into a partnership with Vook to publish ebooks. Playboy launched a series of shorts for the Kindle, the Washington Post announced an e-book program, and the Chronicle of Higher Education, a trade publication focused on the higher education field, launched an e-book business. Other notable companies to jump into the space are magazine publishers Conde Nast and Hearst and NBC News, a division of NBC Universal. And the Wall Street Journal has recently rejuvenated its e-book program.

In addition to these, we know of more: the New York Times, the Toronto Star, the Chicago Tribune, the Boston Globe, TED Books, Esquire, the Guardian, Wharton Business School, the US Army, Provincetown Public Library, the Saturday Evening Post, Xiamen Bluebird Cartoon Company of China, cartoon-producer Fred Seibert creating Frederator Books, and Scott Rudin and Barry Diller’s Brightline, and many others.

Of course, all of these are content-producing entities; many of them are even print-content producers. But it simply wasn’t in their power to decide to become book publishers until the world changed.

Three companies which started out with content-generation ideas of their own — Vook, Byliner, and Atavist — are frequent partners for these new publishers, as are existing publishers from Big Six players to Perseus’s Constellation, Ingram, new ebook publishers Open Road, Diversion and Rosetta, and other companies like INscribe and PressBooks. (Not all of these have gotten into this game yet, but they certainly all will.) These companies are serving the first wave of fledgling publishers and the aspirants so far have been content-generating companies.

Some of those we’ll soon see wouldn’t think of themselves as content creators. Before long, I’d expect to see every museum, every historical society, every consulting firm and law firm and accounting firm joining the party.

For example, a law firm of our acquaintance sent us a notice last year that key members of their team had put together a “White Paper” about changes in trademark law. I called the partner there that I knew and asked “why don’t you publish it as an ebook?” He said, “I don’t know.”

Another attorney to whom I told the story patiently explained to me that intellectual property like this was created to be given away to lure clients to the firm and impress them. Why, I was asked, should we publish it as ebook? What would we gain?

That’s pretty simple. Somebody will go to Amazon and search “trademark law”. You want to come up! And, in fact, you could price your White Paper at $100. It wouldn’t be great for sales, but you’d get the discovery benefit and you’d be putting a marketplace value on what you’re giving away for free. You win twice.

The next wave will be everybody else: every brand with a following, a meaning, a reputation, a website. The next group will need editorial services which presents a whole new set of opportunities for writers, agents, and, especially, packagers. And it will present an opportunity for me to elaborate more on atomization in another post.

Of course, we’ve got this subject covered at our upcoming Publishers Launch Conference at BEA on May 29. The program is starting to take shape, and we’ll have a panel called “Outsiders: New Book Publishing Operations from Media and Content Companies”. Steve Kobrin of Wharton Digital Press, Alison Uncles of the Toronto Star, and David Wilk, just appointed the publisher of Frederator Books, will be speaking on it. Each of their programs is quite different from the others, as are their objectives. But all of them are heading up businesses that would scarcely have been conceivable five years ago.

The announcement of what amounts to the first book publishing program spawned by Google demonstrates a paradigm we’re seeing repeatedly. It suggests a sweeping change in publishing from how we’ve known it. The bottom line is that most people employed publishing books perhaps as soon as 10 years from now won’t be working for publishing companies.

The trade publishing business over the past twenty years has been transitioning from what it was for a century. The Internet, which so many of us said two decades ago “changes everything” is ultimately responsible. Amazon.com has been the primary catalyst, with print on demand technology (especially Ingram’s Lightning Source) and ebooks (mostly Amazon, but others too) as supporting players. With so many more books to choose from and really available than there ever were before, the function of gatekeepers, which trade publishers and booksellers clearly and proudly were, becomes an anachronism.

The big question — at least for me — is what is trade publishing transitioning to? What does the trade publishing world look like when it doesn’t primarily reach readers through bookstores anymore, a day which one could say has already come in the past five years.

Overall trade sales today outside of special outlets, catalogs, and what remain of book clubs divide into three big chunks: one is printed books sold in stores, one is printed books sold online, and one is ebooks. The latter two are sold without stores, and far more than half of that is sold by Amazon. And that is the way it is most helpful to think about sales because it is only print-in-stores that requires (or benefits from) a big publishing organization.

What the latest Bowker information has to say, lumping ebooks into “online commerce”, is that 44% of sales are online, 32% through physical retail, and the remainder through book clubs and warehouse clubs (physical retail to me!) and “all other channels”. But they also report that 30% of sales are ebooks, which would mean that they’re only calling 14% of the remaining 70% online. There are a lot of ways to count these things, and the resulting calculation of 20% of print sales being online feels very low to me.

It all depends on what kind of book we’re talking about, of course. I visualize the market breaking into thirds among the three chunks. Certainly, one-third ebooks is an understatement for fiction.

However we view the current division of sales, the trade book business was built in a completely different environment. Indeed, the central proposition that all publishers offered all authors is ” we put books on shelves.” The companion reality was “you can’t do this by yourself”.

As recently as 2007, before Kindle, there were no ebook sales and upwards of 85% of print was sold in stores.

The requirements to deliver on the promise “to put books on shelves” included the capital to invest and specialized knowledge to turn a manuscript into inventory, a physical plant to manage the warehousing and shipping of those books, and a network of relationships with the owners of the shelves (in the bookstores) to get the right to put your books on those shelves. These were the minimum requirements to be a publisher. If you had them, you could move on to being smart about selecting books (in the case of non-fiction, almost always before they were were completely written), being skilled at developing them, being capable of packaging them attractively, and being managers of another network — of reviewers and broadcast conversation producers and, more recently, bloggers and social megaphones — to bring word of them to the public.

All of this together gave a publisher the capability to pay authors advances against what amounts, for all but the very biggest authors, to a minority share of the revenue the book generated. But, in fact, the central proposition has lost its power. Only a quarter to a half of the sales now — far less for fiction and far more for illustrated books — require a publisher to “put books on shelves”. And that number is going down. For the balance, no inventory investment is actually necessary. Nor is a physical plant or a vast network of sales relationships.

And, without that requirement, the barriers to entry to becoming a “book publisher” have collapsed, particularly if you’re willing to start with ebooks and think of print as an ancillary opportunity. Google is becoming one. Amazon became one a long time ago. NBC has become one. The Toronto Star and The New York Times have become ebook publishers. And, of course, so have many tens of thousands of individual authors, a few of whom are achieving startling success.

Soon — in the next 5 or 10 years — every university (perhaps most departments within a university), every law firm and accounting firm and consulting firm, certainly every content creator in other media, as well as most manufacturers and retailers will become book publishers too.

Why not? Without the requirement of an organization to reach the public through bookstores and without the requirements of capital or knowledge to create printed books, any organization that is routinely reaching people interested in a common topic — whether or not they are creating content around that topic now, but especially if they do — will find it constructive to publish, and well within their reach and means to do so.

That is: publishing will become a function of many entities, not a capability reserved to a few insiders who can call themselves an industry. Think about it this way. If you had told every museum and law firm in 1995 that they needed a web page, many would have wondered “what for?” If you had told them in 2005 that they needed a Facebook presence or in 2008 that they needed a Twitter stream, they would have wondered why. We’ve reached the moment when they all need a publishing strategy, and that will be as obvious to all these entities in a year or two as web pages, Facebook pages, and Twitter streams look now.

This is the atomization of publishing, the dispersal of publishing decisions and the origination of published material from far and wide. In a pretty short time, we will see an industry with a completely different profile than it has had for the past couple of hundred years.

Atomization is verticalization taken to a newly conceivable logical extreme. The self-publishing of authors is already affecting the marketplace. But the introduction of self-publishing by entities will be much more disruptive.

Publishing is not immune to the laws of supply and demand and the price of books is tumbling. Most self-published fiction is crap, but a small percentage of a very large number of self-published novels constitutes a significant range of good cheap choices for fiction readers, particularly in genres. That “diamonds in the dirt” effect has been becoming more and more evident with the passage of time. Recently, the Digital Book World bestseller list (compiled by ioByte’s Dan Lubart in conjunction with our friends at DBW) had a self-published book in the top slot for the first time. It won’t be the last time.

Publishers still have plenty of capabilities that are enticing to authors. There are still stores with shelves on which to put books. And big publishers can build on that increased presence very impressively; it is hard to believe that “Fifty Shades of Grey” would have sold the tens of millions of copies that it has as a self-published book. Random House made a quantum difference.

But perhaps we shouldn’t read too much into that. The publishers’ power to use that capability to command a share of the “easy” (no inventory investment or sales force required) money from ebooks, which was a sine qua non for them until very recently, is evaporating.

When Hugh Howey was in the early stages of what has turned into his eye-popping success with the novel WOOL, publishers would only offer him a deal to publish print if he also gave them ebook rights. Howey and his agent, Kristin Nelson, found those offers easy to resist, since he was making so much money on ebooks and publishers would have wanted a healthy share of it. A few months later, Simon & Schuster (wisely, in my opinion) agreed to give Howey a print-only deal for US rights.

How far away can it be for the NBC News book on a national election or the Whole Foods book on cooking the organic way or the Home Depot book on how to build a shelf or the Boston Celtics’ own book on the history of their team to get the same treatment? (Or, of course, the “brand” can handle the whole job themselves, using services offered by many — most prominently Ingram, Perseus, and Random House — to handle the decreasing percentage of the business that is “books in stores.”)

Of course, there is, or at least there can be, a lot more to publishing than just making good content available and making the people you know already aware that it is there. (Although, increasingly, that will be seen as “enough”, along with ancillary benefits, to make it worth the effort to many entities.) There are rights to be sold. There are ways to market to “known book buyers” that are increasingly going to be the property of entities that have developed lists and techniques at scale.

So there will continue to be a trade book business and it is likely that the machinery of the biggest book publishing organization (or two) will be required for a very long time to maximize the biggest commercial potential, like “Fifty Shades of Grey”. But, without a robust “book trade”, from which trade publishing gets its name, there cannot be commercially robust trade publishing, at least not as we have known it.

I reflect on a pithy bit of wisdom offered to me in conversation a few years ago by David Worlock, who might be thought of as one of the originators of digital publishing, and who, in any case, is a wise observer of the publishing scene and by a few years my senior. Well before we thought of any self-published bestsellers — this must have been about 2005 — David said, to me, “surely, in time, the number of books created within the network must exceed the number of books created outside the network.”

The “network”, of course, was the Internet. He was envisioning direct-to-ebook publishing and automated blogs-to-books publishing as well as a lot of customization. He was right.

And the atomization I think may be the overarching trend of the next decade or two fits right in.

Once the concept of the atomization and dispersal of the publishing function becomes understood, you see it everywhere. Aside from the Google-spawned publishing program — which is built around their massive multi-player game activity, but there are many other applications once they get used to this idea — we had a library announce a new digital press last week.

We’d already been putting together a panel of new entrants to book  publishing for our Publishers Launch BEA conference on May 29. Of course, the atomization we talk about here is enabled by the scale being provided by others, including service providers. And the major houses are trying their hardest to build marketing at scale. Ken Michaels, the President and COO of Hachette, and David Nussbaum, the Chair of F+W Media, are our first two confirmed speakers about that. We’ll have a panel of literary agents talking about how they’re tackling the need for scale to help clients with an increasingly broad range of choices for publishing.

It was reported last week that Hyperion plans to sell off its “backlist” to focus its attention on new titles it will develop in conjunction with its corporate cousins at Disney and ABC. This follows Wiley’s selling a lot of the most bookstore-dependent parts of its list, including the sale of Frommer’s Guides to Google, in 2012.

I believe these transactions are the front end of a trend I first anticipated in a post about four years ago. 

Publishers are going to find it increasingly compelling to reconfigure their inventory of title offerings around their most current thinking about their marketplace. Both Wiley and Hyperion are moving away from a “general” trade model. They’re moving away from publishing books for which their primary revenue dependence would be on bookstores and their primary marketing dependence on the book review media.

Wiley is actually returning to its professional roots. I did a lot of consulting at Wiley in the late 1980s when they were building out their trade presence. Although they were very disciplined about sticking to specific subjects where they had special marketing capabilities or subject expertise, they became increasingly “trade-y” over time. They built a powerful organization to sell to the book trade which reduced the need for them to be as focused on core subjects as they were when they were first building their trade capabilities. But the core of the company — its heart and soul and its DNA — always remained primarily professional. (Wiley also has a college textbook list, but it is a much smaller part of their business than professional books and journals.)

That means that Wiley would view the diminution of bookstore shelf space with more equanimity than a straight trade house, like one of the Big Six (soon to be Big Five) would. They would see themselves readily able to move away from a shrinking business segment that was never “core” for them anyway.

Hyperion is a straight trade house. Unlike Wiley, they don’t have a direct-to-user business or the big library revenue that a professional publisher does. But what Hyperion does have is a close relationship with sister companies Disney and ABC. Those relationships make possible partnerships which don’t change the sales and distribution challenge, but have a huge impact on the marketing opportunities. Hyperion is increasingly able to publish titles that have a strong public awareness component built on the back of TV or movies.

But Hyperion is a straight trade house without a lot of fixed overheads. They have outsourced the heavy requirements of sales and distribution, currently to Hachette. So they can sell off their backlist, even if it amounts to a substantial chunk of their sales, without having to worry about reorganizing their sales force or underutilizing their physical plant. They have apparently decided to become a different, more focused, kind of publishing house, not so much committed to “publishing books” that can make money from whatever source as they are to being the book publishing arm responsible for building out the brands and franchises their corporation invests in for movies and TV.

Both Hyperion and Wiley are showing us what the publisher of the near future is going to look like. They will be more focused. They will be shedding overheads so they can expand or shrink their offerings more readily to respond to opportunities and circumstances. They will be less dependant on the trade bookstore and book review trade networks. And Hyperion’s decision says something more about the future that Wiley’s doesn’t: book publishing will increasingly be an activity operating in tandem with or in service of other objectives of the owning organization. (There is a parallel here in retailing, where Amazon and Google and Apple fit this description, and Kobo and Barnes & Noble do not.)

There may also be a message here about the relative importance of backlist. When digital first started to happen, it seemed like the backlist might be the biggest beneficiary. After all, stores had limited shelf space and online merchants can “carry” all the books they want, particularly if there is no pre-purchased inventory required. (There isn’t for ebooks and there increasingly isn’t for printed books either, which can be purchased from wholesalers for next day delivery, even if they are printed on demand!)

But it turns out that the current state-of-the-art for merchandising and presentation of books online is not very helpful to backlist. Most retailers return a limited number of books (10 or 20) per screen to any query. Customers have limited patience for refreshing screens, so the number of titles an online purchaser “browses through” is far fewer than the number that would catch the same eyes in an equivalent amount of time in a store. This appears to be pushing sales more and more to newer books and books on bestseller lists.

This problem of concentration will probably just get worse as mobile devices become more ubiquitous and the shopping takes places on ever-smaller screens.

It isn’t clear yet to what extent publishers’ marketing practices could be responsible for the consumers’ bent to purchase from the top titles or whether changes in how publishers market could ameliorate it. But it does mean that marketing backlist is its own challenge and not sufficiently addressed, as it was in years past, by sales reps or store systems just keeping in stock what has been selling.

It is now necessary for publishers to communicate directly with consumer audiences to be effective marketers. At the same time, it is now possible for publishers to do the core work of reaching the trade without big fixed overheads. The combination of those two things will motivate changes in how publishers view the value of both their backlists and their publishing programs. What Wiley and Hyperion have done shows what kind of conclusions publishing today allows them to come to.

Should be great times coming for the small number of players in trade publishing’s M&A world.

We are now in a period replete with startups that want to be the disruption in publishing. We see a lot of them in our office. Part of our business involves helping startups find relevance and contacts within the established publishing community.

There are three areas in particular which the startups seem to think the publishing business needs their help with, if the frequency with which we hear about propositions in these spaces is any guide. They can overlap.

1. eBookstore alternatives to the established players.

2. Enabling social connections among readers of books.

3. Subscription services that will deliver books for a fixed monthly cost.

I wrote about the subscription services a while ago when one of the fledglings came into our office. They were well advanced in their planning and tech development. I asked them if they had spoken to any literary agents. They said “no”.

Presumably they have done so since then and have found out that big shot literary agents are very skeptical about the value of subscription propositions for big shot authors. In fact, they are (in their own enlightened self-interest) downright hostile to the idea. That makes smart trade publishers, who are highly dependent on literary agents, also hostile to the idea.

When it comes to selling subscriptions to a general audience, Amazon (and probably only Amazon) can do it without the biggest books. Maybe down the road Penguin Random House can do it because they’ll be the publishers of more than half the bestsellers. O’Reilly, with Safari, has demonstrated that subscription can work in niches, and we’d expect to see more of that in the future. But there’s a damn good reason why no Safari service has cropped up for general reading; it’s a bad commercial model for the copyright holders of the biggest commercial books.

Attention: entrepreneurs with this idea. The reason it isn’t happening has nothing to do with failures of imagination or tech competence by the legacy players.

The “social reading” play also attracts entrepreneurs and, apparently, some funding. I think there are two generic failures of understanding that drive this interest. One is the sheer granularity of the book business. The vast number of titles there is to choose from means that the percentage of overlapping titles in the reading lists of unconnected people is going to be very low. Therefore the value of shared notes and annotations or “in-book” conversations is low as well.

Enabling this kind of shared reading experience can make sense to a class of students or an organized reading group. But it takes a really vast community to deliver value in shared book conversations to many people. And let’s remember that both Amazon and Kobo offer social tools already. If they become important, they’ll build out more. The fact that they haven’t to date is not a reflection of their inadequacy; it is a reflection of how much the people selling lots of ebooks and observing real customer behavior think these capabilities matter.

Several years ago, when they were starting up, I was consulting to Copia, which built social tools right into the reading software as their distinctive feature from the beginning. As a skeptic about the value of social reading (we’re all prisoners of our own experience and preferences, and I have precious little personal interest in “sharing” my reading experiences), I suggested that the key for them was to work in niches: to recruit users who would have common interests and therefore better-than-average chances of being interested in the same books. I think they’ve moved in that direction, but the suggestion was counterintuitive to them at the time. How do you get to be bigger by targeting a smaller audience?

Many of the social plays require the simplicity of DRM-free files to make their proposition work. That just makes it harder for them to get commercial titles into their ecosystem. Or impossible.

Copia is also a competitor in the ebookstore category. There are a lot of them, despite the fact that there are market leaders with advantages it is hard to see how to overcome. The global market leaders are Amazon and Apple. The global runners-up are Google and Kobo. All four of these companies have extremely deep pockets and all except Kobo have other ways — besides selling ebooks — to amortize their investment in audiences. In the US, B&N has managed to make Nook a strong competitor, but it is still very much an open question whether they can do the same internationally without the store footprint they have here and without the funding capabilities of their competitors.

Yet, others, including Copia, keep trying. Baker & Taylor has Blio, which looked early on like a player for illustrated ebooks. Two problems: the flexible tool set they originally promised failed to materialize in the manner they first projected. And the sales of illustrated ebooks are not very good anyway. Joe Regal’s Zola Books has been trying to gain traction, with a variety of propositions including decentralized curation and exclusive content.

Three big US publishers have launched Bookish, which is presumably more a discovery mechanism than a bookstore, but which will have to attract traffic to be of much use as either.

And then there’s Inkling, which has developed tools to make complex ebooks (they seem, quite sensibly, to be more focused on school and college textbooks than on illustrated trade books) and is pairing that with a “store” which would appear by the deals they offer to be an important monetization element in their planning.

With whatever are the limitations of my understanding or imagination, I can’t see success in the cards for any of these adventures in retailing, social, or subscription (Inkling’s product-building tools are different and could have longterm value.)

All of this wraps into a larger question: how much time, money, and bandwidth should commercial publishers be spending on startups?

That subject is of great interest to the investment community, which has been frustrated by what they see as publishers’ lack of engagement with startups or interest in disruptive technologies. One angel investor we know tells us that a need to work with publishers is a real deterrent to raising money from technology investors.

But does that mean the publishers are wrong not to be embracing startups more than they do?

Javier Celaya, a Spain-based consultant to publishers on digital change, recently conducted a survey about this subject. What the detail of Celaya’s investigation seems to show is that investment in startups takes place in the educational sphere, but not in trade. That would make sense. After all, trade publishers deliver books to be consumed by a wide variety of people for an equally dispersed set of motivations. But in education, the “book” needs to fit into an ecosystem, a platform. Educational publishers recognize the possibility of controlling the platform, if they have the right tools to offer. That makes it sensible for Pearson and Cengage and McGraw-Hill and Macmillan to make investments in technologies that might give them that platform advantage.

(We’ve observed that “platforms” aside from those of the big retailers are becoming important in the juvie publishing world.)

I had an exchange with Javier Celaya about his survey after he posted it. To my skepticism that investing in startups made sense for trade publishers, Celaya pointed out that an investment in Goodreads would have been much more fruitful than the massive effort and investment three big publishers made to start Bookish.

That’s true. It is also true that no publisher that missed finding Goodreads in the first year or two or three of its existence would have been much handicapped in making good use of it whenever they did discover it. And it is not clear that owning a chunk of it would give a publisher any great advantages in using it over what they can achieve anyway. It is also not yet clear how successful Goodreads will be monetarily (although it has clearly managed to recruit an audience large enough to be valuable as a marketing engine).

If I were making policy for a publishing house, I would discourage spending any time with a social or subscription proposition that didn’t clearly have a “niche” strategy. And I’d allow the investment of only the minimum of effort in a fledgling ebookstore. Publishers do need to be able to provide their metadata and put titles up for sale easily (Ingram or others can help with that if they don’t want to serve each little ebook retailer themselves) and they should do that. But the odds of any new ebook retailer making much of a dent in the market are so long that conversations about it are most likely to just be a waste of time.

Of course, I’d also have a list of “tech we’re looking for”: ways to streamline metadata enhancement and improve creation workflows would probably make the list. The startups who came with a promise to solve a previously-identified need would certainly be welcome and experimentation might well be called for. But not investment.