Publishing History

One of the recurring characteristics of “change” is that the first iteration of something new looks a lot like what it is replacing. So it has been with ebooks and ebook retailing. The ebooks themselves have, for the most part, been the same as the print books except rendered on a screen instead of on paper. And when we say “the same”, we mean right down to duplicating meaningless blank pages and the legend often found in print books that tells you how many printings the book has had. (This still happens frequently; I’ve just experienced it on The Big Short which I’m now reading in B&N’s reader.)

And ebook retailing has also imitated print book retailing in that the emphasis has been on the assembling the largest possible aggregation of book title choices in one place. This is a paradigm that makes intuitive sense in the physical world; once I’ve driven to my local superstore, I don’t want to find the mysteries are here but the cookbooks are in a store down the block.

It has been a long-established “fact” (although I question if it is still true, as we’ll explain later) that the larger is the selection of books available in a single location, the more powerful is the magnet to attract customers. My father found this out when he was in charge of the Brentano’s chain in the 1960s. Their Short Hills, New Jersey store was the worse-performing store in the chain until they doubled its title selection. And then, like magic, it became the best-performing store in the chain.

Amazon dot com reproved the point when they went into business in the mid-1990s. Although they were not the first online bookstore, they were the first to really attempt to carry everything. In fact, they went beyond carrying everything by providing a database (obtained from Baker & Taylor, in which there is another story) that not only showed just about all the books in print but also books that were no longer in print! Conventional publishing and retailing theory at the time would have said it was a bad move to return suggestions in search results that were books not available for sale. But, of course, it built their competitive advantage. They rapidly became the best place to search because of the completeness of their database and, actually, confirming to a customer that “what you want is a book that was indeed published but is not now readily available” made it easier to sell the customer a substitute. Whereas the the store (online or off) that didn’t have the unavailable book but didn’t also provide that information found it harder to close the alternate sale.

The point about the importance of selection was proven again by Amazon when they launched the Kindle in November, 2007 and lit the fire for what is still a spreading conflagration of ebook reading. Before Kindle, there were perhaps 100,000 ebook titles available as PDFs that could be read on a full-function computer, but not nearly as many in formats that could work on smaller devices (Palm, Mobi, Dotlit). Amazon launched Kindle with about 150,000 titles and used their market power to get big publishers to put more and more of the newest, hottest books into their format closer and closer to publication date.

There were other features of the Kindle (the ability to load books wirelessly and instantly without going through an intermediary device; its easy-to-read e-ink; its built in dictionary; Amazon’s deep relationship with very large numbers of online book buyers; and, of course, eye-catching prices relative to the print edition prices of the hottest new books) that fueled its near instantaneous success, but the robust title selection was a critical element.

So to that point — one could say to this point — the largest possible selection in one place has been as important to the success of an ebook retailer (obviously: online) as it was historically to a print book retailer with a physical store.

Early in the decade, it occurred to me that the magnetic power of the large selection in one physical store had sharply diminished. When Dad doubled the inventory of the Short Hills Brentano’s, he delivered a selection that the consumer couldn’t match for many miles around. When Barnes & Noble and Borders got Wall Street money to replicate the Bookstop model of 100,000+ title superstores in the early 1990s, they were enabling consumers to find conveniently books which had previously been obtainable only with great effort. But the limitless shelf space of online bookselling undercut that advantage and by the early part of this decade, it seemed to me that the consumer was finding the unlimited availability of titles online which could be delivered in a day or two so powerful that the large selection in a store that might be available immediately had really diminished appeal.

But there’s another thread of bookselling history on- and offline that I believe will soon become the dominant paradigm for ebook retailing. And, of course (just so you are reminded what blog you’re reading), it fits into the concept of “verticality”.

Publishers have known for a long time that good deals can be made and large sales can be registered through what we call “specialty retailers”. (The label for these sales in a publishing house, and others such as sales to catalogers or premium sales, is “Special Sales.”) The store that sells the tools and materials to refinish your floors can sell you a book to explain how to do it. The store that sells computers and paper and ink can also effectively sell resume or how-to computer books. The garden supply store can sell books on how to make your roses bloom.

Amazon and other online merchants (and not just of books) have long operated “affiliate” programs by which a web site can earn a commission on sales made at the primary merchant by referring a customer. This generally works by having the affiliate site promote a particular book title; when the site visitor clicks on the link, s/he is delivered to Amazon or BN.com’s page for that title. If the customer buys, the referring site gets a commission. These revenues don’t often amount to big money for the referring sites (although they sometimes do), but it is believed (but as with All Things Amazon, we don’t have the critical data to confirm) that, cumulatively, referrals from perhaps millions of affiliates deliver significant volume and customers to Amazon (and others.)

This is as far as “special sales” have gone in the ebook world. But the guess from here is that this is about to change and that the change we’ll see in the next few years will obliterate the notion that “all subjects in one place” is a significant marketing advantage, online or in a store. Many book sales, and particularly ebook sales, will move to “contextual” resellers. Your accountant’s web site will sell you the book(s) that help you understand a new tax law or how to ready your business for sale. Your favorite sports web site will sell you the new biography of Alex Rodriguez. And your favorite “Literary Review” newsletter and website will take care of your needs to acquire fiction directly and without your having to shop the vaster stacks of an online superstore.

That is: curated ebook offerings (a click away from the ability to buy lots more content beyond the curated selection) will be featured on every web site with any significant traffic. Delivering purchaseable content — books right now, but ulimately magazines, shorter articles, and relevant audio- and video-content as well — will become a standard expectation of any site (or web community) that aspires to a true mutual embrace with its site visitors. “What I’ve read lately and liked, and why” is a legitimate offering to anticipate from every blogger or commentator with a following.

Last week, Barnes & Noble held its regular call to announce financial results and future expectations. In that call, B&N expressed the expectation that the ebook world would ultimately settle down to about five players and that they’d be one of them. With that perspective, they saw for themselves a reasonable proportion — say 20% — of the ebook market.

My first reaction to that was “what are they thinking? There won’t be five online booksellers; there will be five million.” A day or two later I had a conversation with one of my personal tech gurus who saw it the way B&N’s statement suggested they did  (”it will consolidate, just like the music business did…”) He also asked a lot of practical questions. On what devices will these ebooks be read? How will all these individual sites deal with the format issues, the DRM issues, the customer service? In other words, “great vision, Mike, but how can it possibly work?”

I think it will work like affiliate sites worked, but in a more sophisticated way. A strong central operator providing scale facilitates the commercial offering of the niche player. The harbinger of the future is the deal announced last week between F+W Media and Ingram Digital. Ingram is setting up all F+W specialist web sites (and they have them for many different vertical interest groups) with the ability to sell both ebooks and print of all publishers to their site traffic. (Although we have working relationships with both companies, we weren’t involved in that deal and don’t know any of the details.)

I believe that the Ingram-F+W deal is the start of something new and big. Both companies are going to find ways to improve on whatever is the starting point. F+W is going to have to learn how to merchandise what Ingram can give them into a unique shopping and content consumption experience for the consumer. And Ingram is going to have to learn how to deliver what they can offer to F+W in a way that enables F+W  to curate and enhance the selection to deliver something uniquely customized to its own community.

If that view of the future is right, the competition among the players who can provide the ebook selection and transaction services Ingram does — those in the game already like Amazon, B&N, iBooks, and Kobo and those saying they’re about to come in like Google, B&T’s Blio, and Copia — is going to take place in a whole new arena. B&N has announced deals like this, where they “power” somebody else’s bookstore. Kobo hasn’t yet, but I’d expect them to; it just seems to me like an opportunity they’d see. This is a bit odd; it puts “wholesaler” Ingram in competition with retailers to create the next round of niche retailers. Ingram obviously has the built-in capability to offer print and electronic book delivery but, of course, B&N has the internal resources to do that too, and  B&T can do it too. There are anomalies to rationalize about margin, but, in the end, customer acquisition through this strategy will be far cheaper than it is most other ways, even if a fixed margin from the publisher is shared with the niche player.

This business hasn’t really begun to happen yet; we’re just seeing the outlines of it. Initially, the competition appears to be about how each retailer delivers its vast set of content choices to the online consumer in a consolidated way. (And usually it has been the same for Ingram. Most of their business has come from large “sell everything” ebook stores.) But over time it will evolve into a competition for niche resellers. Winning is always about delivering the best consumer experience but the challenge will be to deliver the best consumer experience to somebody else’s consumers. White label is the key to the ebook (and book) retailing future.

Bookmark It:

Big publishers have to be very happy about how things have been developing in the ebook world over the last six months or so. In that time, we have gone from a situation in which Kindle appeared to so totally dominate digital reading that Kindle-only publishing seemed an imminent threat to disintermediate publishers to one where it is not only Amazon’s hegemony that is threatened. Even their position as the ebook market leader isn’t safe.

Although one of the big factors in this change, the iPad, was unforseen at the time, we wrote around 16 months ago about the possibility that Amazon’s position leading the pack on ebooks would be hard to defend in one of the first posts on this blog.

As the ebook world has evolved (so far), we have the following “facts on the ground.” You will see from this recitation why so many people outside commercial publishing see eliminating DRM as a key to ebook marketplace efficiency. Our guess is that, regardless of the merits of the idea, going DRM-free is a non-starter for the big houses because it will be a non-starter with most big authors and most big agents.

1. If you buy an ebook from the Kindle store, you can read it on many devices within the Kindle reader software. That software is currently available for the iPhone, iPad, iPod Touch, PC, Mac, and Blackberry with Android reportedly on the verge. If the Kindle book has no DRM, though, you can read it on any reader that supports the Mobi format or you can use a program like Calibre to convert your Kindle book to epub, which can be read on just about all other devices.

2. But if you buy an ebook from Kobo or BN (through their “reader” software, not for the Nook), you can do the very same thing (and Kobo’s Android app is at least a bit ahead of Kindle’s; it was announced over the last weekend).

3. If you buy a book from iBooks, the iPad bookstore, you can only read it on an iPad and, soon, on an iPhone. That is, unless it were DRM-free which is, some are told, an option for publishers.

4. If you want to read on a Kindle device, you can only read books you buy from the Kindle store (unless you select from DRM-free mobi files, which leaves out the biggest books).

5. If you buy a Nook, you can theoretically read epub content obtained elsewhere by putting it through its DRM paces at Adobe Digital Editions, but it ain’t easy. My expert on these subjects, Kirk Biglione, points out that this is one of the big advantages of loading devices through wireless means (which sidestep having to deal with ADE) rather than computer synching. Because ADE is a challenge for most people, the interoperability across devices promised for epub files is, for protected files, more theoretical than real.

6. The Sony Reader is like the Nook: theoretically able to handle anything epub but made much more difficult by Adobe DRM. Sony is also suffering at the moment from having no apparent mobile strategy.

7. Bottom line: DRM creates hassles if you try to read on anything except the platform on which you bought. But Kindle, Kobo, and BN Reader (not Nook), provide a pretty seamless experience across devices.

8. The promise of the presumably-imminent Google Editions is that you will be able to read them on all systems that browse the web (except that Kindle’s browsing is not going to provide a terribly satisfying experience and Sony, which doesn’t provide a web browser, is probably left out of the Google Editions party).

So the e-ink devices generate the real lock-in, or, more often, lock-out, problem. It is your Kindle device that locks you into the Kindle store; your Kindle file can be ported to a non-Kindle device using the Kindle reader software.

This is a mixed, but probably mostly negative, blessing for future sales of Kindle devices. On the one hand, consumers who figure this out will be increasingly unwilling to chain themselves to a reader that makes them buy files they can’t use elsewhere. On the other hand, the spouse of a friend cracked her Kindle a few days ago and because of the hundreds of books she’d bought over the years from the Kindle store, couldn’t really consider purchasing any other reader as a replacement. So she bought a new Kindle.

So while the Kindle store almost certainly still has the most titles of any ebook retailer, Amazon is definitely facing some uphill battles selling devices to new customers. Even before the iPad hit in April, DigiTimes reported that Nook devices outsold Kindles in March. (Could this be the power of 700 retail locations talking after the cream of the online customer base had already been harvested by Amazon over the past 2+ years?) Then they reported yesterday that total e-ink monochrome ebook reader sales were 700,000+ for April and May, of which 37% were Nook and 16% were Kindle. In the same two months, of course, Apple reports selling 2 million iPads. So, in two months, iPads outsold Kindle devices about 20 to 1.

That means that even if 2 million new iPad owners, on average, buy 1/3 as many ebooks as 700,000 new single-purpose ebook device purchasers, the larger, full-color, web-ready screens sold in the last two months would be responsible for as much ebook consumption as the book-dedicated devices.

Meanwhile, the device prices are coming down sharply. Kobo announced a $159 device on sale at Borders a month ago. Since then Borders announced their own branded device for $119. Then Barnes & Noble cut the price of the Nook to $149 for the wifi model and $199 equipped with 3G. Many had been anticipating a price cut before year-end by Amazon from the $259 level they have maintained; but the B&N move forced their hand and Kindle just announced they were coming down to $189. Because aside from all the competition that Kindle faces on the device side, the Agency model has made it harder for them to keep customers loyal with a pricing advantage on the biggest books.

What this adds up to is that a much more diversified marketplace is developing for ebooks than publishers would have dared hope for a year ago. This, in turn, makes the customized ebook offering that Ingram is enabling (as they announced last week in a deal with F+W) even more powerful, because more and more devices — and therefore consumers — will be able to readily take advantage of ebook offers that aren’t served up from the Kindle store. Since one of the great unmet challenges of book sales on the web is merchandising — making it quick and easy for consumers to find what they want — curated offerings on specialized sites might really work better for a lot of people. And then Amazon will feel some of the pain that big publishers do, being horizontal in an increasingly vertical world.

On the other hand, big publishers have apparently lived past the danger of a massive problem: the possibility that authors could find most of their audience by setting up with Kindle alone. There is still more complexity to be added. Google will arrive shortly with a big splash. Newcomers Copia (a client of Idea Logical) and Blio are still planning market entries in 2010, and they each have some unique propositions the current players do not. The more different places an ebook might successfully be sold; the more variety in the way ebooks get merchandised; and the more benefit that can accrue from effective distribution of files and metadata; the more a publisher with some savvy will look like a sensible option to an author who might be thinking of a do-it-yourself effort.

There was a conference called Untethered last week. I didn’t go because it was an “all publishing” conference about technology, and I am skeptical about any horizontal approach. But there was a panel of publishing CEOs asked to estimate how much of book sales would be ebooks five years from now. The high guesses were 40-50%. I think they’re low. And if the question is what percentage of the books that are narrative writing are ebooks by five years from now, I think they are way low. (Apologies to the first batch of people to see this post and those who got it by subscription because I hadn’t quite finished this thought when I put it up. I saw it later and fixed it.)

Bookmark It:

I am finding an eerie similarity between the disastrous Gulf oil spill and the parlous state of America’s bookstores. In both cases, the forces are in place for a disaster that will play out over the coming months and years. And while the tragedy of what is happening in the Gulf is far more consequential to everybody on the planet than what is happening to our bookstores, we are appoximately as powerless to prevent an eco-system disaster of the first magnitude in both cases.

Of course, the causes of the problems are quite different. British Petroleum, it would seem from here, could have operated differently and the blowout might not have happened. If the US government had the same offshore drilling rules as the Canadian government, requiring the relief well to be dug at the same time as the main drilling well, the disaster might have been averted.

Just like the shrimpers on the Gulf Coast, we are entering the highly visible stages of what will be a painful and accelerating change in the circumstances for general trade publishing. In an exchange in the comments of a post here from last November called “Why are you for killing bookstores?”, I was told by a resident of Orange County, California, that he didn’t even know where his nearest bookstore was. Now there is news that Laredo, Texas, is aware of its status as the largest city in America without a bookstore because its local B. Dalton outlet has been closed. Unfortunately, I don’t think Laredo will retain that status for very long. Much larger cities will be joining Laredo. These are like ships not bothering to leave the harbor because there is nothing out there worth catching.

Bookstores in the US are being pushed aside by the forces of what in the larger sense is definitely progress. The four biggest villains are the switch by consumers to Internet shopping (which affects all brick-and-mortar retail; Walmart’s sales are down too) and three aspects of that switch that amplify the problem: the ubiquitous availability of used books sold alongside the new, competition from long tail books that would have disappeared from commercial view in years past, and the rise of ebooks. All three of these effects reduce print sales in terrestrial stores, crippling retailers and damaging publishers as well.

The trend is impossible to ignore. Borders, just rescued by the latest White Knight that believes the business can be saved, announced that same store sales were down over 11% in the first quarter compared to a year ago. Barnes & Noble’s reduction in same-store sales was put at “2 to 4 percent” in its most recent reporting. [Late add: B&N actually reported same store sales down 5.5% in the most recent quarter.] Borders is a financially challenged operation with an inadequate supply chain, which could have led to not having the books they need to get all the sales that might have been available to them. But, if that’s true, the well-financed and well-operated B&N would be benefiting from their rival’s problems. (They probably are; sales would have been down more if they weren’t.)

I first worked in a bookstore almost 50 years ago, in the summer of 1962 in Brentano’s flagship store on Fifth Avenue. I’m going to guess that there were about 25,000 titles in that store: 10,000 hardcovers upstairs on the main floor and about 15,000 paperbacks downstairs in the brand new paperback department where I worked. Maybe there were more, but not a lot more. And this was one of the best bookstores in America at that time.

There just weren’t a lot of bookstores in America in 1962. Mass-market paperbacks were on sale in many drugstores and on many newsstands, and were in somewhat limited supply in bookstores. Paperback distribution then was just about exclusively through rack-jobbing local wholesalers and offered lower margins than trade books. Even Brentano’s, which was one of the few stores served direct by mass-market publishers, displayed the mass-market paperbacks by publisher rather than by subject to make it easier for the publishers’ reps to check their stock and fill in empty pockets every week.

Department stores were critical outlets for publishers. They provided what amounted to local chains in each city which were, at that time, just beginning to expand into suburban locations through a nascent shopping center industry. Reps for Dolphin Books (Doubleday) and Collier Books (Crowell-Collier, later Macmillan), two trade paperback lines begun by my father, were putting racks of their books into barber shops and motel lobbies in many parts of the country which had virtually no bookstores at all.

Running a bookstore was very hard. Publishers were numerous, title acquisition was fragmented. The only national wholesaler, Baker & Taylor, was really a provider for the libraries, which were willing to wait for B&T to go get the book after they ordered it from them. Local wholesalers, sometimes the same operations that rack-jobbed the mass paperbacks, didn’t attempt to stock much more than the bestsellers, the resupply for which was their real profit center.

In the late 1960s, as shopping center construction heated up, this started to change. Two national chains, Waldenbooks and B. Dalton Booksellers, grew on the back of that expansion. Shopping center developers preferred a national chain to a local independent as a tenant; they were more “bankable” when the developer was borrowing money to build. So these two chains started to grow as fast as suburban mall development would let them, which was pretty damn fast. When I went into publishing sales in 1974, each of the chains had about 300 stores nationally.

Dalton revolutionized backlist sales. Before scanning technology existed, Dalton instituted unique SKU numbers for every title which the cashier would punch into the register when each sale was made. (The SKU number was on a sticker on the book.) That enabled an automated reordering system to bring core backlist (designated “model stock quantities”) back in as they sold it.

Dalton had a “hot list” and a “warm list” of titles. The “hot” titles sold 10 copies a week across the chain. The “warm” list sold 10 copies a month across the chain. That was in a chain of about 300 stores and gave me my first real understanding of how few titles sold very much in a bookstore! Those lists were very important. If your book wasn’t on the hot list, it wasn’t going to get noticed by a buyer for re-ordering. And if it wasn’t on the warm list, the title was likely to be returned.

At about the same time, the early 1970s, the Ingram Book Company introduced technology that changed life for the independent bookseller: the microfiche reader that allowed every retailer to know, before they ordered, what Ingram was carrying. All of a sudden, just as Dalton was demonstrating how important a broader selection and in-stock backlist could be to a store’s economics, independent stores could imitate that strategy by ordering regularly through Ingram. Although computerized inventory management help was still a few years in the future, just being able to get the books from a single reliable supplier enabled independents to begin to compete and grow. (Of course, independents still didn’t have the advantage of 300 locations providing data so they could detect a “hot” book or “warm” book that might not be evident in a single store.)

There were two newer operations spawning stores with robust backlists in the 1970s: Paperback Booksmith and Little Professor. Both jump-started new independent stores with their branding, their inventory, and systems to support both new title buying and keeping key backlist alive. The Doubleday and Brentano’s chains had fewer stores, but bigger and richer ones.

From the publishers’ perspective, this was all providing more and more opportunity: more stores, more efficient stores, more backlist-conscious stores. So general trade publishers grew. Title outputs grew. Dalton and Walden grew. Independents and various smaller chains grew. Ingram grew. Baker & Taylor grew.

In the 1980s, the growth continued, fueled by increased efficiencies. Machine-readable fonts enabled Walden to imitate Dalton’s point-of-sale monitoring without having to sticker every book. Computerized inventory tracking systems improved efficiency at stores far and wide and at the wholesalers as well. New retailer Crown Books pioneered a new idea: a more limited selection of new books, combined with a lot of remainders and bargain books, and aggressive discounting of bestsellers. Even while the chains grew, the independents grew and became more powerful. A newly-energized American Booksellers Association became an aggressive advocate. They sued major publishers, ultimately forcing changes in sales policies that were deemed too chain-friendly.

Throughout the 1980s, the independents were the ones building the big category-killer stores. Good independents were confident that they beat the chain stores on title selection. They were even competing pretty much at full price against Crown’s deep discounting simply by being the place you could find the books you wanted. In the late 1980s, Borders and Barnes & Noble, along with Wall Street, saw the opportunity. Borders acquired Waldenbooks and B&N acquired B. Dalton to give them operational scale, and then they started to open very large 100,000+ title stores (under their own brands, not the acquired ones) in a model that had been developed by a Texas operation called BookStop (which was acquired by Barnes & Noble.) This just meant more growth for publishers; more backlist being stocked in more places. This might have been when the big indies first started feeling a pinch; I recall Andy Ross of Cody’s expressing concern about a big Barnes & Noble opening in Berkeley about that time. But the indies and the chains had a much bigger problem just over the horizon.

In the summer of 1995, Amazon.com opened for business. And, probably since Day One, but certainly increasingly and increasingly obviously, Amazon has been damaging the ecosystem which spawned a robust bookstore network and, which, in turn, fostered large and powerful general trade publishers. That was when the wall protecting the water that fed bookstores and trade publishers was breeched by the oil of digital distribution.

The analogy is not precise. Amazon is not a villain like BP. They aren’t just destroying an old eco-system; they are building a new one. To the consumer that is finding shopping easier than it ever was before, finding books they could never find before, being presented with cheaper choices of used books and electronic books that were not available before, there is no crisis here. In fact, there is no problem.

But to bookstores that depended on customers that had little other choice but to come to them for the books they wanted, shop from what was available under the store’s roof or wait for something to be brought in from outside, and who were effectively restrained by geography from shopping around for price or selection, the waters have become toxic. And to publishers that built a business whose principal competitive advantage is their ability to take intellectual property and put it onto bookstore shelves, the imminent prospect of reduced revenue, increased costs, more difficult title acquisition, and competition from old IP long-sold or long-dead, are now fouling the drink for them as well.

All of the eco-destroying forces that have so far hit the  bookstores, like the oil coming onshore in the Gulf, are just harbingers of much bigger waves of challenge to come. More and more people buy ereaders and cut print consumption drastically; more and more books get digitized; the long tail only gets longer as more and the more digitized stuff meets increasingly efficient print-on-demand. And more and more competitive material enters the supply chain with some appeal to the public but with no participation in the structure that makes bookstore stocking easy. The bookstores’ problem is not just about demand, it is also about supply. That’s competitive advantage for trade publishers in getting their books on bookstore shelves, but it is competitive disadvantage for bookstores competing against a universe of content a click away from more and more eyeballs and mindshare.

In an exchange in front of a large audience at BookExpo last week, one prominent publishing executive took relative comfort in the fact that “more than 90% of our business is still print.” That’s (still barely) true, but only about 70% of the business is still occurring through brick-and-mortar outlets. That number will be under 50% in 12 to 18 months, and the slide will still be accelerating. Big publishing grew in an eco-system of expanding retail shelf space. It has been challenged in the past 15 years as all that growth was stopped by the new forces unleashed online. Now that shelf space is going to start to shrink faster and faster, it is hard to see how big trade publishing can avoid doing the same.

Another aspect of this problem was raised this morning on a mailing list I’m on. Public libraries are losing the funding they need to stay open. Public libraries buy a lot of books from trade publishers, although most of those sales go through wholesalers and not all publishers are managing library sales discretely the way they should. Library purchases have tended to act like ballast in previous recessions; public funding wasn’t usually as volatile as consumer spending. Unfortunately and somewhat coincidentally, the erosion of the bookstore infrastructure is occurring when we’re also facing what is likely to be a longterm crisis in public funding as well.

Two Australian booksellers were in my office last week. The trauma they face is even worse than it will be here. Geography has protected Australia from competition so books are priced 50-to-100 percent higher than they are here. That’s been great for bookshops. Their trade looks like ours did 15 or 20 years ago.  With the arrival of ebooks and POD, they’re probably facing the changes we’ve seen since then in the next two or three years.

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Before the Internet deconstructed the publishing value chain and enabled new models, both publishers and booksellers benefited from a lot of what I’d call “secondary business”. Secondary business was not what they were set up or primarily intending to do, but which they easily could accommodate to earn easy margin that supported their primary operations.

Publishers controlled an apparatus that could make bound books out of manuscripts and put them on bookstore shelves for patrons to buy. These were not trivial capabilities and they were much in demand. Although  the principal business model for a commercial publisher was to select what to publish, develop it editorially in collaboration with the author, and then take the risk of printing inventory and distributing it in hopes that it would sell, sometimes opportunities arose that were less risky ways to employ their skills.

I had my first experience with this kind of publishing in the late 1970s when my friend Caroline Latham was the writer-for-hire and then publishing consultant to a wealthy man named Jack Eisner. Eisner was a Warsaw Ghetto survivor with an exciting and moving story of his experiences on the run from the Nazis during World War II. After the war, he built a very successful import-export business so that by three decades after the war he had the time and resources to deliver his story to the broadest possible audience.

Caroline co-wrote his book, The Survivor. Eisner hired Abby Mann (the Academy Award-winning screenwriter of Judgment at Nurenberg) to write the screenplay for the movie, and the play was written by Susan Nanus. Jack financed the production of the play on Broadway, where it had an extremely brief run.

Caroline engaged me to help her make the book deal. We were working with William Morrow, a fine and venerable publisher. They paid Eisner no advance. Eisner agreed to put up a substantial sum (I think it was $75,000) for advertising and promotion of the book. Morrow made all the decisions about printing and distribution. With a deal like that, they couldn’t lose. And they didn’t, although the book didn’t sell very well in relation to the investment made in it by Eisner. It is worth noting that there is a paperback edition of the book, renamedThe Survivor of The Holocaust, still available from Kensington.

The more common author of this kind for publishers would have written a business book that “paid off” for the author in ways other than trade store sales. Sometimes it just enhanced their reputation and improved their primary business. Some business book authors move large numbers of copies of their books themselves. In bygone days, “selling” your book to a trade publisher (for little or no advance) with contractually-stipulated author buy-backs was a deal that worked for both sides. I remember a very significant trade publisher telling me over a decade ago that “author sales” constituted one of their largest distribution channels.

Working with an established publisher has a couple of distinct advantages: the imprimateur of a brand name is one and their ability to move copies through commercial channels is another. But it also comes with definite drawbacks for the commercially-minded author. The profit on books the author moves is shared with the publisher. And the time schedules for trade publishing are traditionally glacial; virtually every author’s first disappointment is how long it takes from the time their book is completed until the time a publisher puts it out.

One stark example of an author who does better self-publishing than he could do with a trade house is Michael Durkin. Michael is a sales trainer and motivational speaker who sells his own self-published book, bundled together with audio CDs that are simply recordings of his speeches. The package of the book with about six of the CDs sells for $100 and he sells about 25,000 of these a year, mostly through the 100 or more speaking engagements he usually does, plus a few from his own web site. Durkin is so averse to sharing his margin that he doesn’t even try to sell his material through Amazon! Durkin also points out that his book is a fabulous prospecting tool; he uses it regularly as a door-opener. It gets people to hire him for the speaking engagements that fuel his product sales which, if you figure that his cost of goods leaves him with a margin of more than $80 per package sold, is producing a solid seven-figure profit for him annually.

Durkin agrees that 20 years ago he almost certainly would have worked through a publisher with a buy-back arrangement which would have meant a significant hit to his margin. And it would have constituted a very nice subsidy for a publisher.

Bookstores also have lost what is collectively a vast amount of secondary income to the Internet. My father briefly fought a battle in the 1950s to stop the practice of giving wholesalers more discount than bookstores got. Len wanted to force library supply to go through retailers so that library purchases were subsidizing the retail bookstore network, not warehouses that simply extended the publishers’ supply chain. It was a great insight (although both libraries and wholesalers, deeply cognizant of the value-added services wholesalers perform today for libraries, would argue persuasively against it today as, apparently, they did then.)

What often distinguished a successful independent store was its ability to do “back door” trade: serving local businesses, schools, and community groups. If a local reading group needed 10 copies of a book, they’d buy it from their local bookshop. Bulk business, and there is lots of it in every community in America, was most conveniently transacted through a local merchant. Now it is most conveniently transacted through the Internet. When a “back door” book business succeeds (like Jack Covert’s 800CEO-Read business based in Milwaukee and originally spawned by the independent Schwartz Bookstores), it is because it develops a far-flung following (served largely through the Net) rather than a local one.

It only works now if it is built on a vertical principle so it can appeal to a global audience. Being local doesn’t provide enough of a competitive edge for a local purchaser who is looking for wide selection, the ability to buy in bulk, the ability to ship to different recipients, and the ability to handle all that business online.

It is almost impossible to prove this with data, particularly retrospectively, but my intuitive hunch is that competitive independent stores in the 1980s and 1990s outdid their chain competition largely because of their ability to develop and serve secondary business — business above and beyond what is delivered by the traffic that comes in  the front door, shops the displays, and walks out with the goods. If that were true, it would explain why independents seemed to be hit harder than the chains in the first decade and more of the Amazon-led online bookselling revolution.

But all publishers and all brick-and-mortar book retailers earned critical margin in bygone days from sources that have alternatives they didn’t have then, even though neither the publishers nor the booksellers would have identified this business as critical to their survival. That’s another manifestation of the permanent alterations occurring to the ecosystem that spawned and enabled the existence of a general publishing business.

BookExpo America is this week. I’m really sorry I’m missing the Self-Publishing Day on Monday. That’s clearly a movement that is rapidly growing in importance; one we’ll have to “cover” a bit at Digital Book World next January. It’s an increasingly potent commercial force that all elements of the trade community — authors, agents, publishers, wholesalers, and retailers – will want to understand. I can’t make it because I’ve got meetings elsewhere in the city all day Monday. I am planning to be on the floor all three days the exhibits are open. I know many big houses are off the floor in meeting rooms this year; I’ll be paying attention to  how that changes the feel of the show.

I can already tell I’m glad to have Cader’s BEA LunchtoGo app; I don’t believe I’ve had such a simple stand number look-up device. (It has lots of other data and functionality as well, but that’s mainly what I’ll use it for.) I’ve got an iPhone now but I have had a handheld organizer since 1986. I remember a few years ago Frankfurt offered data of this kind for the Palm Pilot which you secured by having it “beamed” from one of the kiosks they set up around the Book Fair for the purpose. The process was klunky and, as I remember, so was the tool. I don’t think the experiment made it into a second year. But Lunch’s tool is much cooler, and it shows how a web site can work just like an app (as long as you’re connected; the data’s in the cloud, not in your hard drive) and dodge the restrictions of the Apple environment.

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I contributed to a long-standing industry argument I usually try to avoid when I speculated that ebook growth could lead to a situation which threatened the returnability model for book inventory shipped to retailers and wholesalers. I should have been more emphatic that what I was actually suggesting was that the model of using speculatively-printed inventory to sell books was threatened, and that returnability, which is a subset of that model, would go along with it.

Coincidentally, Ken Auletta wrote a New Yorker piece at the same time in which he demonstrated that lots of smart people, he among them, don’t actually understand the economic impact of returns, let alone the promotional impact of the practice of using books as posters and display props, which is responsible for most of them.

Misunderstanding the economic implications of returns, failing to grasp how it is most useful to think about and analyze them, and various misinterpretations of them are very common up and down the ranks in publishing, in big companies and small.

I recall in the early 1980s I had a small publisher client that was distributed by a larger one. I used to go into the big publisher’s office every couple of weeks and leaf through the sales rep orders, trying to figure out which reps were best selling my client’s books effectively and which ones perhaps needed to get a refresher course on the sales handles.

The sales director in this shop, who ran sales departments for several large publishers in his career and who was both a nice guy and thought of as a “numbers man”, kept tabs on the returns percentage from the two national chains: at that time, Walden and Dalton. He calculated those percentages meticulously at the end of each month, based on that month’s shipments out and returns processed.

Well, you could count on the fact, every year, that returns percentages for both chains were astronomical in February, when few new big books shipped and every excess of optimism going into Christmas was punished. And you could also be sure that both chains had low returns in November and December, when retailers are much too busy building up stock for holiday sales to send anything back.

In other words, the calculation produced a result that was, literally, useless. It simply confirmed the obvious. I bring up this straw horse because it demonstrates an important fact that is just as true when analyzing returns for an account for any period of time, even a year.

The returns in any period of time are at least partly driven by purchases made in a previous period of time. So if sales in a prior period were high, the returns percentage in a subsequent period of lower sales will also be high, and that’s regardless of the appeal of the books being shipped in either period.

So as sales fluctuate, as they inevitably do, publishers will find that all weak sales years have apparently high returns and strong sales years have low returns. This isn’t cause and effect; it is more like a tautology: the inevitable consequence of the fact that returns are based on the sales made three months ago, six months ago, and sometimes a year ago, not on the sales being made right now.

One way a publisher might try to analyze their way around the timing problem is to look at returns by title which, if the calculation were done when an edition’s life was completed (perhaps on the hardcover after it has been remaindered deep into the paperback’s life), would seem to be a valid number to analyze on a stable base: the shipment of one particular book.

But even calculating things that way is not very useful as an analytical device. Returns come from the inventory in the pipeline when the book declines or dies. If the book has already sold for years in that edition, the base for the returns calculation (all books shipped) includes those from many printings long past. The copies in the pipeline at that point might only be 10% or 5% of the total the book has shipped in its lifetime, so the returns will, of course, come in under those percentages.

A publisher trying to manage inventory efficiency needs to be concerned with the books in her own warehouse and the books currently in the supply chain and subject to return. Those sold long ago are not part of that inventory. Taking 100,000 copies back on a book that sold a million or two million and calculating the returns percentage won’t produce any flashing caution lights, whereas taking back 25,000 of 35,000 pushed out on a new “make” book will produce a lot more internal scrutiny and hand-wringing in most houses. But a tighter focus on how to to manage the inventory actually in the supply chain in the face of declining sales would be much productive than an “analysis” that produces nothing but a historical observation. A publishing company can realistically make a lot more progress and save a lot more money figuring out how to reduce the 100,000 than the 25,000.

One factor that affects returns percentages and is not often considered by a publisher is the frequency with which an account orders. I’ve never had the opportunity to do the analysis, but I’d bet there is a very strong inverse relationship between the frequency with which an account orders a publisher’s books (whether direct or from wholesalers) and returns percentage. There are two interrelated reasons for this.

The obvious one is that the store that reorders is signaling that they’ve sold books, meaning that what is available to be returned as a total of what they’ve ordered is less, the effect we’ve noted above. But the other is that an account that orders less frequently is raising returns as a percentage in one of two other ways (depending on the book): they’re either over-ordering to prevent going out of stock or they’re failing to reorder when they are out and losing sales, which means that whatever is returned (of other titles, in this case) is calculated against a smaller sales base than should have been the case.

And all of this is very important to take on board right now because publishers are likely to be entering a sustained period of declining brick-and-mortar sales (which is the part of the inventory pipeline most likely to generate returns), caused in part by declining brick-and-mortar shelf space. That means that advance sales on new titles are going to be lower than before and the number of backlist titles being stocked is going to steadily decline at the same time. And that adds up to a higher returns percentage on a declining sales base.

It doesn’t take a rocket scientist to understand that if stores close or cut back their shelf space, they’ll be sending books back that will increase returns rates. But it will not be simple to separate out how the current strategies for inventory placement are working and to avoid having the “noise” of returns made because of contraction cloud those judgments.

The “good news” is that the old measurements (total returns in a year against total shipments out in a year) will deliver an exaggerated picture of how much current new title sales are declining (although they will be delivering a true picture of a very sad fiscal reality.) The bad news is that we’re going to start hearing about companies whose overall returns percentages have gone from the 20s to the 30s and then higher.

I wrote in the piece that I referred at the top that it looks like sales registered online — whether print or electronic — will be half the sales of new narrative text books published by 2012. When that number gets to 90%, there won’t be much of a premium on a publisher’s ability to understand, and thus to be able to manage, their returns with sensitivity and sound analysis. But between now we will be living through several years when it will be one of the critical skill sets for all publishers fighting to survive sea changes in the business.

For a few years earlier in the decade, we had a thriving little business called “Supply Chain Tracker” in which we took the sales and inventory data provided by major accounts and delivered publishers reports in Excel to help with analysis. We created what we believe were some critical metrics to watch: percentage of stock on hand sold, week by week in each account; percentage of each book’s stock in an account’s Distribution Center (if they had one); total inventory in the retail pipelines we could see and what percentage was selling through in a week (by title), and then the same for wholesale and distribution centers. Most of a publisher’s supply chain inventory is really visible today, if a publisher takes the time and care to look. Just glancing at each spreadsheet an account delivers for how things are going on top sellers was never sufficient; the price to be paid for such inattention in the future will only escalate.

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I have gotten some requests, in comments and off-the-blog, to write what I was going to say to the AGM of the PA in an appearance I was supposed to make there on Wednesday, April 28. I felt terrible about having to cancel an engagement that was booked many months ago but it was tied into a trip to the London Book Fair which was cancelled due to the Iceland volcano. Since I was really prepared for the talk, updating the “Stay Ahead of the Shift” speech from last year’s Book Expo and adding some thoughts about the immediate future in the US market that I think British publishers should take on board, the suggestion is one I can readily respond to.

The premise underlying this piece (and really much of my work) is that all of us, to function, must have a view of how we think things in publishing will change. Change has been a constant in publishing forever, of course. In my lifetime, in the US, mass-market paperbacks and mall stores have risen and fallen; wholesalers have gone from local warehouses that replenish bestsellers to national operations that can provide hundreds of thousands, if not millions, of titles to any store in 24 hours; general trade publishing has consolidated from tens of real competitors to a Big Six; and, in the past 20 years or so, the superstore, usually run by a chain, with over 100,000 titles has became about the only brick-and-mortar formula that seemed sustainable. (NB: On that last point, I think more focused, smaller stores would actually work better, but it would take a large player with a real supply chain to try them to find out.) When I started in the 1970s, the big national accounts were less than 20% of a publisher’s sales and the field reps were responsible for much more than half the business. It would be inflating the importance of the field now to say that those numbers have reversed.

But the changes we’ve been experiencing in the last ten years have been much more dramatic. The combination of used books and the Long Tail enabled by print-on-demand, all delivered by Internet retailing, has eaten relentlessly, if invisibly, into the market for publishers’ new offerings and estabished backlist. The growth of Internet ordering has sapped the viability of the brick-and-mortar network and in the past decade we’ve seen shelf space shrink following relentless growth since the end of World War II.

And, at the same time, even before the recent growth in ebook sales provoked a new digital consciousness, marketing opportunities have been shifting from the print and broadcast world to online.

Publishers have adapted to these changes by changing their sales force deployments, discovering the virtues of social network marketing, and, more recently, going to XML-based origination procedures that make it easier to deliver a book’s content in a variety of ways (the principal ones being as a book, as an ebook, and as a web page.) Publishers who saw the future coming were able to prepare for it. Cambridge University Press, for example, had tens of thousands of old backlist titles set up for print-on-demand long before other publishers did and they reaped a harvest of sales and profits in the past decade as a result. Last year, Simon & Schuster shifted resources from field reps to telemarketers. In an age when Skype allows free face-to-face phone calls and gas prices do nothing but rise, one can’t help feeling they are also getting ahead of a curve by doing that.

Changes of this kind make it clear that a publisher is required to have a view about where things are likely to be going  to plan their business intelligently. It is our purpose to explore that: first with a long view, looking perhaps 20 to 25 years out, and then with a more immediate one thinking about changes that are literally “coming right up.” Because it’s what I know best, this view is US-centric, but because the US is the largest English-speaking market in the world and the view from where I sit (intellectually, not geographically) is that the world is now any and every publisher’s market, these thoughts should be relevant to a UK publisher even if they aren’t primarily centered on the UK market.

I hope we can agree on two things before we start, though. One is that increasingly profound change is inevitable. And the other is that all future planning, just as inevitably, depends on one’s view of what that change will be.

So, with that as preamble, I want to try to envision two futures: one long-term — which we will call “the next 20 years” — and one short-term, looking ahead just two or three years.

Before tackling the 20 year vision, which will be disturbingly dissimilar to where we are now, I want to remind you from recent history how much can change in 20 years. Once again, I cite US-based examples, but I think these will probably be reminiscent of some aspect of local history for every market in the world.

In 1968, television in the United States was dominated by three over-the-air networks that divided pretty much 100% of the national audience, approximately in thirds on average, but it was not uncommon for a single show to have half the national audience. Major cities had a few local stations available in addition; most of the country did not.

By 1988, cable television penetration had reached well over half US households, delivering a choice of many dozens of channels and network TV’s share of the audience had plunged. Today there are five national TV networks in the US and they share substantially less than half the total audience. Top-rated shows fight for the attention of 15% of the country, not fifty.

In 1982, record companies were on the verge of explosive growth. The Sony Walkman and other portable cassette players were joining cassette players in cars, creating an incentive for maturing boomers to re-buy music they’d purchased 10 or 20 years before on records. A very few years later, the same phenomenon repeated with CDs. Back catalog in new formats became a gold mine for established companies.

But by 2002, the CD sales had turned into a curse. They were gold masters, easily ripped by any computer into the new digital formats which ultimately meant iTunes and iPod for the most part. The transition from analog to digital, which stripped the record companies of the power they had which was based on their ability to put product on store shelves, was accelerated by the CDs that all consumers had by then. The fuel for the final burst of record company profitability in the 1990s resulted in the fire that burned them up.

Newspapers in the US had their biggest year yet for advertising sales in 1989. Things got even better in the early 1990s, with growth in classified ads leading the way.

But then along came the Web. Classified advertising moved to Craig’s List, in some ways to eBay, and to many niche sites for camera buffs and auto aficionados and a host of online real estate communities. Google and Yahoo and the web itself disaggregated and reaggregated the content newspapers produced. Both the advertising model and the circulation that drove the advertising were challenged. Twenty years later, many newspapers have died and those that survive are hanging on by their fingernails and desperately grasping for a formula that will allow them to sustain their business online.

In 1975, the mass market paperback business in the United States was the tail wagging the hardcover dog. Agents and authors were balking at the idea that the hardcover house would get 50% of the subsequent paperback income, even though it had always been that way. In 1979, Crown Publishing sold the paperback rights for the long-forgotten novel “Princess Daisy” to Bantam for $3.1 million, a number that still stands as the record for a mass market licensing deal. As my father predicted in his seminal book, In Cold Type, published in 1982, the distribution model for mass markets was inherently inefficient and couldn’t last for trade-type books. It didn’t. By 1995, mass market publishing was a genre business, which was how it started after World War II and what it is, for the most part, today.

Twenty years ago, we went online through very slow modems to very limited and klunky online portals: Prodigy, Compuserve, and the seemingly-modern America Online. The World Wide Web hadn’t yet been invented!

Today we carry the world’s information in the palm of our hand and we’re annoyed if we can’t get a connection, 24/7/365.

And twenty years ago, the book business was on the verge of its last great boom. In the US, Wall Street was just discovering that very large free-standing bookstores, offering consumers 100,000 titles or more under one roof, were cash-generating machines. They opened the vaults for Barnes & Noble and Borders to open hundreds of such stores across the United States. In the mid-1990s, Amazon.com was founded, enabling sales even deeper into the backlist.

But, although it wasn’t as dramatic as the record companies’ distribution of CDs, there were the seeds of old publishing’s destruction sown. Amazon also enabled the sales of used books and the Long Tail, books that had — before Amazon and Ingram’s Lightning Print made the idea of “out of print” an anachronism — stopped competing with the new offerings of publishers. Now they were alive again. That alone would have made things much more difficult. In addition, the impact of growing online sales steadily weaken bookstores and consequently undermine the primary USP  publishers always had: that they could put books on retail shelves. These factors have made establishment publishing an increasingly difficult proposition every day of the past decade.

This admitted stage-setter is the first of what will be a four-part post. The next installment will spell out a vision of the world of communication into which publishing will fit 20 years from now. The third piece will suggest what a publisher will look like then. And the fourth will cover some changes we can expect over the next three years which, among other things, might call for some recalibration of the competition between UK-based publishers and US-based ones. I’ll publish one each day that I don’t have something else until all four are up. And I’ll have added links to the subsequent pieces in this postscript as they’re made available.

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Sometimes expressing your opinion can have unintended consequences.

In a post last week, I observed that the explosive growth of ebooks made it likely, in my opinion (shared by others, some of whom are in high places), that as many as half the book purchases could be online purchases by the end of 2012. I see many consequences of that change, but one of them is likely to be a complete reconsideration of the long-standing industry policy of accepting returns from retailers and wholesalers of unsold inventory.

My reasoning was that once returns only help you reach half the potential market, viable publishing becomes possible without them. And with perhaps more than half of the brick-and-mortar outlets (by that time) for most books (excluding bestsellers, which are sold in mass merchants) being accessed through a single retailer (Barnes & Noble) that has its own distribution centers and a managed supply chain, returns would start to fade away. (With their robust supply chain capabilities, B&N will be able to work the new marketplace, which will undoubtedly feature a higher discount no-returns option, to their competitive advantage.)

I didn’t deal with my feelings about that (mixed) or the impact on sales I would expect (damaging), but I’m moved to do so today because my prediction has led to a celebration in anticipation of that turn of events, a 2-part series (Part 1 is here and Part 2 is there) called “Publishing 3.0: A World Without Inventory” by agent, ebook publisher, and digital thinker Richard Curtis. He casts preprinted inventory distributed with returns as “the speculative model” and a no-returns marketplace supplied largely with books printed on demand as “the prepaid model.”

Richard characterizes returns as “a bargain with the devil” and “an addiction”. He cites return rates in the neighborhood of 50% (which they are — and even higher — on some books but which they are not for any publisher across their list) as the killer of publishing profits. But I think Richard leaves two very important realities out of his analysis:

1. Inventory creates sales that would not take place without the inventory placement.

2. Publishers (and Richard’s clients: authors) have a great deal to gain from the publisher’s practice of selling returnable.

In fact, this piece effectively argues that a responsible agent will prefer a publisher that allows returns to one that does not for their client, if the royalty rates are the same (and often if they are not.)

Before making the two arguments promised above, let me deal with three realities that are often elided when returns are discussed.

First of all, book publishing is not the only business with returns, despite frequent claims by returns skeptics that it is. Newspapers and magazines have returns, of course. But, apparently, so does technology hardware! I learned this hearing our client Copia present itself and its parent company, DMC, to publishers. DMC is very deep-pocketed. They make the point that putting out six ereader devices (which they are doing) requires the financing to put tens of millions of dollars of inventory onto retail shelves, and taking them back, eating the cost of producing them if they don’t sell. That’s one reason why there are few upstart manufacturers of consumer electronics. Even if you could get in the door at Walmart and get an order for your gadget, the financing required to fill the order would be beyond anything but a large and well-established company. So the principle that the manufacturer insures the retailer who stocks speculative inventory is not applied to books alone.

Second: publishers are customarily asking retailers to put books on their shelves before there has been any public exposure to the title. It hasn’t been reviewed (except possibly by the diminishing industry sources for pre-publication reviews); it hasn’t been sampled by the public; it hasn’t been read by the sales rep pushing it or by the buyer deciding about investing in it. The promotion plans are promises that are sometimes not kept. It is a competitive requirement to offer returns in that situation if the publisher wants the books in place at retail on publication date. I have never heard a clear narrative about the introduction and spread of returns in publishing. Curtis’s account, which confirms my understanding, is that the practice began in the 1930s. This was before my Dad’s time in the business; he thought it was Viking Press that began the practice. But the practice apparently spread so quickly that nobody got clear credit for starting it. And we all got a lesson about the competitive requirement when Harcourt Brace Jovanovich tried to eliminate returns (in favor of much higher discounts) in 1981 and rescinded the policy in about 90 days because the trade just wouldn’t stock their books.

And third, publishers’ practices affect returns. Most returns from major retailers to publishers are on big books for which the publisher wants to force out a quantity that creates a noticeable presence in the stores. There are occasions when the over-ordering is due to retailers being zealous or concerned that they’ll have trouble getting replenishment inventory. But, more often, they are due to publishers pushing out bigger quantities because they know that bigger stacks in the store make the book move faster. Or because the rep wants credit for a bigger sale. Or because the publisher’s discount schedule rewards a larger buy with a better price.

(It is commonly suggested by no-returns advocates that publishers at least eliminate returns on backlist. It would be a dumb publisher that did that. The way you entice the trade to buy without returns is by increasing the discount, shifting margin from the publisher to the retailer. But backlist returns are already low for most publishers. So following this suggestion would lead to a publisher giving away margin to reduce returns on the segment of the list on which there aren’t many returns. It is worth noting that no publisher that I know of has taken the bait to eliminate returns on backlist.)

And all that leads to me making the first point: that inventory creates sales that wouldn’t otherwise occur. The point is made over and over again, most recently by Bowker PubTrack data (click that link and take a look; it’s quite startling) that what happens in the store — how books are displayed and what clerks say (which is also affected by how books are displayed) — influences a lot of purchases. If we don’t have retail locations with books merchandised to entice people to buy, I believe overall book sales will go down. And as long as we do have stores (which we will for quite some time, even after the end of 2012), then the books well displayed in them will have a competitive advantage over the books that are not.

And the first point leads to the second point. The author, in effect, “hires” the publisher to maximize the sales of the author’s book. Pushing out inventory and taking the returns that enable pushing out inventory are part of what a publisher does for an author that the author can’t do for herself. While I believe that publishers will move to no-returns and no-inventory models for many books, and that will enable the publication of  books that would have been too risky the conventional way, the sales expectations for these books will definitely be lower than for those published with inventory and risk. And let’s remember that the cost of each book produced is substantially higher printing one at a time compared to a press run. Press runs are distinctly more profitable if returns aren’t astronomical and very few books are published with the expectation of astronomical returns.

So the days of returns may be numbered, just as the days of brick-and-mortar bookstores likely are numbered, but that’s not a good thing for overall book sales or even for the profits of publishers. For the books with highly-targetable audiences the effects will be less damaging but for the books that sell the most — the kind that agents represent to publishers — it will mean a great reduction in the chances that the book will take off and reach big numbers. And for the publishers that step down from returns by managing them before they eliminate them, there will be a real competitive advantage.

I didn’t make it to London. I’m in good company. My friends who are in London are wondering exactly how and when they’ll get home. Of course, there are far worse places to be stuck.

I see in today’s Shelf Awareness that The Bookseller in the UK has been sold by its corporate owner to an entrepreneur (its publisher, Nigel Roby) just a week after Publishers Weekly in the US was sold by its corporate owner to an entrepreneur (its long-ago former publisher, George Slowik.) There are powerful structural and institutional forces that have weakened the inherent position of a trade magazine for trade publishing in both markets and making a success of them will be a real challenge. We wish the bold new owners luck with their ventures.

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I was interviewed a couple of weeks ago by a journalist who was working on a story about publishers and digital change. He was building something around my “Stay Ahead of the Shift” speech from last year’s Book Expo.

“I was impressed by that speech,” he said. “You were very prescriptive about what publishers should do. So my first question for you is whether anything has changed since that speech?”

“No,” I said.

“Well then, would you say that trade publishers are doing any of the things you suggested? Have they taken your suggestions on board?”

“No,” I said.

“What would they say, then, about the assessment you offered? If I put you and a major trade player on a stage together to discuss the content of that speech, where would they say you went wrong?”

“They wouldn’t,” I said. “They’d probably say I was right and that they’re doing what I suggested. But they’re not.”

We moved along and talked about how the world is indeed, as I said, moving to vertical. We talked about publishers like Hay House and F+W and others that have extensive email lists of book purchasers that they can target directly, and inexpensively, every time they publish a new book. These are advantages and marketing capabilities that the big general publishers don’t have.

After we’d been talking for a while, the journalist had a last question. “Can you suggest any top executives you think I should talk to for this story?”

I suggested one that I thought was interested in pushing out the company point of view. Didn’t work. “I’ve been trying to get to that person for a week and my calls aren’t being returned,” said the journalist.

Then I mentioned another. “Oh, yes,” I was told. “I talk to that person very regularly.”

“A very smart person,” I said. The journalist agreed.

“So take this on board,” I said. “We’re talking about somebody who is a friend of mine. We’re talking about somebody who understands everything I say very well, but who isn’t implementing it. What does that tell you?”

It tells me that big companies are in the business of acquiring rights, creating products called books, and selling them. They have numbers to meet every quarter. They can’t start switching over their businesses from a model based on selling products to a model based on owning communities just because Mike Shatzkin says that’s the future.

I thought back to two pieces of advice I dispensed over a decade ago. In about 1999, executives at Book-of-the-Month Club paid me a modest sum for a quick-and-dirty strategic assessment. My advice anticipated my later thinking, even before I had learned to articulate the concept of “vertical.” What I told them is “book clubs don’t map into the 21st century. Communities of interest do. So you have to take your hunting and fishing book club and turn it into a hunting and fishing community.”

“How would we monetize that?” they asked.

“I don’t know,” I said. “We’ll have to figure that out.”

So they said “thank you very much” and moved on. They apparently made the (perfectly rational) decision to keep extracting cash from the book clubs until they couldn’t anymore and then sell them, if they could. If you owned a blacksmith shop in 1910, you might not want to invest in developing an auto mechanic’s capabilities just because you could see it coming. You might want to just pull out your blacksmith profits and go into another line of work. Or put the money in a bank.

At about the same time, the owners of the Atlantic Monthly magazine asked me for thoughts about a web strategy. “What are you most known for?” I asked.

“Publishing great writing,” they said.

“And who are your top competitors?” I asked.

“The New Yorker and Harper’s,” they replied.

“Then my advice would be to partner with the two of them and create a web community dedicated to great writing.” That advice also went no further.

Looking back on both of those recommendations, I recognize how hard it would have been to follow them. But imagine there were a Hunting and Fishing community that had been built on the backs of the hundreds of thousands of names BOMC had a decade ago. Think you could sell some red checkered jackets and fishing tackle through it now?

And in this age of diminishing reviewers and proliferating content requiring evaluation for consumers of quality literature, do you think my Atlantic-New Yorker-Harper combo community would have some real power today that could be turned into money? I do.

I see the big publishers developing vertical presences in the few areas where they have enough of a content flow to attempt it: books for kids and teens and the genres, particularly romance and science fiction. And they’re leaving just about all the others to upstarts who are slowly and methodically building their presences in cooking (book publisher Harvard Common Press and web sites like Cookstr and Serious Eats), mind body spirit (Hay House), sustainable living (Chelsea Green), crafts (F+W and C & T, among others) and the list will just continue to get longer.

General trade publishers will soon find themselves handicapped trying to sell anything except the most challenging books: the sure-to-be-big ones that cost a fortune to sign and the fiction, memoirs, hot current topics, and other writing that is the most expensive to promote book by book. And they’re remaining dependent on a very fragile chain of intermediaries.

Just as BOMC pursued a strategy that eschewed converting book clubs to communities in favor of squeezing every penny out of the old model, it is also rational for today’s big publishers to pursue a “last man standing” strategy. It will be a very long time before major authors don’t sell lots of print books and they’re going to need a strong organization to print those books and put them on the shelves that are out there. They need a strong organization. But do they need six?

Aside from “last standing”, the other alternative to my “multi-niche development” suggestion is to convert from a rights-acquiring publisher to a service organization. HarperCollins seems to be at least exploring the development of that alternative.

We have had remarkable stability among big publishers since Bertelsmann acquired Random House in 1999. There are reasons for the owners of every one of today’s players to sustain their present operations for the greater good of the larger organization. But would a 10% reduction in the number of bookstores in the US change their mind? How about a 25% reduction? How many years do you think it will be before we find out?

I’d say no more than five, and it could be two.

I am addressing UK publishers at the Annual General Meeting of the Publishers Association at the end of April. I’m taking another look at the Shift speech to try to re-cast the advice for trade publishers to make it more “followable.” One thing for them is to start thinking about the day when they can sell ebooks globally and, in effect, get distribution in the US market without going through a US publisher. On the one hand, why should they care, since they’re all global companies anyway? On the other hand, we know they do care because the UK publishers have been on a pretty successful crusade to convert Europe from an open market where US and UK editions compete to one that is closed to US entries. I suspect that as ebooks grow to and past a quarter of sales over the next few years, UK publishers will be able to see the virtue in a less rigid territorial regime.

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Only a short post on a rainy Sunday, a little folksier than usual. But I did think of something sort-of analytical at the end.

But when I write about my Dad, nice things happen. Last week I got this link sent to me by a friend in London, reminding me of the disclaimer in In Cold Type. Dad was actually pretty proud of it. I also got a call from a retired CEO who encountered him early in his career and was permanently influenced. And next week I’m having coffee with a literary agent  who started her career working with a dose of his mentoring at Doubleday in the 1950s.

Dad’s book is a tour de force. Nobody ever thought more analytically about every single process in trade publishing or brought such a comfort level with technology to their thinking.  He should have gotten more attention for correctly predicting the inevitable decline of mass market publishing at a moment when few saw it: very shortly after what remains the biggest paperback deal in history. (That was Princess Daisy by Judith Krantz, from Crown to Bantam Books, for $3.1 million, in 1979.)

It was a real struggle for Dad to get the book published. Although, as Dad pitched it, this was a book for everybody in book publishing and anybody interested in book publishing, that could only be true in the Cliff’s Notes version. Indeed, this is a book only for people with a deep interest in publishing. But time has proven that, for those, it is compelling.

David Replogle was the head of Houghton Mifflin’s trade department in the early 1980s and he had worked for Dad at Doubleday in the 1950s. All of the big houses had turned the book down. Was it because it wouldn’t sell well enough? Maybe. Was it because they didn’t want their authors and agents and shareholders asking them whether they did things the Len Shatzkin way, which they usually didn’t…? (What were those? Standardized trim sizes and text designs, much larger sales forces, statistically-driven print and pricing decisions, publishing companies encouraging retailers to allow them to manage  inventory at the point of sale…) I believe the nuisance factor crossed more than a few minds. Anyhow, Replogle, in a decision that was X parts business and Y parts sentimental favor, signed the book.

It sold well enough in hardcover to warrant a trade paperback edition. And when it reverted, Dad was one of the first to sign up for Lightning Print, almost two decades after he wrote In Cold Type. New technology always did appeal to him.

Clicking on a few links that I hadn’t for a while for this post made me realize something new about The Long Tail. While Dad’s book is in Lightning, there’s hardly any reason for somebody to buy the POD version anymore. The combination of the ones we’ve sold over the past 10 or 12 years and the relentlessly-increasing efficiency of the online used book supply system means there are probably enough copies in circulation to require bulk demand — for, say, 25 or more copies — for it make sense to do anything but shop the net for used. This is happening book by book. It would mean that the valuable shelf life of many scans for POD purposes might be considerably shorter than forever and that some books probably sell their very last newly-printed copy every day. That’s a new thought to me.

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This blog and my speeches contain frequent references to what we see as the big shifts the book publishing industry, and some publishers more than others, are feeling. The horizontal and format-specific product-centric media of the 20th century are inexorably yielding to the vertical and format-agnostic community-centric delivery environment for content that will soon predominate.

In that context, we’ve observed that the most general publishers are the most challenged. The distinction between publisher and retailer is blurring; in a decade or two it will be a distinction without much difference. What has always been the source of competitive advantage to trade publishers is leverage; they could reach thousands, tens of thousands, or even millions of customers for their wares through retail channels that aggregated audiences for content creators and curated content for consumers.

The non-trade components of the book business: publishers of textbooks, professional information, databases, and academic content already tended to specialize by subject so the challenge of being audience-specific, a prerequesite to creating community, had already been met. Non-trade publishers had never depended much on horizontal intermediaries. Even in college textbook publishing, which depended (and still largely does) on the college bookstore to actually deliver the product and collect the consumer’s money, the marketing component of the bookstore’s contribution was and is minimal. The publisher works vertically through a network of professors to drive adoptions, and adoptions are what drive the sales.

Trade publishers, which are called trade publishers because they reach consumers through “the trade” network of bookstores, libraries, and the wholesalers that serve them, have been generally alert since the 1970s to the importance of what are generically called “special sales”. Those are sales that come from outside the book trade, often from retailers in other channels. Special sales experts learned pretty quickly that you did better when you had a selection of books for an audience. If you had one book of Jewish interest, you couldn’t do much with it. If you had a dozen, it could make sense to buy a mailing lists of rabbis. If you had one home repair book, you couldn’t afford the cost of setting up relationships with retailers of hardware or construction materials (particularly thinking back to days before those outlets had consolidated into giant retailers like Home Depot and Loew’s.) But if you had a list, then the mutual interest in a relationship was obvious to both sides.

Some publishers specialized. When I was consulting with Wiley in the 1980s as they were developing their fledgling trade program, they brought their philosophy of really covering the needs of a vertical market from sci-tech to trade. They didn’t want just one resume book for job-hunters: they wanted one at every sensible price point and different ones for different kinds of jobs. One day a sales rep called in from the road to suggest that they deliver a book on the cover letters that should go out with resumes. They already knew they had a market through specialized customers of all kinds and through their direct mail efforts. The lists that worked for resume books would also work for cover letter books.

The most “general” of the general trade publishers tended not to develop the same depth of specialized lists. When Wiley considered that cover letter book, they knew they’d be able to sell it very efficiently and they knew it would enhance their relationship with individuals and channel partners through and to which they were already selling a lot of books. Would the cover letter book be big? Possibly not, but it didn’t have to be to make it clearly worth doing.

But the big trade houses were not built that way. And the biggest books, the sexiest books, the most exciting books, don’t tend to be in niches. In fact, niche identification can dampen sales in a general trade market. The CEO of a major house told me a couple of years ago that he didn’t want to label a book that could become a betseller a “mystery” title. Mystery was a “category” (read: “niche”) and, while those books tended to meet theshhold expectations more readily, he perceived them as harder to break out to the sales levels they could achieve if they were perceived as unique.

We are now seeing the early signs of what will soon be a tendency, then a trend, and then a stark reality: you just can’t sell as many copies of most books if you don’t have a proprietary position with a vertical audience. The early signs are evident through companies like O’Reilly Media (computer programming and technology), Hay House (mind body spirit), Chelsea Green (sustainable living), Harvard Common Press (cookbooks and pregnancy-childbirth), and F+W Media (several niches, including writers and crafts), which have special retail channels and huge email lists of individual customers that the big houses simply don’t. Niche by niche, the big houses will find it impractical to publish in areas that were once productive for them. Their need for each book to be “big” individually — for the single title to provide its own critical mass — works against what you must do to be “big” in a niche. To do that requires a more across-the-list kind of thinking that is counterintuitive to a company that makes the lion’s share of its sales through trade channels.

So for just about all the books that aren’t novels, memoirs, celebrity-driven, or epic works of popular history or politics, trade publishers are increasingly handicapped. Unfortunately for them, things are going to get worse.

The obvious problem is that the capacity of the general trade market to merchandise and move product is diminishing. I hate to invoke the old wisdom that many things happen “gradually, then suddenly”, but it is often true and we have been gradually losing bookstores for the past decade. What happens to the economics of the big publishers if we lose a big chunk of superstores pretty suddenly?

I recall a dinner conversation with the Chairman  of a large diversified multi-niche publisher two years ago. Even back then, we were speculating about the possible sudden demise of Borders. (Hey! It hasn’t happened; maybe we were wrong!) My dinner companion said, “you know, Mike, we’re as diversified as a publisher can be, but if Borders went out, we’d definitely feel it. It would really hurt us.”

“Temporarily,” I said. He needed me to explain.

“Sure, you’ll suffer a bad debt if they go out. That hurts right now. But over the next couple of years, you’ll get a lot of cheap and useful assets from competitors of yours that couldn’t withstand the blow. By a couple of years from now, you’ll be ahead.”

“You may be right,” he said.

So even with the obvious problem, a multi-niche publisher has a big advantage over a general publisher, just as it does over smaller niche players. But the ground for the general publishers is about to shift in ways that will be even more challenging.

Because “book publishing” in an increasingly vertical world is less and less about content sales in the unit of “books” (although that will be the lion’s share of revenue for a long time) and more and more about sales bigger than the book (databases that stretch across many books and other things too) or smaller than the book (chapters or fragments that naturally stand alone or which address a particular content need.) The iPhone app as a unit of delivery is accelerating the latter trend. The value of a database across titles has long been demonstrated by O’Reilly’s “Safari” offering, which generates more revenue for them than all but one trade account.

As the percentage of a publisher’s revenue that is generated by fragments and aggregations rises, so does the value of being vertical and, especially, so does the value of a direct relationship with the end users. The fragments piece is especially important, especially challenging, and requires new ways of thinking (and perhaps new contracts.) For example, Dominique Raccah, the visionary leader of Sourcebooks, whose Poetry Speaks is building a model for vertical community building, has found that many publishers of poetry aren’t sure they have the rights to license her vertical to sell individual poems! Does that mean she has to go directly to the poets for those rights? And how long will it be before it is more important to a poet to have their individual poems available for sale on Poetry Speaks than to have them available in a publisher’s collection bound as a book?

Bruce Shaw, the longtime empresario of Harvard Common Press, is demonstrating another aspect of this thinking that we’ve expected for a long time but hadn’t seen in practice before. He told us about a macaroni and cheese cookbook his house was considering for publication. Normally, Bruce reports, that’s a subject they’d skip because it just isn’t distinctive enough to make the ambitous sales targets he normally sets for print publications. But, in this case, he’s doing the book because his overall recipe database (all the thousands of recipes HCP has published in over 30 years in business) is light on mac and cheese recipes. So he’s willing to publish the book, knowing he’s going to make less profit than he normally requires, because it is a subsidized way to improve the value of his overall database of recipes.

The question of selling fragments opens up a host of other challenges: figuring out what is a saleable fragment, tagging it with an identifier and metadata, managing transaction costs for a much higher volume or low-value transactions, and retro-fitting accounting systems to process author royalties that will require increasingly complex analysis of smaller amounts of money.

In fact, there is opportunity on what might be viewed as a micro- or nano-level of transaction, too small for even a niche publisher to manage the customer relationship and the transaction. That is going to present new opportunities for our client, Copyright Clearance Center, which we’ll elaborate on in future posts.

There’s a great deal of new opportunity out there but a lot of it is in pennies, not hundred dollar bills.

Let’s hear it for Wifi in the air! This is the first post for The Shatzkin Files filed from an airplane. Boy, did I have fun at Spring Training!

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