The Shatzkin Files

The disruption of the disruption is temporary

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There’s little doubt that the digital (r)evolution, to the degree it is measured by the shift by consumers from reading on paper to reading on a screen, has plateaued, at least temporarily. The most recent article in PW on the subject spells out that some publishers have even seen their digital sales decline, although always with an explanation. (Houghton Harcourt had strong Hobbit sales the prior year they couldn’t match, just as Random House did with 50 Shades.)

Last week I spent a very pleasant hour reviewing the state of the industry with one of the big company CEOs. This executive seemed to be enjoying the opportunity to take a breath. For several years, s/he reported (no gender hints here; I’m preserving anonymity), there were regular “all hands on deck” conversations about policies that needed to be set. These were very large decisions as rapid shifts in sales took place from the well-understood economics of print to the developing economics of digital: the agency model was put in and then modified by court fiat, new methods of marketing needed to be employed, and the decisions about what to pay for new title acquisitions had to be made within a rapidly-changing revenue context.

I think the notion that the dizzying change we saw take place for several years, starting with the introduction of the Kindle and accelerated by the introduction of iPads and other tablets, is now behind us is probably accurate. Both the CEO I was talking with and PW are right. But that doesn’t mean change is over and it doesn’t mean all of today’s incumbents, many of which among the publishers and indie retailers seem to be riding a rising tide of profitability, can assume stability going forward.

Even though the biggest disruptor of the digital era — the shift of reading from paper to screens — has slowed down to a slow walk (at least temporarily), all of the players in the book business are still dealing with disruptive forces that won’t be as dramatic, but which will continue to be inexorable.

1. Even if the shift away from reading on paper has slowed down, the shift to buying print online probably has not. Since the number of titles continues to grow rapidly and bookstore shelf space has still declined (yes, there are reportedly some thriving independents but Barnes & Noble devotes less and less space to books in each store and closes stores slowly but steadily), the increase in the percentage of books purchased online will continue to rise. That undercuts the power of the big publishers relative to competitors, increases the clout of both Amazon and Barnes & Noble, and ratchets up the importance of digital marketing.

2. The margins for big publishers have appeared to improve in the past few years, probably because they retain a bigger share of their revenue from ebooks than they did for print books. Part of that is because the waste of books printed and not sold (and sometimes picked, packed, shipped, and processed as a return) has been drastically reduced. And some overheads, like warehouse space, have been reduced. But another part of is that author royalty of 25% of revenue is better for publishers than the list-based royalties they pay on print. However, the improved margins will be hard to retain. Amazon and Barnes & Noble hold high cards in their negotiations with publishers since they are dominant paths to the online and store-shopping markets, respectively. And even if the contractual 25 percent royalty is slow to change, the big authors will almost certainly be demanding (and getting) advances based on the total margin expectation, not the 25 percent. And the price of ebooks is going to continue to be driven down, also not a good thing for the publishing establishment.

3. Publishing will continue to favor scale. The Big Five houses will monopolize the big authors and the bestseller lists, as they have, and the lion’s share of authors who are predictably headed for the list will be signed with one of them. But this is not a battle among equals: Penguin Random House is as big as the other four combined. As each author becomes a “free agent” on the expiration of current contracts, PRH will be in a position to use its (already) deeper pockets and its (expected, by me) superior distribution capability to take authors away from the other four. This is a battle in which it is hard to see what weapons the other four have. One of their CEOs pins hopes on authors being more inclined to be number one or two with another house than number 20 with PRH. Another told me their belief is that PRH doesn’t want to wipe everybody else out. Certainly, agents will do what they can to maintain a competitive environment, but more money speaks very loudly and PRH is going to have the ability to offer it more frequently than anybody else. I believe we will start to see “takeovers” that occur one author at a time.

4. The verticalization of publishing will continue to separate the straight text books from all the rest. The Random House part of PRH had largely removed itself from the illustrated books sphere before the merger. One has to guess at the reasons for this, but it would seem logical that the failure of illustrated books to work commercially as ebooks was a factor. It is not clearly apparent whether the other big trade houses are doing the same. At the same time, we see two publishers who do primarily illustrated books — F+W Media and Quarto Publishing — growing and acquiring. What is interesting is that they appear to be pursuing diametrically opposite strategies. F+W is emphasizing community development and, in effect, using its print base as a platform to build a digital business. Quarto is emphasizing expanding its ability to distribute illustrated print books globally. Just as PRH will apply its scale to create competitive advantage against other publishers pursuing books primarily meant to be read, F+W and Quarto will have scale that will make it increasingly difficult for illustrated book publishers to compete with them in the areas where they publish. Since neither of them focuses on art and museum publishing, that also leaves room for Abrams to grow in that area. (It is quite possible that the strategies of both F+W and Quarto will “work”, setting up a mega-merger some years down the line.)

5. We have seen a sea change in author options. Most of the big houses have ridden that out very well. Although many authors in a position to do so reclaimed digital rights to their backlist and self-published those titles, authors by and large have not deserted major houses (and big advances) for alternative publishing means, even when Amazon hired a big publishing CEO to manage their checkbook. But we’re now on the verge of another revolution: entity self-publishing. That means newspapers and magazines and brands of all sorts will be using the infrastructure created for indie authors to make content available for sale. This could be more disruptive to publishers than the indie authors have been. Like indie authors, self-publishing brands will be inclined to drive down retail prices in the marketplace. And they’ll have marketing dollars behind them. As they grow their own little cottage publishing operations, they’ll also be a threat to “steal” a big author from time to time, especially when the print-in-store share drops to a small fraction of the total market, which it will.

6. Being a retailer in this space isn’t going to be a bed of roses either. Amazon already has the right answer: they have always used book retailing as a customer acquisition tool and they have a slew of other ways to boost the lifetime value of any customer they get. But they also have been the beneficiaries of an extremely patient investment community, and it is hard to tell how much it might crimp their style if their stock valuation became more “normal”. (I am not going so far as to say this is happening now, although the share price has taken a tumble in the week or so since their last report.) As readers progress away from dedicated devices for reading, it gets easier for the other major retailers to steal Kindle customers. (It also gets easier for Kindle to steal theirs.) Who knows how disruptive he can be, but Kieron Smith, who created the only previous serious global threat to Amazon as a print retailer (called The Book Depository, which Amazon then bought), is at it again with Barnes & Noble just has to manage decline. It will be no surprise if they have to abandon the digital publishing business (Nook) to save the investment for their stores. And they have to invent something they haven’t yet to give the stores something to become besides “smaller”. But the two of them will cushion whatever difficulties they have in the near term by taking more and more of the consumer’s dollar from the publishers and it will be very hard for the publishers to prevent that from happening.

7. There are definitely some expanding opportunities for publishers. Schools and colleges will be growth markets for trade books, once the roads to the customers for them are paved. They aren’t yet. Both publishers and 3rd party aggregators are building “platforms” that combine the content with teaching and assessment tools. Deals will develop, over time, for trade publishers to license their content through these platforms. Another opportunity for publishers in our world arises because the big global ebook retailers are English-language and North America based. The big publishers here have a natural advantage selling to them, which could suck revenue away from publishers all over the world — both by publishers here taking over distribution for publishers elsewhere and by the more direct route of English-language publishers starting to do their own other-language editions.

In the US, we already have one dominant brick-and-mortar retailer and one dominant online retailer. We may be on our way to one dominant global English-language publisher of books to be read with a competition between two others for dominance of books to be looked at. There will be no shortage of diversity of publishing “voices”, but many of them will be doing it as a function supporting another business, not as a stand-alone commercial proposition. Publishers and others are building vertical communities of interest of all sorts, with many of those likely to become part of the “book publishing” infrastructure of the future, as creators, as publishers, and as retailers. None of this will happen overnight but there is almost certainly more disruption of the 20th century publishing business facing us over the next decade.

As of this posting, there are still a few days left for readers of The Shatzkin Files to help us shape the program for Digital Book World 2015. Go to our survey and fill it out and your opinion will be included in our thinking as we map out the program for next January.

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  • Steven Zacharius

    Right now Amazon is the dominant player in the online space. That doesn’t mean that someone else isn’t going to rise. But it has to be someone with deep pockets like Amazon, that can afford to sell books near cost for the bestsellers and differentiate themselves somehow. Apple of course could do this if they wanted to but they don’t really have a dedicated e-reading device. I love the iPad and have several of them, but it’s not a dedicated e-reader with the advantages of longer battery life and e-ink display that allows you to read in bright sun at the beach. The only person I see coming to the table to compete at the moment, if they wanted to; would be Google. They surely have the deep pockets and the Android platform on zillions of phones and tablets. But they really haven’t shown that they want to be in the book business in a big way yet. More competition is always good for everyone.

    • Steve, I don’t think Amazon views the book business in the same way Apple and Google do. For Amazon, the book business has always been a big part of their public identity *and *a very powerful customer acquisition tool. For Apple and Google, books are an important component of a much broader ecosystem. In Apple’s case it is intended to make them more effective at selling their devices; for Google it is about providing a whole ecosystem that involves search as well as each person’s online identity. I don’t think either of them cares enough about competing with Amazon in this space to mount a major effort. And the other big reason for this is that Amazon sells books in all formats; the other two don’t. I am sure both Apple and Google will remain important global players moving book content for many years, but I would be very surprised if either of them expended much energy to cut into Amazon’s share.

  • As always, a remarkable analysis. I wonder whether one shouldn’t add other players that are rising more abroad than they are in the US, I’m thinking for example of Kobo (still small but very visible in Europe – certainly in Italy where I live).

    In other words, digital book growth is reaching a plateau in America – in all likelihood, a natural, physiological plateau – , but maybe it is poised to grow exponentially in the rest of the world…And there, Amazon is not doing as well as in the US…

    • I agree with you, Claude. I have been made aware of Kobo’s presence in some countries, particularly Italy. From the beginning, they seem to have pursued a strategy that would enable them to be viable with little or no penetration of the US market. Their alliances with local booksellers have enabled them to get devices distributed in other markets more successfully than Amazon.

      • Exactly, the alliance with local booksellers is key here. It suggests a radically different business model from Amazon’s that (so it appears) never really considered establishing a physical presence anywhere – this is especially unfortunate when it comes to CreateSpace (Amazon’s printed books are in no bookstores anywhere).

        In a way, this is bizarre because I do think that in future the strongest digital empires will be built by those who don’t forget to maintain a physical presence in the world. It would seem that the two levels – digital and physical – are made to complement each other, interact with each other and ultimately strengthen each other…

        I know that’s what the New York Times is betting on!

      • Claude, if you check the “extended distribution” option on CreateSpace, they make the book available to Lightning, which puts it in the Ingram database. That will, at least, enable BN and others to list it on their web site and sell some copies. But they won’t put it in stores that way; only special order.

      • You’re right (and I have done so for my books) but my point is they don’t put it in stores…

      • Because putting a book into stores entails investment and risk, I think it will remain pretty much out-of-reach for self-published books except in very rare cases. I had a very wealthy client several years ago who had a political book he wanted big distribution on. We got it with a big chain, but only by guaranteeing to pay the freight for returning the books (if necessary, and for many copies it was necessary). No normal author could afford the cost of the offer (or the cost of hiring professionals with access to negotiate it.)

      • Right – and as far as I’m concerned, that’s a big drawback for self-pubbed authors and one that authors should consider more seriously before jumping in and self-publishing!

      • A big drawback. One that is inexorably getting smaller, although I think it will matter for quite some time to come.

    • Although I didn’t yet read the full article this time (which I would meticulously explore by tomorrow, as I couldn’t sleep last night due to a sudden climatic disruption or weather disturbance in my area) — I can at least say at this moment, that I’m very INTRIGUED already by this NEW phrase from Mike Shatzkin: “The Disruption of the Disruption”. And that, I almost endorse this opinion of you:

      “…but maybe it is poised to grow exponentially in the rest of the world…”
      — Very interesting concept indeed.

  • Steven Zacharius

    I would tend to agree with but I know that Apple is in the eBook business for the longhaul. We of course have no idea if they would ever make a dedicated ereader but we do know that an enormous amount of reading takes place on phones. They might decide yet to do with books what they did with music. I just know you don’t count out any billion dollar companies from making a dent. And let’s not count out Penguin Random. If they ever decide to sell their own ebooks directly. Interesting times.

  • Guest

    Thanks, again, Mike, for another insightful post.It occurs to me that another way to frame one dynamic underlying several of the points you raise has to do with the way people are discovering g books. Over the last decade or so, we have shifted gradually away from being a book culture that finds browsing and leisurely in-store shopping appealing. The increased demands on our time (real or imagined) and the declining opportunities for quality in-store book discover has fundamentally changed the dynamics of where and why books are discovered. How books of trusted quality and relevance to our interests will be discovered in this emerging landscape hasn’t really take shape yet–if indeed it ever will, given the volume of content being published and the challenges of truly effective book-search functionality.

    • What you say is true. What is also true is that we have pretty much instant access to whatever we do discover. What is incontrovertible is that the mechanisms that enable a publisher to put a book in front of potential buyer are very different from what they were 10 years ago.

      • Guest

        I’m not sure I follow the relevance of “access” per se. While “the mechanisms that enable a publisher to put books in front of a potential buyer are very different” indeed, the more relevant point is that this role is increasingly theirs alone or at least predominately so, without the aid of brand recognition and the consumer trust that goes along with it. Social media platforms, for example, bombard us with book discovery and purchase opportunities from seemingly numberless authors and “publishers” but trust in the quality and relevance is increasingly questionable.

      • Peter, I am not sure that’s true. There are tons of references to books in online and social media, and not all of them are placed there by the dedicated efforts of the publisher. That is, “word-of-mouth” has been augmented by “word-of-net” in ways that may well make up for the media of the past, even if it is not identifiable. Publishers can help this along by using tools: Ron Martinez’s Aerbook which makes a widget/card that is shareable and contains commerce options within, is such a tool. But even without that, people share on GoodReads, Facebook, Linkedin, and by forwarding things they’ve read or read about via email. Anybody getting one of those references can instantly buy whatever is being referred to. I suspect my partner in digital media, Pete McCarthy, would have a more scientific take on all of this, but I’m quite sure it is real.


      • Guest

        I think we may be saying the same thing. My point, additionally, was that with the explosion of book discovery opportunities there goes the question of consumer trust. In the “attention economy” of the net, *trust* is what seals the deal, something publishers and authors unknown to the potential consumer are in a poor position create. This is why I strongly believe the publishers of the future will increasingly be trusted brands (online booksellers and others) who are able to build community around books of trust-worthy quality and relevance.

      • Various “trusted brands” may develop bookselling capabilities to complement whatever else they are doing. But if you are saying that people will build book- (or content-) selling businesses around niches so that people “trust” their recommendations like the corner bookstore of the past, I really doubt it. The margins simply won’t allow it.

      • Guest

        I’m curious to hear what this conclusion is based on. Also, seems to be working just fine and there are other examples.

      • I find it hard to imagine how any retailer can match Amazon’s prices and have it work for them. So you have to have an audience that, for one reason or another, doesn’t care that you don’t. It seems to me that will always be limited in size. I just don’t think that curation and presentation are sustainable advantages unless prices are reasonably competitive. And, by the way, Amazon can make the “competitive price” problem more or less difficult product-by-product and niche-by-niche. So if you find their prices easy enough to match to build some business, they might notice you and make it harder to match in the future. And this is not a data-driven conclusion, just logic and intuition working.

      • Steven Zacharius

        So far Amazon has been able to cut the price on print and ebooks to whatever they like; even when they’re losing money on the sale. Most big bestsellers are discounted severely. When they wanted to go into the diaper business Jeff Bezos said he would give diapers away for free until would be forced to sell to him….and they did. Maybe at some point investors will demand more profits, but I don’t know when that’s going to happen. So for the short-term there is no way that anybody can compete with Amazon on print pricing in most cases. With digital there’s a little more competition but it’s still very tough to compete.

      • Thanks for that more-informed-than-mine view which totally conforms to what I expected.


  • The Article is quite informative, typical of the Western society. Highly cognitive based & highly analytical based. And of course in the environment of empiricism too. Never relying officially on any ‘anecdotal’ data. Always rather employing expressions like “NOT SURE about…” unless & until the statistically famous 95% or some other % stands out as the test of significance. The typical AGNOSTIC stance of a Scientist, always remaining on the ‘safe’ side about endorsing anything special…so long the *Empirical Research* still does not come at an end.

    I am from INDIA, the Eastern society, & the land of *Conceptual Research*. My INTUITION is that (I’m not saying that I’m a great practitioner in the Conceptual Research, but I’ve tried something in this direction) —

    There are some ‘invisible’ causes behind this E-book Sales Plateau. [Which are not being fully addressed in the contemporary Internet Articles/Mini-articles/Blog-posts, so far my experience goes at the moment.] Some people are citing *Financial Recession* in general, some bring in the ‘theory’ of the *Early Adopters* of Ebook, some others may be attributing to the most modern developments in the Ebook-to-Ebook piracy (say in the cloud) & yet others may be advocating that people’s reading habits are distracted in the current state of the social media…

    But we need to discover the UNDERLYING or the DEEPEST or the MAIN cause first.

    • If you find that underlying and deep main cause, we’ll want to know about it.

      I don’t think the recession has anything to do with the slowdown. eBooks are cheaper. If anything, the recession should stimulate their sales.

      • I believe that there is a serious sampling problem in the realm of Ebook-selling. Whereas in the Brick-&-Mortar bookstores, the world has still seen the best of the browsing/testing for this purpose.

        In the subject of Statistics, this can be perhaps called UNBIASED random sampling (the case of Physical Bookstores). Although the general public may not know such terminology, they *subconsciously* sense the full concept.

        On the other hand, let us assume that Google/Apple/Sony/Kobo/Smashwords offer even more % of sample pages than the physical browsing experience. Even then also, people could suspect if the rest of the E-book contains significant weaknesses — maybe even sabotaging the book theme itself — in terms of Writing or Content (& not essentially formatting/spelling/etc type of mistakes).

        Robert Levine announced a nice concept in a YouTube video (I heard last year). He was saying that Books are not like Softwares in the sense that while each addition to a software does improve it, any more pages/writing added to a book *DO NOT necessarily* increase its value (in fact, the ‘addition’ can even sabotage the whole book). The people subconsciously sense this too, even if they haven’t typed the name “Robert Levine” in the YouTube search box.

        The online book sampling *DOES NOT* represent the Book. There are always some pages selected as NON-SAMPLE and they are hiding in the Ether.

        I call this problem a WALL in the Ether. The Producer is hiding a portion of the Book behinfd this wall. Leading to Consumer’s RISK.

      • Obviously, to the extent you can, you pick the sample that you think will appeal most to the audience that might select it. What you say about the consumer expectation seems reasonable, but I’m not sure we actually “know” it. I wonder what could be learned here around the “search inside’ feature that enables the reader to, essentially, find their own sample. And, of course the consumer takes a risk with any straight text book they buy in a store, too. You wouldn’t read enough of it to know for sure you’d like it all, even if the book were in your hands.

      • True, that even the Brick-&-Mortar bookstores carry the concept of the Consumer’s Risk. Especially for a straight text book where the value seen in the sample (e.g. seemingly indicating that the book is giving rise to a great plot…) could not only be *not enhanced* in the rest of the pages but even rendered *zero* if the writer only had language skill etc and not the ultimate content-integration skill.

        But in a PHYSICAL bookstore this risk is relatively minimized (overall) as it is minimized for the OTHER kinds of books i.e. Non-fiction books e..g. How-to/Art-picture/Travel-guide/etc types of books.

      • Yes, there are some clear advantages to buying books in a bookstore, one of which you have identified and given a name. Then there are the disadvantages, mostly around convenience, and the something-less-than-all books being affected by the “consumer risk”. I’m not sure this is an affect that tips the scales very much in bookstore attrition.