The disruption of the disruption is temporary
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 BestLittleBookshop.com. 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.