The Shatzkin Files


Full-service publishers are rethinking what they can offer


At lunch a few months ago, Brian Murray, the CEO of HarperCollins, expressed dissatisfaction with the term “legacy” to describe the publishers who had been successful since before the digital revolution began. For one thing, he felt that sounded too much like “the past”. “We need to come up with a different term,” was his assessment and he suggested that perhaps “full-service” was more apt.

I find I keep coming back to “full service” as an accurate description of the publisher’s relationship to an author. That’s what the long-established publishers have evolved to be.

It would be disingenuous to suggest that publishing organizations were deliberately created as service organizations for authors. They weren’t. In fact, as we shall see, the service component of a publisher’s DNA was developed in service to other publishers.

My Dad, Leonard Shatzkin, pointed out to me 40 years ago that all trade book publishing companies were started with an “editorial inspiration”: an idea of what they would publish. Sometimes that was a highly personal selection dictated by an individual’s taste, such as by so many of the great company and imprint names: Scribners, Knopf, Farrar and Straus and Giroux, for examples. Random House was begun on the idea of the Modern Library series; Simon & Schuster was started to do crossword puzzle books.

That is: people had the idea that they knew what books would sell and built a company around finding them, developing them, and bringing them to market.

And the development and delivery to the market required building up a repertoire of capabilities that comprised a full-service offering.

The publisher would find a manuscript or the idea for one and then provide everything that was necessary — albeit largely by engaging and coordinating the activities of other contractors or companies — to make the manuscript or idea commercially productive for the author and themselves.

The list of these services describes the publishing value chain. It includes:

select the project (and assume a financial risk, sometimes relieving the author of any);

guide its editorial development (although the work is mostly done by the contracted author or packager);

execute the delivery of the content into transactable and consumable forms (which used to mean “printed books” but now also means as ebooks, apps, or web-viewable content);

put it into the world in a way that it will be found and bought (which used to mean “put it in a catalog widely distributed to opinion-makers or buyers” but now largely means “manage metadata”);

publicize and market it;

build awareness and demand among the people at libraries and bookstores and other distribution channels who can buy it;

process the orders;

manufacture and warehouse the actual books or files or other packaged product;

deliver;

collect;

and, along the way, sell rights to exploit the intellectual property in other forms and markets, including other languages.

It has long been customary for publishers to unbundle the components of their service offering. The most common form of unbundling is through “distribution deals” by which one publisher takes on some of the most scaleable activities on behalf of other smaller ones. It has reached the point where almost every publisher is either a distributor or a distributee. Many are depending on a third party, quite often a competing publisher, for warehousing, shipping, and billing and perhaps sales or even manufacturing. All the big ones and many others, along with a few companies dedicated to distribution, are providing that batch of services. It is not unheard of for one publisher to do both: offering distribution services to a smaller competitor while they are in turn actually being distributed by somebody larger than they.

An assumption which influenced the way things developed was that the key to competitive advantage for a publisher was in the selection and editorial development of books and in their marketing and publicity, which emerged organically from their editorial efforts. All the other functions were necessary, but were not where many editorially-conceived businesses wanted to put their attention or monopolize their own capabilities.

About 15 years ago, working on VISTA’s “Publishing in the 21st Century” program, I learned the concept of “parity functions” in an enterprise. They were defined as things which can’t give you much competitive advantage by doing them well but which can destroy your business if you screw them up. This led to the conclusion that these things were often best laid off on somebody else who specialized in them, leaving the publisher greater ability to focus on the things which truly and meaningfully differentiated them from competitors.

Another driving force here was the way that bigger and smaller publishers look at costs and scale. If you’re very big, it is attractive to handle parity functions as fixed costs: to own your own warehouse, have a salaried sales force, and to invest in having state-of-the-art systems that do exactly what you want them to do. If you’re smaller, you often can’t afford to own these things anyhow and, on a smaller base, fluctuations in sales could suddenly render those fixed costs much too high for commercial success.

It is therefore more attractive to smaller entities to have these costs become variable costs, a percentage of sales or activity, that go up when sales go up but, most importantly, that also go down if sales go down. And the larger entity, by pumping more volume through their fixed-cost capabilities, subsidizes its own overheads and improves the profitability and stability of its business.

One of the things that is challenging the big publishers — the full-service publishers — today is that the unbundling of their, ahem, legacy full-service offering has accelerated. You need scale to cover the buyers and bill and ship to thousands of independent accounts. If you’re mainly focused on the top accounts — which today means Amazon, Barnes & Noble, Ingram, and Baker & Taylor for most general trade publishers — you might feel you can do it as well or better yourself with one dedicated person of your own.

And if you’re willing to confine your selling universe to sales that can be made online — print or digital — you can eliminate the need for a huge swath of the full-service offering. Obviously, you give up a lot of potential sales with that strategy. But the percentage of the market that can be reached that way, combined with the redivision of revenue enabled by cutting the publisher out of the chain, has made this a commercially viable option for some authors and a path to discovery for others.

So the consolidation of business in a smaller number of critical accounts as well as the shifting of business increasingly to online sales channels has been a challenge for some time that larger publishers and distributors like Perseus and Ingram have been dealing with.

But now the need for services and the potential for unbundling is moving further up the value chain. The first instances of this have been seen through the stream of publishing efforts coming directly from authors and content-driven businesses like newspapers, magazines, and websites.

To the extent that the new service requirements are for editorial development help and marketing, it gets complicated for the full-service publishers to deal with. The objective of organization design for large publishers for years has been to consolidate the functions that were amenable to scale and to “keep small” the more creative functions. So it is a point of pride that editorial decisions and the publicity and marketing efforts that follow directly from the content be housed in smaller editorial units — imprints — within the larger publishing house.

That means they are not designed to be scaleable and they’re not amenable to getting work from the outside. It’s much less of an imposition for somebody in a corporate business development role to ask a sales rep to pitch a book that had origins outside the house than it is to assign one to an editor in an imprint. The former is routine and the latter is extremely complicated.

But what does this mean? Should publishers have editorial services for rent? Should they try to scale and use technology to handle editiorial functions — certainly proofreading and copy-editing but ultimately, perhaps, developmental editing — as a commodity to assure themselves a competitive advantage on cost base the way they do now for distribution? Should publishers try to scale digital marketing? Should they have teams that can map out and execute publishing programs for major brands?

The way Murray sees it, a major publisher applies a synthesis of market intelligence and skills that can only be delivered by publishing at scale. He believes that monitoring across markets and marketing channels along with sophisticated and integrated analysis of how they interact provide an unmatchable set of services.

The scale challenge for trade publishers to collaborate with what I’m envisioning will be an exploding number of potential partners is to find ways to deliver the value of the synthesized pool of knowledge and experience efficiently to smaller units of creativity and marketing.

There is plenty of evidence that publishers are thinking along these lines. The most obvious recent event suggesting it is Penguin’s acquisition of Author Solutions. Penguin had shown prior interest in the author services market by creating Book Country, a community and commercial assistance site for genre fiction authors. Penguin suddenly has real scale in the self-publishing market. They have tools nobody else has now to explore where services for the masses provide efficiencies for the professional and how the expertise of the professionals can add value to the long tail.

There are initiatives that stretch the previous constraints of the publisher’s value chain that I know about in other big companies, and undoubtedly a good deal more that I don’t know about. Random House has a bookstore curation capability that they’ve coupled with editorial development in a deal with Politico that could be a prototype. Hachette has developed some software tools for sales and marketing that they’re making available as SaaS to the industry. Macmillan has a division that is developing educational platforms that might become global paths to locked-in student readers. Scholastic has a new platform for kids reading called Storia that involves teachers and parents that they’d hope to make an industry standard. Penguin has a full-time operative in Hollywood forging connections with projects that can spawn licensing deals. Random House has both film and television production initiatives.

These developments are very encouraging. One of the reasons that Amazon has been so successful in our business is that our business is not the only thing they do. One of the elements of genius they have applied ubiquitously is that every capability they build for themselves has additional value if it can be delivered unbundled as well. Publishers were comfortable with that idea for the relatively low-value things that they do long before they ever heard of Amazon. It is a good time to think along the same lines for functions which formerly seemed closer to the core.

Speaking of which, many of publishing’s most creative executives will be speaking as “Publishing Innovators” at our Publishers Launch Frankfurt conference on Monday, October 8, 10:30-6:30, on the grounds of the Book Fair. 

We did a free webinar with a taste of the Frankfurt conference last week and it’s archived and available and worth a listen. Michael Cader and I were joined by Peter Hildick-Smith of The Codex Group, Rick Joyce of Perseus, and Marcello Vena of RCS Libri.

Dominique Raccah of Sourcebooks, Helmut Pesch of Lubbe,  Rebecca Smart of Osprey, Anthony Forbes Watson of Pan Macmillan, Ken Michaels of Hachette, Stephen Page of Faber, and Charlie Redmayne of Pottermore (as well as Joyce and Vena) will all be talking about initiatives in their shops that you won’t find (yet) going on much elsewhere. And that’s just part of the program. There is a ton of other useful information — about developments in the Spanish language, the BRIC countries, the strategies of tech giants and how they affect publishing, and much more — that will make this the most useful single jam-packed day of digital change information you’ll have ever experienced. We hope to see you there.

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  • Lloyd Tosoff

    Great and insightful article

    • http://idealog.com/blog Mike Shatzkin

      Thank you.

      Mike

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  • Caleb Mason (from Publerati)

    I think the big question not being addressed by “legacy” publishers is how can they compete in the new future while burdened by the heavy costs of their past and current operations?

    Two good examples from the death of 35mm photography are Polaroid and Kodak. The former moved at a snail’s pace as Epson made the first digital cameras only to eventually have their brand sold off and affixed to DVD players. Now their iconic building on Route 128 lies in ruins.

    Kodak was also slow to embrace change while giving up high margins from their film and camera lines to move into digital. But they actually did end up making a strong move into digital but never shed the “legacy” business cost structure to be viable. In addition to that cost structure were the many new investments required to play in the new digital game. (Which makes me think about the poor book publishing production managers trying to reinvent themselves as technologists, whom I would not bet on being successful knowing what I do about Silicon Valley costs of software development, maintenance, and expensive staff resources required to keep up with every new piece of hardware hitting the market year after year, along with firmware updates.) This is definitely not the old quaint world of last
    century’s book publishing.

    The decline will accelerate when B&N starts closing down more superstores after this holiday season, as print books surely do not warrant so much retail space when other mainstream product classes such as pharmacy, music, and electronics do not (I’m thinking of Circuit City and CompUSA in part but also all the drug stores now inside supermarkets and then Blockbuster, NewEgg…).

    I have seen a lot of demolition in other business categories so when looking at the book industry it strikes me like a sad “old movie.”

    The Gods gave us two great gifts — denial and rationalization. To that I
    can only say “Thank You, Dear God.”

    • http://idealog.com/blog Mike Shatzkin

      Caleb, you’ve definitely put your finger on a critical problem. Publishers have built very large and capable organizations around the core proposition of “we can put books on shelves” and that has diminishing value. In fact, a key question is how long the print piece will remain “relevant”.

      The answer so far is that for immersive reading (novels and narrative non-fiction), the sales seem to be in a band of 35-65 percent digital. But for everything else — cookbooks and travel books and art books and illustrated children’s books — ebooks aren’t making much of a dent.

      And stores still have a disproportionate impact on getting books rolling.
      The stats say that the migration to digital has slowed down sharply. It had been reliably rising by double or triple per year; this year it seems to be rising by about 20%. Two majors have recently reported that digital is 27% of their revenue (because of the differential impact I mentioned across the list).

      And B&N has already sharply reduced the store space for books. Borders went out of business and a lot of independents are doing well right this minute.
      So while I don’t dispute the overall thrust of your concerns, I think both that the publishers are aware of it and are addressing it and that the apocalypse is a little further off than you describe.

      Mike

      • Caleb Mason (from Publerati)

        Mike,

        Thanks for your reply but the denial I hear in your response sounds so much like what Kodak, Konica, Sony, and others were saying in 1997. Or what Palm was saying in 1999. The changes came faster than anyone thought. (Do you know how many fewer photo prints are printed today than were in 1995? The photo industry looked at the people talking about camera phones back then like they had two heads. Now look where we are.)

        The core message I want to try and get across is that the giant publishers will have to reduce overheads far beyond what they now imagine, which was the miscalculation Kodak made. You have to make a clean break to go forward, so the “legacy” print categories of art books and children’s books will need to pay for themselves while the old cash cow reference category and novels and nonfiction provide them with much lower margins compared to what they are used to (as prices come down).

        I believe we have hit a temporary plateau that will once again move to new lows in the next wave of cheaper tablets and demographic changes in the population. I could not believe how many ereaders I saw at the beach this summer.

        It is probably time for the young people to take over from here and I am sure they will do a wonderful job defining the new future for us all. Just look at how important Goodreads has already become to publishers and authors alike.

        — Caleb

      • http://idealog.com/blog Mike Shatzkin

        Caleb, a consultant I work with said in 2010 that publishers would have to cut their legacy costs by 50% in this decade. I don’t think there’s any lack of commitment to that idea.

        And I completely agree that where we are right now is a plateau. But if we’re on a plateau, B&N might not need a big reduction six months from now. (I’m not saying they *won’t*, but I think the odds are better than 50-50 that they’ve cut enough for a while already.) Your tone suggests that you think it is unreasonably Pollyanish to resist the idea that the world will end next Spring.

        The book business will definitely be roiled. There will definitely not be six major trade publishers 10 years from now, and probably not five years from now. But it won’t change this year.

        And I think projecting the future of a content business from the fates of technology businesses is a misapplication of experience. The fact is that the book business is many businesses and what will happen (and has happened) to major commercial fiction is different from what transpires with romance fiction, let alone political biography, classics, and books on how to knit. And they’re all different from school and college textbooks and books for lawyers and accountants and options traders, all of which face their own different sets of challenges and changes.

        The revolution is moving at different speeds in different genres. But, so far, the margins for big trade publishers have been preserved in the shift from print to digital. It won’t stay that way, but predictions of *imminent* apocalypse
        are not supported by the most recent evidence.

        Mike

      • Peter Turner

        In reference to your point, Mike, about “getting books on shelves,” what I don’t understand is how publishers can effectively shrink the overall cost of the print supply chain to fit diminishing demand. Warehouses, conveyor belts, sorters, labor, electricity, etc.–these are largely fixed costs. I understand that some publishers are pushing the print distribution function off on to other providers or already use distributors, but this only shifts this cost downstream. I suppose if distributors and fulfillment providers consolidate then they’ll be okay but the publishers that do have warehouse facilities seem to be in a fix, no? I know that Random House has “doubled-down” on their warehouse, with recent investments in efficiency, but I don’t see how this isn’t a loosing proposition unless they can make up for lost print volume (perhaps by taking on new distribution clients).

      • http://idealog.com/blog Mike Shatzkin

        The short answer to your question is “consolidation”. Random House is doing distribution for a lot of other publishers besides themselves. Perhaps even before we see one Big Six house acquire another, we’ll see one Big Six house *distribute* another.

        And when you — as you put it — “push those costs downstream” — you also turn them from fixed costs to variable costs. That’s the key.

        And let’s remember that the vertigo period of digital switchover has passed. If change is 10% to 20% per year, there are a lot of ways to cushion that. And that’s what it seems to be now. It may slow from here.
        Mike

      • Peter Turner

        Thanks, Mike. One thing I’ve noticed, which reinforces one of your observations, is that there is stiff competition for distribution clients and publishers and distributors are trying to sweeten their appeal by offering services rather than cutting fees. I know the margins in the distribution business are very, very thin. On the positive side of the balance for publishers with distribution clients and for distributors is that many owners of smaller publishers are coming to an age where they’re thinking about selling. Distribution is often seen as a stepping stone in that direction. And I hear rumors of a few publishers who are shedding sales and fulfillment functions and moving to distributors.

      • http://idealog.com/blog Mike Shatzkin

        There have certainly been instances where distributors have bought lines they were handling as a cleaner way to deal with financial problems at their client than just letting them go under. The distribution marketplace is very active. Perseus, Ingram, and Random House are the current market leaders but there are plenty of others competing for lines.

        Mike

  • Guest

    Hi Caleb,

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  • EricWelch

    I love bookstores and libraries but the siren song of having access to millions of titles available instantly through digital processing cannot be matched by simply business-as-usual and “rebranding” (usually the harbinger of death throes for a business.) Bookstores, should they wish to survive will have to match the capabilities of Amazon digitally. Publishers could cut distribution costs but moving more into POD. Put some POD machines with access to millions of titles in bookstores to capture the local writer market as well as serve those who like the ambiance of the bookstore. You could reduce the size of the store, reduce inventory costs, yet increase access. Put some of those lawyers to work at getting POD rights with higher royalties as incentives. Return rates of books appallingly high and would be supported by no other business that wants to remain profitable. Many ideas won’t work, but goodness, they need to do something different.

    • http://idealog.com/blog Mike Shatzkin

      I’m not a believer in in-store POD, for a variety of reasons that probably deserve their own post, but I’ll leave you with one.

      It takes about 5 minutes to output a book from an Espresso machine (if it is working okay.) That’s fine,, as long as it isn’t successful.

      But if it *is *successful and there are four people in front of me in line, then the whole notion of instant delivery is out the window.

      What stores who have put in these machines have found is that they sell far more locally-self-published books than they do from the Lightning catalog of millions of titles. That’s great but a) the key then is the front end help, giving people the assistance they need to turn their box of words and pictures into a designed PDF fit for printing (which is what all these stores have found they *do* need) and b) might as well print it at Lightning. They deliver in 24 hours (a weak comparison with buying it off a shelf but not a problem if your locally-created book took a few weeks to design) and have far more flexibility in formats and higher quality than the in-store machines.

      If somebody is going to make a bookstore like this, far better to start with a Kinko’s than with an existing bookstore.

      Mike

      • Peter Turner

        Mike, we’ve kicked the viability of in-store POD around before. I understand and appreciate your view. I can’t help but wonder if early investors in Starbucks wondered why anyone would wait 5-10 minutes plus to get a cup of coffee.

      • http://idealog.com/blog Mike Shatzkin

        Not sure that’s relevant. You would never order a cup of coffee for delivery tomorrow. You’d never consume part of a cup of coffee you bought today next week. And you want your coffee hot.

        So far there is not one store I’ve heard of that put in an Espresso machine and reported a significant lift in book sales as a result. In fact, one owner reported to me that part of the strategy she and others were executing was to “beat Amazon” by being able to offer same-day delivery. She told me that at the beginning of July. You might recall that Amazon made an announcement since then that they were going to be able to make same-day delivery to a big part of the country before very long.

        This is, at best, the equivalent of using a hydraulic press to kill an ant. Most likely, it is a massive waste of capital, space, and management attention compared to many alternatives that would be far more productive.
        Mike

      • Peter Turner

        I was replying to your comment about the time to print the book and questioning if the wait time was critical. Nothing else. I can reply more fully if you’d like but I doubt it’s worth the effort as it seems like you’ve decided what you think about in store POD a long time ago. (Note: I have in the past done consulting work for On Demand Books, the folks who make the Espresso Book Machine.)

      • http://idealog.com/blog Mike Shatzkin

        It’s speculation on either of our parts. I start out thinking it never made any sense to me (which is what I told the On Demand people when we spoke at Frankfurt two years ago) for the reasons I’ve said. At that time, the only case I knew was University of Alberta — great fellow there who put it in and did imaginative things with it. But it was all about local self-publishing. Since then, every single store I’ve heard talk about the success of it has talked about the local self-publishing. The original “vision” of it as a way to reduce inventory and deliver backlist hasn’t panned out. I don’t think it ever will.

        I’ve been wrong before but so far the evidence I have seen over the past couple of years as there have been more machines supports my original opinion. And I still think somebody’s missing a BIG boat by not putting a self-publishing front end package together for every bookstore in America. Printing the books at Lightning.

        Maybe Penguin and Author Solutions will figure that out. Barnes & Noble should have done it themselves and still could. The ABA could develop a module. The Espresso HAS proven that bookstores are a great front door for self-publishing services.

        Mike

      • Peter Turner

        I don’t want to belabor this, Mike, as I doubt anything information or opinion I offer on this front will be of any value to you. I don’t want to leave this discussion without saying that self-publishing services of various sorts are integral to the Espresso’s current business plan. I don’t want it to seem that I’m denying this. It is common in fact, essential, that new technologies and new ventures pivot in response to customer response.

        The other key piece of the business model is to provide traditionally published content at retail–titles that are either out of stock or not generally carried. The viability of that model *may* be undermined by Amazon’s same day delivery service. But to say that this model doesn’t make sense is indeed pure speculation, as it’s never been tried. The 6 million or so titles available on the Espresso are by their nature not likely to sell. Why? The available title base almost exclusively consists of public domain titles and some titles available via Lightning Source’s existing POD service. (Ingram is a partner with Espresso.) If these books were marketable they wouldn’t be available only via these sources. So, by definition, this business model has not been tested. That is starting to change, as publishers like Harper come on board. (Brian Murray has been a strong supporter.) So, while I would never speculate that sell publisher content IS a viable business model (as there is no real data), I really don’t see how one can argue the negative. The jury is out.

        More interesting–as it highlights an underlying supply chain concern of major publishers–is why they don’t want to make their titles available via the Espresso network.

        Peter

      • http://idealog.com/blog Mike Shatzkin

        I was an advocate to Ingram of making their titles available through Espresso and I applaud Harper for trying an experiment. Even though I don’t think it will work.

        In fact, Harper *very* smartly made some sort of a vendor-managed inventory program a companion requirement for a store using Espresso. I will bet dollars to donuts that they’ll get a lot more profit out of the VMI than they will from sales through the Espresso machine.

        I can’t take seriously the idea that self-publishing is really “part of the plan” because, if it were, they’d have designed a slick front end and it would be in a LOT of stores that don’t have the machine. Because it requires a lot less capital to do than the machine.

        Books aren’t coffee. They don’t need to be served hot and in 15 minutes. For most books that are in the long tail most of the time, delivery in 24 hours is only worth beating if you can do it *very* efficiently.

        If you think the actual mission of the machine isn’t being tested because the title base isn’t there, I think the right thing to do would be to say to a store thinking about it “wait until the title base is big enough to make it make sense.”

        Even then it won’t, but at least it would have a chance! In the meantime, “design a front-end for self-publishing that really performs that service” is better advice to any bookseller. At least that’s what they’d hear from me.

        Mike

      • Peter Turner

        I think if you can’t take seriously what I’m saying says it all. I’ll save my efforts for people who are interested in dialog.

      • http://idealog.com/blog Mike Shatzkin

        I think you’ve ignored my points much more adroitly than I’ve avoided yours.
        If it’s about selling backlist, then — as you say — it doesn’t really work until it has a title base.

        If it’s about selling self-publishing, then tell me there isn’t a better way to stimulate and serve that business than putting a machine in your store.

        I don’t begrudge you your business relationship with Espresso, but when you don’t answer the points I’m making, I gotta suspect that loyalty may have more to do with your opinion than logic.

        Mike

      • Peter Turner

        Mike, give me a break. I’m happy to answer your questions or reply to your points, but what IS the point if you don’t take seriously my comments and question my interest in logic over opinion. You know me well enough to go there ;-) In any case, like I said, that’s not a good basis for dialogue.

      • http://idealog.com/blog Mike Shatzkin

        Sorry you take umbrage. I don’t get why. You yourself say the model can’t be demonstrated yet with the title base in place.

        Maybe somebody will make a decent self-publishing front end, put it in every bookstore in America, and demonstrate what I think would be a much more useful model for *that* piece of it. And when the day comes that enough of a title base is loaded to perform a meaningful experiment about selling backlist, we can find out about the rest. Stuff that, as you point out, sells very slowly and is hard to get doesn’t suddenly sell a lot more because it can be delivered a day faster.

        Mike

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  • http://www.facebook.com/people/Steve-Smith/100001740549917 Steve Smith
    • http://idealog.com/blog Mike Shatzkin

      Alas, Bob Kohn’s cartoon brief. Amusing and enlightening but unsuccessful.
      Mike

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