Our May 29 conference is built around the theme of “scale” in our business, which means something different than it did a very short time ago. Usually “using scale” means “employing the competitive advantages of size” but it can also be leveraging efficiency; the key beneficial characteristic of scale is that unit costs decline with increased activity.
In times past in publishing, the advantages of scale included lower printing costs (bigger companies doing more volume get better prices); lower warehousing and systems cost (because operations almost always get cheaper on a unit basis as they get bigger); and more revenue for each unit sold (because bigger publishers with better lists could get retailer and wholesaler customers to buy at slightly lower discounts).
All of these scale advantages were centered around what has been the core capability of a book publisher: to put books in sight and in reach of consumers on retail shelves. For the better part of the past 100 years, the publisher who could do that more effectively than its competitors had a significant advantage in the marketplace.
But with more and more of the business of customers finding and buying books shifting away from stores, those scale advantages are both reversing in reality and diminishing in importance. Publishers who had built great systems, efficient warehouses, and a nonpareil sales network find them managing less and less “throughput.” That means that less of their business is taking place in their scale-advantaged activities, but it also means the price of maintaining them is going up on a unit basis.
That’s why you see the two Big Six publishers who have invested most heavily in their scalable activities — Random House and Hachette — most active in competing with Ingram and Perseus (two companies far more dedicated to providing services) pursuing distribution clients. They can offer the benefits of their scale pricing to clients and, at the same time, preserve those benefits for themselves as the print-to-store segment of their business diminishes.
The shift in the business to online discovery and purchase would, at first glance, seem to have a leveling effect. Scale in reaching customers that used to require big publishing operations are now largely offered by Amazon, Apple, and Google. When you “searched” for a book in stores (whether you knew you were searching for that specific book or not), you might find it there and you might not. And you were ever so much more likely to find it if the publisher had a stack of copies in the front than if they had one spine-out copy in a store section. Those distinctions aren’t nearly as determinant of whether you’ll find a book at Amazon, or have it suggested to you by Google.
So the smartest big companies have focused on where scale can benefit them in the new context. Brian Murray, the CEO of HarperCollins, made the point to me over a year ago that his company was advantaged because they were launching books by the dozen into the marketplace every week, and each one gave them an additional opportunity to learn about search optimization, customer reactions, and how various tools from Facebook to Pinterest worked to boost awareness and sales. He was confident that the volume of activity they engaged in provided its own scale advantage.
As former Random House marketing strategist Pete McCarthy will make exceedingly clear in his introductory remarks at our May 29 show (and will amplify considerably at the Marketing show we’ll hold on September 26 just about to be announced), publishers can and should plan and execute all their marketing efforts in a holistic way to keep learning both about the components of the marketplace environment and about individual consumers. And, yes, the bigger companies will have a definite scale advantage in doing that.
But in our increasingly unbundled book business, “scale” — unit costs going down with increased activity — can be applied to niches with precision.
Companies like Hay House and Harvard Common Press and even F+W Media are relatively tiny compared to Random House (even before the Penguin acquisition) or HarperCollins or Hachette, but their focus on specific audiences means they may learn more on a niche-by-niche, or even customer-by-customer, basis than the big guys do.
I keep being amazed at what my longtime clients at Vogue Knitting can do on the back of a relatively small-circulation magazine brand in a niche market, including staging phenomenally successful and profitable live events that will ultimately dwarf the returns from their book publishing efforts (and augment them at the same time). But they can truly apply the scale they have reaching the audience of people who knit and want to know more about it. Nobody can do it as effectively as they can.
(I’ve told this story before. An agent told me several years ago that he had sold a mind-body-spirit title to Random House and that they sold 12,000 copies. He sold the author’s second book to Hay House, a MBS publisher, and they sold 200,000 copies. At that time, I believe Hay House had about one million email addresses of MBS-interested people. They undoubtedly have many more now. That’s people that you can mail to free; scale doesn’t come more starkly presented than that. For MBS scale, Hay House is the 800 pound gorilla.)
What we’re beginning to see repeatedly is that scale can be provided from a position outside publishing. One of our panels on May 29 is of new publishers that work from a base outside the publishing business. Two major daily newspapers (the Chicago Tribune and the Toronto Star), a kids’ animation studio (Frederator), and a business school (Wharton) all have publishing programs. They’re built on their own scale, and they have cost-effectiveness both on the content creation side and the audience-reaching side of the spectrum of publishing activity provided by their existing activities.
Publishers have watched Amazon come into the publishing business employing their scale. They’re now seeing Google do the same thing. Google’s entrance is in a self-created game niche, apparently far less threatening than Amazon’s far-reaching multi-genre plus general publishing approach to signing up titles many publishers might also be competing for. (How long before Apple decides to publish some books?)
These cuts to the commercial publishers’ share of the market are coming from literally thousands of directions. Each is a relative pinprick, but cumulatively they could lead to a lot of bleeding. Will the “scale” that a big publisher can bring to marketing from the experience they have with thousands of titles from across the interest universe provide a proposition that gets them into the game for the biggest commercial-potential books that can be produced by this new myriad of players? If there is truly scalable marketing activity, it should only become more efficient by adding relevant titles to its activity base. That would seem like the modern publishing equivalent of the perpetual motion machine.
I’m not smart enough to know if that’s possible, but I don’t think we’d even be asking the question if bookstores had the share they had five years ago.
A dramatic demonstration of the opportunities that can be provided by scale occurred yesterday, when Amazon announced its new initiative “Kindle Worlds” around fan fiction. Fan fiction has existed in a commercial box; because it depends on using characters invented and owned elsewhere, it couldn’t be sold. But the all time record bestseller “50 Shades of Gray”, liberated by rewriting away from the “Twilight” characters that spawned it, showed the powerful commercial possibilities in the genre.
So Amazon is applying scale to create a whole new commercial enterprise. First, they are licensing the rights to material fans can turn into their own stories, starting with properties from Alloy Entertainment but clearly planning to build out from there. Then Amazon will sell (and own copyright) in the output, using its huge audience as a commercial launching pad and paying royalties to all the stakeholders. Everybody in the game wins: the originators, the fans who create the fiction, the fans who buy and read the fiction, and, of course, Amazon.