The Shatzkin Files


What I was thinking when I said that wild stuff


At our Publishers Launch Conference on the Wednesday of BEA, Michael Cader and I introduced a new feature we think will become regular at our events: a candid 1-on-1 conversation between us. It went well.

In fact, it went so well that what reads like a pretty damn accurate verbatim account of much of it constituted a story for Ed Nawotka at Publishing Perspectives. So, now, thanks to Ed, much of the world knows that I made a number of pretty bold forecasts, probably the boldest of which is that we’ll see the US market boil down to one dominant trade publisher over the next 10 years.

There are a lot of unexpressed assumptions in that calculation. And, in the “predicting the future” part of my business, when I say 10 years I don’t count myself “wrong” if it takes 15. So, with thanks to Ed for reporting me accurately, it seems worthwhile to elaborate a bit more on what I said last week.

Operating with absolutely no “inside” knowledge, I outlined two expectations I have for initiatives we’ll see from Penguin Random House, about which I’ve written before. One is that they’ll create an ebook subscription offering which operates exclusively for their own books. The other is that they’ll apply the knowledge they’ve already gained about vendor-managed inventory (VMI) to create book departments within stores of all kinds, taking advantage of the reduction of shelf space in dedicated bookstores and the related challenges facing all other retailers to maintain top line revenues for whatever is their line of business as sales of all things, not just books, migrate online. Both of these capabilities could also be extended to include their distribution clients; it might require some renegotiation of terms to do it, but it would almost certainly be seen as a beneficial add-on by the distributees.

If PRH did that, and if they hit my made-up-from-thin-air target of 1000 proprietary sales locations over a couple of years, the new trade behemoth would have a bigger distribution base than all the other trade houses to go along with their already-bigger checkbook. So the consolidation of the general trade business under them could occur author-by-author as contracts expire, not requiring them to buy or merge with other companies.

I think the ebook subscription service is a relative no-brainer, assuming Random House can come up with the deal structure to get big authors to agree to it and, without a third party taking out some of the revenue, that should be doable. They don’t need 100% participation; I’d guess that if half the big-brand authors go ahead, the others will follow and the rest should be delighted with the opportunity.

I also think that every major publisher should be offering an ebook subscription service for their kids’ books, because they all have extensive lists and major brand names for that market and subscriptions will prove a very convenient way for parents to give kids lots of reading material at a predictable cost as the book world goes increasingly digital. There are aggregators in the field doing that now across many publishers’ titles, but there might be room for a lot of offers here and the publishers would be wise to consider whether they do best by creating their own subscription offers, licensing their big brand content to aggregators, or doing both.

But the build-up of proprietary offerings at retail and the prediction that trade publishing will consolidate as radically as I forecast, depend on the future of consumer behavior which nobody, and certainly not I, can predict with any certainty.

What most industry observers track is how the percentage of a publisher’s revenue that comes from digital books is rising. That’s commonly considered to be in the 25-30 percent range at the moment, going up by perhaps 30-40% a year (so next year it might e 33-38 percent) after having been rising much faster in recent years. A more nuanced view of this recognizes that it is particular books that (so far) really sell in digital form — generally books you read from beginning to end rather than those you skip around or dip into or which require illustrations — while others do not. For fiction, we are likely at 50% or more digital for a high percentage of the titles published.

In fact, PriceWaterhouseCoopers, tracking ebook sales against print sales, believes that digital will exceed print in a pretty short time.

But an even more important index if you’re charting the future of publishing is what’s bought in stores versus what’s bought online. Obviously, all ebooks are bought online. But there’s pretty strong evidence that the percentage of print books sold online is still steadily rising. In our discussion on stage, Michael Cader (the most reliable source for industry facts there is) remarked on the fact that Amazon print sales are still rising; more slowly than before, but still rising. Juxtapose that fact against the reality that total sales of print books through retailers are not rising, and sales through bookstores are certainly shrinking and it is clear that the online share of print sales is still going up.

I’m assuming that trend will continue. When bookstores close, the people who shopped in them often switch to buying online. When a bookstore reduces the selection of titles it offers, as Barnes & Noble certainly seems to have done, some of the people who browsed it are going to switch to browsing online. This leads to more stores closing and to more stores reducing their book inventory. It’s called a vicious cycle. It’s not a new concept.

Every publisher is trying to put print books into more retail places with great urgency. Some have better lists for it than others; some have better sales policies and other tools for it than others. But the barrier, most of the time, is that buying books is really hard for retailers. Each book is a unique product that has to be tracked uniquely and thought about uniquely and a store has to have at least hundreds, and preferably thousands or tens of thousands of them to be a decent place to shop for books.

That’s why vendor-managed inventory is so important; it can eliminate the need for the store to have book-buying expertise as a pre-condition for them to carry a decent range of books, even in a defined niche market.

So if PRH does what I think they will do and the shelf space for bookstores keeps shrinking and the share of book sales that take place in stores shrinks along with it, the position of other general trade publishers becomes increasingly difficult to navigate. PRH has additional distribution that nobody else has and the biggest checkbook among publishers. Amazon will have an increasing share of the potential market, so authors signing with them will be missing less and less eschewing what most publishers could give them beyond Amazon and the biggest checkbook of all.

Almost two decades ago, when the Internet first posed a threat to the business model for scholarly journals, I asked my friend, Mark Bide (now head of business development for Publishers Licensing Society in the UK), what would be the early warning sign that the traditional journals model is headed for trouble. He said “when the scholars stop submitting to the journals. As long as the scholars submit, their business will work.” In other words, the danger wasn’t so much losing their sources of sales as it was losing their sources of intellectual property.

It looks to me like that wisdom will apply to general trade publishers over the next decade or so.

In the discussion with Cader, we talked about how the other publishers might respond to this. It would take all four of them merging to present an equivalent title offering to PRH, and that would, at the very least, take some time. Another possibility is that a third party aggregator could create a competitive set of titles, or even do the job for the whole industry including PRH. But the challenge there would be terms; publishers need to give up margin to make this workable for a 3rd party, a problem PRH wouldn’t have on their own. And it is also true that PRH could probably complete its set of bestsellers if it had to by buying in those that it didn’t publish for this offering. One CEO I talked to about this nearly a year ago conceded that, if PRH went this way, that CEO’s company would almost certainly have to sell them whatever books they wanted.

And while this post is still extremely speculative, it has what might be the virtue of being fairly consistent with the thinking reflected in the speech I did at BEA six years ago predicting “the end of general trade publishing houses”. 

Final point on this one. I am not saying that nobody but one publisher will publish books that people will want. There will be publishers in many niches, including fiction niches. What I’m predicting is that the “general trade” model of a publisher that issues books on subjects across the board, trusting the book retailing system to sort out the books for the customers by subject and genre, will consolidate to a single player in the next couple of decades.

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  • Raj

    Hi Mike, a couple questions. First, is the Nielsen BookScan data fairly accurate, and if so, what do you make of the fact that their data indicate that print book sales in the US Retail & Club channel have only been down about 1% this year (setting aside the negative year-over-year impact on fiction of last year’s 50 Shades and Hunger Games that began in April)? Logically, if ebooks continue to grow, even if at a lower rate than before, then it’s surprising that print books would more or less have stopped shrinking. Given your view on ebook growth, do you think the BookScan data may be inaccurate (or susceptible to misreporting), or do you think there are other factors that are causing a pause in print book attrition? Any sense of what’s really going on from the publishers you talk to?

    Second, regarding what share of those print book sales will go to Amazon, do you have a rough idea how much Amazon is growing in print books in the US? Jeff Bezos said in the Q4 release that their print book sales were up only 5% in December, the lowest growth rate ever. However, I wasn’t sure if he was including int’l sales and therefore whether that growth rate might be higher than for their US sales. I’m trying to hone in on US sales because that would be apples-to-apples with the BookScan data mentioned above.

    Fyi, by my rough math, if US print book sales are declining at 1% annually, and if Amazon’s US print book sales are growing at 5% annually, and if Amazon represents a third of US print book sales, then bricks-and-mortar retailers’ US print book sales would be shrinking by 4% annually.

    Thanks so much for your insights.

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

      I think BookScan data is reasonably accurate. But “down 1%” could be “down 5%” or “up 3%” and that wouldn’t change my view. It isn’t *precisely* accurate.

      There are possible explanations for the numbers you are trying to reconcile. It could be that ebook purchasers ‘load up’ when they first start reading that way, which would inflate ebook sales for newbies, for example.

      Your math suggesting that bookstore print sales are shrinking 4% annually could be right, or it could be 6% or 8%. The more difficult question is whether that number will accelerate or slow down. There’s strong sentiment to believe that it is slowing down. I personally believe that’s a mirage and that it will accelerate because of the “vicious cycle” effects I cite in the piece.

      Mike

      • Raj

        Thanks, Mike. Your “horse sense” on these matters is valuable. Incidentally, I’ve noticed that the local B&N store in my neighborhood has trimmed its hours–it now closes at 10pm instead of 11pm on most weekdays. I’m sure they did a cost/benefit analysis and the labor savings outweighed the minor amount of lost sales, but to the extent it has a longer term impact on shopping habits, this could be another instance of the “vicious cycle” you mentioned… Shelf space availability, if you will.

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

        You make a good point, Raj. Internet shelves never close.

        Mike

      • Peter Turner

        Yes, this is what happened when the CDs format came on in the music industry; total units went up, as people converted their library to a new format. That dynamic resolved and then digital hit them like ton of bricks.

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

        Not sure it is really quite the same thing, Peter. Because of the nature of music consumption, the format change from vinyl to CDs necessitated people re-acquiring their libraries because the components of music libraries are frequently “re-consumed”. Not so with books. What I think is happening on the ebook side is simply the “books on the beside table” effect. Some people really like to have the next five or ten books they might read in their possession. And then they and others get hooked, at least temporarily, on the ease of obtaining a spontaneous purchase. So the effect wouldn’t be as great and the falloff might not be as dire.

        Mike

  • Mark W. White

    Coming from the magazine industry, I don’t think your vision of 1,000 vendor-managed book departments in non-bookstores is outlandish. There are at least several thousand supermarkets in the U.S. that sell magazines, with wholesalers rather than the supermarkets themselves managing inventory and merchandising. Plus discount stores, drugstores, etc. With an intelligent system (No, the magazine industry doesn’t have one, though Barnes & Noble seems close), a consumer could go online and determine what stores have a particular book in inventory.

  • Peter Turner

    Hi Mike: A couple of questions for clarification. How do you see a subscription model getting marketed–direct-to-consumer? Do the major trade publishers have the on-board expertise for such a strategy? Or are you imagining them working through Kindle, iBookstore, etc.

    On the vender management front, I don’t quite get why you think non-booksore outlets will be any more successful at selling books than traditional bookstores. Since sales are migrating online from traditional bookstores, why wouldn’t this be equility true (if not more so) for non-traditional bookstore outlets. In any case, as you know, these special markets tend to onlly support sales of select genres, gift books, instructional, etc.

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

      Two sensible questions.

      On the first, yes, I was talking about direct-to-consumer, Safari-like services, both for what I expect PRH to do for a general offering and what I was suggesting the majors do for subscription. Because there are a large number (I just counted six) different sources for a white label version of such a thing, the cost of putting it together isn’t steep. And the publishers all need to build direct contact; this becomes a means to do that in way that delivers revenue.

      As for the VMI-generated bookstores, their economics are completely different. They are already in business and want to make better use of some space to add sales to their traffic. I’m positing no (or very low) cost of buying or of inventory. And the size of the book “department” can be whatever the commerce can support.

      One of my premises is that step-increment reductions of shelf space (like chains closing or even making chain-wide decisions to reduce space allocations) will tend to lead the target, reducing faster than consumer demand goes down. I think that’s already happened with Borders closing and B&N’s recent reductions in shelf space, which is why it seems at the moment like indies are doing well.

      So, all in all, I think the economic comparison is apples and oranges.
      Mike

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