How many Christmases until we see a whole new industry?
John Makinson, the global CEO of Penguin, was quoted in a Reuters article saying that the post-Christmas period in publishing coming up is “tougher to predict” than “any time that I can remember”. Asked what he sees in the immediate future, Makinson replied “dark clouds”.
Makinson’s concerns reflect one we have written about many times in this space: the rise of powerful ebook vendors who are tech behemoths essentially replacing the network of brick bookstores, many of which were free-standing independents. (This is true in the UK, where Makinson is based, as well as in the US, for which he is also responsible. It will also happen everywhere else.) He made a very cogent point when he said that publishing has been driven more by supply than demand. He was quoted as saying “consumer taste doesn’t actually change all that much but what does change is the availability of books in different channels.”
He’s completely correct. Up until 15 years ago (the dawn of Amazon), only books that were on store shelves had much chance at all to sell. The biggest and most successful publishers today are still the ones which ascended because of their power to put books on those shelves. It is not the publishers’ fault or doing that this is changing.
Longtime industry executive and consultant Joe Esposito wrote a post around the Borders bankruptcy that makes this general point: publishers are part of an ecosystem that is changing in ways they can’t control.
The growth in ebook sales is not an unbroken line pointing up. Industry stats suggest that sales may even have slowed a bit in September compared to August. But this is the time of year when we get the next step-increment change in the publishing reader-supply network. Starting in November, 2007, when Amazon put the Kindle on sale for the first time, the Christmas season has been when the huge leaps in device ebook reader distribution take place. That includes a huge ebook sales day on Christmas itself followed by a couple of months when ebook sales reach new peaks.
This is inevitably accompanied by bad news from the brick book trade. Last year’s first quarter included the bankruptcy filing of Borders. Stores fight hard to keep their doors open through the Christmas season but, with each passing year, if they’re not selling ebook reading devices, they find disappintment more often than salvation.
One bookstore owner I know has been doing a great job; the store held its own despite the overall slide in print. The bookseller told me that this year, through October, sales at the store were down 5%. Not bad. They were down 2% year-on-year last year. They were down 1% year-on-year in 2009. And they had a record year for sales in 2008.
There’s a pattern there. The percentage reduction is doubling each year. When I said, “so you’ll be down 10% next year and 20% the year after that, right?” Bookseller said, “probably.”
Almost no brick store can stand a sales loss of 20% and remain viable. Maybe one could make up the 20% by selling something else in addition to books. But maybe branching out into other lines of merchandise will cost more than it will generate.
Maybe they won’t be able to hold even that 5% reduction through Christmas. And maybe the 20% we see as two years away is even closer.
Anecdotal reports abound that stores that are near where there formerly was a Borders are seeing a lift in sales. One sales executive I know speculated that B&N would pick up half the Borders business. Since Borders sales were a high double-digit percentage of B&N’s sales, that should provide quite a lift. But because B&N’s store sales now include Nook devices, we aren’t able to analyze very readily from their announced results what the trend of their actual book sales in the stores (or online) is. According to Michael Cader’s report of their just-announced results, B&N tells us that “physical book sales declined”.
As the digital sales of straight text books — which are estimated by some to be 75% of bookstore sales — routinely climb past 30% of the total units, there’s just less and less print business to go around. Ebook sales seem to have doubled again in 2011 from what they were in 2010. There are high expectations this Christmas for ebook reader sales, newly fueled by color tablet-like devices from Kindle, Nook, and Kobo (all on sale at consumer electronics outlets as well as at bookstores and online). That suggests (to me) that 40% or 50% ebook sales shares might be common by early 2012.
Borders was somewhere around 10% of the print book business when they disappeared. More than 10% of the business will have shifted away from brick stores to ebooks and online sales in the year following their bankruptcy announcement.
So the lift from picking up Borders business is unlikely to replace what brick stores are losing to more customers switching to ebooks and online buying of print. And that squares with what B&N just told us about their most recent reporting.
We are seeing sales staff reorganizations all over town and in the UK as well. Fewer stores and less volume through them mandate smaller field sales organizations. One former high-ranking sales executive I know who is now a thriving consultant was telling me yesterday that finding an executive sales position in publishing today is a nearly impossible task.
If the ranks of sales reps and sales management are being thinned, how about the elaborate systems we have built to support them?
How much longer will we be publishing in “seasons”, which was a paradigm really built to serve a far-flung rep network that needed to gather to learn about new titles? It now seems like an anachronism, particularly when the biggest accounts buy from monthly lists. How much longer can that last? Sales conferences have been scaled back dramatically from what they were a decade or two ago. How long before they’re virtually defunct?
At least printing paper catalogs, which is a largely wasted expense these days has been retired by several companies. A bookseller I asked said Harper dispensed with paper catalogs already and she expects Random House and Macmillan to do so in 2012. I’ll bet the comment section of this post will attract others to say they have done so or are about to do so as well.
The old publishing sales-and-distribution ecosystem is disappearing but the new one is not built out yet. Publishers are, to greater and lesser degrees, converting to digital workflows, developing their metadata chops, collecting names, building vertical communities by genre and topic, collecting and analyzing ebook pricing data, building new models to work with authors and even self-publishers, and they’re still signing the books they want with royalty rates for ebooks of 25% of revenue.
These efforts have been financed by the margins being earned on sales of print and sales of digital that publishers were able to acquire because of their power to distribute print. In Esposito’s words, this cash provides “venture capital for the new all-digital businesses that all publishers are contemplating”. These annual step-increments of digital growth and brick store decline have so far been tolerable to most of the big players we’ve known for decades. (Borders was an exception, but we know Borders was not done in by digital change alone.)
The pace of the digital switchover is quickening. That will reduce the cash available to invest in building a new ecosystem at the same time the urgency of coming up with new answers is rising. It’s enough to make a sober executive, even at a very large, successful, smart, and innovative company, admit to serious concern for the industry’s future.