Markus Dohle

Now the Big Six are all selling ebooks on the agency model. Random House has joined their five competitors.

It is almost a year since Apple launched the iPad, opened the iBookstore, and delivered big publishers an opportunity to rewrite the rules of the ebook marketplace, at least for their books and at least for a while. As readers of this blog almost certainly know, five of the top publishers (Hachette, HarperCollins, Macmillan, Penguin, and Simon & Schuster) used the opportunity presented by Apple’s arrival on the scene to implement the change to agency for all their customers. Random House, for reasons that made sense to me at the time and almost certainly delivered some competitive advantages to them over the past year, judging by the open annoyance of many of their similar-sized competitors, stayed with the original wholesale model.

The competitive advantaged stemmed from the fact that all the agency publishers “forced” a 30% selling margin in to the ebook retail channel whereas Random House may actually have drawn margin out of the retail channel.

Here’s what I get out of this change.

1. Agency has been successful in cracking Amazon’s hegemony over the ebook market. A year ago, it seemed possible that Amazon could have an enduring 75% or 80% of the ebook market. While they’re still the biggest piece, and almost certainly have more twice as big a chunk as anybody else, agency has enabled real competition to develop from the iBookstore, B&N’s Nook, Kobo, and Google. And the independents served by Google, Ingram, and Overdrive all over the world offer a lot of potential marketing leverage, if they’re not driven out of the game by price competition. Amazon is still the behemoth, but they’re no longer the only game in town. Agency delivered competitive advantage to Random House, but also to Amazon. If they had continued to be 80% of the market, you might not be seeing this switch.

2. Google may not (yet) be selling a lot of ebooks (as in having a big market share), but they are opening the business up to more and more independents. Independents talk to sales reps, and Random House has more sales reps than anybody else. I would imagine the company began to feel some discomfort about the feedback they were getting from the retail network they very much want to keep alive.

3. So far, none of the major publishers has taken the step of aggressively selling ebooks direct to consumers online. But they’re ultimately going to have to. You may recall that Random House’s CEO, Markus Dohle, told me last summer that he realized publishers needed to become B2C. He wasn’t suggesting he’d sell books direct-to-consumers then; in fact he insisted that there were other ways to manifest that vision other than selling direct. But, if it ever enters your mind to sell direct and you think about it for fifteen minutes, you realize that you either have to do it under agency terms or face complicated and very troubling conversations with your retailers.

And here’s what I’m watching for.

So far, as near as I can tell, there has been very little use made by the big publishers of their ability to manage prices in the market. I am not aware of much experimentation. I am not aware of any direct-marketing or dynamic pricing expertise (both of which would be relevant) being brought on board by major houses to help them realize the potential of the opportunities. And I can only think of one senior executive I know who takes much of a personal interest in pricing dynamics.

Maybe Random House will be different. They’ve been the traditional industry leader in operations and analytics. They do vendor-managed inventory for retail accounts; I’m not aware of any other major publisher who does. They’ve done sophisticated supply chain management for years.

Now they’ve had the advantage of seeing what their competitors have done, and not done, over the first year of agency pricing. It will be worth watching to see whether they approach the pricing opportunity more energetically than the other publishers seem to have done so far.

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I’ve been in the book business for a long time, more than 48 years since my first job on the sales floor of Brentano’s bookstore. For over 37 years it has been my fulltime occupation. My father started his career in books just before I was born, so I have been meeting publishing people more or less since I was in the cradle. And it isn’t that big a business. So, over the years, I’ve gotten to know many people in the industry.

But I hadn’t met Markus Dohle, the relatively new CEO of Random House, until we had lunch last month. He proved to be a very sharp, informal, and relaxed companion, very open with his opinions and observations and very straightforward. And since his prior experience was outside trade publishing (the reason I’d never previously met him), he brings a completely fresh personal perspective to the business.

One thing Markus said really struck me because I agree with it so wholeheartedly and because I hadn’t ever heard it said so explicitly by any of his counterparts. “We have to change from being a b2b company to b2c over the coming years,” he said. He expanded on this when I asked him whether I could attribute the quote for this piece. (I don’t want to disappoint my readers, but I make a living as a consultant, not a blogger, and my career would be crippled if I couldn’t have a conversation with an executive without a looming fear that whatever s/he said would end up in print. If some readers wonder why the sources of some comments remain anonymous, that’s your answer.)

Markus replied that he was fine being quoted because he was “convinced that publishers have to become more reader oriented in a marketing and trend finding/setting way rather than in a direct to consumer selling way.” I welcome the clarification and believe it is right in its emphasis on marketing over sales even though I think that sales, inevitably, becomes part of what a publisher has to do too. And direct contact with and tracking of individual consumers both seem absolutely essential.

(The politics of this are worth a digression to spell out. For several more years at least, big trade publishers will continue to depend primarily on a retail network to reach readers. Despite the fact that all the big retailers, in their way, compete with publishers to control content at its source, they are universally resentful if publishers compete with them to serve consumers. On the other hand, it is increasingly apparent that the retail network is reducing its size and scope and, unless publishers develop alternate channels to consumers, they’ll be reduced in size and scope as well.)

Although Markus was the first CEO whom I ever heard say explicitly that the shift to b2c was in any way a priority, there is evidence in other houses that the importance of direct consumer contact is on the radar. A senior digital officer at another large house is directing a wide-scale effort to organize their consumer contact names — which he found, as he would have in every other house — to be scattered, unorganized, and largely unusable. Pulling names together is one of a number of “first steps” the big publishers must take to act on Markus’s insight.

But there are other “first steps” that are just as important as rationalizing the contact database for consumers. Two of them are related. One is being committing to owning specific groups (or, in the current parlance: communities) of interest. This is what I refer to as “verticalization” and I have written and spoken about it exhaustively. But the commitment to verticalization, in order to be captured and turned into real equity going forward, must be expressed in branding.

The names of publishing houses and the imprints they create are their brands today. (Authors are brands for consumer marketing purposes, but publishers don’t own those brands: the authors do.) What publishers own really do work in a b2b context. Bookstore buyers, book review editors, and collection developers at libraries can discern meaning from company names and imprints. They work the way brands are supposed to work: as shortcuts to establish expectations. Brand tells an informed buyer to expect high-quality writing in a Knopf book and high-quality reproductions in an Abrams book. Brands will also signal them, before they see a finished package, whether a book is likely to feel overpriced or underpriced, and whether the publisher’s claims for promotion and media are likely to be fulfilled.

But most of these brands mean nothing to consumers. And mere knowledge of a brand doesn’t necessarily tell you what to expect if you buy it. Nor would knowledge necessarily provide you with a motivation to get “closer” to it.

The one consumer brand in publishing that means the most and provides the most equity to its owner is Harlequin. Consumers recognize it and have understandings about quality and price based on it. But because they also know that the Harlequin name means the “romance” genre, and because many romance readers buy and consume dozens, even hundreds, of titles in the genre every year, they have logical reasons to visit Harlequin’s web site repeatedly and to request and open email reminders of new publications from them.

In fact, Harlequin’s brand is so clear and so powerful that they can get people to subscribe to their books. When you think about alternative revenue sources, that might be the Holy Grail. It will certainly help publishers stay on the right track if they focus on creating brands and clusters of books around them that could conceivably deliver customers for a subscription proposition.

The Penguin brand is perhaps equally well-known, but it isn’t nearly as well defined. Penguin Classics certainly have a collective meaning, but many books are published under the Penguin imprint that aren’t classics. And while it is likely that sometimes the purchasing choice between one edition of Robinson Crusoe or Hamlet and another might be influenced by familiarity with the imprint, it is not clear that the “quality” signal is important there (because, after all, the words were set down long before Penguin or its competitors existed) as it is for a new romance novel. And it certainly would be harder for Penguin to attract regular web traffic with its brand or to make sales through an email list of brand adherents.

A brand that is in between these two is “Dummies.” It definitely creates a meaningful shortcut for a consumer; they recognize it and it tells them “this book explains the basics on the subject in a way that requires you to bring almost no knowledge to it for it to be useful.” But because Dummies covers many subjects under the sun, it would be difficult to make use of it for audience-gathering or direct marketing the way Harlequin is employed.

You wouldn’t “subscribe” to new offerings, sight unseen, from either Penguin or Dummies. That means that, in at least one very important way, those brands aren’t as useful as Harlequin. Why? They’re too broad. General Motors wouldn’t ever have sold nearly as many cars if they called all the cars “GMs” to create a megabrand and had lost the distinction between Chevrolet and Cadillac. Trying to create “one big brand” if it captures unrelated content or unrelated audiences could be “one big mistake.”

My own theory is that publishers have to completely re-think their imprints in light of the need to move from b2b to b2c. Imprints at big houses are almost always silos with no discernible b2c meaning. In fact, the names of smaller houses, because smaller houses tend to focus on subject areas, can more readily have meaning to consumers.

In fact, Random House just faced a branding question of exactly this nature and got it right. They had acquired a smaller, subject-dedicated company, Watson Guptill, a couple of years ago and had some overlap between what WG published and what Random House already did within their Clarkson Potter imprint. RH executives engineered a solution by which they preserved the venerable Watson Guptill name for “hardworking” instructional books on art and photography —  WG’s strongest historical categories — and made made Potter Crafts a subimprint of WG. They invested in building the crafts list to triple the previous output of WG. The two thirds to three quarters of the WG list that is not crafts will still be WG imprint books. By making Potter Crafts, which they owned before, a part of Watson Guptill (joining Amphoto, the well-known photo line, and WG’s other subimprints), they might get the best of all branding worlds.

And it is further worth noting that tripling down on title output to become a serious player in a niche is probably a move very few Big Six companies would be making these days, but it is necessary to think that way if you’re serious about making substantial b2c marketing efforts. Building a subscription business would almost certainly imply a growth in title output in any vertical.

Random House’s clarity on how publishers should structure brands to have content-specific meaning is still unusual. (There are other examples: Hachette’s invention of “Springboard”, a brand to do books for baby boomers, is a nod in the same direction.) Publishing Perspectives, the thoughtful online publication operated by the Frankfurt Book Fair, offered a piece on the subject six months ago that was locked into what is still publishing’s more normal b2b way of thinking. The catalyst for the post you are now reading, actually, was their editor Ed Nowatka’s piece with the provocative headline asking “Does a Publisher’s Brand Equity Translate to the Digital Age?” which (with all due respect, of which I have plenty, to Ed) I thought really didn’t address the question. But at least he asked it. I don’t recall ever reading a single piece on the subject of this one: how do what have always been b2b publishers create b2c brands?

This is a subject that has been on my mind for a long time. I wrote a post 18 months ago about an imprint started at another house that I considered to be, similarly, the product of the same b2b thinking that characterizes the Publishing Perspectives piece. And about a year ago, I stressed the importance for publishers of building b2c brands going forward.

I believe Markus’s insight is the necessary first step that others haven’t yet taken and, whether or not it started with Markus, the awareness of the need for consumer focus certainly helped Random House make sensible decisions to exploit the brand equity in the WG name they had acquired. Once publishers accept that being consumer-focused is essential to their long-term survival, it follows logically (although not automatically or instantaneously) that they need to think about discrete audiences on more than a book-by-book basis; that they need to gather those audiences on web sites and in mailing lists; that they need to publish books that satisfy them repeatedly, not occasionally; and that all these efforts will make more sense if each separate audience has a brand facing them with real meaning. We’re seeing that from the big publishers right now in genres; they are trying to build science fiction and romance communities and branding them. Random House built a vertical in travel earlier in the decade, developing business models out of a critical mass of content that went beyond simply selling books. That, and the efforts at Random and other big houses to build communities around genres, is a start. But a lot more development of this kind is going to be needed to replace the marketing clout being lost as the old channels to consumers wither in the months and years to come.

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There are two questions about the impact of digital change on publishing that are just about impossible to answer.

One is: how much of the sale of ebooks is incremental business and how much of it is cannibalization of prior print sales?

The other is: what will be the fate of independent bookstores?

The two are connected.

As we watch the (long-term) inexorable but (short- and medium-term) unpredictable growth in ebook sales, it is really not possible to tell to what extent we’re just selling established customers the same purchases in a different form (certainly some of it and my personal guess would be the lion’s share of it) and to what extent we’re finding new customers (also certainly some of it and, to my way of thinking, more likely to the user of a multi-function device than a dedicated book reader like Kindle or Nook) or making incremental sales to established customers.

(We plan to address the whether the multi-function device users have a different consumption profile at the Digital Book World conference in January. It’s a knotty question but we think we have a way to get at it.)

The measurements of industry sales have been far too imprecise and muddied to address a sophisticated question like that. (The AAP and BISG are making a serious joint effort to remedy that situation; I have seen some of the great work in building a new data model that has been led by Tina Jordan of AAP and Scott Lubeck of BISG. More on that very promising initiative some other day.) The aggregate industry numbers that we’re used to probably won’t be sufficient to change any closely-held opinions any time soon.

Individual publishers might see data worth intepreting in the total unit sales of major authors that  have established clear sales patterns over time, if they can analyze their way past the fluctuations that must inevitably occur in the sales of each new major release by an established bestseller writer. One place one might expect to see an uptick is in the prior titles in a series (but, even then, you don’t know if the extra sales of four prior Carl Hiaasson titles weren’t instead of sales of four other books, do you?)

My own analysis has been simplistic, assuming pretty much flat sales into the digital future because that has been the case in our overwhelmingly non-digital recent past. When I do the calculations that lead me to think that the sales available to brick-and-mortar stores will decline drastically over the next five years, I’m assuming that the rise of digital sales results in a pretty much equivalent decline in print sales. I also assume that the increase in ebook sales and the reduction in retail shelf space allocated to books accelerates the movement of print book sales to online. If ebook sales aren’t largely cannibalizing, and they don’t themselves reduce the sales available to be made in stores as much as their growth would suggest, then shelf space might not disappear as fast.

My back-of-the-envelope calculations (which have been endorsed in a series of private conversations with publishers, booksellers, and analysts but also strongly resisted in a private conversation by at least one person whose judgment I really trust and also apparently contradicted by the expectations expressed by Random House CEO Markus Dohle in his recent interview) are that brick-and-mortar’s share of total trade book sales will reduce from around 80% today (some say it is higher) to about 30% five years from now. That would be a reduction of more than 60%. Let’s say the share is still 50% in five years (which I speculated might be the number in 2-1/2 years). That would still constitute a 35-40% reduction from where we are today. That’s drastic.

But it still doesn’t tell us “who fails?” Shelf space reductions can come in a variety of ways. Stores can be closed, chain and independent. Dedicated bookstores of all kinds can become less dedicated and turn over shelf space to other items. And mass merchants can decide to reduce the space they gave books or to eliminate them. All three things will happen to varying degrees.

This is a bit like trying to do a weather forecast based on one’s confident knowledge of climate change. The two are related but there are local factors in addition to global ones. Each time a store closes or reduces its shelf space (or, for that matter, in the rarer cases where a new store opens or one increases its shelf space), it affects the fate of the other stores in its vicinity.

On Tuesday night, I came home from a late meeting with a former Cabinet official who was thinking about buying an independent bookstore and seeking my advice, which, based on no specific knowledge, was “don’t.” I walked in to receive a call from a reporter who asked me for my comment on the Barnes & Noble “news.” “What was that?” I asked. “They’re putting themselves up for sale,” he said. “What has happened recently that would motivate that?”

Without having read the press release, which would have signaled to me that they weren’t actually putting themselves up for sale so much as beginning the process of taking themselves private, I strived to answer the question. I thought the acceleration of ebook uptake, some of it fueled by B&N’s Nook device, was recent news that didn’t bode well for physical bookstores. I thought the recent rescue of Borders, which could postpone their demise or shrinking, wasn’t happy news for Barnes & Noble. And I wondered whether the Ron Burkle lawsuit might make the Riggios less interested in owning the business.

Of course, all of those things are true but none of them apply because the premise was wrong. The Riggios are probably not trying to sell the business; they’re more likely trying to buy the business.

Then I checked with a commission rep friend of mine about the bookstore the former politician I met earlier that evening wanted to buy. It turns out to be an independent with a relatively solid future, with knowledgeable staff underneath its owners and a great reputation with the publishers which assures a continuing flow of traffic-building author appearances. In other words, “don’t” might not be the right advice in this particular case.

Whether the brick-and-mortar share of the business falls by 25%, 50%, or 75% over the next five years from what it is now (and all are possible), the reduction in shelf space depends on whether that reduction is against a rising base of total sales or a stable one. And how it affects any one particular store depends on what has happened to the shelf space allocations by others in that store’s immediate vicinity. That will be very hard for anybody to track.

I am still extremely skeptical of recent celebrations of the successes of independent stores, which we’ve seen coming out of New York City and Pittsburgh in the past couple of weeks. Anecdotal information is not projectable data; it is often misleading data. Nobody seems to be making the claim that bookstore shelf space is increasing in New York or Pittsburgh or anyplace else. Any one bookstore might still, for a while, be a reasonable bet. But this is a case where the usual laws of investment (diversify as much as you can) would likely not apply. It is hard to imagine bets on five or ten or twenty independent stores paying off in the aggregate in the years to come. Unless you were making those bets with knowledge about exactly where Barnes & Noble, Borders, Books-a-Million,Walmart, Target, and Costco were reducing their shelf space the odds will be against you, and I’m pretty sure there won’t be anybody who knows all those facts in a timely way.

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