Peter Wiley

Ed Nawotka, the editor of the Frankfurt Book Fair’s online publication “Publishing Perspectives”, is running a series of pieces responding to his question “what was the most dramatic event in publishing in 2010?” Here’s the answer from The Shatzkin Files.

The most dramatic event in publishing in 2010? That’s easy. It was the face-down between five of the six biggest publishers in the US and Amazon over trading terms in the ebook marketplace: the shift from wholesale pricing to agency.

Even in theory, the shift was complicated. Publishers’ established prices went from near-print to about half-print. Margin offered to the channel was reduced from 50% of the established price to 30%. Control of pricing shifted from the retailer, who could charge whatever it wanted in the wholesale scenario, to the publisher who required the same price across all consumer touchpoints under agency.

But in practice it was even more complex than it was in theory. Shift of pricing control meant shift of responsibility at the point of sale and that meant publishers were now responsible for sales taxes, not the retailer. (Oddly enough, and the lack of public discussion of this point is a dog that didn’t bark, it did not result in the publisher, now seller-of-record, being told exactly who the customer is: the name and email address are still only known to the retailer.) Lawyers advised (at least some) publishers that agency required a contractual relationship between the publisher and each point of distribution, resulting in deal-making complexity that leaves some retailers without a full shelf of agency publisher books more than six months after the shift.

And literary agents representing the top authors required a lot of handholding. Ebook royalties are a raw point in negotiations these days between agents and publishers, and the agency model reduced the royalty per copy on all books, at least during their hardcover life. Of course, the publishers’ take per copy also was reduced, a point the publishers no doubt made as they prevailed on the agents to accept a change they believed was necessary to prevent a potential perpetual monopoly on ebook sales by Amazon.

Adding to the drama surrounding the shift to agency was the fact that the biggest of the Big Six trade houses, Random House, sidestepped it. This put them in a position where they a) sell their books for more per unit, b) see their books offered to the consumer for less per unit, c) can tell agents their royalties are higher per unit, d) are not offered in Apple’s iBookstore (but are available on all Apple devices through Kindle, Nook, and Kobo, at least), and e) have earned the enmity of the other publishers in the Big Six.

The Agency 5 see themselves, not without reason, as having sacrificed revenue at a difficult time for the industry’s long run good while Random House takes tactical advantage of the shift (and, in the words of one CEO, are “gloating” about it.)

(My editorial comment: this may all be true, but isn’t it the job of a company’s management to take tactical advantage of changing industry conditions? The overall point to this piece, of course, is that I applaud the move to agency. But it is hard to see exactly why, from Random House’s point of view, you’d voluntarily give up an advantage that makes all your competitors grind their teeth. As some analysis I did looking at royalties shows, the tactical advantages of wholesale are distinctly greater for hardcover and it may even be disadvantageous for paperbacks, but that’s a balance Random House is very capable of calculating.)

The most dramatic single moment of this long-playing dramatic event was last January when Amazon made a brief, and vain, effort to stop the whole agency movement in its tracks by pulling the buy buttons for Macmillan, apparently because they were the first publisher to officially notify Amazon of the forthcoming change. The giant retailer retreated in about 48 hours marking the first time in anybody’s memory that the publishers had forced them to back down.

Although the Nook and iPad devices certainly have something to do with it as well, agency seems to have accomplished its purpose of preventing Amazon from maintaining a stranglehold Kindle share through their deep-pocketed ability to forgo margin for a pricing advantage. The other retailers in the ebook market have their margin protected. With Google Editions still to join the fray, there is reason to believe that there can be a truly broad-based ebook marketplace for the next few years. What the Agency 5 publishers did was politically and logistically difficult and, because it involved reducing unit margins, somewhat counterintuitive. It would appear more than six months later that the tactic has achieved its most desired result.

Control of pricing immediately challenges publishers to get sophisticated, modern, and scientific at how they approach pricing. That would require, in a formulation I first heard from Peter Wiley (Board Chair of John Wiley & Sons), “constant, controlled experimentation.” Surely, that is taking place on a daily basis at Amazon.

So far, of course, the sales agent is controlling all the customer contact. Sooner or later that is likely to become a point of contention between publishers and their “sales agents.” It might be pushing things to expect that dispute to begin with the next round of agency contract negotiations in 2011, but expect that issue to make its way to the table in 2012 or 2013.

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The New York Times had a story on Tuesday morning about an advantage the Ford Motor Company had over its competitors at GM and Chrysler: it is still family-owned. As the Times explained, the family ownership was able to take a longer view than their competitors. In fact, we still don’t know whether the re-tooling the family has ordered up will work in the long run. But we do know that they have had a steadier and more far-sighted management because the family cared about the long-term health of the business, not just the next quarter’s profits.

This recalled to me a conversation that I had with Peter Wiley, currently the Chair of the Board of John Wiley & Sons, over dinner 15 or more years ago. Peter said then that he believed Wall Street undervalued family ownership. As Peter put it, “just about all our competitors are focused on quarter-to-quarter results. Mike, my family has owned this company since 1807. I am not thinking quarter-to-quarter.” Wiley’s financial results (even though they have suffered in this recession along with everybody else) over time have certainly vindicated Peter’s opinion.

Family-controlled businesses have been  been ubiquitous in publishing through my whole career. When I was young, there were Scribners at Scribners, Doubledays at Doubleday, sometimes two Roger Strauses at Farrar, Straus & Giroux. When family-controlled but publicly-traded Barnes & Noble acquired Sterling in 2002, they acquired it from the founding families: the Hobsons and the Boehms.

I have consulted with several family-owned or -controlled businesses. Wiley, Barnes & Noble, and Ingram are distinguished by how well managed and basically competent they are as organizations. They really do the “blocking and tackling” well. A big part of the competitive edge of all three companies is in the quality of their operations.

They make the investments, particularly in infrastructure, that are critical to the business. I once asked Peter Wiley why it was that his company’s travel web sites were so much more commercially successful than those of other publishers with equivalently-strong travel brands. “Constant, controlled experimentation,” he said. “What worked for us was on the third try. We didn’t get it right the first two times.” Family ownership — with belief — can make those kinds of investments and stay with them. And it can support a second and third attempt to make a good strategy that is tricky to execute succeed.

John Ingram, the member of the owning Ingram family who runs the book industry-related businesses, got a clear vision of the potential in print-on-demand a little over a decade ago. Very few other owners, and almost certainly no publicly-traded owner, would have made a bet of the scale, in relation to the size of the company, that he did with Lightning Print. But John could see that POD would become extremely important and that Ingram, because of its position in the supply chain, was in a great position to apply the technology. And although it took a few years for him to be proven right, the family had the commitment to see it through and, as a result, Lightning occupies an increasingly central place in the US supply chain and is the linchpin of Ingram’s plans for future growth as the traditional book wholesaling business contracts.

What most distinguishes the successful and still-profitable Barnes & Noble from its once equal and now reeling competitor, Borders, is the quality of B&N’s supply chain. That required investments in warehouses and systems that Borders, long ago sold by its founding family, didn’t have the long-view management to make.

Now I’m working with another family business called BookMasters, in Ashland, Ohio. BookMasters started out as a printer in the 1960s. Their operations have grown in both directions along the value chain from printing. They have a business, BookMasters Digital, that provides an XML workflow from concept to the press. And they have another division, BookMasters Distribution, that takes the output from the presses and provides warehousing, sales, fulfillment, and collection. The Wurster family that owns BookMasters has many business characteristics in common with the Wileys, Riggios, and Ingrams. They have a high degree of loyalty with many long-standing employees. They have a persistent commitment to operational excellence. And they have a high degree of strategic consistency: they are willing to build things over a long period of time.

John Ingram saw over a decade ago that the book wholesaling business Ingram was in was living on borrowed time. He saw Lightning as a bridge to the future. Dave Wurster knows that printing is not a growth industry and he’s building his bridge to sustainability with service offerings that expand his importance to his customer base. Over time, both of these family owners can see the possibility of a totally transformed businesses. Their focus primarily is on how to make sure their business survives a long time, not on immediate profit. In a time of great change, I believe it’s a competitive edge.

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