April, 1999

There is no doubt that digital technology changes the way publishers and booksellers handle their most basic business processes, but it is likely that the most profound changes digital technology will create will be in the marketplace itself.

We will spend the next few minutes speculating about what changes we might expect in the environment for publishers and booksellers in the next five years.

Most projections of book consumption in units over the next five years are pretty flat. This has most recently been confirmed by Al Greco, a Fordham University economist and book industry analyst, in a digest of consumer trend data he has just completed for The Book Industry Study Group, which will be released shortly.

So if the market is growing at all, it is not, apparently, getting bigger very quickly.

But that market is being fragmented into many more pieces, with results that seem predictable although they have not yet been adequately acknowledged yet by much of the industry’s strategic planning.

The growth of book sales on the Internet, which recent forecasts suggest is headed past 15 percent, but which we’d guess will be past 25 percent by 2005, is tending to push whatever sales level is achieved across a growing number of titles. Of course, backlist titles benefit. The fact that people search by keyword and not by year of publication changes what comes to the foreground for the consumer compared with what has been true in the brick-and-mortar world. And online sales reflect it.

Every online retailer’s and publisher’s experience that we have heard about demonstrates that the backlist benefits disproportionately when the sales environment moves to online.

One other effect, perhaps not as obvious yet, is that books from non-consumer segments start to compete with consumer books. Publishers who did not have the capability or the vision to put the books they published into bookstores are finding sales through online channels. So those books accelerate the effect of dispersing the book sales dollar over a greater number of titles.

That’s the tip of the iceberg which has been made visible so far, as we near the end of the fourth year of the Internet bookselling revolution. But even more dispersal of the sales dollar is coming.

Added to the titles in print and those put into print by the heretofore normal processes, we now have the “print one” solution, most evidently but certainly not exclusively Ingram’s Lightning Print program. What “print one” does is make “out of print” and, eventually even “temporarily out of stock” into archaic historical concepts with no current meaning.

What it is doing now is sparking an Oklahoma Land Rush for out of print titles with some future sales life, even a very faint pulse of sales life. Authors, agents, and publishers are all waking up to the fact that for a very modest investment, a title is not only back “in print”, it is also in stock at Ingram, which puts it in stock at every Internet retailer, certainly including, in alphabetical order, Amazon, Barnes & Noble, and Borders, as well as every other retailer who sources from Ingram.

Publishers have the added incentive to employ the print-one solution that doing so can forestall the reversion of book rights to authors under many publishing contracts which simply require the publisher to be able to fill any order to maintain control of the book. Rights reversion has been casual in the past 20 years since tax rulings that penalized publishers for holding on to slow-moving inventory. Print-one removes the requirement to maintain inventory.

And we might add at this juncture, the print-in-store model, being pioneered by Sprout and ODMC and other entrepreneurial companies, could also well become ubiquitous in the next few years. This will add hundreds, or perhaps even many thousands, of terrestrial instant delivery locations for every book loaded for print one delivery.

So the number of backlist titles, or “small sale” titles, available to share that not-much-increasing pie is growing at an accelerating rate of speed. How many titles will go back into print through a “print one” solution? We have heard estimates into the hundreds of thousands in the period we are now contemplating, between now and 2005.

But of course, if authors and agents learn how to work the Lightning Print and dot com seller connection for out-of-print books, they could use it for new books too. Certainly that will start to happen for books that publishers, correctly or incorrectly, deem not commercially viable. And since a publisher’s definition of commercial viability usually includes factoring in the publisher’s level of overhead, authors, agents, and small publishers will find it easier and easier to attain commercial viability of their own with titles big publishers can’t see being profitable.

So add a few more tens of thousands of titles to share the flat sales.

Anything else? Yes, indeed.

The book simulator, the Ebook, is now making its debut. Several commercially viable versions, including the Softbook and the Rocket Book, are now in the marketplace. They work pretty well; they’ll work better in time. They cost a few hundred dollars; they’ll cost less in time. They’re having both rights and technology hang-ups building their content libraries; they’ll solve those in time. In the window we’re now talking about, between now and 2005, these ebooks will become a fixture in the marketplace.

Some people today in 1999 just can’t see people reading books from a screen, no matter how it is designed. I personally am of the school that says that, ultimately, the electronic device can be developed that will give you everything a paper book gives you now. “Ultimately” takes a little longer for art books than it does for novels.

But even if you don’t believe what I believe, think about this. In the next few years, corporations all over the world will find Softbooks and Rocket Books (and their successors and competitors) a cost-effective way to for their employees to process instruction and reference and training that is now distributed to them in print. It is quite significant that a recent PW Daily story on Rocket emphasized the ease with which one’s own files could be “loaded” to be read by the device, rather than what otherwise-published material was available.

Colleges and schools are also likely to be powerful distributors of ebook hardware. Students permit amortizing hardware cost over a lot of content.

So, institutionally-driven distribution will assure that by 2005 millions of people will own these devices and use them. The corporate institutions that distribute them will want to buy books to put on them when they want to distribute a book as part of their instruction, reference, or training offerings. And the universities and schools will be loading both trade and non-trade books on the ebooks they distribute.

One might assume that, before too long, somebody will get the idea that an employee or a student might sneak a peak at something of *personal* interest on the institution’s machine. Remember that many companies resisted, and perhaps still resist, broadly distributing Web browsers because employees would find sites of personal interest on company time.

So, it is really not necessary to believe that people will enthusiastically embrace a screen as a substitute for a printed book to accept the idea that there will be a book market in downloads for these screens.

In fact, the existing installed base phenomenon is already visible. A couple of enterprises are distributing “books” to be read on Palm Pilots. Palm Pilots are not nearly as good for that dedicated purpose as any of the Ebooks are, but they do have the virtue of already being widely distributed. Some of the many people who own and carry them will, if the compatible files are made available, read books on them.

So ebook files will share the flat sales numbers too.

I think you can see that there’s a problem building for publishers here. With flat sales being chipped off by bits and pieces in all directions, it will get harder and harder to launch new titles in the ways the industry has gotten used to. The share of sales they will command will be less and less.

In fact, if the flat sales projection is anything LIKE correct, it implies that the actual sales of new titles, year on year, will start to decline, if it hasn’t already. Of course, the mass market itself doesn’t shrink, and the biggest names will continue to sell in ever greater numbers. But it will be harder and harder to break something out, harder and harder for original material to break even, the way it is published today.

And whether the big publishers who practice list management like it or not, there will be an increased number of new titles in the marketplace, as authors learn to operate the new digital distribution apparatus on behalf of works publishers deem to have markets too small to be worth publishing.

There is an essential strategic message for publishers in all this: if your new title publishing strategy is not a backlist-creating strategy, you’re headed for increasingly hard times between now and 2005.

The challenges are no less for booksellers.

In the grandest sense, all this change is very good news for booksellers. The wider the array of potential titles for the consumer to shop, the more dependent consumers will be on intelligent intermediation. Our search engine technology, to the extent that the title metadata is accurate and available, (an issue we will give a bit more attention in a moment) helps scope out the wide range of published possibilities to answer any question. It is not as good at providing more focused and precise answers. And it doesn’t help a consumer judge the quality or the suitability of any particular book to any particular purpose or user.

So a bookseller we can trust, who can help us sort out the possibilities, is increasingly worthwhile. Maybe even worth enough to pay a little margin, even if somebody else on the Internet will sell us one of the books we need a little cheaper.

But the challenges of being a good bookseller will also grow. If you think there are inaccuracies in title metadata now, when Books in Print and the major wholesalers and retailers struggle with large publishers and small to keep information timely and accurate from a book’s inception to its demise, you ain’t seen nothin’ yet. The coming explosion in the diversity of the active title base will be matched only by the explosion in entities providing that title base growth. And even though metadata integrity is critical to Internet sales, it is likely that many of these newer and smaller entities will learn to make books and promote them before they master all the niceties of managing them through the supply chain.

And, of course, what we now call “books”, even with the definitions expanded by print one books and ebooks, will no longer be the boundary of the bookseller’s world. With the Internet, a pamphlet with a Web page can be a “book”, or at least a “bookselling opportunity.”

The growing complexity of the supply problem makes life more difficult for today’s booksellers, but it also insulates them from another evident trend we are likely to see accelerating in the next five years: the selling of non-fiction books by retailers whose primary business is to sell other products related to those books’ content rather than selling other books.

The “affiliate” model pioneered by Amazon is now a proven way for booksellers to cooperate with other retailers or information purveyors to grow sales for everybody. And Amazon is not the only one who can use it. An intelligent and informed specialist in business books, for example, might persuade some very appropriate Web sites that it was a better choice for an affiliate relationship than Amazon. That signifies the new opportunity frontier for independent booksellers.

In the next five years, this tendency for non-fiction books to be marketed and sold in a subject-specific environment will accelerate both on the Web and off. We will see a growing distinction in the distribution patterns for fiction, belles lettres, and art books on the one hand, and everything else on the other.

What this all means is that publishers will be challenged to alter their content delivery mechanisms and their basic economic models, and make corresponding adjustments in how they promote, with more attention to backlist and, almost certainly, less speculative attention to new titles. And the successful publisher in 2005 will have to be a master of marketing, if not selling, through the Net as well as expert at distributing to a widening array of brick-and-mortar retailers, often through wholesalers and subject-specific distributors.

Booksellers will have to capitalize on distributing books in any form the consumer wants them. That, and an increased emphasis on the fiction, belles lettres, and art books that most other retailers can never sell, very likely means that terrestrial bookstores will increasingly see new books and used books being sold in the same outlets, perhaps even shelved side-by-side.

And booksellers will have to be increasingly creative at providing customized services, offering chapters and other summary offerings through the Web both to trigger customer demand and to respond to it. And, as the number of active titles proliferates, the relatively easy sourcing through one or two wholesalers which has satisfied most demand for the past decade or two may also become an artifact of a simpler by-gone day.

Of course, the wholesalers will try to keep up. The fragmentation of the sales over an ever-larger number of titles published by an ever-larger number of publishers keeps raising the bar of wholesaler competition at the very same time that it makes them increasingly useful to the whole supply chain. But the concept of “complete” will become increasingly elusive as old and new titles pour into the marketplace from diverse sources and as pamphlets and magazine article reprints and every other collection of words somebody might want to read becomes part of some bookseller’s universe.

Of course, I have saved the most dramatic prediction for the next five years, and I hope the most comforting one for this audience, for last. Let us conclude by thinking, for a moment, about we still commonly, but anachronistically, refer to as “the record business.”

They have Ebooks too; the technology du jour for it is called MP3. Ebooks are debatably capable replacements for printed books; MP3 is a totally functionally equivalent replacement for CDs or tapes.

They also have decentralized manufacturing capabilities. Print-one for books today costs a lot, takes a lot of time, and won’t work at all yet for color or hardcovers or a number of variations in common use. Making a CD takes a $400 machine and a $1 blank.

And the record business is different in another significant way. Tom Clancy and John Grisham don’t have manuscripts sitting in their closets that no publisher will issue for them. Eric Clapton and The Rolling Stones have so much tape you’ve never heard that is just as good as the tape you have heard that you would hardly believe it: every concert they’ve ever done, every second-best take they never released. But the record companies would rather have, say, one album that sells 500,000 than 20 that sell a total of a million. Good for the record companies, perhaps not so good for the artists.

Between now and 2005, we can expect to see the clear beginnings of what will quite obviously be a complete reorganization of the music business. Major artists will abandon their labels and the widest choices of the best new pop music will no longer come from established labels. It will be obvious very soon, perhaps as soon as the end of 1999, that record behemoths are in serious trouble. And terrestrial music retailers will have to scramble to stay in the game; the justification that you have to see it, touch it, or smell it in order to enjoy all the joys of ownership makes NO sense in the music business.

In fact, when broadband delivery of the Internet becomes common, which it will be in much of the US by 2005, you will able to plug your stereo into a library that can deliver anything you want any time you want in the way of sound, so you actually will “have” all the music when you own your connection, and you’ll pay for it in some form of pay-per-use.

So we get to watch them go first, probably a good five or ten years ahead of us. Aren’t you glad you are in the book business?

I want to thank the BA for the opportunity to address this meeting today. At my only other opportunity to meet this group, at the Dublin meeting two years ago, you were the most stimulating and responsive audience I can remember. It is a pleasure to be here again. I also want to thank Vista Computer Services for both suggesting and sponsoring my appearance.

The erosion of the English-language publishing “territory” controlled from London has been accelerating for about three decades. Whether or not this erosion is an inevitable consequence of the end of what once was the British Empire, it is, of course, disconcerting to the publishers who once controlled more than half of the global English market.

The first serious shot across the British publishing bow took place in the early 1970s, when American publishers were apparently compelled by the US Justice Department to discontinue the extant practice of respecting the British publishing territories as a routine in contract after contract. This effectively trumped the enforcement of that policy by the British Publishers Association, which acted in defense of its local industry in a manner quite legal and respectable in Britain but considered a “combination in restraint of trade” under American law.

The growth of global companies and the understandable self-interested behavior of the Canadians, Australians, and New Zealanders to protect their own home industries are also forces hastening this erosion. Now you’ll rarely control Canada from London, and you have to meet stringent delivery requirements to maintain control in Australia and New Zealand, even if the British publisher buys those rights under contract.

Recently, British publishers feel themselves under assault in their own home territory. The new Europe brings the threat that American editions could be imported by British stores from Continental wholesalers. The American online retailers cheerfully serve a global market, mostly with copies purchased from American publishers and wholesalers, with little apparent regard for what the rights situation might be in their customer’s home country. And American wholesalers, who are seeing their entire marketplace shift domestically as their terrestrial retailer market shrinks and their online retailer market grows, are looking to export increasing numbers of American editions, taking advantage of lower American prices in the still-frequent cases when they exist.

And British retailers seem to be among the most attractive growth customers to these wholesalers.

The changes wrought on English-language distribution over the past three decades have all had perceived self-interest at their core. Although the American Consent Decree was overtly a case where the US Government “ordered” American publishers to do something, they actually placed the power of the US Government against the power of the British Publishers Association. Until the Consent Decree, no British publisher could do a deal that didn’t include Australia, say, without running afoul of the powers-that-be within the publishers’ own industry. After the Consent Decree, no American publisher could routinely accept that requirement without running afoul of the US Government.

And, of course, Canadian-ownership laws and the more recent requirement in Australia and New Zealand that controlling publishers must get copies into the country promptly upon availability anywhere else or forfeit their control are totally logical when viewed from a local perspective.

There is an evident nostalgia among British publishers for what really were, by comparison, “the good old days.” That it was “better then” is not just a figment of somebody’s imagination. There is no doubt that the most direct impact of three decades of globalization has been to redistribute market share and wealth that once belonged to London. But the genie can not be jammed back into the bottle. It is out. The world not only HAS changed, but it will continue to change in some predictable ways. The digital revolution is still in its infancy.

The biggest changes coming in the short run will be caused by digitally-driven production and distribution changes. The basic tools to drive these changes are in place. One is the hand-held reader, or what some people called the “electronic book”, which exists in at least two commercially viable forms now, the RocketBook and the SoftBook. Content archives for each of these hardware choices are too small have much impact yet, but they are growing.

The second big digitally-driven change is the new “print-one” option. The early leader in this area is Ingram’s Lightning Print system. Tying the “print-one” capability to a wholesaler makes so much sense that Baker & Taylor is doing it too. What “print-one” is doing is fostering a whole new publishing model, which may often be author-driven, and which has some of the characteristics of what we used to call Vanity Publishing. But tied to Internet promotion capabilities and the easy supply of Internet retailers like Amazon by the wholesalers who can print the copies, this can suddenly become a model with commercial potential.

Both of these new technologies, which will, I predict, become obvious to nearly everybody as forces to be reckoned with by the end of this year, 1999, further accelerate the trend toward a global, rather than territorial, publishing model. They will, over the next couple of years, be joined by “print-in-store” and “print-at-home” models.

The combination of “no inventory” publishing and Internet retailer distribution turns the historical economics of publishing on its head. Economies of scale become increasingly elusive; the relative value of capital in relation to knowledgeable effort is seriously diminished. The economies of scale that remain in this context relate to subject-specific marketing and, increasingly, making repeat sales to prior customers.

Not that centrally-printed and -distributed books are about to disappear; that eventuality is at least ten, perhaps twenty, years away. The issuance of the infamous Starr Report in the US demonstrates how far we have to go before that occurs. The Starr Report was available free on the Internet before, a week later, bound copies made their way into bookshops. Competing publishers with slightly differentiated editions sold hundreds of thousands of copies. Perhaps some of them were sold to people who still don’t have Internet access. But many were sold to those who do, but who were happy to pay a fair price for the convenience of a centrally-printed-and-bound version.

I would like to make one more point before I propose the principles that I think should govern each country’s individual response to the question of territorial rights in this period of rapid transition. It is simply this: many of the complaints that one hears about how market protection needs to work today can be addressed from publisher-to-publisher. Surely, if the prices of US and UK editions are reasonably close to the same and if those two editions are first available at the same time, a number of the concerns one hears expressed would quickly evaporate.

And, indeed, that is the direction we seem to be headed. Rights traders I have spoken to suggest that these questions, which used to be ignored, are now frequently the subject of discussion and coordination, even if not made a contractual issue.

It is important to remember that retailers and wholesalers are NOT party to contracts with the copyright-holders, authors or publishers. In the United States, there are laws PROHIBITING manufacturers from telling purchasers how or to whom they may resell what they buy. So it is futile to suggest that Random House or Penguin “control” Ingram or Amazon, at least in the United States.

In Britain, publishers feel their position slipping and are looking for relief however they can find it. Booksellers recognize increasing competition from global competitors, and will feel increasing pressure from their own customers to provide globally-competitive prices and service. And British authors will want access to the full global market, and will wonder whose side their publisher is on if they hear that British publishers are doing anything that would tend to reduce the sale of their books, in any edition and to any customer.

So, recognizing that continuing governmental and collective action within local components of the English-language market are both reasonable and inevitable, I would urge initiatives to conform to two principles, which are very much inter-related:

1. Nobody not a party to a contract should be asked to abide by it, or, put another way, nobody should be asked to live up to a contract they never signed.

2. Nobody in the supply chain should be drafted into the role of “rights police”. It is the proper function of the market to fill orders and satisfy customers; it is an improper demand on intermediaries to ask them to research rights, effectively putting forth extra effort to find orders to turn away.

The advice I offer here apparently has at least one virtue: it coincides with the reality of British bookselling as it was reported by respondents to some questions the BA posed in the past 60 days at my request.

Fifty-four percent of responding booksellers say they are increasing their ability to source books from offshore English-language publishers.

Sixty percent have detected awareness from their own customers of international pricing differences.

Thirty-eight percent feel competitively driven to obtain books at the lowest possible price, even if that means foreign rather than domestic sourcing.

But only fifteen percent put much effort into determining the underlying rights situation for books they obtain offshore.

Fortunately, our survey of publishers showed that most of them are not sticking their heads in the sand, or passively expecting marketplace rights enforcement to preserve their profit margins.

Although only fifteen percent of responding publishers think agents are changing their demands in regards to rights;

thirty-five percent say they are proactively changing their contracts concerning rights, forty-three percent have changed policies about what rights they seek to control, and *sixty-five* percent have changed internal policies to improve publishing efforts in markets other than where the book originated.

Forty percent say that internet bookselling and globalization have changed the way they price their books.

Fifty-five percent of publishers say their English language rights revenue is rising, and seventy-five percent say their export sales are growing.

Obviously from these responses, many come from global companies, but they all come from UK headquarters and a UK perspective. Publishers seem, consciously or not, to be responding to the booksellers’ realities. They are not beating their heads against the wall to increase the paltry 15 percent of booksellers who even claim they worry about doing rights research that could cost them a sale. They are responding to the same marketplace conditions the booksellers are experiencing, rationalizing pricing and publishing policies to reflect a globalizing world.

And they also seem to be saying, overwhelmingly, that the markets offshore are growing. We didn’t ask the question, but if we did, I’d bet we find that means one thing: Europe.

There are great inherent strengths to British publishing. The home market it serves and can reach the best is clearly the second-largest in the world. Britain has a natural opportunity to be dominant in Europe, perhaps the fastest-growing English-language market. And British publishers are more experienced and comfortable with co-edition publishing than their American counterparts, so the books that benefit from that kind of publishing, which, as it happens, will be the last part of the market affected by hand-helds or print-one models, constitute another market niche of natural advantage.

Building on these strengths and developing the capability to publish global-interest books themselves in the US market, is the path to a new prosperity for British publishing. Bemoaning the changes that must come and squandering industry resources and efforts to preserve old ways whose time has past is a waste of resources and energy that will, in the long run, not pay off for British publishers, booksellers, or authors.